As filed with the Securities and Exchange Commission on March 5, 2002
Registration No. ___________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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Florida Advanced CommunicationsTechnologies, Inc. 65-0738251
(State or Other Jurisdiction (Name of Registrant in Our Charter) (I.R.S. Employer
of Incorporation Identification No.)
or Organization)
880 Apollo Street, Suite 200 7389 Wayne I. Danson
El Segundo, CA 90245 (Primary Standard Industrial c/o Danson Partners, LLC
(310) 416-1270 Classification Code Number) 420 Lexington Ave., Suite 2739
(Address and telephone number New York, NY 10170
of Principal (646) 227-1600
Executive Offices and (Name, address and telephone
Principal Place of Business) number of agent for service)
Copies to:
Clayton E. Parker, Esq. Troy J. Rillo, Esq.
Kirkpatrick & Lockhart LLP Kirkpatrick & Lockhart LLP
201 S. Biscayne Boulevard, Suite 2000 201 S. Biscayne Boulevard, Suite 2000
Miami, Florida 33131 Miami, Florida 33131
(305) 539-3300 (305) 539-3300
Telecopier No.: (305) 358-7095 Telecopier No.: (305) 358-7095
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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Proposed
Proposed Maximum
Maximum Aggregate Amount Of
Title Of Each Class Of Amount To Be Offering Offering Registration
Securities To Be Registered Registered Price Price(1) Fee
Per Share (1)
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Common stock, no par value 63,387,783 shares $0.13 $8,240,412 $758.12
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Common stock, no par value,
underlying convertible debentures 10,000,000 shares $0.13 $1,300,000 $119.60
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Common stock, no par value,
underlying outstanding warrants 6,440,900 shares $0.13 $837,317 $77.03
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TOTAL 79,828,683 shares $0.13 $10,377,729 $954.75
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. For the purposes
of this table, we have used the average of the closing bid and asked
prices as of March 1, 2002.
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The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Subject to completion, dated March 5, 2002
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
79,828,683 Shares of Common Stock
This prospectus relates to the sale of up to 79,828,683 shares of
Advanced Communications' common stock by certain persons who are, or will
become, stockholders of Advanced Communications. Please refer to "Selling
Stockholders" beginning on page 10. Advanced Communications is not selling any
shares of common stock in this offering and therefore will not receive any
proceeds from this offering. We will, however, receive proceeds from the sale of
common stock under the Equity Line of Credit. All costs associated with this
registration will be borne by us.
The shares of common stock are being offered for sale on a "best
efforts" basis by the selling stockholders at prices established on the
Over-the-Counter Bulletin Board during the term of this offering. There are no
minimum purchase requirements. These prices will fluctuate based on the demand
for the shares of common stock.
The selling stockholders consist of:
o Cornell Capital Partners and holders of convertible debentures that
intend to sell up to 72,960,000 shares of common stock.
o Other selling stockholders, who intend to sell up to 6,868,683
shares of common stock purchased in private offerings.
Cornell Capital Partners, L.P. is an "underwriter" within the meaning
of the Securities Act of 1933 in connection with the sale of common stock under
the Equity Line of Credit Agreement. Cornell Capital Partners, L.P. will pay
Advanced Communications 91% of the market price of our common stock. Advanced
Communications has paid Cornell Capital Partners a one-time commitment fee of
$740,000, payable in 2,960,000 shares of common stock. In addition, Cornell
Capital Partners is entitled to retain 3% of each advance under the Equity Line
of Credit. The 9% discount, the one-time commitment fee and the 3% retention are
underwriting discounts.
Advanced Communications has engaged Westrock Advisors, Inc., a
registered broker-dealer, to advise it in connection with the Equity Line of
Credit. Westrock Advisors, Inc. was paid a fee of 40,000 shares of Advanced
Communications' common stock, which is equal to $10,000 at a closing bid of
$0.25 on January 10, 2002. Westrock Advisors, Inc. is not participating in this
offering.
Our common stock is quoted on the Over-the-Counter Bulletin Board
maintained by the NASD under the symbol "ADVC." On February 28, 2002 the last
reported sale price of our common stock was $0.13 per share.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 5.
With the exception of Cornell Capital Partners, L.P., which is an
"underwriter" within the meaning of the Securities Act of 1933, no other
underwriter or person has been engaged to facilitate the sale of shares of
common stock in this offering. This offering will terminate 24 months after the
accompanying registration statement is declared effective by the Securities and
Exchange Commission. None of the proceeds from the sale of stock by the selling
stockholders will be placed in escrow, trust or any similar account.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is March __, 2002.
TABLE OF CONTENTS
PROSPECTUS SUMMARY............................................................2
THE OFFERING..................................................................3
RISK FACTORS..................................................................5
RISKS RELATED TO OUR BUSINESS.................................................5
RISKS RELATING TO THIS OFFERING...............................................7
FORWARD-LOOKING STATEMENTS....................................................9
SELLING STOCKHOLDERS.........................................................10
USE OF PROCEEDS..............................................................13
DILUTION.....................................................................14
EQUITY LINE OF CREDIT........................................................15
PLAN OF DISTRIBUTION.........................................................16
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION....................18
DESCRIPTION OF BUSINESS......................................................24
MANAGEMENT...................................................................34
DESCRIPTION OF PROPERTY......................................................37
LEGAL PROCEEDINGS............................................................37
PRINCIPAL STOCKHOLDERS.......................................................39
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................40
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER
STOCKHOLDER MATTERS....................................................43
DESCRIPTION OF SECURITIES....................................................44
EXPERTS......................................................................46
LEGAL MATTERS................................................................46
HOW TO GET MORE INFORMATION..................................................46
PART II INFORMATION NOT REQUIRED IN PROSPECTUS.............................II-1
FINANCIAL STATEMENTS........................................................F-1
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We intend to distribute to our stockholders annual reports containing
audited financial statements. Our audited financial statements for the fiscal
year June 30, 2001, were contained in our Annual Report on Form 10-KSB.
1
PROSPECTUS SUMMARY
Overview
We are a party to a license and distribution agreement for SpectruCell,
a wireless software based communications platform that offers mobile
communications network providers the flexibility of processing and transmitting
multiple wireless communication signals through one base station. The
SpectruCell product, which is based on the Software Defined Radio ("SDR")
platform, will allow wireless communication network providers with the ability
to not only direct multiple wireless frequencies (AMPS, CDMA, GSM, Mobile IP,
Voice IP, etc.) through one base station but will also provide flexibility for
future spectrum upgrades to 3G. We believe that the SpectruCell technology is
the only Software Defined Radio platform-based technology with the capability of
providing flexibility in commercial, industrial and military wireless
communications. Without SpectruCell, network carriers would need to provide
separate base stations and/or networks for each wireless frequency. The
SpectruCell product is being developed by our affiliated entity, Advanced
Communications Technologies, Pty (Australia) which we own a 20% interest in. Our
license and distribution agreement encompasses a territory comprising North,
Central, and South America and is for an indefinite period. It grants us the
exclusive right to license, market and distribute SpectruCell and other products
being developed by our affiliated entity throughout the North, Central and South
American territories.
We currently have no other products for licensing and/or distribution
other than SpectruCell and other products being developed for sale and/or
license by our Australian affiliate. SpectruCell is expected to be available for
commercial license and distribution in the fourth quarter 2002.
We expect to generate revenue from the licensing, marketing and
distribution of the SpectruCell product under our license agreement. We have not
had any meaningful revenues to date. We will not manufacture SpectruCell in the
U.S., but will instead be the exclusive licensee and distributor of SpectruCell
in the North, Central, and South American territories.
SpectruCell is a dynamic technology that, we believe, will reduce the
network providers' cost for on-going upgrades to wireless formats 2.5 and 3G and
beyond, as each upgrade will be software-based rather than hardware-based.
Network providers implementing a SpectruCell network architecture will be able
to protect their existing client base through continued support and expansion of
their existing services while being able to support future 2.5 and 3G-based
protocols. This flexible migration path for network operators means that they
can protect their existing financial asset while giving the operator both a
technical and financial migration to 2.5 and 3G.
About Us
Our principal office is located at 880 Apollo Street, Suite 200, El
Segundo, California 90245. Our telephone number is (310) 416-1270.
2
THE OFFERING
This offering relates to the sale of common stock by certain persons who
are, or will become, stockholders of us. The selling stockholders consist of:
o Cornell Capital Partners and other holders of convertible debentures
that intend to sell up to 72,960,000 shares of common stock.
o Other selling stockholders, who intend to sell up to 6,868,683
shares of common stock purchased in private offerings.
Pursuant to the Equity Line of Credit, we may, at our discretion,
periodically issue and sell to Cornell Capital Partners, L.P. shares of common
stock for a total purchase price of $30 million. The amount of each advance is
subject to an aggregate monthly maximum advance amount of $2 million in any
thirty-day period. Cornell Capital Partners, L.P. will purchase the shares of
common stock for a 9% discount to the prevailing market price of our common
stock. In addition, Cornell Capital Partners will retain 3% of each advance
under the Equity Line of Credit, together with a one-time commitment fee of
$740,000, payable in 2,960,000 shares of common stock. Cornell Capital Partners
intends to sell any shares purchased under the Equity Line of Credit at the then
prevailing market price. Among other things, this prospectus relates to the
shares of common stock to be issued under the Equity Line of Credit.
We have engaged Westrock Advisors, Inc., a registered broker-dealer, to
advise us in connection with the Equity Line of Credit. Westrock Advisors, Inc.
was paid a fee of 40,000 shares of Advanced Communications' common stock, which
is equal to $10,000 at a closing bid of $0.25 on January 10, 2002. Westrock
Advisors, Inc. is not participating in this offering.
Common Stock Offered 79,828,683 shares by selling
stockholders
Offering Price Market price
Common Stock Outstanding Before the Offering1 102,530,897 shares
Use of Proceeds We will not receive any proceeds
of the shares offered by the
selling stockholders. Any
proceeds we receive from the
sale of common stock under the
Equity Line of Credit will be
used for (i) the repayment of
our obligation to our Australian
affiliate, (ii) sales and
marketing, (iii) the repayment
of our accounts payable and
accrued expenses, (iv) potential
acquisitions, and (v) general
working capital purposes. See
"Use of Proceeds."
Risk Factors The securities offered hereby
involve a high degree of risk
and immediate substantial
dilution. See "Risk Factors" and
"Dilution."
Over-the-Counter Bulletin Board Symbol ADVC
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1 Excludes warrants to purchase 6,440,990 shares of common stock, debentures
convertible into 10,000,000 shares of common stock (at an assumed
conversion price of $0.10 per share) and up to 60,000,000 shares of common
stock to be issued under the Equity Line of Credit, which amount may be
higher or lower if more or less shares are required upon the conversion of
the debentures.
3
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
For the Quarter For the Year
Ended Ended
December 31, June 30,
2001 2001
Statement of Operation Data:
Revenues $ -- $ 50,000
Cost of revenues -- (57,310)
Gross profit (loss) -- (7,310)
Total operating expenses 650,960 3,334,581
Loss from operations (650,960) (3,341,891)
Loss from investment -- (3,571,654)
Loss from impairment of goodwill -- (12,399,864)
Loss on investment acquisition deposit -- (425,000)
Total other income/(expense) (1,000) (16,413,675)
Net loss from operations $(651,960)) $ (19,732,566)
Net loss per share - basic and diluted $ (0.01) $ (0.22)
December 31, June 30,
2001 2001
Balance Sheet Data:
Cash $ 116,061 $ 6,816
Prepaid expenses 10,634 10,000
Total current assets 126,695 16,816
Property and equipment, net 17,599 19,599
Other goodwill 1,800,000 2,000,000
Deposits 13,225 5,525
Total assets 1,957,519 2,041,940
Accounts payable and accrued expenses 847,737 844,205
Accrued compensation 566,550 479,050
Note payable - Grassland -- 118,530
Loan payable to shareholder 992,736 796,000
Convertible debentures 200,750 200,750
Short-term loan payable 325,000 --
Other advances 63,000 --
Interest payable 1,000 --
Total current liabilities 2,996,773 2,438,535
Note payable to affiliate 1,791,166 2,173,167
Total liabilities 4,787,939 4,611,702
Common stock, no par value, 200,000,000 and
100,000,000
shares authorized, respectively, 98,250,897
and 94,489,916
shares issued and outstanding, respectively 23,793,753 22,696,193
Accumulated deficit (26,624,173) (25,515,955)
Total stockholders' deficiency (2,830,420) (2,569,762)
Total liabilities and Stockholders' deficiency $ 1,957,519 $ 2,041,940
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4
RISK FACTORS
We are subject to various risks that may materially harm our business,
financial condition and results of operations. YOU SHOULD CAREFULLY CONSIDER THE
RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS FILING
BEFORE DECIDING TO PURCHASE OUR COMMON STOCK. IF ANY OF THESE RISKS OR
UNCERTAINTIES ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING
RESULTS COULD BE MATERIALLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE IN THE FUTURE
We have historically lost money. In the year ended June 30, 2001 and
for the six months ended December 31, 2001, we had a net loss of ($19,732,566)
and ($1,108,218) or ($0.22) and ($0.01) per share, respectively. Future losses
are likely to occur. Accordingly, we may experience significant liquidity and
cash flow problems because our operations are not profitable. No assurances can
be given that we will be successful in reaching or maintaining profitable
operations.
WE WILL NEED TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS
We have relied on significant external financing to fund our
operations. Such financing has historically come from a combination of
borrowings and sale of common stock from third parties and funds provided by
certain officers and directors. We cannot assure you that financing whether from
external sources or related parties will be available if needed or on favorable
terms. Our inability to obtain adequate financing will result in the need to
curtail business operations. Any of these events would be materially harmful to
our business and may result in a lower stock price. We will need to raise
additional capital to fund our anticipated operating expenses and future
expansion. Among other things, external financing may be required to cover our
operating costs.
OUR INDEPENDENT AUDITORS HAVE ADDED A GOING CONCERN OPINION TO OUR
FINANCIAL STATEMENTS, WHICH MEANS THAT WE MAY NOT BE ABLE TO CONTINUE OPERATIONS
UNLESS WE OBTAIN ADDITIONAL FUNDING
Our independent auditors have added an explanatory paragraph to their
audit opinions issued in connection with the years 2000 and 2001 financial
statements, which states that our ability to continue as a going concern depends
upon our ability to resolve liquidity problems, principally by obtaining
capital, commencing sales and generating sufficient revenues to become
profitable. Our ability to obtain additional funding will determine our ability
to continue as a going concern. Our financial statements do not include any
adjustments that might result from the outcome of this uncertainty. We expect to
be able to continue operations five months with the cash currently on hand.
WE HAVE A WORKING CAPITAL DEFICIT, WHICH MEANS THAT OUR CURRENT ASSETS
ON DECEMBER 31, 2001 WERE NOT SUFFICIENT TO SATISFY OUR CURRENT LIABILITIES ON
THAT DATE
We had a working capital deficit of $2,870,078 as of December 31, 2001,
which means that our current liabilities exceeded our current assets by
$2,870,078. Current assets are assets that are expected to be converted into
cash within one year and, therefore, may be used to pay current liabilities as
they become due. Our working capital deficit means that our current assets on
December 31, 2001 were not sufficient to satisfy all of our current liabilities
on that date.
OUR FUTURE DEPENDS UPON THE MARKET ACCEPTANCE OF A SINGLE PRODUCT
We intend to market and distribute a single product called SpectruCell.
To date, we have not had any revenue from the sale of this product. Our success
is completely dependent on the telecommunication industry's acceptance of this
product, in such quantities that we can generate sufficient revenues and cash
flow to finance our operations. We may need to overcome substantial hurdles to
obtain such market acceptance, including convincing the telecommunication
industry of the necessity of such product and encouraging companies and other
entities to offer incentives to use our product. No assurances can be given that
the market will accept our product.
The inability of our Australian affiliate to complete the development
of our proposed product and prove its features and functionality will jeopardize
our ability to continue operations.
5
Our proposed product is under development and is not commercially
available. The features and functionality of our proposed product is
commercially unproven. The success of Advanced Communications is dependent upon
the ability of our Australian affiliate to successfully complete the
development, and to prove the features and functionality of our product. The
inability to timely complete such development or to prove to potential customers
our product's features and functionality, such that we can generate sales, will
jeopardize our ability to continue operations. Such testing and functionality is
outside our control and we are dependent on our Australian affiliate's efforts
to complete these tasks.
THE PRICE OF OUR COMMON STOCK MAY BE AFFECTED BY A LIMITED TRADING VOLUME AND
MAY FLUCTUATE SIGNIFICANTLY
Prior to this offering there has been a limited public market for our
common stock and there can be no assurance that an active trading market will
develop. An absence of an active trading market could adversely affect our
stockholders' ability to sell our common stock in short time periods, or
possibly at all. Our common stock has experienced, and is likely to experience
in the future, significant price and volume fluctuations that could adversely
affect the market price of our common stock without regard to our operating
performance. In addition, we believe that factors such as quarterly fluctuations
in our financial results and changes in the overall economy or the condition of
the financial markets could cause the price of our common stock to fluctuate
substantially.
OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE
DIFFICULT FOR INVESTORS TO SELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS
Our common stock is deemed to be "penny stock" as that term is defined
in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. These
requirements may reduce the potential market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors
in our common stock to sell shares to third parties or to otherwise dispose of
them. This could cause our stock price to decline. Penny stocks are stock:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the Nasdaq automated quotation system
(Nasdaq listed stock must still have a price of not less than $5.00
per share); or
o In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$5.0 million (if in continuous operation for less than three years),
or with average revenues of less than $6.0 million for the last
three years.
Broker/dealers dealing in penny stocks are required to provide
potential investors with a document disclosing the risks of penny stocks.
Moreover, broker/dealers are required to determine whether an investment in a
penny stock is a suitable investment for a prospective investor.
WE COULD FAIL TO ATTRACT OR RETAIN KEY PERSONNEL
Our success largely depends on the efforts and abilities of key
executives and consultants, including Gary Ivaska, our Chief Executive Officer
and President, and Wayne Danson, our Chief Financial Officer. The loss of the
services of either Mr. Ivaska or Mr. Danson could materially harm our business
because of the cost and time necessary to replace and train a replacement. Such
a loss would also divert management attention away from operational issues. We
do not presently maintain a key-man life insurance policy on either Mr. Ivaska
or Mr. Danson.
6
RISKS RELATING TO THIS OFFERING
FUTURE SALES BY OUR STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE AND OUR
ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS
Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all. Of
the 102,530,897 shares of common stock outstanding as of February 15, 2002,
41,918,498 shares are, or will be, freely tradable without restriction, unless
held by our "affiliates." The remaining 60,612,399 shares of common stock held
by existing stockholders are "restricted securities" and may be resold in the
public market only if registered or pursuant to an exemption from registration.
Some of these shares may be resold under Rule 144.
In addition, we have issued, or will issue, warrants to purchase up to
6,440,900 shares of common stock and debentures convertible into 10,000,000
shares of common stock (assuming a conversion price of $0.10 per share).
EXISTING STOCKHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION FROM THE SALE OF
SHARES UNDER THE EQUITY LINE OF CREDIT
The sale of shares pursuant to the Equity Line of Credit will have a
dilutive impact on our stockholders. As a result, our net income per share could
decrease in future periods, and the market price of our common stock could
decline. In addition, for a given advance, we will need to issue a greater
number of shares of common stock under the Equity Line of Credit as our stock
price declines. If our stock price is lower, then our existing stockholders
would experience greater dilution.
THE INVESTOR UNDER THE EQUITY LINE OF CREDIT WILL PAY LESS THAN THE
THEN-PREVAILING MARKET PRICE OF OUR COMMON STOCK
The common stock to be issued under the Equity Line of Credit will be
issued at a 9% discount to the lowest closing bid price for the 5 days
immediately following the notice date of an advance. These discounted sales
could cause the price of our common stock to decline.
THE SELLING STOCKHOLDERS INTEND TO SELL THEIR SHARES OF COMMON STOCK IN THE
PUBLIC MARKET, WHICH SALES MAY CAUSE OUR STOCK PRICE TO DECLINE
The selling stockholders intend to sell the shares of common stock
being registered in this offering in the public market. Such sales may cause our
stock price to decline.
THE SALE OF OUR STOCK UNDER OUR EQUITY LINE OF CREDIT COULD ENCOURAGE SHORT
SALES BY THIRD PARTIES, WHICH COULD CONTRIBUTE TO THE FURTHER DECLINE OF OUR
STOCK PRICE
The significant downward pressure on the price of our common stock caused
by the sale of significant amounts of common stock under the Equity Line of
Credit could encourage short sales by third parties. Such an event could place
further downward pressure on the price of our common stock.
OUR COMMON STOCK HAS BEEN RELATIVELY THINLY TRADED AND WE CANNOT PREDICT THE
EXTENT TO WHICH A TRADING MARKET WILL DEVELOP
Before this offering our common stock has traded on the
Over-the-Counter Bulletin Board. Our common stock is thinly traded compared to
larger more widely known companies in our industry. Thinly traded common stock
can be more volatile than common stock trading in an active public market. We
cannot predict the extent to which an active public market for the common stock
will develop or be sustained after this offering.
7
THE PRICE YOU PAY IN THIS OFFERING WILL FLUCTUATE AND MAY BE HIGHER OR LOWER
THAN THE PRICES PAID BY OTHER PEOPLE PARTICIPATING IN THIS OFFERING
The price in this offering will fluctuate based on the prevailing
market price of the common stock on the Over-the-Counter Bulletin Board.
Accordingly, the price you pay in this offering may be higher or lower than the
prices paid by other people participating in this offering.
THE ISSUANCE OF SHARES OF COMMON STOCK UNDER THIS OFFERING COULD RESULT IN A
CHANGE OF CONTROL
We are registering 79,828,683 shares of common stock in this offering.
These shares represent approximately 40% of our authorized capital stock, and we
anticipate all such shares will be sold in this offering. If all or a
significant block of these shares are held by one or more stockholders working
together, then such stockholder or stockholders would have enough shares to
assume control of Advanced Communications by electing its or their own
directors.
8
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus
may contain forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative of these words or other
variations on these words or comparable terminology.
This prospectus contains forward-looking statements, including
statements regarding, among other things, (a) our projected sales and
profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) our future financing plans and (e) our anticipated needs for
working capital. These statements may be found under "Management's Discussion
and Analysis or Plan of Operations" and "Business," as well as in this
prospectus generally. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under "Risk Factors" and
matters described in this prospectus generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this prospectus will in fact occur.
9
SELLING STOCKHOLDERS
The following table presents information regarding the selling
stockholders. The table identifies the selling stockholders and the type of
security or securities to be sold in this offering. None of the selling
stockholders have held a position or office, or had any other material
relationship, with Advanced Communications, except as follows:
o Cornell Capital Partners, L.P. is the investor under the Equity Line
of Credit and a holder of convertible debentures. All investment
decisions of Cornell Capital Partners are made by its general
partner, Yorkville Advisors, LLC. Mark Angelo, the managing member
of Yorkville Advisors, makes the investment decisions on behalf of
Yorkville Advisors.
o Westrock Advisors, Inc. is a registered broker/dealer that has been
retained by us. It has provided advice to us in connection with the
Equity Line of Credit. For its services, Westrock Advisors, Inc.
received a fee of 40,000 shares of Advanced Communications' common
stock, which is equal to $10,000 at a closing bid of $0.25 on
January 10, 2002. These shares were transferred to D. Christian
Southwick, Julia Oliver, Mark Sklar and Mitchel Sklar, each of whom
are employees of Westrock Advisors. These shares are being
registered in this offering.
o Robert Bends makes the investment decisions on behalf of Central
Florida Sales and Leasing.
o Bennie Williams makes the investment decisions on behalf of Morgan
Group.
The table follows:
PERCENTAGE OF PERCENTAGE OF
OUTSTANDING SHARES TO BE OUTSTANDING PERCENTAGE OF
SHARES SHARES ACQUIRED SHARES TO BE SHARES
BENEFICIALLY BENEFICIALLY UNDER THE ACQUIRED UNDER SHARES TO BE BENEFICIALLY
OWNED BEFORE OWNED BEFORE EQUITY LINE THE EQUITY LINE SOLD IN THE OWNED AFTER
SELLING STOCKHOLDER OFFERING OFFERING(1) OF CREDIT(2) OF CREDIT OFFERING OFFERING(1)
- ------------------- ------------ ------------- -------------- --------------- ------------- --------------
WARRANTS:
Anthony Castaldi 125,000 * -- -- 125,000 0.00%
Central Florida 125,000 * -- -- 125,000 0.00%
Sales and Leasing
David R. Osborne 200,000 * -- -- 200,000 0.00%
Frank Tremmel 125,000 * -- -- 125,000 0.00%
Fred S. Mann 125,000 * -- -- 125,000 0.00%
Gary Levy 125,000 * -- -- 125,000 0.00%
Jerome and 125,000 * -- -- 125,000 0.00%
Joanne Martin
John C. Roberson 125,000 * -- -- 125,000 0.00%
Johnny & Janice 250,000 * -- -- 250,000 0.00%
Greene
Leslie Rosenberg 375,000 * -- -- 375,000 0.00%
Melissa Graybeal 125,000 * -- -- 125,000 0.00%
Michael Jones 62,500 * -- -- 62,500 0.00%
Michael Jones & 125,000 * -- -- 125,000 0.00%
Thomas Smith
Morgan Group 2,000,000 1.91% -- -- 2,000,000 0.00%
Paul & Debra Hale 187,500 * -- -- 187,500 0.00%
Paul M. Troop 325,000 * -- -- 325,000 0.00%
R. William Timberman 560,000 * -- -- 560,000 0.00%
Raj Selvaraju 375,000 * -- -- 375,000 0.00%
Ronald Coletta 280,900 * -- -- 280,900 0.00%
Sean R. Repko 125,000 * -- -- 125,000 0.00%
Theodore & 125,000 * -- -- 125,000 0.00%
Claudia Jones
10
PERCENTAGE OF PERCENTAGE OF
OUTSTANDING SHARES TO BE OUTSTANDING PERCENTAGE OF
SHARES SHARES ACQUIRED SHARES TO BE SHARES
BENEFICIALLY BENEFICIALLY UNDER THE ACQUIRED UNDER SHARES TO BE BENEFICIALLY
OWNED BEFORE OWNED BEFORE EQUITY LINE THE EQUITY LINE SOLD IN THE OWNED AFTER
SELLING STOCKHOLDER OFFERING OFFERING(1) OF CREDIT(2) OF CREDIT OFFERING OFFERING(1)
- ------------------- ------------ ------------- -------------- --------------- ------------- --------------
Victoria Lichtman 125,000 * -- -- 125,000 0.00%
Wayne Madden 325,000 * -- -- 325,000 0.00%
------------ ---------- ------------ -------- ------------- ------------
Total Shares
Underlying Warrants 6,440,900 5.91% -- -- 6,440,900 0.00%
------------ ---------- ------------ -------- ------------- ------------
COMMON STOCK:
Alberto Monteiro 160,000 * -- -- 160,000 0.00%
Eduardo Acosta 160,000 * -- -- 160,000 0.00%
James Rennie 34,449 * -- -- 34,449 0.00%
Robert H. Groman 11,111 * -- -- 11,111 0.00%
Richard R. Ross 11,111 * -- -- 11,111 0.00%
Russell G. Tisman 11,112 * -- -- 11,112 0.00%
D. Christian Southwick 16,000 * -- -- 16,000 0.00%
Julia Oliver 16,000 * -- -- 16,000 0.00%
Mark Sklar 4,000 * -- -- 4,000 0.00%
Mitchel Sklar 4,000 * -- -- 4,000 0.00%
------------ ---------- ------------ -------- ------------- ------------
Total Shares
of Common Stock 427,783 * -- -- 427,783 0.00%
------------ ---------- ------------ -------- ------------- ------------
DEBENTURES:
Eric Brager 100,000 * -- -- 100,000 0.00%
Mary Ellen Misiak 1,500,000 1.44% -- -- 1,500,000 0.00%
Connie Benesch 500,000 * -- -- 500,000 0.00%
Adam Denish 150,000 * -- -- 150,000 0.0%
Paul Denish 300,000 * -- -- 300,000 0.0%
Dr. Gerald Holland 1,100,000 1.06% -- -- 1,100,000 0.00%
Doree Kesselbrenner
(For Sarah Kesselbrenner) 110,000 * -- -- 110,000 0.00%
Doree
Kesselbrenner
(For David Kesselbrenner) 110,000 * -- -- 110,000 0.00%
Doree
Kesselbrenner
(For Joseph Kesselbrenner) 110,000 * -- -- 110,000 0.00%
Doree
Kesselbrenner
(For Louis Kesselbrenner) 110,000 * -- -- 110,000 0.00%
Roger Mischel 200,000 * -- -- 200,000 0.00%
Robert Benson 50,000 * -- -- 50,000 0.00%
Kent Chou 150,000 * -- -- 150,000 0.00%
Steve Severance 150,000 * -- -- 150,000 0.00%
Craig Moss 35,000 * -- -- 35,000 0.00%
Meir Levin 325,000 * -- -- 325,000 0.00%
------------ ---------- ------------ -------- ------------- ------------
Total Shares
Underlying Debentures 10,000,000 8.89% -- -- 10,000,000 0.00%
11
PERCENTAGE OF PERCENTAGE OF
OUTSTANDING SHARES TO BE OUTSTANDING PERCENTAGE OF
SHARES SHARES ACQUIRED SHARES TO BE SHARES
BENEFICIALLY BENEFICIALLY UNDER THE ACQUIRED UNDER SHARES TO BE BENEFICIALLY
OWNED BEFORE OWNED BEFORE EQUITY LINE THE EQUITY LINE SOLD IN THE OWNED AFTER
SELLING STOCKHOLDER OFFERING OFFERING(1) OF CREDIT(2) OF CREDIT OFFERING OFFERING(1)
- ------------------- ------------ ------------- -------------- --------------- ------------- --------------
COMMON STOCK
AND DEBENTURES:
Cornell Capital 2,960,000 7.54% 60,000,000 38.74% 62,960,000 0.00%
Partners, L.P.
