SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended June 30, 2005.
[ ] 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
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ENCOMPASS HOLDINGS, INC.
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(Exact name of small business issuer as specified in its charter)
NEVADA 95-4756822
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1005 TERMINAL WAY, SUITE 110, RENO, NEVADA 89502-2179
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(Address of principal executive office) (Zip Code)
(775) 324-8531
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(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
NOVA COMMUNICATIONS LTD.
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(Former name, former address, and former fiscal year, if changed since last
report)
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 for its most recent fiscal year was $ 1,316,697.
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 September 27, 2005 was $2,481,612 based on the average
bid and ask prices on September 27, 2005.
As of June 30, 2005 , the number of outstanding shares of the issuer's
common stock, $0.001 par value was 5,351,332 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.............. 6
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES......... 6
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND
RESULTS OF OPERATIONS............................................ 8
ITEM 7. FINANCIAL STATEMENTS............................................. 11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES............................. 11
ITEM 8A CONTROLS AND PROCEDURES........................................... 11
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 11
ITEM 10. EXECUTIVE COMPENSATION.......................................... 12
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT
AND RELATED STOCKHOLDER MATTERS................................. 13
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 13
ITEM 13. EXHIBITS........................................................ 14
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES........................... 14
SIGNATURES................................................................ 16
INDEX TO EXHIBITS......................................................... 17
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 two wholly-owned subsidiaries,
Aqua Xtremes, Inc. which is in the business of manufacturing and marketing a
personal watercraft and the rotary engine that drives the jet pump that propels
the watercraft; and Nacio Systems, Inc., which is in the business of providing
centralized information technology solutions to corporate clients.
All references to our business include Nova Communications Ltd. and all
of our subsidiaries, on a consolidated basis.
BUSINESS STRATEGY
AQUA XTREMES, INC./ XTREME ENGINES, INC.
Aqua Xtremes, Inc., a Nevada corporation, is the designer,
manufacturer, and marketing company for revolutionary water sports equipment.
One of its most notable products is the XBoard(TM) a jet-powered personal
watercraft that redefines extreme water sports. XBoards(TM) allow riders of all
skill levels the ultimate experience and 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, Inc.,
is refining the rotary engine to bring it into full compliance with today's EPA
standards, while at the same time creating an engine that will utilize a variety
of alternative fuels. The engine has been designed to power the Xboard(TM). It
will also be sold separately to different manufacturers which will utilize it in
the areas of water, sea and air applications, including co-generation.
NACIO SYSTEMS, INC.
Nacio Systems, Inc., a Nevada corporation, 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 Systems, Inc.
hosts, manages and delivers mission critical IT infrastructure from its secure,
high-availability Tier 1 network/data operating center in Northern
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California--reducing costs, mitigating risk, compressing deployment times and
increasing reliability.
Nacio Systems, Inc.'s Professional Services and Application Development
groups provide customization services to ensure that the applications Nacio
delivers are tailored to specific business needs and and are 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
expects to release a new version of GASP, GASP V7.0 in the 3rd quarter of 2005.
ITEM 2. DESCRIPTION OF PROPERTY
Our principal executive and administrative offices are located at 1005
Terminal Way, Suite 110, Reno, Nevada. We have contracted with Nacio Systems,
Inc. to have it provide 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.
ITEM 3. LEGAL PROCEEDINGS
We are a party to the following pending legal proceedings:
o 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 $96,000 advanced by Robins;
interest on the advances; punitive damages; costs; and attorney
fees.
o 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
5
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.
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
MARKET INFORMATION
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 six-months ended June 30, 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
Q3-2004 0.02 0.03
Q4-2004 0.01 0.03
Q 1-2005 $ 0.01 $ 0.01
Q 2-2005 0.50 3.35
Q 3-2005 * *
Q 4-2005 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.
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RECORD HOLDERS
We have only one class of common stock. As of June 30, 2005 there were
1,052 shareholders of record for our common stock and a total of 5,351,332
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 within
the last three years 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.
In April and June 2005, we issued an aggregate of 340,000 shares of
common stock to three individuals. Of that amount, 240,000 were issued in
connection with the conversion of certain non- negotiable convertible promissory
notes in the principal amount of $100,000. Each of the notes allowed the holder
to convert all or any portion of the principal amount and accrued interest into
our common stock based upon a conversion price of 70% of the closing bid price
on the date of conversion.
