SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
Amendment No. 3
(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, 2003.
[ ] 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.
------------------------
(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)
NOVA COMMUNICATIONS LTD.
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(Former name, former address, and former fiscal year, if changed since last
report)
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 [ ].
1
Issuer's revenues of its most recent fiscal year was $4,322,108.
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 February 28, 2004 was $469,582 based on the average bid
and ask prices during January and February 2004.
As of December 31, 2003 , the number of outstanding shares of the
issuer's common stock, $0.001 par value was 255,081,462 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...............................................3
ITEM 2. DESCRIPTION OF PROPERTY...............................................6
ITEM 3. LEGAL PROCEEDINGS.....................................................6
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
RESULTS OF OPERATIONS................................................10
ITEM 7. FINANCIAL STATEMENTS.................................................12
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES.................................12
ITEM 8A CONTROLS AND PROCEDURES..............................................12
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................13
ITEM 10. EXECUTIVE COMPENSATION...............................................14
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT
AND RELATED STOCKHOLDER MATTERS......................................15
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................15
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.....................................15
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES...............................16
SIGNATURES....................................................................17
INDEX TO EXHIBITS.............................................................18
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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
is to achieve long-term growth. At the current time, we have one wholly-owned
subsidiary, Kadfield, Inc. which is in the business of the retail sale of
computer equipment and accessories by direct sale and via the Internet under the
trade name of "BuyMicro".
We have entered into a Memorandum of Understanding with PowerSki
International Corporation pursuant to which we would merge with PowerSki. If the
merger is completed, we will continue as the surviving corporation of the
proposed merger. PowerSki is in the business of designing, manufacturing,
marketing and distribution of its PowerSki Jetboard(TM), a personal watercraft
and its SuperTorque XT(TM) its patented marine engine technology. In addition to
these two products, PowerSki plans to develop and market a range of ancillary
products such as name brand clothing and accessories
BUSINESS STRATEGY
KADFIELD, INC.
Since December 2001, our only operating business has been our
wholly-owned subsidiary, Kadfield, Inc. which engages primarily in the internet
sale of computing equipment and accessories and telecommunications and telephony
equipment and accessories. Kadfield, Inc. conducts its business under the trade
name of "BuyMicro" and maintains an Internet website at www. BuyMicro.com.
Kadfield, Inc. markets computing equipment and accessories manufactured
by such featured companies as Sony, Hewlett-Packard, Lexmark, Philips and Snap
Appliances. BuyMicro's database offers over 100,000 products, including
hardware, software, accessories and office supplies. The online inventory
database is updated on a daily basis, so as to provide the latest information on
products, pricing and availability. BuyMicro relies on high sales volume and
efficient online business operations to offer the lowest prices possible on its
product offerings. Products are shipped from a system of 27 warehouse locations
across the United States and deliveries are made from the warehouse nearest to
the retail customer who made the purchase. Orders are typically filled within
hours of an order being placed and are shipped either via UPS, FEDEX, AirBorne
Express, or the US Postal Service, depending upon a customer's delivery
preferences.
Customers can register online as BuyMicro Members and obtain additional
product cost discounts. In addition, BuyMicro offers flexible equipment
financing programs for small to medium size businesses through eStoreFinance, an
unaffiliated company. BuyMicro is listed as an
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eStoreFinance Preferred Vendor. BuyMicro maintains the latest in encryption
technology to ensure secure online transactions.
POWERSKI INTERNATIONAL CORPORATION
On October 8, 2003, we entered into a Memorandum of Understanding with
PowerSki International Corporation ("PowerSki") pursuant to which we would merge
with PowerSki. Nova Communications Ltd. would be the surviving corporation. The
Memorandum of Understanding provides, among other things, that if the Plan of
Merger was consummated we would issue to the shareholders of PowerSki shares of
our common stock such that the shareholders of PowerSki would hold 80 % of our
issued and outstanding common stock on the effective date of the merger. In
addition, we agreed to provide working capital funding to PowerSki in the amount
of $2 million dollars on or before December 31, 2003. The Memorandum of
Understanding was amended on February 2, 2004. Under the amended Memorandum of
Understanding, PSI acknowledged that we had provided no less than $600,000 of
funding to PSI under the original Memorandum of Understanding and that
$1,400,000 remained to be funded. The amended Memorandum of Understanding
provided that we make an initial funding of $50,000 upon the execution of the
amended Memorandum, which we did. The balance of our funding commitment would be
provided at the rate of no less than $25,000 per week for a period of six months
until the full $2,000,000 has been funded.
In the event that we fail to make any weekly funding installment of
$25,000, PSI is required to give us 10 days written notice to cure the failure.
If the funding is not provided after the 10 day notice, PSI has the right to
terminate the Memorandum. Thereafter, PSI is obligated to repay to us 50% of the
amount of the funding provided pursuant to a promissory note bearing interest at
10% per annum with the entire principal and interest due and payable in a lump
sum on the last day of the 36th month following the signing of the promissory
note. The remaining 50% of our funding will be applied by PSI toward the
purchase by us of a PSI distributorship at a 50% discount to the prevailing cost
of purchasing a similarly situated PSI distributorship.
In the event that the amended Memorandum of Understanding is terminated
for any reason other than by reason of our failure to pay the entire $2,000,000,
PSI will repay to us all of the funding we have provided up to the date that
amended Memorandum is terminated. PSI repayment obligation is to be evidenced by
a promissory note bearing interest at 10% per annum with the entire principal
and interest due and payable in a lump sum within 12 months of the date of the
note.
