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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from _________ to _________
Commission File Number: 2-98014-D
NOVA COMMUNICATIONS LTD.
(formerly First Colonial Ventures, Ltd.)
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(Name of small business issuer in its charter)
NEVADA 95-4756822
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3830 DEL AMO BLVD, TORRANCE, CA 90503
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(Address of principal executive offices)
Issuer's telephone number: (310) 642-0200
6033 WEST CENTURY BOULEVARD, SUITE 1018, LOS ANGELES, CA 90045
(Former address, if changed since last report)
Securities registered under Section 12 (b) of the Exchange Act:
NONE
Securities registered under Section 12 (g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange during the past 12 months (or for such shorter
period that the Registrant was required to file such reports). and (2) has been
subject to such filing requirements for the past 90 Days: Yes [ ] No [X]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10 KSB: [ ]
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Issuer's revenues for its most recent fiscal year: $90,000
The aggregate market value of the voting common equity held by non-affiliates
computed by reference to the average bid and asked price of such common equity
as of February 29, 2000 was $1,815,236 at February 29, 2000, based on the
average bid and ask prices during January and February, 2000.
The issuer had 13,496,182 shares of common stock outstanding as of February 29,
2000.
Documents incorporated by reference: NONE
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(a) General Development of Business
(1) Nova Communications Ltd. (the "Registrant") was formerly known as
First Colonial Ventures, Ltd. Stockholders of the Registrant met in June 1999
and voted to change the name of the Registrant, change its state of
incorporation from Utah to Nevada, and to terminate its status under the
Investment Company Act of 1940 as a Business Development Company. Nova
Communications Ltd. was never a Business Development Company. During the year
ended December 31, 1998, which is the period covered by this report and the
accompanying financial statements, the Registrant was a Business Development
Company ("BDC") which is a form of closed-end, non-diversified investment
Registrant under the Investment Registrant Act of 1940 (the "Investment
Registrant Act"). A BDC generally must maintain 70% of its assets in new,
financially troubled or otherwise qualified companies and offer significant
managerial assistance to such companies. A BDC is not subject to the full
extent of regulation under the Investment Company Act. The Registrant primarily
is engaged in the business of investing in and providing managerial assistance
to developing companies that, in its opinion, would have a significant potential
for growth. The Registrant's investment objective is to achieve long-term
capital appreciation, rather than current income on its investments. There is
no assurance that the Registrant's investment objective will be achieved.
The Registrant was organized under the laws of the State of Utah in 1985 for the
purpose of acquiring a participating interest in one or more businesses.
Through its year ended December 31, 1994, the Registrant conducted business
through various wholly-owned subsidiaries until electing in 1995 to become a
BDC. In January 1995, the Registrant elected to become an Investment Company
pursuant to the Investment Company Act of 1940. In June 1995, the Registrant
terminated its Investment Company election and elected to become a BDC, as
defined in the Small Business Investment Incentive Act of 1980, which Act is an
amendment to the Investment Company Act of 1940. The election resulted in the
Registrant becoming a specialized type of investment company. Consistent with
this change in type of business entity, during the year ended December 31, 1995,
the Registrant changed its method of financial reporting and valuation of
investments from cost to fair value.
The 1987 acquisition of Contemporary Resources, Inc. ("CRI") by the Registrant
was accounted for as a reverse acquisition. Therefore, through December 31,
1994, the Registrant presented consolidated financial statements with the equity
section including the outstanding common stock of the Registrant and the
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accumulated deficit of CRI. However, in conjunction with the 1995 change in
type of entity and change in accounting method, the financial statements of the
Registrant for December 31, 1995, include only the accounts of the Registrant,
Nova Communications Ltd., because pursuant to industry practice, wholly-owned
subsidiaries which are neither investment companies or business development
companies are not consolidated.
Registrant's Board of Directors declared a 1 for 100 reverse stock split in
October 1991, and a 1 for 20 reverse stock split in December 1995. All common
share amounts stated herein have been restated to give effect to these stock
splits.
On May 1, 1987, the Registrant acquired 100% of the outstanding capital stock of
Contemporary Resources, Inc., a California corporation that was formerly known
as A.J.H. Corporation, Inc., dba Michaud ("CRI"), in a stock purchase
transaction pursuant to which the Registrant issued 120,000 shares of its Common
Stock. CRI is engaged in the distribution of disposable items to the airline
and hotel industries. The Registrant accounted for this acquisition as a
reverse purchase.
The acquisition was treated as an acquisition of the net assets of the
Registrant by CRI. As a result of the reverse acquisition, the equity section
of the December 31, 1994, and prior consolidated financial statements reflected
the outstanding common stock of the Registrant and the accumulated deficit of
CRI since its inception.
The bank where CRI had its credit line agreement was seized by the FDIC on
January 31, 1992. At the time of the seizure, CRI had an outstanding balance of
$1,491,000 which was $491,000 over its $1,000,000 credit limit, although the
bank had approved the extended credit and CRI was in the process of obtaining an
increase in the line of credit. Subsequent to the seizure, the FDIC ceased
issuing advances to CRI under the credit line.
The FDIC refusal to issue credit line advances to CRI for inventory and
receivables, coupled with the inability of CRI to find suitable replacement
financing until October 1994, ultimately caused a cash flow shortage leading to
CRI being unable to fulfill certain large contracts and unable to accept certain
large orders. The result was a decline in CRI gross revenues from $8,269,800 in
1993 to $5,327,200 in 1994, $1,979,600 in 1995, and $1,036,600 for 1996. CRI
lost substantially all of its airline business during this decline. CRI's
remaining business was substantially hotel related.
Final settlement was reached between CRI and the FDIC in early 1996 whereby the
balance owed was agreed to be $541,300 and whereby the FDIC agreed to accept
CRI's March 1996 payment of
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$54,000 in full settlement of the debt. Accordingly, CRI recorded a gain of
$487,300 during 1996 for settlement of the debt.
In July 1997, CRI entered into an asset sale agreement with one of its major
vendors for the sale of the CRI hotel business. The buyer is familiar with the
CRI product line and with CRI customers. Under the agreement, the buyer is
required to: (1) use remaining CRI inventories, at cost, to fulfill orders from
former CRI customers, and (2) pay a royalty to CRI for sales to former CRI
customers which were recorded as backlog as of the closing and for sales to new
customers brought to the buyer by CRI.
CRI will continue in the amenity and specialty product business, but is barred
from competing with the buyer for hotel business.
CRI has an asset-based line of credit which had a balance due of $779,510 as of
the closing. The credit line is guaranteed by the Registrant, Murray W.
Goldenberg, President of the Registrant, and Leslie I. Handler, a director of
the Registrant. CRI believes that proceeds from collection of its accounts
receivable, liquidation of non-hotel inventory, and payments from the buyer for
inventory and royalties will be sufficient to pay the line of credit.
On October 15, 1993, the Registrant and its then newly-formed, wholly-owned
subsidiary, Flower Environments, Inc., a Nevada corporation ("FEI"), entered
into an Asset Purchase Agreement to acquire certain assets that it intended to
utilize to commence the operation of a flower display irrigation equipment
business. The agreement provided for the payment of $10,000 and the issuance of
50,000 shares of the Registrant's restricted stock to the seller. In conjunction
with the Asset Purchase Agreement, the Registrant also entered into a Consulting
agreement with the prior owner of the assets purchased. The Consulting agreement
was to expire in April 1995, and provided for base compensation for the years
ending December 31, 1994 and 1995 of $84,000 and $32,000, respectively. The
consulting agreement was terminated July 25, 1994.
FEI operated the business however projections were never realized and losses
were incurred. Therefore, under an asset sale agreement the business was
subsequently sold in November 1994 for a short-term receivable of $50,000, cash
of $25,000, and a non-interest bearing note of $150,000 which was recorded at
present value of future cash flows of $92,200. The buyer resold the business
assets to a foreign purchaser during 1995. At December 31, 1995, the short-term
receivable had not been paid and the note was in default. Both amounts were
still unpaid at December 31, 1996. The foreign buyer has not paid the original
buyer because certain international patents which were a part of the sale have
not yet been obtained. The original buyer has not paid FEI
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because the foreign buyer is withholding payment. Although FEI expected to
receive payment during 1997, the Registrant has written down its investment in
FEI to zero because the receivables are delinquent.
On July 13, 1995, the Registrant acquired a 100% interest, consisting of an
assignment of a lease, in the oil and gas rights to property located in Concho
County, Texas, in exchange for common stock. The Registrant assigned its rights
in the lease to FEI which intends to find a partner or otherwise raise the
capital necessary to drill wells, extract and sell the oil and natural gas
located on the property. No business activity was conducted during 1997 or 1998
with respect to the oil and gas lease.
During 1996, FEI was re-named First Colonial Real Estate, Ltd. ("FCREL").
On August 10, 1994, the Registrant acquired the rights to 50% of the stock of
Sherwood Properties, Inc. ("Sherwood"), a non-public Nevada Registrant
incorporated in February 1995, in exchange for common stock. Sherwood was
formed to hold 50% of the stock of a Mississippi corporation that owns, subject
to a land sale contract, certain residential lots and is a joint venture partner
in the construction and sale of homes on the lots.
The Mississippi corporation has been unable to raise the cash necessary to pay
certain 1995 installments required by the land sale contract, accordingly, that
contract is in default. The contract provides the sellers with the option to
cancel the contract should default occur. The sellers have indicated a
willingness to continue to work with the Mississippi corporation and have not
taken any steps to cancel the contract. The Registrant has written down its
investment in Sherwood to zero until the Sherwood financial condition improves
and the land sale contract is no longer in default. Sherwood conducted no
operations during 1997 or 1998.
In December 1994 the Registrant acquired a 50% interest in Gulf Coast Hotels,
Inc. ("Gulf Coast") in exchange for common stock. Gulf Coast has a contract to
acquire 1.435 acres of waterfront real estate in Biloxi, Mississippi for the
purpose of constructing a commercial high rise hotel and condominium. The
property has 250 feet of frontage along the Gulf of Mexico. Gulf Coast has been
unable to raise the approximately $1,000,000 necessary to complete the down
payment, and although the seller has provided extensions, the contract was in
default at December 31, 1995 and continues to be in default. For these reasons,
the Registrant has written down its investment in Gulf Coast to zero until the
Gulf Coast financial condition improves. Gulf Coast conducted no operations
during 1997 or 1998.
