U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1O-QSB
(check one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE THREE MONTHS ENDED MARCH 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT OF 1934
Commission File Number 000-30486
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
------------------------------------------
(Exact name of small business issuer as specified in its charter)
FLORIDA
-------
(State or other jurisdiction
of incorporation or organization)
65-0738251
----------
(IRS Employer Identification No.)
880 Apollo Street, Suite 200 El Segundo CA 90245
------------------------------------------------
(Address of principal executive offices)
(310) 416-1270
--------------
(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 3 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
As of March 31, 2002, there were 106,731,332 shares of the registrant's
no par value common stock issued and outstanding
Transmittal Small Business Disclosure Format (check one):
YES [ ] NO [X]
PART I-FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets as of March 31, 2002 and June 30, 2001
(Audited)
Consolidated Statement of Operations for the three and nine months
ended March 31, 2002 and March 31, 2001
Consolidated Statement of Changes in Stockholders' Deficiency for the
three and nine months ended March 31, 2002
Consolidated Statement of Cash Flows for the nine months ended March
31, 2002 and March 31, 2001
Notes to Unaudited Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PART II-OTHER INFORMATION
ITEM 1. LEGAL MATTERS
ITEM 2. CHANGES IN SECURITIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 6. Subsequent Events, Exhibits and Reports on Form 8-K
2
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2002 June 30, 2001
(Unaudited) (Audited)
----------- ---------
ASSETS:
Cash $ 164,359 $ 6,816
Prepaid expenses 3,000 10,000
----------- -----------
TOTAL CURRENT ASSETS 167,359 16,816
----------- -----------
PROPERTY & EQUIPMENT - NET 18,274 19,599
----------- -----------
OTHER ASSETS
Goodwill, less accumulated amortization of
$300,000 1,700,000 2,000,000
Deposits 13,225 5,525
Other receivables 9,927 --
Deferred bond financing costs, less accumulated
amortization of $6,667 73,333 --
----------- -----------
TOTAL OTHER ASSETS 1,796,485 2,005,525
----------- -----------
TOTAL ASSETS $ 1,982,118 $ 2,041,940
=========== ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 683,002 $ 844,205
Accrued compensation 172,183 479,050
Note Payable-Grassland -- 118,530
Loan Payable to shareholder 1,055,736 796,000
Convertible debentures 1,200,750 200,750
Interest payable 10,417 --
----------- -----------
TOTAL CURRENT LIABILITIES 3,122,088 2,438,535
LONG-TERM LIABILITIES
Notes Payable-Unconsolidated affiliate 1,791,166 2,173,167
----------- -----------
TOTAL LIABILITIES $ 4,913,254 $ 4,611,702
----------- -----------
STOCKHOLDERS' DEFICIENCY
Common stock, no par value, 200,000,000 and 100,000,000
shares authorized, respectively, 106,731,332 and 94,489,916
shares issued and outstanding, respectively 25,214,690 22,696,193
Common stock to be issued, 0 and 833,333 shares, respectively -- 250,000
Less: Deferred commitment fees, net of accumulated amortization
of $93,750 (656,250) --
Accumulated deficit (27,489,576) (25,515,955)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIENCY $(2,931,136) $(2,569,762)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 1,982,118 $ 2,041,940
=========== ===========
The accompanying notes are an integral part of these financial statements
3
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED
------------------------------------ ---------------------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2002 2001 2002 2001
------------------------------------ ---------------------------------------
TELEPHONE NETWORK REVENUE $ - $ - $ - $ 50,000
COST OF REVENUES - - - (57,310)
------------------ ---------------- ----------------- -----------------
GROSS PROFIT (LOSS)
- - - (7,310)
------------------ ---------------- ----------------- -----------------
OPERATING EXPENSES
Depreciation and amortization 201,417 262,542 403,417 787,626
Professional and consulting fees 42,189 753,389 607,451 1,235,495
Other selling, general and
administrative expenses 340,370 104,451 616,120 409,917
Stock-based compensation 21,010 30,000 81,010 176,120
------------------ ---------------- ----------------- -----------------
TOTAL OPERATING EXPENSES 604,986 1,150,382 1,707,998 2,609,158
------------------ ---------------- ----------------- -----------------
LOSS FROM OPERATIONS (604,986) (1,150,382) (1,707,998) (2,616,468)
------------------ ---------------- ----------------- -----------------
OTHER INCOME/(EXPENSE)
Interest expense (260,417) - (265,623) -
Income ( Loss) from investment in affiliate - 229,803 - (7,487)
(425,000)
Investment Write-down - (425,000) - -
------------------ ---------------- ----------------- -----------------
TOTAL OTHER INCOME/(EXPENSE) (260,417) (195,197) (265,623) (432,487)
------------------ ---------------- ----------------- -----------------
LOSS BEFORE EXTRAORDINARY GAINS $ (865,403) $ (1,345,579) $ (1,973,621) $ (3,048,955)
EXTRAORDINARY GAINS
Gains on extinguishment of debt - - - 23,000
------------------ ---------------- ----------------- -----------------
NET (LOSS) $ (865,403) $ (1,345,579) $ (1,973,621) $ (3,025,955)
OTHER COMPREHENSIVE (LOSS), NET OF TAX
Unrealized (loss) on marketable securities - 195 - (4,680)
------------------ ---------------- ----------------- -----------------
COMPREHENSIVE (LOSS) $ (865,403) $ (1,345,384) $ (1,973,621) $ (3,030,635)
================== ================ ================= =================
Net (loss) per share-basic and diluted $ (0.01) $ (0.01) $ (0.02) $ (0.03)
================== ================ ================= =================
Weighted average number of shares outstanding
during the period-basic and diluted 101,794,353 90,354,548 98,506,328 86,593,311
================== ================ ================= =================
The accompanying notes are an integral part of these financial statements
4
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD JULY 1, 2000 TO MARCH 31, 2002
COMMON STOCK
TO BE ISSUED
COMMON STOCK ACCUMULATED -----------------------------
SHARES AMOUNT DEFICIT SHARES AMOUNT
--------------- ---------------- -------------------- -------------- --------------
BALANCE AT 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 833,334 250,000
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
debt 1,803,545 412,800
Common stock retired (500,000) (375,000)
Net (loss) for period (19,732,566)
--------------- ---------------- -------------------- -------------- --------------
BALANCE AT JUNE 30, 2001 94,489,916 $ 22,696,193 $ (25,515,955) 833,334 $ 250,000
--------------- ---------------- -------------------- -------------- --------------
Stock issued for services 780,240 244,224
Stock issued for extinguishments of debt 1,190,000 357,001
Stock issued for cash 1,233,333 260,000 (800,000) (240,000)
Stock warrants issued for cash 110,000
Net (loss) for the period (456,258)
--------------- ---------------- -------------------- -------------- --------------
BALANCE AT SEPTEMBER 30, 2001 97,693,489 $ 23,667,418 $ (25,972,213) 33,334 $ 10,000
--------------- ---------------- -------------------- -------------- --------------
Stock issued for services 419,681 126,335 (33,334) (10,000)
Stock issued for offering costs 137,727
Net (loss) for the period (651,960)
--------------- ---------------- -------------------- -------------- --------------
BALANCE AT DECEMBER 31, 2001 98,250,897 $ 23,793,753 $ (26,624,173) $
Stock issued for services 2,013,468 151,010
Stock issued for cash and warrants 2,146,967
Stock issued to Directors for services 1,000,000 180,000
Stock issued for commitment fees 3,000,000 750,000
Deferred commitment fees (656,250)
Net (loss) for the period (865,403)
Capital contribution 9,927
Stock issued in settlement of lawsuit 320,000 80,000
Interest on beneficial conversion debentures 250,000
--------------- ---------------- -------------------- -------------- --------------
BALANCE AT MARCH 31, 2002 106,731,332 $ 24,558,440 $ (27,489,576)
=============== = ================ ==================== ============== ==============
The accompanying notes are an integral part of these financial statements
5
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD JULY 1, 2000 TO MARCH 31, 2002
(CONTINUED)
COMMON STOCK
ADVANCES TOTAL
---------------- ---------------
BALANCE AT 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
debt 412,800
Common stock retired (375,000) --
Net (loss) for period (19,732,566)
---------------- ---------------
BALANCE AT JUNE 30, 2001 $ $ (2,569,762)
---------------- ---------------
