1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ________ to _________
COMMISSION FILE NUMBER 0-23111
A NOVO BROADBAND, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 31-1239657
(State of Incorporation) (I.R.S. Employer
Identification No.)
3015 GREENE STREET, HOLLYWOOD, FLORIDA 33020
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (954) 921-3870
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
The aggregate market value of the voting and non-voting common equity
(which consists solely of shares of Common Stock) held by non-affiliates of the
issuer as of July 31, 2001, computed by reference to the closing sales price of
the issuer's Common Stock on the Nasdaq Bulletin Board on that date, was
approximately $ 6,084,984.
The number of shares of the issuer's Common Stock outstanding as of
July 31, 2001 was 4,869,082.
Transitional Small Business Disclosure Format. Yes [X] No [ ]
2
A NOVO BROADBAND, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
INDEX
PAGE NUMBER
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Consolidated Balance Sheets at June 30, 2001 and September 30, 2000 3
Consolidated Statements of Operations for the Three and Nine Months Ended 5
June 30, 2001 and 2000
Consolidated Statements of Cash Flows for the Nine Months ended June 30, 6
2001 and 2000
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 9
Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities; Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
3
A NOVO BROADBAND, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30, SEPTEMBER 30,
2001 2000
------------ -------------
CURRENT ASSETS
Cash and cash equivalents......................................... $ 3,892,098 $ 7,104,915
Accounts receivable, net.......................................... 2,092,492 2,508,590
Inventories, net.................................................. 1,839,838 1,481,718
Notes receivable, related parties................................. 200,000 200,000
Prepaid and other assets.......................................... 194,591 160,324
Deferred income taxes............................................. 47,000 47,000
----------- -----------
Total current assets............................................ 8,266,019 11,502,547
PROPERTY AND EQUIPMENT, net ......................................... 1,976,627 701,740
OTHER ASSETS
Notes receivable, related parties................................. 58,161 200,000
Goodwill, net..................................................... 3,023,951 3,167,411
Deferred income taxes............................................. 800,731 641,000
Other assets...................................................... 265,451 28,039
----------- -----------
TOTAL ASSETS ........................................................ $14,390,940 $16,240,737
=========== ===========
See accompanying notes to the consolidated financial statements.
3
4
A NOVO BROADBAND, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, SEPTEMBER 30,
2001 2000
----------- ------------
CURRENT LIABILITIES
Current portion of long-term obligations .......... $ 190,008 $ 192,496
Notes payable - bank .............................. -- 937,569
Accounts payable .................................. 1,578,682 1,911,285
Accrued expenses .................................. 235,274 324,805
----------- -----------
Total current liabilities ....................... 2,003,964 3,366,155
LONG-TERM OBLIGATIONS ............................... 104,167 166,667
----------- -----------
Total liabilities ............................... 2,108,131 3,532,822
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value
Authorized shares - 1,000,000
Issued shares - none ............................ -- --
Common stock, $0.001 par value as of June 30, 2001,
no par value as of September 30, 2000
Authorized shares - 20,000,000
Issued shares - 4,869,082 and 4,749,602 ......... 4,869 13,449,014
Additional paid-in-capital ........................ 13,706,709 159,136
Retained deficit .................................. (1,428,769) (900,235)
----------- -----------
Total stockholders' equity ...................... 12,282,809 12,707,915
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........... $14,390,940 $16,240,737
=========== ===========
See accompanying notes to the consolidated financial statements.
