10QSB 1 l88223ae10qsb.txt A NOVO BROADBAND, INC. 10QSB 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 MARCH 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.) 3015 GREENE STREET, HOLLYWOOD, FLORIDA 33020 (Address of Principal Executive Offices) (Zip Code) Issuer's telephone number, including area code: (954) 922-8776 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 April 30, 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 $6,136,331. The number of shares of the issuer's Common Stock outstanding as of April 30, 2001 was 4,844,002. Transitional Small Business Disclosure Format. Yes [X] No [ ] 2 A NOVO BROADBAND, INC. FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 INDEX
PAGE NUMBER PART I. FINANCIAL INFORMATION (UNAUDITED) Item 1. Consolidated Balance Sheets at March 31, 2001 and September 30, 2000 3 Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2001 and 2000 5 Consolidated Statements of Cash Flows for the Six Months ended March 31, 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 17 SIGNATURES 18
2 3 A NOVO BROADBAND, INC. CONSOLIDATED BALANCE SHEETS ASSETS
MARCH 31, SEPTEMBER 30, 2001 2000 ------------- ------------- CURRENT ASSETS Cash and cash equivalents................................ $ 5,915,508 $ 7,104,915 Accounts receivable, net................................. 2,468,458 2,508,590 Inventories, net......................................... 1,595,851 1,481,718 Notes receivable, related parties........................ 200,000 200,000 Prepaid and other assets................................. 223,256 160,324 Deferred income taxes.................................... 47,000 47,000 ------------ ------------ Total current assets................................... 10,450,073 11,502,547 PROPERTY AND EQUIPMENT, net 968,036 701,740 OTHER ASSETS Notes receivable, related parties........................ 95,083 200,000 Goodwill, net............................................ 3,094,656 3,167,411 Deferred income taxes.................................... 595,639 641,000 Other assets............................................. 97,539 28,039 ------------ ------------ TOTAL ASSETS $15,301,026 $16,240,737 ============ ============
See accompanying notes to the consolidated financial statements. 3 4 A NOVO BROADBAND, INC. CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31, SEPTEMBER 30, 2001 2000 ---------- -------------- CURRENT LIABILITIES Current portion of long-term obligations $ 190,008 $ 192,496 Notes payable - bank................................... - 937,569 Accounts payable....................................... 1,913,137 1,911,285 Accrued payroll and related taxes...................... 210,526 324,805 ---------------- --------------- Total current liabilities............................ 2,313,671 3,366,155 LONG-TERM OBLIGATIONS.................................... 130,161 166,667 ---------------- --------------- Total liabilities.................................... 2,443,832 3,532,822 ---------------- --------------- STOCKHOLDERS' EQUITY Common stock, no par value............................. 13,513,285 13,449,014 Additional paid-in-capital............................. 159,136 159,136 Retained deficit....................................... (815,227) (900,235) ---------------- --------------- Total stockholders' equity 12,857,194 12,707,915 ---------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................ $15,301,026 $16,240,737 ================ ===============
See accompanying notes to the consolidated financial statements. 4 5 A NOVO BROADBAND, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Revenues...................................... $3,996,083 $2,078,664 $8,722,483 $4,338,877 Cost of sales................................. 2,905,338 1,225,747 6,297,147 2,353,073 --------------- --------------- -------------- -------------- Gross profit............................... 1,090,745 852,917 2,425,336 1,985,804 Selling, general and administrative expenses. 1,432,005 798,649 2,742,668 1,501,913 --------------- --------------- -------------- -------------- Income (loss) from operations (341,260) 54,268 (317,332) 483,891 Interest expense.............................. (14,042) (13,019) (21,362) (49,546) Interest income............................... 85,721 273 196,314 273 --------------- --------------- -------------- -------------- Income (loss) before income taxes............. (269,581) 41,522 (142,380) 434,618 Benefit from (provision for) income taxes.... 90,409 --. 47,158 (370,529) --------------- --------------- -------------- -------------- Income (loss) from continuing operations... (179,172) 41,522 (95,222) 64,089 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 ($93,000), ($93,000) and $266,000 respectively........................... 