Stock issued for services 244,224
Stock issued for extinguishments of debt 357,001
Stock issued for cash 20,000
Stock warrants issued for cash 110,000
Net (loss) for the period (456,258)
---------------- ---------------
BALANCE AT SEPTEMBER 30, 2001 $ $ (2,294,795)
---------------- ---------------
Stock issued for services 116,335
Stock issued for offering costs 0
Net (loss) for the period (651,960)
---------------- ---------------
BALANCE AT DECEMBER 31, 2001 $ $ (2,830,420)
Stock issued for services 151,010
Stock issued for cash and warrants
Stock issued to Directors for services 180,000
Stock issued for commitment fees 750,000
Deferred commitment fees (656,250)
Net (loss) for the period (865,403)
Capital contribution 9,927
Stock issued in settlement of lawsuit 80,000
Interest on beneficial conversion debentures 250,000
---------------- ---------------
BALANCE AT MARCH 31, 2002 $ (2,931,136)
================ ===============
The accompanying notes are an integral part of these financial statements
5 (Continued)
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
-----------------------------------------
MARCH 31, MARCH 31,
2002 2001
-----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (1,973,621) $ (3,025,955)
Adjustments to reconcile net loss to net cash used:
Depreciation and amortization 403,417 787,626
Expenses incurred in exchange for common stock 781,569 257,070
Gain on extinguishment of debt - (23,000)
(Loss) on minority interest in affiliate - 7,487
Interest expense on beneficial conversion feature 250,000 -
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Prepaid expense 7,000 46,118
Deposits and other (24,700) 40,000
Increase (decrease) in liabilities:
Accounts payable (161,203) 477,900
Interest payable 10,417 -
Accrued compensation (306,867) 195,000
Other advances (63,000) -
Deferred revenue and other - (50,000)
-----------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (1,076,988) (1,287,754)
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan to affiliated company - (10,108)
Purchase of fixed assets (1,675) (8,580)
Repayment of loan to unconsolidated affiliate (25,000) -
Repayment of short-term loan (325,000) -
-----------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (351,675) (18,688)
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of note payable (118,530) (41,802)
Loan proceeds from shareholder 259,736 534,500
Proceeds from sale of stock - 41,802
Proceeds from issuance of common stock
and warrants, net of offering costs 120,000 768,180
Proceeds from issuance of convertible debentures 1,000,000 -
Proceeds from issuance of short-term note 325,000 -
-----------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,586,206 1,302,680
-----------------------------------------
Net increase (decrease) in cash 157,543 (3,762)
Cash and cash equivalents at beginning of period 6,816 30,154
------------------- ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 164,359 $ 26,392
=================== ==================
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
During the nine months ended March 31, 2002, 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
6
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO 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 nine months ended March 31, 2002
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 unconsolidated affiliated entity. The Company
accounts for its investment in ACT-AU under the equity method of
accounting. On July 5, 2000, the Company entered into a License and
Distribution Agreement with Advanced Communications Technologies
(Australia) Pty Ltd. pursuant to which the Company has the exclusive
rights to market and distribute the SpectruCell technology in North,
South and Central America. The License and Distribution Agreement is
effective for an indefinite period. The parties to this License and
Distribution Agrfeement are currently involved in litigation in
connection with this agreement. 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.
(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.
7
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 three and nine months
ended March 31, 2002 and 2001 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.
8
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 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 UNCONSOLIDATED AFFILIATE
In April 2000, the Company acquired 20% of the common stock of ACT-AU,
an unconsolidated 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. During the year ended June 30, 2001, the
Company reduced the carrying value of its unconsolidated equity
investment in ACT-AU to $2,000,000 based on management's evaluation of
ACT-AU's fair market value. This adjustment was required by FASB 121
("Accounting for Impairment of Long-Lived Assets") and APB 18 ("The
9
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity Method of Accounting for Investments in Common Stock"). Such
pronouncements require the annual evaluation of long-lived assets for
impairment.
ACT-AU had 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 generated any sales
revenue for its products. ACT-AU's projections of estimated future cash
flows could not be objectively verified because ACT-AU had not
completed scheduled field trials of the SpectruCell product, a
requisite before sales can be recognized. Based on these factors,
management completely wrote-off its investment in ACT-AU and wrote-down
its investment in ACT-AU's goodwill to $2,000,000 based on the fair
market value of ACT-AU's 66% majority ownership interest in Australon
Enterprises, Ltd, a publicly traded Australian company.
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. This change coupled with the writedown of
goodwill resulted in a reduction of Goodwill amortization on a
quarterly basis from $261,542 to $100,000. The amortization of goodwill
charged to income for the nine months ended March 31, 2002 and March
31, 2001 was $300,000 and $784,626, respectively.
The components of the investment in ACT-AU at March 31, 2002 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 3/31/02 (300,000) (300,000)
----------------- ------------------ --------------------
Balance at March 31, 2002 $ $ 1,700,000 $ 1,700,000
================= ================== ====================
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. [DOES THIS BELONG?]
NOTE 4. PROPERTY AND EQUIPMENT
Computer and office equipment $ 32,909
Less: Accumulated depreciation (14,635)
--------------------
Property and equipment - net $ 18,274
====================
Depreciation expense for the nine months ended March 31, 2002 was
$3,000.
NOTE 5. ACCRUED COMPENSATION
The Company had an oral agreement with Mr. Roger May to serve as the
Chief Executive Officer of the Company. Mr. May agreed to defer payment
of the amounts owed him pursuant to the oral agreement due to the
Company's lack of funds. The Company owed Mr. May $479,050 at June 30,
2001. On November 30, 2001, Mr. May was removed as the Company's Chief
Executive Officer. Subsequent to that date, Mr. May was not entitled to
receive any additional compensation from the Company.
10
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At the request of the Company's Board of Directors, the Compensation
Committee conducted a review of the nature of the past services
provided by Mr. May to the Company to determine whether a portion of
such services are more properly allocable to the Company's
unconsolidated Australian affiliate. At the Company's March 26, 2002
Board of Director's meeting, the Board of Directors unanimously
approved the recommendation of the Compensation Committee to reduce Mr.
May's prior accrued compensation by $394,361 representing services Mr.
May performed for ACT-Australia, leaving a balance of $172,183 at March
31, 2002.
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 ACT-AUSTRALIA
The Company had a non-interest bearing and unsecured note payable to
ACT-AU of $7,500,000 as of April 5, 2000 (See Note 2). The note was
payable in three equal monthly installments commencing on May 31, 2000.
Under the terms of the Stock Purchase Agreement with ACT-AU, the
monthly installment payments were extended without interest to allow
for the Company to, on a best efforts basis, raise the cash portion of
the purchase price through a private or public offering of securities.
There are no default or penalty provisions. Upon raising funds pursuant
to a private or public offering, the Company shall only be obligated to
repay ACT-AU's note with those funds remaining after deduction for
reserves needed for current operations, working capital and the
development and expansion of its operations and the operations of its
subsidiaries, as determined by the Company's Board of Directors.