4
5
A NOVO BROADBAND, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, MARCH 31,
2001 2000 2001 2000
----------- ----------- ------------ -----------
Revenues ..................................... $ 3,007,407 $ 2,533,460 $ 11,729,890 $ 6,872,337
Cost of sales ................................ 1,961,884 1,707,690 8,259,031 4,060,763
----------- ----------- ------------ -----------
Gross profit .............................. 1,045,523 825,770 3,470,859 2,811,574
Selling, general and administrative expenses . 2,050,261 861,143 4,792,929 2,363,056
----------- ----------- ------------ -----------
Income (loss) from operations ................ (1,004,738) (35,373) (1,322,070) 448,518
Interest expense ............................. (3,452) (17,488) (24,814) (67,034)
Interest income .............................. 77,277 81 273,591 354
----------- ----------- ------------ -----------
Income (loss) before income taxes ......... (930,913) (52,780) (1,073,293) 381,838
Benefit from (provision for) income taxes ... 317,371 (3,060) 364,529 (373,589)
----------- ----------- ------------ -----------
Income (loss) from continuing operations .. (613,542) (55,840) (708,764) 8,249
Discontinued operations:
Loss from operations of discontinued
division, net of tax benefit of $19,000 -- -- -- (68,773)
Gain (loss) on disposal of division, net of
tax (provision) or benefit of ($0),
($0), ($93,000) and $266,000
respectively .......................... -- 44,905 180,230 (711,383)
----------- ----------- ------------ -----------
Net loss ..................................... $ (613,542) $ (10,935) $ (528,534) $ (771,907)
=========== =========== ============ ===========
Basic Earnings Per Share
Income (loss) from continuing operations . $ (0.13) $ (0.03) $ (0.15) $ 0.01
Gain (loss) on discontinued operations .... $ -- $ 0.02 $ 0.04 $ (0.46)
----------- ----------- ------------ -----------
Net loss per share ........................ $ (0.13) $ (0.01) $ (0.11) $ (0.45)
=========== =========== ============ ===========
Weighted average shares outstanding ....... 4,849,923 1,708,936 4,817,731 1,700,363
=========== =========== ============ ===========
Diluted Earnings Per Share
Income (loss) from continuing operations .. $ (0.13) $ (0.03) $ (0.15) $ 0.00
Income (loss) on discontinued operations .. $ -- $ 0.02 $ 0.04 $ (0.42)
----------- ----------- ------------ -----------
Net loss per share ........................ $ (0.13) $ (0.01) $ (0.11) $ (0.42)
=========== =========== ============ ===========
Weighted average shares outstanding ....... 4,849,923 1,708,936 4,817,731 1,842,752
=========== =========== ============ ===========
See accompanying notes to the consolidated financial statements.
5
6
A NOVO BROADBAND, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31,
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ................................................. $ (528,534) $ (771,907)
----------- -----------
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization ......................... 365,921 273,093
Loss on disposal of property and equipment ............ 54,304 30,205
Provision for losses on receivables ................... 34,625 30,583
Provision for inventory obsolescence .................. (526) --
Loan to former CEO repaid by bonus .................... 141,839 --
Deferred income taxes ................................. (252,731) (19,720)
Loss (gain) on disposal of division ................... (180,230) 711,383
(Increase) decrease in operating assets:
Accounts receivable ............................... 381,473 926,493
Income tax receivable ............................. -- 43,875
Inventories ....................................... (357,594) 116,494
Prepaid and other assets .......................... (271,679) 63,114
Decrease in operating liabilities:
Accounts payable .................................. (59,373) (22,485)
Accrued expenses .................................. (89,531) (321,316)
----------- -----------
Total adjustments ............................. (233,502) 1,831,719
----------- -----------
Net cash (used in)provided by operating activities ....... (762,036) 1,059,812
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment ....................... (1,571,389) (263,311)
Refund of acquisition costs .............................. 19,737 --
Proceeds from disposal of property ....................... -- 34,865
----------- -----------
Net cash used in investing activities .................... (1,551,652) (228,446)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options and warrants ..... 103,428 47,507
Net payments on obligations .............................. (1,002,557) (966,798)
----------- -----------
Net cash used in financing activities .................... (899,129) (919,291)
----------- -----------
Net decrease in cash and cash equivalents ................ (3,212,817) (87,925)
Cash and cash equivalents at beginning of period ......... 7,104,915 130,572
----------- -----------
Cash and cash equivalents at end of period .............. $ 3,892,098 $ 42,647
=========== ===========
See accompanying notes to the consolidated financial statements.
6
7
A NOVO BROADBAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements for the period ended June 30,
2001 are unaudited (except for the September 30, 2000 consolidated balance
sheet, which was derived from the Company's audited financial statements),
should be read in conjunction with the consolidated financial statements and
footnotes thereto included in the Company's Transitional Report on Form 10-KSB,
for the 12 months ended September 30, 2000, and have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete consolidated financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation have been
included.