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Also in July 1995, the Registrant acquired 50% of the stock of First Colonial
Funds, Ltd., a non-public Nevada business development Registrant, and 25% of the
stock of First Colonial Fund's subsidiary, Colonial Funds, Limited, a non-public
Commonwealth of the Bahamas off-shore fund with investments in various
companies, in an exchange of common stock. During 1996, the Colonial Funds,
Limited stock was acquired by the Registrant's wholly-owned investee, YPE, Inc,
to conform with BDC requirements. Due to its 50% ownership of First Colonial
Funds, Ltd., which owns 75% of Colonial Funds, Limited, and its 100% ownership
of YPE, Inc., which owns 25% of Colonial Funds, Limited, the Registrant owned
62.5% of Colonial Funds, Limited.
During 1996 the Registrant decided to discontinue its relationship with First
Colonial Funds, Ltd., which had also acted as manager for Colonial Funds,
Limited. During June 1997, First Colonial Funds, Ltd. relinquished its shares
in Colonial Funds, Limited in exchange for the First Colonial Funds, Ltd. shares
held by the Registrant. Accordingly, YPE, Inc. became 100% owner of Colonial
Funds, Limited.
During March 1996, in exchange for 400,000 shares of its common stock the
Registrant acquired a 10% interest in a non-public Florida corporation, And In
Justice For All, Inc., which operates a nation-wide membership organization
providing its members with access to attorney services at discounted rates.
During 1997, the Registrant agreed to increase its investment in And In Justice
For All, Inc. to a total of 15%. The agreement required the Registrant to issue
an additional 515,235 shares of its common stock and required And In Justice For
All, Inc. to assume the Registrant's convertible debenture payable of $210,000
plus accrued interest of approximately $55,000. The agreement further provides
that And In Justice For All, Inc. has the option to reacquire the additional 5%
interest from the Registrant for a fixed price of $266,666 at any time prior to
July 31, 1998.
During August 1996, in exchange for shares of its common stock equal to $350,000
the Registrant acquired a one-third interest in a non-public California
corporation, TND/Medical International, Inc., which owns and operates, subject
to a third-party management agreement, a magnetic resonance imaging center
located in San Diego, California. At December 31, 1996, $220,000 of the
purchase price was unpaid.
On September 1, 1996 , the Registrant reached an agreement in principal with
members of Acclaim Studios, LLC, a California limited liability company, for the
acquisition of certain assets and liabilities of Acclaim in exchange for 180,000
shares of the Registrant's unregistered common stock which shares have not yet
been issued. During November 1996, the Registrant formed a non-
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public, wholly-owned Nevada corporation, First Colonial Studios, Inc., dba
Acclaim, ("Acclaim") which acquired certain assets and liabilities consisting of
substantially all of the operations of Acclaim Studios, LLC, operating in Studio
City, California, in the business of video production and post production.
During 1997, the Registrant reached an agreement in principal with the Beverly
Hills Video Group, Inc.("BHVG"), a California non-public corporation, for the
acquisition of certain assets of BHVG in exchange for 800,000 shares of the
Registrant's unregistered common stock.
During 1997, the Registrant reached an agreement with the creditors of the
former Golden Hills Studios for the acquisition of certain assets of Golden
Hills Studios including $120,000 in cash in exchange for 2,250,000 shares of the
Registrant's unregistered common stock.
During May 1997, in exchange for 1,000,000 shares of its common stock, the
Registrant acquired all of the outstanding common stock of Dryden Energy, Inc.,
a Utah corporation ("Dryden"), which was a wholly-owned subsidiary of a non-
public Texas corporation, Pilares Oil & Gas, Inc., ("Pilares"). Dryden owns an
assignment of six oil, gas and mineral leases pertaining to properties located
in Coleman County, Texas. The acquisition agreement required Pilares to reopen
the six capped natural gas wells on the property, drill ten new wells, and
operate the project. The six capped wells have been reopened and four are
operating. The Registrant has issued approximately 710,000 shares and under the
agreement "Dryden" has retained 520,000 of the 710,000 shares against future
performance by Pilares.
During 1998 the Registrant closed its operating investees due to continuing
losses. Closed were Acclaim Studios, Acclaim Productions, and Contemporary
Resources. Also during 1998 the Registrant abandoned various other investments
due to lack of working capital. For the most part, these other investments had
already been written off. Accordingly, 1998 losses pertaining to these
investments consisted of writing off the 1998 advances made by the Registrant to
these investees.
Transactions with Turbo, Inc:
Effective March 31, 1992, Turbo, Inc., a Nevada corporation ("Turbo"), then a
newly-formed, wholly-owned subsidiary of Gerant Industries, Inc.
("Gerant")(formerly known as L.A. Entertainment, Inc.), acquired 100% of the
outstanding common stock of CRI from the Registrant. In exchange, the
Registrant received 49% of the outstanding common stock of Turbo and a $500,000
note made by Turbo in favor of the Registrant. The note accrued interest at 10%
per annum, and was payable on demand. As a condition of the
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acquisition, the $500,000 note was to be collateral to secure the
interRegistrant debt of the Registrant to CRI. On May 22, 1992, the Registrant
liquidated its $500,000 debt to CRI by assigning the $500,000 note to CRI. Also,
the Registrant agreed to convert the subordinated note due from CRI of $550,000
to contributed capital.
As incentive for the Registrant to exchange its 100% interest in CRI for a 49%
interest in Turbo, Gerant agreed to capitalize Turbo at $1,500,000 by issuing
4,383,710 shares of its restricted common stock to Turbo valued at the fair
market value of $.31 per share. In conjunction with this transaction, Gerant
was required to register the shares of common stock for sale to the public by
December 31, 1992, failing which the acquisition agreement would be
automatically rescinded.
Effective June 30, 1992, the Registrant and Gerant sold their aggregate 100%
shareholder interest in Turbo (the parent of CRI) for a combined 80% equity
interest in Lucky Chance Mining Registrant, Inc., a publicly-held Arizona
Corporation ("Lucky"), with Turbo thus becoming a wholly-owned subsidiary of
Lucky. Lucky had filed a voluntary petition for reorganization under Chapter 11
of the U.S. Bankruptcy Code on August 22, 1989, and operated as debtor-in-
possession. Lucky confirmed its Second Amended Plan of Reorganization on June 8,
1992, and the Order Confirming Debtor's Second Amended Plan of Reorganization
was entered by the Bankruptcy Court on June 17, 1992. Lucky subsequently merged
with and into Turbo, resulting in Turbo being the surviving public company ("New
Turbo"). Daniel Lezak, Gerant's President and Director, was Lucky's President
and controlling shareholder from July 1989 through June 30, 1992. Murray W.
Goldenberg, the President of the Registrant, CRI and Turbo, was subsequently
appointed as the President of New Turbo.
Effective September 30, 1992, Gerant completed its obligation to provide
$500,000 of additional funding to New Turbo by issuing 2,285,715 shares of its
restricted common stock at the then fair market value of $.22 per share, in
exchange for which Gerant was to receive 10,000,000 shares of New Turbo's
restricted common stock.
In conjunction with the aforedescribed transactions, New Turbo received an
aggregate of 7,124,425 shares of common stock of Gerant valued at $2,000,000.
On or about March 31, 1993, New Turbo sold 3,000,000 shares of such common stock
for $216,000. During June 1993, New Turbo sold an additional 250,000 shares of
such common stock for $20,000.
As of December 31, 1992, Gerant had not registered the shares of common stock
issued to Turbo. This failure resulted in the automatic rescission of the
original agreement effective March 31,
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1992. Subsequent to December 31, 1992, in response to requests from Gerant, the
Registrant negotiated with Gerant concerning a possible restructuring of the
original agreement, but no agreement could be reached. Therefore, in the opinion
of the Registrant's management, the original agreement was never consummated,
the December 31, 1992 rescission was effective, and CRI continues to be a
wholly-owned subsidiary of the Registrant.
On April 6, 1994, Gerant filed a voluntary petition for reorganization under
Chapter 11 of the United States Bankruptcy Code.
On August 26, 1994 Gerant filed suit against Murray W. Goldenberg, Nova
Communications, Ltd., CRI and Turbo, Inc. The adversary proceeding in the
bankruptcy court was dismissed with prejudice on February 22, 1995 and without
prejudice as to their right to file a new action in a court other than the
bankruptcy court.
On March 1, 1996, a new complaint was filed, however, prior to trial the matter
was settled on June 26, 1996, at a cost of $30,000 to the Registrant.
(4) Although the Registrant does not directly compete with any single company,
individual or organization, the Registrant is subject to substantial competition
from business development companies, venture capital firms, new product
development companies, marketing companies and diversified manufacturers, most
of whom are larger than the Registrant and have significantly larger net worth
and financial and personnel resources than the Registrant. In addition, the
Registrant competes with companies and individuals engaged in the business of
providing management consulting services.
(5) The Registrant does not require raw materials.
(6) The Registrant's business is not dependent upon a single customer, or a few
customers, the loss of any one or more of which would have a material adverse
effect on the Registrant.
(7) The Registrant holds no patents or trademarks, and has no interest in
any franchises, concessions, royalty agreements or labor contracts.
(9) Effect of existing or probable government regulations on the business.
The Registrant is a close-end, non-diversified investment company under the
Investment Company Act and has elected to become a business development company
under that act. The Registrant's investment objective is to achieve long-term
capital appreciation, rather than current income, on its investment. There can
be no
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assurance that this objective will be realized. The Registrant's investment
decisions are made by its management in accordance with policies approved by its
board of directors. The Registrant does not have a registered investment
advisor. In addition, the Registrant does not operate pursuant to a written
investment advisory agreement that must be approved periodically by
shareholders. The Registrant relies solely upon its management, particularly its
officers on a day to day basis, and also on the experience of its directors, in
making investment decisions.
In accordance with this objective, the Registrant consults with its investees
with respect to obtaining capital and offers managerial assistance to selected
businesses that, in the opinion of the Registrant's management, have a
significant potential for growth.
In addition to acquiring investment positions in new and developing companies,
the Registrant also seeks investees in more mature privately and publicly-held
companies which the Registrant believes could be further developed or
revitalized, some of which may be experiencing financial difficulties.
The Registrant plans to take advantage of other opportunities to maintain and
create independent companies with a significant potential for growth. The
Registrant's priorities for the future will be to (1) maximize the value and
liquidity of its present investees, (2) increase its cash flow, sources of
income tax benefits and intermediate term value through the acquisition of
securities or assets of more established companies, (3) make new investments in
more mature companies, and (4) to a lesser degree, make a few small higher risk
investments in new and developing companies.
The Registrant has no fixed policy as to the business or industry group in which
it may invest or as to the amount or type of securities or assets that it may
acquire. 1995 was the Registrant's first year as a BDC, and the Registrant made
investments in new and developing companies whose securities had no established
public market. These companies were unable to obtain significant capital on
reasonable terms from conventional sources. However, in future years the
Registrant anticipates seeking out and evaluating investments in more mature
companies. The Registrant endeavors to assist its investee companies and
management teams in devising realistic business strategies and obtaining
necessary financing.