In April and May 2005, we issued non-negotiable convertible promissory
notes in the aggregate principal amount of $35,000. Each note carried interest
at 20% per annum. The principal amount of each note, plus accrued interest, is
convertible into our common stock at a conversion price ranging between 85% to
90% of the closing bid price on the date of conversion, depending on
7
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.
Between January 1, 2004 and October 29, 2004, we issued an aggregate of
$260,000 of non- negotiable 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.
Pursuant to a Stock Exchange Agreement with Seven Angels Ventures LLC
("SAV") dated October 20, 2003, we agreed to issue 3,300,000 shares of our
common stock to SAV in exchange for the issuance to us of 133,000 shares of
common stock of Epic Financial Corp. held by SAV.
Between August 20, 2003 and December 29, 2003, we issued an aggregate
of $490,000 of Convertible Promissory Notes to a select group of investors
totaling 19 persons.
On December 2, 2003, we issued 4,000,000 shares of our common stock to
Kenneth D. Owen, our then current President and CEO.
Each of these transactions was 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. Each transaction was privately negotiated
with sophisticated persons with whom we had an existing business or personal
relationship, without the use of advertising or general solicitation.
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.
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.
8
Management has also devoted substantial efforts in the operations of Nacio
Systems, Inc. by pursuing aggressive cost cutting programs and eliminated
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. consist of computer software
compliance monitoring services and products.
Revenues for Aqua Xtremes, Inc. to date consist of the sale of dealerships.
We presently have executive offices at 1005 Terminal Way, Suite 110, Reno,
Nevada 89502-2179 Nacio Systems, Inc.'s enterprise server facilities are also
located at that address. Currently, the only significant business risk of Nacio
Systems, Inc.'s operations is that the electricity to power the enterprise
service facility is obtained from a single-source supplier, Pacific Gas &
Electric. Nacio Systems, Inc. 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 Systems, Inc.
by Pacific Gas & Electric were delayed or curtailed, the ability of Nacio
Systems, Inc. to provide services to its customers could be adversely affected.
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 of Nacio effective April 1, 2005. Cost of
sales related entirely to Nacio's products.
9
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 of Nova 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. The Company began
developing those products in August 2004.
FINANCIAL POSITION & LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2005 compared to June 30, 2004:
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
=========== =========== ===========
The Company's change in assets consist of the following. Effective December 31,
2004, the Company divested the common stock of Kadfield resulting in the
disposal of an aggregate of $254,467. In August 2004, the Company 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.
10
ITEM 7. FINANCIAL STATEMENTS
Our consolidated, audited, condensed financial statements including
a balance sheet as of the fiscal year ended June 30, 2005 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-11 and are incorporated herein by this reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
In its 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 reporting, 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. We acquired the assets and assumed the
liabilities of Nacio Systems, Inc., a California corporation, through our
subsidiary Nacio Systems, Inc., a Nevada corporation. The acquisition was
effective as of April 1, 2005. We excluded Nacio Systems, Inc., the California
corporation, from our assessment and evaluation of the effectiveness of our
disclosure controls and procedures because we did have sufficient time to make
such an assesment and evaluation as it applies to that corporation.
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, Acting Chief Financial
Officer, Director
Arthur N. Robins 54 Chief Executive Officer, Director
James F. Abel, III 44 Corporate Secretary, Director
Greg K. Hoggatt 48 Director
11
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 Chief Executive Officer to Fastrap, Inc., a manufacturer of trailer
tops for the transportation industry.
James F. Abel, III was the President of The Hines Group, Inc. a
precision custom metal stamping company with headquarters in Queensboro,
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 at 1005 Terminal Way, Suite 110, Reno,
Nevada 89502-2179.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
NAME AND
PRINCIPAL POSITION YEAR ANNUAL COMPENSATION LONG TERM COMPENSATION
Arthur N. Robins
CEO 2005 $120,000 (a) -0-
(a) Mr. Robins' annual compensation is unpaid at this time and is being accrued.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS &
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth, as of June 30, 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).
