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 DECEMBER 31, 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.)
196 Quigley Boulevard, New Castle, Delaware 19720
(Address of Principal Executive Offices)(Zip Code)
Issuer's telephone number, including area code: (302)322-6088
Check 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 January 31, 2002, computed by reference to the closing sales price
of the issuer's Common Stock on the Nasdaq Bulletin Board on that date, was
approximately $1,627,766.
The number of shares of the issuer's Common Stock outstanding as of January
31, 2002 was 5,045,542.
Transitional Small Business Disclosure Format. Yes [X] No [ ]
A NOVO BROADBAND, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
INDEX
PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets at December 31, 2001 (unaudited) and September 3
30, 2001 (audited)
Consolidated Statements of Operations and Comprehensive (Loss)
Income for 5 the Three Months Ended December 31, 2001 and 2000
(unaudited)
Consolidated Statements of Cash Flows for the Three Months ended December 6
31, 2001 and 2000 (unaudited)
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 14
Item 2. Changes in Securities; Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
A NOVO BROADBAND, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, September 30,
2001 2001
------------ ------------
(unaudited) (audited)
CURRENT ASSETS
Cash ........................... $ 403,586 $ 320,696
Accounts receivable, net ....... 4,373,729 4,267,857
Inventories, net ............... 2,086,897 1,871,350
Notes receivable-related parties 150,000 200,000
Prepaid and other assets ....... 289,646 163,306
Deferred income taxes .......... 541,000 541,000
------------ ------------
Total current assets ......... 7,844,858 7,364,209
------------ ------------
PROPERTY AND EQUIPMENT, at cost
Furniture and fixtures ......... 1,161,048 1,217,341
Equipment ...................... 3,881,781 2,885,684
Leasehold improvements ......... 955,538 523,371
Software ....................... 136,114 57,000
------------ ------------
6,134,481 4,683,396
Less accumulated depreciation .. (1,445,005) (1,216,323)
------------ ------------
Net property and equipment ... 4,689,476 3,467,073
------------ ------------
OTHER ASSETS
Goodwill, net .................. 8,515,114 8,528,807
Deferred income taxes .......... 1,886,579 1,552,000
Other assets ................... 139,519 139,519
------------ ------------
Total other assets ........... 10,541,212 10,220,326
------------ ------------
TOTAL ASSETS ...................... $ 23,075,546 $ 21,051,608
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
3
A NOVO BROADBAND, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, September 30,
2001 2001
------------ ------------
(unaudited) (audited)
CURRENT LIABILITIES
Current portion of long-term obligations $ 190,008 $ 190,008
Notes payable - bank ................... 1,500,000 500,000
Note payable - related party ........... 5,071,752 4,971,940
Accounts payable ....................... 5,015,727 3,039,259
Advances from related party ............ 100,000 --
Accrued expenses
Payroll and related taxes ............ 610,375 990,935
Other ................................ 108,634 250,429
------------ ------------
Total current liabilities ............ 12,596,496 9,942,571
------------ ------------
LONG-TERM LIABILITIES ..................... 62,500 83,334
------------ ------------
Total liabilities .................... 12,658,996 10,025,905
------------ ------------
STOCKHOLDERS' EQUITY
Common stock ........................... 4,916 4,915
Additional paid-in-capital ............. 13,862,310 13,861,873
Accumulated other comprehensive loss ... (56,516) (47,304)
Retained deficit ....................... (3,394,160) (2,793,781)
------------ ------------
Total stockholders' equity ........... 10,416,550 11,025,703
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 23,075,546 $ 21,051,608
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
4
A NOVO BROADBAND, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
THREE MONTHS ENDED DECEMBER 31,
2001 2000
----------- -----------
(unaudited) (unaudited)
Revenues ................................... $ 5,334,861 $ 4,726,400
Cost of sales .............................. 4,039,143 3,391,809
----------- -----------
Gross profit ............................ 1,295,718 1,334,591
Selling, general and administrative expenses 2,121,521 1,310,663
----------- -----------
(Loss) income from operations ........... (825,803) 23,928
Other (expense) income
Interest expense ...................... (133,504) (7,320)
Interest income ....................... 24,349 110,593
----------- -----------
Total other (expense) income .............. (109,155) 103,273
----------- -----------
(Loss) income before income taxes ....... (934,958) 127,201
Benefit from (provision for) taxes ........ 334,579 (43,251)
----------- -----------
Net (loss) income .......................... (600,379) 83,950
Other comprehensive (loss) ................. (9,212) --
----------- -----------
