-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JEpZt/VubWIH6RJTvdW39LVs7OQrtfbLvUZ4p+goAYSHok/3E+4xQqS4JXrVe1kU I/4rzYqo7OQB+KpHgvBs1w== 0001116502-02-000722.txt : 20020520 0001116502-02-000722.hdr.sgml : 20020520 20020520170132 ACCESSION NUMBER: 0001116502-02-000722 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020520 FILER: COMPANY DATA: COMPANY CONFORMED NAME: A NOVO BROADBAND INC CENTRAL INDEX KEY: 0000893139 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 311239657 STATE OF INCORPORATION: OH FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-23111 FILM NUMBER: 02658013 BUSINESS ADDRESS: STREET 1: 3015 GREENE STREET CITY: HOLLYWOOD STATE: FL ZIP: 33020 BUSINESS PHONE: 954-921-3870 MAIL ADDRESS: STREET 1: 8303 GREEN MEADOWS DR N CITY: LEWIS CENTER STATE: OH ZIP: 43035 FORMER COMPANY: FORMER CONFORMED NAME: CABLE LINK INC DATE OF NAME CHANGE: 19970912 10QSB 1 anovo-10qsb.txt QUARTERLY REPORT 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, 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 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 April 30, 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 $2,544,653 The number of shares of the issuer's Common Stock outstanding as of April 30, 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 MARCH 31, 2002 INDEX
PAGE NUMBER PART I. FINANCIAL INFORMATION Item 1. Consolidated Balance Sheets at March 31, 2002 (unaudited) and September 30, 3 2001 (audited) Consolidated Statements of Operations and Comprehensive (Loss) 5 Income for the Three and Six Months Ended March 31, 2002 and 2001 (unaudited) Consolidated Statements of Cash Flows for the Six Months ended March 31, 6 2002 and 2001 (unaudited) Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of 10 Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Changes in Securities; Use of Proceeds 17 Item 3. Defaults Upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES S-1
A NOVO BROADBAND, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
MARCH 31, 2002 September 30,2001 -------------- ------------ (unaudited) (audited) ------------ ------------ CURRENT ASSETS Cash ................................................ 1,816,033 $ 320,696 Accounts receivable, net ............................ 4,529,320 4,267,857 Inventories, net .................................... 1,522,535 1,871,350 Notes receivable-related parties .................... 104,809 200,000 Prepaid and other assets ............................ 270,104 163,306 Deferred income taxes ............................... 541,000 541,000 ------------ ------------ Total current assets .............................. 8,783,801 7,364,209 ------------ ------------ PROPERTY AND EQUIPMENT, at cost Furniture and fixtures .............................. 1,173,753 1,217,341 Equipment ........................................... 3,662,790 2,885,684 Leasehold improvements .............................. 1,018,395 523,371 Software ............................................ 136,528 57,000 ------------ ------------ 5,991,466 4,683,396 Less accumulated depreciation ....................... (1,741,421) (1,216,323) ------------ ------------ Net property and equipment ........................ 4,250,045 3,467,073 ------------ ------------ OTHER ASSETS Goodwill, net ....................................... 8,473,684 8,528,807 Deferred income taxes ............................... 1,962,279 1,552,000 Note receivable-related party ....................... 10,511 -- Other assets ........................................ 139,519 139,519 ------------ ------------ Total other assets ................................ 10,585,993 10,220,326 ------------ ------------ TOTAL ASSETS ........................................... $ 23,619,839 $ 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
MARCH 31, 2002 September 30, 2001 -------------- ------------------ (unaudited) (audited) ------------ ------------ CURRENT LIABILITIES Current portion of long-term obligations .... $ 200,611 $ 190,008 Notes payable - bank ........................ 1,500,000 500,000 Note payable - related party ................ 5,123,730 4,971,940 Accounts payable ............................ 4,550,747 3,039,259 Advances from related party ................. 3,055,430 -- Accrued expenses Payroll and related taxes ................. 659,020 990,935 Other ..................................... 214,723 250,429 ------------ ------------ Total current liabilities ................. 15,304,261 9,942,571 ------------ ------------ LONG-TERM LIABILITIES .......................... 41,667 83,334 ------------ ------------ Total liabilities ......................... 15,345,928 10,025,905 ------------ ------------ STOCKHOLDERS' EQUITY Common stock ................................ 5,046 4,915 Additional paid-in-capital .................. 14,000,567 13,861,873 Stock subscription receivable ............... (138,387) -- Accumulated other comprehensive loss ........ (59,621) (47,304) Retained deficit ............................ (5,533,694) (2,793,781) ------------ ------------ Total stockholders' equity ................ 8,273,911 11,025,703 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..... $ 23,619,839 $ 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 SIX MONTHS ENDED MARCH 31, MARCH 31, 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Revenues ............................................... $ 5,033,253 $ 3,996,083 $ 10,368,114 $ 8,722,483 Cost of sales .......................................... 4,731,261 2,905,338 8,770,404 6,297,147 ------------ ------------ ------------ ------------ Gross profit ........................................ 301,992 1,090,745 1,597,710 2,425,336 Selling, general and administrative expenses ........... 2,349,003 1,432,005 4,470,524 2,742,668 ------------ ------------ ------------ ------------ Loss from operations ................................ (2,047,011) (341,260) (2,872,814) (317,332) ------------ ------------ ------------ ------------ Other (expense) income Interest expense .................................. (148,882) (14,042) (282,386) (21,362) Interest income ................................... 4,845 85,721 29,194 196,314 ------------ ------------ ------------ ------------ Total other (expense) income .......................... (144,037) 71,679 (253,192) 174,952 ------------ ------------ ------------ ------------ Loss before income taxes ............................ (2,191,048) (269,581) (3,126,006) (142,380) Benefit from taxes .................................... 51,514 90,409 386,093 47,158 ------------ ------------ ------------ ------------ Loss from continuing operations ........................ (2,139,534) (179,172) (2,739,913) (95,222) Discontinued operations: Gain on disposal of division, net of tax provision of $0, $93,000, $0 and $93,000 ........ -- 180,230 (2,739,913) (95,222) ------------ ------------ ------------ ------------ Net (loss) income ...................................... (2,139,534) 1,058 $ (2,752,230) $ 85,008 Other comprehensive loss ............................... (3,105) -- (12,317) -- ------------ ------------ ------------ ------------ Total comprehensive (loss) income ...................... $ (2,142,639) $ 1,058 $ (2,752,230) $ 85,008 ============ ============ ============ ============ Basic and diluted earnings per share Loss from continuing operations ..................... $ (0.42) $ (0.04) $ (0.55) $ (0.02) Gain on discontinued operations ..................... $ 0.00 $ 0.04 $ 0.00 $ 0.04 ------------ ------------ ------------ ------------ Net (loss) income per share ......................... $ (0.42) $ 0.00 $ (0.55) $ 0.02 ============ ============ ============ ============ Weighted average shares outstanding ................. 5,041,219 4,843,624 4,977,803 4,801,635