------------ ---------- ------------ -------- -------------- ------------
Total Shares
of Common Stock
and Underlying Debentures 2,960,000 7.54% 60,000,000 38.74% 62,960,000 0.00%
------------ ---------- ------------ -------- -------------- ------------
GRAND TOTAL 19,828,683 16.21% 60,000,000 36.92% 79,828,683 0.00%
============= ========== ============ ======== ============== ===========
- -------------------
* Less than 1%.
(1) Applicable percentage of ownership is based on 102,530,897 shares of
common stock outstanding as of February 15, 2002, together with securities
exercisable or convertible into shares of common stock within 60 days of
February 15, 2002, for each stockholder. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect
to securities. Shares of common stock subject to securities exercisable or
convertible into shares of common stock that are currently exercisable or
exercisable within 60 days of February 15, 2002, are deemed to be
beneficially owned by the person holding such securities for the purpose
of computing the percentage of ownership of such person, but are not
treated as outstanding for the purpose of computing the percentage
ownership of any other person. The common stock is the only outstanding
class of equity securities of Advanced Communications.
(2) The number of shares of common stock available under the Equity Line of
Credit may be increased to a maximum of 70,000,000 shares of common stock
if none of the outstanding debentures are converted into shares of common
stock.
12
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by certain selling stockholders. There will be no
proceeds to us from the sale of shares of common stock in this offering.
However, we will receive the proceeds from the sale of shares of common stock to
Cornell Capital Partners, L.P. under the Equity Line of Credit. The purchase
price of the shares purchased under the Equity Line of Credit will be equal to
91% of the lowest closing bid price of our common stock on the Over-the-Counter
Bulletin Board for the 5 days immediately following the notice date.
For illustrative purposes, we have set forth below our intended use of
proceeds for the range of net proceeds indicated below to be received under the
Equity Line of Credit. The table assumes estimated offering expenses of $85,000
and 3% retention of the gross proceeds raised under the Equity Line of Credit.
GROSS PROCEEDS $10,000,000 $20,000,000 $30,000,000
NET PROCEEDS $9,615,000 $19,315,000 $29,015,000
USE OF PROCEEDS: AMOUNT AMOUNT AMOUNT
- ------------------------------------------------------------------------------------------
Repayment of Affiliated Loan $1,800,000 $1,800,000 $1,800,000
Sales and Marketing 2,500,000 5,000,000 7,500,000
Administrative Expenses, Including Salaries 1,000,000 1,500,000 2,000,000
Accounts Payable 1,750,000 2,000,000 2,250,000
Future Acquisitions 2,000,000 8,000,000 13,500,000
General Working Capital 565,000 1,015,000 1,965,000
--------- --------- -----------
TOTAL $9,615,000 $19,315,000 $29,015,000
========== =========== ===========
Any proceeds received upon issuance of outstanding options or warrants
will be used for general working capital purposes.
13
DILUTION
The net tangible book value of our company as of December 31, 2001 was
($4,630,420) or ($0.0452) per share of common stock. Net tangible book value per
share is determined by dividing the tangible book value of our company (total
tangible assets less total liabilities) by the number of outstanding shares of
our common stock. Since this offering is being made solely by the selling
stockholders and none of the proceeds will be paid to our company, our net
tangible book value will be unaffected by this offering. Our net tangible book
value, however, will be impacted by the common stock to be issued under the
Equity Line of Credit. The amount of dilution will depend on the offering price
and number of shares to be issued under the Equity Line of Credit. The following
example shows the dilution to new investors at an offering price of $0.13 per
share.
If we assume that our company had issued 70,000,000 shares of common stock
under the Equity Line of Credit at an assumed offering price of $0.13 per share
(i.e., the maximum number of shares registered in this offering under the Equity
Line of Credit, which number of shares assumes none of the debentures will be
converted into shares of common stock), less retention fees of $273,000 and
offering expenses of $85,000, our net tangible book value as of December 31,
2001 would have been $4,111,580 or $0.0238 per share. Note that at an offering
price of $0.13 per share, Advanced Communications would receive gross proceeds
of $9,100,000, $20,900,000 less than is available under the Equity Line of
Credit. Such an offering would represent an immediate increase in net tangible
book value to existing stockholders of $0.069 per share and an immediate
dilution to new stockholders of $0.1062 per share. The following table
illustrates the per share dilution:
Assumed public offering price per share $0.1300
Net tangible book value per share before this offering ($0.0452)
Increase attributable to new investors $0.0690
-----------
Net tangible book value per share after this offering $0.0238
---------
Dilution per share to new stockholders $0.1062
=========
The offering price of our common stock is based on the then-existing market
price. In order to give prospective investors an idea of the dilution per share
they may experience, we have prepared the following table showing the dilution
per share at various assumed offering prices:
DILUTION PER
ASSUMED NO. OF SHARES SHARE TO NEW
OFFERING PRICE TO BE ISSUED(1) INVESTORS
---------------- ----------------- --------------
$0.1950 70,000,000 $0.1456
$0.1625 70,000,000 $0.1259
$0.1300 70,000,000 $0.1062
$0.0975 70,000,000 $0.0865
$0.0650 70,000,000 $0.0667
$0.0325 70,000,000 $0.0470
- -------------------
(1) This represents the maximum number of shares of common stock that will be
be registered under the Equity Line of Credit.
14
EQUITY LINE OF CREDIT
Summary. In January 2002, we entered into an Equity Line of Credit with
Cornell Capital Partners, L.P. Pursuant to the Equity Line of Credit, we may, at
our discretion, periodically sell to Cornell Capital Partners shares of common
stock for a total purchase price of up to $30.0 million. For each share of
common stock purchased under the Equity Line of Credit, Cornell Capital Partners
will pay 91% of the lowest closing bid price of our common stock on the
Over-the-Counter Bulletin Board or other principal market on which our common
stock is traded for the 5 days immediately following the notice date. Cornell
Capital Partners is a private limited partnership whose business operations are
conducted through its general partner, Yorkville Advisors, LLC. Further, Cornell
Capital Partners will retain a fee of 3% of each advance under the Equity Line
of Credit. In addition, we engaged Westrock Advisors, Inc., a registered
broker-dealer, to advise us in connection with the Equity Line of Credit. For
its services, Westrock Advisors, Inc. received 40,000 shares of our common
stock. The effectiveness of the sale of the shares under the Equity Line of
Credit is conditioned upon us registering the shares of common stock with the
Securities and Exchange Commission. The costs associated with this registration
will be borne by us.
Equity Line of Credit Explained. Pursuant to the Equity Line of Credit, we
may periodically sell shares of common stock to Cornell Capital Partners, L.P.
to raise capital to fund our working capital needs. The periodic sale of shares
is known as an advance. We may request an advance every 5 trading days. A
closing will be held 7 trading days after such written notice at which time we
will deliver shares of common stock and Cornell Capital Partners, L.P. will pay
the advance amount, less the 3% retention.
We may request advances under the Equity Line of Credit once the underlying
shares are registered with the Securities and Exchange Commission. Thereafter,
we may continue to request advances until Cornell Capital Partners has advanced
$30.0 million or two years after the effective date of the accompanying
registration statement, whichever occurs first.
The amount of each advance is subject to an aggregate maximum advance
amount of $2 million in any thirty-day period. The amount available under the
Equity Line of Credit is not dependent on the price or volume of our common
stock.
We cannot predict the actual number of shares of common stock that will be
issued pursuant to the Equity Line of Credit, in part, because the purchase
price of the shares will fluctuate based on prevailing market conditions and we
have not determined the total amount of advances we intend to draw. Nonetheless,
we can estimate the number of shares of our common stock that will be issued
using certain assumptions. Assuming we issued the maximum number of shares of
common stock being registered in the accompanying registration statement at a
recent price of $0.13 per share, we would issue 70,000,000 shares of common
stock to Cornell Capital Partners, L.P. for gross proceeds of $9,100,000, or
$20,900,000 less than is available under the Equity Line of Credit. These shares
would represent 41% of our outstanding common stock upon issuance. We are
registering 70,000,000 shares of common stock for the sale under the Equity Line
of Credit and the conversion of debentures. Accordingly, we would need to
register additional shares of common stock in order to fully utilize the $30.0
million available under the Equity Line of Credit at the current price of $0.13
per share.
The issuance of shares under the Equity Line of Credit may result in a
change of control. That is, up to 60,000,000 shares of common stock could be
issued under the Equity Line of Credit (i.e., the maximum number of shares being
registered in the accompanying registration statement). If all or a significant
block of these shares are held by one or more stockholders working together,
then such stockholder or stockholders would have enough shares to assume control
of Advanced Communications by electing its or their own directors.
Proceeds used under the Equity Line of Credit will be used in the manner
set forth in the "Use of Proceeds" section of this prospectus. We cannot predict
the total amount of proceeds to be raised in this transaction because we have
not determined the total amount of the advances we intend to draw.
We expect to incur expenses of approximately $85,000 in connection with
this registration, consisting primarily of professional fees. In addition,
Cornell Capital Partners will retain 3% of each advance. In connection with the
Equity Line of Credit, we paid Cornell Capital Partners a commitment fee of
$740,000, which was paid by the issuance of 2,960,000 shares of common stock.
The number of shares issued for the commitment fee was equal to $0.25 per share.
In addition, we issued 40,000 shares of common stock, valued at $10,000, to
Westrock Advisors, Inc., a registered broker-dealer, as a placement agent fee.
15
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution of
our common stock owned by the selling stockholders may be effected directly to
purchasers by the selling stockholders or by pledgees, donees, transferees or
other successors in interest, as principals or through one or more underwriters,
brokers, dealers or agents from time to time in one or more transactions (which
may involve crosses or block transactions) (i) on the over-the-counter market or
in any other market on which the price of our shares of common stock are quoted
or (ii) in transactions otherwise than on the over-the-counter market or in any
other market on which the price of our shares of common stock are quoted. Any of
such transactions may be effected at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at varying prices
determined at the time of sale or at negotiated or fixed prices, in each case as
determined by the selling stockholders or by agreement between the selling
stockholders and underwriters, brokers, dealers or agents, or purchasers. If the
selling stockholders effect such transactions by selling their shares of common
stock to or through underwriters, brokers, dealers or agents, such underwriters,
brokers, dealers or agents may receive compensation in the form of discounts,
concessions or commissions from the selling stockholders or commissions from
purchasers of common stock for whom they may act as agent (which discounts,
concessions or commissions as to particular underwriters, brokers, dealers or
agents may be in excess of those customary in the types of transactions
involved). The selling stockholders and any brokers, dealers or agents that
participate in the distribution of the common stock may be deemed to be
underwriters, and any profit on the sale of common stock by them and any
discounts, concessions or commissions received by any such underwriters,
brokers, dealers or agents may be deemed to be underwriting discounts and
commissions under the Securities Act.
Cornell Capital Partners, L.P. is an "underwriter" within the meaning of
the Securities Act of 1933 in connection with the sale of common stock under the
Equity Line of Credit. Cornell Capital Partners, L.P. will pay us 91% of the
lowest closing bid price of our common stock on the Over-the-Counter Bulletin
Board or other principal trading market on which our common stock is traded for
the 5 days immediately following the advance date. In addition, Cornell Capital
Partners will retain 3% of the proceeds received by us under the Equity Line of
Credit, plus a one-time commitment fee of $740,000 which was paid by the
issuance of 2,960,000 shares of common stock. The 9% discount, the 3% retention,
and the one-time commitment fee are underwriting discounts. In addition, we
engaged Westrock Advisors, Inc., a registered broker-dealer, to advise us in
connection with the Equity Line of Credit. For its services, Westrock Advisors,
Inc. received 40,000 shares of our common stock.
Cornell Capital Partners, L.P. was formed in February 2000 as a Delaware
limited partnership. Cornell Capital Partners is a domestic hedge fund in the
business of investing in and financing public companies. Cornell Capital
Partners does not intend to make a market in our stock or to otherwise engage in
stabilizing or other transactions intended to help support the stock price.
Prospective investors should take these factors into consideration before
purchasing our common stock.
Under the securities laws of certain states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. The selling stockholders are advised to ensure that any underwriters,
brokers, dealers or agents effecting transactions on behalf of the selling
stockholders are registered to sell securities in all fifty states. In addition,
in certain states the shares of common stock may not be sold unless the shares
have been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public hereunder other than
commissions, fees and discounts of underwriters, brokers, dealers and agents. We
have agreed to indemnify Cornell Capital Partners and its controlling persons
against certain liabilities, including liabilities under the Securities Act. We
estimate that the expenses of the offering to be borne by us will be
approximately $85,000, and a one-time fee of $740,000 payable in common stock.
In addition, we engaged Westrock Advisors, Inc., a registered broker-dealer, to
advise us in connection with the Equity Line of Credit. For its services,
Westrock Advisors, Inc. received 40,000 shares of our common stock. The offering
expenses consist of: a SEC registration fee of $955, printing expenses of
$2,500, accounting fees of $15,000, legal fees of $50,000 and miscellaneous
expenses of $16,545. We will not receive any proceeds from the sale of any of
the shares of common stock by the selling stockholders. We will, however,
receive proceeds from the sale of common stock under the Equity Line of Credit.
16
The selling stockholders should be aware that the anti-manipulation
provisions of Regulation M under the Exchange Act will apply to purchases and
sales of shares of common stock by the selling stockholders, and that there are
restrictions on market-making activities by persons engaged in the distribution
of the shares. Under Registration M, the selling stockholders or their agents
may not bid for, purchase, or attempt to induce any person to bid for or
purchase, shares of our common stock while such selling stockholders are
distributing shares covered by this prospectus. Accordingly, except as noted
below, the selling stockholders are not permitted to cover short sales by
purchasing shares while the distribution is taking place. Cornell Capital
Partners can cover any short positions only with shares received from us under
the Equity Line of Credit. The selling stockholders are advised that if a
particular offer of common stock is to be made on terms constituting a material
change from the information set forth above with respect to the Plan of
Distribution, then, to the extent required, a post-effective amendment to the
accompanying registration statement must be filed with the Securities and
Exchange Commission.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following information should be read in conjunction with the
consolidated financial statements of Advanced Communications and the notes
thereto appearing elsewhere in this filing. Statements in this Management's
Discussion and Analysis or Plan of Operation and elsewhere in this prospectus
that are not statements of historical or current fact constitute
"forward-looking statements."
OVERVIEW
Advanced Communications was incorporated in Florida on April 30, 1998 and
will license and distribute a product called SpectruCell, once it is
commercially available. We are a party to a license and distribution agreement
for SpectruCell, a wireless software based communications platform that offers
mobile communications network providers the flexibility of processing and
transmitting multiple wireless communication signals through one base station.
The SpectruCell product, which is based on the Software Defined Radio ("SDR")
platform, will allow wireless communication network providers with the ability
to not only direct multiple wireless frequencies (AMPS, CDMA, GSM, Mobile IP,
Voice IP, etc.) through one base station but will also provide flexibility for
future spectrum upgrades to 3G. We believe that the SpectruCell technology is
the only Software Defined Radio based technology with the capability of
providing flexibility in commercial, industrial and military wireless
communications. Without SpectruCell, network carriers would need to provide
separate base stations and/or networks for each wireless frequency. The
SpectruCell product is being developed by our affiliated entity, Advanced
Communications Technologies, Pty (Australia), an entity in which we own 20%. Our
license and distribution agreement encompasses a territory comprising North,
Central and South America and is for an indefinite period. It grants us the
exclusive right to license, market and distribute SpectruCell and other products
being developed by our affiliated entity throughout the North, Central and South
American territories.
We currently have no other products for licensing and/or distribution,
other than SpectruCell and other products being developed for sale and/or
license by our Australian affiliate. Based on information available to us, we
believe that SpectruCell is expected to be available for commercial license and
distribution in the fourth quarter 2002.
We expect to generate revenue from the marketing and distribution of the
SpectruCell product under our license agreement. We will not manufacture
SpectruCell in the U.S., but will instead be the exclusive distributor of
SpectruCell in the North and South America.
PLAN OF OPERATION
We had no revenues from operations in each of the last two fiscal years,
or the last fiscal year and the six months ended December 31, 2001. As such, we
are required to provide a Plan of Operation.
Over the next 12 months, we intend to pursue the marketing and
distribution of the SpectruCell product after it is commercially tested. In this
regard, we intend to support our Australian affiliate in the financial cost of
this endeavor. Moreover, we fully intend to pursue active negotiations with our
Australian affiliate to acquire the worldwide rights to SpectruCell and other
technologies currently being developed by our Australian affiliate under the
Letter of Intent dated as of September 7, 2001. Because we believe that
SpectruCell will not be ready for commercial marketing and distribution until
the fourth quarter of 2002, we are actively pursuing discussions with both
private and public companies to acquire a majority interest in these businesses.
As of this date, we do not have any agreements for an acquisition. While we have
determined to seek acquisition candidates in the telecommunications industry is
our preferred objective, we are not limiting our activities solely to this
industry. We believe that given the current economic climate, there are a
substantial number of business opportunities to pursue in industries other than
telecommunications. The equity line will be used not only for general working
capital needs, but also to support the SpectruCell product, the potential
acquisition of the worldwide rights to SpectruCell and possible strategic
acquisitions.
We intend to continue to keep our infrastructure and overhead costs to
a minimum until such time as we generate revenues from SpectruCell or other
operations. Thereafter, we intend to expand our sales and marketing
activities to promote our SpectruCell and other operations.
CHANGES IN NUMBER OF EMPLOYEES
We do not anticipate any significant changes in the number of employees.
RESEARCH AND DEVELOPMENT
We do not anticipate any research and development expenses over the next
12 months.
PLANT AND EQUIPMENT
We do not anticipate plant and equipment expenses over the next 12 months.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and the related notes and the other financial information appearing
elsewhere in this report.
GOING CONCERN
Our consolidated financial statements for the year ended June 30, 2001
have been prepared on a going concern basis, which contemplates the realization
18
of assets and the settlement of liabilities and commitments in the normal course
of business. We incurred a net loss of $19,732,566 for the year ended June 30,
2001, a working capital deficiency of $2,421,719, and a stockholders' deficiency
of $2,569,792.
Our ability to continue as a going concern is dependent on our ability to
raise additional capital and implement its business plan. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
SIX MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THE SIX MONTHS ENDED DECEMBER
31, 2000
For the six months ended December 31, 2001, we incurred an overall net
loss of ($1,108,218) or ($.01) per share, as compared to an overall net loss of
($1,680,377) or ($.02) per share, for the comparative six months ended December
31, 2000. The overall net loss for the six months ended December 31, 2001 was
34% less than the net loss for the six months ended December 31, 2000.
REVENUE AND COST OF SALES
We did not generate any revenue for the six months ended December 31,
2001. Revenue for the six-months ended December 31, 2000 was $50,000 and was
realized entirely from our subsidiary's then operational U.S.-Pakistan
international telephone distribution network. Cost of sales attributable to
telephone network revenue was $57,310 for the six-months ended December 31,
2000.
OPERATING EXPENSES
Operating expenses, net of stock-based compensation charges of $60,000 for
the six months ended December 31, 2001, were $1,043,012 and represent a $269,645
decrease, or 21%, in operating costs, net of stock-based compensation charges of
$146,120 for the six months ended December 31, 2000.
OTHER INCOME (EXPENSE)
Interest expense incurred for the six months ended December 31, 2001 was
$5,206. We incurred no interest expense for the comparative six months ended
December 31, 2000.
Other income (loss) for the six months ended December 31, 2000 includes
our share, determined under the equity method of accounting, of our Australian
affiliates operating loss of ($237,290). No loss was reported for the
comparative period ended December 31, 2001, as our investment in our Australian
affiliate was written down to zero as of June 30, 2001 and we are no longer
required to record our share of our Australian affiliates loss until our
investment becomes positive. We realized no extraordinary gain or loss during
the six-months ended December 31, 2001. Extraordinary gain for the six months
ended December 31, 2001 includes $23,000 of gain on the extinguishments of our
obligation to our Australian affiliate that was partially repaid with common
stock valued in excess of the then market price.
YEAR ENDED JUNE 30, 2001 COMPARED TO YEAR ENDED JUNE 30, 2000
REVENUE
We realized nominal revenue during the year from sales of international
telephone services into Pakistan through our international network providers. We
ceased operating our international telephone services network during the year
because of regulatory difficulties we encountered in our target market. We did
not realize any revenue from the sale and/or license of the SpectruCell product
as such product was not ready to be commercially sold in our territory.
OPERATING EXPENSES
Total operating expenses for the fiscal years ended June 30, 2001 and June
30, 2000 were $3,334,581 and $4,635,186, respectively, and represents a decrease
of $1,300,605 from the prior fiscal year. This decrease is primarily
attributable to a decrease in professional fees of $1,214,739 and $3,409,038
respectively, which decrease was partially offset by an increase in depreciation
and amortization of $800,674. For the year ended June 30, 2001, operating
expenses primarily c
19
OTHER INCOME (EXPENSE)
Total other expense increased by $15,661,366 in the year ended June 30,
2001, from $752,309 to $16,413,675. This increase was primarily due to an
increase in loss from investment of $3,571,654, loss from impairment of goodwill
of $12,399,864 and loss on investment acquisition deposit of $425,000.
EXTRAORDINARY GAIN
Extraordinary gain for the fiscal year ended June 30, 2001 included a
$23,000 gain on the issuance of our restricted common stock to vendors of our
Australian affiliate in excess of the then current market value. In fiscal 2000,
we realized extraordinary gains of $242,561 on the extinguishments of prior
shareholder loans in exchange for 600,000 of our restricted common stock, and
$34,507 on the settlement of the Grassland loan payable.
NET LOSS
Net loss was $(19,732,566), or $(0.22) per share, in the three months
ended June 30, 2001, compared to $5,110,427, or $(0.07) per share, in the
comparable period in the prior year. This increase in net loss is primarily
attributable to an increase in loss from investment of $3,571,654 and loss from
impairment of goodwill of $12,399,864.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through the sale of
common stock and convertible debentures and from unsecured loans from our major
shareholder. We have raised approximately $2,900,000 before offering costs
through the sale of these securities and have borrowed $992,736 from our
principal shareholder.
At December 31, 2001, our cash and cash equivalents balance was $116,061,
an increase of $109,245 from the balance of $6,816 at June 30, 2001. During the
six months ended December 31, 2001, cash provided by (used in) operations
amounted to ($398,961). Cash provided by (used in) investing activities was
($25,000). Cash provided by financing activities during the six months ended
December 31, 2001 amounted to $533,206 and consisted of $196,736 of unsecured
loans from our principal shareholder, $130,000 from the sale of common stock and
warrants pursuant to our Reg. D Section 506 private offering and $325,000 of
proceeds from the short-term loan from Cornell Capital Partners, LP. For the
comparative six-month period ended December 31, 2000, no cash was provided by
operations as all of our operations during this period were financed via
unsecured loans from our principal shareholder and proceeds from the sale of
stock that we used to partially repay our Grassland obligation. We had a working
capital deficiency in the amount of ($2,870,078) and ($1,839,866), respectively,
for the six-month periods ended December 31, 2001 and December 31, 2000.
On August 14, 2001, we filed a S-1 Registration Statement to register
37,500,000 of our shares in connection with our proposed $12,000,000 equity line
credit facility with Ladenburg Thalmann & Co., Inc. and Wanquay Limited. Based
on comments received by the SEC relating to the terms and conditions of the
proposed equity line and on advice of counsel, on November 30, 2001, we withdrew
the Registration Statement with the SEC. Advanced Communications intends to
terminate this equity line of credit facility.
On December 13, 2001, we entered into a 90-day $325,000 Promissory Note
(the "Note") with Cornell Capital Partners, LP. The Note had an interest rate of
12% and was secured by a Guaranty and Pledge Agreement executed by Messrs.
Danson, Lichtman and Prouty. We realized $269,000 of net proceeds after
financing costs and legal fees. The Note was repaid on January 14, 2002 with
proceeds from Advanced Communications' $1 million Convertible Debentures.
On January 10, 2002, we executed various financing agreements with Cornell
Capital Partners, LP ("Cornell"), a New Jersey-based hedge fund whereby Cornell
and certain other investors purchased from us $1 million of two-year Convertible
Debentures and Cornell entered into a $30 million structured equity facility.
Pursuant to the Convertible Debenture financing, we received $564,000 net of
financing and closing costs and the repayment of the $325,000 ninety-day note.
Under the terms of the $30 million structured equity facility, we have the right
to require Cornell to make monthly purchases of up to $2 million of our stock on
a discounted basis.
Our anticipated cash needs over the next 12 months consist of general
working capital needs of $1,200,000, plus the repayment of outstanding
indebtedness of $2,671,773. These obligations include outstanding secured
convertible debentures in an amount of $200,750 that are subject of a pending
lawsuit brought by the lenders, as well as accounts payable and accrued expenses
of $847,737, accrued compensation of $566,550 and a loan payable to a
shareholder of $992,736.
20
In addition, our company has a note payable to our Australian affiliate of
$1,791,166 at December 31, 2001.