The following schedule represents payments on such debt by issuance of
restricted common stock to either ACT-AU or creditors or employees of
ACT-AU. 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 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 and March 31, 2002.
11
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 March 31, 2002, 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 attempt by Mr. May and ACT-AU to lien or transfer the
Company's shares in ACT-AU for alleged nonpayment of the Company's
obligation (See Note 10).
(C) LOAN PAYABLE TO SHAREHOLDER
As of March 31, 2002, the Company owed Global Communications Technology
Pty, an Australian company wholly-owned by Mr. May, a former officer
and director of the Company, $1,055,736 for funds advanced to the
Company to provide working capital. This loan is non-interest bearing
and unsecured, and has no fixed date for repayment.
(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 7(B)).
NOTE 7. CONVERTIBLE DEBENTURES
(A) AJW PARTNERS, LLC AND NEW MILLENNIUM CAPITAL PARTNERS II, LLC
On September 30, 1999, the Company entered into secured convertible
debentures purchase agreements with two investors, who were also
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
Bank Insinger de Beaufort N.V. 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.
The Company further reduced these bonds payable by offsetting a related
bond receivable in the amount of $36,450.
Between October and December 2000, AJW Partners, LLC and New Millennium
Capital Partners II, LLC elected to convert $262,800 of convertible
debentures into 860,378 shares of the Company's restricted common
stock.
In December 2000, Bank Insinger de Beaufort N.V. converted its $150,000
note, inclusive of accrued and unpaid interest into 943,167 shares of
the Company's restricted common stock.
As of March 31, 2002 and June 30, 2001, $200,750 of Secured Convertible
Debentures were still outstanding. The Company is in default of its
remaining obligations to AJW Partners, LLC and New Millennium Capital
Partners II, LLC.
On April 24, 2002 the Company entered into a Settlement Agreement with
the two note holders, AJW Partners, LLC and New Millennium Capital
Partners II, LLC. Under the terms of the Settlement Agreement, the note
holders agreed to dismiss their lawsuit and convert their remaining
unpaid obligation, inclusive of accrued and unpaid interest, into
12
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8,500,000 shares of the Company's common stock, payable over a 180-day
period. The Company has the option, until July 23, 2002, to cash out
the note holders by remitting to them $475,000 by June 8, 2002 or
$325,000 by July 23, 2002 in lieu of the balance of shares to be
delivered. On April 24, 2002, the Company issued 1,460,725 and 664,275
shares of common stock to AJW Partners, LLC and New Millennium Capital
Partners II, LLC, respectively (See Note 10(B)).
(B) CORNELL CAPITAL PARTNERS, LP
In January 2002, the Company issued, in the aggregate $1 million of 5%
Convertible Debentures to Cornell Capital Partners, LP and other
investors.
These debentures are convertible into shares of common stock at a price
equal to either (a) an amount equal to 120% of the closing bid price of
the common stock as of the closing date or $.40, whichever is higher,
or (b) an amount equal to 80% of the lowest closing bid price of the
common stock for the five trading days immediately preceding the
conversion date. 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 the Company's
option, these debentures may be paid in cash or redeemed at a 20%
premium prior to January 2004.
The convertible debentures contain a beneficial conversion feature
computed at its intrinsic value that 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 $250,000, was recorded as an interest expense and a
component of equity on the issuance date.
The Company realized $564,000 of net proceeds after financing fees,
closing costs and the repayment of the $325,000 ninety-day short-term
note (See Note 6(D)).
NOTE 8. STOCKHOLDERS' EQUITY (DEFICIENCY)
(A) PRIVATE PLACEMENT
During the period of December 2000 to August 2001, pursuant to a
private placement, 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 private placement memorandum of $.30 per share. The value of the
common stock has been charged to equity as direct costs to the offering
and has been netted against proceeds received from the issuance of
shares in the previous quarter.
On February 27, 2002, the Company's Board of Directors approved a
resolution to reprice the private placement offering from $.30 per
share to $.20 per share. The repricing resulted in the additional
issuance of 2,146,967 of its restricted common stock and warrants to
the 23 investors that previously subscribed to the Company's private
placement. The exercise price of the underlying warrants will remain at
$.30 per share.
13
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(B) EQUITY LINE OF CREDIT FACILITY
On January 10, 2002, the Company entered into a $30 million Equity Line
of Credit facility with Cornell Capital Partners, LP. Pursuant to the
Equity Line of Credit, the Company may, at its discretion, periodically
issue and sell to Cornell Capital Partners, LP shares of common stock
for a total purchase of $30 million. The amount of each advance is
subject to an aggregate monthly maximum advance amount of $2 million in
any 30 day period. Cornell Capital Partners, LP will purchase the
shares of common stock for a 9% discount to the lowest closing bid
price of the Company's common stock during the 5 trading days after a
notice date. In addition, Cornell Capital Partners, LP will retain 3%
of each advance under the Equity Line of Credit, together with a
one-time commitment fee of $740,000, paid in 2,960,000 shares of common
stock. Cornell Capital Partners, LP intends to sell any shares under
the Equity Line of Credit at the then prevailing market price.
The Company 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 the
Company's common stock, which was equal to $10,000 at a closing bid of
$.25 on January 10, 2002.
(C) 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.
During the three months ended March 31, 2002, the Company issued
2,013,468 shares of restricted common stock having a value of $151,010
for prior professional services rendered. The stock was valued based on
the quoted trading price on the date the stock was granted.
(D) STOCK ISSUED FOR EXTINGUISHMENT OF DEBT
During the nine months ended March 31, 2002, the Company issued
1,190,000 shares of restricted common stock to ACT-AU, its vendors and
employees for the partial extinguishment of debt. The stock was valued
based on the quoted trading price on the grant dates, which aggregated
$370,001 (See Note 6(B)).
(E) STOCK ISSUED TO DIRECTORS
During the three months ended March 31, 2002, the Company issued
200,000 shares of its restricted common stock having a value of $36,000
to each of its five current Directors for services rendered to the
Company as directors. The Company issued a total of 1,000,000 shares in
the aggregate having a value of $180,000. The stock was valued based on
the quoted trading price of the Company's stock on the date that the
shares were granted to the individual directors.
(F) STOCK ISSUED IN SETTLEMENT OF LAWSUIT
During the three months ended March 31, 2002, the Company issued
320,000 shares of its restricted common stock having a value of $80,000
to the principals of WORLD IP in full settlement of the WORLD IP
rescission lawsuit. The stock was valued based on the quoted trading
price of the Company's stock on the date that the shares were granted
(See Note 10).
(G) STOCK ISSUED FOR PLACEMENT FEES
During the three months ended March 31, 2002, the Company issued
2,960,000 shares of its restricted common stock having a value of
$740,000 to Cornell Capital Partners, LP as a one-time commitment fee
in connection with the $30 million Equity Line of Credit Agreement. The
stock was priced at the closing bid price of $.25 per share on January
10, 2002. In addition, the Company issued 40,000 shares of its
restricted common stock having a value of $10,000 to Westrock Advisors,
Inc to advise it in connection with the Equity Line of Credit. The
40,000 shares were also priced at the closing bid price of $.25 on
January 10, 2002.
14
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. RELATED PARTIES
(A) GLOBAL COMMUNICATIONS TECHNOLOGY PTY LTD
Global Communications Technologies Pty Ltd., a related party, is wholly
owned by Mr. May 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 Mr. May's wholly-owned company, Global
Communications Technology Pty Ltd.
(C) LEGAL COUNSEL
Certain of the Company's legal counsel are stockholders and directors
of the Company.
