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, 2002
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 (Address of 19720 (Zip Code)
Principal Executive Offices)
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 July 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 $961,983.
The number of shares of the issuer's Common Stock outstanding as of July
31, 2002 was 8,759,600.
Transitional Small Business Disclosure Format. Yes [X] No [ ]
A NOVO BROADBAND, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
INDEX
Page
Number
Part I. Financial Information
Item 1. Consolidated Balance Sheets at June 30, 2002 (unaudited) and September 30, 3
2001 (audited)
Consolidated Statements of Operations and Comprehensive Loss for 5
the Three and Nine Months Ended June 30, 2002 and 2001
(unaudited)
Consolidated Statements of Cash Flows for the Nine Months ended June 30, 6
2002 and 2001 (unaudited)
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 12
Operations
Part II. Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities; Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
A NOVO BROADBAND, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, 2002 September 30,
(unaudited) 2001(audited)
------------ ------------
CURRENT ASSETS
Cash .............................. $ 328,218 $ 320,696
Accounts receivable, net .......... 5,128,606 4,267,857
Inventories, net .................. 2,004,385 1,871,350
Notes receivable-related party .... 52,819 200,000
Prepaid and other assets .......... 362,115 163,306
Deferred income taxes ............. 541,000 541,000
------------ ------------
Total current assets ............ 8,417,143 7,364,209
------------ ------------
PROPERTY AND EQUIPMENT, at cost
Furniture and fixtures ............ 1,183,393 1,217,341
Equipment ......................... 3,093,941 2,885,684
Leasehold improvements ............ 1,024,145 523,371
Software .......................... 136,528 57,000
------------ ------------
5,438,007 4,683,396
Less accumulated depreciation ..... (1,817,544) (1,216,323)
------------ ------------
Net property and equipment ...... 3,620,463 3,467,073
------------ ------------
OTHER ASSETS
Goodwill, net ..................... 5,973,498 8,528,807
Deferred income taxes ............. 1,962,279 1,552,000
Note receivable-related party ..... 12,161 --
Other assets ...................... 147,172 139,519
------------ ------------
Total other assets .............. 8,095,110 10,220,326
------------ ------------
TOTAL ASSETS ......................... 20,132,716 $ 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
June 30, 2002 September 30, 2001
(unaudited) (audited)
------------- ------------------
CURRENT LIABILITIES
Current portion of long-term obligations $ 202,379 $ 190,008
Notes payable - bank ................... 2,772,186 500,000
Note payable - related party ........... 3,606,503 4,971,940
Accounts payable ....................... 2,606,732 3,039,259
Accrued expenses
Payroll and related taxes ............ 392,981 990,935
Other ................................ 120,661 250,429
------------ ------------
Total current liabilities ............ 9,701,442 9,942,571
------------ ------------
LONG-TERM LIABILITIES ..................... 53,809 83,334
------------ ------------
Total liabilities .................... 9,755,251 10,025,905
------------ ------------
STOCKHOLDERS' EQUITY
Common stock ........................... 8,760 4,915
Additional paid-in-capital ............. 19,196,535 13,861,873
Stock subscription receivable .......... (138,387) --
Accumulated other comprehensive loss ... (38,464) (47,304)
Retained deficit ....................... (8,650,979) (2,793,781)
------------ ------------
Total stockholders' equity ........... 10,377,465 11,025,703
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,132,716 $ 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
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
------------ ----------- ------------ ------------
Revenues $ 4,886,286 $ 3,007,407 $ 15,254,400 $ 11,729,890
Cost of sales.............................. 3,383,326 1,961,884 12,153,730 8,259,031
------------ ----------- ------------ ------------
Gross profit............................ 1,502,960 1,045,523 3,100,670 3,470,859
Selling, general and administrative expenses 1,993,503 2,050,261 6,464,027 4,792,929
------------ ----------- ------------ ------------
Loss from operations.................... (490,543) (1,004,738) (3,363,357) (1,322,070)
------------ ----------- ------------ ------------
Other (expense) income
Interest expense........................ (113,430) (3,452) (395,816) (24,814)
Interest income......................... 1,038 77,277 30,232 273,591
Loss on disposal of assets.............. (2,561,775) - (2,561,775) -
------------ ----------- ------------ ------------
Total other (expense) income (2,674,167) 73,825 (2,927,359) 248,777
------------ ----------- ------------ ------------
Loss before income taxes................ (3,164,710) (930,913) (6,290,716) (1,073,293)
Benefit from taxes - 317,371 386,093 364,529
------------ ----------- ------------ ------------
Loss from continuing operations............ (3,164,710) (613,542) (5,904,623) (708,764)
Discontinued operations:
Gain on disposal of division, net of tax
provision of $0, $0, $0 and ($93,000) 47,425 - 47,425 180,230
------------ ----------- ------------ ------------
Net loss (3,117,285) (613,542) (5,857,198) ( 528,534)
Other comprehensive loss .................. 21,157 - 8,840 -
------------ ----------- ------------ ------------
Total comprehensive loss................... $ (3,096,128) $ (613,542) $ (5,848,358) $ (528,534)
============ =========== ============ ============
Basic and diluted earnings per share
Loss from continuing operations....... $ (0.50) $ (0.13) $ (1.08) $ (0.15)
Gain on discontinued operations....... $ 0.01 - $ 0.01 $ 0.04
------------ ----------- ------------ ------------
Net loss per share $ (0.49) $ (0.13) $ (1.07) $ (0.11)
============ =========== ============ ============
Weighted average shares outstanding 6,392,398 4,849,923 5,449,335 4,817,731
The accompanying notes are an integral part of the consolidated
financial statements.