We anticipate that our cash needs over the next 12 months will come
primarily from the sale of securities or loans, including the Equity Line of
Credit. Pursuant to the Equity Line of Credit, we may periodically issue and
sell to Cornell Capital Partners, L.P. shares of common stock for a total
purchase price of $30 million. The amount of each advance is subject to an
aggregate maximum advance amount of $2 million in any thirty-day period. Cornell
Capital Partners, L.P. will purchase the shares of common stock for a 9%
discount to the prevailing market price of our common stock. In addition,
Cornell Capital Partners may retain 3% of each advance under the Equity Line of
Credit. Cornell Capital Partners intends to sell any shares purchased under the
Equity Line of Credit at the then prevailing market price. Except for the Equity
Line of Credit, we have no commitments for capital.
Our ability to draw upon the Equity Line of Credit is conditioned upon our
company registering with the SEC the shares of common stock to be issued under
the Equity Line of Credit.
On September 30, 1999, Advanced Communications entered into secured
convertible debentures purchase agreement with two companies, which were
stockholders of Advanced Communications, whereby Advanced Communications sold
$500,000 of 12% Secured Convertible Debentures due April 1, 2000, which were
convertible into shares of Advanced Communications' Common Stock. In addition,
on September 30, 1999, Advanced Communications issued another convertible
debenture to an unrelated party in the amount of $150,000. The debentures were
convertible, at the holder's option, into shares of common stock in whole or in
part at any time after the original issue date. The number of shares of common
stock issuable upon a conversion was to be determined by dividing the
outstanding principal amount of the debenture to be converted, plus all accrued
interest, by the conversion price. The conversion price in effect on any
conversion date is 50% of the average of the bid price during the twenty trading
days immediately preceding the applicable conversion date.
The convertible debentures contained a beneficial conversion feature
computed at its intrinsic value which is the difference between the conversion
price and the fair value on the debenture issuance date of the common stock into
which the debt is convertible, multiplied by the number of shares into which the
debt is convertible at the commitment date. Since the beneficial conversion
feature is to be settled by issuing equity, the amount attributed to the
beneficial conversion feature, of $650,000, was recorded as an interest expense
and a component of equity on the issuance date during the fiscal year ended June
30, 2000.
During December 2000, holders of $412,800 of convertible debentures
elected to convert their notes into 1,803,545 of Advanced Communications'
restricted common stock. Advanced Communications further reduced these bonds
payable by offsetting a related bond receivable in the amount of $36,450.
As of December 31, 2001 and June 30, 2001, $200,750 of Secured Convertible
Debentures are still outstanding. Advanced Communications is in default based on
the April 1, 2000 due date and Advanced Communications is currently in
litigation with these bondholders
During December 1997, MFI, Advanced Communications' former name, issued
75,000 of its common shares to settle the amounts due, which was $150,000 to a
company (the "Payee") pursuant to a convertible promissory note (the "Grassland
Note"). However, a dispute arose as to whether the Payee authorized the issuance
of the shares. The Payee filed a suit during December 1997 to enforce the
convertible promissory note. Total interest payable was $84,507 as of June 30,
2000 resulting in the total principal and accrued interest payable at June 30,
2000 of $234,507. In June 2000, the parties agreed to settle the matter for a
payment of $200,000. This resulted in a gain on extinguishment of debt in the
amount of $34,507. Advanced Communications made a payment of $50,000 by June 30,
2000. The $150,000 remainder was to be paid with proceeds from the 75,000 shares
of stock and any remaining balance to be paid by Advanced Communications. The
revised obligation was to be paid by August 14, 2000. Advanced Communications
defaulted on this revised payment obligation and a judgment against Advanced
Communications was entered. In October 2000, Advanced Communications sold the
75,000 shares of stock realizing $41,802 which it remitted in partial repayment
of its outstanding debt. As of June 30, 2001, Advanced Communications' remaining
balance and accrued interest on this obligation was $118,530. An additional
$4,206 of interest was accrued on this note and on October 19, 2001 Advanced
Communications paid the obligation in full. On October 24, 2001, the court
issued its notice of satisfaction and release.
Advanced Communications had a non-interest bearing note payable to an
affiliate of $7,500,000 as of April 5, 2000. The following schedule represents
payments on such debt by issuance of restricted common stock to either the
affiliate or creditors of the affiliate. Such transactions were recorded at the
market price of the stock at date of issuance.
21
SHARES OF
COMMON STOCK
DATE ISSUED VALUE
September 2000 5,000,000 $ 3,500,000
October 2000(1) 460,000 460,000
June 2001 1,137,000 567,100
September 2001 1,190,000 357,001
--------- -------
7,787,000 $ 4,884,101
========= =========
(1) This transaction resulted in a gain on extinguishment of debt of
$23,000.
During the year ended June 30, 2001 Advanced Communications repaid an
aggregate of $247,608 of the obligation in cash. During the three-month period
ended September 2001, Advanced Communications repaid $25,000 of the obligation
in cash. No payments on the note were made during the three months ended
December 31, 2001.
Pursuant to the terms of the April 5, 2000 Stock Purchase Agreement
between Advanced Communications and our Australian affiliate, Advanced
Communications has elected to reduce its outstanding loan balance by $552,125
for funds previously advanced to our Australian Affiliate.
As of December 31, 2001, the balance of Advanced Communications'
obligation to our Australia affiliate was $1,791,166. Advanced Communications is
currently in litigation with our Australian affiliate regarding the timing for
the repayment of Advanced Communications' obligation.
As of December 31, 2001, Advanced Communications owed a principal
shareholder $992,736 for funds advanced to Advanced Communications to provide
working capital and for the repayment of certain of Advanced Communications'
obligations. This loan is non-interest bearing and unsecured.
On December 13, 2001 Advanced Communications entered into a 90-day
$325,000 Promissory Note (the "Note") with Cornell Capital Partners, LP. The
Note had an interest rate of 12% and was secured by a Guaranty and Pledge
Agreement executed by Messrs. Danson, Lichtman and Prouty. Advanced
Communications realized $269,000 of net proceeds after financing costs and legal
fees. The Note was repaid on January 14, 2002 with proceeds from Advanced
Communications' $1 million Convertible Debenture.
During the period of December 2000 to August 2001, pursuant to a private
placement under Regulation D, Rule 506, Advanced Communications issued 3,060,600
shares of common stock and 3,060,000 warrants at $.30 per share. Advanced
Communications received $1,168,180 from investors, which included $250,000 for
stock not yet issued as of June 30, 2001 and $275,454 for warrants.
Advanced Communications issued 250,000 shares of common stock, valued at
$75,000, in payment of offering costs incurred. The value assigned to this stock
was based on the private placement memorandum of $.30 per share. The value of
the common stock has been charged to equity as direct costs of the offering.
The fair market value of the warrants, aggregating $275,454 and $110,000
at June 30, 2001 and September 30, 2001, respectively, was estimated on the
grant date using the Black-Scholes option pricing model as required under FASB
123 with the following weighted average assumptions: expected dividend yield 0%,
volatility 49.84%, risk-free interest rate 4.22%, expected option life 2 years.
At December 31, 2001, no warrants have been exercised.
During the three months ended September30, 2001, Advanced Communications
received the balance of the offering proceeds and issued an additional 1,233,333
shares of its restricted common stock and associated warrants.
On February 27, 2002, our Board of Directors approved a resolution to
reprice the private placement offering from $0.30 per share to $0.20 per share.
This repricing will result in the issuance of an additional 2,146,967 shares of
common stock and warrants to the private placement investors. These additional
shares are included in the number of shares that we are registering for these
selling shareholders. The exercise price of the underlying warrants will remain
at $0.30 per share.
During the three months ended December 31, 2001, Advanced Communications
issued 137,727 shares of common stock, valued at $41,318 in payment of offering
22
costs incurred. The value assigned to this stock was based on the private
placement memorandum of $.30 per share. The value of the common stock has been
charged to equity as direct costs to the offering.
We believe that the financings described above will provide us with
sufficient capital to meet our immediate and long term capital needs with
respect to our plans to purchase the worldwide rights to SpectruCell from our
Australian affiliate, distribute and market SpectruCell throughout the U.S and
other world markets as well as implement other acquisition and growth strategies
in the communications industry.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 11, 2001 a Special Meeting of Stockholders was held in
Irvine, California. At this meeting, our stockholders authorized the following
changes to our Articles of Incorporation:
1. To increase our authorized shares of common stock from
100,000,000 shares to 200,000,000;
2. To provide for a class of 25,000,000 shares of Preferred Stock which
will have such terms as the Board of Directors shall determine from time to
time; and
3. To provide for indemnification of our officers, directors, employees
and agents to the full extent permitted by law.
A Certificate of Amendment to our Articles of Incorporation embodying the
above changes was filed in Florida on September 27, 2001.
VOTES FOR VOTES AGAINST ABSTAINED
------------ -------------- ------------------- --------------
Proposal 1 60,763,890 14,851,790 94,431
Proposal 2 39,055,860 14,952,263 94,283
Proposal 3 73,407,585 2,129,775 172,751
- ------------------------------------------------------------------------------
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June, 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives.
SFAS No. 142 is effective for years beginning after December 15, 2001 and
must be applied as of the beginning of such year to all goodwill and other
intangible assets that have already been recorded in the balance sheet as of the
first day in which SFAS No. 142 is initially applied, regardless of when such
assets were acquired. Goodwill acquired in a business combination whose
acquisition date is on or after July 1, 2001, should not be amortized, but
should be reviewed for impairment pursuant to SFAS No. 121, even though SFAS No.
142 has not yet been adopted. However, previously acquired goodwill should
continue to be amortized until SFAS No. 142 is first adopted.
In August 2001, the Financial Accounting Standards Board Issued Statement
of Financial Accounting Standards No. 143 "Accounting for Asset Retirement
Obligations", effective for fiscal years beginning after June 15, 2002. This
statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
retirement costs.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-lived Assets", effective for fiscal years beginning after
December 15, 2001. This statement addresses financial accounting and reporting
for the impairment or disposal of long-lived assets.
We believe that adopting the above statements will not have a material
impact on our financial statements.
23
DESCRIPTION OF BUSINESS
COMPANY HISTORY
We were incorporated on April 30, 1998 and were inactive from April 1998
to June 1998 except for the issuance of founders' shares. On April 7, 1999,
Media Forum International, Inc., a Florida corporation, acquired all of our
stock in exchange for its stock. Pursuant to the merger agreement, our
shareholders received nine shares of Media Forum's common stock for each share
of common stock held in our company. After the merger, _ our
shareholders owned approximately 90% of Media Forum. Media Forum, the surviving
entity, subsequently changed its name to Advanced Communications Technologies,
Inc. Upon completion of the merger, we changed our trading symbol to "ADVC."
On January 31, 2000, we acquired Smart Investments.com, Inc. through a
stock exchange with Smart Investments' sole shareholder. Immediately upon
completion of that acquisition, we elected successor issuer status in accordance
with Rule 12g-3 promulgated under the Securities Exchange Act of 1934, as
amended, and consequently became a "reporting company" in compliance with the
NASD's requirements.
On July 20, 1999, we formed Advanced Global Communications, Inc., a
Florida corporation. Advanced Global was established to develop and operate our
international telecommunications network as well as to acquire other switching
and telecommunications companies. During the fiscal year ended June 30, 2001, we
ceased operating Advanced Global's international telecommunications network and
wrote-off our entire investment in various telephone equipment and network
costs. Such write-off amounted to $69,506.
On November 10, 1999, Advanced Global entered into an agreement with the
shareholders of World IP Incorporated and its wholly-owned foreign subsidiaries,
Sur Comunicaciones, S.A., a Chilean corporation, and Acinel, S.A., an
Argentinean corporation, to acquire a 51% controlling interest in the World IP.
Under the terms of the agreement, 500,000 shares of our restricted common stock,
plus $95,000 in cash was exchanged for 1,020 shares of stock representing 51% of
the then issued and outstanding shares of World. The 500,000 shares of
restricted common stock were valued at the trading price on the closing date and
together with the cash consideration resulted in a purchase price of $470,000.
World IP provides wholesale international telephone services from the U.S. to
Chile and Argentina.
On October 4, 2000, we notified World's management and its shareholders
that we intended to rescind the agreement because we were unable, after repeated
requests, to obtain from World's management financial records and audited
financial statements. Consequently, our management deemed that it was in our
best interest to unilaterally rescind the agreement. On October 6, 2000, we
filed suit in the Circuit Court in and for Palm Beach County, Florida against
the World IP and its shareholders for rescission of the agreement and for
monetary damages resulting from such breach. On January 23, 2002, the parties
entered into Settlement and Rescission Agreements and a Stipulation for
Dismissal with Prejudice (the "Stipulation") to settle this matter. The
Stipulation states that the November 10, 1999, Agreement and all related
transactions, including the issuance of 1,020 shares of World IP to Advanced
Global and the 500,000 shares of restricted common stock to World IP
shareholders, are rescinded, ab initio, effective November 10, 1999, as though
such transactions never occurred. Further, as part of the settlement, Advanced
Communications issued a total of 320,000 shares of restricted common stock to
certain shareholders of World IP, which shares are being registered pursuant to
this Registration Statement. The Circuit Court in and for Palm Beach County
issued an Order Approving Stipulation approving the Settlement and Rescission
Agreements and the Stipulation.
For financial statement purposes, we have treated the World IP rescission
transaction as if we had never acquired the World IP stock and wrote-off our
$125,000 investment in World IP in our June 30, 2000 financial statements.
On April 5, 2000, we entered into a Stock Purchase Agreement with Advanced
Communications Technologies (Australia) Pty Ltd. to acquire a 20% interest in
our Australian affiliate for $19,350,000. In consideration for our purchase of
the our Australian affiliate stock, we issued 5,000,000 shares of our common
stock having a value of $11,850,000 and a $7,500,000 unsecured non-interest
bearing note payable in installments. The shares issued were valued at the
average quoted trading price during the acquisition period. The fair value of
the investment at the acquisition date was determined to be $3,657,472. The
excess of the purchase price over the fair value of the investment in the amount
of $15,692,528 was accounted for as goodwill.
Our 20% interest in our Australian affiliate was accounted for using the
equity method of accounting and was stated at the amortized cost of goodwill and
the equity in undistributed earnings since acquisition. The equity in earnings
24
of our Australian affiliate was adjusted for the amortization of the goodwill,
as discussed above. Amortization was computed on a straight-line basis over
fifteen years until June 30, 2001 at which time we reassessed the life of the
goodwill to be five years. The amortization of goodwill charged to income for
each of the six months ended December 31, 2001 and December 31, 2000 was
$200,000 and $523,084, respectively.
The following information is provided for our Australian affiliate at
December 31, 2001 and 2000 and has been translated to US dollars using the
average exchange rate for the three-month period:
December 31, 2001 December 31, 2000
-------------------- -----------------
Average exchange rate for the period $ 0.51393 $ .55820
Revenue from operations $ 639,882 $ 6,851
Gross profit $ 639,882 $ 6,851
Net loss from operations $ (3,163,694) $ (1,195,132)
Net loss for the quarter $ (3,163,694) $ (1,195,132)
During the year ended December 31, 2001, we reduced the carrying value of
its investment in our Australian affiliate to $2,000,000 based on management
evaluation of our Australian affiliate. This adjustment was necessitated by FASB
121 ("Accounting for Impairment of Long Lived Assets") and APB 18 ("The Equity
Method of Accounting for Investments in Common Stock"). Such pronouncements
require the annual evaluation of long-lived assets for impairment.
The components of the investment in our Australian affiliate at December
31, 2001 are as follows:
Investment Goodwill Total
-------------- ------------- ----------
At acquisition $ 3,657,472 $ 15,692,528 $ 19,350,000
Cumulative Investment loss (3,657,472) -- (3,657,472)
Amortization of goodwill -- (1,292,664) (1,292,664)
Impairment of goodwill -- (12,399,864) (12,399,864)
Balance at June 30, 2001 -- 2,000,000 2,000,000
Cumulative amortization of
Goodwill through 12/31/01 (200,000) (200,000)
Balance at December 31, 2001 $ -- $ 1,800,000 $ 1,800,000
On July 24, 2000, our company formed Australon USA, Inc., a Delaware
corporation, owned 50% by our company and 50% by Australon Enterprises Pty.,
Ltd., a 67% owned subsidiary of our Australian affiliate. We formed Australon
USA, Inc. to market and sell the Australon suite of products in the U.S., Canada
and South America. Australon USA, Inc. is presently inactive and had no revenue
and expense for the fiscal year ended June 30, 2001.
In November 2000, we formed Advanced Network Technologies (USA), Inc., a
Delaware corporation, owned 70% by us and 30% by our Australian affiliate.
Advanced Network Technologies (USA), Inc. is presently inactive and had no
revenue or expense for the fiscal year ended June 30, 2001.
ACQUISITIONS
On September 7, 2001 we entered into a Letter of Intent with our
Australian affiliate to acquire all of the intellectual property, including the
worldwide rights (other than rights to territories that we currently possess)
for the licensing and distribution of the SpectruCell product (the "IP Rights").
The Letter of Intent which was executed by Messrs Roberts and May on behalf of
the Australian affiliate and us, respectively, includes various conditions
precedent to the transfer of the IP Rights including, but not limited to, the
raising by us of $80 million in the US capital markets, appropriate regulatory
approvals, approval by both our Board of Directors and shareholders, appropriate
due diligence and definitive agreements. Our Australian financial and legal
advisors will commence their due diligence of our Australian affiliate's
operations (both legal and financial) and technology once a Non-Disclosure
Agreement is executed by both parties. We intend to vigorously negotiate the
purchase of all of the tangible and intangible assets of our Australian
affiliate relating to the SpectruCell and other technologies, subject to the
assumption of certain liabilities. Because of the inherent conflict of interest
of Messrs May and Roberts, we have insisted that they recluse themselves from
the negotiations entirely. On January 23, 2002, we brought a legal action
against our Australian affiliate and Mr. May to temporary enjoin our Australian
affiliate from canceling or selling our 20% interest in the Australian affiliate
due to the alleged nonpayment of the note payable under the terms of the April
5, 2000 Stock Purchase Agreement. On that date, the Court issued an interim
order effectively enjoining and prohibiting our Australian affiliate from
"transferring, dealing with, charging, diminishing, mortgaging, assigning
25
or disposing of" Advanced Communications' stock in our Australian affiliate. The
January 23 2002 Court order, which had already been extended twice, was extended
by the Court on February 20, 2002, until a final determination is made at trial.
Our Australian affiliate declined to contest the Court Orders sought by Advanced
Communications. Because of the matters described above, there can be no
assurance that the proposed acquisition of all of the tangible and intangible
(including the IP Rights) assets will be completed under the terms and
conditions as expressed in the Letter of Intent or at all.
During the year, we were also involved in two unsuccessful acquisitions.
On February 28, 2001, we were the successful bidder to purchase all of the
assets of ORBCOMM Global L.P and related debtors. ORBCOMM, a partnership formed
by Teleglobe Holding Corp. and Orbital Sciences Corporation, is the owner and
operator of 30 low earth orbit satellites, digital satellite communications
systems, gateway earth stations, control center facilities and related
equipment, and intellectual property and provides asset monitoring, global
positioning, communications and other data information services. In September
2000, ORBCOMM filed for Chapter 11 Bankruptcy protection in the United States
Bankruptcy Court for the District of Delaware. On March 9, 2001, the Court
entered an Order to approve the sale of substantially all of ORBCOMM's assets to
us. The acquisition of the assets was viewed by us as an opportunity to engage
in a business that was synergistic to the marketing and deployment of our
SpectruCell technology, and to augment Australon Limited's business of providing
real time remote smart metering and other Lon-works based services. The assets
were to be owned by a newly formed entity wholly owned by our 50% owned U.S.
affiliate, Australon USA, Inc. We also entered into a joint venture agreement
with another bidder to sell a portion of the new entity's equity in return for a
substantial capital commitment. Our joint venture partner subsequently defaulted
on its commitment to provide capital to the new entity. Because of the extreme
time constraints place by the Court on us to close the transaction, and the
substantial capital commitment needed to turn ORBCOMM's business around, our
management subsequently determined that it was no longer in our best interest to
pursue the purchase of the assets.
We incurred a loss in the amount of $835,375 in connection with our
unsuccessful attempt to acquire the assets. This loss is reflected in our June
30, 2001 financial statements as professional fees ($395,151), loss on
investment acquisition deposit ($425,000) and other selling, general and
administrative expenses ($15,224).
On February 5, 2001, we entered into a Letter of Intent with Dr. Gil
Amelio and his majority owned company, Beneventure Capital, LLC, to acquire all
of the assets of Beneventure in exchange for stock of our company. Beneventure
is a privately held technology investment and management company that owns
varying interests in private companies involved in the telecommunications,
semiconductor, Internet and financial services industries. After many attempts
to negotiate a fair agreement with Beneventure, we ceased negotiations and
determined that the Beneventure acquisition was not in our best interest. We
incurred $125,965 of professional fees and expenses in the transaction that are
included in our June 30, 2001 financial statements.
INDUSTRY OVERVIEW
GROWTH OF THE WIRELESS TELECOM INDUSTRY
The wireless telecom industry is a rapidly growing business, driven by the
dramatic increase in wireless telephone usage, as well as strong demand for
wireless Internet and other data services. Since 1992, wireless has been the
fastest-growing telecom market sector, according to Forrester Research.
International Data Corporation expects that by 2003, the U.S. wireless
subscriber base will grow to over 185 million, generating revenues in excess of
$68 billion. EMC World Cellular Database at the end of June 2001 has stated that
there are 854.7 million users of cellular services worldwide. The demand for
wireless Internet access and other data services is accelerating the adoption of
new technologies such as those embodied in the emerging third-generation (3G)
standard. High-speed fiber optic networks are being coupled with broadband
wireless technologies to deliver enhanced telecom capabilities and features to
new customers and markets.
Wireless carriers must continuously upgrade their networks with new
technologies and expand into new geographic regions in order to remain
competitive and satisfy the demand for wireless service. Additionally, new
carriers are entering the market as a result of deregulation, the issuance of
new licenses and the demand for new services, fueling the development of new
networks. Consequently, carriers are deploying new network equipment both in the
U.S. and abroad. New technologies, such as broadband wireless, are helping to
fuel demand for more advanced wireless equipment. Dataquest estimates that the
market for broadband wireless equipment in North America will grow from $90.7
million in 1998 to $901.3 million in 2002, a compound annual growth rate of
77.5%. Alcatel forecasts that the global third-generation mobile telephone
infrastructure market will be valued at $60 billion to $80 billion between 2001
and 2004 as new networks are rolled out beginning in several European countries.
26
CHANGES IN THE WIRELESS TELECOM INDUSTRY
As carriers deploy their networks, they face significant competition.
Through privatization in the 1980s and deregulation in the 1990s, both
domestically and internationally, the competitive landscape has changed for
wireless carriers. For carriers to differentiate themselves and remain
competitive in this new environment, they are deploying networks to:
o provide seamless nationwide coverage and avoid expensive roaming costs
on competitors' networks in markets where carriers do not currently own
infrastructure;
o offer PCS service in new geographic markets;
o offer enhanced services, such as one rate plans, calling party pays,
caller ID, text messaging and emergency 911 locator services;
o implement the new third-generation (3G) network standard to deliver
wireless broadband data services, including Internet access and two-way
e-mail;
o introduce other emerging data networking and broadband technologies,
such as LMDS, MMDS and other point-to-multipoint architectures, for the
provision of high speed data wireless Internet access and other
broadband services; and
o offer wireless local loop systems domestically to bypass incumbent
wireline competitors and in developing countries lacking modern
wireline telephone infrastructure.
The convergence of traditional wireless, wireline and cable services is
also adding complexity to the telecom environment as carriers deploy networks
spanning traditional wireless/wireline boundaries to offer these enhanced
services and new technologies.
Due to this increasingly competitive environment, carriers need to focus
on satisfying customer demand for enhanced services, seamless and comprehensive
coverage, better quality, more bandwidth and lower prices. The proliferation of
carriers and new technologies has created an environment where speed to market
is an essential element of a wireless carrier's success. Carriers are also
experiencing challenges managing increasingly complex networks and technologies.
For example, the introduction of wireless Internet technologies and the growth
in broadband wireless services requiring the transmission of large amounts of
data creates additional new technological hurdles for carriers establishing or
upgrading their networks. In this dynamic environment, customer acquisition and
retention are the most important determinants of success. This has led carriers
to increasingly prioritize their resources, focusing on mission critical revenue
generating activities such as marketing, billing and customer care and
outsourcing whenever they can do so effectively.
The changing environment is also placing significant operational
challenges on carriers. Carriers must make critical decisions about which
geographic markets to serve and which services and technologies to offer. They
are striving to avoid the cost uncertainties and considerable operational
challenges associated with the staffing and process implementation software for
the deployment and management of their networks. Furthermore, the rapidly
changing and increasingly complex nature of wireless technologies has made it
difficult for carriers to optimize employee training and utilization for what
are often one-time upgrades for each generation of new technology. Additionally,
networks are being implemented with equipment from unrelated vendors, posing
system integration challenges. This situation is exacerbated by consolidation in
the industry, which often entails the integration of disparate networks.
Equipment vendors are facing numerous challenges in the current
environment, as carriers are requiring them to develop new generations of
equipment that are capable of handling increased features and functionality. In
addition, vendors must provide equipment that can be deployed within a carrier's
existing network and integrate with equipment offered by other vendors. Carriers
are more likely to select a vendor who provides a full suite of products and
deployment services. Given the rapid pace of technological change, equipment
vendors are finding it increasingly difficult to justify using resources for the
deployment, integration and optimization of their current generation of
products. This has increasingly led equipment vendors to focus on their core
competencies to offer competitive solutions in this rapidly changing
technological environment and to outsource network design, deployment and
management services.
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CONVENTIONAL WIRELESS COMMUNICATIONS TECHNOLOGY
Conventional mobile networks primarily rely upon long-established mobile
radio technology and traditional voice channel transmission. This was the only
suitable technology available when cellular communications first evolved 20
years ago. The SpectruCell Technology represents a departure from this somewhat
antiquated technology.
Conventional telephone networks were traditionally configured with a major
Central Office Switch (CO) and numerous smaller switches (Points of Presence or
POPS) throughout the network. The POPS collect calls from the outlying reaches
of the network and route them back to the CO for processing and routing to the
call termination.
Cellular telephone networks evolved from the long established mobile radio
telephone technology and the traditional call processing and voice channel
transmission applications associated with that technology. Much of the call
processing and routing is done at the cell site and this can be very restrictive
because it depends upon the number of voice channels and processing capacity at
each cell site. In a conventional telephone network environment any upgrades or
call capacity changes can be effected at the Central Office Switch, whereas in
the present cellular network environment hundreds of cell sites would have to be
upgraded individually.
The SpectruCell platform is comprised of a base hardware platform and a
software operating system that controls the hardware. The hardware portion of
SpectruCell uses mainly commercial off the shelf components (COTS) with
proprietary processing cards developed by our Australian affiliate. The COTS
hardware used is industry standard equipment and sourced from manufacturers
worldwide.
The software can be upgraded without the need to upgrade the hardware. The
types of software upgrade possible are the changing of protocols supported, new
versions of the protocol software or custom applications may be installed and
upgraded or removed. The analogy is very much like your home PC where you have
hardware and software. If you would like to make your system more powerful you
can choose to upgrade the hardware. It is up to the network operator to choose
how much processing power they require in order to run their chosen software.
The hardware itself is built upon industry standard platforms so that it can be
easily scaled up or down by installing or removing processing cards. The CPCI
chassis allows for the use of hot-swappable hardware allowing for the removal
and upgrade of cards when required.