Total comprehensive (loss) income .......... $ (609,591) $ 83,950
=========== ===========
Basic earnings per share
(Loss) income from continuing operations $ (0.12) $ 0.02
=========== ===========
Weighted average shares outstanding ..... 4,915,766 4,759,645
=========== ===========
Diluted earnings per share
(Loss) income from continuing operations $ (0.12) $ 0.02
=========== ===========
Weighted average shares outstanding ..... 4,915,766 5,073,220
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
5
A NOVO BROADBAND, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31,
2001 2000
----------- -----------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income .................................. $ (600,379) $ 83,950
----------- -----------
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Depreciation and amortization ................... 270,115 140,798
Provision for losses on receivables ............. (56,844) 14,402
Provision for inventory obsolescence ............ 14,800 24,702
Deferred income taxes ........................... (334,579) 43,251
Acquisition bonus ............................... 50,000 33,333
Accrued interest - related parties .............. 99,812 --
Increase in operating assets:
Accounts receivable ......................... (49,028) (227,746)
Inventories ................................. (230,347) (59,878)
Prepaid and other assets .................... (126,340) (116,727)
Increase (decrease) in operating liabilities:
Accounts payable ............................ 1,976,468 545,223
Accrued expenses ............................ (522,355) (29,284)
----------- -----------
Total adjustments ....................... 1,091,702 368,074
----------- -----------
Net cash provided by operating activities .......... 491,323 452,024
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment ................. (1,478,825) (73,100)
Increase in notes receivable ....................... -- (11,982)
----------- -----------
Net cash used in investing activities .............. (1,478,825) (85,082)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options
and warrants ...................................... 438 58,521
Net borrowings on notes payable - bank ............. 1,000,000 --
Net advances from related party .................... 100,000 --
Net payments on obligations ........................ (20,834) (960,985)
----------- -----------
Net cash provided by (used in) financing activities 1,079,604 (902,464)
----------- -----------
Effect of exchange rate changes on cash ............ (9,212) --
----------- -----------
Net increase (decrease) in cash and cash equivalents 82,890 (535,522)
Cash and cash equivalents at beginning of period ... 320,696 7,104,915
----------- -----------
Cash and cash equivalents at end of period ......... $ 403,586 $ 6,569,393
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
6
A NOVO BROADBAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements, which should be read in
conjunction with the consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-KSB for the fiscal year ended
September 30, 2001, are unaudited (except for the September 30, 2001
consolidated balance sheet, which was derived from the Company's audited
financial statements), but have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete 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 months ended December 31, 2001 are not
necessarily indicative of the results that may be expected for the entire fiscal
year ending September 30, 2002.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
DECEMBER 31
2001 2000
Numerator:
(Loss) income ........................ $ (600,379) $ 83,950
========== ==========
Denominator:
Denominator for basic earnings per share -
Weighted-average shares outstanding ... 4,915,766 4,759,645
Effect of dilutive securities:
Employee stock options ................... -- 313,575
---------- ----------
Denominator for diluted earnings per share 4,915,766 5,073,220
========== ==========
Basic earnings per share ................. $ (0.12) $ 0.02
========== ==========
Diluted earnings per share ............... $ (0.12) $ 0.02
========== ==========
7
3. NOTES PAYABLE - RELATED PARTY
On August 31, 2001, the Company purchased assets constituting the repair
business of Broadband Services, Inc. for $8 million cash, subject to
post-closing adjustments, and the assumption of certain related liabilities. To
fund the acquisition the Company used existing cash and a $4.97 million bridge
loan from an affiliate of its indirect parent, A Novo SA ("A Novo SA"), due on
April 2, 2002, with interest at 2% over EURIBOR (not to exceed 6%). Accrued
interest on the obligation was approximately $100,000 at December 31, 2001. The
bridge loan is convertible into shares of the Company's common stock at $1.40
per share (a maximum of 3,640,526 shares as of January 31, 2002 based on a
bridge loan balance of $5.09 million as of that date). The Company's working
capital deficit at December 31, 2001, reflects the outstanding bridge loan
balance as a short-term liability.