The accompanying notes are an integral part of the consolidated financial statements. 5 A NOVO BROADBAND, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 2002(unaudited) 2001 (unaudited) -------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income .................................... $(2,739,913) $ 85,008 ----------- ----------- Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization ..................... 580,221 224,605 Provision for losses on receivables ............... (11,902) 34,625 Provision for inventory obsolescence .............. (219,294) 37,446 Deferred income taxes ............................. (410,279) (47,485) Acquisition bonus ................................. 95,191 104,917 Accrued interest income - related party ........... (4,003) -- Accrued interest - related parties ................ 206,646 -- Gain on disposal of division ..................... -- (180,230) (Increase) decrease in operating assets: Accounts receivable ........................... (249,561) 5,507 Inventories ................................... 568,109 (151,579) Prepaid and other assets ...................... (106,798) (132,432) Increase (decrease) in operating liabilities: Accounts payable .............................. 1,511,488 274,928 Accrued expenses .............................. (357,018) (114,279) ----------- ----------- Total adjustments ......................... 1,602,800 56,023 ----------- ----------- Net cash (used in) provided by operating activities .. (1,137,113) 141,031 ----------- ----------- CASH FLOW FROM INVESTING ACTIVITIES Purchase of property and equipment ................... (1,308,070) (418,146) Increase in notes receivable ......................... (6,508) -- ----------- ----------- Net cash used in investing activities ................ (1,314,578) (418,146) ----------- ----------- CASH FLOW FROM FINANCING ACTIVITIES Proceeds from exercise of stock options and warrants . 438 64,271 Net borrowings on notes payable - bank ............... 1,000,000 -- Net advances from related party ...................... 3,000,574 -- Net payments on debt obligations ..................... (41,667) (976,563) ----------- ----------- Net cash provided by (used in) financing activities .. 3,959,345 (912,292) ----------- ----------- Effect of exchange rate changes on cash .............. (12,317) -- ----------- ----------- Net increase (decrease) in cash and cash equivalents . 1,495,337 (1,189,407) Cash and cash equivalents at beginning of period ..... 320,696 7,104,915 ----------- ----------- Cash and cash equivalents at end of period ........... $ 1,816,033 $ 5,915,508 =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: On January 4, 2002, the Company loaned $138,387 to the Chief Development Officer pursuant to his exercising of stock options to purchase 129,700 shares of the Company's common stock. 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 and six months ended March 31, 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 MARCH 31 SIX MONTHS ENDED MARCH 31, 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Numerator: - ---------- Loss from continuing operations ...... $(2,139,534) $ (179,172) $(2,739,913) $ (95,222) =========== =========== =========== =========== Denominator: - ------------ Denominator for basic earnings per share Weighted-average shares outstanding ... 5,041,219 4,843,624 4,977,803 4,801,635 Effect of dilutive securities: Employee stock options ................... -- -- -- -- ----------- ----------- ----------- ----------- Denominator for diluted earnings per share 5,041,219 4,843,624 4,977,803 4,801,635 =========== =========== =========== =========== Basic and diluted earnings per share ..... $ (0.42) $ (0.04) $ (0.55) $ (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 secured bridge loan from an affiliate of its indirect parent, A Novo SA , with interest at 2% over EURIBOR (not to exceed 6%). Accrued interest on the obligation was approximately $152,000 at March 31, 2002. The bridge loan is convertible into shares of the Company's common stock at $1.40 per share (a maximum of 3,659,807 shares as of March 31, 2002 based on a bridge loan balance of $5,123,730 as of that date). Maturity of the bridge loan has been extended to the closing date of the Company's proposed new credit facility, at which time it is expected that the entire bridge loan balance will be converted into shares of common stock. The Company's working capital deficit at March 31, 2002, reflects the outstanding bridge loan balance as a short-term liability. In the first six months of fiscal 2002, the Company received working capital advances totaling $3,000,574 from A Novo SA. Initially advances bore interest at rates charged by A Novo SA to its other affiliates, 2% over EURIBOR, not to exceed 6% per year. On March 15, 2002, in light of the Company's need for additional funding to meet its working capital requirements and its inability to increase or renew its existing bank line of credit, which matured on April 2, 2002, and its delay in obtaining a new line of credit, A Novo SA advanced the Company $2,200,000. In order to induce A Novo SA (a) to advance the additional funds, (b) to agree to subordinate all of its working capital advances to a new credit line and (c) to agree to guarantee a new credit line, the terms of such advances were revised and incorporated into an unsecured demand convertible grid note of the Company in nominal principal amount of $4 million, due on demand. From and after March 31, 2002, interest on the principal of the note accrues at an annual rate equal to 2% plus prime, adjusted monthly. 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. The average conversion price is $1.41 per share. Based on a balance of $3,000,574 outstanding as of March 31, 2002, the note was convertible into a maximum of 2,133,520 shares of Common Stock. The Company's working capital deficit at March 31, 2002, reflects the outstanding working capital advances as a short-term liability. Subsequent to March 31, 2002, A Novo SA advanced the Company an additional $500,000 under the demand note. 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. Interest is charged at prime plus 1% (5.75% at March 31, 2002). The line matured on April 2, 2002 and, as of May 20, 2002, had not been repaid or further extended. The lender has taken no action to enforce repayment of the loan, pending the Company's completion of a proposed new line of credit from another bank. As of May 20, 2002, the Company had received a term sheet and loan documentation from another bank for a new secured line of credit of up to $3,000,000, from which it expects to satisfy the existing line prior to May 31, 2002. Outstanding borrowings under the existing line were $1,500,000 and $500,000 at March 31, 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 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 the principal, and is payable in three installments of $44,637 plus interest on January 24, 2005 and $46,875 plus interest on both January 4, 2006 and 2007. The loan is accounted for as a stock subscription receivable and accordingly the receivable portion is shown in the equity section of the consolidated balance sheet. 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. 8 6. 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 March 31, 2002 was approximately $820,000. 