180,230 225,922 180,230 (756,288) --------------- --------------- -------------- -------------- Net income (loss)............................. $ 1,058 $ 267,344 $ 85,008 $ (760,972) =============== =============== ============== ============== Basic Earnings Per Share Income (loss) from continuing operations.. $(0.04) $ 0.02 $(0.02) $ 0.04 Gain (loss) on discontinued operations..... $ 0.04 $ 0.11 $ 0.04 $(0.52) --------------- --------------- -------------- -------------- Net income (loss) per share................ $.0.00 $ 0.13 $ 0.02 $(0.48) =============== =============== ============== ============== Weighted average shares outstanding ....... 4,843,624 1,697,078 4,801,635 1,696,077 =============== =============== ============== ============== Diluted Earnings Per Share Income (loss) from continuing operations... $(0.04) $0.02 $(0.02) $ 0.03 Income (loss) on discontinued operations .. $ 0.04 $0.09 $ 0.04 $(0.48) --------------- --------------- -------------- -------------- Net income (loss) per share................ $ 0.00 $0.11 $ 0.02 $(0.45) =============== =============== ============== ============== Weighted average shares outstanding........ 4,843,624 1,916,404 4,801,635 1,814,771 =============== =============== ============== ==============
See accompanying notes to the consolidated financial statements. 5 6 A NOVO BROADBAND, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 2001 2000 ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)........................................... $85,008 $(760,972) ------------- ------------- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization............................ 224,605 217,657 Loss on disposal of property and equipment............... -- 7,199 Provision for losses on receivables...................... 34,625 30,583 Provision for inventory obsolescence..................... 37,446 -- Loan to former CEO repaid by bonus....................... 104,917 -- Deferred income taxes.................................... (47,485) 3,888 Loss (gain) on disposal of division...................... (180,230) 825,061 (Increase) decrease in operating assets: Accounts receivable.................................. 5,507 917,974 Income tax receivable................................ -- 46,815 Inventories.......................................... (151,579) 10,455 Prepaid and other assets............................. (132,432) 52,894 Increase (decrease) in operating liabilities: Accounts payable..................................... 274,928 (118,102) Accrued expenses..................................... (114,279) (221,201) ------------- ------------- Total adjustments................................ 56,023 1,773,223 ------------- ------------- Net cash provided by operating activities................... 141,031 1,012,251 ------------- ------------- CASH FLOW FROM INVESTING ACTIVITIES Purchase of property and equipment.......................... (418,146) (128,767) Proceeds from disposal of property.......................... -- 8,546 ------------- ------------- Net cash used in investing activities....................... (418,146) (120,221) ------------- ------------- CASH FLOW FROM FINANCING ACTIVITIES Proceeds from exercise of stock options and warrants........ 64,271 24,507 Net borrowings (payments) on obligations.................... (976,563) (914,965) ------------- ------------- Net cash used in financing activities....................... (912,292) (890,458) ------------- ------------- Net increase (decrease) in cash and cash equivalents........ (1,189,407) 1,572 Cash and cash equivalents at beginning of period............ 7,104,915 130,572 ------------- ------------- Cash and cash equivalents at end of period.................. $5,915,508 $132,144 ============= =============
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 March 31, 2001 are unaudited (except for the September 30, 2000 consolidated balance sheet, which was derived from the Company's audited financial statements), and 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, 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 six months ended March 31, 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 SIX MONTHS ENDED MARCH 31, MARCH 31, 2001 2000 2001 2000 ------------ ---------- ----------- ------------ Numerator: Income (loss) from continuing operations.... $ (179,172) $ 41,522 $ (95,222) $ 64,089 ============ ========== =========== ============ Denominator: Denominator for basic earnings per share Weighted-average shares outstanding...... 4,843,624 1,697,078 4,801,635 1,696,077 Effect of dilutive securities: Employee stock options...................... -- 219,326 -- 118,694 ------------ ---------- ----------- ------------ Denominator for diluted earnings per share.. 4,843,624 1,916,404 4,801,635 1,814,771 ============ ========== =========== ============ Basic earnings (loss) per share............ $ (0.04) $ 0.02 $ (0.02) $ 0.04 ============ ========== =========== ============ Diluted earnings (loss) per share.......... $ (0.04) $ 0.02 $ (0.02) $ 0.03 ============ ========== =========== ============