TITLE OF CLASS NAME AND ADDRESS OF AMOUNT OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL 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, #139
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
(a) Mr. Handler's holdings do not include 31,319 shares held by Mr. Handler's
wife, as to which he has neither voting nor investment control and for
which he disclaims beneficial ownership.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
13
ITEM 13. 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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table discloses the aggregate fees billed for each of the
last two years for audit services rendered by our Principal Accountant for the
audit of our of our annual financial statements and review of financial
statements included in our Form 10QSB reports.
12/31/04 6/30/05
-------- -------
Audit fees billed $34,151 $35,032
14
PART F/S
INDEX TO FINANCIAL STATEMENTS
NOVA COMMUNICATIONS LTD.
Table of Contents
Years ended June 30, 2005 and 2004
Page
Report of Independent Registered Public Accounting Firm............... F-2
Consolidated Financial Statements:
Balance sheets..................................................... F-3 - F-4
Statements of operations........................................... F-5
Statements of comprehensive loss................................... F-6
Statements of stockholders' equity (deficit)....................... F-7 - F-8
Statements of cash flows........................................... F-9
Notes to consolidated financial statements.........................F-10 - F27
15
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 30th day of May, 2006.
NOVA COMMUNICATIONS LTD
By: /s/ LESLIE I. HANDLER
President
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; Director May 30, 2006
Leslie I. Handler
/s/ ARTHUR N. ROBINS Chief Executive Officer;
Arthur N. Robins Director May 30, 2006
/s/ JAMES F. ABEL,III Corporate Secretary;
James F. Abel,III Director May 30, 2006
/s/ GREG K. HOGGATT Director May 30, 2006
Greg K. Hoggatt
16
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) * Certificate of Amendment of First Colonial Ventures Ltd. dated
August 12, 1985.
3(iii) * Certificate of Amendment of First Colonial Ventures Ltd. dated
September 3, 1985.
3(iv) * Certificate of Amendment of First Colonial Ventures Ltd. dated
February 3, 1992.
3(v) * Articles of Incorporation of Nova Communications Ltd. dated
July 21, 1999.
3(vi) * Bylaws
21 * SUBSIDIARIES
CERTIFICATIONS
31.1 Rule 15d-14(a) certifications
31.2 Rule 15d-14(a) certifications
32.1 Section 1350 certifications
32.2 Section 1350 certifications
* Incorporated herein by reference from filings previously made by the
Company
17
NOVA COMMUNICATIONS LTD.
Table of Contents
Years ended June 30, 2005 and 2004
Page
Report of Independent Registered Public Accounting Firm............... F-2
Consolidated Financial Statements:
Balance sheets..................................................... F-3 - F-4
Statements of operations........................................... F-5
Statements of comprehensive loss................................... F-6
Statements of stockholders' equity (deficit)....................... F-7 - F-8
Statements of cash flows........................................... F-9
Notes to consolidated financial statements.........................F-10 - F27
F-1
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.
As described in Note 7, the consolidated financial statements have been restated
as of and for the years ended June 30, 2005 and 2004 to reflect certain
derivative instruments as liabilities at fair value, to recognize the conversion
of notes payable into common stock measured at fair value, and to recognize the
change in fair value of derivative liabilities.
August 19, 2005, except with respect to Note 7
as to which the date is April 10, 2006
Portland, Oregon
F-2
NOVA COMMUNICATIONS LTD.
Balance Sheets
June 30
-------------------------------------
2005 2004
---------------- ----------------
(restated) (restated)
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 on next page.)
F-3
NOVA COMMUNICATIONS LTD.
Balance Sheets (continued)
June 30
-------------------------------------
2005 2004
---------------- ----------------
(restated) (restated)
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 182,941 -
Other accrued liabilities 541,857 55,000
Unearned revenue 521,027 -
Notes payable accrued interest subject to conversion into
an indeterminable number of shares of common stock 163,459 324,372
Derivative liabilities 117,749 100,475
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 4,745,792 1,256,208
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 22,809,499 20,602,385
Retained deficit (27,470,576) (22,075,686)
---------------- ----------------
Total stockholders' equity (deficit) 4,150,191 (715,934)
---------------- ----------------
$ 11,506,829 $ 981,506
================ ================
See accompanying notes.