7. SUBSEQUENT EVENTS Following the curtailment of operations at the Company's Montreal facility in February of 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 $262,000 in cash and the assumption of certain liabilities. As a result of the sale, the Company expects to recognize a third quarter loss estimated at $2.7 million, including the write-down of approximately $2.5 million of goodwill related to its acquisition of the operations in September 2000. During the first six months of 2002, the operations of the Canadian facility resulted in an operating loss that the Company estimates at $338,000. 8. RECENT ACCOUNTING PRONOUNCEMENTS In March 2002, the Accounting Standards Executive Committee issued Statement of Position (SOP) 01-6 "Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others." This SOP clarifies certain disclosures of companies' accounting policies concerning trade receivables and other lending activities, which will be required for fiscal years beginning after December 15, 2001. The Company anticipates that the adoption of this standard will not have any significant impact to its financial statements and will adopt this SOP on October 1, 2002. In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This new standard supersedes both SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for the Long-Lived Assets to be Disposed of," and sections of the Accounting Principles Board Opinion No. 30," providing one accounting model with which to review for asset impairment. The statement retains much of the recognition and measurement provisions of SFAS No. 121, but removes goodwill from its scope. It also alters the criteria of classifying long-lived assets to be disposed of by sale and changes the method for accounting for the disposal of long-lived assets if other than through sale. Finally, while this statement retains the basic presentation provisions for the disposal of a segment of a business or discontinued operations, it broadens the definition of a discontinued operation to include a component of an entity. Management is currently determining what effect, if any, the adoption of this standard will have on its financial statements. The adoption of this statement is required for fiscal years beginning after December 15, 2001. The Company will adopt this statement on October 1, 2002. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." The objective of this statement is to provide accounting guidance for legal obligations associated with the retirement of long-lived assets by requiring the fair value of a liability for the asset retirement obligation to be recognized in the period in which it is incurred. When the liability is initially recognized, the asset retirement costs should also be capitalized by increasing the carrying amount of the related long-lived asset. The liability is depreciated over the useful life of the associated asset. The Company is currently assessing its legal obligations. Management anticipates that the adoption of this standard will not have any significant impact to its financial statements. This statement is effective for fiscal years beginning after June 15, 2002. The Company will adopt this standard on October 1, 2002. 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 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 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. To deal with our liquidity requirements, we have taken affirmative measures to conserve cash and focus our resources on the development of our core service functions. Pending the development of positive cash flow and an increased banking facility, we have relied on significant working capital advances from our parent and its affiliates. The effect of our sharpened focus on repair services is already discernable in our production figures. Most of the increase in revenue 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 first quarter. We expect production under the Scientific Atlanta authorization to continue to increase significantly over the remainder of the fiscal year. Our services afford our customers opportunities 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 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 share of an expanding North American market for digital broadband repair and related services. 10 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 recently discontinued service operations at our Montreal service center and completed the sale of most of the assets related to that facility. 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 system of strong regional presences which enables us to respond quickly to local 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 convenient logistics services and warehousing. RESULTS OF OPERATIONS The following table sets forth certain information, expressed as a percentage of net sales, reflected in the Company's consolidated statements of income for the three and six months ended March 31, 2002 and 2001:
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, 2002 2001 2002 2001 ----- ----- ----- ----- Revenues ........................................ 100.0 100.0 100.0 100.0 Cost of revenues ................................ 94.0 72.7 84.6 72.2 ----- ----- ----- ----- Gross profit .................................... 6.0 27.3 15.4 27.8 Selling, general & administrative expenses ...... 46.7 35.8 43.1 31.5 ----- ----- ----- ----- Loss from operations ............................ (40.7) (8.5) (27.7) (3.7) Interest expense ................................ (2.9) (0.4) (2.7) .2 Interest income ................................. 0.1 2.1 0.3 2.3 ----- ----- ----- ----- Net loss before tax ............................. (43.5) (6.8) (30.1) (1.6) Benefit from income tax ......................... 1.0 2.3 3.7 0.5 ----- ----- ----- ----- Net loss ........................................ (42.5) (4.5) (26.4) (1.1) ===== ===== ===== =====
11 THREE MONTHS ENDED MARCH 31, 2002 RESULTS COMPARED TO THREE MONTHS ENDED MARCH 31, 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. During the second quarter of fiscal 2002, we continued to generate revenues from the sale of refurbished line gear and power supplies and for a portion of the quarter, from brokerage services and sales of refurbished cable equipment. During the quarter, we elected to discontinue all remaining brokerage and distribution activities, in order to further concentrate on meeting demand in our growing repair activities. Our sales for the second quarter of 2002 increased 25% to $5.0 million, as compared to $4.0 million for the second quarter of 2001. As we focused our business more on the repair of set top boxes, our repair revenue increased 600% to $3.5 million, as compared to $500,000 for the second quarter of 2001. We have also increased our efforts to provide logistics services to our customers, and our revenue from this source increased to $722,000, as compared to $100,000 in the corresponding quarter of 2001. Sales from our now-discontinued international and domestic distribution activities decreased 50% to $710,000, as compared to $1.4 million in 2001, due to both decreased demand and the termination of these activities mid-way through the quarter. For similar reasons, brokerage sales decreased to $53,000 during the quarter, as compared to $1.5 million in 2001. Finally, also for these reasons, sales of refurbished products decreased 96% to $20,000, as compared to $554,000 in 2001. As we have now discontinued our brokerage and distribution activities, 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, and our subsequent designation as an authorized in-warranty repair provider for Scientific Atlanta products, are the primary causes for 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 94% of sales in the second quarter of fiscal 2002, compared to 73% 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 low margins resulting from liquidation of the associated inventory of brokerage and distribution services and refurbished equipment ($290,000) . We also continued to incur increased labor expense (recognized in cost of goods sold) associated with increases in repair capacity which was not fully utilized during the current period. 