NOTE 10. COMMITMENTS AND CONTINGENCIES
(A) LEASE AGREEMENT
The Company is a party to a three-year office lease commencing January
1, 2002 and ending December 31, 2004. The monthly rent is $7,634
inclusive of the cost of monthly parking. The minimum lease payments
for the remaining life of the lease is $251,922.
(B) LEGAL MATTERS
(I) NANCY J. NEEDHAM AND EDMUND R. DUPONT LAWSUIT
In NANCY J. NEEDHAM; EDMUND R. DUPONT ET AL V. ADVANCED
COMMUNICATIONS TECHNOLOGIES, INC., ET AL, an action filed July
2000 in the Fifteenth Judicial Circuit in the State of Florida,
two former officers and directors of the Company are seeking
damages and injunctive relief arising out of the Company's refusal
to provide legal opinion letters and to take other actions
necessary to allow the former officers to convert restricted stock
into unrestricted stock under an exemption under Rule 144. The
plaintiffs have not specified the amount of damages they are
seeking. The Company has filed a counterclaim to rescind all of
the Plaintiffs' stock for lack and/or failure of consideration and
other damages. The Company believes that it has meritorious
defenses to the suit and is vigorously defending the litigation.
In October 2001, the Court denied summary judgment for the
Plaintiffs.
(II) WORLD IP INCORPORATED SETTLEMENT
In ADVANCED COMMUNICATIONS TECHNOLOGIES, INC., ET AL V. WORLD IP
INCORPORATED, ET AL, an action filed in the Fifteenth Judicial
Circuit in the State of Florida, the Company sued World IP
Incorporated, its subsidiaries and shareholders (collectively,
"World") for breach of the terms of a Stock Subscription and
Purchase Agreement between the parties dated November 10, 1999.
The parties entered into Settlement and Rescission Agreements,
pursuant to which all transactions between the parties including
the Stock Subscription and Purchase Agreement, the issuance of
World stock to the Company and the issuance of 500,000 shares of
the Company's stock to World's shareholders were rescinded
effective November 10, 1999. Further, World's shareholders were
issued 320,000 shares of the Company's stock which will be
registered pursuant to the Registration Statement currently on
file with the Securities Exchange Commission. The lawsuit was
dismissed by a Court order dated January 29, 2002.
(III) AJW PARTNERS, LLC AND NEW MILLENNIUM CAPITAL PARTNERS II,
LLC
On April 24, 2002, the Company entered into a Settlement Agreement
with the two remaining September 1999 Convertible Debenture
holders, AJW Partners, LLC and New Millennium Capital Partners II,
LLC. Under the terms of the Settlement Agreement, the Company is
obligated to issue, over a 180 day period, 8,500,000 shares of its
common stock in exchange for the dismissal of the lawsuit and in
satisfaction of the remaining outstanding principal and accrued
15
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interest. The Company has the option, until July 23, 2002, to
substitute cash in lieu of shares. On closing, the Company issued
1,460,725 and 664,275 shares of its common stock to AJW Partners,
LLC and New Millennium Capital Partners II, LLC, respectively. A
Stipulation and Order of Discontinuance was filed with and Ordered
by the court on April 25, 2002 (See Note 7A ).
(IV) ACT-AUSTRALIA LITIGATION
On December 6, 2001, Mr. Roger May, as Chairman and Chief
Executive Officer of ACT-Australia, sent a letter to Advanced
Communications demanding full payment of all amounts due under the
Stock Purchase Agreement between Advanced Communications and
ACT-Australia (the "STOCK PURCHASE Agreement). This letter was
dated six days after Mr. May was removed by the Board of Directors
from all executive capacities including as President and Chief
Executive Officer. Mr. May sent additional demand letters on
December 11, 2001, and December 21, 2001. These demand letters
threatened to exercise the rights granted to ACT-Australia under
its constitutional documents, which include exercising
ACT-Australia's lien over the shares registered in the name of
Advanced Communications or declaring that those shares be
forfeited. Advanced Communications believes that it has fully met
its obligation under the Stock Purchase Agreement, which states
that payments are only required to be paid to ACT-Australia 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. At this time, Advanced
Communications does not have sufficient funds available to pay to
ACT-Australia. On January 23, 2002, Advanced Communications filed
suit against ACT-Australia and Roger May in the Supreme Court of
Victoria at Melbourne, Australia to protect its investment.
On January 23, 2002, the Court issued an interim order effectively
enjoining and prohibiting ACT-Australia from "transferring,
dealing with, charging, diminishing, mortgaging, assigning or
disposing of" Advanced Communications' stock in ACT-Australia.
Although the court order had already been extended twice, it was
again extended by the court on February 20, 2002, until a final
determination is made at trial. ACT-Australia declined to contest
the court orders sought by Advanced Communications. ACT-Australia
filed its Answer to the suit and the parties are currently
conducting discovery of material documents.
On March 15, 2002, ACT-Australia issued a press release stating
that EntrePort Corporation ("EntrePort"), an AMEX listed company,
executed "definitive documents" whereby EntrePort would acquire a
minority interest in ACT-Australia and ACT-Australia would
purchase a majority interest in EntrePort. Further, on March 14,
2002, ACT-Australia entered into an Acquisition Agreement with
EntrePort (the "Acquisition Agreement") which stated that
ACT-Australia "now plans to locate and establish a base of
operations in the United States for the continued development,
marketing and distribution of the SpectruCell product in the USA
and Canada. Such base of operations will involve the establishment
of engineering facilities, research and development, sales,
marketing and distribution." The Acquisition Agreement also stated
that EntrePort's name would be changed to "Advanced Communications
USA, Inc." Mr. May resigned from Advanced Communications' Board of
Directors one day before entering into the Acquisition Agreement.
Advanced Communications believes that the transaction with
EntrePort as described in the Acquisition Agreement is
inconsistent with the rights granted to it by ACT-Australia in the
License and Distribution Agreement dated July 5, 2000 pursuant to
which Advanced Communications received the exclusive rights to
market and distribute the SpectruCell technology in North, South
and Central America. Advanced Communications therefore instructed
its Australian lawyers to write to ACT-Australia requesting an
undertaking that it would not appoint EntrePort or any other
person to market and distribute the SpectruCell technology in the
exclusive territory in breach of the license agreement.
ACT-Australia refused to provide the undertaking sought by
Advanced Communications and, accordingly, Advanced Communications
applied to the Court for an order restraining ACT-Australia from
breaching the terms of the license agreement. On April 26, 2002,
the Court issued an interim order on the following terms:
"Until the determination of the plaintiff's [i.e.,
Advanced Communications'] summons filed on 23 April 2002
or further order, the first defendant [i.e.,
ACT-Australia], whether by itself or by its officers,
employees, agents, attorneys, or any of them or otherwise,
be restrained from appointing or agreeing to appoint in
any way whatsoever EntrePort Corporation or any other
person to distribute, sell, offer to sell or supply or
otherwise deal in or with the wireless or terrestrial
multi-protocols communication network technology known as
SpectruCell (`Product') (incorporating the software which
16
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
enables the Product to perform to its specifications,
consisting of a set of instructions or statements in
machine readable medium, and any enhancement or
modification of that software (`Software') and related
hardware performing part of the base station controller
which processes and transmits mobile communications
protocols such as AMPS, CDMA, TDMA GSM, W-CDMA, UMTS, 3G &
Voice IP) in the United States of America, the North
American and South American Continents (`Exclusive
Territory') without the prior written consent of the
plaintiff."
EntrePort was added as a defendant to the proceedings.