F-4
NOVA COMMUNICATIONS LTD.
Consolidated Statements of Operations
Years ended June 30
-------------------------------------
2005 2004
---------------- ----------------
(restated) (restated)
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)
Change in fair value of derivative liabilities 1,951 92,382
Interest expense (201,176) (16,446)
---------------- ----------------
Total other expenses (199,225) (421,821)
---------------- ----------------
Net loss before provision for income taxes (5,532,007) (4,142,320)
Provision for income taxes (2,400) (800)
---------------- ----------------
Net loss from continuing operations (5,534,407) (4,143,120)
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 $ (5,394,890) $ (4,276,900)
================ ================
Net income (loss) per common share:
Continuing operations $ (1.27) $ (1.29)
================ ================
Discontinued operations $ .03 $ (.04)
================ ================
See accompanying notes.
F-5
NOVA COMMUNICATIONS LTD.
Consolidated Statements of Comprehensive Loss
Years ended June 30
-------------------------------------
2005 2004
---------------- ----------------
(restated) (restated)
Net loss $ (5,394,890) $ (4,276,900)
Realized loss on available-for-sale investments - 465,132
---------------- ----------------
Comprehensive loss $ (5,394,890) $ (3,811,768)
================ ================
Comprehensive loss per common share $ (1.24) $ (1.19)
================ ================
See accompanying notes.
F-6
NOVA COMMUNICATIONS LTD.
Consolidated Statements of Stockholders' Equity (Deficit)
July 1, 2003 through June 30, 2004 (restated)
Unrealized
Convertible holding Total
Preferred promissory loss from stock-
stock Common stock Common note and Additional 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
Comprehensive loss - - - - - - - (4,276,900) 465,132 (3,811,768)
------- ------ --------- ------ ---------- ----------- ------------ ------------- ----------- ------------
Balance at June 30, 2004 - - 3,439,815 3,440 753,927 - 20,749,385 (22,075,686) - (715,934)
======= ====== ========= ====== ========== =========== ============ ============= =========== ============
See accompanying notes.
F-7
NOVA COMMUNICATIONS LTD.
Consolidated Statements of Stockholders' Equity (Deficit)
July 1, 2004 through June 30, 2005 (restated)
Convertible Total
Preferred promissory stock-
stock Common stock Common note and Additional holders'
-------------- ---------------- stock to accrued paid-in Retained equity
Shares Amount Shares Amount be issued interest capital deficit (deficit)
------------------------ ------- ------ --------- ------ ---------- ----------- ------------ ------------- ------------
Balance at July 1, 2004 - - 3,439,815 $3,440 753,927 $ - $20,602,385 (22,075,686) $ (715,934)
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 - - 587,090 - 588,200
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
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 $20,602,385 $(27,470,576) $ 4,150,191
======= ====== ========= ====== ========== =========== ============ ============= ============
See accompanying notes.
F-8
NOVA COMMUNICATIONS LTD.
Consolidated Statements of Cash Flows
Years ended June 30
-------------------------------------
2005 2004
---------------- ----------------
(restated) (restated)
Cash flows from operating activities:
Net loss from continuing operations $ (5,534,407) $ (4,143,120)
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 -
Change in fair value of derivative liabilities (1,951) (92,382)
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 618,018 424,874
---------------- ----------------
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 295,000 490,000
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-9
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-10
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.
DERIVATIVE INSTRUMENTS: In connection with the issuance of convertible
notes payable, the terms of certain notes payable provide for principal
and interest to be converted into an indeterminable number of shares of
the Company's common stock. This variable conversion feature is
determined to be an embedded derivative instrument and the Company has
accounted for these derivatives pursuant to SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended, and
Financial Accounting Standards Board's Emerging Issues Task Force
("EITF") Issue No. 00-19, "Accounting for Derivative Financial
Instruments Indexed
F-11
1. Business and summary of significant accounting policies (continued)
-------------------------------------------------------------------
DERIVATIVE INSTRUMENTS (CONTINUED): to, and Potentially Settled in A
Company's Own Stock". Under EITF No. 00-19, the estimated fair value of
the embedded derivative instrument is reported separate from the notes
payable on the date of issuance as derivative liabilities. Derivative
liabilities are reported at fair value as of the balance sheet date and
any change in fair value during the period is reported as other income
or expense in the statement of operations.