POWERSKI PRODUCTS
JETBOARD
The PowerSki Jet Board(TM)is a revolutionary motorized surfboard. which
can reach speeds in excess of 30 mph. The Jetboard(TM)is typically 8' 4" long.
To operate the Jetboard(TM), the rider assumes a "sideways stance"
employed as in wakeboarding, windsurfing, snowboarding, surfing and
skateboarding. The rider mounts the
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Jetboard(TM) and starts the engine. The craft is equipped with an armpole tether
assembly which provides the rider with added balance through the use of the
control handle. The handle is equipped with four operating features: start and
stop, colored green and red; thumb throttle; and a kill switch tether assembly
attached to the rider's vest that shuts the engine off upon dismount. After a
dismount, the rider simply pulls back the craft with the leash, sinks the tail,
lays flat on the hull and restarts.
MARINE ENGINE
The Jetboard(TM) is powered by patented PowerSki's SuperTorqueXT(TM)
marine engine. The engine is 6.5" in height.10" in width and 15" in length and
produces approximately300 lbs of thrust with 40 horsepower. It can generate
speeds of 30 mph.
The engines features a belt-drive transmission mated to a jet-drive
pump assembly designed for marine, aerospace, commercial and industrial uses.
The engine has a wide range of potential applications including powering
inflatables, catamarans, ultralights, amphibious ATVs, kayaks, military vehicles
and generators.
PowerSki plans to introduce a range of marine engines, both 2 and
4-stroke combustion and electric engines with the potential for 50 hp while
maintaining the same height and length of its current engine design.
ANCILLARY PRODUCTS
In addition to designing, manufacturing, marketing and distributing the
patented Jetboard(TM) and the SuperTorqueXT(TM) engine, PowerSki intends to
develop multiple product spin-offs. These include accessories such as
Jetboard(TM) wetsuits, life vests, gloves, helmets, and Jetboard(TM) bags.
POWERSKI INTELLECTUAL PROPERTY
At this time, PowerSki holds 63 patents worldwide, both design and
utility patents, for both the Jetboard(TM) and the SuperTorqueXT(TM) marine
engine, with over 40 patents pending worldwide. PowerSki has been awarded one
utility patent on May 1, 2001 ( U.S. utility patent 6,233,712) and three design
patents in the United States for the Jetboard(TM). There is one additional
design patent pending. PowerSki has more than 45 foreign design and utility
patents issued for the Jetboard(TM).
PowerSki has been awarded utility patents for the SuperTorque XT(TM)
marine engine technology in the United States, the European Union; Brazil;
Japan; New Zealand and South Africa, with all claims allowed on the 2-stroke and
4-stroke internal combustion engines.
PowerSki has registered Jetboard(TM) as a trademark with the United
States Patent and Trademark Office. PowerSki maintains a Internet website at
www.powerski.com.
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PRODUCT DISTRIBUTION
PowerSki distributes the Jetboard(TM) and the SuperTorqueXT(TM) marine
engine through a network of dealerships in 18 states in the U.S. and 28
international distributors.
FACILITIES
PowerSki is presently located 150 Calle Iglesia, San Clemente,
California where it leases approximately 10,000 square feet.
ALL INFORMATION ABOUT THE BUSINESS AND PRODUCTS OF POWERSKI HAVE BEEN OBTAINED
FROM THE MANAGEMENT OF POWERSKI AND OTHER SOURCES SUCH AS PUBLICALLY AVAILABLE
INFORMATION DISTRIBUTED BY POWERSKI. ALL SUCH INFORMATION IS STILL SUBJECT TO
THE COMPLETION OF THE COMPANY'S DUE DILIGENCE.
EVEN THOUGH THE COMPANY HAS ENTERED INTO A MEMORANDUM OF UNDERSTANDING TO
ACQUIRE POWERSKI BY MERGER, THERE CAN BE NO ASSURANCE THE MERGER OR ANY OTHER
FORM OF BUSINESS COMBINATION WILL IN FACT BE CONSUMMATED OR, IF CONSUMMATED,
THAT THE TERMS AND CONDITIONS OF THE MERGER OR BUSINESS COMBINATION WILL BE AS
DESCRIBED IN THE MEMORANDUM OF UNDERSTANDING.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal executive and administrative offices are
located at 370 Amapola Ave., Suite 202, Torrance, California 90501, where the
Company occupies approximately 800 square feet of the 4,000 square feet leased
by the Company's President, Kenneth D. Owen.
ITEM 3. LEGAL PROCEEDINGS
The Company not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of its 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
The common stock of the Company 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 years ended December 31, 2003 and December 31, 2002. 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
--- ----
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
Q 1-2002 $ 0.06 $ 0.22
Q 2- 2002 0.01 0.08
Q 3- 2002 0.01 0.05
Q 4- 2002 0.01 0.03
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RECORD HOLDERS
There is only one class of common stock. As of December 31, 2003, there
were 1, 046 shareholders of record for the Company's common stock and a total of
255,081,462 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 vote 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 by us
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.
Pursuant to a Stock Exchange Agreement with Seven Angels Ventures LLC
("SAV") dated October 20, 2003, Nova Communications Ltd. has agreed to issue
3,300,000 shares of its common stock to SAV in exchange for the issuance to Nova
of 133,000 shares of common stock of Epic Financial Corp. held by SAV.