On May 7, 2002, Advanced Communications received a notice alleging
a breach from ACT-Australia stating that Advanced Communications
had breached its obligation under the License Agreement. Advanced
Communications believes that the notice of breach is without merit
and it is taking the necessary legal actions to prevent
ACT-Australia from terminating its rights under the License
Agreement.
The Court extended its April 26, 2002 order through May 27, 2002,
further restraining ACT-Australia from "acting upon or taking any
further steps in reliance upon" the notice of breach until May 27,
2002 when this matter will be heard by the Court.
V) STAR MULTICARE SERVICES, INC.
In STAR MULTI CARE SERVICES, INC. v. ADVANCED COMMUNICATIONS
TECHNOLOGIES, INC., an action filed September 18, 2000 in the
Fifteenth Judicial Circuit in the State of Florida, Star Multi
Care Services, Inc. ("Star") sued the Company for alleged breach
of contract and the recovery of a break-up or termination fee in
excess of $50,000 in conjunction with the Company's alleged
failure to consummate a proposed merger with Star in January 2000.
The Company believes that the suit is without basis and is
vigorously defending the alleged claim.
NOTE 11. GOING CONCERN
The Company's consolidated financial statements for the nine months
ended March 31, 2002, 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's net loss of $(1,973,621) for the nine months ended March 31,
2002, working capital deficiency of $2,954,729 and stockholders'
deficiency of $2,931,136, raise substantial doubt about its ability to
continue as a going concern.
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 for the continuation of the
Company's operations (See Note 8B).
The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
NOTE 12. SUBSEQUENT EVENTS
Effective April 30, 2002, Mr. Gary Ivaska resigned as the Company's
Chief Executive Officer. The Company and Mr. Ivaska have settled all
outstanding amounts otherwise due him for his prior services. Under the
terms of the Ivaska Agreement, the Company is obligated to pay Mr.
Ivaska $40,000 at the rate of $10,000 per month for four months
commencing on May 31, 2002.
On May 2, 2002, the Company's Board of Directors voted to appoint Mr.
Wayne Danson, currently the Company's Vice President and Chief
Financial Officer to assume the role of the Company's President.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CO0NDITION
AND RESULTS OF OPERATIONS
ITEM 1. BUSINESS
Unless the context requires otherwise, "we", "us" or "our" refers to
Advanced Communications Technologies, Inc. and subsidiaries on a consolidated
basis.
COMPANY 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. We believe
that 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 Advanced Communications Technologies,
Pty (Australia), an entity that we own a 20% interest in. Mr. May, a former
officer and director and a significant shareholder of Advanced Communications,
owns 70% of Advanced Communications Technologies (Australia) Pty Ltd. through
Global Communications Technology Pty Ltd., his wholly owned company. 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 Advanced Communications (Australia) throughout the North, Central
and South American territories. We are currently involved in litigation with
Advanced Communications (Australia) in connection with the license agreement.
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 Advanced Communications (Australia). SpectruCell has not yet been
commercially tested and is expected to be field tested in the U.S. in 2002. 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 licensing, marketing and
distribution of the SpectruCell product under our license agreement. The license
agreement gives us the exclusive right to market and distribute SpectruCell in
North, Central and South America. The manufacturing of SpectruCell will be
arranged by Advanced Communications (Australia). We have not had any meaningful
revenues to date.
We believe that the SpectruCell technology 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. We believe
that 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.
The following is management's discussion and analysis of certain
significant factors, which have affected our financial position and operating
results. Certain statements under this section may constitute "forward-looking
statements" (See Part II- Other Information). The following discussion should be
read in conjunction with the unaudited financial statements and Notes thereto.
18
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2002 TO THE THREE MONTHS ENDED
MARCH 31, 2001
OVERALL RESULTS OF OPERATIONS
For the three months ended March 31, 2002 we incurred an overall loss
of ($615,403) or ($.01) per share, which was 54% less than the overall loss of
($1,345,384) or ($0.01) per share in the comparable period in the prior year.
REVENUE AND COST OF SALES.
No revenues were generated during the three months ended March 31, 2002
or March 31, 2001.
OPERATING EXPENSES.
Operating expenses, net of stock-based compensation charges of $21,010
for the three months ended March 31, 2002, were $583,976 and represent a
$536,406 or 48% decrease in operating expenses of $1,120,382, net of stock-based
compensation charges, for the comparative period ended March 31, 2001. Included
in operating expense for both periods is $100,000 and $262,542 respectively, of
depreciation and amortization attributable to the quarterly depreciation of our
office property and equipment and amortization of goodwill for the three months
ended March 31, 2002 and 2001. Additional amortization of deferred financing
costs and commitment fee of $100,417 is included for the three months ended
March 31, 2002.
OTHER INCOME (EXPENSE).
Interest expense incurred for the three months ended March 31, 2002 was
$260,417 and was attributable to accrued interest on the $1 million Convertible
Debentures we issued in January 2002. Included in total interest expense is
$250,000 interest attributable to the intrinsic value of the beneficial
conversion feature included in the convertible debentures we issued to Cornell
Capital Partners, L.P. and other investors. We incurred no interest for the
comparative three-month period ended March 31, 2001.
For the quarter ended March 31, 2002, we did not record our share of
our unconsolidated investment in Advanced Communications Technologies
(Australia) Pty Ltd. consolidated quarterly loss because our equity investment
in its underlying net assets was written down to zero as of June 30, 2001. In
accordance with the equity method of accounting, we are not required to record
our share of future losses from our investment in Advanced Communications
Technologies, Pty (Australia) until our investment becomes positive. For the
comparative three months ended March 31, 2001, our share, expressed in US
dollars, of our unconsolidated investment in Advanced Communications
Technologies, Pty (Australia) consolidated net income for the quarter was
$229,803. During the three months ended March 31, 2001, we recognized a $425,000
loss on the unsuccessful acquisition of ORBCOMM's assets.
COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 2002 TO THE NINE MONTHS ENDED
MARCH 31, 2001
OVERALL RESULTS OF OPERATIONS
For the nine months ended March 31, 2002, the Company incurred an
overall net loss of ($1,973,621) or ($.02) per share, as compared to an overall
net loss of ($3,030,635) or ($.03) per share, for the comparative period in the
prior year. The overall net loss for the nine months ended March 31, 2002 was
35% less than the net loss for the nine months ended March 31, 2001.
REVENUE. We did not generate any revenue for the nine months ended
March 31, 2002. Revenue for the nine months ended March 31, 2001 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 nine months ended March 31, 2001.
19
OPERATING EXPENSES. Operating expenses, net of stock-based compensation
charges of $81,010 for the nine months ended March 31, 2002, were $1,626,988 and
represent a $806,050 decrease, or 33%, in operating costs net of stock-based
compensation charges of $176,120 for the comparable nine month period ended
March 31, 2001.
Interest expense incurred for the nine months ended March 31, 2002 was
$265,623. Included in total interest expense is $250,000 interest attributable
to the intrinsic value of the beneficial conversion feature included in the
convertible debentures we issued to Cornell Capital Partners, L.P. and other
investors. We incurred no interest expense for the comparative nine months ended
March 31, 2001.
Other income (loss) for the nine months ended March 31, 2001 includes
our share, determined under the equity method of accounting, of Advanced
Communications Technologies, Pty (Australia) operating loss. No loss was
reported for the comparative period ended March 31, 2002, as our investment in
Advanced Communications Technologies, Pty (Australia) was written down to zero
as of June 30, 2001 and we are no longer required to record our share of
Advanced Communications Technologies, Pty (Australia) loss until our investment
becomes positive. We realized no extraordinary gain or loss during the nine
months ended March 31, 2002.