5
A NOVO BROADBAND, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended June 30,
2002(unaudited) 2001 (unaudited)
------------------ -----------------
Cash Flows From Operating Activities
Net loss ......................................................... $(5,857,198) $ (528,534)
----------- -----------
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 831,160 365,921
Loss on disposal of assets 2,561,775 54,304
Provision for losses on receivables............................ (241) 34,625
Provision for inventory obsolescence........................... (373,466) (526)
Loan to former CEO repaid by bonus 147,181 141,839
Deferred income taxes.......................................... (410,279) (252,731)
Accrued interest - related party converted to equity........... 227,742 -
Accrued interest income - related party (5,653) -
Accrued interest expense - related party 105,929 -
Gain on disposal of division (47,425) (180,230)
(Increase) decrease in operating assets:
Accounts receivable........................................ (860,508) 381,473
Inventories................................................ 254,564 (357,594)
Prepaid and other assets................................... (206,462) (271,679)
Decrease in operating liabilities:
Accounts payable........................................... (312,375) (59,373)
Accrued expenses........................................... (715,351) (89,531)
----------- -----------
Total adjustments...................................... 1,196,591 (233,502)
----------- -----------
Net cash used in operating activities............................. (4,660,607) (762,036)
----------- -----------
Cash Flows From Investing Activities
Purchase of property and equipment................................ (1,304,889) (1,571,389)
Refund of acquisition costs - 19,737
Proceeds from sale of property and equipment 259,988 -
Increase in notes receivable - related party...................... (6,508) -
----------- -----------
Net cash used in investing activities............................. (1,051,409) (1,551,652)
----------- -----------
Cash Flows From Financing Activities
Proceeds from exercise of stock options and warrants............. 438 103,428
Net borrowings on notes payable - bank........................... 2,272,186 -
Net advances from related party ................................. 3,500,574 -
Net payments on debt obligations................................. (62,500) (1,002,557)
----------- -----------
Net cash provided by (used in) financing activities.............. 5,710,698 (899,129)
----------- -----------
Effect of exchange rate changes on cash.......................... 8,840 -
----------- -----------
Net increase (decrease) in cash.................................. 7,522 (3,212,817)
Cash at beginning of period...................................... 320,696 7,104,915
----------- -----------
Cash at end of period............................................ $ 328,218 $ 3,892,098
=========== ===========
6
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
On January 4, 2002, the Company completed a non-cash transaction by accepting
a note in the sum of $138,387 from an affiliate of the Chief Development
Officer which was applied to exercise stock options to purchase 129,700
shares of the Company's common stock.
On May 29, 2002, in conjunction with a new credit facility, the related party
bridge loan and accrued interest in the amounts of $4,971,940 and $227,742,
respectively, were converted into a total of 3,714,058 shares of the
Company's common stock at $1.40 per share pursuant to the bridge loan
agreement.
During the nine months ended June 30, 2002, the Company entered into a
capital lease for the purchase of a new delivery truck for $32,975.
The accompanying notes are an integral part of the consolidated financial
statements.