In the first quarter of fiscal 2002, the Company received working capital
advances totaling $100,000 from A Novo SA. Such advances bear interest at rates
charged by A Novo SA to its other affiliates, currently 2% over EURIBOR, not to
exceed 6% per year. A Novo SA has since advanced the Company an additional
$500,000 on the same terms.
4. NOTES PAYABLE - BANK
The Company obtained a $1,500,000 revolving credit line with a bank during
fiscal 2001. The credit line is secured by substantially all assets of the
Company and is payable on demand. Interest is charged at prime plus 1% (5.75% at
December 31, 2001). The line matures on April 2, 2002. Outstanding borrowings
were $1,500,000 and $500,000 at December 31, 2001 and September 30, 2001,
respectively.
5. SUBSEQUENT EVENTS
On January 4, 2002, the Company entered into agreements with its Chief
Development Officer pursuant to which he exercised options to purchase 129,700
shares of Common Stock at an aggregate purchase price of $138,387. Upon the
exercise of the options, the Chief Development Officer waived his rights to
tandem stock appreciation rights under 475,080 remaining outstanding options.
Payment of the purchase price was made entirely from proceeds of the Company's
loan to the Chief Development Officer's affiliate, secured by the pledge of
129,700 of shares of Common Stock issued on the exercise of the options. The
loan is with full recourse to the Chief Development Officer as to the stated
interest of 6% per year, is non-recourse as to principal, and is payable in
three approximately equal installments on January 24, 2005, January 4, 2006, and
January 4, 2007.
On January 21, 2002, the Company scaled back service operations in its Montreal
service center. It is currently evaluating options for the service center.
On January 25, 2002, the Company terminated domestic distribution and brokerage
services, and, on February 6, 2002, the Company terminated international
distribution and brokerage services. The Company is currently evaluating the
inventory and fixed assets associated with these functions and is seeking to
liquidate those assets during the second quarter. At January 31, 2002, the
Company had inventory associated with these functions valued at $966,358 against
which it had established obsolescence reserves of $509,000. The net book value
of fixed assets associated with these functions at January 31, 2002 was
negligible.
8
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
Report on Form 10-KSB for the fiscal year ended September 30, 2001. 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. Unless
otherwise indicated, all references to years or quarters in this discussion are
to fiscal years or quarters.
OVERVIEW
A Novo Broadband, Inc. ("we" or the "Company") is engaged primarily in
the industrial scale repair and servicing of broadband equipment for equipment
manufacturers and operators of cable and other broadband systems in North
America. Formerly known as Cable Link, Inc., we changed our name in February
2001, to reflect a fundamental change in our business and our association with a
group of affiliated companies, operating throughout Europe and in North and
South America as the "A Novo Group". Beginning in September 2000, we began
adapting and expanding our operations to enable us to offer a range of equipment
repair and maintenance services at regional service centers strategically
located in proximity to national and regional broadband system operators. We
took this step to meet anticipated repair service opportunities stemming from
the ongoing consumer-driven shift of broadband signal delivery in the United
States and Canada from analog to digital format.
Since the end of fiscal 2001, we have suffered from a shortage of
working capital. This shortage is attributable in part to the depletion of our
cash resources to complete the acquisition of the Broadband Services repair
business in August 2001, purchase new equipment during the first quarter of
fiscal 2001 to enable us to service Motorola and Scientific Atlanta digital
equipment, and pay employee severance costs in connection with work-force
reductions in the quarter. Additionally, demand at certain of our facilities and
for certain of our non-core services has developed more slowly than we
anticipated. To deal with our liquidity requirement, we have taken affirmative
measures to conserve cash and focus our resources on the development of our core
service functions. Since December 31, 2001, we have scaled back operations in
Canada, closed our brokerage and distribution services, reorganized management
and eliminated certain positions.