7 8 3. NOTES PAYABLE Pursuant to a guaranty, in October 2000 the Company satisfied an indebtedness of Auro Computer Services to a commercial bank. Auro is a subsidiary whose operations were ceased in February 2000. The indebtedness was reflected as a liability in the Company's balance sheet as of September 30, 2000. 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. SUBSEQUENT EVENT 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. The loan will bear interest at a rate of prime plus 1% and expires on January 31, 2002. 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 towards 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 implementation 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 gained by the transition to digital signal delivery in Europe, which was begun over four years ago. We believe that the resources we receive 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 prepare our service centers to have the technical resources 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 and cable and DSL modems, linegear, headend, power generators and power supplies, and test equipment. We believe that our capabilities 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: - screening, testing and profiling new equipment on behalf of manufacturers prior to initial installation; and - repairing, calibrating, upgrading and maintaining the equipment as an authorized warranty service center with manufacturers and under post-warranty arrangements with of 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 the equipment apart for repair. The manufacturing plants are typically located outside of the U.S., which provides favorable labor rates, but makes it difficult for them to respond quickly to the demands of after sales customer support. The repair of digital equipment is quite complex and requires significant capital investment. In light of these factors, we expect manufacturers to capitalize on the economies of scales 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: - Scientific Atlanta for digital decoders and for advanced analog decoders, analog converters, remote controls, linegear and headend equipment in Canada and the United States, - Pace MicroTechnology for digital decoders and DSL modems in all of North America, - Motorola (General Instruments) for analog decoders, analog converters, remote controls, linegear and headend equipment in Canada, - Lindsay for linegear in Canada, - ANTEC for linegear in Canada, - Blonder Tongue for headend in Canada, - Alpha Technologies for power supplies in the United States, - Powerguard for power supplies in Canada, and - Sadelco for test equipment. Out-of-Warranty/Broadband Operators Repair: ------------------------------------------- Our principal customers among broadband system operators currently include - Adelphia, - AT&T Broadband, - Ameritech New Media, - Cablevision, - Charter, - Comcast, - Insight Communications, - Time Warner, and - Videotron. 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 expect to begin processing digital equipment in our Montreal facility during our third fiscal quarter. This represents a significant accomplishment due to the complexity of the process and the various levels of detail involved with communicating with the manufacturers regarding the digital equipment. Following the completion of the installation of digital repair capabilities in Montreal, we will implement digital repair capabilities in our other service centers, a process we expect to complete this fiscal year. RECENT DEVELOPMENTS During the current fiscal year, we have established service agreements with the following manufacturers and operators: 10 11 - Pace MicroTechnology - We were recently approved as an in and out of warranty service center for Pace MicroTechnology. Known more for their market penetration in Europe, Pace has recently announced that they will be delivering in excess of 1 million digital decoders to Time Warner and Comcast in the U.S. We anticipate generating revenue from this agreement in our third quarter. - Adelphia - We announced a contract to provide asset management for Adelphia. Adelphia is a large cable operator, serving approximately 5.5 million subscribers in the U.S. We began recognizing revenue from this contract during the second quarter. - Ameritech New Media - We received a contract with AmeriTech, a cable operator in the Midwest U.S. serving approximately 300,000 homes, to provide out of warranty repair for a five year period. - Videotron - We announced an agreement to provide out of warranty repair services for Videotron, the third largest cable operator in Canada. 