The Registrant does not currently intend to pay cash dividends.
The Registrant believes that the key to achieving its objectives is finding and
supporting business executives who have the ability, entrepreneurial motivation
and experience required to
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build independent companies with a significant potential for growth. In the
Registrant's view, it is more difficult to locate and attract capable executives
than to identify, select and finance promising investment opportunities.
Business development is by nature a high-risk activity that can result in
substantial losses. The companies in which the Registrant invests and will
invest, especially in the early stages of an investment, often lack effective
management, face operating problems and incur substantial losses. However, the
Registrant is seeking out and evaluating investments in more mature companies.
Potential investees include established businesses which may be experiencing
severe financial or operating difficulties or may, in the opinion of management,
be ineffectively managed or have the potential for substantial growth or
reorganization into separate independent companies.
The Registrant attempts to reduce the level of its investment risks through one
or more of the following:
(i) carefully investigating potential investees;
(ii) financing only what it believes to be practical business
opportunities as contrasted with research projects;
(iii) selecting effective, entrepreneurial management for its
investees;
(iv) providing active managerial assistance and support to
investees;
(v) obtaining, alone or with others, actual or working control of
its investees;
(vi) supporting the investees in obtaining necessary financing and
arranging major contracts, joint ventures or mergers and acquisitions where
feasible; and
(vii) maintaining sufficient capital resources to make follow-up
investments where necessary, appropriate and feasible.
Investment Policies:
The Registrant has elected to be regulated as a business development company and
is subject to the provisions of Sections 55 through 65 of the Investment Company
Act made applicable to business development companies by Section 59 of the
Investment Company Act. In accordance with those provisions, the Registrant's
investment policies are defined and subject to certain limitations.
Furthermore, under Section 58 of the Investment Company Act, the Registrant may
not withdraw its
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election to be so regulated without the consent of a majority of its
stockholders. If the Registrant were to withdraw its election to be regulated as
a BDC, it may be subject full regulation under of the Investment Company Act as
if it were a closed-end investment company.
The Registrant has no fixed policy as to the business or industry group in which
it may invest or as to the amount or type of securities or assets that it may
acquire. However, the Registrant, at this time, is seeking out and evaluating
investments in more mature companies. During 1995, the Registrant invested in
assets that are not qualifying assets under Section 55 of the Investment
Registrant Act; however, such unqualified investment was inadvertent. The
Registrant does not intend to fall below the 70% requirement as set forth in
Section 55.
The Registrant endeavors to achieve its objectives in accordance with the
following general policies:
(i) The Registrant acquires securities through negotiated private
placement transactions directly from the investee company, its affiliates, or
third parties, or through open market transactions.
(ii) The Registrant attempts to acquire, consistent with the
Registrant's capital resources, a large or controlling interest in its investees
through purchases of equity securities with loans, guarantees, and common stock
of the Registrant.
(iii) The Registrant may make additional or "follow-on" investments
in or loans to its investees when appropriate to sustain the investees or to
enhance or protect the Registrant's existing investment.
(iv) The Registrant determines the length of time it will retain its
investment by evaluating the facts and circumstances of each investee and its
relationship with such investee. The Registrant anticipates retaining
investments for a relatively long period, generally many years, with the result
that portfolio turnover will be low. Investments are retained until, in the
opinion of the Registrant, the investee company has a demonstrated record of
successful operations and there is a meaningful public market for its securities
which reflects the investment value the Registrant sought (or such a market can
be readily established) or until the Registrant decides that its investment is
not likely to result in future long-term capital appreciation.
Valuation Policy Guidelines
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The Registrant's Board of Directors is responsible for the valuation of the
Registrant's assets in accordance with its
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approved guidelines. The registrant's Board of Directors is responsible for (1)
recommending overall valuation guidelines and (2) the valuation of specific
investments.
There is a range of values which are reasonable for an investment at any
particular time. Fair value is generally defined as the price at which the
investment in question could change hands, assuming that both parties to the
transaction are under no unusual pressure to buy or sell and both have
reasonable knowledge of all the relevant facts. To increase objectivity in
valuing the securities, the Registrant uses the best information available
including the following criteria.
The Registrant uses four basic methods of valuation for its investments and
there are variations within each of these methods. The Registrant's Board of
Directors has determined that the Registrant's four basic valuation methods
constitute fair value. As an investee evolves, its progress usually requires
changes in the Registrant's method of valuing the investee's securities. The
Registrant's investment is separated into its component parts (such as debt,
preferred stock, common stock or warrants), and each component is valued
separately to arrive at total value. The Registrant believes that a mixture of
valuation methods is often essential to represent fairly the value of the
Registrant's investment position in an investee. For example, one method may be
appropriate for the equity securities of a Registrant while another method may
be appropriate for the senior securities of the same company.
The cost method values an investment based on its original cost to the
Registrant, adjusted for the amortization of original issue discount, accrued
interest and certain capitalized expenditures of the Registrant. While the cost
method is the simplest method of valuation, it is often the most unreliable
because it is applied in the early stages of an investee's development and is
often not directly tied to objective measurements. The original cost may be
adjusted by the Board of Directors in good faith taking into account such
factors as available financial information of the investee, the nature and
duration of any restrictions as to resale and other factors which influence the
market in which a security is purchased or sold. All investments are carried at
cost until significant positive or adverse events subsequent to the date of the
original investment call for a change to another method. Some examples of such
events are: (1) a major recapitalization; (2) a major refinancing; (3) a
significant third-party transaction; (4) the development of a meaningful public
market for the investee's common stock; and (5) material positive or adverse
changes in the investee's business.
The appraisal method is used to value an investment position based upon a
careful analysis of the best available outside information
12
<PAGE>
when there is no established public or private market in the investee company's
own securities and it is no longer appropriate to use the cost method.
Comparisons are made using factors (such as earnings, sales or net worth) that
influence the market value of similar public companies or that are used in the
pricing of private transactions of comparable companies. Major discounts are
considered when private companies are appraised by comparing them to similar
public companies. Liquidation value may be used when an investee is performing
substantially below plan and it's continuation as an operating entity is in
doubt. Under the appraisal method, the differences among companies in terms of
the source and type of revenues, quality of earnings, and capital structure, are
carefully considered.
An appraisal value can be defined as the price at which the investment in
question could change hands, assuming that both parties to the transaction are
under no unusual pressure to buy or sell and both have reasonable knowledge of
all the relevant facts. In the case of start-up companies where the entire
assets may consist of only one or more of the following: a marketing plan,
management or a pilot operation, an evaluation may be established by
capitalizing the amount of the investment that could reasonably be obtained for
a predetermined percentage of the Registrant. Valuations under the appraisal
method are considered to be more subjective than the cost, public market or
private market methods.
The private market method uses third-party transactions (actual or proposed) in
the investee's securities as the basis for valuation. This method is considered
to be an objective measure of value since it depends upon the judgment of a
sophisticated, independent investor. Actual firm offers are used as well as
historical transactions, provided that any offer used was seriously considered
and well documented and adjusted (if applicable) by the Board of Directors in
good faith taking into account such factors as available financial information
of the investee, the nature and duration of any restrictions as to resale and
other factors which influence the market in which a security is purchased or
sold.
The public market method is the preferred method of valuation when there is an
established public market for the investee's common stock, since that market
provides the most objective basis for valuation. In determining whether the
public market is sufficiently established for valuation purposes, the Registrant
examines the trading volumes, the number of shareholders and the number of
market makers. Under the public market method, as well as under the other
valuation methods, the Registrant discounts investment positions that are
subject to significant legal, contractual or practical restrictions and
appropriate adjustments may be made by the Board of Directors in good faith
taking into account such other factors as available financial information of the
investee, the nature and duration of any restrictions as to
13
<PAGE>
resale and other factors which influence the market in which a security is
purchased or sold. When an investee's common stock is valued under the public
market method, common stock equivalents such as presently exercisable warrants
or options are valued based on the difference between the exercise price and the
market value of the underlying common stock. Although the Registrant believes
that a public market could be created for the options and warrants of certain of
its investees, thereby possibly increasing the value of these rights for their
arbitrage value, the Registrant does not reflect this possibility in its
valuation.
Managerial Assistance
- ---------------------
The Registrant believes that providing managerial assistance to its investees is
critical to its business development activities. "Making available significant
managerial assistance" as defined in the Investment Company Act with respect to
a business development company such as the Registrant means (a) any arrangement
whereby a business development Registrant, through its directors, officers,
employees or general partners, offers to provide, and, if accepted, does so
provide, significant guidance and counsel concerning the management, operations,
or business objectives and policies of a portfolio Registrant; or (b) the
exercise by a business development company of a controlling influence over the
management or policies of a portfolio company by the business development
company acting individually or as a part of a group acting together which
controls such portfolio company. The Registrant is required by the Investment
Company Act to make significant managerial assistance available at least with
respect to investee companies that the Registrant treats as qualifying assets
for purposes of the 70% test. The nature, timing and amount of managerial
assistance provided by the Registrant vary depending upon the particular
requirements of each investee company.
The Registrant may be involved with its investees in recruiting management,
product planning, marketing and advertising and the development of financial
plans, operating strategies and corporate goals. In this connection, the
Registrant may assist clients in developing and utilizing accounting procedures
to efficiently and accurately record transactions in books of account which will
facilitate asset and cost control and the ready determination of results of
operations. The Registrant also seeks capital for its investees from other
potential investors and occasionally subordinates its own investment to those of
other investors. The Registrant introduces its investees to potential
suppliers, customers and joint venture partners and assists its investees in
establishing relationships with commercial and investment bankers and other
professionals, including management consultants, recruiters, legal counsel and
independent accountants. The
14
<PAGE>
Registrant also assists with joint ventures, acquisitions and mergers.
In connection with its managerial assistance, the Registrant may be represented
by one or more of its officers or directors on the board of directors of an
investee. As an investment matures and the investee develops management depth
and experience, the Registrant's role will become progressively less active.
However, when the Registrant owns or on a pro forma basis could acquire a
substantial proportion of a more mature investee company's equity, the
Registrant remains active in and will frequently initiate planning of major
transactions by the investee. The Registrant's goal is to assist each investee
company in establishing its own independent and effective board of directors and
management.
The following is a summary description of the Investment Company Act as applied
to business development companies. This description is qualified in its
entirety by reference to the full text of the Investment Company Act and the
rules adopted thereunder by the SEC.