(b) 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 $3,900,000 before offering costs
through the sale of these securities and have borrowed $1,055,736 from an entity
wholly-owned by Roger May, a former officer and director of our company and a
significant shareholder.
At March 31, 2002, our cash and cash equivalents balance was $164,359
an increase of $157,543 from the balance of $6,816 at June 30, 2001. During the
nine-months ended March 31, 2002, cash provided by (used in) operations amounted
to ($1,076,988). Cash provided by (used in) investing activities was ($351,675).
Cash provided by financing activities during the nine-months ended March 31,
2002 amounted to $1,586,206 and consisted of $259,736 of unsecured loans from an
entity wholly-owned by Roger May, a former officer and director of our company
and a significant shareholder, $120,000 from the sale of common stock and
warrants pursuant to our private offering and $1,000,000 of proceeds from the
sale of convertible debentures to Cornell Capital Partners, LP and other
investors. For the comparative nine-month period ended March 31, 2001, no cash
was provided by operations as all of our operations during this period were
financed via unsecured loans from an entity wholly-owned by Roger May, a former
officer and director of our company and a significant shareholder and proceeds
from the sale of securities in private offerings. We had a working capital
deficiency in the amount of ($2,954,729) and ($2,950,011) respectively, for the
nine month periods ended March 31, 2002 and March 31, 2001.
Based on our loss from operations, working capital deficiency and
stockholders' deficiency, our auditors have expressed substantial doubt about
our ability to continue as a going concern. Our ability to continue as a going
concern is dependent on our ability to raise additional capital and execute our
business plan.
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. ("LTCO") 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 our S-1 application with the SEC.
On December 13, 2001, we entered into a 90 day $325,000 Promissory Note
(the "Note") with Cornell Capital Partners, LP. The Note bears interest at 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 the
Company's $1 million Convertible Debentures.
On January 10, 2002, we executed various financing agreements with
Cornell Capital Partners, LP ("Cornell"), a New Jersey-based investment fund
whereby Cornell purchased $1 million of two year Convertible Debentures and
provided us with a $30 million structured equity facility. Subsequent to January
10, 2002, we closed on the $1 million Convertible Debenture financing and
20
received $564,000 net of financing and closing costs and the repayment of the
$325,000 ninety-day note. Pursuant to the terms of 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 lowest closing bid price of our common
stock during the 5 trading days after an advance date. In addition, Cornell
Capital Partners, L.P. will retain 3% of each advance under the Equity Line of
Credit. Cornell Capital Partners, L.P. 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 Registration Statement being declared effective by the SEC. On March 5,
2002, we filed a Registration Statement with the SEC seeking to register
70,000,000 million shares of our common stock for sale to Cornell Capital
Partners, L.P. Based upon our current stock price of $.05 per share, we will
only have 45,000,000 shares available to sell to Cornell Capital Partners, L.P.
under the terms of the Equity Line of Credit after taking into account the
conversion of our $1 million convertible Debentures. Based on the current market
price of our stock, we would only be able to realize approximately $2 million of
the $30 million available to us under the Equity Line of Credit. Such issuance
would be substantially dilutive to our existing shareholders.
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 $2,921,338. These obligations include outstanding convertible
debentures in the amount of $1 million, as well as accounts payable and accrued
expenses in the amount of $683,002, accrued compensation of $172,183 and an
unsecured, non-interest bearing loan payable to an entity wholly-owned by Roger
May, a former officer and director and a significant shareholder. In addition,
we have a note payable to Advanced Communications Technologies, Pty (Australia)
in the amount of $1,791,166 at March 31, 2002 that is the subject of a pending
lawsuit brought by us against Roger May and Advanced Communications
Technologies, Pty (Australia).
We anticipate that our cash needs over the next twelve months will come
solely from the sale of securities or loans, including the Equity Line of
Credit.
(c) ACQUISITIONS
On September 7, 2001 we entered into a Letter of Intent with Advanced
Communications Technologies, Pty (Australia). 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 Advanced Communications Technologies, Pty
(Australia) 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. During the period from January 2002 to
present, we, along with our Australian financial and legal advisors, have
attempted to negotiate with Mr. May in good faith to enter into a Non-Disclosure
Agreement to allow us to commence our due diligence on the financial, legal and
technological affairs of Advanced Communications Technologies (Australia) Pty
Ltd. In addition, during this period we have filed two lawsuits against Mr. May
and Advanced Communications Technologies (Australia) Pty Ltd. for breach of our
April 5, 2000 Stock Purchase Agreement and July 5, 2000 License and Distribution
Agreement. Consequently, we have been unable to execute any Non-Disclosure
Agreement nor commence any active or meaningful negotiations with Mr. May for
the acquisition of the SpectruCell technology pursuant to the terms of the
September 7, 2001 Letter of Intent. 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.
21
(D) ACT'S QUARTERLY STOCK PRICE
for the Quarter Ended High Low
--------------------- ---- ---
March 31, 2002 $.30 $.05
December 31, 2001 .38 .17
September 30, 2001 .41 .25
June 30, 2001 .68 .27
March 31, 2001 1.03 .45
22
PART II- OTHER INFORMATION
The statements in this quarterly report, Form 10-QSB, that are not
historical constitute "forward-looking statements". Said forward-looking
statements involve risks and uncertainties that may cause the actual results,
performance or achievements of the Company and its subsidiary to be materially
different from any future results, performances or achievements, express or
implied by such forward-looking statements. These forward-looking statements are
identified by their use of such terms and phrases as "expects", "intends",
"goals", "estimates", "projects", "plans", "anticipates", "should", "future",
"believes", and "scheduled".
The variables which may cause differences include, but are not limited
to, the following: i) general economic and business conditions; ii) competition;
iii) success of operating initiatives including the successful field testing and
commercialization of the SpectruCell product; iv) financing efforts; v)
advertising and promotional efforts; vi) the existence or absence of adverse
publicity; vii) changes in business strategy or development plans; viii) the
ability to retain and attract new management; ix) availability, terms and
deployment of capital; x) business abilities and judgment of personnel; xi)
labor and employment benefit costs; xii) availability and costs of raw materials
and supplies; and xiii) changes in, or failure to comply with various government
regulations. Although we believe that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this filing will prove to be
accurate.
ITEM 1. LEGAL PROCEEDINGS
In NANCY J. NEEDHAM; EDMUND R. DUPONT ET AL V. ADVANCED COMMUNICATIONS
TECHNOLOGIES, INC., ET AL, an action filed July 2000 in the Fifteenth Judicial
Circuit in the State of Florida, two former officers and directors of the
Company are seeking damages and injunctive relief arising out of the Company's
refusal to provide legal opinion letters and to take other actions necessary to
allow the former officers to convert restricted stock into unrestricted stock
under an exemption under Rule 144. The plaintiffs have not specified the amount
of damages they are seeking. The Company has filed a counterclaim to rescind all
of the Plaintiffs' stock for lack and/or failure of consideration and other
damages. The Company believes that it has meritorious defenses to the suit and
is vigorously defending the litigation. In October 2001, the Court denied
summary judgment for the Plaintiffs.
In ADVANCED COMMUNICATIONS TECHNOLOGIES, INC., ET AL V. WORLD IP
INCORPORATED, ET AL, an action filed in the Fifteenth Judicial Circuit in the
State of Florida, the Company sued World IP Incorporated, its subsidiaries and
shareholders (collectively, "World") for breach of the terms of a Stock
Subscription and Purchase Agreement between the parties dated November 10, 1999.