Between August 20, 2003 and December 29, 2003, the Company issued an
aggregate of $490,000 of its Convertible Promissory Notes to a select group of
investors totaling 19 persons.
On December 2, 2003, the Company issued 4,000,000 shares of its common
stock to Kenneth D. Owen, the Company's President and CEO.
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.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Results of Operations
These results include the operations of the Company and its
consolidated subsidiaries for the years ended December 31, 2003 and December 31,
2002. The Company sold one of its two principal operating subsidiaries at
mid-year 2002. The financial statements for the year ended December 31, 2002
include the accounts of Communications 2000, Inc. from January 1 through June
30, 2002 as Loss on Discontinued Operations of $775,336. The financial
statements for the year ended December 31, 2002 also include a Gain on Sale of
Discontinued Operations of $5,522,708.
Net loss from continuing operations, comprehensive loss, net loss from
continuing operations per common share and comprehensive loss per common share
Net loss from continuing operations for the year ended December 31,
2003 was $4,124,337; a loss increase of $3,201,080 compared with a loss of
$923,257 for 2002. As a result, net loss from continuing operations per share
for the year ended December 31, 2003 was $.0192, a loss decrease of $.0025 per
share compared with a loss of $.0217 for 2002.
Comprehensive loss for the year ended December 31, 2003 was $4,124,337,
a loss increase of $7,948,452 compared with income of $3,824,115 for 2002. As a
result, comprehensive loss per share for the year ended December 31, 2003 was
$.019, a loss increase of $.1090 per share compared with income of $.0898 for
2002.
Net loss and comprehensive loss for the three months ended December 31,
2003 was $1,809,276, a loss increase of $1,604,424 compared with a loss of
$204,852 for the same three months of 2002. As a result, net loss per share for
the three months ended December 30, 2003 was $.0070, a loss increase of $.0026
per share compared with a loss of $.0044 for the same three months of 2002.
Revenues, cost of revenues and gross margin
Net revenues for the year ended December 31, 2003 were $4,322,108, a
decrease of $3,568,292 compared with $7,890,400 for the 2002. Cost of revenues
for the year ended December 31, 2003 was $3,743,659, or 86.62% of net revenues.
Gross margin for the year ended December 31, 2003 was $578,449, a decrease of
$557,465 compared with $1,135,914 for 2002.
Net revenues for the three months ended December 31, 2003 were
$537,290, a decrease of $1,307,740 compared with $1,845,030 for the same three
months of 2002. Cost of revenues for the three months ended December 31, 2003
was $585,364, or 108.95% of net revenues. Gross margin (loss) for the three
months ended December 31, 2003 was $48,074, a decrease of $237,327 compared with
$189,253 for the same three months of 2002.
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Operating expenses
Operating expenses for the year ended December 31, 2003 were
$4,652,593, an increase of $2,695,394 compared with $1,957,199 for 2002. During
2003 $3,315,964 was recorded as consulting fees that were paid by share issuance
(compared with $573,169 in 2002.) In 2003, operating expenses included $540,000
in executive salary under an employment agreement with the Company's President
of which $360,000 was in recognition of prior year's service. Without these
items, other operating expenses for the year decreased $587,401 from 2002 to
2003, as a result of cost reduction efforts.
Operating expenses for the three months ended December 31, 2003 were
$1,749,412 an increase of $1,376,242 compared with $373,170 for the same three
months of 2002. In 2003, operating expenses included $1,480,500 as consulting
fees that were paid by share issuance and $45,000 in executive salary under an
employment agreement with the Company's President. Without these items,
operating expenses for the 3rd quarter decreased $49,258from 2002 to 2003, as a
result of cost reduction efforts.
Other income (expenses)
Net interest expense for the year ended December 31, 2003 was $49,393,
a decrease of $51,779 compared with $101,172 for the same nine months of 2002.
Net interest expense for the three months ended December 31, 2003 was $11,790, a
decrease of $9,145 compared with $20,935 for the same three months of 2002.
OPERATING STRATEGIES AND COST REDUCTIONS
The Company and its subsidiaries have been hampered in their operations
during 2002 and 2001 by a shortage of working capital. Despite engaging the
services of several investment bankers and professional fundraisers, only
$92,000 has been raised from the sale of shares during 2002 to outside parties.
The Company's growth and strategic operating plans for TEC-networks were
predicated upon raising $2,000,000 to $4,000,000 in working capital during the
first half of 2001. Without adequate working capital, TEC-networks was not able
to expand its sales presence as planned. It was also not able to sponsor levels
of advertising programs necessary to create a significant number of leads for
its existing sales force.
Decisions were made in late 2001 to close the Tampa, FL and Concord, CA
offices of Communications 2000, as cost reduction measures. The Tampa, FL
location was closed on February 15, 2002, and the Concord, CA office was closed
on February 28, 2002. Lease agreements on these locations were simultaneously
cancelled. Compensation agreements with remaining sales agents have been
converted to a modest base salary with performance-based incentives. During the
first half of 2002, Communications 2000 retained its ability to sell and install
telecommunications systems on a nationwide basis from its Torrance, CA location.