The Small Business Investment Incentive Act of 1980 modified the provisions of
the Investment Company Act that are applicable to a Registrant, such as the
Registrant, which elects to be treated as a "Business Development Company"
("BDC"). The Registrant elected to be treated as a business development company
in July 1995. The Registrant may not withdraw its election without first
obtaining the approval of a majority of its outstanding voting securities.
A BDC must be operated for the purpose of investing in the securities of certain
present and former "eligible portfolio companies" and certain bankrupt or
insolvent companies and must make available significant managerial assistance to
its investee companies. An eligible portfolio company generally is a United
States company that is not an investment company (except for wholly-owned SBIC's
licensed by the Small Business Administration) and (1) does not have a class of
securities included in the Federal Reserve Board's over-the-counter margin list,
(2) is actively controlled by the business development company and has an
affiliate of the business development company on its board of directors, or (3)
meets such other criteria as may be established by the SEC. Control, under the
Investment Company Act, is presumed to exist where the business development
company owns 25% or more of the outstanding voting securities of the investee.
The Investment Comapny Act prohibits or restricts the Registrant from investing
in certain types of companies, such as brokerage firms, insurance companies,
investment banking firms and investment companies. Moreover, the Investment
Company Act limits the type of assets that the Registrant may acquire to
"qualifying assets" and certain assets necessary for its operations (such as
15
<PAGE>
office furniture, equipment and facilities) if, at the time of the acquisition,
less than 70% of the value of the Registrant's assets consists of qualifying
assets. The effect of the regulation is to require that at least 70% of a
business development company's assets be maintained in qualifying assets.
Qualifying assets include: (1) securities of companies that were eligible
portfolio companies at the time the Registrant acquired their securities, (2)
securities of bankrupt or insolvent companies that are not otherwise eligible
portfolio companies, (3) securities acquired as follow-on investments in
companies that were eligible at the time of the Registrant's initial acquisition
of their securities but are no longer eligible, provided that the Registrant has
maintained a substantial portion of its initial investment in those companies,
(4) securities received in exchange for or distributed on or with respect to any
of the forgoing, and (5) cash items, government securities and high-quality
short-term debt. The Investment Company act also places restrictions on the
nature of the transactions in which, and the persons from whom, securities can
be purchased in order for the securities to be considered to be qualifying
assets.
At December 31, 1995, the Registrant may not have complied with Section 55 of
the Investment Company Act with respect to the 70% test as a result of its
investment in Colonial Funds, Limited. Any non-compliance was inadvertent and
the Registrant took corrective action by transferring the investment to YPE,
Inc., Registrant's wholly-owned investee.
Colonial Funds, Limited is a Commonwealth of the Bahamas corporation operating
as an off-shore fund. This investment does not satisfy the requirements of a
"Qualifying Asset" because Colonial Funds, Limited is not organized in the
United States.
During August 1996, the Registrant entered into a recession agreement with
Colonial Funds, Limited for the purpose of correcting the non-compliance so that
the form of this investment would comply with the requirements of a qualifying
asset. The Registrant returned the shares of Colonial Funds, Limited Class B
common stock and received and canceled the shares which it had issued for such
stock. Concurrently, the Registrant acquired a 100% interest in YPE,Inc., a
non-public Nevada corporation, in exchange for 3,333,333 shares of NOVA common
stock which YPE, Inc. exchanged for 25,000 Class B common shares of Colonial
Funds, Limited.
Registrant believes any non-compliance with Section 55 has been corrected.
The Registrant is permitted by the Investment Company Act, under specified
conditions, to issue multiple classes of senior debt and a single class of
preferred stock if its asset coverage, as
16
<PAGE>
defined in the Investment Registrant Act, is at least 200% after the issuance
of the debt or the preferred stock. The Registrant currently has no policy
regarding issuing multiple classes of senior debt or a class of preferred stock.
The Registrant may issue in limited amounts, warrants, options and rights to
purchase its securities to its directors, officers and employees (and provide
loans to those persons for the exercise thereof) in connection with an executive
compensation plan if certain conditions are met. These conditions include the
authorization of such issuance by a majority of the Registrant's voting shares
and the approval of a majority of the independent members of the Board of
Directors and a majority of the directors who have no financial interest in the
transaction. The issuance of options, warrants or rights to directors who are
not also officers requires the prior approval of the SEC.
The Registrant may sell its securities at a price that is below the prevailing
net asset value per share only upon the approval of the policy by the holders of
a majority of its voting securities, including a majority of the voting
securities held by non-affiliated persons, at its last annual meeting or within
one year prior to the transaction. In addition, the Registrant may repurchase
its Common Stock, subject to the restrictions of the Investment Company Act.
The Registrant at this time does not contemplate selling its securities at a
price below prevailing net asset value per share or repurchasing its Common
Stock.
In accordance with the Investment Company Act, a majority of the members of the
Registrant's Board of Directors must not be "interested persons" of the
Registrant as that term is defined in the Investment Company Act. Generally,
"interested persons" of the Registrant include all affiliated persons of the
Registrant and members of their immediate families, any "interested person" of
an underwriter or of an "investment advisor" to the Registrant, any person who
has acted as legal counsel to the Registrant within the last two years, or any
broker or dealer, or affiliate of a broker or dealer.
Most of the transactions involving the Registrant and its affiliates (as well as
affiliates of those affiliates) which were prohibited without the prior approval
of the SEC under the Investment Company Act prior to its amendment by the Small
Business Investment Incentive Act now require the prior approval of a majority
of the Registrant's independent directors and a majority of the directors having
no financial interest in the transactions. The effect of the amendment is that
the Registrant may engage in certain affiliated transactions that would be
prohibited absent SEC approval in the case of investment companies which are not
business development companies. However, transactions involving certain closely
affiliated persons of the
17
<PAGE>
Registrant, including its directors, officers and employees, still require the
prior approval of the SEC. In general, "affiliated persons" of a person include:
(a) any person who owns, controls or holds with power to vote, more than five
percent of the Registrant's outstanding Common Stock (b) any director, executive
officer or general partner of that person, (c) any person who directly or
indirectly controls, is controlled by, or is under common control with, that
person, and (d) any person five percent or more of whose outstanding voting
securities are directly or indirectly owned, controlled or held with power to
vote, by such other person. Such persons generally must obtain the prior
approval of a majority of the Registrant's independent directors and, in some
situations, the prior approval of the SEC, before engaging in certain
transactions involving the Registrant or any Registrant controlled by the
Registrant. The Investment Company Act generally does not restrict transactions
between the Registrant and its investee companies.
Finally, notwithstanding restrictions imposed under federal securities laws, it
is anticipated that the Registrant will acquire securities of investee companies
pursuant to stock purchase agreements or other agreements that may further limit
the Registrant's ability to distribute, or sell or transfer such securities;
and, as a practical matter, even if such transfers are legally or contractually
permissible, there may be no market, or a very limited market, for the
securities and economic conditions may make the price and terms of a sale or
transfer unattractive.
Other Securities Law Considerations
- -----------------------------------
In addition to the above-described provisions of the Investment Company Act,
there are a number of other provisions of the federal securities laws which
affect the Registrant's operations. for example, restrictions imposed by the
federal securities laws, in addition to possible contractual provisions, may
affect adversely the ability of the Registrant to sell or otherwise distribute
its portfolio securities.
Most if not all securities which the Registrant acquires as venture capital
investments will be "restricted securities" within the meaning of the Securities
Act of 1933 ("Securities Act") and will not be permitted to be resold without
compliance with the Securities Act. Thus, the Registrant will not be permitted
to resell portfolio securities unless a registration statement has been declared
effective by the SEC with respect to such securities or the Registrant is able
to rely on an available exemption from such registration requirements. In most
cases the Registrant will endeavor to obtain from its investee companies
"registration rights" pursuant to which the Registrant would be able to demand
that an investee company register the securities owned by the Registrant at the
expense of the investee company. Even if the
18
<PAGE>
investee company bears this expense, however, the registration of the securities
owned by the Registrant is likely to be a time-consuming process, and the
Registrant always bears the risk, because of these delays, that it will be
unable to resell such securities, or that it will not be able to obtain an
attractive price for the securities.
Sometimes the Registrant will not register portfolio securities for sale but
will seek to rely upon an exemption from registration. The most likely
exemption available to the Registrant is section 4(1) of the Securities Act
that, in effect exempts sales of securities not involving a distribution of the
securities. This exemption will likely be available to permit a private sale of
portfolio securities, and, in some cases, a public sale, if the provisions of
Rule 144 under the Securities Act are satisfied. Among other things, Rule 144
requires that securities be sold in "broker transactions", and imposes a two-
year holding period prior to the sale of restricted securities.
(10) During the last three years the Registrant spent no amounts on
Registrant-sponsored or customer-sponsored research and development activities.
(11) The Registrant is not subject to any federal, state or local
provisions which have been enacted or adopted regulating the discharge of
materials into the environment or otherwise relating to the protection of the
environment.
(12) As of December 31, 1998, the Registrant has 1 full time employee and
several part time employees. The Registrant's employees are not subject to a
collective bargaining agreement, and the Registrant has not experienced any
slow-downs, strikes or work stoppages due to labor difficulties. The Registrant
considers its employee relations to be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
(a) Office
------
The Registrant's executive and administrative office is located at 3830 Del Amo
Boulevard, Torrance, California 90503. The Registrant leases this space,
consisting of approximately 900 square feet, on a one year lease. Currently,
the monthly rental is $500.
(2) Oil and Gas Interests
----------------------
Through its wholly-owned investee, FCREL, the Registrant owns interests in (1)
exploratory oil and gas property in Concho County, Texas, which is currently
inactive, and (2) operating oil and gas property located in Coleman County,
Texas.
19
<PAGE>
At December 31, 1998, the Registrant wrote off these investments.
(3) Residential Real Estate Subdivision
-----------------------------------
Through its 50% owned investee, Sherwood, the Registrant owns an interest in a
residential sub division consisting of raw land sub divided into lots located
near Biloxi, Mississippi.
These lots are available for sale and, in conjunction with a joint venture
agreement, the design and construction of custom homes on the lots are also
available.
Through December 31, 1998, no lots were sold and no homes were constructed on
the property.
At December 31, 1998 the Registrant wrote off this investment.
ITEM 3. LEGAL PROCEEDINGS
During the year ended December 31, 1998, neither the Registrant nor its
subsidiaries were a party to or the subject of any material legal proceedings,
except as described below.
The Registrant's President and Chief Executive Officer, Murray W. Goldenberg,
was convicted on December 20, 1999 in U.S. District Court for the Southern
District of New York. The convictions were based on violations of Title 15 USC
78j(b) and 78ff; 17 CFR Section 240.10b-5; Title 18 USC 371, 1343, 1346,
1952(a)(3).