THE SPECTRUCELL TECHNOLOGY
The SpectruCell concept was originally conceived in the United States in
an entirely different format and configuration to the current product design.
The request to develop the SpectruCell Wireless Base Station concept was
presented to the Royal Melbourne Institute of Technology University in the first
quarter of 1998 for evaluation and development. The current technology for the
SpectruCell Wireless Base Station unit has been developed entirely in Melbourne,
Australia by our Australian affiliate in collaboration with the Department of
Computer Systems Engineering at the Royal Melbourne Institute of Technology
University.
Our Australian affiliate has developed and beta tested a wireless
communication network technology that will be trademarked and marketed as
"SpectruCell". Unlike existing communications networks, SpectruCell supports a
wireless network architecture designed to process and transmit numerous
communications protocols (AMPS, CDMA, TDMA, GSM, W-CDMA, UMTS, 3G, Voice IP,
etc.), as well as wireless Internet applications, all within one network. By
utilizing the multiple protocol wireless base station, network providers will be
able to support substantially all current and future wireless frequencies with
the same equipment on the same network through software upgrades. For example,
Telstra Australia reportedly spent approximately $500 million in implementing a
new CDMA network to compliment their existing GSM network. With SpectruCell, we
believe that Telstra could have simply plugged in a SpectruCell base station to
their existing GSM network, enabling it to carry both protocols (CDMA and GSM)
on the same network.
The SpectruCell system architecture is a distinct departure from
conventional Cellular/PCS network structure. The SpectruCell architecture
provides a method of transmitting the entire base bank spectrum from the
receiving Antenna/Cell to a centralized Mobile Telephone Switching Office (MTSO)
for call processing and redistribution, rather than processing calls at the cell
site. Until approximately three years ago almost all cellular transmissions were
Analog. In the current cellular network environment, additional call processing
hardware has to be added to each cell site (usually around 200+ cells per
average network), for network operators to transmit evolving new digital
protocols (CDMA, TDMA, GSM, W-CDMA, etc.) over their existing cellular networks.
In a SpectruCell network environment, the additional hardware and/or
software upgrades would only be required at the MTSO/Central Office Switch
location. The potential savings in network implementation and establishment
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costs, and cell site maintenance costs savings would be substantial. In
addition, given the SpectruCell network's ability to carry all current evolving
and future call protocols, the network operator would also benefit from future
revenues from foreign roaming calls.
We believe that SpectruCell also has the capacity to dynamically assign
channels and spectrum (i.e., call carrying capacity) to the cells requiring it
most. In a sense, the cellular operator would possess a so-called "elastic
capacity" at cells in the system. Since all voice channels would be centrally
located at the switch instead of at the cell/antenna sites, individual voice
channels and RF trunks can be distributed as needed to busy cell/antenna sites.
Channels would be essentially "borrowed" from surrounding
cells and used to support call traffic at the busier sites during call volume
peaks. This is a distinct departure from present "honeycomb style" systems where
each cellular network is dedicated to a single protocol and each cell has fixed
call carrying capacity or bandwidth, that is limited by the number of voice
channels installed at each cell site. In essence, the SpectruCell architecture
provides a basis for a paradigm shift from the conventional telecommunications
central office switching structure for evolving wireless networks.
For carriers to support multiple protocols such as GSM and CDMA digital
mobile phones, current wireless communications technology requires separate cell
sites with separate equipment for each protocol carried. We believe that upon
implementation, SpectruCell, however, will allow carriers to maintain and
utilize their existing networks within a modern network platform that will
enable them to support evolving protocols. We also believe that by utilizing the
SpectruCell multiple protocol wireless base station, network providers will be
able to support current and in all probability future protocols with the same
equipment on the same existing networks. Future protocols would be added to the
network through software upgrades.
Benefits of the SpectruCell network include:
o lower rollout cost due to the network being wireless;
o cost effective upgrades to existing networks to handle additional
protocols through utilization of existing network infrastructure rather
than creating a new structure;
o fewer dropped calls and busy signals in current mobile networks that
are caused through bottlenecks, as calls on the SpectruCell network
would be configured through a distributed network rather than a
centralized switching facility; and
o direct access to Internet services for cellular subscribers via mobile
IP and other evolving data protocols (such as ITU 3G).
In third world countries or regions of the world with little or no
existing communications infrastructure, the SpectruCell system would provide for
the deployment of a wireless communications network infrastructure (known as a
"greenfield-installation"). This could be achieved at lower cost, and in a
shorter time frame than an equivalent land-based infrastructure network.
The SpectruCell operating system and hardware platform has been compared
in concept to the use of generic hardware running a common operating system
allowing for the deployment of applications. As examples MS word, MS Excel etc.
are applications running on an operating system independent of the type of
hardware. In a SpectruCell sense, the applications are software modules that
support cellular protocols (AMPS, GSM, CDMA, WCDMA, UMTS, etc.). SpectruCell
provides open systems and a standard operating platform to an industry dominated
by proprietary applications and interfaces.
Some of the key applications of the SpectruCell Platform are:
o SpectruCell is a new mobile communications wireless base station/switch
built on a Software Defined Radio (SDR) platform.
o A SpectruCell SDR base station has the unique ability of being able to
simultaneously process and transmit multiple wireless communications
protocols (AMPS, CDMA, TDMA, GSM, W-CDMA, UMTS, 3G, Voice IP, etc.) as
well as wireless Internet applications, all within the one base station
and network infrastructure.
29
o SpectruCell is built with a publishable API (open architecture) so that
network operators can write their own interfaces, and it is also
software upgradeable so that additional protocols (UMTS, 3G, etc.) can
be easily added to an existing SpectruCell base station by uploading
another software module to the base station.
o SpectruCell has a 25mhz front end capable of processing signals
anywhere from 400 MHz to 2.9 GHz which covers all proposed 3G frequency
ranges. It can also accept all backbones (wire, fiber, cable,
microwave, satellite, etc.) SpectruCell's technology is such that is
able to work in any country of the world using a variety of air
interfaces such as GSM, CDMA, CDMA2000, WCDMA & UMTS. Its RF front end
flexibility makes its attractive to areas of the world that have
cluttered spectrum allocation for cellular systems such as found in the
US market.
o Network operators can seamlessly install a SpectruCell base
station/switch into their existing 2G networks and it will process
their existing customer base while at the same time providing an
efficient migration path to 2.5G and 3G services with the addition of
the appropriate SpectruCell software modules. And as an added benefit
the SpectruCell base station will process all protocols simultaneously
over the same network infrastructure.
o The SpectruCell system is patent pending with the first 3 of some 35
proposed patents filed in Australia.
The SpectruCell technology is a safe choice for developers as all the
implementation of 3G protocols is in software. With the current confusion over a
3G standard (15+ proposals) it is hard for manufacturers to provide a hardware
based solution, whereas with SpectruCell all 15+ protocols can be supported on
the one hardware platform.
Several other applications that have been identified as for potential
deployment upon SpectruCell include:
x A hardware platform for 3G cellular test equipment;
x A hardware platform for high end military based signal processing;
o Radar;
o Sonar;
o Military communications;
x Aerial communications and mobile communications platforms;
x Abase development platform for new protocols and base station
equipment from existing vendors (Nokia, Lucent, Siemens, Ericsson,
etc.) and new third party developers; and
x A 3G capable development platform for new technology vendors looking
to enter the market with a head start.
PATENTS
Our Australian affiliate has filed various patent applications with the
Australian patent office in connection with the SpectruCell technology and
anticipates preparing and filing additional patents in our fiscal year 2002. Our
affiliate is confident that its applications for patent protection will be
granted by the Australian regulatory authorities.
SPECTRUCELL MARKETING ADVANTAGES
We believe that SpectruCell's greatest marketing advantage is its unique
flexibility and open system approach to mobile communications. Providers using
SpectruCell will have the ability to expand and utilize technological advances
as they occur without making their current network infrastructure redundant. The
open system, non-proprietary approach means that third party developers can
manufacture products for use within the system, as well as develop additional
applications ensuring a SpectruCell network will be always at the leading edge
of technology.
30
We believe that using a network of SpectruCell base stations, network
providers will have architecture that can be reconfigured to support the
following:
o Multiple protocols. The cell site's protocols can be added or removed.
These are wireless protocols like AMPS, GSM, CDMA, W-CDMA, UMTS, 3G and
new evolving standards;
o Intelligent call routing. Calls can be routed centrally or in a
distributed fashion to ease network congestion, allowing for more
efficient use of network resources; and
o Flexible management and billing systems. The open architecture
interfaces of SpectruCell allow for the provision of a more customer
driven service that utilizes third party software applications.
We also believe that existing network providers will have the ability to:
o Upgrade their existing network to evolving new protocols without having
to start again with a new network, maintaining the asset base of their
old networks;
o Gradually and seamlessly replace their existing mobile base stations
with SpectruCell base stations;
o Replace existing base stations with SpectruCell base stations, allowing
network providers to rollout new services and protocols; and
o Increase their current call capacity while still maintaining their
existing infrastructure.
COMPETITION
We believe that the SpectruCell system will compete with traditional
cellular telephone and other wireless communications technologies. However, we
will have to differentiate our technology through cost savings in implementation
and upgrades and through improved service.
Some of the competitive advantages of the SpectruCell system are more
efficient equipment utilization, reduced capital equipment costs and higher
revenues from increased U.S. and foreign roaming, or multiple protocol, calls
handled in domestic networks. One very important advantage is that SpectruCell
can be implemented into domestic networks. Another very important advantage is
that SpectruCell can be implemented into existing cellular networks and run in
parallel with conventional cellular network technology. It does not require the
complete redesign and replacement of the existing cellular network structure.
Rather it can be implemented in stages, until the entire network structure has
been upgraded to the SpectruCell architecture.
We cannot be sure that we will be able to effectively compete with
existing wireless network companies or that we will gain acceptance for the
SpectruCell system.
PROSPECTIVE CUSTOMERS
The market for telecommunications infrastructure equipment will continue
to be stimulated by the increasing demand for voice and high-speed data
applications. We believe that network operators will be forced to replace or
upgrade their existing networks to facilitate the introduction of 3G services.
Infrastructure equipment manufacturers not already well into the development of
3G products will now be looking for proprietary components to reduce their
development schedules.
Therefore there are three distinct target markets that have now been
identified for the SpectruCell product:
o Primary & Secondary Network Operators;
o Infrastructure Manufacturers and 3rd Party Developers; and
o Military (Signals Intelligence).
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The initial marketing focus will target existing network operators,
particularly smaller network operators in the US currently using CDMA, IS95 and
IS136 air interfaces. This initial implementation of "SpectruCell" will provide
network operators with a natural migration path to 2.5G and 3G technologies via
CDMA2000.
Strong demand is also expected from Canada, Mexico and Latin America as a
result of increasing demand for Internet access and the extension of basic
telecommunications services that will stimulate infrastructure spending in these
regions.
The advantages of SpectruCell to Network Operators:
o Enables upgrading of existing network to evolving new protocols without
having to start again with a new network, thereby maintaining the asset
base of their old networks;
o Can seamlessly replace existing mobile base stations with SpectruCell
base stations, ensuring the existing network functionality remains
intact, while at the same time allowing the provider access to the
features and advantages not available on a conventional network;
o Flexible migration to 3G technologies. As a network provider replaces
existing base stations with SpectruCell base stations, the network is
changed in a way that allows network providers to rollout new services
and protocols with a software upgrade; and
Benefits of the SpectruCell system for Network Operators include:
o Cheaper rollout cost due to the network being wireless;
o Cheaper costs for upgrading existing networks to handle additional
protocols through utilization of existing network infrastructure and
software upgrades;
o Will enable cellular subscribers to access all Internet services via
mobile IP and other evolving data protocols (such as ITU 3G).
o 2G and 3G-multi protocol capable solution commercially available first
quarter 2002.
o Financial asset saver offering a migration from 2G to 3G for existing
network providers.
The definition of a third party developer can be further broken down into
several categories:
o CORE DEVELOPER - an organization that sells product to Network
Operators. The main advantage of the SpectruCell platform to this type
of developer is the rapid time to market that they can achieve with a
standardized platform and available library source code; and
o 2ND TIER DEVELOPER - organizations offering core network enhancements
in the 3G and wireless arena. Examples are companies like WSI,
M-Diversity, Open Telecommunications. The main advantage to these types
of organizations is that it provides a platform that they can deploy
their technology on, while partitioning off their core functionality.
In essence they can use SpectruCell to enhance existing systems.
Without a solution like SpectruCell, such developers require
integration with all existing proprietary systems to get their
technology to market. SpectruCell provides them with a standard 3G
capable operating platform and open system architecture.
SALES AND DISTRIBUTION
We expect to have independent distribution and sales offices located in
Los Angeles, New York City and Fort Lauderdale. Sales from these offices will be
directed mainly to OEMs, Network Operators and telecommunication product
manufacturers who are buying components to add to their own product or the
SpectruCell Platform as a third party developer.
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GOVERNMENT REGULATION
Our proposed provision of wireless communications services is subject to
substantial government regulation. Federal law regulates interstate and
international telecommunications, while states have jurisdiction over
telecommunications that originate and terminate within the same state. Changes
in existing policies or regulations in any state or by the Federal
Communications Commission ("FCC") could have a material adverse effect on our
financial condition or results of operations. There can be no assurance that the
regulatory authorities in one or more states or the FCC will not take action
having an adverse effect on our business or financial condition or results of
operations. The use of SDR technology in the commercial area is subject to
conditions specified by the FCC. The FCC has stated that it will allow for the
deployment of SDR platforms and support the regulation of such equipment.
Another area that may affect the use of SpectruCell in the U.S. 3G cellular
market will be associated with the timetable surrounding the 3G spectrum
allocation by the FCC.
EMPLOYEES AND CONSULTANTS
As of February 15, 2002, we have eight full time employees and
consultants. None of our employees are covered by any collective bargaining
agreement.
33
MANAGEMENT
The following table sets forth the names and ages of our current directors
and executive officers, their principal offices and positions and the date each
such person became a director or executive officer. Our executive officers are
elected annually by the Board of Directors. Our directors serve one-year terms
until their successors are elected. The executive officers serve terms of one
year or until their death, resignation or removal by the Board of Directors.
There are no family relationships between any of the directors and executive
officers. In addition, there was no arrangement or understanding between any
executive officer and any other person pursuant to which any person was selected
as an executive officer.
Our directors and officers are as follows:
Name and Address Age Position Date Elected
- ---------------- --- -------- ------------
Gary Ivaska 44 President and --
880 Apollo Street, Ste. 200 Chief Executive Officer
El Segundo, CA 90245
Wayne I. Danson 48 Vice President, Chief January 3, 2000
420 Lexington Ave. Financial Officer and
New York, NY 10170 Director
Jonathan J. Lichtman 49 Secretary and Director November 9, 1999
4800 N. Federal Hwy
Boca Raton, FL 33431
Dr. Michael Finch 53 Director March 10, 1997
37 Walnut Street
Wellesley, MA 02481
Randall Prouty 49 Director and Chairman March 10, 1997
19200 Von Karman Ave. of the Board
Irvine, CA 92612
Wilbank J. Roche 50 Director March 25, 1999
2530 Wilshire Blvd.
Santa Monica, CA 90403
Allan Roberts 50 Director July 10, 2001
350 Queen Street
Melbourne Australia
Roger May 55 Director March 10, 1997
350 Queen Street
Melbourne, Australia
The directors named above will serve until the next annual meeting of our
shareholders or until their successors shall be elected and accept their
positions. Mr. Ivaska is a party to an oral agreement with Advanced
Communications that entitles him to a salary of $180,000 per year. Mr. Danson is
party to a written consulting agreement that entitles him to $20,000 per month
in cash and stock for the period September 1, 2000 through August 31, 2001 and,
as extended orally, to December 31, 2001. Effective January 1, 2002, Mr. Danson
agreed to orally extend his consulting agreement with Advanced Communications
through December 31, 2003 at a monthly rate of $12,500. Both Mr. Ivaska and Mr.
Danson are reimbursed for reasonable out-of-pocket expenses relating to their
activities for Advanced Communications.
Our directors are not compensated for their services as a director, but
are reimbursed for all of their out-of-pocket expenses incurred in connection
with the rendering of services as a director.
GARY IVASKA, CHIEF EXECUTIVE OFFICER AND PRESIDENT. Mr. Ivaska has over 20
years of senior management experience and marketing serving start-up to
established international enterprises in the aerospace, computer networking,
government, industrial automation, internet, security, and telecommunications
markets. Most recently, Mr. Ivaska served as the Chief Executive Officer &
President for ThemeWare Corporation and Corporate Vice President for Imask,
Inc., a security technology company. In 1997, Mr. Ivaska was recognized for
business development and management of prestigious programs and market share
34
growth with Cisco Systems, Hughes Aircraft, and Rockwell International in
national and regional management capacities. Mr. Ivaska received a B.S. degree
in International Finance and Marketing from the University of Southern Illinois
in 1981. He has formal education in electronics engineering and corporate
provided education in financial, media management, sales, and technology areas.
WAYNE I. DANSON, VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND DIRECTOR. Mr.
Danson has served as our company's Chief Financial Officer since December 1,
1999 and was appointed a Director on January 3, 2000. Mr. Danson is the Managing
Director and Founder of Danson Partners, LLC, a financial advisory firm
specializing in middle market companies in the real estate and technology
industries. Prior to forming Danson Partners, LLC in May 1999, Mr. Danson was
co-head of and Managing Director of PricewaterhouseCoopers LLP's Real Estate
Capital Markets Group. Prior to rejoining PricewaterhouseCoopers in 1996, Mr.
Danson was a Managing Tax Partner with Kenneth Leventhal & Company in New York
and Washington D.C., where he was also Kenneth Leventhal's National Director of
its International and Debt Restructure Tax Practices. Prior to his involvement
with Kenneth Leventhal in 1988, Mr. Danson was a Managing Director with Wolper
Ross & Co., Ltd. in New York, a closely held financial services company
specializing in financial tax, pension consulting, designing financial
instruments and providing venture capital and investment banking services. Mr.
Danson graduated with honors from Bernard M. Baruch College with a BBA in
Accounting and an MBA in Taxation. He is a certified public accountant and a
member of the AICPA and the New York State Society of CPAs.
JONATHAN J. LICHTMAN, SECRETARY AND DIRECTOR. Mr. Lichtman was appointed a
Director on November 9, 1999 and is currently a partner with the Boca Raton law
firm of Levinson & Lichtman, LLP, where he specializes in structuring corporate
and partnership transactions, including real estate syndications. Mr. Lichtman
is also currently a general partner of several real estate partnerships in New
York, North Carolina and Florida. Prior to forming Levinson and Lichtman LLP,
Mr. Lichtman was an attorney with English, McCaughan and O'Bryan, PA, where he
performed legal work for domestic and international clients, as well as real
estate partnerships and development. Mr. Lichtman obtained his J.D. degree, cum
laude, from Syracuse University College of Law and his LLM degree in taxation
from the University of Miami School of Law. He is also a certified public
accountant and is licensed to practice law in Florida and New York.
DR. MICHAEL FINCH, DIRECTOR. Dr. Finch was appointed a Director on March
10, 1997 and since 1998, has been Chief Technology Officer of New Media
Solutions, responsible for the conception, planning, creation, execution and
deployment of all software products and projects. For the four years before
that, he was employed by Media Forum (first in the UK, and then in the U.S.) as
Director of Product Development. He was responsible for developing and
implementing Media Forum's software capabilities and strategy, managing
technical and complex software projects for high-end clients, and pre-sales
demonstrations to clients of Media Forum's software stance and expertise. From
1983 to 1993, Dr. Finch was a Financial Software Engineer, who designed, wrote
and implemented sophisticated real-time computer programs for trading Financial
Instruments and Commodities on the Chicago and New York Futures exchanges. Prior
to 1983, Dr. Finch was a research scientist and mathematician, with an academic
career at four UK universities. He obtained a Doctorate of Mathematics at Sussex
University for original research into Einstein's Theory of General Relativity
and its application to Neutron Stars. He lectured at Queen Mary's College London
on advanced mathematics.
RANDALL PROUTY, CHAIRMAN OF THE BOARD AND DIRECTOR. Mr. Prouty, a
co-founder and Director since March 10, 1997, is currently the President and CEO
of World Associates, Inc., a publicly traded development stage company. He is
also the sole owner of Bristol Capital, Inc., a firm active in consulting and
business development work for companies seeking access to capital markets, and
through which he is incubating other e-business ventures. Mr. Prouty is a
licensed real estate and mortgage broker in the State of Florida. His technical
background includes being a qualified webmaster and developing e-businesses on
the web.
WILBANK J. ROCHE, DIRECTOR. Mr. Roche was appointed a Director on March
25, 1999 and is currently a principal with the law firm of Roche & Holt in Santa
Monica, California. Mr. Roche was an honors graduate from the University of
California in 1976, as well as from Loyola University School of Law, Los
Angeles, in 1979. He was admitted to the California State Bar in 1979 and has
been practicing law actively since that time. Mr. Roche worked for law firms in
the Los Angeles area from 1976 to 1983, when he opened his own office. In 1985,
he formed Roche & Holt. Mr. Roche's law practice has revolved largely around
representing small businesses and their owners. In that regard, he has provided
legal services in connection with the formation, purchase, sale, and dissolution
of numerous entities, as well as in connection with their on-going operations.
In the past several years, he has devoted substantial time to clients in the
telecommunications business.
ALLAN ROBERTS, DIRECTOR. Mr. Roberts was appointed a Director on July 10,
2001 and is currently Vice President - Mergers & Acquisitions for our Australian
affiliate. Since joining our affiliate in 2000, Mr. Roberts was responsible for
and directly involved in the Gawler Gold, Data Link Technologies Pty, LTD,
Victoria Communications and Simoco Australia Pty Ltd acquisitions. Prior to
35
joining our affiliate, Mr. Roberts was the sole shareholder of an Australian
based financial consulting company specializing in mergers, acquisitions and
capital markets activities. Prior to that, he was Head of Credit for the Bank of
Melbourne where he reported to the Managing Director and the Bank's Board of
Directors.
ROGER MAY, DIRECTOR. Roger May was the Chairman and Chief Executive
Officer of Advanced Communications from its inception until November 30, 2001.
In 1991 he founded the nationwide central reservation system known as
Independent Reservation Services Ltd. ("IRSL") In 1997 Mr. May negotiated the
sale of IRSL to a Florida public company, Teleservices International Group. In
1987, Mr. May began his focus on telecommunications, first establishing
nationwide distribution networks for a private network and then marketing
discounted telecommunications products and associated services to the
hospitality industry. He established successful joint ventures with Cable &
Wireless, and relationships with Rochester Telephone, Bell Atlantic, Frontier
Communications and others. Mr. May moved to Los Angeles from Australia in 1980
to capitalize on export incentive allowances offered by the Australian
government. He began operating a wool exporting company and then purchased a
franchise for International Business Exchange, Inc., a barter exchange company.
Mr. May began his marketing career in Australia in 1969, where he was a General
Manager for the largest General Motors dealership in Australia.
COMMITTEES OF THE BOARD OF DIRECTORS
In a board meeting held on May 15, 2001, both an audit and compensation
committee was established. The audit committee will report to the board
regarding the appointment of our independent public accountants, the scope and
results of our annual audits, compliance with our accounting and financial
policies and management's procedures and policies relative to the adequacy of
our internal accounting controls. The audit committee is comprised of Mr. Prouty
and Mr. Finch. The compensation committee of the board of directors will review
and make recommendations to the board regarding our compensation policies and
all forms of compensation to be provided to our executive officers. In addition,
the compensation committee will review bonus and stock compensation arrangements
for all of our other employees. The compensation committee is comprised of Mr.
Roche and Mr. Prouty.
The Board of Directors also established an Acquisitions Committee and an
Australian Affiliate Committee. Messrs. Prouty, Danson, Lichtman and Roche
currently serve on the Acquisitions Committee and Messrs. Prouty, Danson,
Lichtman, Roche and Finch serve on the Australian Affiliate Committee, which
will address and make all decisions relating to the activities of our Australian
Affiliate and SpectruCell.
EXECUTIVE COMPENSATION
The following table shows all cash compensation accrued and/or paid by
Advanced Communications, as well as certain other compensation paid or accrued,
for the fiscal years ended June 30, 2001 and 2000. Other than as set forth
herein, no executive officer's cash salary and bonus exceeded $50,000 in any of
the applicable years. The following information includes the dollar value of
base salaries, bonus awards, the value of restricted shares issued in lieu of
cash compensation and certain other compensation, if any, whether paid or
deferred.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------------- -----------------------------
AWARDS PAYOUTS
------------------ -------
OTHER RESTRICTED
ANNUAL STOCK OPTION LTIP ALL OTHER
SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
NAME AND ----------- ------- ------------ ---------- ------ ------- ------------
PRINCIPAl
POSITION Year ($) ($) ($) ($) (#) ($) ($)
- -------- ---- ----------- ------- ------------ ---------- ------ ------- ------------
Roger May, CEO 2001 $197,500(1) $50,000 -- -- -- -- --
CEO 2000 $120,000(1) -- -- -- -- -- --
Wayne I. Danson 2001 $235,931(2) -- -- $167,500 -- -- --
CFO 2000 $ 50,000(3) -- -- $223,400(4) -- -- --
- ------------------------------------------------------------------------------
(1) Accrued and unpaid compensation. No cash was received by Mr. May during
the fiscal years ended June 30, 2001 and 2000. Mr. May's compensation for
fiscal 2001 includes a $50,000 cash bonus which remains unpaid as of June
30, 2001. Mr. May left Advanced Communications on November 30, 2001.
(2) Represents the value of accrued fees and stock-based compensation earned
by Mr. Danson during the fiscal year ended June 30, 2001. Stock-based
compensation amounted to $167,500. Of accrued consulting fees earned in
the amount of $235,931, only $23,105 was paid in cash to Mr. Danson. The
balance of Mr. Danson's accrued compensation remains unpaid as of June 30,
2001. In August 2001, Mr. Danson agreed to receive 500,000 shares of our
restricted common stock in lieu of $150,000 of unpaid consulting fees.
36
(3) Mr. Danson became Chief Financial Officer of Advanced Communications on
December 1, 1999 and such amount reflects the cash compensation (exclusive
of reimbursement of expenses) paid to him during the period December 1,
1999 to June 30, 2000. Mr. Danson also received 100,000 shares of our
stock as a signing bonus.
(4) Mr. Danson also received 100,000 shares of our stock as a signing bonus in
December 1999 and June 2000. During this time, the shares were trading
between $1.50-$3.50 per share.
Our company has no deferred compensation, stock options, SAR or other
bonus arrangements for its employees and/or directors. During the fiscal year
ended June 30, 2001, all decisions concerning executive compensation were made
by the Board of Directors and, effective May 15, 2001, by our compensation
committee. Our compensation committee will be reviewing the propriety of
establishing various stock option and SAR Grant programs for the benefit of our
executive employees during the fiscal year ending June 30, 2002.
EMPLOYMENT AGREEMENTS
On November 29, 1999, we entered into an employment agreement with a
consulting organization to provide the functions customarily provided by a Chief
Financial Officer. As compensation for these services, we paid $5,000 monthly in
advance, plus 100,000 restricted shares of common stock. Starting April 1, 2000,
compensation for these services increased to $10,000 per month. On September 1,
2000, we entered into another one-year consulting agreement with Wayne I.