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On July 22, 2002 the Board of Directors met and approved the sale of
the Company's 46.68% interest in Communications 2000, Inc., which transaction
was effective on July 1, 2002. The financial statements for the year ended
December 31, 2002 include the accounts of Communications 2000, Inc. from January
1 through June 30, 2002 as Loss on Discontinued Operations of $775,336. The
financial statements for the year ended December 31, 2002 also include a Gain on
Sale of Discontinued Operations of $5,522,708. The financial statements for the
year ended December 31, 2001 have been restated to reflect the accounts of
Communications 2000, Inc. as Loss on Discontinued Operations of $6,727,345. The
Company's Balance Sheet at December 31, 2001 has been restated to present the
net liabilities of Communications 2000 as Net Liabilities of Discontinued
Operations of $4,720,840.
Kadfield, Inc., operating as BuyMicro, was successful in increasing its
lines of credit with its suppliers during 2002and 2001. It also has focused a
portion of its business in large systems that are financed under capital lease
arrangements for its customers. Its operations have been profitable in all
quarters except for the fourth quarter of 2003.
The Company and its principal subsidiary, Kadfield, Inc , continue to
suffer from a working capital shortage. The effort to raise additional working
capital continues. Although Kadfield, Inc. is operating profitably, additional
capital is required to enable it to attain its business plan. New product lines
are being added to its business plan and an active effort is underway to acquire
additional lines and or other business that will be synergistic with Kadfield's
plan. The Company believes the above actions, events and other factors will
allow them to continue operations and ultimately achieve profitability. Until
then, the Company is dependent upon its ability to obtain additional capital and
debt financing.
ITEM 7. FINANCIAL STATEMENTS
As used herein, the term "Company" refers to Nova Communications Ltd.,
a Nevada corporation, and its subsidiaries and predecessors unless otherwise
indicated. Consolidated, audited, condensed financial statements including a
balance sheet for the Company as of the year ended December 31, 2003 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, the
Company has had no disagreements with its certifying accountants on accounting
and financial disclosures.
ITEM 8A. CONTROLS AND PROCEDURES
Based on an evaluation of its disclosure controls and procedures as of
December 31, 2003, the Company, through Kenneth D. Owen, its President and Chief
Executive Officer, is satisfied as to the effectiveness of its disclosure
controls and procedures.
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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
Kenneth D. Owen 40 President, Chief Executive Officer, Director
Leslie I. Handler 66 Corporate Secretary, Director
Bryce Sherwood 51 Director
Kenneth D. Owen became a director in June 1999 and has been our
President since September 2000. Mr. Owen has been in the communications industry
for over 15 years. From 1989 to 1991 he was vice president of AT&T Business
Systems for Southern California.
Leslie I. Handler has been a director and corporate secretary since
August 1991. 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.
Bryce Sherwood has been a director since September 2000. Mr. Sherwood
is currently retired. Prior to his retirement, he was a securities account
representative with A.G. Edwards and Co.
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 370 Amapola Dr., Suite 202, Torrance,
California 90501.
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SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company's President and Chief Executive Office, Kenneth D. Owen,
failed to file reports on Form 4 covering 18 reportable events from the period
July 14, 2003 to December 2, 2003. Mr. Owen will file Form 5 to disclose these
previously undisclosed transactions.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
--------------------------
NAME AND
PRINCIPAL POSITION YEAR ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------ ---- ------------------- ----------------------
Kenneth D. Owen
President/CEO 2003 $ 180,000 81,000,000 shares of common
2002 90,000 stock (a)
2001 180,000
(a) In April 2003, Mr. Owen was issued 72,000,000 shares of the Company's
common stock pursuant to a registration statement on Form S-8. On
December 2, 2003, Mr. Owen was issued an additional 5,000,000 shares of
the Company's common stock pursuant to a registration statement on Form
S-8 plus 4,000,000 shares of common stock, the latter being restricted
securities under the Securities Act of 1933. All of the 81,000,000
shares were issued to Mr. Owen in lieu of $360,000 of accrued but
unpaid compensation for 2002 and 2001. Mr. Owen has since disposed of
virtually all of those shares in open market and private resale
transactions.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS &
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth, as of March 30, 2004, 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 Kenneth D. Owen 6,714,300 2.6%
31913 Taylor Road
Thousand Palms, CA 92276
Common Stock Leslie I. Handler 312,903 (a) *
382 Running Springs Dr.
Palm Desert, CA 92276
Common Stock Bryce Sherwood 125,000 *
7517 Taylor Trace
Battle Creek, MI 49017
Common Stock (all officers and
directors as a group-3 persons) 7,152,203 2.8%
* 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
There were no reportable transactions during the period covered by this
report.
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.
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(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during the period covered
by this Form 10-KSB:
April 18, 2003 Item 1. Changes in Control of Registrant;
---------------------------------
Item 7. Financial Statements and Exhibits
---------------------------------
May 9, 2003 Item 5. Other Events and FD Disclosures;
--------------------------------
Item 7. Financial Statements and Exhibits
---------------------------------
October 29, 2003 Item 1. Changes in Control of Registrant
--------------------------------
November 12, 2003 Item 2. Acquisition or Disposition of Assets;
-------------------------------------
Item 7. Financial Statements and Exhibits
---------------------------------
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit fees for the year 2003 were $24,495.
16
NOVA COMMUNICATIONS LTD.