For information regarding the Registrant's dispute with Gerant Industries, Inc.,
see "ITEM 1. DESCRIPTION OF BUSINESS - Transactions with Turbo, Inc."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant did not submit any matters to a vote of its security holders
during the years ended December 31, 1997 or 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information:
The equity securities of the Registrant have been quoted on the National
Quotation Service Pink Sheets since January, 1986, however the stock was
unpriced from July 1989 to October 1994. On October 18, 1994 the Registrant
completed the documentation
20
<PAGE>
necessary to resume trading. The Registrant's equity securities were originally
issued in units. Each unit consisted of (1) 100 shares of common stock, (ii) 100
A warrants to purchase 100 shares of common stock at 0.02 per share exercisable
any time within one year of the effective date of the offering, (iii) 100 B
warrants to purchase 100 shares of common stock at 0.03 per share exercisable
any time within one year of the effective date of the offering, and (iv) 50 C
warrants to purchase 50 shares of common stock at 0.04 per share exercisable at
any time within two years of the effective date of the offering. After the
offering the Registrant extended the exercise period for the A and B warrants to
December 10, 1987 and for the C warrants to December 10, 1988. By March 1986,
all of the A and B warrants had been exercised.
The following table sets forth the range of high and low bid prices during each
quarter for the Registrant's common stock for the years ending December 31,
1998, and December 31, 1997. These over-the-counter market quotations may
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not represent actual transactions. The 1998 and 1997 information was
obtained from Blumberg Financial Services on March 23, 2000 and May 4, 1999,
respectively.
<TABLE>
<CAPTION>
1998
----
Common Stock Bid Ask
------ ------
<S> <C> <C>
Q1-98 1 9/16 1/8
Q2-98 5/16 .01
Q3-98 1/4 .05
Q4-98 1/16 .01
1997 BID PRICE :
-----------------
HIGH LOW AVERAGE
------- ------ -------
Q1-97 $1.5000 0.5000 1.1058
Q2-97 $1.1250 0.6250 0.8654
Q3-97 $1.1250 0.3750 0.6971
Q4-97 $1.0000 0.5000 0.7596
Approximate Number
of Record Holders
Title of Class (as of February 29, 2000)
-------------- -------------------------
-------------- -------------------------
Common Stock,
$.001 Par Value 1600
- -----------------
</TABLE>
21
<PAGE>
Dividends:
The Registrant has never paid cash dividends on its common stock. The
declaration and payment of dividends is within the discretion of the
Registrant's board of directors and will depend, among other factors, on
earnings and debt service requirements, as well as the operating and financial
condition of the Registrant. At the present time, the Registrant's anticipated
working capital requirements are such that it intends to follow a policy of
retaining earnings in order to finance the development of its business.
Accordingly, the Registrant does not expect to pay a cash dividend within the
foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(a) Plan of Operation
During 1998 the Registrant closed its operating investees due to continuing
losses. Closed were Acclaim Studios, Acclaim Productions, and Contemporary
Resources. Also, during 1998 the Registrant abandoned various other investments
due to lack of working capital.
At December 31, 1998, the Registrant's remaining investments included the Gulf
Coast Hotels project, cash advances to STS Communications, and the investment in
And In Justice For All (the "Legal Club").
Management intends to concentrate future investment and operating activities in
the telecommunications and internet industries.
(b) Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Investment expenses for the years ended December 31, 1997 and 1998 were and
$449,148 and $500,887, respectively. These expenses were typical of the
Registrant's operations.
The Registrant's losses on investments for the years ended December 31, 1997 and
1998 were $4,514,438 and $184,091, respectively. The 1997 loss represented the
write-off of all major assets due to uncertainties surrounding lack of working
capital and operating losses. the 1998 loss represented the write off of 1998
advances to various investees.
Financial Condition
22
<PAGE>
The Registrant's qualifying investments at fair value totaled $200,000 and
$281,000 at December 31, 1997 and 1998.
Liabilities totaled $1,121,213 and $1,546,439 at December 31, 1997 and 1998,
respectively. Liabilities increased due to losses incurred and lack of working
capital to pay debts when due.
Registrant had substantial working capital deficits at both December 31, 1997
and 1998.
The following transactions involving shares of Registrant's common stock
occurred during the years ended December 31, 1997 and 1998:
During September 1997, pursuant to Section 4(2) the Registrant issued
180,000 shares to Acclaim Studios, LLC, to conclude the purchase of Acclaim
assets discussed in Note 1.
During September 1997, pursuant to section 4(2) the Registrant issued
600,000 shares to Contemporary Resources, Inc., at a price of approximately $1
per share in partial payment of the Registrant's debts to CRI.
During September 1997, pursuant to Section 4(2) the Registrant issued
150,000 shares to the private investor holding the demand note discussed in Note
7. These shares were to be used by the investor as partial payment of the note.
During the second quarter of 1998 the Registrant issued shares of its
common stock as follows: (1) 2,250,000 shares in connection with the
acquisition of the assets of the former Golden Hill Studios, (2) 300,000 shares
for the investment in TND, and (3) 520,000 shares for the investment in Dryden
Energy.
During the third quarter of 1998 the Registrant issued 800,000 shares
in connection with the acquisition of the assets of the former Beverly Hills
Video Group.
ITEM 7. FINANCIAL STATEMENTS
The financial statements for the years ended December 31, 1998 and
1997 are listed under Item 13.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements with accountants during the most
recent two fiscal years.
On November 27, 1996 the Registrant filed Form 8-K reporting
23
<PAGE>
dismissal of accountants Beckman Hollander & Associates and appointment of
accountant J. Paul Kenote, P.C.
On April 25, 1999 the registrant filed Form 8-K reporting the
retirement of Accountant J. Paul Kenote, P.C. and the appointment of Accountant
Timothy L. Steers, LLC.
On May 1, 1997 the Registrant filed Form 8-K reporting acquisition of
First Colonial Studios, Inc.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSON; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table and text sets forth the names and ages of all
directors and executive officers of the Registrant and their positions and
offices with the Registrant as of December 31, 1998. All of the directors will
serve until the next annual meeting of the shareholders and until their
successors are elected and qualified, or until their earlier death, retirement,
resignation or removal. Officers serve at the discretion of the Board of
Directors. A brief description of the business experience of each director and
executive officer during the past five years and an indication of directorships
held by each director in other companies subject to the reporting requirements
under the federal securities laws is also provided.
<TABLE>
<CAPTION>
Name Age Position(s) Director Since
- ---- --- ----------- --------------
<S> <C> <C> <C>
Murray W. Goldenberg 57 President,
Treasurer,
Secretary,
and Director September 1, 1987
Leslie I. Handler 58 Director August 27, 1991
</TABLE>
There are no family relationships among directors and executive
officers.
Biographies of Directors and/or Officers:
Murray W. Goldenberg - President, Treasurer, Secretary and Director -
Murray W. Goldenberg has been Secretary, Treasurer and a director of the
Registrant since September 1, 1987, and President of the Registrant since
October 1, 1988. Mr. Goldenberg has been a financial consultant to numerous
troubled companies in various industries, including the garment and heavy
equipment
24
<PAGE>
manufacturing industries. Mr. Goldenberg has also acted as a trustee in
bankruptcy. Mr. Goldenberg is a Chartered Accountant under the laws of Canada
and the Province of Manitoba.
Leslie I. Handler - Director - Leslie I. Handler has been a Director
of the Registrant since August 27, 1991. From 1988 to 1992, Mr. Handler was
president of Far West Commercial Finance Company, Los Angeles, California, the
asset-based lending subsidiary of Far West Federal Bank, Portland, Oregon. Mr.
Handler is an experienced senior manager with more than 30 years of experience
with asset-based lending organizations. Since 1993, Mr. Handler has been a
consultant to the banking industry.
Compliance with Section 16(a) of the Exchange Act:
The Registrant does not have any class of equity securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.
Accordingly, during the year ended December 31, 1993, no Forms 3,4, or 5 and
amendments thereto were required to be furnished to the Registrant pursuant to
Rule 16(a) - 3(e).
ITEM 10. EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
Summary Compensation Table
Name and Principal
Principal Annual All Other
Position Year Compensation Compensation
- --------- ---- ------------ ------------
<S> <C> <C> <C>
Murray W. Goldenberg 1998 $165,000
President 1997 165,000
1996 165,000
1995 162,000 (1)
Leslie I. Handler, 1998 --
Director 1997 8,275 (2)
1996 --
1995 --
</TABLE>
(1) During the year ended December 31, 1994, Mr. Goldenberg and his family were
issued 1,400,511 shares of the Registrant's common stock valued at $.001 per
share in exchange for the issuance of their continuing personal guarantee and
the hypothecation of their residence for CRI's bank line of credit.
(2) During the year ended December 31, 1994, Mr. Leslie I. Handler and his
family were issued 1,400,511 shares of the
25
<PAGE>
Registrant's common stock valued at $.001 per share in exchange for the issuance
of their continuing personal guarantee and the hypothecation of their residence
for CRI's bank line of credit.
Compensation Arrangements:
During the year ended December 31, 1996, Murray W. Goldenberg was
compensated pursuant to a month-to-month consulting agreement. Compensation to
Mr. Goldenberg pursuant to this consulting agreement will be approximately
$165,000 for the year ending December 31, 1998, exclusive of any bonus that may
be paid.
Board of Directors:
Directors of the Registrant receive no compensation for serving as
Directors of the Registrant. During the year ended December 31, 1996, there
were no meetings of the Board of Directors. All necessary board approvals and
actions were obtained by unanimous written consent. The Directors met on May
28, 1997. The Registrant had no audit, nominating or compensation or committees
performing similar functions during the year ended December 31, 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As used in this section, the term beneficial ownership with respect to a
security is defined by Rule 13d-3 under the Securities Exchange Act of 1934 as
consisting of sole or shared voting power (including the power to vote or direct
the vote) and/or sole or shared investment power (including the power to dispose
of or direct the disposition of) with respect to a security through any
contract, arrangement, understanding, relationship or otherwise, subject to
community property laws.
As of December 31, 1995, the Registrant had authorized 500,000,000 shares of its
common stock, $.001 par value (the "common stock"), 15,516,183 shares of which
were issued at December 31, 1998, and 10,000,000 shares of its preferred stock,
no par value, none of which were issued. The Registrant's Board of Directors
has the authority, without approval of the shareholders, to issue all or any
portion of the authorized shares of preferred stock in one or more series, and
to determine the preferences as to dividends, redemption and liquidation,
conversion rights, and other rights of such series, which may carry rights
superior to those of the common stock. The holders of shares of preferred stock
shall not have any voting rights except as specifically required by law.