12 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 30% during the second 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 64% in the second quarter of 2002 to $2.3 million, as compared to $1.4 million in the second quarter of the prior year. The increase reflected certain non-recurring items. These consisted of professional fees and certain costs associated with the termination of our brokerage and distribution activities, including severance payments to former employees and the establishment of reserves against $ 70,000 of receivables from offshore customers. Additional operating costs were also attributable to the operation of two repair facilities acquired from Broadband Services in August 2001. In February 2002, we curtailed our operations in Canada and sought a sale of the related assets, which we completed in May of this fiscal year. As a result of the sale, we expect to recognize a third quarter loss estimated at $2.7 million, including the write-down of approximately $2.5 million of goodwill related to our acquisition of the facility in September 2000. For the second quarter of fiscal 2002, our Canadian facility incurred an operating loss that we estimate at $219,000. During the second quarter of 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 resulted in operating losses in the second quarter of fiscal 2002 that we estimate at $442,000. INCOME TAX PROVISION The effective tax benefit rate on continuing operations was 2% for the second quarter of 2002, as compared to 34% in 2001. This reflects the recognition of a valuation allowance 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 In February 2000, we decided to close our subsidiary, Auro Computer Services, Inc. ("Auro").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 a 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 2001, due to the settlement of Auro's obligations. There was no activity relating to Auro during the second quarter of 2002. Adjustment will be made for Auro's remaining obligations as and when they are settled with Auro's creditors. We do not anticipate any further adverse impact on our financial position or results of operations relating to Auro. SIX MONTHS ENDED MARCH 31, 2002 RESULTS COMPARED TO SIX MONTHS ENDED MARCH 31, 2001 SALES Our revenues for the six months ended March 31, 2002 increased 19% to $10.4 million, as compared to $8.7 million for the same period for 2001. As we focused our business more on the repair of set top boxes, our repair revenue increased 556% to $6.3 million, as compared to $961,000 from last year. We have also increased our efforts to provide logistics services to our customers, and our revenue from this source increased to $1.3 million, as compared to $100,000 in 2001. 13 Sales from international and domestic distribution remained constant at $2.2 million for the six months ended March 31, 2002 and 2001. Brokerage sales decreased to $296,000 during the six month period, as compared to $3.8 million in 2001, consistent with our reduced efforts and decreased demand in this service sector. Finally, sales of refurbished products decreased 77% to $371,000, as compared to $1.6 million in 2001. As we subsequently discontinued our brokerage and distribution services activities, we expect little revenue from these activities during the remainder of fiscal year 2002. COST OF GOODS SOLD Cost of goods sold for the six months of this year was 85% compared to 72% last year. 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 liquidation of the associated inventories 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. In the first six months of 2002, revenue generated from our brokerage and distribution services amounted to 24% of our total sales as opposed to 69% during the previous year. The costs of goods associated with those sales were 97% during 2002 as opposed to 78% for the same period during 2001. OPERATING EXPENSES Operating expenses for the first six months increased $1.7 million or 63% over the previous year. The increase was due to costs associated with two repair facilities acquired from Broadband Services in August 2001. Also included in the expenses were severance payments to former employees 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 in May of this fiscal year. As a result of the sale, we expect to recognize a third quarter loss estimated at $2.7 million, including the write-down of approximately $2.5 million of goodwill related to our acquisition of the facility in September 2000. For the first six months of fiscal 2002, our Canadian facility incurred an operating loss that we estimate at $338,000. During the second quarter of 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 resulted in an operating loss for the first six months of fiscal 2002 that we estimate at $540,000. INCOME TAX PROVISION The effective tax benefit rate on continuing operations was 12% for the first six months of 2002, as compared to 33% in 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 In February 2000, we decided to close our subsidiary, Auro Computer Services, Inc. ("Auro").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 a 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 2001, due to the settlement of Auro's obligations. There was no activity relating to Auro during the second quarter of 2002. Adjustment will be made for Auro's remaining obligations as and when they are settled with Auro's creditors. We do not anticipate any further adverse impact on our financial position or results of operations relating to Auro. 14 LIQUIDITY AND CAPITAL RESOURCES For the first six months of fiscal 2002, we had significant cash needs which we satisfied with working capital advances totaling $3.0 million from our French parent, A Novo SA. Initially advances bore interest at rates charged by A Novo SA to its other affiliates, 2% over EURIBOR, not to exceed 6% per year. On March 15, 2002, in light of our immediate needs for additional funding to meet our working capital requirements and our inability to increase or renew our existing bank line of credit, which matured on April 2, 2002, and our delay in obtaining a new line of credit, A Novo SA advanced us $2,200,000. In order to induce A Novo SA (a) to advance the additional funds, (b) to agree to subordinate all of its working capital advances to a new credit line and (c) to agree to guarantee a new credit line, the terms of such advances were revised and incorporated into an unsecured demand convertible grid note of us in nominal principal amount of $4 million, due on demand. From and after March 31, 2002, interest on the principal of the note accrues at an annual rate equal to 2% plus prime, adjusted monthly. The principal of the note may be converted into shares of the 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. The average conversion price is $1.41 per share. Based on a balance of $3,000,574 outstanding as of March 31, 2002, the note was convertible into a maximum of 2,133,520 shares of common stock. We received an additional $500,000 of advances under the demand note during April 2002. As of May 1, 2002, none of the working capital advances from A Novo SA had been repaid. We expect that