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 SIX MONTHS ENDED MARCH 31, MARCH 31, 2001 2000 2001 2000 -------------- ------------- ------------ ------------- Revenues .................................. 100.0 100.0 100.0 100.0 Cost of revenues .......................... 72.7 59.0 72.2 54.2 -------------- ------------- ------------ ------------- Gross profit .............................. 27.3 41.0 27.8 45.8 Selling, general & administrative expenses 35.8 38.4 31.5 34.6 -------------- ------------- ------------ ------------- Income from operations .................... (8.5) 2.6 (3.7) 11.2 Interest expense .......................... (0.4) (0.6) (0.2) (1.1) Interest income ........................... 2.1 0.0 2.3 0.0 -------------- ------------- ------------ ------------- Net income before tax ..................... (6.8) 2.0 (1.6) 10.1 (Provision) for benefit from income tax.... 2.3 0.0 0.5 (8.6) -------------- ------------- ------------ ------------- Income from continuing operations. ........ (4.5) 2.0 (1.1) 1.5 ============== ============= ============ =============
THREE MONTHS ENDED MARCH 31, 2001 RESULTS COMPARED TO THREE MONTHS ENDED MARCH 31, 2000 (ALL REFERENCES TO YEARS ARE TO FISCAL YEARS) SALES Our revenues for the second quarter of 2001 increased $1.9 million, or 92%, over the same quarter for 2000. During 2001, we generated 71%, or $2.8 million, of our revenues from sales of brokerage and distribution, compared to 19%, or $392,000, of our revenue during 2000. Sales of refurbished equipment during 2001 were $554,000, or 14% of revenue, compared to $1.5 million, or 71% of revenue, last year. Revenues from repair activities increased 139% from $208,000 last year to $500,000 during the current quarter. We recorded $100,000 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 will be generated by our relationships with the manufacturers of equipment for the broadband market. 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 revenues for the second quarter of 2001 was 73% compared to 59% of revenues for same quarter in 2000. The decrease in our gross margin percentage occurred mainly because the gross margins generated from revenues from sales of brokerage and distribution is much lower than the gross margin generated by the sale of refurbished equipment or by revenue from equipment repairs. In 2001, 71% of our revenue was generated by revenues from sales of brokerage and distribution, compared to 2000, when we realized 71% of our revenue from sales of refurbished equipment, which generate much higher margins. 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 second quarter of 2001 increased $600,000, or 79%, over the same quarter in the previous year. Most of this increase is directly attributable to the costs associated with our new service centers. We incurred an additional $500,000 of operating expenses during 2001 in adding three new service centers. Of this increase in operating expenses, $80,000 is attributable to amortization. Additionally, we have expanded our executive staff to implement the change in our business plan and manage our new administrative requirements. INCOME TAX PROVISION The effective tax rate on continuing operations was 34% for the quarter ended March 31, 2001, compared to an effective tax rate of 21% last year. There was no tax provision recorded for 2000. 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 $180,230, net of income tax, during the second quarter of this year due to the settlement of Auro's obligations, compared to $178,399 net of income tax recognized last year. Auro's remaining obligations will be adjusted at such time that they have been 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. SIX MONTHS ENDED MARCH 31, 2001 RESULTS COMPARED TO SIX MONTHS ENDED MARCH 31, 2000 (ALL REFERENCES TO YEARS ARE TO FISCAL YEARS) SALES Our revenues for the six months ended March 31, 2001 increased $4.4 million, or 101%, over the same period for 2000. Our emphasis on increasing our repair revenue is evidenced by the 111% increase from $456,000 last year to $961,000 this year. We also increased our focus on brokerage and distribution sales during the first six months of 2001, which resulted in significant increases in revenues from those activities. Our revenue from sales of brokerage increased 311% from $930,000 last year to $3.8 million this year. In 2000, we had just begun our distribution operations, thus our distribution revenue increased from $138,000 last year to $2.2 million this year. Our revenue generated by sales of refurbished equipment has been adversely 13 14 affected