The following table sets forth certain information regarding the beneficial
ownership of the common stock as of March 31, 1999.
26
<PAGE>
Listed below are (a) the name and address of each beneficial owner of more than
five percent (5%) of the Registrant's common stock known to the Registrant, the
number of shares of common stock beneficially owned by each such person or
entity, and the percent of the Registrant's common stock so owned; and (b) the
number of shares of common stock of the Registrant beneficially owned, and the
percentage of the Registrant's common stock so owned, by each director and by
all directors and officers of the Registrant as a group. Each such person or
entity has sole voting and investment power with respect to the shares of common
stock, except as otherwise indicated. Beneficial ownership consists of a direct
interest in the shares of common stock, except as otherwise indicated.
<TABLE>
<CAPTION>
Amount and
Name and Nature of Percent of
Address of Beneficial Shares of
Beneficial Owner Ownership Common Stock
- ---------------- ---------- ------------
<S> <C> <C>
Murray W. Goldenberg 23,707(1) *
President, Treasurer,
Secretary and Director
6151 W. Century Blvd #1018
Los Angeles
California 90045
Leslie I. Handler 24,902 *
Director
1108 Via Zumaya
Palos Verdes Estates
California 90274
All Directors and 48,609 *
Officers as a Group
(2 persons)
YPE, Inc. 1,866,668 19.82
6151 W. Century Blvd #1018
Los Angeles
California 90045
First Capital Services, Inc. 2,250,000 23.90%
2300 Glades Road, Suite 450
West Tower
Boca Raton, FL 33431
Contemporary Resources, Inc. 600,000 6.37%
6151 W. Century Blvd. Ste. 1018
Los Angeles, CA 90045
</TABLE>
* Less than 1%
27
<PAGE>
(1) This does not include 30,000 shares owned by Mr. Goldenberg's three adult
children, and 53,595 shares owned by Mr. Goldenberg's wife, Patricia as to which
Mr. Goldenberg has neither voting nor investment power and disclaims beneficial
ownership.
Changes in Control:
There are no contractual or other arrangements currently in effect or
contemplated that may later result in a change in control of the Registrant.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Document
- ------- -----------------------
3(i)(1) Articles of Incorporation - March 25, 1985 (1)
3(i)(2) Amendment to Articles of Incorporation-August 12,1985 (1)
3(i)(3) Amendment to Articles of Incorporation-September 3,1985(1)
3(i)(4) Amendment to Articles of Incorporation-February 3,1992(1)
3(ii) Bylaws (1)
10.1 Lease Agreement between Airport Center Associates Limited Partnership,
a Connecticut limited partnership, as Landlord, and contemporary Resources,
Inc., a California corporation, as Tenant (1)
10.2 Amendment to Lease Agreement between Airport Center Associates Limited
Partnership, a Connecticut limited partnership, and Contemporary Resources,
Inc., a California corporation - July 31, 1993 (1)
10.3 Promissory Note from Contemporary Resources, Inc. to Independence Bank
- - February 20, 1991 (1)
28
<PAGE>
10.4 Asset Purchase Agreement among John E. Ferris, Flower Environments,
Inc., a Nevada corporation, and Nova Communications, Ltd., a Utah corporation -
October 15, 1993(1)
10.5 Consulting Agreement among Nova Communications, Ltd., a Utah
corporation, Flower Environments, Inc., a Nevada corporation, and John E. Ferris
- - October 15, 1993(1)
21 Subsidiaries of the registrant(1)
(b) Reports on Form 8-K:
1) Previously filed as an exhibit to the Registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1992, and incorporated
herein by reference.
2) Filed October 26, 1995, for change in accountants dismissing
Kellogg & Andelson and appointing Beckman Hollander & Associates.
3) Filed February 21, 1996, to amend the 8-K filed on October 26,
1995.
4) Filed May 1, 1997, for acquisition of specific assets and
liabilities comprising substantially all of the operations of Acclaim Studios,
LLC, a California limited liability Registrant, by Registrant's non-public,
wholly-owned investee, First Colonial Studios, Inc., a Nevada corporation.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NOVA COMMUNICATIONS, LTD.
(Registrant)
Date: March 15, 2000
By: /s/ Murray W. Goldenberg
------------------------
Murray W. Goldenberg
President
29
<PAGE>
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the dates
indicated:
March 15, 2000
/s/ Murray W. Goldenberg
- ------------------------
Murray W. Goldenberg, C.A. Chairman
President, Treasurer,
Secretary and Director
(Chief Executive, Financial
and Accounting Officer)
March 15, 2000
/s/ Leslie I. Handler Director
- ---------------------
Leslie I. Handler
30
<PAGE>
NOVA COMMUNICATIONS, LTD.
INDEX TO FINANCIAL STATEMENTS
Page
---------
Report of Independent Auditor F-2
Balance Sheets F-3
Statements of Operations F-4
Statement of Net Capital Deficiency F-5
Statements of Cash Flows F-6
Notes to the Financial Statements F-7,F-16
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITOR
To the Stockholders
Nova Communications Ltd.
I have audited the accompanying balance sheet of Nova Communications Ltd.
(formerly First Colonial Ventures, Ltd.) as of December 31, 1998 and 1997, and
the related statements of operations, changes in net capital deficiency, and
cash flows for the two years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audits.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Nova Communications Ltd. (formerly
First Colonial Ventures, Ltd.) as of December 31, 1998 and 1997 and the results
of its operations and its cash flows for the two years in the period ended
December 31, 1998 in accordance with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 2 to the
financial statements, the Company has a working capital deficit, a net capital
deficiency, and recurring net losses that raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Portland, Oregon
October 25, 1999
F-2
<PAGE>
NOVA COMMUNICATIONS LTD.
(formerly First Colonial Ventures, Ltd.)
Balance Sheets
<TABLE>
<CAPTION>
December 31
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
------
Investments $ 281,000 $ 200,000
Cash - 689
Equipment 13,743 12,680
Deposits 2,325 -
----------- -----------
$ 297,068 $ 213,369
=========== ===========
LIABILITIES AND NET CAPITAL DEFICIENCY
--------------------------------------
Liabilities:
Outstanding checks in excess of cash in bank $ 3,492 $ -
Notes payable 309,453 297,428
Accounts payable 754,327 198,394
Payable to related parties 375,220 559,331
Accrued payroll and payroll related liabilities 57,453 13,560
Other accrued liabilities 46,494 52,500
----------- -----------
Total liabilities 1,546,439 1,121,213
Net capital deficiency:
Preferred stock; no par value; authorized 10,000,000 shares - -
Common stock; $.001 par value; authorized 500,000,000 shares;
outstanding 15,516,183 shares in 1998 (11,646,183 shares
in 1997) 15,516 11,646
Additional paid-in capital 9,758,935 9,508,554
Retained deficit:
Prior to becoming a Business Development Company (3,508,063) (3,508,063)
Net realized investment losses (7,044,551) (2,604,112)
Net unrealized investment losses (471,208) (4,315,869)
----------- -----------
Net capital deficiency (equivalent to ($.08) per share in
1998 (($.07) in 1997) (1,249,371) (907,844)
----------- -----------
$ 297,068 $ 213,369
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
NOVA COMMUNICATIONS LTD.
(formerly First Colonial Ventures, Ltd.)
Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Management fees $ 90,000 $ 180,000
Expenses:
Salaries & consulting fees 353,370 190,020
Legal & accounting fees 35,889 88,344
Other general & administrative 87,072 121,003
Depreciation 3,731 6,320
Interest 20,825 43,461
----------- -----------
Total expenses 500,887 449,148
----------- -----------
Loss before net loss on investments and
provision for income taxes (410,887) (269,148)
Net loss on investments:
Realized loss on investments (4,028,752) (1,488,992)
Change in unrealized loss on investments 3,844,661 (3,025,446)
----------- -----------
Net loss on investments (184,091) (4,514,438)
Provision for income taxes (800) (800)
----------- -----------
Net loss $ (595,778) $(4,784,386)
=========== ===========
Net loss per share $ (.043) $ (.437)
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
NOVA COMMUNICATIONS LTD.
(formerly First Colonial Ventures, Ltd.)
Statements of Net Capital Deficiency
For The Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated Deficit
------------------------------------------
Additional Pre-BDC Accumulated Unrealized Net
Preferred Common paid-in accumulated investment investment capital
stock stock capital deficit loss loss deficiency
---------- ------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ - $10,716 $7,271,619 $(3,508,063) $ (845,172) $(1,290,423) $ 1,638,677
Common stock issued -
930,000 shares - 930 749,400 - - - 750,330
Collections on notes
receivable - - 1,085,260 - - - 1,085,260
Capital contributed - - 402,275 - - - 402,275
Net loss - - - - (1,758,940) (3,025,446) (4,784,386)
---------- ------- ---------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 - 11,646 9,508,554 (3,508,063) (2,604,112) (4,315,869) (907,844)
Common stock issued in
exchange for investments -
3,870,000 shares - 3,870 120,095 - - - 123,965
Collections on notes
receivable - - 130,286 - - - 130,286
Net loss - - - - (4,440,439) 3,844,661 (595,778)
---------- ------- ---------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 $ - $15,516 $9,758,935 $(3,508,063) $(7,044,551) $ (471,208) $(1,249,371)
========== ======= ========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
NOVA COMMUNICATIONS LTD.
(formerly First Colonial Ventures, Ltd.)
Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31
----------------------------
1998 1997
---------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(595,778) $(4,784,386)
Adjustments to reconcile net loss to net cash
used in operating activities:
Net loss on investments 184,091 4,514,438
Benefit for uncollectible notes (60,000) -
Depreciation 3,730 6,320
Deferred income tax benefit (251,100) (1,627,000)
Valuation allowance on deferred income taxes 251,000 1,627,000
Changes in assets and liabilities:
Investments (81,000) (1,402,432)
Deposits and other assets (2,451) (10,725)
Outstanding checks in excess of cash in bank 3,492 -
Accounts payable and accrued liabilities 421,734 208,582
--------- -----------
(126,182) (1,468,203)
Cash flows from investing activities:
Repayment of related party debt - (21,845)
Capital expenditures (4,793) -
--------- -----------
(4,793) (21,845)
Cash flows from financing activities:
Collections on notes receivable on sale of
common stock 130,286 1,085,260
Capital contributed - 402,275
Proceeds from issuance of common stock - 330
--------- -----------
130,286 1,487,865
--------- -----------
Net decrease in cash (689) (2,183)
Cash at beginning of year 689 2,872
--------- -----------
Cash at end of year $ - $ 689
========= ===========
Supplemental disclosure of cash flow information -
cash paid for interest $ 8,800 $ 23,596
========= ===========
Non-cash investing and financing activities:
Common stock issued in exchange for
investment in qualifying assets $ 123,965 $ -
========= ===========
Common stock issued in exchange for related
party debt $ - $ 750,000
========= ===========
Notes payable assumed by investment company $ - $ 210,000
========= ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
NOVA COMMUNICATIONS LTD.