The parties entered into Settlement and Rescission Agreements, pursuant to which
all transactions between the parties including the Stock Subscription and
Purchase Agreement, the issuance of World stock to the Company and the issuance
of 500,000 shares of the Company's stock to World's shareholders were rescinded
effective November 10, 1999. Further, World's shareholders were issued 320,000
shares of the Company's stock which have been included in the Registration
Statement currently on file with the Securities Exchange Commission. The lawsuit
was dismissed by a Court order dated January 29, 2002.
On April 24, 2002, the Company entered into a Settlement Agreement with
the two remaining September 1999 Convertible Debenture holders, AJW Partners,
LLC and New Millennium Capital Partners II, LLC. Under the terms of the
Settlement Agreement, the Company is obligated to issue, over a 180 day period,
8,500,000 shares of its common stock in exchange for the dismissal of the
lawsuit and in satisfaction of the remaining outstanding principal and accrued
interest. The Company has the option, until July 23, 2002, to substitute cash in
lieu of shares. On closing, the Company issued 1,460,725 and 664,275 shares of
its common stock to AJW Partners, LLC and New Millennium Capital Partners II,
LLC, respectively. A Stipulation and Order of Discontinuance was filed with and
Ordered by the court on April 25, 2002 (See Note 7A ).
On December 6, 2001, Mr. Roger May, as Chairman and Chief Executive
Officer of ACT-Australia, sent a letter to Advanced Communications demanding
full payment of all amounts due under the Stock Purchase Agreement between
Advanced Communications and ACT-Australia (the "STOCK PURCHASE AGREEMENT). This
letter was dated six days after Mr. May was removed by the Board of Directors
from all executive capacities including as President and Chief Executive
Officer. Mr. May sent additional demand letters on December 11, 2001, and
23
December 21, 2001. These demand letters threatened to exercise the rights
granted to ACT-Australia under its constitutional documents, which include
exercising ACT-Australia's lien over the shares registered in the name of
Advanced Communications or declaring that those shares be forfeited. Advanced
Communications believes that it has fully met its obligation under the Stock
Purchase Agreement, which states that payments are only required to be paid to
ACT-Australia 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. At this time, Advanced Communications does not have sufficient funds
available to pay to ACT-Australia. On January 23, 2002, Advanced Communications
filed suit against ACT-Australia and Roger May in the Supreme Court of Victoria
at Melbourne, Australia to protect its investment.
On January 23, 2002, the Court issued an interim order effectively
enjoining and prohibiting ACT-Australia from "transferring, dealing with,
charging, diminishing, mortgaging, assigning or disposing of" Advanced
Communications' stock in ACT-Australia. Although the court order had already
been extended twice, it was again extended by the court on February 20, 2002,
until a final determination is made at trial. ACT-Australia declined to contest
the court orders sought by Advanced Communications. ACT-Australia filed its
Answer to the suit and the parties are currently conducting discovery of
material documents.
On March 15, 2002, ACT-Australia issued a press release stating that
EntrePort Corporation ("EntrePort"), an AMEX listed company, executed
"definitive documents" whereby EntrePort would acquire a minority interest in
ACT-Australia and ACT-Australia would purchase a majority interest in EntrePort.
Further, on March 14, 2002, ACT-Australia entered into an Acquisition Agreement
with EntrePort (the "Acquisition Agreement") which stated that ACT-Australia
"now plans to locate and establish a base of operations in the United States for
the continued development, marketing and distribution of the SpectruCell product
in the USA and Canada. Such base of operations will involve the establishment of
engineering facilities, research and development, sales, marketing and
distribution." The Acquisition Agreement also stated that EntrePort's name would
be changed to "Advanced Communications USA, Inc." Mr. May resigned from Advanced
Communications' Board of Directors one day before entering into the Acquisition
Agreement.
Advanced Communications believes that the transaction with EntrePort as
described in the Acquisition Agreement is inconsistent with the rights granted
to it by ACT-Australia in the License and Distribution Agreement dated July 5,
2000 pursuant to which Advanced Communications received the exclusive rights to
market and distribute the SpectruCell technology in North, South and Central
America. Advanced Communications therefore instructed its Australian lawyers to
write to ACT-Australia requesting an undertaking that it would not appoint
EntrePort or any other person to market and distribute the SpectruCell
technology in the exclusive territory in breach of the license agreement.
ACT-Australia refused to provide the undertaking sought by Advanced
Communications and, accordingly, Advanced Communications applied to the Court
for an order restraining ACT-Australia from breaching the terms of the license
agreement. On April 26, 2002, the Court issued an interim order on the following
terms:
"Until the determination of the plaintiff's [i.e., Advanced
Communications'] summons filed on 23 April 2002 or further order, the
first defendant [i.e., ACT-Australia], whether by itself or by its
officers, employees, agents, attorneys, or any of them or otherwise, be
restrained from appointing or agreeing to appoint in any way whatsoever
EntrePort Corporation or any other person to distribute, sell, offer to
sell or supply or otherwise deal in or with the wireless or terrestrial
multi-protocols communication network technology known as SpectruCell
(`Product') (incorporating the software which enables the Product to
perform to its specifications, consisting of a set of instructions or
statements in machine readable medium, and any enhancement or
modification of that software (`Software') and related hardware
performing part of the base station controller which processes and
transmits mobile communications protocols such as AMPS, CDMA, TDMA GSM,
W-CDMA, UMTS, 3G & Voice IP) in the United States of America, the North
American and South American Continents (`Exclusive Territory') without
the prior written consent of the plaintiff."
On May 7, 2002, Advanced Communications received a notice alleging a
breach from ACT-Australia stating that Advanced Communications had breached its
obligation under the License Agreement. Advanced Communications believes that
24
the notice of breach is without merit and it is taking the necessary legal
actions to prevent ACT-Australia from terminating its rights under the License
Agreement.
The Court extended its April 26, 2002 order through May 27, 2002,
further restraining ACT-Australia from "acting upon or taking any further steps
in reliance upon" the notice of breach until May 27, 2002 when this matter will
be heard by the Court.
In STAR MULTI CARE SERVICES, INC. v. ADVANCED COMMUNICATIONS
TECHNOLOGIES, INC., an action filed September 18, 2000 in the Fifteenth Judicial
Circuit in the State of Florida, Star Multi Care Services, Inc. ("Star") sued
the Company for alleged breach of contract and the recovery of a break-up or
termination fee in excess of $50,000 in conjunction with the Company's alleged
failure to consummate a proposed merger with Star in January 2000. The Company
believes that the suit is without basis and is vigorously defending the alleged
claim.
ITEM 2. CHANGES IN SECURITIES
During the quarter, we issued 8,480,435 shares of our restricted common
stock having a value of $1,161,010 to the following parties:
(i) 200,000 shares each having a value of $36,000 were issued to
Messrs. Danson, Prouty, Lichtman, Roche and Finch for
director's fees;
(ii) 2,960,000 shares having a value of $740,000 were issued to
Cornell Capital Partners, LP as a one-time commitment fee for
the $30 million Equity Line of Credit facility;
(iii) 40,000 shares having a value of $10,000 were issued to
Westrock Advisors, Inc. for financial advisory services in
connection with the Equity Line of Credit facility;
(iv) 160,000 shares each having a value of $40,000 were each issued
to Eduardo Acosta and Alberto Monteiro in settlement of the
World IP recession lawsuit;
(v) 667,667 share having a value of $50,000 were issued to Danson
Partners, LLC for prior professional services;
(vi) 666,667 shares having a value of $50,000 were issued to
Levinson & Lichtman, LLP for prior legal services;
(vii) 400,000 shares having a value of $30,000 were issued to Jack
Halperin, Esq. for prior legal services;
(viii) 133,334 shares having a value of $10,000 were issued to Dr.