Operating results for the three and nine months ended June 30, 2001 are not
necessarily indicative of the results that may be expected for the entire fiscal
year ending September 30, 2001.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Numerator:
Income (loss) from continuing operations ......... $ (613,542) $ (55,840) $ (708,764) $ 8,249
========== ========== ========== ==========
Denominator:
Denominator for basic earnings per share
Weighted-average shares outstanding ........... 4,849,923 1,708,936 4,817,731 1,700,363
Effect of dilutive securities:
Employee stock options ........................... -- -- -- 142,389
---------- ---------- ---------- ----------
Denominator for diluted earnings per share........ 4,849,923 1,708,936 4,817,731 1,842,752
========== ========== ========== ==========
Basic earnings (loss) per share ................. $(0..13) $(0.03) $(0.15) $0.01
========== ========== =========== ==========
Diluted earnings (loss) per share ............... $(0.13) $(0.03) $(0.15) $0.00
========== ========== =========== ==========
7
8
3. NOTES PAYABLE
Pursuant to a guaranty, in October 2000 the Company satisfied an indebtedness to
a commercial bank of Auro Computer Services. Auro is a subsidiary whose
operations ceased in February 2000. The indebtedness was reflected as a
liability in the Company's balance sheet as of September 30, 2000.
The Company's line of credit with its former commercial bank expired on March
31, 2001. On April 26, 2001, the Company entered into a new loan agreement with
its new commercial bank to provide a $1.5 million revolving line of credit. The
Company has pledged its inventories and accounts receivable as security for the
line of credit. Advances under the line will bear interest at a rate of prime
plus 1%, and the line expires on January 31, 2002.
4. LEASES
The Company has entered into lease agreements for new service centers in Los
Angeles, California, Hollywood, Florida, and Columbus, Ohio. The lease terms are
for five, five and eight years, expiring in 2005, 2006 and 2009 respectively.
5. SHAREHOLDER'S EQUITY
On February 15, 2001, the Company reincorporated in Delaware and its common
stock was changed to a par value of $.001.
6. SUBSEQUENT EVENT
On August 13, 2001, the Company entered into a binding agreement to purchase
assets constituting the equipment repair business of Broadband Services, Inc.
The transaction is expected to close on or around August 31, 2001, subject to
the satisfaction of customary conditions. The purchase price for the net assets
of the repair business is approximately $8 million cash plus assumed
liabilities. The Company expects to record approximately $5.5 million in
goodwill in conjunction with this transaction. The Company will use existing
cash and a bridge loan from an affiliate, among other sources, to finance the
transaction.
8
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto included in the
Company's Transitional Report on Form 10-KSB for the 12 months ended September
30, 2000. Quarterly operating results have varied significantly in the past and
can be expected to vary in the future. Results of operations for any particular
quarter are not necessarily indicative of results of operations for a full year.
OVERVIEW
A Novo Broadband, Inc. ("We" or "The Company") was formerly known as Cable
Link, Inc. We changed our name and reincorporated in Delaware in February 2001,
and at that time we changed our ticker symbol on the NASDAQ Bulletin Board to
ANVB. Our decision to change our name reflects a fundamental change in our
business plan to direct our business toward the service and repair of broadband
equipment. We are now adapting and expanding our operations to enable us to
offer services to manufacturers of broadband equipment and to the operators of
the systems in North America that employ this equipment. We are taking this step
in anticipation of a shift of broadband services from analog to digital format
in the United States and Canada. Our goal is to seize a significant early share
of the service and repair market that we estimate will generate in excess of $1
billion in revenue in the U.S. and Canada by the year 2005.
Our operational model is based on high volume processing techniques that
have been implemented successfully in Europe and the utilization of proprietary
information management software. Certain of these techniques are available to us
as a result of our relationship with the Paris-based A Novo Group, which became
an affiliate of the Company in August 2000. A Novo Group's experience has been
developed by the transition to digital signal delivery in Europe, which began
over four years ago. We believe that the resources available to us from A Novo
Group, in combination with our new management team, expanded capital, existing
skilled labor force, technical knowledge base, and industry relationships will
enable us to become the primary service provider to the broadband equipment
industry in North America.