(Formerly First Colonial Ventures, Ltd.)
Notes to Financial Statements
December 31, 1998
1. Business and summary of significant accounting policies
-------------------------------------------------------
Business: Nova Communications Ltd. (the "Company" or "Nova") was
--------
incorporated under the laws of the State of Utah on March 25, 1985. On
June 28, 1999, the Company changed its name from First Colonial Ventures,
Ltd. to Nova Communications Ltd. The Company advances funds to and
acquires ownership interests in business opportunities.
On January 10, 1995, the Company elected to become an Investment Company
pursuant to the Investment Company Act of 1940. On June 27, 1995, the
Company elected to become a "Business Development Company" (a "BDC") as
that term is defined in the Small Business Investment Incentive Act of
1980, which Act is an amendment to the Investment Company Act of 1940. The
election resulted in the Company becoming a specialized type of investment
company.
Basis of reporting: The financial statements include only the accounts of
------------------
the Company because, pursuant to industry practice, an investee of a
business development company is not consolidated unless such investee is a
small business investment company or a wholly-owned business development
company.
Business Development Company considerations: As a BDC, the Company may only
-------------------------------------------
acquire "Qualifying Assets" unless, at the time of acquisition, the
qualifying assets acquired represent at least 70% of the value of the
Company's total assets (the 70% test). The principal categories of
qualifying assets relevant to the business of the Company are:
(1) Securities purchased in transactions not involving any public offering
from the issuer of such securities, which issuer is an eligible
portfolio company. An eligible portfolio company is defined to include
any issuer that (a) is organized and has its principal place of
business in the United States, (b) is not an investment company other
than a Small Business Investment Company wholly-owned by the BDC, and
(c) does not have any class of publicly traded securities with respect
to which a broker may extend margin credit.
(2) Securities received in exchange for or distributed with respect to
securities described in (1), above, or pursuant to the exchange of
options, warrants or rights relating to such securities.
(3) Cash, cash items, government securities, or high quality debt
securities (within the meaning of the 1940 Act) maturing in one year of
less from the time of investment.
In addition, to treating securities described in (1) and (2), above, as
Qualifying Assets for the purpose of the 70% test, a BDC must make
available to the issuer of those securities significant managerial
assistance. Significant managerial assistance means, among other things,
(i) any arrangement whereby the BDC, through its directors, officers or
employees, provides significant guidance and counsel
F-7
<PAGE>
NOVA COMMUNICATIONS LTD.
(Formerly First Colonial Ventures, Ltd.)
Notes to Financial Statements
December 31, 1998
1. Business and summary of significant accounting policies (continued)
------------------------------------------------------------------
Business Development Company considerations (continued): concerning the
-------------------------------------------------------
management, operations or business objectives and policies of a portfolio
company, or (ii) in the case of an SBIC, making loans to a portfolio
company. Managerial assistance is made available to the portfolio
companies by the Company's directors and officers who are highly
experienced in providing managerial assistance to small businesses.
Cash and cash concentrations: For purposes of the statement of cash flows,
----------------------------
the Company considers cash equivalents to be highly liquid instruments with
original due dates within three months of the date purchased. In addition,
consistent with the reporting requirements of a BDC, the financial
statement account category investments, which relate to the Company's
activity as a BDC, are included as operating activities in the statement of
cash flows.
Nova and its investment companies place their cash in financial
institutions and, at various times throughout the year, cash held in these
accounts has exceeded Federal Deposit Insurance Corporation limits.
Neither Nova nor any of its investment companies experienced any losses as
a result of these cash concentrations.
Investment valuation:
--------------------
Investments consist of investments in debt or equity securities and working
capital advancements to portfolio companies. Investments are reported at
fair value.
The fair value method provides for Nova's Board of Directors to be
responsible for the valuation of the Company's investments, including notes
and interest receivable. Fair value is the value that could reasonably be
expected to be realized in a current arm's length sale using the following
four basic methods of valuation:
(1) Cost - The cost method is based on the original cost of the investment
company or securities adjusted for amortization of original issue
discounts, accrued interest or certain capitalization expenditures.
Other adjustments are considered as determined to be appropriate by the
Board of Directors in good faith, taking into consideration such
factors as available financial information of the investment company,
the nature and duration of any restrictions as to resale, and other
factors which influence the market in which a security is purchased and
sold. Such method is to be applied in the early stages of an
investment company's development until significant positive or adverse
events subsequent to the date of the original investment require a
change to another method.
F-8
<PAGE>
NOVA COMMUNICATIONS LTD.
(Formerly First Colonial Ventures, Ltd.)
Notes to Financial Statements
December 31, 1998
1. Business and summary of significant accounting policies (continued)
------------------------------------------------------------------
Investment valuation (continued):
--------------------------------
(2) Private market - The private market method is based on third party
transactions in the investment company's securities, utilizing actual
firm offers as well as historical transactions, provided that any offer
used is seriously considered and well documented by the investment
company. Adjustments are considered by the Board of Directors in good
faith taking into consideration such factors as available financial
information of the investment company, the nature and duration of any
restrictions as to resale, and other factors which influence the market
in which a security is purchased and sold.
(3) Public market - The public market is the preferred method of valuation
when there is an established public market for the investment company's
securities. In determining whether the public market method is
sufficiently established for valuation purposes, the Board of Directors
examines the trading volume, the number of shareholders and the number
of market makers in the investment company's securities, along with the
trend in trading volume as compared to the Company's proportionate
share of the investment company's securities.
(4) Appraisal - The appraisal method is used to value an investment
position after analysis of the best available outside information where
there is no established public or private market in the investment
company's securities.
Reporting comprehensive income: The Company reports and displays
------------------------------
comprehensive income and its components as separate amounts in the
financial statements. Comprehensive income includes all changes in equity
during a period that results from recognized transactions and other
economic events other than transactions with owners. As of December 31,
1998, the Company does not carry any items required to be disclosed as
other comprehensive income.
Income taxes: Income taxes are accounted for using an asset and liabilities
------------
approach. Under this method, deferred income tax assets and liabilities are
computed annually for differences between the financial statement carrying
amounts and their tax bases that will result in taxable or deductible
amounts in the future using enacted tax rates in effect in the years in
which the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the year in
deferred tax assets and liabilities.
Net loss per share: Net loss per share is computed by dividing net loss by
------------------
the weighted average number of common shares outstanding during the period.
The weighted average number of common stock shares outstanding was
13,724,128 for 1998 (10,958,682 for 1997). Preferred stock is not
considered to be a common stock equivalent.
F-9
<PAGE>
NOVA COMMUNICATIONS LTD.
(Formerly First Colonial Ventures, Ltd.)
Notes to Financial Statements
December 31, 1998
1. Business and summary of significant accounting policies (continued)
------------------------------------------------------------------
Significant risks and uncertainties: The process of preparing financial
-----------------------------------
statements in conformity with generally accepted accounting principles
requires the use of estimates and assumptions regarding certain types of
assets, liabilities, revenues and expenses. Management of the Company has
made certain estimates and assumptions regarding the valuation of
investment companies. Such estimates and assumptions primarily relate to
unsettled transactions and events as of the date of the financial
statements. Accordingly, upon settlement, actual results may differ from
estimated amounts.
Recently issued accounting pronouncements:
-----------------------------------------
Accounting for derivative instruments and hedging activities: In June 1998,
------------------------------------------------------------
SFAS No. 133, " Accounting for Derivative Instruments and Hedging
Activities" was issued. The Statement requires that all derivatives be
carried on the balance sheet at fair value and changes in the fair value of
derivatives be recognized in income when they occur, unless the derivatives
qualify as hedges in accordance with the standard. If a derivative
qualifies as a hedge, a company can elect to use hedge accounting. The
type of accounting to be applied varies depending on the nature of the
exposure that is being hedged, and the standard defines three hedge risks:
change in fair value, change in cash flows and change in foreign currency.
A fair-value hedge represents the hedge of an exposure to changes in the
fair value of an asset, liability or an unrecognized firm commitment.
Changes in fair value hedges are recognized in earnings, as well as the
gain or loss on the hedged item attributable to the hedged risk. Certain
criteria must be met in order for a hedging relationship to qualify as a
fair-value hedge.
A cash-flow hedge is a hedge of an exposure to variability in cash flows
that is attributable to a particular risk. That exposure may be associated
with an existing recognized asset or liability or a forecasted transaction.
The effective portion of a hedging instrument's gain or loss is initially
reported as a component of other comprehensive income and is reclassified
as a component of earnings in the same period or periods during which the
hedge forecasted transaction affects earnings. As in fair value hedges,
certain criteria must be met in order for a hedging relationship to qualify
as a cash-flow hedge.
A foreign-currency hedge can be a fair-value hedge or a cash-flow hedge of
the foreign currency exposure, therefore it follows the same principles as
those that apply to the accounting for non-foreign hedges with some
particularities defined in the statement.
This statement is effective for fiscal years beginning after June 15, 1999
and cannot be applied retroactively. Management believes that the adoption
of this statement will not have a material effect on the Company's
financial position or results of operations.
F-10
<PAGE>
NOVA COMMUNICATIONS LTD.
(Formerly First Colonial Ventures, Ltd.)
Notes to Financial Statements
December 31, 1998
1. Business and summary of significant accounting policies (continued)
------------------------------------------------------------------
Recently issued accounting pronouncements (continued):
-----------------------------------------------------
Accounting for the cost of computer software developed for internal use: In
-----------------------------------------------------------------------
March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, " Accounting for the Cost of Computer Software
Developed for Internal Use" ("SOP 98-1"), which will become effective for
financial statements for the year beginning January 1, 1999, with early
adoption encouraged. SOP 98-1 requires the capitalization of eligible
costs of specified activities related to computer software developed or
obtained for internal use. Management does not believe the impact of
adoption will have a material effect on the Company's financial position or
results of operations.
2. Operations
----------
The Company's continued existence is dependent upon its ability to obtain
profitable operations from its investments or additional capital. The
Company's investments have experienced recurring losses and negative
working capital.