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. 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.
F-12
1. Business and summary of significant accounting policies (continued)
-------------------------------------------------------------------
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 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
F-13
2. Operations (continued)
----------------------
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. 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.
F-14
3. Business combinations (continued)
---------------------------------
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.
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)
F-15
3. Business combinations (continued)
---------------------------------
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.
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
===============
F-16
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
============= =============
6. Notes payable subject to conversion into an indeterminable number of
-----------------------------------------------------------------------
shares of common stock
---------------------
Notes payable are due one year from the issuance date of the note with
interest at rates ranging from 8% to 20% per annum. The notes,
including unpaid interest, are convertible, in whole or in part, at any
time after six months from the date of the note at the option of the
holder. The notes are convertible at the option of the Company upon ten
days written notice after six months from the date of the note or at
the time of any public offering by the Company in an aggregate amount
of no less than $10,000,000, or upon any merger or acquisition to which
the Company is a party. The notes may be converted at prices per share
ranging from 70% to 90% of the closing bid price of the Company's
common stock on the date of the notice of conversion. There is no limit
on the number of shares of common stock that would be required to by
issued upon conversion of the notes payable and the number of shares
required to be issued could exceed the number of shares of the
Company's common stock currently authorized. The Company would have
been required to issue 1,915,433 shares of its common stock if the
principal and accrued interest of the notes were converted as of June
30, 2005.
7. Restatement of previously issued financial statements
-----------------------------------------------------
The Company determined that it had incorrectly accounted for the
conversion feature of the certain convertible notes payable under EITF
98-5, "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios" in their
consolidated financial statements as of June 30, 2005 and 2004. Rather,
the Company determined that it should have accounted for the embedded
conversion feature of the notes payable as a derivative instrument and
the conversion of notes payable into shares of common stock at fair
value pursuant to SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended, and Financial Accounting Standards
Board's Emerging Issues Task Force ("EITF") Issue No. 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in A Company's Own Stock" in their 2003 and 2004
consolidated financial statements.
The Company estimated the fair value of the conversion feature of its
notes payable to be $117,749 as of June 30, 2005 and $100,475 as of
June 30, 2004. Under EITF
F-17
7. Restatement of previously issued financial statements (continued)
-----------------------------------------------------------------
No. 00-19, this amount is reported separate from the notes payable as
derivative liabilities. Further, under SFAS No. 133, derivative
liabilities are reported at fair value as of the balance sheet date and
any change in fair value during the period is reported as other income
or expense in the statement of operations. The Company recognized other
income of $1,951 for the change in fair value for the year ended June
30, 2005 and $92,382 for the year ended June 30, 2004. During the year
ended June 30, 2005, holders converted $588,200 of notes and accrued
interest into 1,110,000 shares of the Company's common stock. Those
transactions were not correctly reported at fair value and the Company
increased the value of the common stock issued by $35,583 during 2005.
Under EITF 98-5, the Company had previously reported the portion of the
proceeds from the note that represents the beneficial conversion
feature as additional paid-in-capital. This debt discount was being
amortized to interest expense using the interest method over the life
of the conversion feature. During the year ended June 30, 2005, the
Company previously reported $78,000 as additional paid-in-capital for
the beneficial conversion feature of its notes payable and interest
expense of $21,500 for the amortization of the debt discount for the
year then ended. During the year ended June 30, 2004, the Company
previously reported $147,000 as additional paid-in-capital for the
beneficial conversion feature of its notes payable and interest expense
of $73,500 for the amortization of the debt discount for the year then
ended.