As we continue to adapt our service centers to service and repair digital
equipment, we plan to continue to function as a broker and distributor of new
and refurbished broadband equipment, primarily in secondary and international
markets. During our fiscal year ending September 30, 2001, we expect to derive a
significant portion of our revenues from these activities. Revenue from these
activities is subject to significant risks, however, because it depends on
potentially volatile levels of capital expenditures by the system operators who
access the surplus equipment market. The equipment we currently sell and service
for manufacturers and system operators includes analog converters, cable and DSL
modems, linegear, headend, power generators and power supplies, and test
equipment. We believe that our capability to deal with used and surplus
equipment should help to foster relationships with many of the large system
operators we are targeting as customers for digital repair. Over the next
several years, we anticipate that our relatively low-margin equipment sales will
represent a decreasing portion of our total revenues as our volume in repair and
related services increases and provides the majority of our revenues.
To capture digital warranty service authorizations, we are creating
comprehensive servicing arrangements with both equipment manufacturers and
system operators. These arrangements are to be based upon a core of services
consisting of:
o screening, testing and profiling new equipment on behalf of manufacturers
prior to initial installation; and
o repairing, calibrating, upgrading and maintaining the equipment as an
authorized warranty service center for manufacturers and under
post-warranty arrangements with system operators.
In conjunction with these core services, we expect to offer a variety of
other services to our customers. These services will include asset management
and logistics functions, which will allow the tracking of customer inventory by
monitoring the warranty and upgrade status of individual units of equipment on a
real time basis, and receiving, storing, packing and shipping new and used
customer assets to multiple locations.
9
10
We believe that equipment manufacturers will elect to outsource these
services to focus on design, research and development, and manufacturing.
Generally, their manufacturing facilities are not designed to accommodate repair
functions. These facilities are designed to assemble equipment, as opposed to
take equipment apart for repair. The manufacturing plants are typically located
outside of the U.S. These locations provide favorable labor rates, but make it
difficult for equipment manufacturers to respond quickly to the demands of after
sales customer support. The repair of digital equipment is complex and requires
significant capital investment. In light of these factors, we expect
manufacturers to capitalize on the economies of scale and efficiencies they can
achieve through outsourcing. Many of them have already recognized the benefits
of outsourcing the manufacturing process, and we are receiving favorable
responses to our proposals for outsourcing repairs.
In-Warranty Repair:
We are currently approved as an "In-Warranty Service Center" by:
o Scientific Atlanta for digital decoders and for advanced analog decoders,
analog converters, remote controls, linegear and headend equipment in
Canada and the United States,
o Pace MicroTechnology for digital decoders and DSL modems in all of North
America,
o Motorola (which manufactures under the brand General Instruments) for
analog decoders, analog converters, remote controls, linegear and headend
equipment in Canada,
o Lindsay for linegear in Canada,
o ANTEC for linegear in Canada,
o Blonder Tongue for headend in Canada,
o Alpha Technologies for power supplies in the United States,
o Powerguard for power supplies in Canada, and
o Sadelco for test equipment.
Out-of-Warranty/Broadband Operators Repair:
Our principal customers among broadband system operators currently include
o Adelphia,
o AT&T Broadband,
o Ameritech New Media,
o Cablevision,
o Charter,
o Comcast,
o Insight Communications,
o Time Warner,
o Videotron, and
o 3 Com.
We currently distribute certain power supply and other broadband equipment
for Alpha Technologies, ADC, Aegis and Times Fiber to customers outside the
United States.
LAUNCH OF DIGITAL REPAIR
We began processing digital equipment in our Montreal facility during the
third fiscal quarter. This represents a significant accomplishment due to the
complexity of the process and the various levels of detail involved in
communicating with the manufacturers. Following the completion of the
installation of digital repair capabilities in Montreal, we began to implement
digital repair capabilities in our other service centers, and we expect to
complete the process by the end of the fiscal year.
