U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO THE FORM 10-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 SEPTEMBER 30, 2001
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 September 30, 2001, 97,693,489 shares of the registrant's no par value
common stock were 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 September 30, 2001 and
June 30, 2001 (Audited)
Consolidated Statement of Operations for the three months
ended September 30, 2001 and September 30, 2000
Consolidated Statement of Changes in Stockholders'
Deficiency for the three months ended September 30, 2001
Consolidated Statement of Cash Flows for the three months
ended September 30, 2001 and September 30, 2000
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 Proceedings
ITEM 2. Changes in Securities
ITEM 3. Defaults upon Senior Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 6. Subsequent Events, Exhibits and Reports on Form 8-K
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
2001 2001
(UNAUDITED) (AUDITED)
-------------- -----------
ASSETS:
Cash $54,594 $6,816
Prepaid expenses -- 10,000
TOTAL CURRENT ASSETS 54,594 16,816
-------------- -----------
PROPERTY & EQUIPMENT - NET 18,599 19,599
-------------- -----------
OTHER ASSETS
Goodwill, less accumulated amortization of $100,000 1,900,000 2,000,000
Deposits 5,525 5,525
-------------- -----------
TOTAL OTHER ASSETS 1,905,525 2,005,525
-------------- -----------
TOTAL ASSETS $1,978,718 $2,041,940
============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued expenses $743,111 $844,205
Accrued compensation 531,550 479,050
Note Payable-Grassland 122,736 118,530
Loan Payable to shareholder 821,200 796,000
Convertible debentures 200,750 200,750
Other advances 63,000 --
-------------- -----------
TOTAL CURRENT LIABILITIES 2,482,347 2,438,535
LONG-TERM LIABILITIES
Notes Payable-affiliate 1,791,166 2,173,167
-------------- -----------
TOTAL LIABILITIES $4,273,513 $4,611,702
-------------- -----------
STOCKHOLDERS' DEFICIENCY
Common stock, no par value, 200,000,000 and 100,000,000 shares authorized,
respectively, 97,693,489 and 94,489,916 shares issued and outstanding,
respectively 23,667,418 22,696,193
Common stock to be issued, 33,333 and 833,333 shares, respectively 10,000 250,000
Accumulated deficit (25,972,213) (25,515,955)
-------------- -----------
TOTAL STOCKHOLDERS' DEFICIENCY $(2,294,795) $(2,569,762)
-------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $1,978,718 $2,041,940
============== ===========
The accompanying notes are an integral part of these financial statements
1
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE
THREE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
------------- -------------
TELEPHONE NETWORK REVENUE $ -- $ 36,739
COST OF REVENUES -- (44,782)
------------- -------------
GROSS PROFIT (LOSS) -- (8,043)
------------- -------------
OPERATING EXPENSES
Consulting fees $100,000 $153,125
Depreciation and amortization 101,000 262,542
Professional fees 130,748 12,822
Other selling, general & administrative expenses 90,304 115,041
Stock-based compensation 30,000 --
------------- -------------
TOTAL OPERATING EXPENSES 452,052 543,530
------------- -------------
LOSS FROM OPERATIONS (452,052) (551,573)
------------- -------------
OTHER INCOME/(EXPENSE)
Interest expense (4,206) --
Income (Loss) from investment in affiliate -- (122,137)
Investment write-down -- (585)
------------- -------------
TOTAL OTHER INCOME/(EXPENSE) (4,206) (122,722)
------------- -------------
NET LOSS FROM OPERATIONS $(456,258) $(674,295)
============= =============
Net loss per share-basic and diluted $(.005) $(.01)
------------- -------------
Weighted average number of shares outstanding
during the period-basic and diluted 95,639,024 81,787,932
============= =============
The accompanying notes are an integral part of these financial statements
2
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD JULY 1, 2000 TO SEPTEMBER 30, 2001
COMMON STOCK TO BE
COMMON STOCK ISSUED
----------------------------- ------------------------
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 -- -- -- 833,333 250,000
Stock issued for offering costs 250,000 -- -- -- --
Stock issued for services 1,051,491 328,870 -- -- --
Stock issued for extinguishment of debt 6,597,000 4,545,902 -- -- --
Stock issued for conversion of
convertible 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) 833,333 250,000
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) 33,333 10,000
============== ============== =============== ============= ============
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)