all amounts owing for working capital advances from A Novo SA and its affiliates will be subordinated to our proposed new bank credit facility. In addition to funding operating expenses, during the first six months of fiscal 2002, 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 existing bank credit facility provides for advances of up to $1.5 million. Balances under the facility totaling approximately $1.518 million were due, and the facility expired on April 2, 2002. The lender has taken no action to enforce repayment of the loan, pending the Company's completion of a proposed new line of credit from another bank but has not granted a formal extension of the loan. As of May 20, 2002, we had received a term sheet and loan documentation from another bank for a new secured line of credit of up to $3,000,000, from which we expect to satisfy the existing facility prior to May 31, 2002. The existing facility was fully drawn as of March 31, 2002 and May 1, 2002. The terms of the new credit facility provides for interest at 2% over the lending bank's prime rate and a one-year maturity. We believe that as a result of measures taken during the second quarter to contain costs, conserve cash and our expectations of increasing revenues from our core repair service functions, we will be able to meet our working capital and capital expenditure requirements for the foreseeable future out of cash flow from operations and incremental funds available under our proposed new credit facility. Nevertheless, if the proposed new facility is not funded, we will have immediate need for other sources of funds to satisfy our bank debt and provide working capital. We have no assurance that our parent will continue to supply working capital or other funds to meet our needs. Failure to obtain additional working capital and to meet our obligations to our bank lender would have a material adverse effect on our business. 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 such acquisitions in the foreseeable future would probably require that we obtain additional financing through the public or private issuance of additional debt or equity securities. No such acquisitions are currently pending or planned. To fund a portion of the purchase price of the Broadband Services repair assets we acquired 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%. Accrued interest on the bridge loan was approximately $152,000 at March 31, 2002. The bridge loan is convertible into shares of our common stock at $1.40 per share (a maximum of 3,659,807 shares as of March 31, 2002 based on a bridge loan balance of $5,123,730 at March 31, 2002.). Maturity of the bridge loan has been extended to the closing date of our proposed new credit facility, at which time we expect that the entire bridge loan balance will be converted into shares of common stock. 15 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. 16 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. The Company has defaulted in payment of its existing bank credit facility that provides for advances of up to $1.5 million. Balances under the facility were due, and the facility expired on, April 2, 2002. The lender has taken no action to enforce repayment of the loan, pending the Company's completion of a proposed new $3 million line of credit from another bank but has not granted a formal extension of the loan. Total arrearages as of May 20, 2002 were approximately $1.518 million. The Company expects to pay the defaulted facility prior to May 31, 2002 with proceeds of the proposed new line of credit. 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 3.6 Demand Convertible Grid Note of the issuer dated March 31, 2002 in nominal principal amount of $4 million, payable to A Novo SA. 17 A NOVO BROADBAND, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. A Novo Broadband, Inc. Date: May 20, 2002 By: /s/ William Kelly -------------------------------- William Kelly President and Chief Executive Officer Date: May 20, 2002 By: /s/ Steven J. Easterday ---------------------------------------- Steven J. Easterday Principal Financial Officer S-1 EX-3.6 3 ex3-6.txt DEMAND CONVERTIBLE GRID NOTE This Note and the securities issuable on exercise of the conversion privilege contained herein have not been registered under the Securities Act of 1933, as amended, and may not be transferred or otherwise sold or disposed of except pursuant to (i) registration under such Act or (ii) an available exemption from such registration. A NOVO BROADBAND, INC. Demand Convertible Grid Note ---------------------------- US $4,000,000.00 New Castle, Delaware March 31, 2002 FOR VALUE RECEIVED, A NOVO BROADBAND, INC., a Delaware corporation ("Borrower"), hereby promises to pay to the order of A Novo SA, whose registered office is located at BEAUVAIS (60000), Z.I. de Bracheux, 16 rue Joseph Cugnot, France, incorporated under French law at the business registry of Beauvais under number 341 125 540 ("Lender") (i) the principal sum of FOUR MILLION AND NO/100 DOLLARS ($4,000,000.00), or so much thereof as shall have been advanced by Lender to Borrower, in Lender's sole discretion, and not repaid, plus (ii) additional principal equal to such amounts of interest and loan fees as may be capitalized and added to principal as herein further provided, and (iii) interest and costs as herein further provided. The principal of this Note to the extent not earlier paid shall be due and payable on demand (or earlier as hereinafter provided). Interest shall accrue on the unpaid balance of the principal of this Note from time to time outstanding after the date hereof at the Interest Rate (as defined below) and shall be due and payable on the first day of each calendar quarter, commencing July 1, 2002 (and on the first day of each succeeding October, January, April and July), or earlier on demand; provided, however, that unless demand shall be made for payment of the principal of this Note, (i) interest due as of the first day of any calendar quarter may, at the option of Borrower, be deferred and added to principal, and, (ii) if interest accrued as of the first day of any calendar quarter shall not be paid within five days thereafter, the amount thereof shall automatically be added to principal, effective in either case as of the first day of such calendar quarter. Interest shall accrue during each month at an annual rate (the "Interest Rate") equal to 2% plus the rate reported as the "prime rate" in the East Coast Edition of the Wall Street Journal as of the first day for which a prime rate is so reported in such month. This Note incorporates the following additional terms: 1. (a) This Note evidences loans made by Lender to Borrower, in Lender's sole discretion, from time to time, as requested by Borrower. The unpaid principal balance of this Note at any time shall be the total amount advanced by Lender to Borrower in Lender's sole discretion, plus so much of interest accrued hereunder and points payable in connection with the funding of loans as shall be capitalized and added to principal as provided above or in paragraph (c) of this Section 1, less the total amount of principal paid by Borrower or applied upon conversion of this Note in accordance with Section 8 or Section 9. The date and amount of each such loan and each payment on account of principal hereof may be endorsed by Lender or any subsequent holder of this Note on the Schedule attached to this Note and when so endorsed shall represent evidence thereof binding upon Borrower in the absence of manifest error. Any failure by Lender or any such holder so to endorse any such loan shall in no