10
11
RECENT DEVELOPMENTS
During the current fiscal year, we have established service agreements with
the following manufacturers and operators:
o 3 Com - We were recently approved as a repair service center for cable
modems for 3 Com. 3Com has approximately 1.3 million cable modems installed
in the North American market.
o Pace MicroTechnology - We were recently approved as an in and out of
warranty service center for Pace MicroTechnology. Pace, a European cable
equipment manufacturer, has recently announced that they will be delivering
more than 1 million digital decoders to Time Warner and Comcast in the U.S.
We anticipate generating revenue from this agreement in our fourth quarter.
o Adelphia - We entered into a contract to provide asset management for
Adelphia, a cable operator serving approximately 5.5 million
subscribers in the U.S. We began recognizing revenue from this contract
during the second quarter.
o Ameritech New Media - We received a contract to provide out of warranty
repair for a five year period with AmeriTech, a cable operator in the
Midwest U.S. serving approximately 300,000 homes.
o Ameritech New Media - We received a contract with AmeriTech to provide
asset management services.
o Videotron - We entered into an agreement to provide out of warranty repair
services for Videotron, the third largest cable operator in Canada. We
expect to generate revenue from this agreement in our fourth quarter.
11
12
RESULTS OF OPERATIONS
The following table contains certain amounts, expressed as a percentage
of net sales, reflected in our consolidated statements of income for the three
and six months ended March 31, 2001 and 2000:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
----- ----- ----- -----
Revenues ........................................ 100.0 100.0 100.0 100.0
Cost of revenues ................................ 65.2 67.4 70.4 59.1
----- ----- ----- -----
Gross profit .................................... 34.8 32.6 29.6 40.9
Selling, general & administrative expenses....... 68.2 34.0 40.9 34.4
----- ----- ----- -----
Income from operations .......................... (33.4) (1.4) (11.3) 6.5
Interest expense ................................ (0.1) (0.7) (0.2) (1.0)
Interest income ................................. 2.5 0.0 2.3 0.0
----- ----- ----- -----
Net income before tax ........................... (31.0) (2.1) (9.2) 5.5
(Provision for) benefit from income tax ......... 10.6 (0.1) 3.1 (5.4)
----- ----- ----- -----
Income from continuing operations ............... (20.4) (2.2) (6.1) 0.1
===== ===== ===== =====
THREE MONTHS ENDED JUNE 30, 2001 RESULTS COMPARED TO THREE MONTHS ENDED JUNE 30,
2000 (ALL REFERENCES TO YEARS ARE TO FISCAL YEARS)
SALES
Our revenues for the third quarter of 2001 increased $474,000, or 19%,
over the same quarter for 2000. During 2001, we generated 63%, or $1.9 million,
of our revenues from sales of brokerage and distribution, compared to 50%, or
$1.3 million of our revenue during 2000. Sales of refurbished equipment during
2001 were $619,000, or 21% of revenue, compared to $1.1 million, or 45% of
revenue last year. Revenues from repair activities increased 113% from $143,000
last year to $305,000 during the current quarter. We recorded $185,000 of
revenue from logistics during the current quarter compared to none last year. We
believe that the decrease in revenue from the sales of refurbished equipment was
due to the downturn in the economy during the quarter, which resulted in the
reduction of capital spending by broadband operators.
Our new business plan is focused on increasing repair and logistics
revenue which we expect will be generated by our relationships with the
manufacturers of equipment for the broadband market and the operators that use
them. Specifically, we are targeting service and repair opportunities for
digital set top boxes for the cable industry, cable modems, and DSL modems.
However, brokerage and distribution sales are currently necessary to sustain
existing relationships and to develop new relationships with system operators.
Additionally, these activities are necessary to generate revenues which will
assist in funding our new business plan.
12
13
COST OF GOODS SOLD
The cost of goods sold for the third quarter of 2001 was 65% compared
to 67% of revenues for same quarter in 2000. While the overall gross margins
percentages were relatively constant over the two periods, the mix of revenue
caused differing affects in the cost of goods sold. The cost of goods sold for
brokerage and refurbishment were higher this year than last year, as the slow
down in capital expenditures in the cable industry caused selling prices to
compress. However, these higher costs were mitigated in the current quarter by
logistics revenue, which has a high gross margin.