Years ended December 31, 2003 (restated) and 2002
Contents
Page
----------
Report of Independent Auditor's..................................... F-2
Consolidated Financial Statements:
Balance sheets................................................... F-3 - F-4
Statements of operations......................................... F-5
Statements of comprehensive loss................................. F-6
Statements of changes in stockholders' equity (deficit).......... F-7
Statements of cash flows......................................... F-8
Notes to consolidated financial statements....................... F-9 - F-18
F-1
REPORT OF INDEPENDENT AUDITOR'S
To the Stockholders
Nova Communications Ltd.
We have audited the accompanying consolidated balance sheet of Nova
Communications Ltd. as of December 31, 2003 and 2002, and the related
consolidated statements of operations, comprehensive loss, changes in
stockholders' equity (deficit), and cash flows for each of the two years in the
period ended December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. 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 consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated 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 Nova Communications
Ltd. as of December 31, 2003 and 2002 and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 2003 in
accordance 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 has a working capital deficit, a
net capital deficiency, and recurring net losses that raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As described in Note 5, the consolidated financial statements have been restated
as of and for the year ended December 31, 2003 to reflect certain derivative
instruments as liabilities, measured at fair value, in the balance sheet and to
recognize the change in their fair value in the statement of operations.
April 10, 2004, except with respect to Note 5
as to which the date is April 10, 2006
Portland, Oregon
F-2
NOVA COMMUNICATIONS LTD.
Consolidated Balance Sheets
December 31
-------------------------------------
2003 2002
---------------- ----------------
(restated)
ASSETS
------
Current assets:
Cash $ 51,451 $ 78
Receivables - 702
Note receivable, due within one year 9,557 6,402
Available-for-sale investments - 32,625
Current assets of discontinued operations, net 51,435 209,475
---------------- ----------------
Total current assets 112,443 249,282
Equipment, net 1,278 15,155
Equipment of discontinued operations, net 140,221 179,246
Other assets:
Note receivable 15,317 24,874
Advances receivable 513,506 -
Deposits - 1,478
Other assets of discontinued operations, net 62,811 81,147
---------------- ----------------
Total other assets 591,634 107,499
$ 845,576 $ 551,182
================ ================
Continued on next page.
F-3
NOVA COMMUNICATIONS LTD.
Consolidated Balance Sheets (continued)
December 31
-------------------------------------
2003 2002
---------------- ----------------
(restated)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------
Current liabilities:
Accounts payable $ 159,637 $ 237,914
Payable to related parties 11,593 27,121
Accrued payroll and payroll related liabilities 392,445 218,059
Income taxes payable 2,400 1,600
Other accrued liabilities 39,229 26,122
Other accrued liabilities to related parties - 297,197
Notes payable and accrued interest subject to conversion
into an indeterminable number of shares of common stock 308,102 -
Derivative liabilities 176,866 -
Current liabilities of discontinued operations 393,984 383,683
---------------- ----------------
Total current liabilities 1,484,256 1,191,696
Payable to related party 264,232 -
Long-term obligations - 736,427
Long-term obligations of discontinued operations - 126,791
Notes payable to related parties - 625,000
Net Capital Deficiency:
Preferred stock; no par value; authorized 10,000,000
shares - -
Common stock; $.001 par value; authorized
500,000,000 shares; outstanding 255,081,368 shares
in 2003 (46,958,181 shares in 2002) 255,081 46,958
Common stock to be issued 15,000 -
Additional paid-in capital 18,913,171 13,797,842
Retained deficit (20,086,164) (15,508,400)
Unrealized holding loss from available-for-sale
investments - (465,132)
---------------- ----------------
Net capital deficiency (902,912) (2,128,732)
---------------- ----------------
$ 845,576 $ 551,182
================ ================
See accompanying notes.
F-4
NOVA COMMUNICATIONS LTD.
Consolidated Statements of Operations
Years ended December 31
2003 2002
---------------- ----------------
(restated)
Revenues $ 9,768 $ -
General and administrative 3,978,098 861,286
---------------- ----------------
Loss from operations (3,968,330) (861,286)
Other income (expenses):
Loss on available-for-sale investments (497,757) -
Change in fair value of derivative liabilities 11,705
Interest and loan fees, net (24,814) (64,716)
---------------- ----------------
Total other expenses (510,866) (64,716)
---------------- ----------------
Loss before benefit for income taxes (4,479,196) (926,002)
Provision for income taxes 800 800
---------------- ----------------
Net loss from continuing operations (4,479,996) (926,802)
Discontinued operations:
Net loss, net of benefit for income taxes (97,768) (771,791)
Net gain on disposal - 5,522,708
---------------- ----------------
Net income from discontinued operations (97,768) 4,750,917
---------------- ----------------
Net income (loss) $ (4,577,764) $ 3,824,115
================ ================
Net income (loss) per common share:
Continuing operations $ (.020) $ (.022)
================ ================
Discontinued operations $ - $ .112
================ ================
See accompanying notes.
F-5
NOVA COMMUNICATIONS LTD.
Consolidated Statements of Comprehensive Loss
Years ended December 31
2003 2002
---------------- ----------------
(restated)
Net income (loss) $ (4,577,764) $ 3,824,115
Realized loss on available-for-sale investments 465,132 -
---------------- ----------------
Comprehensive income (loss) $ (4,112,632) $ 3,824,115
================ ================
Comprehensive income (loss) per common share $ (.018) $ .090
================ ================
See accompanying notes.