The accompanying consolidated financial statements for the year ended
June 30, 2005 have been restated for the effects of the changes
described above. The changes to the consolidated balance sheet and
consolidated statement of operations are as follows:
As previously
reported Adjustments As restated
---------------- ---------------- ----------------
Consolidated Balance Sheet:
Current liabilities:
Accrued interest $ 199,065 $ (16,124) $ 182,941
================ ================ ================
Notes payable and accrued interest subject to conversion into a
indeterminable number of
shares of common stock $ 265,000 $ (101,541) $ 163,459
================ ================ ================
Derivative liabilities $ - $ 117,749 $ 117,749
================ ================ ================
Total current liabilities $ 4,745,708 $ 84 $ 4,745,792
================ ================ ================
Stockholders' equity:
Additional paid-in capital $ 22,998,916 $ (189,417) $ 22,809,499
================ ================ ================
Retained deficit $ (27,659,909) $ 189,333 $ (27,470,576)
================ ================ ================
Total stockholders' equity $ 4,150,275 $ (84) $ 4,150,191
================ ================ ================
F-18
7. Restatement of previously issued financial statements (continued)
-----------------------------------------------------------------
As previously
reported Adjustments As restated
---------------- ---------------- ----------------
Consolidated Statement of Operations:
Other income (expenses):
Change in fair value of derivative
liabilities $ - $ 1,951 $ 1,951
================ ================ ================
Interest expense $ (222,676) $ 21,500 $ (201,176)
================ ================ ================
Total other expenses $ (222,676) $ 23,451 $ (199,225)
================ ================ ================
Net loss from continuing operations $ (5,557,858) $ 23,451 $ (5,534,407)
================ ================ ================
Net loss $ (5,418,341) $ 23,451 $ (5,394,890)
================ ================ ================
Net loss per common share from
continuing operations $ (1.28) $ .001 $ (1.27)
================ ================ ================
The accompanying consolidated financial statements for the year ended
June 30, 2004 have been restated for the effects of the changes
described above. The changes to the consolidated balance sheet and
consolidated statement of operations are as follows:
As previously
reported Adjustments As restated
---------------- ---------------- ----------------
Consolidated Balance Sheet:
Current liabilities:
Accrued interest $ 27,229 $ (27,229) $ -
================ ================ ================
Notes payable and accrued interest subject to conversion into a
indeterminable number of
shares of common stock $ 416,500 $ (92,128) $ 324,372
================ ================ ================
Derivative liabilities $ - $ 100,475 $ 100,475
================ ================ ================
Total current liabilities $ 1,275,090 $ (18,882) $ 1,256,208
================ ================ ================
Stockholders' deficit:
Additional paid-in-capital $ 20,749,385 $ (147,000) $ 20,602,385
================ ================ ================
Retained deficit $ (22,241,568) $ 165,882 $ (22,075,686)
================ ================ ================
Total stockholders' deficit $ (734,816) $ 18,882 $ (715,934)
================ ================ ================
F-19
7. Restatement of previously issued financial statements (continued)
-----------------------------------------------------------------
As previously
reported Adjustments As restated
---------------- ---------------- ----------------
Consolidated Statement of Operations:
Other income (expenses):
Change in fair value of derivative
liabilities $ - $ 92,382 $ 92,382
================ ================ ================
Interest expense $ (89,946) $ 73,500 $ (16,446)
================ ================ ================
Total other expenses $ (587,703) $ 165,882 $ (421,821)
================ ================ ================
Net loss from continuing operations $ (4,309,002) $ 165,882 $ (4,143,120)
================ ================ ================
Net loss $ (4,442,782) $ 165,882 $ (4,276,900)
================ ================ ================
Net loss per common share from
continuing operations $ (1.35) $ - $ (1.35)
================ ================ ================
8. 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 $ -
============== ==============
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
===============
F-20
8. Long-term debt (continued)
--------------------------
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
9. 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.
10. 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 on the consumer price index. The lease agreement
contains renewal provisions for up to ten additional years.
F-21
10. Lease commitments (continued) 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
11. 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.
12. Common stock
------------
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.
F-22
12. Common stock (continued)
------------------------
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.
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.
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 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.
13. Stock based compensation
------------------------
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.
F-23
13. Stock based compensation (continued)
------------------------------------
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.
14. 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
================ ================
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
================ ================
F-24
14. Income taxes (continued)
------------------------
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.
15. 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
Net operating loss (1,898,936) (457,394) (79,786) (2,436,116)
Identifiable assets 401,114 10,763,652 342,063 11,506,829
Depreciation &
amortization - 330,407 - 330,407
F-25
15. Segment information (continued)
-------------------------------
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)
=================
16. 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.
17. 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 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.
F-26
17. Recently issued pronouncements (continued)
------------------------------------------
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-27