Danson, the Chief Financial Officer. A signing bonus of 75,000 shares of stock
was issued, valued at $67,500. This contract expired August 31, 2001, but was
orally extended to December 31, 2001. As compensation, Mr. Danson receives
$10,000 per month in cash and $10,000 per month in stock. Effective January 1,
2002, Mr. Danson agreed to orally extend his contract with Advanced
Communications through December 31, 2003, at a monthly rate of $12,500.
Effective July 1, 2000, Advanced Communications and Mr. May, our former
Chief Executive Officer, entered into an oral employment agreement that entitled
Mr. May to receive $15,000 per month and a bonus of $50,000. Effective December
1, 2000, Mr. May's compensation increased to $17,500 per month. On November 30,
2001, Mr. May was terminated as Advanced Communications' Chief Executive
Officer. The Compensation Committee of the Board of Directors is currently
reviewing the nature and extent of Mr. May's past services to Advanced
Communications to determine how much of Mr. May's prior services are more
properly allocable to our Australian affiliate.
On November 30, 2001, we entered into an oral employment agreement with
Mr. Gary Ivaska to serve as our President and Chief Executive Officer at a rate
of $180,000 per annum.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
DESCRIPTION OF PROPERTY
Our principal executive office is located at 880 Apollo Street, Suite 200,
El Segundo, California 90245. We have a three-year lease for our office that
expires on December 31, 2004. The monthly rent is $7,634 inclusive of the cost
of monthly parking.
LEGAL PROCEEDINGS
We are a defendant in number of lawsuits as described below. We do not
believe that these lawsuits will have a material adverse impact on our business.
In Nancy J. Needham; Thomas R.B. Wardell et al v. Advanced Communications
Technologies, Inc., et al., an action filed July 2000 in the Florida State
Court, two former officers and directors are seeking damages and injunctive
relief arising out of our refusal to provide legal opinion letters and to take
other actions necessary to allow the former officers to transfer restricted
securities to unrestricted securities under a Rule 144 exemption. We have filed
a counterclaim to rescind all of the Plaintiffs' shares for lack and/or failure
of consideration and other damages. We believe that we have meritorious defenses
to the suit and are vigorously defending the litigation on procedural, as well
as substantive grounds. In October 2001, the Court ruled in our favor and denied
37
summary judgment for the Plaintiffs. We have been actively negotiating
settlement with Ms. Needham and Mr. DuPont and are confident that a favorable
settlement can be reached soon.
In STAR MULTI CARE SERVICES, INC. V. ADVANCED COMMUNICATIONS TECHNOLOGIES,
INC., filed in the Fifteenth Judicial Circuit in the State of Florida on
September 18, 2000, Star Multi Care Services, Inc. sued us for alleged breach of
contract and the recovery of a break-up or termination fee in excess of $50,000
in conjunction with our alleged failure to consummate a proposed merger with
Star in January 2000. We believe that the suit is without basis and we are
vigorously defending the alleged claim.
On April 13, 2001, New Millennium Capital Partners II, LLC and AJW
Partners, LLC, holders of the remaining amount of our 12% Secured Convertible
Debentures totaling $200,750, filed an action in the Federal Court in the
Eastern District of New York seeking recovery of the principal amount of the
obligation, plus accrued interest and other monetary damages. We believe that
the Plaintiffs' breached the terms of the debenture and as such, we are
defending the suit and pursuing various legal remedies. In December 2001, we
commenced settlement discussions with New Millennium Capital and AJ W Partners,
LLC and we are confident that the lawsuit will be settled on terms that are
favorable to us.
On December 6, 2001, Mr. May, as Chairman and Chief Executive Officer of
our Australian affiliate, sent a letter to us demanding full payment of all
amounts due under the Stock Purchase Agreement dated April 5, 2000, between the
parties (the "Stock Purchase Agreement"). This letter was dated six days after
Mr. May was removed by the Board of Directors as President, Chief Executive
Officer and Chairman of the Board of Advanced Communications. Mr. May sent
additional demand letters to us dated December 11, 2001, and December 21, 2001
(collectively, the "Demand Letters"). The Demand Letters threatened to exercise
the rights granted to it under Advanced Communications' constitution, which
include exercising our Australian affiliate's lien over the shares registered in
the name of ADVC or declaring that those shares be forfeited. We believe that we
have fully met our obligation under the Stock Purchase Agreement which states
that payments are only required to be paid to our Australian affiliate from
those funds remaining after deduction of reserves needed for current operations,
working capital and the development and expansion of its operations and the
operations of its subsidiaries, as determined by its Board of Directors. We do
not currently have sufficient funds available to pay to our Australian affiliate
under the clear terms of the Stock Purchase Agreement. However, to protect our
investment in our Australian affiliate on January 23, 2002, we filed suit
against our Australian affiliate and Roger May in the Supreme Court at
Melbourne, Victoria Australia.
On January 23, 2002, the Court issued an interim order effectively
enjoining and prohibiting our Australian affiliate from "transferring, dealing
with, charging, diminishing, mortgaging, assigning or disposing of" Advanced
Communications' stock in our Australian affiliate. The January 23 2002 Court
order, which had already been extended twice, was extended by the Court on
February 20, 2002, until a final determination is made at trial. Our Australian
affiliate declined to contest the Court Orders sought by Advanced
Communications.
38
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of February 15, 2002, information with
respect to the beneficial ownership of our common stock by (i) persons known by
us to beneficially own more than five percent of the outstanding shares, (ii)
each director, (iii) each executive officer and (iv) all directors and executive
officers as a group.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains information about the beneficial ownership of
our common stock as of December 31, 2001 for:
o each person who beneficially owns more than five percent of the common
stock;
o each of our directors;
o the named executive officers; and
o all directors and executive officers as a group.
Unless otherwise indicated, the address for each person or entity named
below is c/o Advanced Communications Technologies, Inc., 880 Apollo Street,
Suite 200, El Segundo, California 90245.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by footnote, and subject
to community property laws where applicable, the persons named in the table
below have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them. The percentage of beneficial
ownership is based on 102,530,897 shares of common stock outstanding as of
February 15, 2002.
Common Stock
Beneficially Owned
Name/Address Number Percent(1)
Roger May 19,528,000(1)(2) 19.05%
Nancy Need 11,958,801(3)* 11.66%
R.H. Du Pont 6,200,383(4)* 6.05%
Wayne Danson 1,229,547(5) 1.20%
Gary Ivaska 250,000 **
Jonathan J. Lichtman 1,347,000(6) 1.31%
Dr. Michael Finch 358,000 **
Randall Prouty 1,018,056 **
Wilbank J. Roche 250,000 **
Allan Roberts 100,000(7) **
-------------- -----
All Officers and Directors as a Group 24,080,603 23.49%
- ------------------------------------
* Less than 1%.
(1) No shares are owned directly by Mr. May. All shares beneficially owned by
Mr. May are owned through affiliated entities and/or by family members.
(2) Includes 10,000,000 shares beneficially owned through Advanced
Communications Technologies Pty Ltd.
(3) Includes 4,790,347 shares held by Mrs. Needham's adult children.
(4) Includes 5,173,572 shares held by Mr. DuPont's adult children and in trust
for Rhett DuPont, a minor.
(5) Includes 879,547 shares owned beneficially by Mr. Danson's affiliated
entity.
(6) Excludes 160,000 shares beneficially owned through various family trusts.
Mr. Lichtman disclaims beneficial ownership of these shares.
(7) Held through Mr. Roberts' affiliated entity.
* Advanced Communications presently is disputing the ownership of these
shares.
** Less than 1%.
39
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 10, 2002, Advanced Communications executed various financing
agreements with Cornell Capital Partners, LP ("Cornell"), a New Jersey-based
hedge fund, whereby Cornell and certain other investors purchased from Advanced
Communications $1 million of two-year Convertible Debentures and Cornell
provided a $30 million structured equity facility. Pursuant to the Convertible
Debenture financing, Advanced Communications received $564,000 net of financing
and closing costs and the repayment of the $325,000 ninety-day note. Under the
terms of the $30 million structured equity facility, Advanced Communications has
the right to require Cornell to make monthly purchases of up to $2 million of
Advanced Communications' stock on a discounted basis. Advanced Communications
issued 2,960,000 shares of common stock with a market value of $740,000 as a
commitment fee as part of this transaction.
On January 15, 2002, Advanced Communications moved its corporate
headquarters from Irvine to El Segundo, California. The terms of Advanced
Communications' new lease are significantly more favorable than the terms of the
Irvine lease. The lease has a three-year term commencing on January 1, 2002.
On January 22, 2002, Advanced Communications' directors, excluding Mr. May
and Mr. Roberts, pursuant to a January 4, 2002 Board of Directors Meeting, were
each issued 200,000 shares for a total of 1,000,000 shares of Advanced
Communications' restricted common stock for services rendered to Advanced
Communications as directors for the 2001 and 2002 fiscal years.
On January 23, 2002, Advanced Communications filed suit against Advanced
Communications Technologies (Australia) Pty Ltd. and Roger May in the Supreme
Court at Melbourne, Victoria, Australia. On that date, the Court issued an
interim order effectively enjoining and prohibiting our Australian affiliate
from "transferring, dealing with, charging, diminishing, mortgaging, assigning
or disposing of" Advanced Communications' stock in our Australian affiliate. The
January 23 2002 Court order, which had already been extended twice, was extended
by the Court on February 20, 2002, until a final determination is made at trial.
Our Australian affiliate declined to contest the Court Orders sought by Advanced
Communications.
On January 28, 2002, Advanced Communications issued 2,960,000 shares of
its restricted common stock to Cornell Capital Partners, LP as a commitment fee
for the $30 million structured equity facility.
Through a family trust established in Australia, Mr. May, a principal
shareholder of our company, indirectly owns a 70% majority interest in our
Australian affiliate. We own 20% of the common stock of our Australian
affiliate.
Through December 31, 2001, we repaid $5,708,834 of our obligation to our
Australian affiliate, in part by the issuance of 7,787,000 shares of restricted
common stock having a value of $4,884,101. The balance of our repayments was in
the form of cash and the offset of funds previously advanced to our Australian
affiliate. Mr. May is a principal shareholder of both our company and our
Australian affiliate. As of December 31, 2001, the balance of our obligation to
our Australian affiliate was $1,791,166.
As of December 31, 2001, we are indebted to Global Communications
Technologies, Ltd., an entity owned by Mr. May, in the amount of $992,736. Our
obligation to Global is non-interest bearing and unsecured. During the fiscal
year ended June 30, 2000, we were indebted to Global for $251,500 for advances
made. In addition, Mr. May has deferred receiving his annual compensation and is
owed $479,050 and $231,550 in accrued and unpaid compensation as of June 30,
2001 and 2000, respectively. As of December 31, 2001, Mr. May's accrued and
unpaid compensation amounted to $566,550. Our Compensation Committee is
currently examining the nature of the past service provided by Mr. May as our
former Chief Executive Officer and whether a portion of Mr. May's services are
more properly allocable to our Australian affiliate.
On September 1, 2000, Mr. Danson entered into a one-year consulting
agreement with our company for the period September 1, 2000 through August 31,
2001. Under the terms of the consulting agreement, Mr. Danson received $10,000
per month in cash and $10,000 per month in stock for his services. Mr. Danson's
agreement expired on August 31, 2001. Mr. Danson has agreed to orally extend his
consulting agreement with Advanced Communications through December 31, 2003 at a
monthly rate of $12,500.
Advanced Communications is currently negotiating an employment agreement
with Mr. Ivaska to serve as our Chief Executive Officer, effective November 30,
2001. In the interim, we have orally agreed to compensate Mr. Ivaska at a rate
of $180,000 per annum.
40
In April 2000, our company acquired 20% of the common stock of our
Australian affiliate. The purchase price of the investment amounted to
$19,350,000, and was comprised of a note payable for $7,500,000 and the issuance
of 5,000,000 shares of restricted common stock valued at $11,850,000. The shares
issued were valued at the average quoted trading price during the acquisition
period. The fair value of the investment at the acquisition date was determined
to be $3,657,472. The excess of the purchase price over the fair value of the
investment in the amount of $15,692,528 was accounted for as goodwill. Mr. May
is a principal shareholder of our company and our Australian affiliate.
Our company's 20% interest in the Australian affiliate was accounted for
using the equity method of accounting and was stated at the amortized cost of
goodwill and the equity in undistributed earnings since acquisition. The equity
in earnings of the Australian affiliate was adjusted for the amortization of the
goodwill, as discussed above. Amortization was computed on a straight-line basis
over fifteen years until June 30, 2001 at which time Advanced Communications
reassessed the life of the Goodwill to be five years.
Advanced Communications had a non-interest bearing note payable to an
affiliate of $7,500,000 as of April 5, 2000. The following schedule represents
payments on such debt by issuance of restricted common stock to either the
affiliate or creditors of the affiliate. Such transactions were recorded at the
market price of the stock at date of issuance.
Shares of Common
Date Stock Issued Value
--------------- ---------------- ----------------
September 2000 5,000,000 $ 3,500,000
October 2000(1) 460,000 460,000
June 2001 1,137,000 567,100
September 2001 1,190,000 357,001
---------------- ----------------
7,787,000 $ 4,884,101
================ ================
- -------------------------
(1) This transaction resulted in a gain on extinguishment of debt of $23,000.
During the year ended June 30, 2001 Advanced Communications repaid an
aggregate of $247,608 of the obligation in cash. During the three-month period
ended September 2001, Advanced Communications repaid $25,000 of the obligation
in cash. No payments on the note were made during the three months ended
December 31, 2001.
Pursuant to the terms of the April 5, 2000 Stock Purchase Agreement
between Advanced Communications and our Australian affiliate, Advanced
Communications has elected to reduce its outstanding loan balance by $552,125
for funds previously advanced to our Australian affiliate.
As of December 31, 2001, the balance of Advanced Communications'
obligation to our Australian affiliate was $1,791,166. Advanced Communications
is currently in litigation with our Australian affiliate regarding the timing
for the repayment of Advanced Communications' obligation.
As of December 31, 2001, Advanced Communications owed a principal
shareholder $992,736 for funds advanced to Advanced Communications to provide
working capital and for the repayment of certain of Advanced Communications'
obligations. This loan is non-interest bearing and unsecured.
On December 13, 2001, Advanced Communications entered into a 90-day
$325,000 Promissory Note (the "Note") with Cornell Capital Partners, LP. The
Note had an interest rate of 12% and was secured by a Guaranty and Pledge
Agreement executed by Mr. Danson, Mr. Lichtman and Mr. Prouty. Advanced
Communications realized $269,000 of net proceeds after financing costs and legal
fees. The Note was repaid on January 14, 2002 with proceeds from Advanced
Communications' $1 million Convertible Debenture.
On September 30, 1999, Advanced Communications entered into secured
convertible debentures purchase agreement with two companies, which were
stockholders of Advanced Communications, whereby Advanced Communications sold
$500,000 of 12% Secured Convertible Debentures due April 1, 2000, which were
convertible into shares of Advanced Communications' Common Stock. In addition,
on September 30, 1999, Advanced Communications issued another convertible
debenture to an unrelated party in the amount of $150,000. The debentures were
convertible, at the holder's option, into shares of common stock in whole or in
part at any time after the original issue date. The number of shares of common
41
stock issuable upon a conversion was to be determined by dividing the
outstanding principal amount of the debenture to be converted, plus all accrued
interest, by the conversion price. The conversion price in effect on any
conversion date is 50% of the average of the bid price during the twenty trading
days immediately preceding the applicable conversion date.
The convertible debentures contained a beneficial conversion feature
computed at its intrinsic value which is the difference between the conversion
price and the fair value on the debenture issuance date of the common stock into
which the debt is convertible, multiplied by the number of shares into which the
debt is convertible at the commitment date. Since the beneficial conversion
feature is to be settled by issuing equity, the amount attributed to the
beneficial conversion feature, of $650,000, was recorded as an interest expense
and a component of equity on the issuance date during the fiscal year ended June
30, 2000.
During December 2000, holders of $412,800 of convertible debentures
elected to convert their notes into 1,803,545 of Advanced Communications'
restricted common stock. Advanced Communications further reduced these bonds
payable by offsetting a related bond receivable in the amount of $36,450.
As of December 31, 2001 and June 30, 2001, $200,750 of Secured Convertible
Debentures are still outstanding. Advanced Communications is in default based on
the April 1, 2000 due date and Advanced Communications is currently in
litigation with these bondholders.
The following information is provided for our Australian affiliate at
December 31, 2001 and 2000 and has been translated to U.S. dollars using the
average exchange for the three-month period:
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
Average exchange rate for the $ .51393 $ 0.55820
period
Revenue from operations $ 639,882 $ 6,851
Gross profit $ 639,882 $ 6,851
Net loss from operations $ (3,163,694) $ (1,195,132)
Net loss for the quarter $ (327,193) $ (610,687)
During the year ended June 30, 2001, we reduced the carrying value of its
investment in the Australian affiliate to $2,000,000 based on management
evaluation of our Australian affiliate. This adjustment was necessitated by FASB
121 ("Accounting for Impairment of Long Lived Assets") and APB 18 ("The Equity
Method of Accounting for Investments in Common Stock"). Such pronouncements
require the annual evaluation of long lived assets for impairment.
The components of the investment in our Australian affiliate at December
31, 2001 are as follows:
INVESTMENT GOODWILL TOTAL
------------ ------------- --------------
At acquisition $ 3,657,472 $ 15,692,528 $ 19,350,000
Cumulative Investment loss (3,657,472) -- (3,657,472)
Amortization of goodwill -- (1,554,206) (1,554,206)
Impairment of goodwill -- (12,399,864) (12,399,864)
Balance at June 30, 2001 $ 2,000,000 $ 2,000,000
------------ ------------- --------------
Cumulative amortization
of goodwill through 12/31/01 (200,000) (200,000)
------------ -------------- ---------------
Balance at December 31, 2001 $ -- $ 1,800,000 $ 1,800,000
42
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS
Our common stock is currently traded on the National Association of
Securities Dealers Automated Quotation System Over-the-Counter Bulletin Board
under the symbol "ADVC". As of February 15, 2002, there were 102,530,897 common
shares outstanding and approximately 367 holders of record.
The following table sets forth, for the fiscal periods indicated, the bid
price range of our common stock:
HIGH BID LOW BID
----------------- -----------------
FISCAL 2000
Quarter Ended March 31, 2000 $6.03 $2.21
Quarter Ended June 30, 2000 2.46 1.06
FISCAL 2001
Quarter Ended September 29, 2000 $1.21 $0.56
Quarter Ended December 29, 2000 0.98 0.40
Quarter Ended March 30, 2001 1.02 0.48
Quarter Ended June 29, 2001 0.62 0.31
FISCAL 2002
Quarter Ended September 28, 2001 $0.38 $0.25
Quarter Ended December 31, 2001 0.35 0.17
Such market quotations reflect the high bid and low prices as reflected by
the OTCBB or by prices, without retail mark-up, markdown or commissions and may
not necessarily represent actual transactions.
We did not pay any dividends during fiscal 2001and have never paid any
dividends on our capital stock. We currently expect that we will retain future
earnings for use in the operation and expansion of our business and do not
anticipate paying any cash dividends in the foreseeable future. Any decision on
the future payment of dividends will depend on our earnings and financial
position at that time and such other factors as the Board of Directors deems
relevant.
43
DESCRIPTION OF SECURITIES
CAPITAL STOCK
The authorized capital stock of Advanced Communications consists of
200,000,000 shares of common stock, no par value per share, and 25,000,000
shares of preferred stock. As of February 15, 2002, we had 102,530,897 shares of
our common stock outstanding. In addition, there are outstanding debentures
convertible into 10,000,000 shares of common stock (at an assumed conversion
price of $0.10 per share) and warrants to purchase up to 6,440,900 shares of
common stock. The following description is a summary of the capital stock of
Advanced Communications and contains the material terms of the capital stock.
Additional information can be found in Advanced Communications' Articles of
Incorporation and Bylaws.
COMMON STOCK. Each share of common stock entitles the holder to one vote
on each matter submitted to a vote of our stockholders, including the election
of directors. There is no cumulative voting. Subject to preferences that may be
applicable to any outstanding preferred stock, stockholders are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the Board of Directors. Stockholders have no preemptive, conversion or other
subscription rights. There are no redemption or sinking fund provisions related
to the common stock. In the event of liquidation, dissolution or winding up of
Advanced Communications Technologies, Inc., stockholders are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding.
PREFERRED STOCK. The Board of Directors is authorized, subject to any
limitations prescribed by the Florida Statutes, or the rules of any quotation
system or national securities exchange on which stock of our company may be
quoted or listed, to provide for the issuance of shares of preferred stock in
one or more series; to establish from time to time the number of shares to be
included in each such series; to fix the rights, powers, preferences, and
privileges of the shares of such series, without any further vote or action by
the shareholders. Depending upon the terms of the preferred stock established by
the Board of Directors, any or all series of preferred stock could have
preference over the common stock with respect to dividends and other
distributions and upon liquidation of our company or could have voting or
conversion rights that could adversely affect the holders of the outstanding
common stock. Advanced Communications has no present plans to issue any shares
of preferred stock.
CONVERTIBLE DEBENTURES. We have outstanding convertible debentures with an
original principal balance of $1,000,000. These debentures are convertible into
shares of common stock at a price equal to either (a) an amount equal to one
hundred twenty percent (120%) of the closing bid price of the common stock as of
the closing date or $0.40, whichever is higher, or (b) an amount equal to eighty
percent (80%) of the lowest closing bid price of the common stock for the five
trading days immediately preceding the conversion date. If such conversion had
taken place at $0.11 (i.e., 80% of the recent price of $0.14), then the holders
of the convertible debentures would have received 9,090,909 shares of common
stock. These convertible debentures accrue interest at a rate of 5% per year and
are convertible at the holder's option. These convertible debentures have a term
of two years. At our option, these debentures may be paid in cash or redeemed at
a 20% premium prior to January 2004.
OPTIONS. Advanced Communications has no outstanding options.
WARRANTS. Advanced Communications has outstanding warrants to purchase up
to 6,440,900 shares of common stock. All of the warrants have a $0.30 exercise
price.
TRANSFER AGENT
Advanced Communications' transfer agent is American Stock Transfer & Trust
Company. Its address is 6201 15th Avenue, 3rd Floor, Brooklyn, New York 11219.
Its telephone number is (718) 921-8200.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE ARTICLES OF INCORPORATION
AUTHORIZED AND UNISSUED STOCK. The authorized but unissued shares of our
common are available for future issuance without our stockholders' approval.
These additional shares may be utilized for a variety of corporate purposes
including but not limited to future public or direct offerings to raise
additional capital, corporate acquisitions and employee incentive plans. The
issuance of such shares may also be used to deter a potential takeover of
Advanced Communications that may otherwise be beneficial to stockholders by
diluting the shares held by a potential suitor or issuing shares to a
stockholder that will vote in accordance with Advanced Communications' Board of
Directors' desires. A takeover may be beneficial to stockholders because, among
44
other reasons, a potential suitor may offer stockholders a premium for their
shares of stock compared to the then-existing market price.
The existence of authorized but unissued and unreserved shares of
preferred stock may enable the Board of Directors to issue shares to persons
friendly to current management which would render more difficult or discourage
an attempt to obtain control of our company by means of a proxy contest, tender
offer, merger or otherwise, and thereby protect the continuity of our company's
management.
45
EXPERTS
The financial statements for the year ended June 30, 2001 included in the
Prospectus have been audited by Weinberg & Company, P.A., independent certified
public accountants, to the extent and for the periods set forth in their report
(which contains an explanatory paragraph regarding Advanced Communications'
ability to continue as a going concern) appearing elsewhere herein and are
included in reliance upon such report given upon the authority of said firm as
experts in auditing and accounting.
LEGAL MATTERS
Kirkpatrick & Lockhart LLP, Miami, Florida, will pass upon the validity of
the shares of common stock offered hereby for us.
HOW TO GET MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act with respect to the securities
offered by this prospectus. This prospectus, which forms a part of the
registration statement, does not contain all the information set forth in the
registration statement, as permitted by the rules and regulations of the
Commission. For further information with respect to us and the securities
offered by this prospectus, reference is made to the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document that we have filed as an exhibit to the registration statement
are qualified in their entirety by reference to the to the exhibits for a
complete statement of their terms and conditions. The registration statement and
other information may be read and copied at the Commission's Public Reference
Room at 450 Fifth Street N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the
Commission.