============== ==================
The accompanying notes are an integral part of these financial statements
3
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE
THREE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
------------- -------------
Net loss $ (456,258) $ (674,295)
Adjustments to reconcile net loss to net cash used:
Depreciation and amortization 101,000 262,542
Expenses incurred in exchange for common stock 244,224 (138,430)
Loss on minority interest in affiliate -- 122,137
Investment Writedown -- 585
Changes in operating assets and liabilities:
Increase (decrease) in assets:
Prepaid expense (10,000) 23,590
Increase (decrease) in liabilities:
Accounts payable (101,094) 141,087
Other advances 63,000 --
Interest payable 4,206 --
Accrued compensation 52,500 95,000
Deferred revenue -- (36,739)
------------- -------------
Net cash used in operating activities (102,422) (204,523)
Cash flows from investing activities
Loan to affiliated company -- (10,108)
Purchase of fixed assets -- (4,667)
------------- -------------
Net cash used in investing activities -- (14,775)
------------- -------------
Cash flows from financing activities
Loan proceeds from shareholder 25,200 183,500
Proceeds from issuance of common stock and warrants, net of offering costs 125,000 --
------------- -------------
Net cash provided by financing activities 150,200 183,500
------------- -------------
Net increase (decrease) in cash 47,778 (35,798)
------------- -------------
Cash and cash equivalents at beginning of period 6,816 30,154
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 54,594 $ (5,644)
============= =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the three months ended September 30, 2001, the Company issued
1,190,000 shares of common stock, valued at $357,001, in partial payment of
notes payable held by a related Australian corporation, in which we hold a 20%
investment in.
The accompanying notes are an integral part of these financial statements
4
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-PRINCIPLES OF CONSOLIDATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements include
the results of Advanced Communications Technologies, Inc. ("ACT" or the
"Company") and its 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 months ended September 30, 2001 are not
necessarily indicative of the results that may be expected for the fiscal year
ending June 30, 2002. The interim financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the fiscal year ended June 30, 2001 included in the Company's Form 10-KSB as
filed with the Securities and Exchange Commission.
(A) ORGANIZATION
The Company was formed on April 30, 1998 and was inactive from its date
of formation until April 1999 when it acquired all of the issued and outstanding
stock of Media Forum International, Inc. ("MFI") in a reverse merger. The merger
was treated as an acquisition of all of the assets of MFI and as a
recapitalization of the Company. In July 1999, the Company formed Advanced
Global Communications, Inc. ("AGC") as a wholly owned subsidiary to conduct its
international telephone network distribution business. On January 31, 2000, the
Company acquired all of the then issued and outstanding shares of
SmartInvestment.com, Inc. ("Smart") an inactive reporting company, for 200,000
shares of restricted common stock. The Company elected successor issuer status
to become a fully reporting company. The Company treated the purchase as a
recapitalization, and has not recorded any goodwill associated with the
acquisition. On April 5, 2000, the Company acquired a 20% equity ownership
interest in Advanced Communications Technology (Australia) Pty Ltd ("ACT-AU"),
an 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 Agreement are
directly 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.
5
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED 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 months ended
September 30, 2001 and 2000 due to net operating losses in both periods. Any
deferred tax asset arising from the future benefit of the Company's net
operating loss carryforward has been fully reserved.
(I) COMPREHENSIVE INCOME
The Company accounts for Comprehensive Income (Loss) under the
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (Statement No. 130"). Statement No.
130 establishes standards for reporting and display of comprehensive income and
its components.
(J) REVENUE RECOGNITION
Revenue was generally recognized at the time telephone service minutes
were used and based on the volume of call service provided to customers and
processed by the Company's contractual service providers.