Michael Finch for prior professional services;
(ix) 27,800 shares having a value of $2,085 were issued to The Law
Offices of Alan Foxman for prior legal services;
(x) 119,000 shares having a value of $8,925 were issued to
DDInvestor.com, Inc. for prior investor relations services;
and
(xi) 2,146,967 shares and associated warrants were issued to all of
the private placement investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to various risks in connection with the operation of our
business. These risks include, but are not limited to, dependence on
operating agreements with foreign partners, significant foreign and
U.S.-based customers and suppliers, availability of transmission
facilities, U.S. and foreign regulations, international economic and
political instability, dependence on effective billing and information
25
systems, customer attrition, and rapid technological change. Many of
our competitors are significantly larger and have substantially greater
resources than we have.
We have devoted significant resources to Advanced Communications
Technologies, Pty (Australia) for the development, testing and
commercialization of the SpectruCell technology and for unsuccessful
acquisitions of existing businesses that would have complemented our
marketing and sales efforts for SpectruCell. As a result, we have
experienced significant operating losses and negative cash flows from
operations. These losses and negative operating cash flows are expected
to continue for additional periods in the future. There can be no
assurance that we will become profitable or will produce positive cash
flows. Our capital requirement for the marketing of SpectruCell is
substantial. The Company intends to fund its operational and capital
requirements using cash on hand, and through the Equity Line of Credit
and debt.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. SUBSEQUENT EVENTS, EXHIBITS AND REPORTS ON FORM 8-K
Effective April 30, 2002, Mr. Gary Ivaska resigned as the Company's
Chief Executive Officer. The Company and Mr. Ivaska have settled all
outstanding amounts otherwise due him for his prior services. Under the
terms of the Ivaska Agreement, the Company is obligated to pay Mr.
Ivaska $40,000 at the rate of $10,000 per month for four months
commencing on May 31, 2002.
On May 2, 2002, the Company's Board of Directors voted to appoint Mr.
Wayne I. Danson, currently the Company's Vice President and Chief
Financial Officer to assume the role of the Company's President.
On May 7, 2002, we received a Termination Notice signed by Mr. Roger
May on behalf of Advanced Communications Technologies (Australia) Pty
Ltd. notifying us that we have breached our License and Distribution
Agreement because Mr. May alleged that we failed to act in good faith
and also alleged that we failed to provide details on a proposed
contract with a U.S. company pursuant to the terms of the License and
Distribution Agreement. We believe that the Termination Notice is
without merit and we are taking the necessary legal actions to prevent
Mr. May and Advanced Communications Technologies (Australia) Pty Ltd.
from terminating our rights under the License and Distribution
Agreement.
26
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 Services Incorporated by reference to Exhibit 1.1 to
Corporation and Advanced Communications Technologies, Company's Form 8-K filed on February 4, 2000
Inc. dated as of January 31, 2000
2.1 Articles of Incorporation of Media Forum Incorporated by reference to Exhibit 2.1 to
International, Inc. the Company's Form S-8 filed on February 9,
2000
2.2 Second Amendment to Articles of Incorporation of Incorporated by reference to Exhibit 2.2 to
Telenetworx, Inc. the Company's Form S-8 filed on February 9,
2000
2.3 Third Amendment to Articles of Incorporation of Media Incorporated by reference to Exhibit 2.3 to
Forum International, Inc. the Company's 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 currently in effect for Incorporated by reference to Exhibit 3.1 to
the Company 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 Incorporation Provided herewith
10.1 Lease Agreement dated as of November 27, 2001 between Provided herewith
the Company and Continental Development, L. P. II
10.2 Not Used.
10.3 Agreement dated June 27, 2000, between Ladenburg Incorporated by reference to Exhibit 10.3 to
Thalmann & Co. and the Company the Company's Form S-1 Registration Statement
filed on August 14, 2001
10.4 Common Stock Purchase Agreement dated December 14, Incorporated by reference to Exhibit 10.4 to
2000, between the Company and Wanquay Ltd. the Company's Form S-1 Registration Statement
filed on August 14, 2001
10.5 Registration Rights Agreement dated December 14, 2000, Incorporated by reference to Exhibit 10.5 to
between the Company and Wanquay Ltd. the Company's Form S-1 Registration Statement
filed on August 14, 2001
27
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
10.6 Escrow Agreement dated December 14, 2000, among the Incorporated by reference to Exhibit 10.6 to
Company, Wanquay Ltd. and Epstein Becker & Green the Company's Form S-1 Registration Statement
filed on August 14, 2001
10.7 Consulting Agreement with M. Richard Cutler dated Incorporated by reference to Exhibit 10.1 to
January 31, 2000 the Company's Form S-8 filed on February 9,
2000
10.8 Stock Purchase Agreement dated April 5, 2000, between Incorporated by reference to Exhibit 10.5 to
Advanced Communications Technologies, Inc. and the Company's Form 10-QSB filed on May 24, 2000
Advanced Communications Technologies Pty Ltd.
10.9 Securities Purchase Agreement dated January 10, 2002, Incorporated by referenced to Exhibit 10.9 to
by and among Advanced Communications Technologies, the Company's Form 10-QSB filed on February
Inc. and Buyers 12, 2002
10.10 Investor Registration Rights Agreement dated January Incorporated by reference to Exhibit 10.10 to
10, 2002, by and among Advanced Communications the Company's 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, 2002, by and among Incorporated by reference to Exhibit 10.12 to
Advanced Communications Technologies, Inc., Buyers and the Company's Form 10-QSB filed on February
First Union National Bank 12, 2002
10.13 Equity Line of Credit Agreement dated January 10, Incorporated by reference to Exhibit 10.13 to
2002, by and between Cornell Capital Partners, LP and the Company's Form 10-QSB filed on February
Advanced Communications Technologies, Inc. 12, 2002
10.14 Registration Rights Agreement dated January 10, 2002, Incorporated by reference to Exhibit 10.14 to
by and between Advanced Communications Technologies, the Company's Form 10-QSB filed on February
Inc. 12, 2002
10.15 Placement Agent Agreement dated January 10, 2002, by Incorporated by reference to Exhibit 10.15 to
and between Advanced Communications Technologies, Inc. the Company's Form 10-QSB filed on February
and Westrock Advisors, Inc. 12, 2002
10.16 Escrow Agreement dated January 10, 2002, by and among Incorporated by reference to Exhibit 10.16 to
Advanced Communications Technologies, Inc., Cornell the Company's Form 10-QSB filed on February
Capital Partners, LP , Butler Gonzalez LLP and First 12, 2002
Union National Bank
10.17 License and Distribution Agreement dated as of July 5, Provided herewith
2000 between Advanced Communications Technologies,
Inc. and Advanced Communications Technologies
(Australia) Pty. Ltd.
28
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
11.0 Audited Consolidated Financial Statements for Advanced Incorporated by reference to Exhibit 11.0 to
Communications Technology (Australia) PTY Ltd and the Company's Form 10-KSB filed on October 30,
controlled entities 2001
29
(b) REPORTS ON FORM 8-K.
On May 9, 2002, Advanced Communications filed a Form 8-K disclosing the
resignation of Gary Ivaska as President and Chief Executive Officer and
the appointment of Wayne Danson as President. The Form 8-K also
contained new developments in Advanced Communications' litigation with
Advanced Communications Technologies (Australia), in which our company
owns a 20% interest.
30
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Advanced Communications Technologies, Inc.
(Registrant)
/s/ Wayne I. Danson May 14, 2002
--------------------------------------- -------------------
Wayne I. Danson Date
President, Chief Financial Officer and Director
(Principal Accounting Officer)
31