46
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets as of December 31, 2001 and June 30, 2001
(Audited)
Consolidated Statement of Operations for the three and six months ended
December 31, 2001 and December 31, 2000
Consolidated Statement of Changes in Stockholders' Deficiency for the
three and six months ended December 31, 2001
Consolidated Statement of Cash Flows for the six months ended December
31, 2001 and December 31, 2000
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
F-1
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2001 June 30, 2001
(Unaudited) (Audited)
----------- ---------
ASSETS:
Cash $ 116,061 $ 6,816
Prepaid expenses 10,634 10,000
----------- -----------
TOTAL CURRENT ASSETS 126,695 16,816
----------- -----------
PROPERTY & EQUIPMENT - NET 17,599 19,599
----------- -----------
OTHER ASSETS
Goodwill, less accumulated
amortization of $200,000 1,800,000 2,000,000
Deposits 13,225 5,525
----------- -----------
TOTAL OTHER ASSETS 1,813,225 2,005,525
----------- -----------
TOTAL ASSETS $ 1,957,519 $ 2,041,940
=========== ============
LIABILITIES AND STOCKHOLDERS'
DEFICIENCY:
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 847,737 $ 844,205
Accrued compensation 566,550 479,050
Note Payable-Grassland -- 118,530
Loan Payable to shareholder 992,736 796,000
Convertible debentures 200,750 200,750
Short-term loan payable 325,000 --
Other advances 63,000 --
Interest payable 1,000 --
----------- -----------
TOTAL CURRENT LIABILITIES 2,996,773 2,438,535
LONG-TERM LIABILITIES
Notes Payable-affiliate 1,791,166 2,173,167
----------- -----------
TOTAL LIABILITIES $ 4,787,939 $ 4,611,702
----------- -----------
STOCKHOLDERS' DEFICIENCY
Common stock, no par value, 200,000,000
and 100,000,000 shares authorized,
respectively, 98,250,897 and 94,489,916
shares issued and outstanding, respectively 23,793,753 22,696,193
Common stock to be issued, 0 and 833,333
shares, respectively -- 250,000
Accumulated deficit (26,624,173) (25,515,955)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIENCY $(2,830,420) $(2,569,762)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY $ 1,957,519 $ 2,041,940
============ ============
The accompanying notes are an integral part of these financial statements
F-2
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED ENDED
---------------------------------- ----------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 2001 2000
---------------- ---------------- --------------- -----------------
TELEPHONE NETWORK REVENUE $ - $ 13,261 $ - $ 50,000
COST OF REVENUES - (12,528) - (57,310)
---------------- ---------------- --------------- -----------------
GROSS PROFIT (LOSS) - 733 - (7,310)
---------------- ---------------- --------------- -----------------
OPERATING EXPENSES
Consulting fees 124,453 153,000 224,453 306,125
Depreciation and amortization 101,000 262,543 202,000 525,085
Professional fees 210,061 176,279 340,809 175,981
Other selling, general and
administrative expenses 185,446 190,425 275,750 305,466
Stock-based compensation 30,000 133,000 60,000 146,120
---------------- ---------------- --------------- -----------------
TOTAL OPERATING EXPENSES 650,960 915,247 1,103,012 1,458,777
---------------- ---------------- --------------- -----------------
LOSS FROM OPERATIONS (650,960) (914,514) (1,103,012) (1,466,087)
---------------- ---------------- --------------- -----------------
OTHER INCOME/(EXPENSE)
Interest expense (1,000) - (5,206) -
Loss from investment in affiliate - (115,153) - (237,290)
Other income - - - -
---------------- ---------------- --------------- -----------------
TOTAL OTHER INCOME/(EXPENSE) (1,000) (115,153) (5,206) (237,290)
---------------- ---------------- --------------- -----------------
LOSS BEFORE EXTRAORDINARY GAINS $ (651,960) $ (1,029,667) $ (1,108,218) $ (1,703,377)
EXTRAORDINARY GAINS
Gains on extinguishment of debt - 23,000 - 23,000
---------------- ---------------- --------------- -----------------
NET (LOSS) $ (651,960) $ (1,006,667) $ (1,108,218) $ (1,680,377)
OTHER COMPREHENSIVE (LOSS), NET OF TAX
Unrealized (loss) on marketable securities - (4,290) - (4,875)
---------------- ---------------- --------------- -----------------
COMPREHENSIVE (LOSS) $ (651,960) $ (1,010,957) $ (1,108,218) $ (1,685,252)
================ ================ =============== =================
Net (loss) per share-basic and diluted $ (0.01) $ (0.01) $ (0.01) $ (0.01)
================ ================ =============== =================
Weighted average number of shares outstanding
during the period-basic and diluted 98,157,087 87,719,218 96,898,056 84,753,575
================ ================ =============== =================
The accompanying notes are an integral part of these financial statements
F-3
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD JULY 1, 2000 TO DECEMBER 31, 2001
COMMON STOCK ACCUMULATED COMMON STOCK
TO BE ISSUED COMMON
------------------- STOCK
SHARES AMOUNT DEFICIT SHARES AMOUNT ADVANCES TOTAL
------------ ------------- -------------- -------- ---------- ------------- ---------------
BALANCE AT JUNE 30, 2000 82,227,280 $ 16,865,441 $ (5,783,389) -- $ -- $ 375,000 $ 10,707,052
Stock issued for cash 3,060,600 642,726 642,726
Stock warrants issued for cash -- 275,454 275,454
Stock to be issued (833,334) 250,000 250,000
Stock issued for offering costs 250,000 -- --
Stock issued for services 1,051,491 328,870 328,870
Stock issued for extinguishment
of debt 6,597,000 4,545,902 4,545,902
Stock issued for conversion
of convertible debt 1,803,545 412,800 412,800
Common stock retired (500,000) (375,000) (375,000) --
Net (loss) for period (19,732,566) (19,732,566)
------------ -------------- --------------- ---------- ----------- ------------ ---------------
BALANCE AT JUNE 30, 2001 94,489,916 $ 22,696,193 $(25,515,955) 833,334 $250,000 $ -- $ (2,569,762)
------------ -------------- --------------- ---------- ----------- ------------ ---------------
Stock issued for services 780,240 244,224 244,224
Stock issued for
extinguishments of debt 1,190,000 357,001 357,001
Stock issued for cash 1,233,333 260,000 800,000) (240,000) 20,000
Stock warrants issued for cash 110,000 110,000
Net (loss) for the period (456,258) (456,258)
------------ -------------- --------------- ---------- ----------- ------------ ---------------
BALANCE AT SEPTEMBER 30, 2001 97,693,489 $ 23,667,418 $(25,972,213) 33,334 $ 10,000 $ -- $ (2,294,795)
------------ -------------- --------------- ---------- ----------- ------------ ---------------
Stock issued for services 419,681 126,335 (33,334) (10,000) 116,335
Stock issued for offering costs 137,727 -- 0
Net (loss) for the period (651,960) (651,960)
------------ -------------- --------------- ---------- ----------- ------------ ---------------
BALANCE AT DECEMBER 31, 2001 98,250,897 $ 23,793,753 $(26,624,173) -- $ -- $ -- $ (2,830,420)
============ ============== =============== ========== =========== ============ ===============
The accompanying notes are an integral part of these financial statements
F-4
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
------------------- -------------------
DECEMBER 31, DECEMBER 31,
2001 2000
------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (1,108,218) $ (1,680,377)
Adjustments to reconcile net loss to net
cash used:
Depreciation and amortization 202,000 525,085
Expenses incurred in exchange for common stock 360,559 54,570
Gain on extinguishment of debt - (23,000)
(Loss) on minority interest in affiliate - 237,290
Changes in operating assets and liabilities:
(Increase) decrease in assets
Prepaid expense (634) 46,118
Other deposits (7,700) 40,000
Increase (decrease) in liabilities:
Accounts payable 3,532 280,376
Interest payable 1,000 -
Accrued compensation 87,500 142,500
Other advances 63,000 -
Deferred revenue - (50,000)
------------------- -------------------
NET CASH USED IN OPERATING ACTIVITIES (398,961) (427,438)
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan to affiliated company - (10,108)
Purchase of fixed assets - (8,580)
Repayment of affiliate note payable (25,000) -
------------------- -------------------
NET CASH USED IN INVESTING ACTIVITIES (25,000) (18,688)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of note payable (118,530) (41,802)
Loan proceeds from shareholder 196,736 431,000
Proceeds from sale of stock - 41,802
Proceeds from issuance of common stock
and warrants, net of offering costs 130,000 -
Proceeds from issuance of short-term note 325,000 -
------------------- -------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 533,206 431,000
------------------- -------------------
Net increase (decrease) in cash 109,245 (15,126)
Cash and cash equivalents at beginning of period 6,816 30,154
------------------- -------------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 116,061 $ 15,028
=================== ===================
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
During the six months ended December 31, 2001, the Company issued 1,190,000
shares of common stock valued at $357,001 in partial repayment of Notes
Payable held by a related Australian Corporation in which we hold a 20%
investment.
The accompanying notes are an integral part of these financial statements
F-5
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-PRINCIPLES OF CONSOLIDATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements include
the results of Advanced Communications Technologies, Inc. ("ACT" or the
"Company") and its wholly-owned subsidiaries. The accompanying
unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States for interim financial statements. Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to the quarterly
reporting rules of the Securities and Exchange Commission. The
financial statements reflect all adjustments of a recurring nature that
are, in the opinion of management, necessary for the fair presentation
of the financial statements.
Operating results for the three and six months ended December 31, 2001
are not necessarily indicative of the results that may be expected for
the fiscal year ending June 30, 2002. The interim financial statements
should be read in conjunction with the audited consolidated financial
statements and notes thereto for the fiscal year ended June 30, 2001
included in the Company's Form 10-KSB as filed with the Securities and
Exchange Commission.
(A) ORGANIZATION
The Company was formed on April 30, 1998 and was inactive from its date
of formation until April 1999 when it acquired all of the issued and
outstanding stock of Media Forum International, Inc. ("MFI") in a
reverse merger. The merger was treated as an acquisition of all of the
assets of MFI and as a recapitalization of the Company. In July 1999,
the Company formed Advanced Global Communications, Inc. ("AGC") as a
wholly owned subsidiary to conduct its international telephone network
distribution business. On January 31, 2000, the Company acquired all of
the then issued and outstanding shares of SmartInvestment.com, Inc.
("Smart") an inactive reporting company, for 200,000 shares of
restricted common stock. The Company elected successor issuer status to
become a fully reporting company. The Company treated the purchase as a
recapitalization, and has not recorded any goodwill associated with the
acquisition. On April 5, 2000, the Company acquired a 20% equity
ownership interest in Advanced Communications Technology (Australia)
Pty Ltd ("ACT-AU"), an affiliated entity. The Company accounts for its
investment in ACT-AU under the equity method of accounting. In July
2000, the Company formed Australon USA, Inc. ("Australon"), a Delaware
corporation owned 50% by the Company and 50% by Australon Enterprises
Pty., Ltd., a publicly traded company listed on the Australian Stock
Exchange and a 66% owned subsidiary of ACT-AU. In November 2000, the
Company formed Advanced Network Technologies (USA), Inc. ("ANT"), a
Delaware corporation owned 70% by the Company and 30% by ACT-AU. Both
Australon and ANT are inactive. The Company will account for the future
results of operations of Australon on an equity basis and ANT on a
consolidated basis.
The Company is a holding company, whose primary activity is the
investment in companies involved in the wireless telecom industry. The
Company expects to generate revenue from marketing and distribution of
their wireless communication network products through licensing
agreements with network providers.
F-6
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(B) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries AGC, Australon and ANT (all
presently inactive). All significant intercompany transactions and
balances have been eliminated in consolidation.
(C) USE OF ESTIMATES
In preparing consolidated financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and revenues and
expenses during the reported period. Actual results could differ from
those estimates.
(D) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's accounts payable, accrued
liabilities, and loans payable approximates fair value due to the
relatively short period to maturity for these instruments.
(E) MARKETABLE SECURITIES
Management determines the appropriate classification of its investments
at the time of acquisition and reevaluates such determination at each
balance sheet date. Available-for-sale securities are carried at fair
value, with unrealized losses, reported as a separate component of
stockholders' equity.
Declines in the fair value of individual available for sale securities
below their cost that are other than temporary would result in
write-downs of the individual securities to their fair value. The
related write-downs are included in earnings as realized losses.
(F) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated, using
accelerated methods, over the estimated useful lives of 5 years.
(G) LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable assets
related to those assets for impairment whenever circumstances and
situations change such that there is an indication that the carrying
amounts may not be recoverable.
(H) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
F-7
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
There was no current income tax expense for the three and six months
ended December 31, 2001 and 2000 due to net operating losses in both
periods. Any deferred tax asset arising from the future benefit of the
Company's net operating loss carryforward has been fully reserved.
(I) COMPREHENSIVE INCOME
The Company accounts for Comprehensive Income (Loss) under the Financial
Accounting Standards Board Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (Statement No. 130").
Statement No. 130 establishes standards for reporting and display of
comprehensive income and its components.
(J) REVENUE RECOGNITION
Revenue was generally recognized at the time telephone service minutes
were used and based on the volume of call service provided to customers
and processed by the Company's contractual service providers.
(K) CONCENTRATION OF CREDIT RISK
The Company maintains its cash in bank deposit accounts, which, at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed
to any significant credit risk on cash and cash equivalents.
(L) LOSS PER SHARE
Net loss per common share is computed based upon the weighted average
common shares outstanding.
(M) NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued several new
Statements of Financial Accounting Standards. Statement No. 141,
"Business Combinations" supersedes APB Opinion 16 and various related
pronouncements. Pursuant to the new guidance in Statement No. 141, all
business combinations must be accounted for under the purchase method of
accounting; the pooling-of-interests method is no longer permitted. SFAS
141 also establishes new rules concerning the recognition of goodwill
and other intangible assets arising in a purchase business combination
and requires disclosure of more information concerning a business
combination in the period in which it is completed. This statement is
generally effective for business combinations initiated on or after July
1, 2001.
Statement No. 142, "Goodwill and Other Intangible Assets" supercedes APB
Opinion 17 and related interpretations. Statement No. 142 establishes
new rules on accounting for the acquisition of intangible assets not
acquired in a business combination and the manner in which goodwill and
all other intangibles should be accounted for subsequent to their
initial recognition in a business combination accounted for under SFAS
No. 141. Under SFAS No. 142, intangible assets should be recorded at
fair value. Intangible assets with finite useful lives should be
amortized over such period and those with indefinite lives should not be
F-8
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
amortized. All intangible assets being amortized as well as those that
are not, are both subject to review for potential impairment under SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". SFAS No. 142 also requires that
goodwill arising in a business combination should not be amortized but
is subject to impairment testing at the reporting unit level to which
the goodwill was assigned to at the date of the business combination.
SFAS No. 142 is effective for years beginning after December 15, 2001
and must be applied as of the beginning of such year to all goodwill and
other intangible assets that have already been recorded in the balance
sheet as of the first day in which SFAS No. 142 is initially applied,
regardless of when such assets were acquired. Goodwill acquired in a
business combination whose acquisition date is on or after July 1, 2001,
should not be amortized, but should be reviewed for impairment pursuant
to SFAS No. 121, even though SFAS No. 142 has not yet been adopted.
However, previously acquired goodwill should continue to be amortized
until SFAS No. 142 is first adopted.
Statement No. 143 "Accounting for Asset Retirement Obligations"
establishes standards for the initial measurement and subsequent
accounting for obligations associated with the sale, abandonment, or
other type of disposal of long-lived tangible assets arising from the
acquisition, construction, or development and/or normal operation of
such assets. SFAS No. 143 is effective for years beginning after June
15, 2002, with earlier application encouraged.
The future adoption of these pronouncements is not expected to have a
material effect on the Company's financial position or results of
operations.
NOTE 2. INVESTMENT IN AFFILIATE
In April 2000, the Company acquired 20% of the common stock of ACT-AU,
an affiliate. The purchase price of the investment amounted to
$19,350,000, and was comprised of a note payable for $7,500,000 (See
Note 1(d) and Note 6(B)) and the issuance of 5,000,000 shares of
restricted common stock valued at $11,850,000. The shares issued were
valued at the average quoted trading price during the acquisition
period. The fair value of the investment at the acquisition date was
determined to be $3,657,472. The excess of the purchase price over the
fair value of the investment in the amount of $15,692,528 was accounted
for as Goodwill.
The Company's 20% interest in ACT-AU was accounted for using the equity
method of accounting and was stated at the amortized cost of Goodwill
and the equity in undistributed earnings since acquisition. The equity
in earnings of ACT-AU was adjusted for the amortization of the Goodwill,
as discussed above. Amortization was computed on a straight-line basis
over fifteen years until June 30, 2001 when the Company re-assessed the
life of the Goodwill to be 5 years. The amortization of Goodwill charged
to income for the six months ended December 31, 2001 and December 31,
2000 was $200,000 and $523,085, respectively.
.
The following information is provided for ACT-AU at December 31, 2001
and 2000 and have been translated to US dollars using the average
exchange rate for the six month period:
F-9
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 December 31, 2000
------------------ -------------------
Average exchange rate for the period $ .51393 $ .55820
Revenue from operations $ 639,882 $ 6,851
Gross profit $ 639,882 $ 6,851
Net loss from operations $ (3,163,694) $ (1,195,132)
Net loss for the period $ (3,163,694) $ (1,195,132)
During the year ended June 30, 2001, the Company reduced the carrying
value of its investment in ACT-AU to $2,000,000 based on management
evaluation of ACT-AU. This adjustment was necessitated by FASB 121
("Accounting for Impairment of Long Lived Assets") and APB 18 ("The
Equity Method of Accounting for Investments in Common Stock"). Such
pronouncements require the annual evaluation of long lived assets for
impairment.
The components of the investment in ACT-AU at December 31, 2001 are as
follows:
Investment Goodwill Total
----------------- ------------------ --------------------
At acquisition $ 3,657,472 $ 15,692,528 $ 19,350,000
Cumulative Investment loss (3,657,472) -- (3,657,472)
Amortization of goodwill -- (1,292,664) (1,292,664)
Impairment of goodwill -- (12,399,864) (12,399,864)
----------------- ------------------ --------------------
Balance at June 30, 2001 $ -- $ 2,000,000 $ 2,000,000
Cumulative amortization of
goodwill through 12/31/01 (200,000) (200,000)
----------------- ------------------ --------------------
Balance at December 31, 2001 $ $ 1,800,000 $ 1,800,000
================= ================== ====================
NOTE 3. REALIZED LOSS ON DECLINE IN MARKETABLE SECURITIES
The Company's marketable securities were comprised of equity securities,
all classified as available-for-sale, which were carried at their fair
value based upon the quoted market prices of those investments at June
30, 2001 and 2000. Declines in the fair value that are other than
temporary result in write-downs of the securities and included in
earnings as realized losses. The Company determined there was a
permanent decline in the fair value of these securities and at June 30,
2001 the Company wrote down these securities to their fair value of $0.
This resulted in $6,825 being recognized in the statements of operations
as a realized loss on decline in marketable securities for the year
ended June 30, 2001.
NOTE 4. PROPERTY AND EQUIPMENT
Computer and office equipment $ 31,234
Less: Accumulated depreciation (13,635)
--------------------
Property and equipment - net $ 17,599
====================
F-10
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Depreciation expense for the six months ended December 31, 2001 was
$2,000.
NOTE 5. ACCRUED COMPENSATION
The Company had an oral agreement with an individual to serve as the
Chief Executive Officer of the Company. The individual agreed to defer
payment of the amounts owed him pursuant to the agreement due to the
Company's lack of funds. The Company owed the individual $479,050 at
June 30, 2001. On November 30, 2001, the individual ceased to be the
Company's Chief Executive Officer. For the three months ended December
31, 2001 an additional two months of compensation or $35,000 was accrued
resulting in a balance due the individual of $566,550.
The Company's Compensation Committee is currently examining the nature
of the past services provided by the former Chief Executive Officer and
whether a portion of such services are more properly allocable to the
Company's Australian affiliate.
NOTE 6. NOTES AND LOAN PAYABLE
(A) NOTE PAYABLE-GRASSLAND
MFI was obligated to pay $150,000 to a company (the "Payee") pursuant to
a convertible promissory note. During December 1997, MFI issued 75,000
of its common shares to settle the amounts due to the Payee. However, a
dispute arose as to whether the Payee authorized the issuance of the
shares. The Payee filed a suit during December 1997 to enforce the
convertible promissory note. Total interest payable was $84,507 as of
June 30, 2000 resulting in the total principal and accrued interest
payable at June 30, 2000 of $234,507. In June 2000, the parties agreed
to settle the matter for a payment of $200,000. This resulted in a gain
on extinguishment of debt in the amount of $34,507. The Company made a
payment of $50,000 by June 30, 2000. The $150,000 remainder was to be
paid with proceeds from the 75,000 shares of stock and any remaining
balance to be paid by the Company. The revised obligation was to be paid
by August 14, 2000. The Company defaulted on this revised payment
obligation and a judgment against the Company was entered. In October
2000, the Company sold the 75,000 shares of stock realizing $41,802
which it remitted in partial repayment of its outstanding debt. As of
June 30, 2001, the Company's remaining balance and accrued interest on
this obligation was $118,530. An additional $4,206 of interest was
accrued on this note and on October 19, 2001 the Company paid the
obligation in full. On October 24, 2001 the Company received notice from
the court that its judgment has been satisfied.
(B) NOTE PAYABLE TO AFFILIATE
The Company had a non-interest bearing note payable to an affiliate of
$7,500,000 as of April 5, 2000 (See Note 2). The following schedule
represents payments on such debt by issuance of restricted common stock
to either the affiliate or creditors of the affiliate. Such transactions
were recorded at the market price of the stock at date of issuance.
F-11
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Shares of Common
Date Stock Issued Value
------------------------ ----------------- ---------------
September 2000 5,000,000 3,500,000
October 2000 (1) 460,000 460,000
June 2001 1,137,000 567,100
September 2001 1,190,000 357,001
----------------- ---------------
7,787,000 4,884,101
----------------- ---------------
(1) This transaction resulted in a gain on extinguishment of debt of
$23,000.
During the year ended June 30, 2001 the Company repaid an aggregate of
$247,608 of the obligation in cash. During the three month period ended
September 2001, the Company repaid $25,000 of the obligation in cash. No
payments on the note were made during the three months ended December
31, 2001.
Pursuant to the terms of the April 5, 2000 Stock Purchase Agreement
between the Company and ACT-AU, the Company has elected to reduce its
outstanding loan balance by $552,125 for funds previously advanced to
ACT-AU.
As of December 31, 2001, the balance of the Company's obligation to
ACT-AU was $1,791,166. The Company is currently in litigation with
ACT-AU regarding the timing for the repayment of the Company's
obligation (See Note 11).
(C) LOAN PAYABLE TO SHAREHOLDER
As of December 31, 2001, the Company owed a principal shareholder
$992,736 for funds advanced to the Company to provide working capital
and for the repayment of certain of the Company's obligations. This loan
is non-interest bearing and unsecured.
(D) SHORT TERM LOAN PAYABLE
On December 13, 2001 the Company entered into a 90 day $325,000
Promissory Note (the "Note") with Cornell Capital Partners, LP. The Note
bears interest at 12% and is secured by a Guaranty and Pledge Agreement
executed by Messrs. Danson, Lichtman and Prouty. The Company realized
$269,000 of net proceeds after financing costs and legal fees. The Note
was repaid on January 14, 2002 with proceeds from the Company's $1
million Convertible Debenture (See Note 11).
NOTE 7. CONVERTIBLE DEBENTURES
On September 30, 1999, the Company entered into secured convertible
debentures purchase agreement with two companies, which were
stockholders of the Company, whereby the Company sold $500,000 of 12%
Secured Convertible Debentures due April 1, 2000, which were convertible
into shares of the Company's Common Stock. In addition, on September 30,
1999, the Company issued another convertible debenture to an unrelated
party in the amount of $150,000. The debentures were convertible, at the
holder's option, into shares of common stock in whole or in part at any
F-12
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
time after the original issue date. The number of shares of common stock
issuable upon a conversion was to be determined by dividing the
outstanding principal amount of the debenture to be converted, plus all
accrued interest, by the conversion price. The conversion price in
effect on any conversion date is 50% of the average of the bid price
during the twenty trading days immediately preceding the applicable
conversion date.
The convertible debentures contained a beneficial conversion feature
computed at its intrinsic value which is the difference between the
conversion price and the fair value on the debenture issuance date of
the common stock into which the debt is convertible, multiplied by the
number of shares into which the debt is convertible at the commitment
date. Since the beneficial conversion feature is to be settled by
issuing equity, the amount attributed to the beneficial conversion
feature, of $650,000, was recorded as an interest expense and a
component of equity on the issuance date during the fiscal year ended
June 30, 2000.
During December, 2000, holders of $412,800 of convertible debentures
elected to convert their notes into 1,803,545 of the Company's
restricted common stock. The Company further reduced these bonds payable
by offsetting a related bond receivable in the amount of $36,450.
As of December 31, 2001 and June 30, 2001, $200,750 of Secured
Convertible Debentures are still outstanding. The Company is in default
based on the April 1, 2000 due date and the Company is currently in
litigation with these bondholders.
NOTE 8. STOCKHOLDERS' EQUITY (DEFICIENCY)
(A) PRIVATE PLACEMENT
During the period of December 2000 to August 2001, pursuant to a private
placement under Regulation D, Rule 506, the Company issued 3,060,600
shares of common stock and 3,060,000 warrants at $.30 per share. The
Company received $1,168,180 from investors, which included $250,000 for
stock not yet issued as of June 30, 2001 and $275,454 for warrants.
The Company issued 250,000 shares of common stock, valued at $75,000, in
payment of offering costs incurred. The value assigned to this stock was
based on the private placement memorandum of $.30 per share. The value
of the common stock has been charged to equity as direct costs to the
offering.
The fair market value of the warrants, aggregating $275,454 and $110,000
at June 30, 2001 and September 30, 2001, respectively, was estimated on
the grant date using the Black-Scholes option pricing model as required
under FASB 123 with the following weighted average assumptions: expected
dividend yield 0%, volatility 49.84%, risk-free interest rate 4.22%,
expected option life 2 years. At December 31, 2001, no warrants have
been exercised.
During the three months ended September 30, 2001, the Company received
the balance of the offering proceeds and issued an additional 1,233,333
shares of its restricted common stock and associated warrants.
During the three months ended December 31, 2001, the Company issued
137,727 shares of common stock, valued at $41,318 in payment of offering
costs incurred. The value assigned to this stock was based on the
F-13
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
private placement memorandum of $.30 per share. The value of the common
stock has been charged to equity as direct costs to the offering.
(B) STOCK ISSUED FOR SERVICES
During the year ended June 30, 2001, the Company issued 1,051,491 shares
of common stock for services. The stock was valued based on the quoted
trading price on the grant dates, which aggregated $328,870.
During the three months ended September 30, 2001, the Company issued
780,240 shares of restricted common stock for services. The stock was
valued based on the quoted trading price on the grant dates, which
aggregated $244,224.
During the three months ended December 31, 2001, the Company issued
419,681 shares of restricted common stock for prior professional
services rendered. The stock was valued based on the quoted trading
price on the grant dates, which aggregated $116,335.
(C) STOCK ISSUED FOR EXTINGUISHMENT OF DEBT
During the six months ended December 31, 2001, the Company issued
1,190,000 shares of restricted common stock for the extinguishment of
debt. The stock was valued based on the quoted trading price on the
grant dates, which aggregated $370,001 (See Notes 6(A) and 6(B)).
NOTE 9. RELATED PARTIES
(A) GLOBAL COMMUNICATIONS TECHNOLOGY CONSULTANTS, INC.
Global Communications Technology Consultants, Inc., a related party, is
wholly owned by the individual who owns Global Communications
Technologies Ltd., a principal stockholder of the Company.
(B) ADVANCED COMMUNICATIONS TECHNOLOGY (AUSTRALIA) PTY. LTD.
Advanced Communications Technology (Australia) Pty. Ltd., an Australian
company, is 70% owned by entities beneficially controlled by a principal
stockholder.
(C) LEGAL COUNSEL
Certain of the Company's legal counsel are stockholders and directors of
the Company.
NOTE 10. GOING CONCERN
The Company's consolidated financial statements for the six months ended
December 31, 2001, have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business. The Company incurred a
net loss of $(1,108,218) for the six months ended December 31, 2001, a
working capital deficiency of $2,870,078 and a stockholders' deficiency
of $2,830,420.
F-14
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The ability of the Company to continue as a going concern is dependent
on the Company's ability to raise additional capital and implement its
business plan. Management anticipates that the issuance of securities
will generate sufficient resources to assure continuation of the
Company's operations (See Notes 8A and 11).
The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
NOTE 11. SUBSEQUENT EVENTS
On January 10, 2002, the Company executed various financing agreements
with Cornell Capital Partners, LP ("Cornell"), a New Jersey-based
investment fund, whereby Cornell will purchase from the Company $1
million two year Convertible Debentures and provide a $30 million
structured equity facility. Subsequent to January 10, 2002, the Company
closed on the $1 million Convertible Debenture financing and received
$564,000 net of financing and closing costs and the repayment of the
$325,000 90 day note. The Company anticipates filing an S-1 Registration
Statement in February 2002 in connection with the $30 million structure
equity facility. Under the terms of the $30 million structured equity
facility, the Company has the right to require Cornell to make monthly
purchases of up to $2 million of the Company's stock on a discounted
basis. The Company issued 2,960,000 shares of common stock with a market
value of $740,000 as a commitment fee as part of this transaction.
On January 15, 2002, the Company moved its corporate headquarters from
Irvine to El Segundo, California. The terms of the Company's new lease
are significantly more favorable than the terms of the Irvine lease. The
lease has a three-year term commencing on January 1, 2002.
On January 22, 2002, the Company's directors, excluding Messrs. May and
Roberts, pursuant to a January 4, 2002 Board of Directors Meeting, were
each issued 200,000 shares for a total of 1,000,000 shares of the
Company's restricted common stock for services rendered to the Company
as directors for the 2001 and 2002 fiscal years.
On January 23, 2002, the Company filed suit against Advanced
Communications Technologies (Australia) Pty Ltd. ("ACT-AU") and Roger
May in the Supreme Court at Melbourne, Victoria, Australia and received
a temporary injunction against ACT-AU and Mr. May from transferring,
assigning, mortgaging or disposing of the Company's 20% stock interest
in ACT-AU. The Company's claim is scheduled for a full hearing on
February 11, 2002, where it is seeking, among other things, a permanent
injunction against ACT-AU and Mr. May and the delivery of stock
certificates evidencing its 20% ownership in ACT-AU.
On January 28, 2002, the Company issued 2,960,000 shares of its
restricted common stock to Cornell Capital Partners, LP as a commitment
fee for the $30 million structured equity line facility.