F-6
NOVA COMMUNICATIONS LTD.
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
January 1, 2002 through December 31, 2003 (restated)
Unrealized
holding
loss from Total
Common stock Common Additional available- stockholders'
Preferred ---------------------- stock to paid-in Retained for-sale equity
stock Shares Amount be issued capital deficit investments (deficit)
----------- ----------- ---------- ----------- ----------- ------------- ----------- -------------
(restated) (restated)
Balance at January 1, 2002 $ - 31,428,458 $ 31,429 $ 20,000 $13,075,523 $(19,332,515) $(465,132) $(6,670,695)
Shares issued - - - (20,000) 20,000 - - -
Common stock issued in exchange
for interest and loan fees - 400,000 400 - 69,600 - - 70,000
Common stock issued in exchange
for long-term debt - 143,313 143 - 24,857 - - 25,000
Common stock issued in exchange
for services - 14,986,410 14,986 - 607,862 - - 622,848
Comprehensive income - - - - - 3,824,115 - 3,824,115
----------- ----------- ---------- ----------- ----------- ------------- ----------- -------------
Balance at December 31, 2002 - 46,958,181 46,958 - 13,797,842 (15,508,400) (465,132) (2,128,732)
Common stock to be issued in
exchange for long-term debt and
interest - - - 15,000 738,927 - - 753,927
Common stock issued in exchange
for notes payable and accrued
liabilities to related parties - 10,000,000 10,000 - 912,197 - - 922,197
Common stock issued in exchange
for services 198,123,187 198,123 - 3,464,205 - - 3,662,328
Beneficial conversion feature of
convertible notes payable - - - - 147,000 - - 147,000
Comprehensive income - - - - - (4,577,764) 465,132 (4,112,632)
----------- ----------- ---------- ----------- ----------- ------------- ----------- -------------
Balance at December 31, 2003 $ - 255,081,368 $255,081 $ 15,000 $19,060,171 $(20,086,164) $ - $ (902,912)
=========== =========== ========== =========== =========== ============= =========== =============
See accompanying notes.
F-7
NOVA COMMUNICATIONS LTD.
Consolidated Statements of Cash Flows
Years ended December 31
2003 2002
--------------- ---------------
(restated)
Cash flows from operating activities:
Net loss from continuing operations $ (4,479,996) $ (926,802)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 13,877 5,049
Common stock issued for services and interest and
loan fees 3,679,828 803,700
Realized loss on available-for-sale investments 497,757 -
Change in fair value of derivative liabilities 11,705
Changes in assets and liabilities:
Receivables 702 1,132
Deposits 1,478 -
Accounts payable (92,795) 154,990
Accrued liabilities 187,283 372,312
--------------- ---------------
(203,571) 410,381
Cash flows from discontinued operations 126,349 226,315
Cash flows from investing activities:
Principal repayments on notes receivable 6,402 8,170
Advances paid (513,506) -
Net investing activities of discontinued operations 1,585 368,035
--------------- ---------------
(505,519) 376,205
Cash flows from financing activities:
Advances from related parties 760,905 -
Principal payments on capitalized lease obligations - (5,274)
Net financing activities of discontinued operations (126,791) (1,007,727)
--------------- ---------------
634,114 (1,013,001)
--------------- ---------------
Net increase (decrease) in cash 51,373 (100)
Cash at beginning of year 78 178
--------------- ---------------
Cash at end of year $ 51,451 $ 78
=============== ===============
Supplemental disclosure of cash flow information -
cash paid for interest $ 7,314 $ 1,999
=============== ===============
Non-cash financing activities -
common stock issued in exchange for long-term debt $ 1,658,624 $ 25,000
=============== ===============
See accompanying notes.
F-8
NOVA COMMUNICATIONS LTD.
Notes to Consolidated Financial Statements
December 31, 2003
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. The Company invests
in and provides managerial assistance to developing companies.
BASIS OF CONSOLIDATION: The consolidated financial statements include
the accounts of Nova and its 100% owned subsidiary Kadfield, Inc.
("Kadfield"). All intercompany accounts and transactions have been
eliminated.
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.
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.
INVESTMENTS: Investments are accounted for under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
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
F-9
1. Business and summary of significant accounting policies (continued)
-------------------------------------------------------------------
IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED): value and charged to
operations in the period in which the impairment is determined by
management.
REVENUE RECOGNITION: Revenue from the Company's managerial assistance
services is recognized when services are rendered.
STOCK OPTIONS AND WARRANTS: The Company accounts for stock based
compensation to employees under SFAS No. 123, "Accounting for Stock
Based Compensation". SFAS 123 defines a fair value based method of
accounting for stock based compensation. However, SFAS 123 allows an
entity to continue to measure compensation cost related to stock and
stock options issued to employees using the intrinsic method of
accounting prescribed by Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees". Entities electing
to remain with the accounting method of APB 25 must make pro forma
disclosures of net income and earnings per share, as if the fair value
method of accounting defined in SFAS 123 had been applied. The Company
has elected to account for its stock based compensation to employees
under APB 25.
During 2003, the Company adopted SFAS 148 that amended SFAS 123 to
provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for
stock-based employee compensation. It also amended the disclosure
provisions of SFAS 123 requiring prominent disclosure about the effects
on reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. SFAS 148 also amended APB
28, "Interim Financial Reporting", to require disclosure about those
effects in interim financial information. The adoption of SFAS 148 had
no effect on the Company's financial position or results of operations.