7
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 and nine months ended June 30, 2002 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:
Three Months Ended June 30 Nine Months Ended June 30,
2002 2001 2002 2001
------------ ---------- ------------ ----------
Numerator:
- ----------
Loss from continuing operations ......... $ (3,164,710) $ (613,542) $ (5,904,623) $ (708,764)
============ ========== ============ ==========
Denominator:
- ------------
Denominator for basic earnings per share
Weighted-average shares outstanding....... 6,392,398 4,849,923 5,449,335 4,817,731
Effect of dilutive securities:
Employee stock options....................... - - - -
------------ ---------- ------------ ----------
Denominator for diluted earnings per share... 6,392,398 4,849,923 5,449,335 4,817,731
============ ========== ============ ==========
Basic and diluted earnings per share......... $ (0.50) $ (0.13) $ (1.08) $ ( 0.15)
============ ========== ============ ==========
8
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 secured
bridge loan from a subsidiary of its indirect parent, A Novo SA, with interest
at 2% over EURIBOR (not to exceed 6%). Principal of and interest on the bridge
loan were convertible into common stock at $1.40 per share, reflecting the
market price of the common stock during December 2001, when the bridge loan was
amended and its term extended to meet the Company's bank-financing requirements.
On May 29, 2002, to satisfy a condition of the Company's new credit facility,
the bridge loan and accrued interest were converted into shares of common stock.
See Note 5.
In the first nine months of fiscal 2002, the Company received working capital
advances totaling $3,500,574 from A Novo SA. Initially advances bore interest at
the same rate as the secured bridge loan. On March 15, 2002, to meet the
Company's need for additional working capital, A Novo SA advanced the Company
$2,200,000. In order to induce A Novo SA to (a) advance the additional funds,
(b) agree to subordinate all of its working capital advances to a new bank
credit line and (c) agree to guarantee a new credit line, the terms of all
working capital advances were revised and incorporated into an unsecured
convertible grid note, due on demand. From and after March 31, 2002, interest on
the principal of the note accrues at an annual rate equal to a defined prime
rate plus 2%, adjusted monthly. Subsequent to March 15, 2002, A Novo SA advanced
the Company an additional $500,000 under the convertible note. The principal of
the note may be converted into shares of the Company's common stock at prices
based on the average closing price per share for the 10 trading days immediately
following the time of the related advance. As of June 30, 2002, the average
conversion price was $1.37 per share. Based on a balance of $3,606,503
outstanding as of June 30, 2002, the note was convertible into a maximum of
2,640,218 shares of common stock. The Company's working capital deficit at June
30, 2002, reflects the outstanding working capital advances as a short-term
liability. All amounts owing under the convertible note have been subordinated
to the Company's new bank credit facility.
4. Notes Payable - Bank
On May 29, 2002, the Company entered into a one-year senior secured revolving
credit facility with Silicon Valley Bank. Under the terms of the credit
facility, the Company may borrow up to 80% of the amount of its eligible
accounts receivable up to a maximum of $3.0 million at any time outstanding.
Amounts borrowed under the credit facility bear interest at 2% per year over the
bank's prime rate. The agreement governing the facility requires the Company to
maintain tangible net worth of at least $7.25 million. Borrowings under the
facility are guaranteed by A Novo SA and A Novo Americas LLC, the Company's
indirect and direct parents, respectively. At June 30, 2002, amounts drawn under
the facility and then outstanding totaled $2,772,186, which was subsequently
determined to exceed the Company's borrowing base. See Note 9.
The Company used approximately $1.5 million under the new facility to pay off
its overdue prior credit facility with Bank of America. The Company is using the
new credit facility for general corporate purposes, including working capital.
Outstanding borrowings under the old facility were $0 and $500,000 at June 30,
2002 and September 30, 2001, respectively. Outstanding borrowings under the new
facility were $2,772,186 and $0 at June 30, 2002 and September 30, 2001,
respectively.
5. Stock Transactions
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 his 475,080 remaining outstanding
options. Payment of the stock's purchase price was made by delivery of a
promissory note from 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 the principal, and is
payable in three installments of $44,637 plus interest on January 24, 2005 and
$46,875 plus interest on both
9
January 4, 2006 and 2007. The Company also loaned the Chief Development Officer
$6,508 to cover the payroll tax liability associated with this transaction. The
payroll tax loan accrues interest at a stated rate of 4.49% and is payable in
full on January 4, 2007.
On May 29, 2002, to satisfy a condition of the Company's new bank credit
facility, A Novo Americas, the Company's parent, converted the $5.20 million
balance of its bridge loan and accrued interest owed by the Company into
3,714,058 shares of common stock, at the conversion price of $1.40 per share as
provided for in the bridge loan, thereby increasing its ownership to
approximately 76.8% of the Company's outstanding common stock. See Note 3.