by the economic slow down during the second quarter. As a result, revenue from refurbished equipment sales dropped from $2.8 million last year to $1.6 million this year, a decrease of 43%. COST OF GOODS SOLD Cost of goods sold this year was 72% compared to 54% last year. This decrease in our gross margin percentage occurred because the gross margin generated by the revenues from sales of brokerage and distribution is much lower than the gross margin generated by the revenue from the sales of refurbished equipment or from repair services. In the first six months of 2001, 69% of our revenue was generated from sales of brokerage and distribution, compared to 25% last year, while 18% of our revenue was generated from sales of refurbished equipment this year compared to 65% last year. 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 first six months of 2001 increased $1.2 million, or 83%, over the previous year. Most of this increase is directly attributable to the expansion of service centers in Los Angeles, Montreal, and Hollywood, Florida. Additionally, we have expanded our executive staff to implement the change in our business plan and to manage our new administrative requirements. Our operating expenses for the first six months of 2001 for our facility in Columbus, Ohio were less than those incurred last year due to more efficient operating processes. INCOME TAX PROVISION The effective tax rate was 34% for the current year, fiscal 2001. The effective tax rate for continuing operations for the first six months last year was 85% due to the timing of events and the elimination of deferred tax assets associated with the write down of assets of Auro on December 31, 1999. 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, 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 $872,484, net of income tax, with regard to the closure of the business, subsequent losses from operating expenses, and gains from the disposition of obligations. Auro's remaining obligations will be adjusted at such time that they have been 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 six months ended March 31, 2001, we provided $141,000 of cash from operating activities. We spent $418,000 for fixed assets, primarily for the purchase of digital repair and testing equipment. 14 15 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 2001. We expect to spend at least $2.4 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 anticipated move 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 that we 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. Forward-looking statements are necessarily dependent 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. 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 The Annual Meeting of Stockholders of the Company was held on February 14, 2001 at the Hyatt Regency Hotel Pier 66, Fort Lauderdale, Florida. 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 Daniel Auzan, Louis Brunel, Bob Binsky, Pierre Brodeur, Henri Triebel, and John C. Wilson to the Board of Directors. Messrs. Binsky and Brodeur will serve as Class I directors whose terms expire at the 2002 annual meeting; Messrs. Triebel and Wilson will serve as Class II directors whose terms expire at the 2003 annual meeting; and Messrs. Brunel and Auzan will serve as Class III directors whose terms expire at the 2004 annual meeting. Director For Against Abstain Louis Brunel 4,292,162 5,714 -0- Bob Binksy 4,290,001 7,875 -0- Daniel Auzan 4,292,162 5,714 -0- Pierre Brodeur 4,292,162 5,714 -0- Henry Triebel 4,292,162 5,714 -0- John C. Wilson 4,292,162 5,714 -0- 2. Approved the Company's 2000 stock plan. For Against Abstain 3,572,044 106,680 1,323 3. Approved a proposal to change the Company's state of incorporation from Ohio to Delaware and in connection therewith, amend the certificate of incorporation and change the Company's name to A Novo Broadband, Inc. For Against Abstain 3,668,185 11,061 801 Item 5. Other Information 16 17 None. Item 6. Exhibits and Reports on Form 8-K a. Exhibits 2.1(1) Agreement and Plan of Merger and Reorganization dated January 17, 2001. 3.1(1) Amended and Restated Articles of Incorporation of the Company. 3.2(1) Bylaws of the Company. b. Reports on Form 8-K Current Report on Form 8 K/A dated September 14, 2000 and filed January 23, 2001, regarding the acquisition of Les Telecommunications Valsysteme, Inc. -------- (1) Filed with the Securities and Exchange Commission as an exhibit to the issuer's definitive proxy statement for its annual meeting of shareholders held on February 14, 2001. 17 18 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: May 14, 2001 By: /s/ David E. Chisum --------------------------------- David E. Chisum Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 18