The Company accounts for stock options and warrants issued to
non-employees for services under the fair value method of SFAS 148.
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 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.
F-10
1. Business and summary of significant accounting policies (continued)
-------------------------------------------------------------------
DERIVATIVE INSTRUMENTS (CONTINUED): 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.
During the year ended December 31, 2003, the Company recognized other
income of approximately $11,700 relating to the change in fair value of
its derivative liabilities.
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: The Company files a consolidated tax return that includes
Nova and Kadfield. The consolidated tax liability, determined without
taking credits into account, is allocated based on each company's
contribution to consolidated taxable income. Tax credits are allocated
on a pro rata basis equal to each company's contribution to the
consolidated tax credits determined to be available each year.
Income taxes are provided on the liability method whereby deferred tax
assets and liabilities are recognized for the expected tax consequences
of temporary differences between the tax bases and reported amounts of
assets and liabilities. Deferred tax assets and liabilities are
computed using enacted tax rates expected to apply to taxable income in
the years in which temporary differences are expected to 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.
SEGMENT REPORTING: The Company reports information about operating
segments and related disclosures about products and services,
geographic areas and major customers under Statement of Financial
Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of
an Enterprise and Related Information". Operating segments are defined
as components of an enterprise for which separate financial information
is available that is evaluated regularly by management in deciding how
to allocate resources and in assessing performance. The Company views
its operations and manages its business in principally one segment,
providing managerial assistance services.
F-11
1. Business and summary of significant accounting policies (continued)
-------------------------------------------------------------------
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 226,437,467 for 2003 (42,599,877 for
2002). Common stock to be issued is not considered to be a common stock
equivalent as the effect on net loss per common share would be
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 2002 balances have been reclassified in the
accompanying consolidated financial statements to conform to the 2003
presentation.
2. Operations
----------
The Company has experienced recurring losses from operations and as of
December 31, 2003 had a working capital deficit of $886,845 and a net
capital deficiency of $914,617. In addition Kadfield is in default on
various long-term obligations.
During 2003, the Company announced their intentions to divest of its
investment in Kadfield, Inc. Also, the Company is currently negotiating
with several companies in which to invest or acquire.
The Company believes the above actions and along with other plans will
allow them to continue operations and ultimately achieve profitability.
Until then, the Company is dependent upon its ability to obtain
additional capital and debt financing. The consolidated financial
statements do not reflect adjustments relating to the recorded asset
amounts, or the amounts of liabilities that would be necessary should
the Company not be able to continue in existence.
3. Advances receivable
-------------------
The Company has advanced funds to a company for cash flow purposes. The
advances are unsecured, non-interest bearing, and due on demand.
F-12
4. 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 a rate of 8% 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 a price per share equal to 70%
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 26,278,995
shares of its common stock if the principal and accrued interest of the
notes were converted as of December 31, 2003.
5. Restatement of previously issued financial statements
-----------------------------------------------------
The Company determined that it had incorrectly reported certain
convertible notes payable and accrued interest aggregating $496,673 as
payables to related parties in their consolidated financial statements
as of December 31, 2003. The Company further determined that it had not
accounted for the embedded conversion feature of the notes payable as a
derivative instrument 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".
The Company estimated the fair value of the conversion feature of its
notes payable to be $188,571 as of the date of issuance of the notes.
Under EITF 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
estimated the fair value of its derivative liabilities to be $176,866
as of December 31, 2003 and recognized other income of $11,705 in the
consolidated statement of operations for the year then ended.
F-13
5. Restatement of previously issued financial statements (continued)
-----------------------------------------------------------------
The accompanying consolidated financial statements for the year ended
December 31, 2003 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:
Notes payable and accrued
interest subject to conversion
into a indeterminable number of
shares of common stock $ - $ 308,102 $ 308,102
================= ================= =================
Derivative liabilities $ - $ 176,866 $ 176,866
================= ================= =================
Total current liabilities $ 999,288 $ 484,968 $ 1,484,256
================= ================= =================
Payable to related parties $ 760,905 $ (496,673) $ 264,232
================= ================= =================
Net capital deficiency:
Retained deficit $ (20,097,869) $ 11,705 $ (20,086,164)
================= ================= =================
Net capital deficiency $ (914,617) $ 11,705 $ (902,912)
================= ================= =================
Consolidated Statement of Operations:
Other income (expenses):
Change in fair value of derivative
liabilities $ - $ 11,705 $ 11,705
================= ================= =================
Total other income (expenses) $ (522,571) $ 11,705 $ (510,866)
================= ================= =================
Net loss from continuing operations $ (4,491,701) $ 11,705 $ (4,479,996)
================= ================= =================
Net loss $ (4,589,469) $ 11,705 $ (4,577,764)
================= ================= =================
Net loss per common share from
continuing operations $ (.020) $ - $ (.020)
================= ================= =================
6. Payable to related party
------------------------
The payable to related party is due to a company related to the
president of the Company. The advances are unsecured, non-interest
bearing, and due on demand however, this company has agreed not to
demand repayment before April 2005.
F-14
7. Common stock
------------
In December 2003, the Board of Directors authorized to issue of
15,000,000 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.