On December 23, 2001, Mr. Louis Brunel resigned as our President and
CEO. He was replaced by Mr. William Kelly, who joined us in September 2001 as
our chief operating officer. Mr. Kelly previously headed the repair business of
Broadband Services, Inc. We acquired the assets of that business in August 2001,
and it now represents a key component of our ongoing activities.
Our goal is to be the largest and most successful digital equipment
service provider to the broadband market in North America. To achieve this goal,
we have established and are continuing to build relationships with broadband
equipment manufacturers and system operators who are the primary candidates for
our services.
The effect of our sharpened focus on repair services is already
discernable in our production figures. From September 2001 through January 2002,
our repair volume increased by 118%, from 17,000 set top boxes per month to over
37,000 units per month. Most of this increase was attributable to in-warranty
repair of Motorola set-top boxes stemming from our acquisition of the Broadband
Services repair business. Actual production increased substantially from the
levels achieved by Broadband Services prior to the acquisition.
During the first quarter of fiscal 2002, we were authorized by
Scientific Atlanta to perform in-warranty repairs on their digital set-top boxes
in North America. We have been ramping up production under this authorization
since mid-way during the quarter. As of January 31, 2002, we were processing
Scientific Atlanta set-top boxes for repair at a rate of 1,700 units per month
after nominal processing in prior quarters. We expect production under the
Scientific Atlanta authorization to continue to increase significantly over the
remainder of the fiscal year, reaching anticipated levels of 12,000 units per
month by the end of the second fiscal quarter and nearly 17,000 units per month
by the end of the fiscal year.
9
We believe that our services are in demand because they afford our
customers opportunities to achieve significant economies and efficiencies by
outsourcing their repair and other service functions. We perform these functions
utilizing high volume processing techniques that have been implemented
successfully in Europe and are available to us through our relationship with the
A Novo Group. In Europe, A Novo Group has been servicing the broadband equipment
industry for more than five years, providing digital equipment screening and
testing, calibration, repair, upgrade and maintenance both in and out of
warranty. In the U.S., we have been providing a variety of equipment-related
services to system operators and equipment manufacturers since 1987. We believe
that the resources and experience of A Novo Group in combination with our
management team, existing skilled labor force, technical knowledge base and
industry relationships position us to capture a significant early share of an
expanding North American market for digital broadband repair and related
services.
A critical component of our strategy is to obtain designation as an
authorized in-warranty service provider for the principal manufacturers of
digital broadband equipment. With each such designation, we gain access to the
proprietary and technical information that is essential for performance of the
required warranty services for the manufacturer's sophisticated digital
equipment and, in turn, enables us to perform out-of- warranty repair and
maintenance work for both the manufacturer and the system operators that use its
equipment. Without each specific manufacturer's authorization and proprietary
information, there is no practical way to access the service market for its
digital equipment. During fiscal 2001 and the first quarter of fiscal 2002, we
became an authorized in-warranty service provider for digital broadband
equipment manufactured by Motorola, Scientific Atlanta, and Pace Micro
Technology.
Another critical component of our strategy has been the establishment
of regional service centers to meet opportunities stemming from the ongoing
trend to consolidation of system operators. Our service centers are located in
proximity to many of the multiple system operators that now dominate our
industry, facilitating quick response and delivery times. We currently conduct
service operations at facilities in Hollywood, Florida, Chatsworth, California,
Columbus, Ohio, and New Castle, Delaware. As a result of slower than anticipated
demand, we have scaled back service operations in our Montreal service center,
pending an evaluation of available opportunities for this center.
Our business model is to enter into comprehensive servicing
arrangements with broadband equipment manufacturers and system operators. These
arrangements are based on a core menu of services consisting of:
o calibration, repair, upgrade and maintenance of equipment as an
authorized warranty servicer for manufacturers and under post-warranty
arrangements for system operators, and
o logistics functions, including 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.