6. Loss on sale of assets at the discontinued facility
Following the curtailment of operations at the Company's Montreal facility in
February 2002, the Company undertook to sell the related assets. On May 8, 2002,
the Company completed a sale of these assets to a former employee for $259,988
in cash and the assumption of $120,152 of certain liabilities. In connection
with the sale, the Company recognized a loss of $2,561,775, including the
write-off of approximately $2.5 million of goodwill originally related to its
acquisition of the operations in September 2000. During the first nine months of
2002, the operation of the Canadian facility contributed an estimated $627,000
to the Company's loss from operations.
7. Income taxes
Management has elected to record a valuation allowance against any further
increases to the deferred tax asset recorded on the consolidated financial
statements to reflect the future benefit of net operating loss carry forwards.
The valuation allowance at June 30, 2002 was approximately $1,986,000, which
included an increase of $1,166,000 during the quarter then ended.
8. Concentration of Business Activity
As of June 30, 2002, approximately 72% of the Company's accounts receivable was
due from one customer. For the three and nine-months ended June 30, 2002,
approximately 76% and 58% of the Company's total revenues were from the same
customer and approximately 57% and 52% of the Company's total purchases were
from the same customer as a vendor. Activity involving this customer consists
primarily of services provided by the Company to a number of users of the
customer's equipment pursuant to warranty arrangements for which the customer is
responsible.
9. Subsequent Events
On July 30, 2002, in order to reduce costs and improve liquidity, the Company
suspended operations in its Ohio and California facilities and reduced its
employee head count significantly. The Company anticipates utilizing excess
capacity in its two remaining facilities in Delaware and Florida to service its
customers. The Company will maintain the leases in California and Ohio until it
can sublet the facilities or market conditions warrant restarting operations.
The Company estimates that moving and carrying costs during the fourth quarter
relating to these facilities will be approximately $250,000. The Company's
remaining obligations under the leases for the two facilities extend until 2009
and total approximately $2,996,000.
At August 1, 2002, $2,777,792 was outstanding under the Company's new bank
credit facility (see Note 5), which was approximately $1.22 million in excess of
the adjusted borrowing base at that date. The overdraw resulted primarily from
the re-calculation of the borrowing base to reflect certain accounts payable to
a major customer. The bank consented to the overdraw and waived any resulting
default, subject to elimination of the overdraw in scheduled reductions,
including an initial reduction of $124,000, which the Company satisfied on
August 12, 2002, and further reductions at 30 day intervals commencing on August
25, 2002, each in an equal amount equal to the lesser of the actual balance of
the accounts payable to the customer or $250,000. The Company expects
10
to meet the remaining scheduled reductions in the ordinary course of its
operations based on its anticipated production schedules and the cost reduction
and improved billing measures it had previously implemented.
10. Recent Accounting Pronouncements
In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. Statement 145 updates, clarifies, and simplifies existing
accounting pronouncements. Statement 145 rescinds FASB Statement No. 4,
Reporting Gains and Losses from Extinguishment of Debt, which required a company
to aggregate and, if material, classify all gains and losses from a debt
extinguishment as an extraordinary item, net of related income tax effect.
Statement 145 also rescinds Statement 44 dealing with motor carriers. Statement
145 also amends FASB Statement No. 13, Accounting for Leases, to require that a
company use sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. Statement 145 as it
relates to the rescission of Statement 4 is effect for fiscal years beginning
after May 15, 2002, with earlier application encouraged. All other provisions of
Statement 145 are effective for transaction or financial statements issued on or
after May 15, 2002. The Company does not expect the adoption of this
pronouncement to have any effect on the Company's financial statements.
The Financial Accounting Standards Board (FASB) has issued Statement No. 146,
Accounting for Costs Associated with Exit or Disposal Activities in July 2002.
The standard requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by the
standard include lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operation, plant closing,
or other exit or disposal activity. Statement 146 is to be applied prospectively
to exit or disposal activities initiated after December 31, 2002. The Company
expects early application of this pronouncement to allow for the deferral of
certain exit activity costs relating to the suspended activities of the
California and Ohio locations during the fourth quarter. The full impact of this
pronouncement on the Company's fourth quarter results is unknown at this time,
but will be determined during the fourth quarter.