(K) CONCENTRATION OF CREDIT RISK
The Company maintains its cash in bank deposit accounts, which, at
times, may exceed federally insured limits. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant credit
risk on cash and cash equivalents.
6
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED 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.
Amortization was computed on a straight-line basis over fifteen years until June
30, 2001 when the Company re-assessed the life of the Goodwill to be 5 years.
The amortization of Goodwill charged to income for each of the three months
ended September 30, 2001 and September 30, 2000 was $100,000 and $261,542,
respectively.
7
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company also reduced the estimated life of the remaining goodwill
to 5 years. This change coupled with the writedown of its goodwill resulted in a
reduction of goodwill amortization on a quarterly basis from $261,142 to
$100,000. The effects of such reduction are shown below:
ASSUMING CHANGE
AS REPORTED DID NOT OCCUR
-------------------- ----------------- -------------------
Net Loss $(456,258) $(617,400)
Net Loss Per Share $(0.005) $(0.006)
The following information is provided for ACT-AU at September 30, 2001
and 2000 and have been translated to US dollars using the average exchange rate
for the three month period:
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
-------------- --------------
Average exchange rate for the period $ .51353 $ .5492
Revenue from operations $1,923,309 $ --
Gross profit $1,923,309 $ --
Net loss from operations $(327,193) $(610,687)
Net loss for the quarter $(327,193) $(610,687)
During the year ended June 30, 2001, the Company reduced the carrying
value of its investment in ACT-AU to $2,000,000 based on management evaluation
of ACT-AU. This adjustment was necessitated by FASB 121 ("Accounting for
Impairment of Long Lived Assets") and APB 18 ("The Equity Method of Accounting
for Investments in Common Stock"). Such pronouncements require the annual
evaluation of long lived assets for impairment. Based upon management's review
of ACT-AU's forecasted sales and cash flows, as well as a draft independent
valuation of ACT-AU and its subsidiaries, it was determined that insufficient
empirical evidence existed to support the position that the investment was not
impaired. Consequently, the Company's investment in ACT-AU was completely
written-off and the Company's investment in ACT-AU's goodwill was written down
to the estimated realizable value of the Company's portion of its investment in
ACT-AU that is represented by ACT-AU's ownership interest in the publicly traded
company Australon Enterprise, Pty.
The components of the investment in ACT-AU at September 30, 2001 and
June 30, 2001 are as follows:
INVESTMENT GOODWILL TOTAL
-------------- ------------- --------------
At acquisition $ 3,657,472 $ 15,692,528 $ 19,350,000
Cumulative Investment loss (3,657,472) -- (3,657,472)
Amortization of goodwill -- (1,292,664) (1,292,664)
Impairment of goodwill -- (12,399,864) (12,399,864)
-------------- ------------- --------------
Balance at June 30, 2001 $ $ 2,000,000 $ 2,000,000
-------------- ------------- --------------
Cumulative amortization goodwill through 9/30/01 -- (100,000) (100,000)
-------------- ------------- --------------
Balance at 9/30/01 $ -- $ 1,900,000 $ 1,900,000
============== ============== ==============
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
8
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
securities and at June 30, 2001 the Company wrote down these securities to their
fair value of $0. This resulted in $6,825 being recognized in the statements of
operations as a realized loss on decline in marketable securities for the year
ended June 30, 2001.
NOTE 4. PROPERTY AND EQUIPMENT
Computer and office equipment $ 31,234
Less: Accumulated depreciation (12,635)
----------
Property and equipment - net $ 18,599
==========
Depreciation expense for the three months ended September 30, 2001 was
$1,000.
NOTE 5. ACCRUED COMPENSATION
The Company has an agreement with an individual to serve as the Chief
Executive Officer of the Company. The individual agreed to defer payment of the
amounts owed him pursuant to the agreement due to the Company's lack of funds.
The Company owed the individual $479,050 at June 30, 2001. For the three months
ended September 30, 2001 an additional $52,500 was accrued resulting in a
balance due the individual of $531,550.
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. The judgment is in the process of being released by the
court.
(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.