Thus, we offer manufacturers and system operators:
o a single relationship for all digital equipment service requirements;
o the delivery of top quality technical support and reliable maintenance
and related services, using our proprietary production processes and
tracking and quality control systems;
o a close relationship through strong regional operations which allows
us to respond quickly to their needs and provide fast turn-around;
o a real-time tracking system to monitor location of their assets in our
possession and the progress of these assets through any process we
manage; and
o logistics and warehousing services.
10
RESULTS OF OPERATIONS
The following table contains certain amounts, expressed as a percentage
of net sales, reflected in the Company's consolidated statements of income for
the three months ended December 31, 2001 and 2000:
THREE MONTHS ENDED
DECEMBER 31,
2001 2000
Revenues .................................... 100.0 100.0
Cost of revenues ............................ 75.7 71.8
----- -----
Gross profit ................................ 24.3 28.2
Selling, general & administrative expenses... 39.8 27.7
----- -----
(Loss) income from operations ............... (15.5) 0.5
Interest expense ............................ (2.5) (0.1)
Interest income ............................. 0.5 2.3
----- -----
Net (loss) income before tax ................ (17.5) 2.7
Benefit from (provision for) income tax ..... 6.3 (0.9)
----- -----
Net (loss) income ........................... (11.3) 1.8
===== =====
THREE MONTHS ENDED DECEMBER 31, 2001 RESULTS COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 2000
SALES
Our ongoing sales consist of revenues from the repair of set top boxes,
linegear, and power supplies and the provision of asset management, warehousing,
and logistics services for cable equipment. During the first quarter of fiscal
2002, we continued to generate revenues from the sale of refurbished line gear
and power supplies and from brokerage services and sales of refurbished cable
equipment. We substantially reduced our brokerage efforts during the quarter, as
capital expenditures by system operators dwindled. Subsequent to the first
quarter, we decided to discontinue brokerage and distribution services entirely
in order to further concentrate on meeting demand in our growing repair
activities.
Our sales for the first quarter of fiscal 2002 increased 13%, to $5.3
million, as compared to $4.7 million for the first quarter of fiscal 2001. As we
focused our business more on the repair of set top boxes, our repair revenue
increased 562% to $3.1 million, as compared to $462,000 for the first quarter of
fiscal 2001. We have also increased our efforts to provide logistics services to
our customers, and our revenue from this source increased to $561,000, as
compared to $11,000 in 2001.
Sales from international distribution increased 14% to $981,000, as
compared to $857,000 in 2001. Brokerage sales decreased to $384,000 during the
quarter, as compared to $2.3 million in 2001, consistent with our reduced
efforts and decreased demand in this service sector. Finally, sales of
refurbished products decreased 67% to $351,000, as compared to $1.1 million in
2001. As we subsequently discontinued our brokerage and distribution services
activities, we expect little revenue from these activities during the second
quarter of fiscal 2002 and none thereafter.
Our business plan is now sharply focused on increasing repair and
logistics revenues. We expect these will continue to be generated by our
relationships with the manufacturers of equipment for the broadband market and
the system operators that use them. We continue to target service and repair
opportunities for digital set top boxes for the cable industry, cable modems,
and digital subscriber line modems. The acquisition of the assets constituting
the repair business of Broadband Services, which provided us in-warranty repair
authorization for Motorola products, and our designation as an authorized
in-warranty repair provider for Scientific Atlanta products, are the primary
factors for the increase in our repair revenues during the first quarter of
2002. For fiscal 2001, we recorded revenue from the newly acquired repair
business only for the month of September of 2001.
Our exposure to manufacturers and system operators as a result of the
repair services we provide them positions us to afford them logistics and
warehousing services as well. These equipment storage and distribution functions
are typically based on short term arrangements and enable us to make productive
use of our substantial vertical storage capacities.