11
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 to meet anticipated new demand driven by the
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 to enable us to service Motorola
and Scientific Atlanta digital equipment, and pay employee severance costs in
connection with work-force reductions. Additionally, demand at certain of our
facilities and for certain of our non-core services has developed more slowly
than we anticipated, and it has been necessary to scale back our plans for rapid
and continuing expansion. Rather than maintain a network of facilities in
anticipation of demand, we have elected to focus our resources on the
development of our core service functions in a limited number of high-capacity
facilities.
To meet cash needs during the current fiscal year, we have relied on
significant working capital advances from our parent and its affiliates, as well
as a new bank credit facility. To conserve cash and increase liquidity, we have
disposed of our Montreal facility and, on July 30, 2002, we suspended activity
at our Ohio and California facilities, significantly reducing our employee head
count. We believe that existing capacity in our remaining facilities in Delaware
and Florida is sufficient to continue full service to all of our customers, and
we do not expect the closings that have taken place to have an adverse impact on
our revenues.
The effect of our sharpened focus is discernable in our recent
production figures. We have seen an increase in revenue since February 2002
which is mostly 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. Due to technical and other concerns we have encountered, this
business has not developed as anticipated, and we are currently re-evaluating
it.
Our services are intended to enable our customers to achieve
significant economies and efficiencies by outsourcing their repair 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 seven years, providing digital
equipment screening and testing, calibration, repair, upgrade and maintenance
both in and out of warranty. In the U.S., through our acquired businesses, we
have been providing equipment-related services to system operators and equipment
manufacturers since 1982.
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
12
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 for us 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. In the second quarter of fiscal 2002 we
signed a contract with Com 21, a leading modem manufacturer.
Our business model is to enter into comprehensive repair and 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.
To induce manufacturers and system operators to retain us, we offer
them:
o a single relationship for all digital equipment service requirements;
o top quality technical support and reliable repair and related
capabilities, using our proprietary production processes and tracking
and quality control systems;
o a real-time tracking system to monitor location of customer assets in
our possession and the progress of these assets through any process we
manage; and
o convenient logistics services and warehousing.
Results of Operations
The following table sets forth certain information, expressed as a
percentage of net sales, reflected in our consolidated statements of income for
the three and nine months ended June 30, 2002 and 2001:
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
--------- -------- --------- ---------
Revenues.......................................... 100.0 100.0 100.0 100.0
Cost of revenues.................................. 69.2 65.2 79.7 70.4
-------------------------- -----------------------------
Gross profit............................. ........ 30.8 34.8 20.3 29.6
Selling, general & administrative expenses........ 40.8 68.2 42.4 40.9
-------------------------- -----------------------------
Loss from operations.............................. (10.0) (33.4) (22.1) (11.3)
Interest expense.................................. (2.3) (0.1) (2.6) (0.2)
Interest income................................... 0.0 2.5 0.2 2.3
Loss on disposal of assets........................ (52.4) 0.0 (16.8) 0.0
-------------------------- -----------------------------
Net loss before tax............................... (64.7) (31.0) (41.3) (9.2)
Benefit from income tax........................... 0.0 10.6 2.5 3.1
-------------------------- -----------------------------
Net loss from continuing operations............... (64.7) (20.4) (38.8) (6.1)
========================== =============================
13
Three Months Ended June 30, 2002 Compared to Three Months Ended
June 30, 2001
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.
Our sales for the third quarter of fiscal 2002 increased 62% to $4.9
million, as compared to $3.0 million for the third quarter of fiscal 2001. As we
focused our business more on the repair of set top boxes, our repair revenue
increased to $4.5 million for the third quarter of fiscal 2002, as compared to
$305,000 for the third 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 $348,000 for the quarter ended June 30, 2002, as
compared to $185,000 in the corresponding quarter of fiscal 2001.
For the three months ended June 30, 2002, approximately 76% of our
total revenues were from the same customer and approximately 57% of our total
purchases were from the same customer as a vendor. Activity involving this
customer consists primarily of services we provide to a number of users of the
customer's equipment pursuant to warranty arrangements for which the customer is
responsible.
For the three months ended June 30, 2001, sales from our
now-discontinued international and domestic distribution activities and
brokerage activities decreased to $0, as compared to $1.9 million in the
comparable period of fiscal 2001. This was due to the termination of these
activities mid-way through the second quarter of this year. For the same reason,
sales of refurbished products decreased to $0 in the third quarter of fiscal
2002, as compared to $619,000 in the same three months of 2001. We expect no
further revenues from these sources.