In March 2003, the Board of Directors authorized the issuance of
10,000,000 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 grated 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 188,023,187 shares of common stock of the Company in
exchange for services. The weighted average issuance price of the
shares was $.02 per share. Management of the Company valued the shares
issued at 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. The Company recorded consulting fees aggregating
$3,557,328 during the year ended December 31, 2003 as a result of the
issuances.
In March 2002, the Board of Directors authorized the issuance of
143,313 shares of common stock of the Company in exchange for long-term
obligations. Management of the Company valued the shares issued at $.18
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 June 2002, the Board of Directors authorized the issuance of 400,000
shares of common stock of the Company to PFK Development Group as loan
fees to extend the due date of a note payable to them from December
2003 to December 2004. Management of the Company valued the shares
issued at $.18 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. The Company recorded loan fees expense of
$70,000 as a result of the issuance.
F-15
7. Common stock (continued)
------------------------
During 2002, the Board of Directors authorized the issuance of an
aggregate of 14,986,410 shares of common stock of the Company in
exchange for professional services. The weighted average issuance price
of the shares was $.04 per share. Management of the Company valued the
shares issued at 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. The Company recorded professional fees aggregating
$622,848 during the year ended December 31, 2002 as a result of the
issuance.
8. Stock based compensation
------------------------
In December 2003, the Company issued 9,000,000 shares of its common
stock to its president as compensation for services. Compensation
expense of $90,000 was recorded for 2003 for the intrinsic value of the
services rendered.
During 2003, the Company issued an aggregate of 1,100,000 shares of its
common stock to an employee as compensation for services. Compensation
expense of $15,000 was recorded for 2003 for the intrinsic value of the
services rendered.
The Company's net loss from continuing operations would have changed
had compensation cost for stock based compensation been determined
based on the fair market value at the grant date, consistent with SFAS
148, to the following pro-forma amounts for the years ended December
31:
2003 2002
---------------- ----------------
Net loss from continuing operations as reported $ (4,491,701) $ (926,802)
Pro-forma effect (81,700) -
---------------- ----------------
Pro-forma net loss $ (4,573,401) $ (926,802)
================ ================
Net loss per share from continuing operations as reported $ (.020) $ (.022)
Pro-forma effect - -
---------------- ----------------
Pro-forma net loss per share from continuing operations $ (.020) $ (.022)
================ ================
9. Discontinued operations
-----------------------
In June 2002, the Company completed the divestiture of Communications
2000, Inc., dba TEC-networks. Communications 2000, Inc. had no annual
sales in 2002 and a loss from operations of approximately $775,400. The
Company recorded a gain on the divestiture of Communications 2000, Inc.
of $5,522,708 in 2002.
F-16
9. Discontinued operations (continued)
-----------------------------------
On July 21, 2003 the Board of Directors approved a formal plan to
dispose of Kadfield. It is anticipated that the disposal will be
completed during 2004. Kadfield had annual sales of approximately
$4,312,300 in 2003 ($7,890,400 in 2002) and a loss from operations of
approximately $97,800 in 2003 (income from operations of approximately
$3,600 in 2002).
10. Income taxes
------------
Deferred income taxes consisted of the following at December 31:
2003 2002
---------------- ----------------
Deferred tax assets:
Net operating loss carryovers $ 5,560,000 $ 3,828,800
Unrealized losses on investments - 158,100
Allowance for uncollectible accounts - 12,900
---------------- ----------------
$ 5,560,000 $ 3,999,800
================ ================
2003 2002
---------------- ----------------
Deferred tax assets $ 5,560,000 $ 3,999,800
Valuation allowance for deferred tax assets (5,560,000) (3,999,800)
---------------- ----------------
Net deferred income taxes $ - $ -
================ ================
The components of the provision for income taxes are as follows for the
years ended December 31:
2003 2002
---------------- ----------------
State of California -
Currently payable $ 800 $ 800
================ ================
The provision for income taxes is included in the accompanying income
statements under the following captions for the years ended December
31:
2003 2002
---------------- ----------------
Continuing operations $ 800 $ 800
Discontinued operations - -
---------------- ----------------
$ 800 $ 800
================ ================
F-17
10. Income taxes (continued)
------------------------
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:
2003 2002
---------------- ----------------
Tax at statutory rates $ 1,556,440 $ 1,300,471
Differences resulting from:
State tax, net of Federal tax benefit 528 528
Non-deductible and other items 4,032 71,801
Change in deferred tax valuation allowance (1,560,200) (1,372,000)
---------------- ----------------
Provision for income taxes $ 800 $ 800
================ ================
The Company has approximately $15,850,000 in Federal and State of
California net operating losses, which, if not utilized, expire through
2023.
The 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, 2003 and 2002.
F-18
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.
ENCOMPASS HOLDINGS, INC.
/s/ ARTHUR N. ROBINS
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 May 30, 2006
-------------------
Leslie I. Handler
/s/ ARTHUR N. ROBINS Chief Executive Officer May 30, 2006
-------------------
Arthur N. Robins
23
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
10.1 * Letter of Intent dated May 2. 2003 with PowerSki
International Corporation.
10.2 * Memorandum of Understanding dated October 8, 2003 with
PowerSki International Corporation.
10.3 * Memorandum of Understanding II dated February 2, 2004 with
PowerSki International Corporation.
SUBSIDIARIES
21 * Kadfield, Inc., doing business as BuyMicro.
CERTIFICATIONS
31.1 Rule 15d-14(a) certification of Leslie I. Handler.
31.1 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
24