F-15
ADVANCED COMMUNICATIONS
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2001
F-16
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONTENTS
PAGE 1 INDEPENDENT AUDITORS' REPORT
PAGE 2 CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2001
PAGE 3 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE
30, 2001 AND 2000
PAGE 4 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIENCY) FOR THE YEARS ENDED JUNE 30, 2001 AND 2000
PAGE 5 - 6 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
JUNE 30, 2001 AND 2000
PAGES 7 - 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-17
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of:
Advanced Communications Technologies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Advanced
Communications Technologies, Inc., and Subsidiaries as of June 30, 2001 and the
related consolidated statements of operations, changes in stockholders' equity
(deficiency) and cash flows for the years ended June 30, 2001 and 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly in all material respects, the financial position of Advanced
Communications Technologies, Inc. and Subsidiaries as of June 30, 2001, and the
results of their operations and their cash flows for the years ended June 30,
2001 and 2000 in conformity with accounting principles generally accepted in the
United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 14 to
the consolidated financial statements, the Company's significant net loss of
$19,732,566 for the year ended June 30, 2001, a working capital deficiency of
$2,421,719, and a stockholders' deficiency of $2,569,792, raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regards to these matters are also described in Note 14. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
October 19, 2001
F-18
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2001
ASSETS
CURRENT ASSETS
Cash $ 6,816
Prepaid expenses 10,000
-----------------
Total Current Assets 16,816
PROPERTY AND EQUIPMENT - NET 19,599
OTHER ASSETS 2,005,525
-----------------
TOTAL ASSETS $ 2,041,940
=================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable $ 844,205
Accrued compensation 479,050
Note payable 118,530
Loan payable to shareholder 796,000
Convertible debentures 200,750
-----------------
Total Current Liabilities 2,438,535
LONG-TERM LIABILITIES
Note payable to affiliate 2,173,167
-----------------
TOTAL LIABILITIES 4,611,702
-----------------
STOCKHOLDERS' DEFICIENCY
Common stock, no par value, 100,000,000
shares authorized, 94,489,916 shares
issued and outstanding 22,696,193
Common stock to be issued, 833,333 shares 250,000
Accumulated deficit (25,515,955)
-----------------
Total Stockholders' Deficiency (2,569,762)
-----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 2,041,940
=================
See accompanying notes to consolidated financial statements.
F-19
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30 2001 AND 2000
2001 2000
------------------- ------------------
REVENUES $ 50,000 $ -
COST OF REVENUES (57,310) -
------------------- ------------------
GROSS PROFIT (LOSS) (7,310) -
------------------- ------------------
OPERATING EXPENSES
Consulting fees 567,625 563,543
Depreciation and amortization 1,051,169 250,495
Professional fees 1,214,739 3,409,038
Other selling, general,
administrative expenses 501,048 412,110
------------------- ------------------
Total Operating Expenses 3,334,581 4,635,186
------------------- ------------------
LOSS FROM OPERATIONS (3,341,891) (4,635,186)
------------------- ------------------
OTHER INCOME (EXPENSE)
Interest income (expense) (10,332) (739,040)
Loss from investment (3,571,654) (85,818)
Loss from impairment of goodwill (12,399,864) -
Loss on investment acquisition deposit (425,000) -
Realized loss on decline in marketable
securities (6,825) (119,925)
Other income - 192,474
------------------- ------------------
Total Other Income (Expense) (16,413,675) (752,309)
------------------- ------------------
LOSS BEFORE EXTRAORDINARY GAIN (19,755,566) (5,387,495)
EXTRAORDINARY GAIN
Gains on extinguishment of debt 23,000 277,068
------------------- ------------------
NET LOSS $ (19,732,566) $ (5,110,427)
=================== ==================
Net loss per share - basic and diluted $ (0.22) $ (0.07)
=================== ==================
Weighted average number of shares
outstanding during the period - basic
and diluted 87,976,428 76,750,291
=================== ==================
See accompanying notes to consolidated financial statements.
F-20
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED TO JUNE 30, 2001 AND 2000
Common Stock Common Stock to be Issued Accumulated
Shares Amount Shares Amount Deficit
------------- ------------ ------------ ------------- --------------
Balance, June 30, 1999 73,312,280 $ 416,183 - $ - $ (672,962)
Stock issued for services 2,585,000 3,384,358 - - -
Stock issued for office furniture 30,000 9,900 - - -
Stock issued for extinguishment of debt 600,000 180,000 - - -
Stock issued for acquisitions 5,700,000 12,225,000 - - -
Change in unrealized loss on securities
available for sale - - - - -
Interest on beneficial conversion of
debentures - 650,000 - - -
Common stock advances - - - - -
Net loss for the year ended June 30, 2000 - - (5,110,427)
------------- ------------ ----------- ------------- --------------
Balance, June 30, 2000 82,227,280 16,865,441 - - (5,783,389)
Stock issued for cash 3,060,600 642,726 - - -
Stock warrants issued for cash - 275,454 - - -
Stock to be issued 833,333 250,000 -
Stock issued for offering costs 250,000 - - - -
Stock issued for services 1,051,491 328,870 - - -
Stock issued for extinguishment of debt 6,597,000 4,545,902 - - -
Stock issued for conversion of
convertible debentures 1,803,545 412,800 - - -
Stock retired (500,000) (375,000) - - -
Net loss for the year ended June 30, 2001 - - - - (19,732,566)
------------- ------------ ----------- ------------- --------------
BALANCE, JUNE 30, 2001 94,489,916 $ 22,696,193 833,333 $ 250,000 $(25,515,955)
============= ============ =========== ============= ==============
F-21
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED TO JUNE 30, 2001 AND 2000
(Continued)
Accumulated
Other Common
Comprehensive Stock
Loss Advances Total
---------------- ------------- --------------
Balance, June 30, 1999 (97,500) $ - $ (354,279)
Stock issued for services - - 3,384,358
Stock issued for office furniture - - 9,900
Stock issued for extinguishment of debt - - 180,000
Stock issued for acquisitions - - 12,225,000
Change in unrealized loss on securities
available for sale 97,500 - 97,500
Interest on beneficial conversion of
debentures - - 650,000
Common stock advances (375,000) (375,000)
Net loss for the year ended June 30, 2000 - - (5,110,427)
---------------- ------------- --------------
Balance, June 30, 2000 - (375,000) 10,707,052
Stock issued for cash - - 642,726
Stock warrants issued for cash - - 275,454
Stock to be issued - - 250,000
Stock issued for offering costs - - -
Stock issued for services - - 328,870
Stock issued for extinguishment of debt - - 4,545,902
Stock issued for conversion of
convertible debentures - - 412,800
Stock retired - 375,000 -
Net loss for the year ended June 30, 2001 - - (19,732,566)
---------------- ------------- --------------
BALANCE, JUNE 30, 2001 - $ - $ (2,569,762)
================ ============= ==============
See accompanying notes to consolidated financial statements.
F-22
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED TO JUNE 30, 2001 AND 2000
2001 2000
------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (19,732,566) $ (5,110,427)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,051,169 250,495
Interest expense - amortization of debt costs - 65,000
Realized loss on decline in marketable securities 6,825 119,925
Stock issued for services 328,870 3,384,358
Interest for beneficial conversion feature - 650,000
Gain on extinguishment of debt (23,000) (277,068)
Gain on settlement of note receivable - (8,070)
Forgiveness of accounts payable - (192,474)
Loss from investment 3,571,654 85,818
Loss from impairment of goodwill 12,399,864 -
Provision for doubtful account - 125,000
Accrued compensation 247,500 120,000
Changes in operating assets and liabilities:
(Increase) decrease in assets
Prepaid expense 36,118 (46,118)
Other deposits 40,000 (40,000)
Security deposits - (5,525)
Increase (decrease) in liabilities:
Accounts payable 633,235 184,450
Interest payable 10,332 (17,890)
Other liabilities - (115,000)
Deferred revenue (50,000) 50,000
------------------- --------------------
Net Cash Used In Operating Activities (1,479,999) (777,526)
------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan to affiliated company (247,608) (242,125)
Purchase of fixed assets (8,411) (6,335)
Other Investments - 33,070
------------------- --------------------
Net Cash Used In Investing Activities (256,019) (215,390)
------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan from affiliate 544,500 251,500
Proceeds from common stock subscriptions - 273,500
Proceeds from issuance of common stock and warrants, net of offering costs 918,180 -
Proceeds from common stock to be issued 250,000 -
Proceeds from issuance of convertible debt, net - 488,050
------------------- --------------------
Net Cash Provided By Financing Activities 1,712,680 1,013,050
------------------- --------------------
Net (DECREASE) increase in cash (23,338) 20,134
Cash and cash equivalents at beginning of YEAR 30,154 10,020
------------------- --------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 6,816 $ 30,154
=================== ====================
See accompanying notes to consolidated financial statements.
F-23
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In April 2000, the Company acquired 20% of the common stock of Advanced
Communications Technologies, Pty, an Australian corporation ("ACT_AU"). This
resulted in an investment totaling $19,350,000, comprised of a note payable of
$7,500,000 and the issuance of 5,000,000 shares of restricted common stock
valued at $11,850,000 (See Note 3).
During the year ended June 30, 2000, the Company issued 500,000 shares of common
stock, valued at $375,000, related to a rescinded acquisition. As of June 30,
2000, the Company had not received the funds for these shares; therefore, a
common stock advance had been recorded in the equity section, in the amount of
$375,000, to offset the value of the shares that were issued at year-end.
On January 31, 2000 the Company issued 200,000 shares of common stock to acquire
100% of Smart Investment.com Inc. (See Note 1(A)).
During the year ended June 30, 2000, the Company accrued interest, of $32,110,
on a note payable. The terms of the obligation were renegotiated and an interest
accrual of $34,507 was incorporated in the gain on extinguishment of debt.
During the year ended June 30, 2001, the Company issued 6,597,000 shares of
common stock, valued at $4,545,902, in partial payment of notes payable held by
a related Australian corporation, in whom we hold a 20% investment, and a
non-related company (See Notes 7(A) and (B))).
During the year ended June 30, 2001, the Company issued 1,803,545 shares of
common stock, valued at $412,800, for the conversion of convertible debentures.
See accompanying notes to consolidated financial statements.
F-24
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2001
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(A) ORGANIZATION
The Company was formed on April 30, 1998 and was inactive from its date
of formation until April 1999 when it acquired all of the issued and
outstanding stock of Media Forum International, Inc. ("MFI") in a
reverse merger. In July 1999, the Company formed Advanced Global
Communications, Inc. ("AGC") as a wholly owned subsidiary to conduct its
international telephone network distribution business. The merger was
treated as an acquisition of all of the assets of MFI and as a
recapitalization of the Company. On January 31, 2000, the Company
acquired all of the then issued and outstanding shares of
SmartInvestment.com, Inc. ("Smart") an inactive reporting company, for
200,000 shares of restricted common stock. The Company elected successor
issuer status to become a fully reporting company. The Company treated
the purchase as a recapitalization, and has not recorded any goodwill
associated with the acquisition. On April 5, 2000, the Company acquired
a 20% equity ownership interest in Advanced Communications Technologies
Pty Ltd (Australia) ("ACT-AU"), an affiliated entity. The Company
accounts for its investment in ACT-AU under the equity method of
accounting. In July 2000, the Company formed Australon USA, Inc.
("Australon"), a Delaware corporation owned 50% by the Company and 50%
by Australon Enterprises Pty., Ltd., a publicly traded company listed on
the Australian Stock Exchange and a 66% owned subsidiary of ACT-AU. In
November 2000, the Company formed Advanced Network Technologies (USA),
Inc. ("ANT"), a Delaware corporation owned 70% by the Company and 30% by
ACT-AU. Both Australon and ANT are inactive. The Company intends to
account for the future results of operations of Australon on an equity
basis and ANT on a consolidated basis.
The Company is a holding company, whose primary activity is the
investment in companies involved in the wireless telecom industry. The
Company expects to generate revenue from marketing and distribution of
their wireless communication network products through licensing
agreements with network providers.
(B) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries AGC and ANT (both
inactive). All significant intercompany transactions and balances have
been eliminated in consolidation.
(C) USE OF ESTIMATES
In preparing consolidated financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and revenues and
expenses during the reported period. Actual results could differ from
those estimates.
F-25
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2001
(D) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's accounts payable, accrued
liabilities, and loans payable approximates fair value due to the
relatively short period to maturity for these instruments.
(E) MARKETABLE SECURITIES
Management determines the appropriate classification of its investments
at the time of acquisition and reevaluates such determination at each
balance sheet date. Available-for-sale securities are carried at fair
value, with unrealized losses, reported as a separate component of
stockholders' equity.
Declines in the fair value of individual available for sale securities
below their cost that are other than temporary would result in
write-downs of the individual securities to their fair value. The
related write-downs are included in earnings as realized losses.
(F) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated, using
accelerated methods, over the estimated useful lives of 5 years.
(G) LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable assets
related to those assets for impairment whenever circumstances and
situations change such that there is an indication that the carrying
amounts may not be recoverable.
(H) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
There was no current income tax expense for the years ended June 30,
2001 and 2000 due to the net losses in both years and any deferred tax
asset arising from the future benefit of the Company's net operating
loss carryforwards has been fully reserved.
F-26
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2001
(I) COMPREHENSIVE INCOME
The Company accounts for Comprehensive Income (Loss) under the Financial
Accounting Standards Board Statements of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (Statement No. 130").
Statement No. 130 establishes standards for reporting and display of
comprehensive income and its components.
The unrealized gains and losses, net of tax, resulting from the
valuation of available-for-sale marketable securities at their fair
market value at year end are reported as Other Comprehensive Income
(Loss) in the Statement of Operations and as Accumulated Other
Comprehensive Income (Loss) in Stockholders' Equity and in the Statement
of Stockholders' Equity.
(J) REVENUE RECOGNITION
Revenue was generally recognized at the time telephone service minutes
were used and based on the volume of call service provided to customers
and processed by the Company's contractual service providers.
(K) CONCENTRATION OF CREDIT RISK
The Company maintains its cash in bank deposit accounts, which, at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed
to any significant credit risk on cash and cash equivalents.
(L) LOSS PER SHARE
Net loss per common share is computed based upon the weighted average
common shares outstanding.
(M) NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued several new
Statements of Financial Accounting Standards. Statement No. 141,
"Business Combinations" supersedes APB Opinion 16 and various related
pronouncements. Pursuant to the new guidance in Statement No. 141, all
business combinations must be accounted for under the purchase method of
accounting; the pooling-of-interests method is no longer permitted. SFAS
141 also establishes new rules concerning the recognition of goodwill
and other intangible assets arising in a purchase business combination
and requires disclosure of more information concerning a business
combination in the period in which it is completed. This statement is
generally effective for business combinations initiated on or after July
1, 2001.
Statement No. 142, "Goodwill and Other Intangible Assets" supercedes APB
Opinion 17 and related interpretations. Statement No. 142 establishes
new rules on accounting for the acquisition of intangible assets not
F-27
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2001
acquired in a business combination and the manner in which goodwill and
all other intangibles should be accounted for subsequent to their
initial recognition in a business combination accounted for under SFAS
No. 141. Under SFAS No. 142, intangible assets should be recorded at
fair value. Intangible assets with finite useful lives should be
amortized over such period and those with indefinite lives should not be
amortized. All intangible assets being amortized as well as those that
are not, are both subject to review for potential impairment under SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". SFAS No. 142 also requires that
goodwill arising in a business combination should not be amortized but
is subject to impairment testing at the reporting unit level to which
the goodwill was assigned to at the date of the business combination.
SFAS No. 142 is effective for years beginning after December 15, 2001
and must be applied as of the beginning of such year to all goodwill and
other intangible assets that have already been recorded in the balance
sheet as of the first day in which SFAS No. 142 is initially applied,
regardless of when such assets were acquired. Goodwill acquired in a
business combination whose acquisition date is on or after July 1, 2001,
should not be amortized, but should be reviewed for impairment pursuant
to SFAS No. 121, even though SFAS No. 142 has not yet been adopted.
However, previously acquired goodwill should continue to be amortized
until SFAS No. 142 is first adopted.
Statement No. 143 "Accounting for Asset Retirement Obligations"
establishes standards for the initial measurement and subsequent
accounting for obligations associated with the sale, abandonment, or
other type of disposal of long-lived tangible assets arising from the
acquisition, construction, or development and/or normal operation of
such assets. SFAS No. 143 is effective for years beginning after June
15, 2002, with earlier application encouraged.
The future adoption of these pronouncements will not have a material
effect on the Company's financial position or results of operations.
NOTE 2 DUE FROM AFFILIATE
The Company has advanced funds to ACT-AU that is majority owned by a
principal stockholder of the Company and in which it has a 20%
investment (See Note 3 and 7(B)). These funds were provided in order to
support the related company's operations. The Company has advanced
$552,125 through June 30, 2001. These advances have been offset against
the Company's Note Payable to ACT-AU (See Note 7(B)).
F-28
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2001
NOTE 3 LOSS FROM INVESTMENT IN AFFILIATE
In April 2000, the Company acquired 20% of the common stock of ACT-AU,
an affiliate (See Note 10(B)). The purchase price of the investment
amounted to $19,350,000, and was comprised of a note payable for
$7,500,000 (See Note 1(d) and Note 7(B)) and the issuance of 5,000,000
shares of restricted common stock valued at $11,850,000. The shares
issued were valued at the average quoted trading price during the
acquisition period. The fair value of the investment at the acquisition
date was determined to be $3,657,472. The excess of the purchase price
over the fair value of the investment in the amount of $15,692,528 was
accounted for as Goodwill.
The Company's 20% interest in ACT-AU WAS accounted for using the equity
method of accounting and WAS stated at the amortized cost of Goodwill
and the equity in undistributed earnings since acquisition. The equity
in earnings of ACT-AU WAS adjusted for the amortization of the Goodwill,
as discussed above. Amortization was computed on a straight-line basis
over fifteen years. The amortization of Goodwill charged to income for
the year ended June 30, 2001 and 2000 was $1,046,169 and $246,495
respectively . The following information is provided for ACT-AU at June
30, 2001 and 2000 and have been translated to US dollars using the
average exchange rate for the years ended:
June 30, 2001 June 30, 2000
--------------- ----------------
Average exchange rate for the year $ .53913 $ .62939
Revenue from operations $ 3,109,395 $ 22,282
Gross profit $ 3,109,395 $ 22,282
Net loss from operations $ (18,525,300) $ (1,708,728)
Net loss $ (18,525,300) $ (1,708,728)
During the year ended June 30, 2001, the Company reduced the carrying
value of its investment in ACT-AU to $2,000,000 based on management
evaluation of ACT-AU. This adjustment was necessitated by FASB 121
("Accounting for Impairment of Long Lived Assets") and APB 18 ("The
Equity Method of Accounting for Investments in Common Stock"). Such
pronouncements require the annual evaluation of long lived assets for
impairment.
ACT-AU has a current period operating loss combined with a history of
operating losses due to the fact that ACT-AU has been in development
stage activities since inception, and has not yet made any sales. ACT-AU
projections of estimated future cash flows could not be verified
objectively because ACT-AU has not completed scheduled field trials of
their system, a requisite before sales could be recognized. Furthermore
the completion of the field trials may be curtailed die to working
capital requirements.
F-29
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2001
The components of the investment in ACT-AU at June 30, 2001 are as
follows:
Investment Goodwill Total
---------------- ----------------- --------------------
At acquisition $ 3,657,472 $ 15,692,528 $ 19,350,000
Investment loss (3,657,472) - (3,657,472)
Amortization of goodwill - (1,292,664) (1,292,664)
Impairment of goodwill - (12,399,864) (12,399,864)
---------------- ----------------- --------------------
Balance at June 30, 2001 $ - $ 2,000,000 $ 2,000,000
================ ================= ====================
NOTE 4 REALIZED LOSS ON DECLINE IN MARKETABLE SECURITIES
The Company's marketable securities were comprised of equity securities,
all classified as available-for-sale, which were carried at their fair
value based upon the quoted market prices of those investments at June
30, 2001and 2000. Declines in the fair value that are other than
temporary result in write-downs of the securities and included in
earnings as realized losses. The Company determined there was a
permanent decline in the fair value of these securities and at June 30,
2001 and 2000 the Company wrote down these securities to their fair
value of $0 and $6,825 respectively. This resulted in $6,825 and
$119,925 being recognized in the statements of operations as a realized
loss on decline in marketable securities for the year ended June 30,
2001 and 2000.
NOTE 5 PROPERTY AND EQUIPMENT
Computer and office equipment $ 31,234
Less: Accumulated depreciation (11,635)
--------------------
Property and equipment - net $ 19,599
====================
Depreciation expense for the year ended June 30, 2001 and 2000 was
$5,000 and $4,000, respectively.
NOTE 6 ACCRUED COMPENSATION
The Company has an agreement with an individual to serve as the Chief
Executive Officer of the Company (See Note 11). The individual agreed to
defer payment of the amounts owed him pursuant to the agreement due to
the Company's lack of funds. During fiscal June 30, 2001, $247,500 was
accrued and charged to consulting fees on the statement of operations.
The Company owed the individual $479,050 at June 30, 2001.
F-30
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2001
NOTE 7 NOTES AND LOAN PAYABLE
(A) NOTE PAYABLE
MFI was obligated to pay $150,000 to a company (the "Payee") pursuant to
a convertible promissory note. During December 1997, MFI issued 75,000
of its common shares to settle the amounts due to the Payee. However, a
dispute arose as to whether the Payee authorized the issuance of the
shares. The Payee filed a suit during December 1997, to enforce the
convertible promissory note. Total interest payable was $84,507 as of
June 30, 2000 resulting in the total principal and accrued interest
payable at June 30, 2000 of $234,507. In June 2000, the parties agreed
to settle the matter for a payment of $200,000. This resulted in a gain
on extinguishment of debt in the amount of $34,507. The Company made a
payment of $50,000 by June 30, 2000. The $150,000 remainder was to be
paid with proceeds from the 75,000 shares of stock and any remaining
balance to be paid by the Company. The revised obligation was to be paid
by August 14, 2000. The Company defaulted on this revised payment
obligation and a judgment against the Company was entered. In October
2000, the Company sold the 75,000 shares of stock realizing $41,802
which it remitted in partial repayment of its outstanding debt. As of
June 30, 2001, the Company's remaining balance and accrued interest on
this obligation was $118,530 (See Note 15).
(B) NOTE PAYABLE TO AFFILIATE
The Company had a non-interest bearing note payable to an affiliate of
$7,500,000 as of April 5, 2000 (See Note 3). The following schedule
represents payments on such debt by issuance of restricted common stock.
Such transactions were recorded at the market price of the stock at date
of issuance.
Shares of Common
Date Stock Issued Value
--------------------- --------------------- ------------------
September 2000 5,000,000 $ 3,500,000
October 2000 (1) 460,000 460,000
June 2001 1,137,000 567,100
--------------- ------------------
6,597,000 $ 4,527,100
--------------- ------------------
(1) This transaction resulted in a gain on extinguishment of debt of
$23,000.
During the year ended June 30, 2001 the Company repaid an aggregate of
$247,608 of the obligation in cash.
F-31
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2001
Pursuant to the terms of the April 5, 2000 Stock Purchase Agreement
between the Company and ACT-AU, the Company has elected to reduce its
outstanding loan balance by $552,125 for funds previously advanced to
ACT-AU.
As of June 30, 2001, the balance of the Company's obligation to ACT-AU
was $2,173,167.
(C) LOAN PAYABLE TO SHAREHOLDER
As of June 30, 2001, the Company owed a shareholder $796,000 for funds
advanced to the Company to provide working capital for normal business
operations. This loan is non-interest bearing.
NOTE 8 CONVERTIBLE DEBENTURES
On September 30, 1999, the Company entered into secured convertible
debentures purchase agreement with two companies, who were stockholders
of the Company, whereby the Company sold $500,000 of 12% Secured
Convertible Debentures due April 1, 2000, which were convertible into
shares of the Company's Class A Common Stock. In addition, on September
30, 1999, the Company issued another convertible debenture to an
unrelated party in the amount of $150,000. The debentures were
convertible, at the holder's option, into shares of common stock in
whole or in part at any time after the original issue date. The number
of shares of common stock issuable upon a conversion was to be
determined by dividing the outstanding principal amount of the debenture
to be converted, plus all accrued interest, by the conversion price. The
conversion price in effect on any conversion date is 50% of the average
of the bid price during the twenty trading days immediately preceding
the applicable conversion date
The convertible debentures contained a beneficial conversion feature
computed at its intrinsic value which is the difference between the
conversion price and the fair value on the debenture issuance date of
the common stock into which the debt is convertible, multiplied by the
number of shares into which the debt is convertible at the commitment
date. Since the beneficial conversion feature is to be settled by
issuing equity, the amount attributed to the beneficial conversion
feature, of $650,000, was recorded as an interest expense and a
component of equity on the issuance date.
During December, 2000, holders of $412,800 of convertible debentures
elected to convert their notes into 1,803,545 of the Company's
restricted common STOCK. THE COMPANY FURTHER REDUCED THESE BONDS PAYABLE
BY OFFSETTING A RELATED BOND RECEIVABLE IN THE AMOUNT OF $36,450.
As of June 30, 2001, $200,750 of Secured Convertible Debentures are
still outstanding. The Company is in default based on the April 1, 2000
due date (See Note 13(B)(i)).
F-32
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2001
NOTE 9 STOCKHOLDERS' EQUITY (DEFICIENCY)
(A) PRIVATE PLACEMENT
During the period of December 2000 to June 2001, pursuant to a private
placement under Regulation D, Rule 506, the Company issued 3,060,600
shares of common stock and 3,060,000 warrants at $.30 per share. The
Company received $1,168,180 from investors, which included $250,000 for
stock not yet issued as of June 30, 2001 and $275,454 for warrants.
The Company issued 250,000 shares of common stock, valued at $75,000, in
payment of offering costs incurred. The value assigned to this stock was
based on the private placement memorandum of $.30 per share. The value
of the common stock has been charged to equity as direct costs to the
offering.
The fair market value of the warrants, aggregating $275,454, was
estimated on the grant date using the Black-Scholes option pricing model
as required under FASB 123 with the following weighted average
assumptions: expected dividend yield 0%, volatility 49.84%, risk-free
interest rate 4.22%, expected option life 2 years. At June 30, 2001, no
warrants have been exercised.
(B) STOCK ISSUED FOR SERVICES
During the year ended June 30, 2001, the Company issued 1,051,491 shares
of common stock for services. The stock was valued based on the quoted
trading price on the grant dates, which aggregated $328,870.
During the year ended June 30, 2000, the Company issued 2,585,000 shares
of common stock for services. The stock was valued based on the quoted
trading price on the grant dates, which aggregated $3,384,358.
(C) STOCK ISSUED FOR EXTINGUISHMENT OF DEBT
During the year ended June 30, 2001, the Company issued 6,597,000 shares
of common stock for the extinguishment of debt. The stock was valued
based on the quoted trading price on the grant dates, which aggregated
$4,545,902 (See Notes 7(A) & 7(B)).
(D) STOCK RETIRED
During the year ended June 30, 2001, the Company retired 500,000 shares
of restricted common stock, valued at $375,000. The stock was originally
issued to the owners of World IP in connection with that company's
acquisition in November 1999 and was then retired pursuant to a
rescission of this transaction in October 2000.
F-33
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2001
NOTE 10 RELATED PARTIES
(A) GLOBAL COMMUNICATIONS TECHNOLOGY CONSULTANTS, INC.