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 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 in August 2001, of the
assets constituting the repair business of Broadband Services, which provided us
in-warranty repair authorization for Motorola products, is the primary cause of
the increase in our repair revenues during this year. 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.
Cost of Goods Sold
Cost of goods sold was 69% of sales in the third quarter of fiscal
2002, compared to 65% in the 2001 quarter. The overall cost of goods sold
increased as a percentage of revenues as a result of the increased labor expense
(recognized in cost of goods sold) associated with increases in repair capacity
which was not fully utilized during the current period.
We expect margins to increase during the remainder of the current
fiscal year as utilization of our reduced capacity improves and we realize the
effects of cost-cutting measures, including work force reductions and the
elimination of lower margin services. Margins at our repair facilities which
have adapted to performing Motorola repair operations and are fully operational
were close to 35% during the third quarter of 2002.
Operating Expenses
Operating expenses decreased 3% in the third quarter of fiscal 2002 to
$2.0 million, as compared to $2.1 million in the third quarter of the prior
fiscal year. The decrease reflects managements' efforts to implement cost
controls and increased efficiencies.
In February 2002, we curtailed our operations in Canada and sought a
sale of the related assets, which we completed on May 8, 2002. As a result of
the sale, we recognized a loss of $2.6 million, including the write-off
14
of approximately $2.5 million of goodwill stemming from our acquisition of
the facility in September 2000. For the third quarter of fiscal 2002, the
Canadian facility contributed an estimated operating loss of $289,000 to our
overall loss from operations of $491,000.
On July 30, 2002, in order to further reduce operating expenses, we
suspended operations at our Ohio and California facilities and reduced our
employee head count.
Discontinued Operations
The operations of our subsidiary, Auro Computer Services, were
discontinued on February 21, 2000. As of December 31, 1999, Auro's assets were
written down to their estimated net realizable values. During the third quarter
of fiscal 2002, we recognized a gain of $47,425, net of income tax effect, due
to a settlement of certain of Auro's remaining obligations. Further adjustment
may be made for Auro's remaining obligations as they are settled with Auro's
creditors.
Nine Months Ended June 30, 2002 Compared to Nine Months Ended
June 30, 2001
Sales
Our revenues for the nine months ended June 30, 2002 increased 30% to
$15.3 million, as compared to $11.7 million for the same period of 2001. As we
focused our business more on the repair of set top boxes, our repair revenue
increased 738% to $10.9 million, as compared to $1.3 million for the nine months
of last year. We have also increased our efforts to provide logistics services
to our customers, and our revenue from this source increased to $1.6 million in
the first nine months of Fiscal 2002, as compared to $274,000 in the same period
of fiscal 2001.
For the nine-months ended June 30, 2002, approximately 58% of our total
revenues were from the same customer and approximately 52% of our total
purchases were from the same customer as a vendor. Activity involving this
customer consists primarily of services we provide to a number of users of the
customer's equipment pursuant to warranty arrangements for which the customer is
responsible.
Sales from international and domestic distribution totaled $2.2 million
for the nine months ended June 30, 2002 compared to $3.0 million for the same
period of fiscal 2001. Brokerage sales decreased to $296,000 during the nine
month period, as compared to $4.9 million in fiscal 2001. Finally, sales of
refurbished products decreased to $371,000, as compared to $2.2 million in
fiscal 2001. These decreases reflect weaker demand and our decision to terminate
our distribution and brokerage activities, which was effective in the second
quarter of fiscal 2002. We do not expect any further revenue from these sources
during the remainder of fiscal 2002.
Cost of Goods Sold
Cost of goods sold for the first nine months of fiscal 2002 was 80%
compared to 70% for the comparable period last year. The overall cost of goods
sold increased as a percentage of revenues partly as a result of increased labor
expense (recognized in cost of goods sold) associated with increases in repair
capacity which was not fully utilized during the current period.
In the first nine months of fiscal 2002, revenue generated from
brokerage and distribution services amounted to 15% of our total sales as
opposed to 68% during the previous year. The cost of goods associated with those
sales was 97% during the first nine months of fiscal 2002 as opposed to 77% for
the same period during fiscal 2001. The lower margins reflect the effects of
reduced demand and the decision to terminate these activities during the second
quarter.