way mitigate or discharge the obligation of Borrower to repay any loans actually made. (b) Requests by Borrower for further loans to be made and directions as to the disposition of the proceeds thereof may be given orally (including by telephone) or in writing to Lender by the officers of Borrower or other persons authorized to borrow on Borrower's behalf by borrowing resolutions of Borrower's Board of Directors heretofore delivered to Lender, as such resolutions may be amended or superseded from time to time, provided that any such amending or superseding resolutions shall have been certified by the Secretary or an Assistant Secretary of Borrower, and a copy thereof, so certified, shall have been delivered to an officer of Lender at its office for payment. Lender may conclusively rely on the authorization contained in said resolutions. Any such loan so made shall be conclusively presumed to have been made to or for the benefit of Borrower and Borrower shall be liable in respect thereof when made in accordance with any such request or direction. (c) Borrower shall pay to Lender a loan fee in an amount equal to 1% of the principal amount of each loan evidenced by this Note. Such fee shall be paid in cash and deducted from the funds advanced by Lender to Borrower in each instance or, at Lender's discretion in any instance, shall be capitalized and added to principal concurrently with the funding of such loan. The amount of such fees added to principal may be endorsed by Lender on the Schedule attached to this Note and when so endorsed shall represent evidence thereof binding upon Borrower in the absence of manifest error. Any failure by Lender so to endorse any such fee shall in no way mitigate or discharge the obligation of Borrower to repay any fee payable pursuant to this paragraph (c). 2. Payments of principal of and interest on this Note shall be made at the address of Lender set forth in Section 13 or at such other place within or without the United States as Lender or any subsequent holder of this Note shall have designated to Borrower in writing. All payments on this Note shall be applied first to the payment of interest accrued hereunder until all interest shall be paid in full, and then to the payment of principal. Each payment of principal shall be applied first to pay capitalized interest and then to pay loans made pursuant to this Note (including any capitalized fee relating to each loan) in the inverse order of the funding of such loans as specified on the Schedule attached hereto. 3. All payments made under this Note shall be made in United States Dollars, and, if for any reason any payment made hereunder is made in a currency (the "Other Currency") other than United States Dollars, then to the extent that the payment actually received by the holder when converted into United States Dollars at the Rate of Exchange (as defined below) on the date of payment (or as soon thereafter as it is practicable for the holder to purchase United States Dollars, or, in the case of the liquidation, insolvency, bankruptcy or analogous process of Borrower, at the rate of exchange on the latest date permitted by applicable law for the determination of liabilities in such liquidation, insolvency, bankruptcy or analogous process) falls short of the amount due hereunder, Borrower shall, as a separate and independent obligation of Borrower, indemnify Lender or any subsequent holder of this Note and hold such person harmless from and against the amount of such shortfall. As used in this Note, the term "Rate of Exchange" means the rate at which the holder is able on the relevant date to purchase United States Dollars with the Other Currency and shall include any premiums and costs of exchange payable in connection with the purchase of, or conversion into, United States Dollars. 2 4. All payments made by Borrower under or with respect to this Note shall be made free and clear of, and without withholding or deduction for or on account of any present or future tax, duty, levy, impost, assessment or other governmental charge (including penalties, interest and other liabilities related thereto) imposed or levied by or on behalf of the United States Government or any state or municipality therein or thereof or by any authority or agency therein or thereof having power to tax (hereinafter, "Taxes") unless Borrower is required to withhold or deduct Taxes by law or by the interpretation or administration thereof. If Borrower is required to withhold or deduct any amount for or on account Taxes from any payment made under or with respect to this Note, Borrower shall pay such additional amounts ("Additional Amounts") as may be necessary so that the net amount received by the holder or holders of this Note (including Additional Amounts) after such withholding deduction will not be less than the amount such holder would have received if such Taxes had not been withheld or deducted; provided, however, that no additional amounts shall be payable with respect to a payment made to a holder (an "Excluded Holder") which is subject to such Taxes by reason of its being connected with the United States of America or any state thereof otherwise than solely by reason of the holder's activity in connection with making loans hereunder or holding this Note or by reason of the receipt of payments hereunder. Borrower shall upon the request of any holder of this Note (other than an Excluded Holder) reimburse such holder for the amount of (i) any Taxes so levied or imposed and paid by such holder as a result of payments made under or with respect to this Note and (ii) any Taxes so levied or imposed with respect to any reimbursement under the preceding clause (i) but excluding any such Taxes on such holder's net income, so that the net amount received by such holder (net of payments made under or with respect to this Note) after such reimbursement will not be less than the net amount the holder would have received if Taxes on such reimbursement had not been imposed. 5. In no event shall the interest rate applicable at any time to this Note exceed the maximum rate permitted by law. Interest shall be calculated on the basis of a 365-day year and actual days elapsed. Any payment which is required to be made on a day which is not a banking business day in the State of Delaware shall be payable on the next succeeding banking business day and such additional time shall be included in the computation of interest. 6. Lender, by its acceptance of this Note, covenants to and agrees with Borrower that Lender will at no time dispose of this Note or any securities issued on exercise of the conversion privilege contained herein except in compliance with the requirements of the Securities Act of 1933, as amended. 3 7. This Note may be prepaid by Borrower at any time without premium or penalty upon 15 days prior notice to Lender or any other person who at the time of such notice is the holder of this Note, provided that the holder of this Note shall be entitled at any time prior to such prepayment to exercise the conversion privilege contained herein with respect to all or any of the amount proposed by Borrower to be prepaid. 