In June 1999, the Company was successful in obtaining a $525,000 note
payable which becomes due in August 2000. The proceeds of the note were
used to satisfy a $390,000 obligation of Contemporary Resources, Inc. which
Nova had guaranteed. The remaining proceeds of the note are being used for
working capital in 1999.
As of October 25, 1999, the Company owned 362,500 restricted shares of
common stock of And In Justice For All, Inc., dba Legal Club of America
("Legal Club"). The restrictive time period of those shares expire on
December 19, 1999. The shares are pledged as collateral against the note
payable described above. The Company intends to sell some or all of the
Legal Club shares and believes, based on current trading prices, the
proceeds will be sufficient to repay the note payable and provide working
capital for the next fiscal year.
The financial statements do not reflect adjustments relating to the
recorded asset amounts, or the amounts of liabilities that would be
necessary should the Company not be able to continue in existence.
F-11
<PAGE>
NOVA COMMUNICATIONS LTD.
(Formerly First Colonial Ventures, Ltd.)
Notes to Financial Statements
December 31, 1998
3. Investments
-----------
Investments aggregated the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
--------------------- -----------------------
Fair Value Cost Fair Value Cost
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Investments in qualifying assets $281,000 $752,208 $200,000 $5,046,564
Investments in non-qualifying asset-
First Colonial Funds, Ltd.:
Common stock, 50,000 shares - 110,000 - 110,000
Advances - 4,304 - 4,304
-------- -------- -------- ----------
- 114,304 - 114,304
-------- -------- -------- ----------
Aggregate investments $281,000 $866,512 $200,000 $5,160,868
======== ======== ======== ==========
</TABLE>
4. Investments in qualifying assets
--------------------------------
The Company's investments in qualifying assets were as follows at December
31:
<TABLE>
<CAPTION>
1998 1997
--------------------- -----------------------
Fair Value Cost Fair Value Cost
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Wholly owned portfolio companies:
Contemporary Resources, Inc. -
Common stock $ - $ - $ - $ 773,115
First Colonial Real Estate, Inc.:
Common stock - - - 10,130
Advances - - - 218,085
Baja Pacific International, Inc. -
Common stock - - - 7,600
YPE, Inc. -
Common stock - - - 3,367
First Colonial Productions, Inc.:
Common stock - - - 25,000
Advances - - - 268,105
First Colonial Studios, Inc.:
Common stock - - - 690,000
Advances - - - 147,478
Dryden Energy, Inc.:
Common stock - - - 1,802,241
Advances - - - 960
</TABLE>
F-12
<PAGE>
NOVA COMMUNICATIONS LTD.
(Formerly First Colonial Ventures, Ltd.)
Notes to Financial Statements
December 31, 1998
4. Investments in qualifying assets (continued)
--------------------------------------------
<TABLE>
<CAPTION>
1998 1997
--------------------- -----------------------
Fair Value Cost Fair Value Cost
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Controlled (50%) portfolio companies:
Sherwood Properties, Inc.:
Common stock - - 1,919
Advances - - - 73,000
Gulf Coast Hotels, Inc.:
Common stock, 1,875 shares - 209,782 - 209,782
Advances - 85,000 - 85,000
Other portfolio companies:
TND/Medical International, Inc. -
Common stock - - - 350,000
And In Justice For All, Inc. -
Common stock, 650,000 shares 200,000 376,426 200,000 376,426
Gerant Industries, Inc. -
Common stock - - - 4,356
STS Communications -
Advances 81,000 81,000 - -
-------- -------- -------- ----------
Total investments $281,000 $752,208 $200,000 $5,046,564
======== ======== ======== ==========
</TABLE>
Gulf Coast Hotels, Inc. ("Gulf Coast"): In December 1994, the Company
--------------------------------------
purchased the rights to 50% of Gulf Coast, a company incorporated under the
laws of the State of Nevada. Gulf Coast was formed to purchase the rights
to approximately 1.4 acres in Biloxi, Mississippi and to develop a high-
rise condominium hotel on that site. Gulf Coast has been unable to raise
the approximately $1,000,000 necessary to complete the down payment. The
seller has provided extensions to Gulf Coast, however, the agreement is in
default.
During 1997, Gulf Coast entered into agreements to sell its interest in the
property and to become a minority partner in the development project
subject to the majority partners obtaining financing.
Management of Nova has determined that its investment in and advances to
Gulf Coast have no value based upon the appraisal investment valuation
method due to the uncertainty of the outcome of Gulf Coast's default.
F-13
<PAGE>
NOVA COMMUNICATIONS LTD.
(Formerly First Colonial Ventures, Ltd.)
Notes to Financial Statements
December 31, 1998
4. Investments in qualifying assets (continued)
-------------------------------------------
Legal Club: During March 1996, the Company acquired an interest in Legal
----------
Club, which was incorporated under the laws of the State of Florida. Legal
Club started a new nationwide membership organization providing access to
attorney services at discounted rates. During 1997, Legal Club became a
publicly traded company.
The value of the Company's investment in Legal Club was determined based
upon the public market and appraisal investment valuation methods.
STS Communications ("STS"): During 1998, the Company made advances to STS,
--------------------------
a non-public California company providing communication services, under an
agreement where Nova would acquire up to 50% of STS. Later during 1998,
STS was acquired by another company. In March 1999, an agreement was
reached whereby Nova would receive $130,000 as complete settlement for its
investment in and advances to STS.
Change in unrealized loss on investments consisted of the following for the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ------------
<S> <C> <C>
Contemporary Resources, Inc. $ 242,521 $ (649,952)
Sherwood Properties, Inc. 74,919 -
Baja Pacific International, Inc. 7,500 (7,500)
YPE, Inc. 3,367 (3,367)
First Colonial Productions, Inc. 293,105 -
First Colonial Studios, Inc. 837,477 -
Dryden Energy, Inc. 1,803,201 (1,803,201)
First Colonial Real Estate, Inc. 228,215 -
Gulf Coast Hotels, Inc. - (35,000)
TND/Medical International, Inc. 350,000 (350,000)
Legal Club - (176,426)
Gerant Industries, Inc. 4,356 -
---------- -----------
Total change in unrealized loss on investments $3,844,661 $(3,025,446)
========== ===========
</TABLE>
5. Notes payable
-------------
Notes payable consisted of a loan and accrued interest payable to a private
investor. The note is unsecured and bears interest per annum at 2% over
Bank of America prime rate. The Company intends to issue a minimum of
150,000 shares of its common stock as repayment of the amount.
F-14
<PAGE>
NOVA COMMUNICATIONS LTD.
(Formerly First Colonial Ventures, Ltd.)
Notes to Financial Statements
December 31, 1998
6. Income taxes
------------
The Company files a consolidated tax return in the name of Contemporary
Resources, Inc. as a result of the original reverse purchase of the assets
of Nova by Contemporary Resources, Inc.
Deferred income taxes consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryovers $ 2,266,300 $ 690,500
Unrealized losses on investments 164,900 1,510,600
Allowance for uncollectible notes 21,000 -
----------- -----------
2,452,200 2,201,100
Valuation allowance for deferred tax
assets (2,452,200) (2,201,100)
----------- -----------
Net deferred income taxes $ - $ -
=========== ===========
</TABLE>
The Company had net operating loss carryovers as of December 31, 1998 of
approximately $6,475,100 available to offset future taxable income, if any.
In the event of ownership changes aggregating 50% or more in any three-year
period, the amount of loss carryovers that become available for utilization
in any year may be limited. If not utilized against future taxable income,
the tax loss carryovers will expire in the years 2002 through 2013.
Reconciliation of income taxes computed at the federal statutory rate to
the provision for income taxes is as follows for the years ended December
31:
<TABLE>
<CAPTION>
1998 1997
---------- ------------
<S> <C> <C>
Tax at statutory rates $(202,293) $(1,626,691)
Differences resulting from:
State tax, net of federal tax benefit 528 528
Non-deductible and other items (48,535) (37)
Change in deferred tax valuation allowance 251,100 1,627,000
--------- -----------
Provision for income taxes $ 800 $ 800
========= ===========
</TABLE>
7. Legal matters
-------------
The president of the Company, along with several other individuals, has
been indicted by the United States District Court, Southern District of New
York alleging conspiracy, securities fraud, and wire-fraud. The president
denies the allegations and is vigorously defending the matter.
F-15
<PAGE>
NOVA COMMUNICATIONS LTD.
(Formerly First Colonial Ventures, Ltd.)
Notes to Financial Statements
December 31, 1998
8. Other related party transactions
--------------------------------
The Company pays a monthly fee of $13,750 to its president under a month-
to-month consulting agreement. Consulting expenses charged to operations
was $165,000 for 1998 ($165,000 for 1997).
9. Subsequent events
-----------------
At its annual meeting in June 1999, the Board of Directors of the Company
terminated the election to be an Investment Company pursuant to the
Investment Company Act of 1940 and no longer be considered a Business
Development Company. As a result of this resolution, the Company will
begin to present consolidated financial position and results of operations
with their investment companies.
In January 1999, the Company entered into an agreement to acquire 100% of
the outstanding shares of Communications 2000; dba Telephone Equipment
Company, a non-public California corporation that sells and installs
telephone and other communication equipment and systems. Under the
agreement, the Company would exchange a note payable convertible into
2,000,000 shares of its common stock for all of the outstanding shares of
Communications 2000. The note would be convertible on or after March 31,
2000. The Company may rescind the agreement if Communications 2000 does
not meet certain financial goals and Communications 2000 may rescind the
agreement if the Company's common stock is not trading at or above $1 per
share by March 31, 2000. As of October 25, 1999, the Company had advanced
Communications 2000 approximately $28,100.
In 1999, the Company cancelled 300,000 shares of its common stock issued
for the purchase of TND/Medical International, Inc to terminate its
investment in that company. As of October 25, 1999, the Company had
15,216,183 share of its common stock issued and outstanding.
In 1999, the Company sold 287,500 share of Legal Club, the proceeds of
which were used primarily for fees and costs to obtain a $525,000 note
payable.
F-16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DEC. 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 281,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 281,000
<PP&E> 13,743
<DEPRECIATION> 0
<TOTAL-ASSETS> 297,068
<CURRENT-LIABILITIES> 1,546,439
<BONDS> 0
0
0
<COMMON> 15,516
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 297,000
<SALES> 90,000
<TOTAL-REVENUES> 90,000
<CGS> 0
<TOTAL-COSTS> 500,887
<OTHER-EXPENSES> 184,091
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (594,778)
<INCOME-TAX> 800
<INCOME-CONTINUING> (595,778)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (595,778)
<EPS-BASIC> (.043)
<EPS-DILUTED> (.043)
</TABLE>