Operating Expenses
Operating expenses for the first nine months of fiscal 2002 increased
$1.7 million or 35% over the comparable period of the previous year. The
increase was due primarily to costs associated with the operation of two repair
facilities
15
acquired from Broadband Services in August 2001. Also included in the expenses
were severance payments to former employees who had been engaged in our
distribution and brokerages activities.
In February 2002, we curtailed our operations in Canada and sought a
sale of the related assets, which we completed on May 8, 2002. As a result of
the sale, we recognized a loss of $2.6 million, including the write-off of
approximately $2.5 million of goodwill related to our acquisition of the
facility in September 2000. For the first nine months of fiscal 2002, the
Canadian facility contributed an estimated operating loss of $627,000 to our
overall loss from operations of $3,363,000.
During the second quarter of fiscal 2002, in order to focus on our
core repair service activities, we ceased our brokerage and distribution
activities (including the related refurbishment activities) and liquidated the
related inventories. This contributed an estimated operating loss of $540,000 to
our overall loss from operations for the nine months.
On July 30, 2002, in order to further reduce operating expenses, we
suspended operations at our Ohio and California facilities and reduced our
employee head count.
Income Tax Provision
The effective tax benefit rate on continuing operations was 6% for the
first nine months of fiscal 2002, as compared to 34% in the comparable period of
fiscal 2001. This reflects the valuation allowance being recognized against our
deferred tax assets, due to management's uncertainty whether we will realize
profits in the near term that will fully utilize our net operating losses.
Discontinued Operations
The operations of our subsidiary, Auro Computer Services, were
discontinued on February 21, 2000. As of December 31, 1999, Auro's assets were
written down to their estimated net realizable values. During the first nine
months of fiscal 2002, we recognized a gain of $47,425, net of income tax
effect, due to a settlement of certain of Auro's remaining obligations. Further
adjustment may be made for Auro's remaining obligations as they are settled with
Auro's creditors.
Liquidity and Capital Resources
To meet cash needs during the first nine months of fiscal 2002, we have
relied on significant working capital advances from A Novo S.A., our French
parent, and a new bank credit facility. We used cash from these sources to fund
operating expenses, repay our previous bank credit facility, purchase capital
equipment to enable us to service Motorola and Scientific Atlanta and pay
severance costs attributable to work force reductions. We do not expect that
additional funding from our parent will be available if it should be needed.
To conserve cash and increase liquidity, we have disposed of our
Montreal facility and, on July 30, 2002, we suspended activity at our Ohio and
California facilities and reduced our employee head count. Our obligations under
the leases for these two facilities extend until 2009 and total $2,996,000.
Advances from our parent during the first nine months of fiscal 2002,
totaled $3.5 million. Through the second quarter of fiscal 2002, these advances
bore interest at 2% over EURIBOR, up to a maximum annual rate of 6%. On March
15, 2002, our parent responded to our request for additional working capital
with an advance of $2,200,000. In order to induce our parent to (a) make this
additional advance, (b) agree to subordinate all of its working capital advances
to a new bank credit line and (c) agree to guarantee the new bank credit line,
the terms of all working capital advances were revised and incorporated into an
unsecured convertible grid note, due on demand. From and after March 31, 2002,
interest on the note accrues at an annual rate equal to 2% plus a defined prime
rate, adjusted monthly. The principal of the note may be converted into shares
of our common stock at prices based on the average closing price per share for
the 10 trading days immediately following the time of the related advance.
During April 2002, we received an additional $500,000
16
of advances under the convertible note. All amounts owing under the convertible
note have been subordinated to our new bank credit facility.
On May 29, 2002, we entered into a one-year senior secured revolving
credit facility with Silicon Valley Bank. Under the terms of the credit
facility, we may borrow up to 80% of the amount of our eligible accounts
receivable up to a maximum of $3.0 million at any time outstanding. Amounts
borrowed under the credit facility bear interest at an annual rate equal to 2%
over the bank's prime rate. The agreement governing the facility requires us to
maintain tangible net worth of at least $7.25 million. Borrowings under the
facility are guaranteed by A Novo SA and A Novo Americas LLC, our indirect and
direct parents. At August 1, 2002, $2,777,792 was outstanding under the
facility, which was approximately $1.22 million in excess of the borrowing base
at that date. The overdraw resulted primarily from the re-calculation of the
borrowing base to reflect certain accounts payable to a major customer. The bank
consented to the overdraw and waived any resulting default, subject to
elimination of the overdraw in scheduled reductions, including an initial
reduction of $124,000, which we satisfied on August 12, 2002, and further
reductions at scheduled 30-day intervals, commencing August 25, 2002, each in an
amount equal to the lesser of the actual balance of the accounts payable to the
customer or $250,000. We expect to meet the scheduled reductions in the ordinary
course of our operations based on our anticipated production schedules and the
cost reduction and improved billing measures we have previously implemented.