8. (a) Subject to and upon compliance with the provisions of this Section 8 and Section 9, Lender or any other holder of this Note may, at its option, convert the principal amount of this Note (or any portion thereof), together with all accrued interest on the principal portion hereof being so converted, into fully paid and nonassessable shares of common stock of Borrower ("Borrower Stock") at the Conversion Price (as hereinafter defined) in effect at the time of conversion. (b) Subject to certain adjustments as hereinafter provided, the Conversion Price for the principal of and interest on each loan made hereunder shall be the average closing price per share of Borrower Stock during the 10 trading days immediately following the funding of such loan as officially reported by the principal national securities exchange on which such shares are listed or admitted to trading, or if such shares are not listed or admitted to trading on a national securities exchange, the closing bid price of such shares on the Nasdaq Stock Market as officially reported by The Nasdaq Stock Market, Inc., or if such shares are not listed on the Nasdaq Stock Market, the closing bid price of such shares in the over the counter market as officially reported by the National Association of Securities Dealers, Inc. (c) The Conversion Price shall be subject to appropriate decrease or increase, as the case may be, if Borrower shall at any time after the date of issuance of this Note: (i) declare with respect to Borrower Stock any dividend or distribution payable in shares of Borrower Stock or in securities directly or indirectly convertible into or exchangeable for shares of Borrower Stock following the conversion or exchange of such securities, or (ii) subdivide or combine outstanding shares of Borrower Stock. (d) In case of reclassification, change or exchange of outstanding shares of Borrower Stock (except for a change as a result of a subdivision or combination of such shares), or in the case of any consolidation of Borrower with, or merger of Borrower into, another corporation (except for a merger or a consolidation in which Borrower is the continuing corporation and which does not result in any reclassification, change or exchange of outstanding shares of Borrower Stock other than a change as a result of a subdivision combination of such shares), or in case of any transfer to another corporation of the assets of Borrower as an entirety or substantially as an entirety, or if Borrower shall declare a dividend or distribution (except in shares of Borrower Stock payable otherwise than in cash out of earned surplus, this Note shall thereafter be convertible pursuant to this Section 8 into this kind and amount of shares and other securities and property that the person exercising the conversion privilege herein would have owned or would have been entitled to receive immediately after such reclassification, change, exchange, consolidation, merger, transfer, dividend or distribution, had this Note been converted immediately prior to the effective date of such reclassification, change, exchange, consolidation, merger or transfer or immediately prior to the date for the determination of security holders of record entitled to receive such dividend or distribution. 4 (e) At the option of the person exercising the conversion privilege herein, to avoid the issuance of any fractional shares upon any conversion, adjustment therefor may be made in cash in an amount equal to the same fraction of the Conversion Price in effect on the date of such conversion. (f) No adjustment will be made upon conversion of this Note in respect of dividends or distributions previously paid or declared (the date for the determination of security holders of record entitled to receive such dividends or distributions having passed) on the shares of Borrower Stock previously outstanding, except as otherwise provided in paragraph (d) of this Section 8. (g) Whenever the number of shares of Borrower Stock or other securities or assets deliverable upon conversion of this Note shall be adjusted as provided in this Section 8, Borrower shall forthwith obtain and file with its corporate records a certificate or letter from the firm of independent public accountants then retained by Borrower setting forth the adjusted number of shares of Borrower Stock or other securities or assets deliverable upon conversion of this Note. Any such certificate or letter shall be conclusive evidence as to the correctness of the adjustment or adjustments referred to therein and shall be available at the principal office of Borrower for inspection by the holder of this Note on any day during normal business hours. 9. To exercise the conversion privilege contained herein, the Lender or any other holder of this Note shall surrender this Note, with the attached form of Conversion Notice duly completed, to Borrower at the principal office of Borrower or at such other place as Borrower may designate. As promptly as practicable after surrender of this Note as aforesaid but in no event later than seven business days thereafter, Borrower shall issue and deliver to the person exercising the conversion privilege a certificate or certificates for the number of shares of Borrower Stock and/or other securities issuable or deliverable upon the conversion of this Note or such designated portion hereof in accordance herewith and cash in respect of any fraction of a share of Borrower Stock for which such person has elected to receive cash. Such conversion shall be deemed to have been effected at the time when such notice shall have been received by Borrower and this Note shall have been surrendered as aforesaid, and the person in whose name any certificate for shares of Borrower Stock or other securities shall be issuable upon such conversion shall be deemed to have become on such date the holder of record of the shares or other securities represented thereby, subject to the provisions of Section 10. If less than all of the amount owing in respect of this Note shall be converted or paid in cash upon any such conversion, the amount of principal of this Note so converted shall be endorsed by the person exercising the conversion privilege as a payment in respect of principal on the Schedule attached to and made a part of this Note. 5 10. Borrower covenants and agrees that it will at all times reserve and keep available such number of its duly authorized and unissued shares of Borrower Stock as shall from time to time be sufficient to effect the conversion of this Note and the exercise or conversion of all other outstanding securities exercisable or convertible with respect to shares of Borrower Stock and that, if at any time the number of authorized but unissued shares of Borrower Stock shall not be sufficient to effect the conversion of this Note and the exercise or conversion of all other outstanding securities exercisable or convertible with respect to shares of Borrower Stock at the conversion price then in effect for each such security, Borrower will take such corporate action as may, in the opinion of its counsel, be necessary to increase the number of its authorized but unissued shares of Borrower Stock to such number as shall be sufficient for such purpose. 11. If, at any time prior to the date fixed for payment of this Note, any of the following events shall occur: (a) Borrower shall declare any dividend or other distribution upon the shares of Borrower Stock payable otherwise than in cash out of earned surplus; or (b) Borrower shall offer to the holders of shares of Borrower Stock any additional shares of Borrower or options or warrants therefor or securities convertible into shares of Borrower or any right to subscribe therefor; or (c) a recapitalization, reclassification, consolidation, merger, transfer of assets, dissolution, liquidation, winding-up of Borrower or other similar action of Borrower requiring approval by its stockholders shall be proposed, then in any one or more of such events, Borrower shall give to the holder of this Note at the time of such event, in accordance with Section 13, not less than 20 days prior notice of the date on which: (i) the books of Borrower shall be closed or a record taken for determination of the stockholders entitled to such dividend, distribution or subscription rights, or (ii) the books of Borrower shall be closed or a record taken for determination of the stockholders entitled to vote on such proposed recapitalization, reclassification, consolidation, merger, transfer of assets, dissolution, liquidation, winding-up or other similar action. Failure to give such notice or any defect therein shall not affect the validity of any action taken. 