11
COST OF GOODS SOLD
Cost of goods sold was 76% of sales in the first quarter of fiscal
2002, compared to 72% in the 2001 quarter. The overall cost of goods sold
increased as a percentage of revenues as a result of the overall reduction in
combined revenues from brokerage and distribution services and the sale of
refurbished goods without a corresponding reduction in certain related fixed
costs. Margins from brokerage and sales of refurbished equipment were also
compressed by the effects of the slowdown in capital expenditures in the cable
industry which put pressure on selling prices. Direct labor expense associated
with increases in repair capacity is recognized in costs of goods sold. During
the fiscal 2002 first quarter, we incurred significant labor costs at our Los
Angeles and Montreal facilities as we prepared them to perform Scientific
Atlanta repair operations. The effects of higher costs were mitigated to some
extent by the increase during the quarter in logistics revenue, which has a
relatively high gross margin.
We expect margins to increase during the remainder of the current
fiscal year as utilization of our expanded capacity improves and the effects of
certain cost-cutting measures are realized, including the discontinuance of
lower margin sectors. Margins at our repair facilities which have adapted to
performing Motorola repair operations and are fully operational were more than
33% during the first quarter of 2002. We anticipate that margins for all our
repair operations will approach these levels as our other facilities become
fully operational.
OPERATING EXPENSES
Operating expenses increased 62% in the first quarter of 2002 to $2.1
million, as compared to $1.3 million in the first quarter of the prior year. The
increase was mostly due to costs associated with the assets and business,
including two repair facilities, acquired from Broadband Services in August
2001. Administrative expense and corporate payroll increases stemming from the
acquisition totaled $336,184, and operating expenses for the two additional
repair facilities totaled $356,491.
INCOME TAX PROVISION
The effective tax rate on continuing operations was 36% for the first
quarter of 2002, as compared to 34% in 2001. We have not recorded any valuation
allowance against our deferred tax assets, because management believes that we
will realize profits in the near term that will fully utilize our net operating
loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
For the first quarter of fiscal 2002, we met a portion our operating
cash requirements with a working capital advance of $100,000 from our French
parent, A Novo SA, additional draws of $1,000,000 under our existing bank line
of credit and cash of $491,000 provided by operations. Interest on the advance
from A Novo SA is charged at rates equivalent to those charged by A Novo SA to
its other affiliates, currently 2% over EURIBOR, not to exceed 6% per year. A
Novo SA has since advanced us an additional $500,000. As of February 1, 2002,
none of these working capital advances had been repaid. In addition to funding
operating expense, during the quarter, we used cash to purchase capital
equipment to enable us to service Motorola and Scientific Atlanta and to pay
severance costs attributable to work force reductions.
Our bank credit facility with a commercial bank provides for advances
of up to $1.5 million. Balances under the facility are due, and the facility
expires, on April 2, 2002. The facility was fully drawn as of December 31, 2001
and February 1, 2002. We are currently seeking to refinance or replace this
facility at or prior to its maturity.
To fund a portion of the purchase price of the Broadband Services
repair assets in August 2001, we obtained a $4.97 million bridge loan from an
affiliate of A Novo SA, with interest at 2% over EURIBOR (not to exceed 6%). The
bridge loan currently matures on April 2, 2002 and is convertible into shares of
12
our common stock at $1.40 per share (a maximum of 3,640,526 shares as of January
31, 2002 based on a bridge loan balance of $5.09 million as of that date). Our
working capital deficit at December 31, 2001, reflects the outstanding bridge
loan balance as a short-term liability. Management expects the bridge loan to be
extended at maturity.
We believe that cash flow from operations, a refinancing or replacement
of our credit facility and anticipated working capital advances from A Novo SA
will be adequate to meet our working capital and capital expenditure needs for
fiscal 2002. If we are unable to refinance or replace the credit facility, we
will have immediate need for an alternate source of liquidity to meet our
working capital requirements. We continue to explore alternate sources of
liquidity, but we cannot be certain that we will be able to obtain needed
working capital on a timely basis.
An important element of our business strategy has been the acquisition
of similar businesses and the integration of such businesses into our existing
operations. Any future such acquisitions would probably require that we obtain
additional financing through the public or private issuance of additional debt
or equity securities.
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.
13
A NOVO BROADBAND, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
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.
14
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: February 14, 2002 By: /s/ William Kelly
--------------------------------
William Kelly
President and Chief Executive Officer
Date: February 14, 2002 By: /s/ John Maguire
--------------------------------
John Maguire
Principal Financial Officer
15