Margins for the current quarter were also adversely affected by the
expansion of our capacity by adding service centers in Los Angeles, Montreal,
and Hollywood, Florida. Direct labor expenses associated with each of these new
facilities is recognized in costs of goods sold. We expect margins to increase
as utilization of the expanded capacity improves.
OPERATING EXPENSES
Operating expenses for the third quarter of 2001 increased $1.2
million, or 138%, over the same quarter in 2000. Most of this increase is
directly attributable to the costs associated with our new service centers. We
incurred an additional $300,000 of operating expenses during 2001 compared to
2000 because of our addition of three new service centers. An additional $41,000
in operating expenses is attributable to amortization. Additionally, we have
expanded our corporate staff to implement the change in our business plan and
to manage our new administrative requirements. This addition in staff and
related expenses contributed $700,000 of the increase.
INCOME TAX PROVISION
The effective tax rate on continuing operations was 34% for the quarter
ended June 30, 2001, compared to an effective tax rate of 6% last year, which
was immaterial. We have not recorded any valuation allowance against our
deferred tax assets, because it is management's belief that we will realize
profits in the near term that will fully utilize our net operating loss
carryforwards.
DISCONTINUED OPERATIONS
In February 2000, we decided to close our subsidiary, Auro Computer
Services, Inc. ("Auro"), and the operations of Auro were discontinued on
February 21, 2000. As of December 31, 1999, we recorded a charge for the
expected loss on the disposition of Auro's assets, net of tax effect. The assets
were written down to their estimated net realizable values. We recognized a gain
of $45,000 during the third quarter last year due to the collection of
outstanding receivables which had been charged off.
Auro's remaining obligations will be adjusted when they are settled
with the creditors. We do not anticipate any further adverse impact on our
results of operations as a result of the discontinuance of this business.
Pursuant to a guaranty, in October 2000 the Company satisfied indebtedness of
Auro to a commercial bank. The indebtedness was reflected as a liability on our
balance sheet as of September 30, 2000.
13
14
NINE MONTHS ENDED JUNE 30, 2001 RESULTS COMPARED TO NINE MONTHS ENDED JUNE 30,
2000 (ALL REFERENCES TO YEARS ARE TO FISCAL YEARS)
SALES
Our revenues for the nine months ended September 30, 2001 increased
$4.8 million, or 71%, over the same period for 2000. Our emphasis on increasing
our repair revenue is evidenced by the 111% increase from $600,000 last year to
$1.3 million this year. Despite the slow down in capital spending by cable
operators due to the economic environment in the United States, we have also
increased our brokerage and distribution sales during the first nine months of
2001. Our revenue from sales of brokerage increased 203% from $1.6 million last
year to $4.9 million this year. In 2000, we had just begun our distribution
operations, thus our distribution revenue increased from $700,000 last year to
$3.0 million this year. Our revenue generated by sales of refurbished equipment
has been adversely affected by the economic slow down, and as a result, revenue
from refurbished equipment sales dropped from $3.9 million last year to $2.2
million this year, a decrease of 43%.
COST OF GOODS SOLD
Cost of goods sold this year was 70% compared to 59% last year. This
decrease in our gross margin percentage occurred because the gross margin
generated by the revenues from brokerage and distribution sales is much lower
than the gross margin generated by the revenue from the sales of refurbished
equipment or from repair services. In the first nine months of 2001, 68% of our
revenue was generated from brokerage and distribution sales, compared to 34%
last year, while 19% of our revenue was generated from sales of refurbished
equipment this year compared to 57% last year.
Margins for the current year were also adversely affected by the
expansion of our capacity by adding service centers in Los Angeles, Montreal,
and Hollywood, Florida. Direct labor expenses associated with each of these new
facilities is recognized in costs of goods sold. We expect margins to increase
as utilization of the expanded capacity improves.
OPERATING EXPENSES
Operating expenses for the first nine months of 2001 increased $2.4
million, or 103%, over the previous year. Of this increase, $800,000 is directly
attributable to the addition of service centers in Los Angeles, Montreal, and
Hollywood, Florida. Additionally, we have expanded our corporate staff to
implement the change in our business plan and to manage our new administrative
requirements. Our operating expenses for the first nine months of 2001 also
includes $120,000 in amortization which was not recorded last year.