9
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 STOCK
DATE ISSUED VALUE
September 2000 5,000,000 3,500,000
October 2000(1) 460,000 460,000
June 2001 1,137,000 567,100
September 2001 1,190,000 357,001
-------------------------------- ----------------------
7,787,000 4,884,101
-------------------------------- ----------------------
(1) This transaction resulted in a gain on extinguishment of debt of $23,000.
During the year ended June 30, 2001 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.
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 September 30, 2001, the Company owed Global Communications
Technology, an Australian company, wholly-owned by Mr. May, a former officer and
director of the Company, $821,200 for funds advanced to the Company to provide
working capital for normal business operations. This loan is non-interest
bearing and unsecured and has no fixed date for repayment.
NOTE 7. CONVERTIBLE DEBENTURES
On September 30, 1999, the Company entered into secured convertible
debentures purchase agreement with two companies, which were stockholders of the
Company, whereby the Company sold $500,000 of 12% Secured Convertible Debentures
due April 1, 2000, which were convertible into shares of the Company's Common
Stock. In addition, on September 30, 1999, the Company issued another
convertible debenture to an unrelated party in the amount of $150,000. The
debentures were convertible, at the holder's option, into shares of common stock
in whole or in part at any time after the original issue date. The number of
shares of common stock issuable upon a conversion was to be determined by
dividing the outstanding principal amount of the debenture to be converted, plus
all accrued interest, by the conversion price. The conversion price in effect on
any conversion date is 50% of the average of the bid price during the twenty
trading days immediately preceding the applicable conversion date.
The convertible debentures contained a beneficial conversion feature
computed at its intrinsic value which is the difference between the conversion
price and the fair value on the debenture issuance date of the common stock into
which the debt is convertible, multiplied by the number of shares into which the
debt is convertible at the commitment date. Since the beneficial conversion
feature is to be settled by issuing equity, the amount attributed to the
beneficial conversion feature, of $650,000, was recorded as an interest expense
and a component of equity on the issuance date during the fiscal year ended June
30, 2000.
During December, 2000, holders of $412,800 of convertible debentures
elected to convert their notes into 1,803,545 of the Company's restricted common
stock. The Company further reduced these bonds payable by offsetting a related
bond receivable in the amount of $36,450.
As of September 30, 2001 and June 30, 2001, $200,750 of Secured
Convertible Debentures are still outstanding. The Company is in default based on
the April 1, 2000 due date and the Company is currently in litigation with these
bondholders.
10
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 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)).
NOTE 8. STOCKHOLDERS' EQUITY (DEFICIENCY)
(A) PRIVATE PLACEMENT
During the period of December 2000 to August 2001, pursuant to a
private placement under Regulation D, Rule 506, the Company issued 3,060,600
shares of common stock and 3,060,000 warrants at $.30 per share. The Company
received $1,168,180 from investors, which included $250,000 for stock not yet
issued as of June 30, 2001 and $275,454 for warrants.
The Company issued 250,000 shares of common stock, valued at $75,000,
in payment of offering costs incurred. The value assigned to this stock was
based on the private placement memorandum of $.30 per share. The value of the
common stock has been charged to equity as direct costs to the offering.
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.
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 September 30, 2001, no warrants have been exercised.
(B) STOCK ISSUED FOR SERVICES
During the year ended June 30, 2001, the Company issued 1,051,491
shares of common stock for services. The stock was valued based on the quoted
trading price on the grant dates, which aggregated $328,870.
During the 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.
(C) STOCK ISSUED FOR EXTINGUISHMENT OF DEBT
During the three months ended September 30, 2001, the Company issued
1,190,000 shares of restricted common stock for the extinguishment of debt. The
stock was valued based on the quoted trading price on the grant dates, which
aggregated $357,001 (See Notes 6(A) and 6(B)).
NOTE 9. RELATED PARTIES
(A) GLOBAL COMMUNICATIONS TECHNOLOGIES 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
Technologies Pty Ltd.
(C) LEGAL COUNSEL
Certain of the Company's legal counsel are stockholders of the Company.