Global Communications Technology Consultants, Inc., a related party, is
wholly owned by the individual who owns Global Communications
Technologies Ltd., a principal stockholder of the Company.
(B) ADVANCED COMMUNICATIONS TECHNOLOGIES PTY. LTD.
Advanced Communications Technologies Pty. Ltd., an Australian company,
is majority owned by entities beneficially related to a principal
stockholder.
(C) LEGAL COUNSEL
Certain of the Company's legal counsel are stockholders of the Company.
(See Notes 2, 3, & 11 for additional related party disclosures).
NOTE 11 EXECUTIVE EMPLOYMENT AGREEMENTS
On November 29, 1999, the Company entered into an employment agreement
with a consulting organization to provide the functions customarily
provided by a Chief Financial Officer. As compensation for these
services, the Company pays $5,000 monthly in advance, plus 100,000
restricted shares of the Company's common stock. Starting April 1, 2000,
compensation for these services increased to $10,000 per month. On
September 1, 2000, the Company entered into another one-year consulting
agreement with the Chief Financial Officer. A signing bonus of 75,000
shares of stock was issued, valued at $67,500. This contract expired
August 31, 2001, but was orally extended to December 31, 2001. As
compensation, the individual receives $10,000 per month in cash and
$10,000 per month in stock
Effective July 1, 2000, the Company and its Chief Executive Officer
entered into an employment agreement that compensates the individual at
$15,000 per month and a bonus of $50,000. Effective December 1, 2000,
the compensation increased to $17,500 per month.
NOTE 12 UNSUCCESSFUL PROPOSED ACQUISITIONS
(A) ORBCOMM GLOBAL L.P.
In February 2001, the Company was the successful bidder to purchase the
assets of ORBCOMM Global L.P and related debtors (collectively
"ORBCOMM"). ORBCOMM, a partnership formed by Teleglobe Holding Corp. and
Orbital Sciences Corporation, is the owner and operator of 30 low earth
orbit satellites, digital satellite communications systems, gateway
F-34
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2001
earth stations, control center facilities and related equipment, and
intellectual property. ORBCOMM provides asset monitoring, global
positioning, communications and other data information services. In
September 2000, ORBCOMM filed for Chapter 11 Bankruptcy protection in
the United States Bankruptcy Court for the District of Delaware (the
"Court"). In March 2001, the Court entered an Order to approve the sale
of substantially all of ORBCOMM's assets to the Company.
The assets were to be owned by a newly formed entity owned by the
Company's 50% owned U.S. affiliate, Australon USA, Inc. The Company also
entered into a joint venture agreement with another bidder to sell a
portion of the new entity's equity in return for a substantial capital
commitment. The Company's joint venture partner subsequently defaulted
on its commitment to provide capital to the new entity. Because of the
extreme time constraints place by the Court on the Company to close the
transaction, and the substantial capital commitment needed to turn
ORBCOMM's business around, Company management subsequently determined
that it was no longer in the Company's best interest to pursue this
acquisition. In the unsuccessful attempt to acquire the assets of
ORBCOMM, the Company incurred expenses totaling $835,375 which are
included in the Company's Income Statement for the year ended June 30,
2001. Of this amount, the Company incurred a loss in the amount of
$425,000 relating to a non-refundable bid deposit made in connection
with the proposed acquisition. The balance of expenses were included in
professional fees totaling $395,151 and in other selling and
administrative expenses totaling $15,224.
(B) BENEVENTURE CAPITAL, LLC
On February 5, 2001, the Company entered into a Letter of Intent with an
individual and his majority owned company, Beneventure Capital , LLC
("Beneventure") to acquire the assets of Beneventure in exchange for
shares of stock of the Company. Beneventure is a privately held
technology investment and management company that owns varying interests
in private companies involved in the telecommunications, semiconductor,
Internet and financial services industries. After many attempts to
negotiate an agreement with Beneventure, the Company ceased negotiations
and determined that the acquisition was not in the best interests of the
Company. In the unsuccessful attempt to acquire the assets of
Beneventure, the Company incurred $125,965 of professional fees and
expenses that are included in the Company's Income Statement for the
year ended June 30, 2001.
NOTE 13 COMMITMENTS AND CONTINGENCIES
(A) LEASE AGREEMENTS
The Company has agreements for the rental of its offices, aggregating
$7,050 per month with lease terms of twelve months as renewed on the
first day of March and April 2001, with options to automatically renew
F-35
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2001
these leases each year. The minimum lease payments for the remaining
life of these leases is $56,400.
(B) LEGAL MATTERS
(i) As of June 30, 2001, the Company is in default on its obligation
to debenture holders based on the April 1, 2000 due date. (See
Note 8). TWO DEBENTURE HOLDERS FILED A LAWSUIT DURING APRIL 2001
FOR DAMAGES ARISING FROM THE ALLEGED DEFAULT OF THE COMPANY IN
MAKING PAYMENTS OF PRINCIPAL AND INTEREST. THE COMPLAINT ALSO
ALLEGES THAT THE PLAINTIFFS SUSTAINED DAMAGES ARISING FROM THE
COMPANY'S FAILURE TO FILE A REGISTRATION STATEMENT WHICH WAS
REQUIRED BY THE TERMS OF THE DEBENTURES. THE COMPANY INTENDS TO
DEFEND THIS ACTION VIGOROUSLY. BASED ON THE FACTS KNOWN TO DATE,
AN UNFAVORABLE OUTCOME IS LIKELY, HOWEVER THE LIKELY RANGE OF
POTENTIAL LOSS IS NOT DETERMINABLE AT THIS TIME.
(ii) As of June 30, 2001, the Company had agreed to settle a dispute
regarding a convertible promissory note. The Company is in
default on this obligation. A judgement against the Company has
been entered. The potential loss is believed to be the recorded
liability at June 30, 2001 of $118,530 plus additional accrued
interest (See Note 7(A)). THIS JUDGEMENT WAS FULLY SATISFIED IN
OCTOBER 2001.
(iii) In July 2000, several stockholders filed an action against the
Company to allow shares of the stock to be transferred from
restrictive to unrestrictive under a Rule 144 exemption. The
outcome of this litigation is unknown.
(iv) In September 2000, a Third Party complaint was filed against the
Company, which alleges that the Company failed to pay a break-up
or termination fee in excess of $50,000. This allegedly was due
to a failure of the parties to consummate a merger agreement. The
outcome of this litigation is unknown.
(v) In October 2000, the Company filed suit against the World Group
and its stockholders for the rescission of the World IP agreement
and for monetary damages resulting from management's alleged
breach of the agreement. THE OUTCOME OF THIS LITIGATION IS
UNKNOWN.
NOTE 14 GOING CONCERN
The Company's consolidated financial statements for the year ended June
30, 2001 have been prepared on a going concern basis, which contemplates
the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The Company incurred a net
loss of $19,732,566 for the year ended June 30, 2001, a working capital
deficiency of $2,421,719, and a stockholders' deficiency of $2,569,792.
F-36
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2001
The ability of the Company to continue as a going concern is dependent
on the Company's ability to raise additional capital and implement its
business plan. Management anticipates that the issuance of securities
will generate sufficient resources to assure continuation of the
Company's operations (See Note 9A and 15).
The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
NOTE 15 SUBSEQUENT EVENTS
In July and August 2001, the Company authorized the issuance of
1,190,000 Regulation 144 shares on behalf of ACT-AU in consideration for
a $357,000 credit ($.30 a share) against the outstanding debt incurred
that is currently owing by the Company INCURRED for the 20% equity
purchase of ACT-AU. These shares were issued on August 29, 2001.
In addition, on August 29, 2001, the Company issued 1,233,333 shares of
stock FOR CASH OF $370,000 to purchasers in connection with a Regulation
D Section 506 private placement. These shares were valued at $370,000.
Finally, on August 29, 2001, the Company issued 780,240 shares of stock
to professionals for legal and other services, valued at $234,700.
In September 2001, a creditor filed an Involuntary Petition for
bankruptcy against the Company. As discussed in Note 7(A) and 13(B)(ii),
the Company has a money judgement against it. THE COMPANY MADE A CASH
PAYMENT FOR $122,736 IN OCTOBER 2001 TO SETTLE THIS JUDGEMENT AND HAS
RECEIVED A DISMISSAL OF THE INVOLUNTARY PETITION FOR BANKRUPTCY. THE
COMPANY HAS REQUESTED THE CREDITOR ISSUE AND RECORD A SATISFACTION OF
JUDGEMENT IN FAVOR OF THE COMPANY.
F-37
WE HAVE NOT AUTHORIZED ANY DEALER,
SALESPERSON OR OTHER PERSON TO PROVIDE
ANY INFORMATION OR MAKE ANY
REPRESENTATIONS ABOUT ADVANCED
COMMUNICATIONS TECHNOLOGIES, INC. EXCEPT
THE INFORMATION OR REPRESENTATIONS
CONTAINED IN THIS PROSPECTUS. YOU SHOULD
NOT RELY ON ANY ADDITIONAL INFORMATION
OR REPRESENTATIONS IF MADE.
-----------------------
This prospectus does not constitute an ----------------------
offer to sell, or a solicitation of an
offer to buy any securities: PROSPECTUS
[ ] except the common stock offered by ---------------------
this prospectus;
[ ] in any jurisdiction in which the
offer or solicitation is not
authorized; 79,828,683 SHARES OF COMMON STOCK
[ ] in any jurisdiction where the
dealer or other salesperson is not
qualified to make the offer or ADVANCED COMMUNICATIONS
solicitation; TECHNOLOGIES, INC.
[ ] to any person to whom it is
unlawful to make the offer or
solicitation; or
[ ] to any person who is not a United
States resident or who is outside ___________ __, 2002
the jurisdiction of the United
States.
The delivery of this prospectus or any accompanying sale does not imply that:
[ ] there have been no changes in the
affairs of Advanced Communications
Technologies, Inc. after the date
of this prospectus; or
[ ] the information contained in this
prospectus is correct after the
date of this prospectus.
-----------------------
Until __________, 2002, all dealers
effecting transactions in the registered
securities, whether or not participating
in this distribution, may be required to
deliver a prospectus. This is in
addition to the obligation of dealers to
deliver a prospectus when acting as
underwriters.
47
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Advanced Communications Technologies, Inc.'s bylaws provide that it has
the power to indemnify any officer or director against damages if such person
acted in good faith and in a manner the person reasonably believed to be in the
best interests of Advanced Communications Technologies, Inc. No indemnification
may be made (i) if a person is adjudged liable unless a Court determines that
such person is entitled to such indemnification, (ii) with respect to amounts
paid in settlement without court approval or (iii) expenses incurred in
defending any action without court approval.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimated expenses expected to be incurred
in connection with the issuance and distribution of the securities being
registered. Advanced Communications will pay all expenses in connection with
this offering.
Securities and Exchange Commission Registration Fee $ 955
Printing and Engraving Expenses $ 2,500
Accounting Fees and Expenses $ 15,000
Legal Fees and Expenses $ 50,000
Blue Sky Qualification Fees and Expenses $ 2,500
Miscellaneous $ 16,545
======
TOTAL $ 85,000
RECENT SALES OF UNREGISTERED SECURITIES
In January 2002, Advanced Communications entered into the Equity Line of
Credit Agreement where Advanced Communications may, at its discretion,
periodically issue and sell to Cornell Capital Partners, L.P. shares of common
stock for a total purchase price of $30 million. The amount of each advance is
subject to an aggregate maximum advance amount of $2 million in any thirty-day
period. Cornell Capital Partners, L.P. will purchase the shares of common stock
for a 9% discount to the prevailing market price of our common stock. In
addition, Cornell Capital Partners is entitled to retain 3% of each advance
under the Equity Line of Credit, together with a one-time commitment fee of
$740,000, payable in shares of its common stock. On January 28, 2002, we issued
2,960,000 shares of our restricted common stock to Cornell Capital Partners, LP
with a market value of $740,000 as a commitment fee for the $30 million
structured equity line facility. Cornell Capital Partners intends to sell any
shares purchased under the Equity Line of Credit at the then prevailing market
price. Additionally, Westrock Advisors, Inc. was paid a fee of 40,000 shares of
Advanced Communications' common stock, which is equal to $10,000 at a closing
bid of $0.25 on January 10, 2002 for acting as the placement agent.
In January 2002, Advanced Communications entered into a Securities
Purchase Agreement with Buyers (as listed in Schedule 1 of the Securities
Purchase Agreement), where they shall issue and sell to Buyers up to One Million
Dollars of convertible debentures Advanced Communications has outstanding
convertible debentures with an original principal balance of $1,000,000. These
debentures are convertible into shares of common stock at a price equal to equal
to either (a) an amount equal to one hundred twenty percent (120%) of the
closing bid price of the common stock as of the closing date or $0.40, whichever
is higher, or (b) an amount equal to eighty percent (80%) of the lowest closing
bid price of the common stock for the five trading days immediately preceding
the conversion date. If such conversion had taken place at $0.16 (i.e., 80% of
the recent price of $016), then the holders of the convertible debentures would
have received 7,812,500 shares of common stock. These convertible debentures
accrue interest at a rate 5% per year and are convertible at the holder's
option. These convertible debentures have a term two years. At Advanced
Communications' option, these debentures may be paid in cash or redeemed at a
20% premium prior to January 2004.
On January 22, 2002, our directors, excluding Mr. May and Roberts,
pursuant to a January 4, 2002 Board of Directors Meeting, were each issued
200,000 shares for a total of 1,000,000 shares of our restricted common stock
for services rendered to us as directors for the 2001 and 2002 fiscal years.
II-1
During the quarter ended December 31, 2001, we issued 557,408 shares of
our restricted common stock, of which 419,681 shares valued at $116,335 were
issued in exchange for professional services and 137,727 shares valued at
$41,318 were issued to our placement agent for placement fees in connection with
the 504(d) private placement.
During the quarter ended September 30, 2001, Advanced Communications
issued 3,203,573 shares of its restricted common stock, of which 780,240 shares
valued at $244,224 were issued in exchange for services and 1,190,000 shares
valued at $357,001 were issued to various employees and vendors of our
Australian affiliate in partial repayment of our note payable.
As of September 30, 2001 and June 30, 2001, $200,750 of Secured
Convertible Debentures are still outstanding. Advanced Communications is in
default based on the April 1, 2000 due date and Advanced Communications is
currently in litigation with these debenture holders.
During the year ended June 30, 2001, Advanced Communications issued
1,051,491 shares of common stock for services. The stock was valued based on the
quoted trading price on the grant dates, which aggregated $328,870.
During the quarter ending June 30, 2001, Advanced Communications issued
780,240 shares of restricted common stock for services. The stock was valued
based on the quoted trading price on the grant dates, which aggregated $244,224.
During the period of December 2000 to August 2001, pursuant to a private
placement under Regulation D, Rule 506, Advanced Communications issued 3,060,600
shares of common stock and 3,060,000 warrants at $.30 per share. Advanced
Communications received $1,168,180 from investors, which included $250,000 for
stock not yet issued as of June 30, 2001 and $275,454 for warrants. Advanced
Communications issued 250,000 shares of common stock, valued at $75,000, in
payment of offering costs incurred. The value assigned to this stock was based
on the private placement memorandum of $.30 per share. The value of the common
stock has been charged to equity as direct costs to the offering. The fair
market value of the warrants, aggregating $275,454, was estimated on the grant
date using the Black-Scholes option pricing model as required under FASB 123
with the following weighted average assumptions: expected dividend yield 0%,
volatility 49.84%, risk-free interest rate 4.22%, expected option life 2 years.
To date, no warrants have been exercised.
During the quarter ended September 30, 2001, we issued an additional
1,233,333 shares of restricted common stock for cash and warrants at $0.30 per
share that were subscribed for prior to August 2001. On February 27, 2002, our
Board of Directors approved a resolution to reprice the private placement
offering from $0.30 per share to $0.20 per share. This repricing will result in
the issuance of an additional 2,146,967 shares of common stock and warrants to
the private placement investors. These additional shares are included in the
number of shares that we are registering for these selling shareholders. The
exercise price of the underlying warrants will remain at $0.30 per share.
During December 2000, holders of $412,800 of convertible debentures
elected to convert their notes into 1,803,545 of Advanced Communications'
restricted common stock. Advanced Communications further reduced these bonds
payable by offsetting a related bond receivable in the amount of $36,450.
As of April 5, 2000, Advanced Communications had a non-interest bearing
note payable to an affiliate of $7,500,000. The following schedule represents
payments on such debt by issuance of restricted common stock to either the
affiliate or creditors of the affiliate. Such transactions were recorded at the
market price of the stock at date of issuance.
SHARES OF
COMMON
STOCK
DATE ISSUED VALUE
-------------------------------- ------------- ------------------
September 2000 5,000,000 $ 3,500,000
October 2000(1) 460,000 460,000
June 2001 1,137,000 567,100
September 2001 1,190,000 357,001
December 2001
7,787,000 $ 4,884,101
========= =============
(1) This transaction resulted in a gain on extinguishment of debt of
$23,000.
II-2
In April 2000, Advanced Communications acquired 20% of the common stock of
our Australian affiliate. The purchase price of the investment amounted to
$19,350,000, and was comprised of a note payable for $7,500,000 and the issuance
of 5,000,000 shares of restricted common stock valued at $11,850,000. The shares
issued were valued at the average quoted trading price during the acquisition
period. The fair value of the investment at the acquisition date was determined
to be $3,657,472. The excess of the purchase price over the fair value of the
investment in the amount of $15,692,528 was accounted for as goodwill.
In April 2000, Advanced Communications' 20% interest in our Australian
affiliate was accounted for using the equity method of accounting and was stated
at the amortized cost of goodwill and the equity in undistributed earnings since
acquisition. The equity in earnings of our Australian affiliate was adjusted for
the amortization of the goodwill, as discussed above. Amortization was computed
on a straight-line basis over fifteen years. The amortization of goodwill
charged to income for each of the three months ended September 30, 2001 and
September 30, 2000 was $261,542.
On September 30, 1999, Advanced Communications entered into secured
convertible debentures purchase agreement with two companies, which were
stockholders of Advanced Communications, whereby Advanced Communications sold
$500,000 of 12% Secured Convertible Debentures due April 1, 2000, which were
convertible into shares of Advanced Communications' Common Stock. In addition,
on September 30, 1999, Advanced Communications issued another convertible
debenture to an unrelated party in the amount of $150,000. The debentures were
convertible, at the holder's option, into shares of common stock in whole or in
part at any time after the original issue date. The number of shares of common
stock issuable upon a conversion was to be determined by dividing the
outstanding principal amount of the debenture to be converted, plus all accrued
interest, by the conversion price. The conversion price in effect on any
conversion date is 50% of the average of the bid price during the twenty trading
days immediately preceding the applicable conversion date. The convertible
debentures contained a beneficial conversion feature computed at its intrinsic
value which is the difference between the conversion price and the fair value on
the debenture issuance date of the common stock into which the debt is
convertible, multiplied by the number of shares into which the debt is
convertible at the commitment date. Since the beneficial conversion feature is
to be settled by issuing equity, the amount attributed to the beneficial
conversion feature, of $650,000, was recorded as an interest expense and a
component of equity on the issuance date during the fiscal year ended June 30,
2000.
MFI (as previously defined) was obligated to pay $150,000 to a company
(the "Payee") pursuant to a convertible promissory note. During December 1997,
MFI issued 75,000 of its common shares to settle the amounts due to the Payee.
However, a dispute arose as to whether the Payee authorized the issuance of the
shares. The Payee filed a suit during December 1997 to enforce the convertible
promissory note. Total interest payable was $84,507 as of June 30, 2000
resulting in the total principal and accrued interest payable at June 30, 2000
of $234,507. In June 2000, the parties agreed to settle the matter for a payment
of $200,000. This resulted in a gain on extinguishment of debt in the amount of
$34,507. Advanced Communications made a payment of $50,000 by June 30, 2000. The
$150,000 remainder was to be paid with proceeds from the 75,000 shares of stock
and any remaining balance to be paid by Advanced Communications. The revised
obligation was to be paid by August 14, 2000. Advanced Communications defaulted
on this revised payment obligation and a judgment against Advanced
Communications was entered. In October 2000, Advanced Communications sold the
75,000 shares of stock realizing $41,802 which it remitted in partial repayment
of its outstanding debt. As of June 30, 2001, Advanced Communications' remaining
balance and accrued interest on this obligation was $118,530. An additional
$4,206 of interest was accrued on this note and on October 19, 2001 ___ Advanced
Communications paid the obligation in full. On October 24, 2001 Advanced
Communications received notice from the court that its judgment has been
satisfied.
With respect to the sale of unregistered securities referenced above, all
transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 (the "1933 Act"), and Regulation D promulgated under the
1933 Act. In each instance, the purchaser had access to sufficient information
regarding Advanced Communications so as to make an informed investment decision.
More specifically, Advanced Communications had a reasonable basis to believe
that each purchaser was an "accredited investor" as defined in Regulation D of
the 1933 Act and otherwise had the requisite sophistication to make an
investment in Advanced Communications' securities.
II-3
EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
EXHIBIT NO. DESCRIPTION LOCATION
- -------------- ------------------------------------ --------------------------
1.1 Exchange Agreement between MRC Legal Incorporated by reference to
Services Corporation and Advanced Exhibit 1.1 to Company's Form
Communications Technologies, Inc. 8-K filed on February 4, 2000
dated as of January 31, 2000
2.1 Articles of Incorporation of Media Incorporated by reference to
Forum International, Inc. Exhibit 2.1 to the Company's
Form S-8 filed on February 9,
2000
2.2 Second Amendment to Articles of Incorporated by reference to
Incorporation of Telenetworx, Inc. Exhibit 2.2 to the Company's
Form S-8 filed on February 9,
2000
2.3 Third Amendment to Articles of Incorporated by reference to
Incorporation of Media Forum Exhibit 2.3 to the Company's
International, Inc. Form S-8 filed on February 9,
2000
2.4 Bylaws of the Company Incorporated by reference to
Exhibit 2.4 to the Company's
Form S-8 filed on February 9,
2000
2.5 Articles of Incorporation as Incorporated by reference to
currently in effect for the Company Exhibit 3.1 to Form S-1
Registration Statement filed on
August 14, 2001
2.6 Bylaws, as currently in effect Incorporated by reference to
Exhibit 3.2 to Form S-1
Registration Statement filed on
August 14, 2001
2.7 Fourth Amendment to Articles of Provided herewith
Incorporation
5.1 Opinion re: Legality Provided herewith
10.1 Lease Agreement dated as of November Provided herewith
27, 2001 between the Company and
Continental Development, L. P. II
10.2 Stock Purchase Agreement between the Incorporated by reference to
Company and our Australian affiliate Exhibit 10.2 to the Form S-1
Registration Statement filed on
August 14, 2001
10.3 Agreement dated June 27, 2000, Incorporated by reference to
between Ladenburg Thalmann & Co. and Exhibit 10.3 to the Company's
the Company Form S-1 Registration Statement
filed on August 14, 2001
10.4 Common Stock Purchase Agreement dated Incorporated by reference to
December 14, 2000, between the Exhibit 10.4 to the Company's
Company and Wanquay Ltd. Form S-1 Registration Statement
filed on August 14, 2001
10.5 Registration Rights Agreement dated Incorporated by reference to
December 14, 2000, between the Exhibit 10.5 to the Company's
Company and Wanquay Ltd. Form S-1 Registration Statement
filed on August 14, 2001
EXHIBIT NO. DESCRIPTION LOCATION
- -------------- ------------------------------------ --------------------------
10.6 Escrow Agreement dated December 14, Incorporated by reference to
2000, among the Company, Wanquay Ltd. Exhibit 10.6 to the Company's
and Epstein Becker & Green Form S-1 Registration Statement
filed on August 14, 2001
10.7 Consulting Agreement with M. Richard Incorporated by reference to
Cutler dated January 31, 2000 Exhibit 10.1 to the Company's
Form S-8 filed on February 9,
2000
10.8 Stock Purchase Agreement dated April Incorporated by reference to
5, 2000, between Advanced Exhibit 10.5 to the Company's
Communications Technologies, Inc. and Form 10-QSB filed on May 24,
Advanced Communications Technologies 2000
Pty Ltd.
10.9 Securities Purchase Agreement dated Incorporated by referenced to
January 10, 2002, by and among Exhibit 10.9 to the Company's
Advanced Communications Technologies, Form 10-QSB filed on February
Inc. and Buyers 12, 2002
10.10 Investor Registration Rights Incorporated by reference to
Agreement dated January 10, 2002, by Exhibit 10.10 to the Company's
and among Advanced Communications Form 10-QSB filed on February
Technologies, Inc. and Investors 12, 2002
10.11 Transfer Agent Instructions Incorporated by reference to
Exhibit 10.11 to the Company's
Form 10-QSB filed on February
12, 2002
10.12 Escrow Agreement dated January 10, Incorporated by reference to
2002, by and among Advanced Exhibit 10.12 to the Company's
Communications Technologies, Inc., Form 10-QSB filed on February
Buyers and First Union National Bank 12, 2002
10.13 Equity Line of Credit Agreement dated Incorporated by reference to
January 10, 2002, by and between Exhibit 10.13 to the Company's
Cornell Capital Partners, LP and Form 10-QSB filed on February
Advanced Communications Technologies, 12, 2002
Inc.
10.14 Registration Rights Agreement dated Incorporated by reference to
January 10, 2002, by and between Exhibit 10.14 to the Company's
Advanced Communications Technologies, Form 10-QSB filed on February
Inc. 12, 2002
10.15 Placement Agent Agreement dated Incorporated by reference to
January 10, 2002, by and between Exhibit 10.15 to the Company's
Advanced Communications Technologies, Form 10-QSB filed on February
Inc. and Westrock Advisors, Inc. 12, 2002
10.16 Escrow Agreement dated January 10, Incorporated by reference to
2002, by and among Advanced Exhibit 10.16 to the Company's
Communications Technologies, Inc., Form 10-QSB filed on February
Cornell Capital Partners, LP , Butler 12, 2002
Gonzalez LLP and First Union National
Bank
11.0 Audited Consolidated Financial Incorporated by reference to
Statements for Advanced Exhibit 11.0 to the Company's
Communications Technology (Australia) Form 10-KSB filed on October
PTY Ltd and controlled entities 30, 2001
23.1 Consent of Weinberg & Company, P.A. Provided herewith
23.2 Consent of Kirkpatrick & Lockhart, LLP Incorporated by reference to
Exhibit 5.1 to this
Registration Statement
(b) Reports on Form 8-K.
II-5
None.
II-6
UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Sections 10(a)(3)
of the Securities Act of 1933 (the "Act");
(ii) Reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement;
(iii) Include any additional or changed material information
on the plan of distribution;
(2) That, for the purpose of determining any liability under the
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-7
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on our behalf by the undersigned, on March 4, 2002.
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
By: /s/ Gary Ivaska
-----------------------
Name: Gary Ivaska
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
- --------- ----- -----
/s/ Gary Ivaska Chief Executive Officer (Principal March 4, 2002
- ---------------------- Executive Officer)
Gary Ivaska
/s/ Wayne I. Danson Chief Financial Officer (Principal March 4, 2002
- ---------------------- Accounting Officer) and Director
Wayne I. Danson
/s/ Jonathan Lichtman Secretary and Director March 4, 2002
- ----------------------
Jonathan Lichtman
/s/ Randall Prouty Director and Chairman of the Board March 4, 2002
- ----------------------
Randall Prouty
/s/ Michael Finch Director March 4, 2002
- ----------------------
Michael Finch
/s/ Wilbank Roche Director March 4, 2002
- ----------------------
Wilbank Roche
II-8