INCOME TAX PROVISION
The effective tax rate was 34% for the current year. The effective tax
rate for continuing operations for the first nine months last year was 98% due
to the timing of events and the elimination of deferred tax assets associated
with the write down of assets of Auro at December 31, 1999. We have not recorded
a valuation allowance against our deferred tax assets because it is management's
belief that we will realize profits in the near term that will fully utilize our
net operating loss carryforwards.
DISCONTINUED OPERATIONS
In February 2000, we decided to close our subsidiary, Auro, and the
operations of Auro were discontinued on February 21, 2000. We recorded a charge
for the expected loss on disposition of Auro's assets, net of tax effects as of
December 31, 1999. The assets were written down to their estimated net
realizable values. We have recognized a gain of $180,230, net of income tax,
during the current year due to the settlement of obligations recorded on Auro's
books. Last year, we recognized losses of $780,000, net of income tax, with
regard to the closure of the business, subsequent losses from operating
expenses, and gains from the disposition of obligations.
14
15
Auro's remaining obligations will be adjusted when they are settled
with the creditors. We do not anticipate any further adverse impact to our
results of operations as a result of the discontinuance of this business.
LIQUIDITY AND CAPITAL RESOURCES
For the past three years, we have satisfied our operating cash
requirements principally through cash flow from operations and borrowings from
our line of credit. In the nine months ended June 30, 2001, we have used
$762,000 of cash in operating activities. We spent $1.6 million for fixed
assets, primarily for the purchase of digital repair and testing equipment and
leasehold improvements at our new service centers.
We currently have a $1.5 million revolving line of credit with our
commercial bank under an arrangement that expires on January 31, 2002. The line
of credit provides for interest at the bank's prime rate plus 1%. At September
30, 2000, there was a balance of $937,000 owed to our previous commercial bank,
which was paid in its entirety in October 2000.
We believe that cash flow from operations, our existing cash resources,
and funds available under our line of credit will be adequate to meet our
working capital and capital expenditure needs for the remainder of the current
fiscal year. We expect to spend at least $3.0 million on capital expenditures
during this fiscal year, primarily to improve our equipment capabilities for
servicing digital broadband equipment and to provide furniture and fixtures and
computer equipment for our expanded facilities in Hollywood, Florida, Los
Angeles, California, and Montreal, Canada and the move to our new facility in
Columbus, Ohio.
An important element of our business strategy has been, and continues
to be, the acquisition of similar businesses and the integration of such
businesses into our existing operations. Such future acquisitions, if they
occur, may require us to obtain additional funds. We would expect to seek such
funds through private or public sales of additional equity securities or debt
instruments.
CONTINGENCIES
We are a party from time to time to ordinary litigation incidental to
our business, none of which is expected to have a material adverse effect on our
results of operations, financial position or liquidity.
FORWARD LOOKING STATEMENTS
Certain statements in this report are forward-looking statements
regarding future events or our future financial performance. These statements
are subject to a number of risks and other factors which could cause actual
results to differ materially from those anticipated by the forward-looking
statements. Among such factors are industry development (including the rate at
which digital broadband services are introduced in our markets), competition
(including direct competition by equipment suppliers and broadband system
operators), customer acceptance of and demand for our services, technological
developments which may render our services obsolete or unnecessary, availability
of financing and our ability to expand our facilities and manage growth and
change, general business and economic conditions, and our likely increasing
dependence on new information systems.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("SFAS") No. 141 "Business Combinations" and
No. 142 "Goodwill and Other Intangible Assets." We are currently evaluating the
impact of these pronouncements and we do not expect the adoption of SFAS No. 141
and 142 to have an impact on our financial conditions or results of operations
for the year ending September 30, 2001.
15
16
A NOVO BROADBAND, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information pertaining to this item is incorporated herein from Part 1.
Financial Information (Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Contingencies).
Item 2. Changes in Securities; Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
16
17
A NOVO BROADBAND, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
A Novo Broadband, Inc.
Date: August 14, 2001 By: /s/ David E. Chisum
-----------------------------------
David E. Chisum
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
17