12. The agreements, undertakings, representations and warranties contained in this Note shall remain operative and in full force and effect and, subject to payment in full of all principal and interest due hereon, and shall survive the surrender and/or delivery of this Note to Borrower for cancellation or otherwise in connection with the conversion, redemption or assignment or endorsement hereof. 6 13. Except as herein otherwise expressly provided, all notices, requests, demands, consents and other communications required or permitted under this Note shall be in writing and shall be considered to have been duly given when (i) delivered by hand, (ii) sent by telecopier (with receipt confirmed), provided that a copy is mailed (on the same date) by certified or registered mail, return receipt requested, postage prepaid, or (iii) received by the addressee, if sent by Express Mail, Federal Express or other reputable express delivery service (receipt requested), or by first class certified or registered mail, return receipt requested, postage prepaid, in each case to the appropriate addresses and telecopier numbers set forth below (or to such other addresses and telecopier numbers as a person whose address is herein specified may from time to time designate as to itself by notice similarly given to the other such designees in accordance herewith). A notice of change of address shall not be deemed given until received by the addressee. Notice shall be addressed: (i) if to Lender: A Novo SA 31, rue des Peupliers F-92660 Boulogne CEDEX France Telecopier: + 33 1 58 17 00 99 Attention: Tax and Legal Manager (ii) if to Borrower A Novo Broadband, Inc. 196 Quigley Boulevard New Castle, Delaware, 19720 Telecopier: (302)322-6331 Attention: Chief Executive Officer In each case with a copy to: Kronish Lieb Weiner & Hellman LLP 1114 Avenue of the Americas New York, New York 10036-7798 Attn: Russell S. Berman Telecopier: 212-479-6275 14. This Note shall be governed by and construed in accordance with the laws of the State of Delaware applicable to instruments made and to be performed wholly within that state. If any provision of this Note is held to be illegal or unenforceable for any reason whatsoever, such illegality or unenforceability shall not affect the validity of any other provision hereof. 15. All the covenants, stipulations, promises and agreements contained in this Note by or on behalf of Borrower shall bind its successors and assigns, whether or not so expressed. 7 16. Borrower hereby waives presentment for payment, demands (other than demand for payment as contemplated hereby), notice of dishonor and protest and further agrees that none of the terms or provisions of this Note may be waived, altered, modified or amended except as the holder hereof may consent in a writing duly signed on its behalf. No failure or delay on the part of any holder of this Note in exercising any of its rights, powers or privileges hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. All rights and remedies provided herein or otherwise available to any holder of this Note are cumulative and are not exclusive of any other available remedies and all such remedies may be exercised singly or concurrently. Any waiver by a holder of this Note on any occasion shall not bar any right or remedy which Lender or any other holder would otherwise have on any future occasion. No executory agreement unless signed by a holder of this Note and no course of dealing between Borrower and Lender or any other holder of this Note shall be effective to modify or discharge, in whole or in part, this Note. 17. Borrower also agrees to pay on demand all costs and expenses (including fees and expenses of counsel) incurred by Lender or any holder of this Note in connection with the making, redemption or conversion of this Note or any loan hereunder or in enforcing this Note. IN WITNESS WHEREOF, Borrower has executed and delivered this Note. A NOVO BROADBAND, INC. By: /s/ William Kelly ------------------------------ William Kelly, President and CEO 8 SCHEDULE TO DEMAND PROMISSORY NOTE OF A NOVO BROADBAND, INC. DATED MARCH 31, 2002 ----------------------------------------------------------- LOANS AND PAYMENTS OR CONVERSIONS OF PRINCIPAL
- ------------------- ------------------- ---------------- ----------------- ---------------- ---------------- --------------- Loan Fee (if not deducted Amount of Loan Initial Date from funds Paid or Principal Conversion Notation Made (Month/Day/Year) Amount of Loan advanced) Converted Balance Price By - ------------------- ------------------- ---------------- ----------------- ---------------- ---------------- --------------- - ------------------- ------------------- ---------------- ----------------- ---------------- ---------------- --------------- - ------------------- ------------------- ---------------- ----------------- ---------------- ---------------- --------------- - ------------------- ------------------- ---------------- ----------------- ---------------- ---------------- --------------- - ------------------- ------------------- ---------------- ----------------- ---------------- ---------------- --------------- - ------------------- ------------------- ---------------- ----------------- ---------------- ---------------- --------------- - ------------------- ------------------- ---------------- ----------------- ---------------- ---------------- ---------------
9 Notice of Conversion To be executed by the holder of the attached Note if such holder desires to convert all or part of the attached Note: The undersigned holder of the attached Note hereby irrevocably exercises the option to convert such Note or the portions thereof specified below into shares of Common Stock of A Novo Broadband, Inc. ("ANVB") in accordance with the terms of the Note, elects to receive payment in cash for any fractional share issuable upon such conversion, and directs that the shares of Common Stock of ANVB issuable and deliverable upon such conversion, together with any check in payment for any fractional share, be delivered to the undersigned. If less than all of the amounts owing under the Note are so converted, the Note shall be returned to the undersigned and the Schedule attached to the Note shall be appropriately endorsed by the undersigned to reflect payment of principal to the extent of the principal portion of the Note so converted or paid in cash. Dated: By: -------------------------- Name: -------------------------- Title: -------------------------- Portion to be converted (if less than remaining principal balance): - -------------------------- ------------------------ ---------------------------- Date of Loan Loan Number Principal Dollar/Euro Amount - -------------------------- ------------------------ ---------------------------- - -------------------------- ------------------------ ---------------------------- - -------------------------- ------------------------ ---------------------------- 10 -----END PRIVACY-ENHANCED MESSAGE-----