To finance the purchase of certain assets of Broadband Services in
August 2001, we obtained a $4.97 million bridge loan from A Novo Americas, with
interest at 2% over EURIBOR, not to exceed 6% per year. To satisfy a condition
of the new credit facility, on May 29, 2002, principal of and accrued interest
on the bridge loan were converted into 3,714,058 shares of our common stock at
the $1.40 per share conversion price provided for in the bridge loan.
We believe that as a result of the measures taken to improve cash flow
and liquidity during the first nine months of the current fiscal year and the
subsequent suspension of our Ohio and California operations, together with
anticipated increases in net revenues from our core repair service functions and
the anticipated availability of funds under our bank credit facility, we will
have sufficient liquidity to meet our working capital and capital expenditure
needs for the foreseeable future. Our cash resources are limited, however, and a
failure to maintain sufficient levels of eligible receivables under our bank
credit facility could lead to a default under that facility. Any such default
could have a severe adverse impact on our business and might require us to cease
operations.
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. Forward-looking
statements can be identified by the use of words such as "estimates,"
"projects", "anticipates," " expects," "intends," " believes" or the negative
thereof or other variations thereon or by discussions of strategy that involve
risks and uncertainties. These statements are subject to a number of risks and
other factors, including those set forth in our Annual Report on Form 10-KSB for
our year ended September 30, 2001, as filed with the Securities and Exchange
Commission. Such risks include the immediate availability of additional working
capital, industry developments (including the rate at which digital broadband
services are introduced in our markets), our relations with broadband equipment
suppliers, competition (including direct competition by equipment suppliers and
broadband system operators), technological developments which may render our
services obsolete or unnecessary, and our likely increasing dependence on new
information systems. Forward-looking statements are necessarily based upon
assumptions, estimates and data that are uncertain. No assurance can be given
that the anticipated results will be achieved, and future results may in fact
differ materially from those anticipated.
17
A NOVO BROADBAND, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities; Use of Proceeds
In the first nine months of fiscal 2002, the Company received
advances from A Novo SA, its indirect parent, totaling $3.5 million. As of June
30, 2002, these advances were evidenced by the Company's unsecured convertible
grid note, due on demand, in nominal principal amount of $4.0 million. Principal
of and interest on the note may be converted into shares of the Company's common
stock at prices based on the average closing price per share for the 10 trading
days immediately following the time of the related advance. As of June 30, 2002,
the average conversion price was $1.37 per share. Based on a balance of
$3,606,503 outstanding as of June 30, 2002, the note was convertible into a
maximum of 2,640,218 shares of common stock. The issuance of the note was exempt
from registration under the Securities Act of 1933 pursuant to Section 4(2) of
the Act, as a transaction by an issuer not involving any public offering.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on May 13,
2002. A majority of the Company's voting shares were present at the meeting,
either in person or by proxy.
At such meeting, the stockholders:
1. Elected Bob Binsky as a Class I director whose term expires at
the 2005 annual meeting.
2. Approved an amendment increasing by 500,000 the number of
shares available under the Company's 2000 Stock Plan.
3. Ratified the appointment of GBQ LLP as independent auditors of
the Company for the fiscal year ending September 30, 2002.
The vote tallies were as follows:
1. Election of Bob Binsky
For 4,140,766 Against 11,038 Abstain 893,738
2. Approving Amendment to 2000 Stock Plan
For 4,073,267 Against 36,538 Abstain 935,737
3. Ratification of GBQ LLP as independent public auditors
For 4,145,684 Against 3,000 Abstain 896,858
For further information respecting all such matters reference
is made to the Company's definitive proxy statement dated April
22, 2002.
18
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer
99.2 Certification of Principal Financial Officer
(b) Reports on Form 8-K
1. The registrant filed a current report on Form 8-k dated
August 5, 2002 reporting Other Events.
2. The registrant filed a current report on Form 8-k dated June
5, 2002 reporting Other Events.
19
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, 2002 By: /s/ William Kelly
------------------------------------------
William Kelly
President and Chief Executive Officer
Date: August 14, 2002 By: /s/ Steven J. Easterday
------------------------------------------
Steven J. Easterday
Principal Financial Officer
20