11
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. GOING CONCERN
The Company's consolidated financial statements for the three months
ended September 30, 2001 have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The Company incurred a net loss of
$456,258 for the three months ended September 30, 2001, a working capital
deficiency of $2,427,753, and a stockholders' deficiency of $2,294,795.
The ability of the Company to continue as a going concern is dependent
on the Company's ability to raise additional capital and implement its business
plan. Management anticipates that the issuance of securities will generate
sufficient resources to assure continuation of the Company's operations (See
Note 8A).
The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
NOTE 11. SUBSEQUENT EVENTS
On August 29, 2001 we issued in the aggregate, 3,203,573 shares of our
restricted common stock to the following parties: 1,233,333 to purchasers in
connection with our Reg. D Section 506 private placement, 780,240 to
professionals for legal and other services provided to us and 1,190,000 to
employees and vendors of Advanced Communications (Australia) in partial
repayment of our note payable. All shares were issued at $.30 per share for an
aggregate value of $961,072.
On September 11, 2001 we convened a Special Shareholders meeting to
vote on certain amendments to our Articles of Incorporation. See Item 4.
Submission of Matters to a Vote to Security Holders for a complete description
of our shareholder meeting.
On October 19, 2001 our obligation to Grassland was settled in full by
the cash payment of $122,736 representing the unpaid balance of the amount owed
plus accrued interest.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Unless the context requires otherwise, "we", "us" or "our" refers to
Advanced Communications Technologies, Inc. and subsidiaries on a consolidated
basis.
OVERVIEW
We are a party to a license and distribution agreement for SpectruCell,
a wireless software based communications platform that is being developed to
offer mobile communications network providers the flexibility of processing and
transmitting multiple wireless communication signals through one base station.
The SpectruCell product, which is based on the Software Defined Radio ("SDR")
platform, is being developed to 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 also to provide
flexibility for future spectrum upgrades to 3G. The SpectruCell product is being
developed by Advanced Communications Technologies, Pty (Australia) which we own
a 20% interest in. Mr. May, a former officer and director and significant
shareholder, 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 our affiliated entity throughout the North,
Central and South American territories. On May 7, 2002, Advanced Communications
(Australia) alleged that we are in default of the license and distribution
agreement. We believe this allegation is without merit and intend to defend our
rights.
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. For the year ended June 30, 2001, we had a net loss of
$19,755, 566 or $.0.22 per share. At September 30, 2001, we had negative working
capital of $2,427,753 and an accumulated deficit of $25,972,213.
SpectruCell is being developed as a technology that, we believe, will
reduce the network providers' cost for on-going upgrades to wireless formats 2.5
and 3G and beyond, as each upgrade will be software-based rather than
hardware-based. We also 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.
LICENSE AGREEMENT
On July 5, 2000, we entered into a license and distribution agreement
with Advanced Communications Technologies (Australia) Pty Ltd, a company in
which we own a 20% interest and Mr. May indirectly owns a 70% interest. Mr. May
is a former officer and director and a significant shareholder of our company.
Pursuant to the agreement, we received an exclusive license to market and
distribute in North, South and Central America the SpectruCell technology and
certain other technologies to be developed. This license is for an indefinite
period of time. Upon the SpectruCell technology becoming commercially available,
our company and Advanced Communications (Australia) will need to negotiate
minimum guaranty payments, as well as the amount of the commission payable to
our company. These amounts will be negotiated in accordance with industry
standards after the final pricing of the SpectruCell technology is established.
We are involved in litigation in Australia with Advanced Communications
(Australia) regarding the license. On April 26, 2002, the Supreme Court of
Victoria at Melbourne, Australia issued an interim order against Advanced
13
Communications (Australia) and Mr. May in connection with the ongoing litigation
between Advanced Communications and Advanced Communications (Australia). The
interim order prohibits Advanced Communications (Australia) and Mr. May from
violating the terms of the license and distribution agreement. Based on a press
release issued by Advanced Communications (Australia), Advanced Communications
(Australia) appears to be seeking to license the SpectruCell technology to
another entity in our territory. On April 26, 2002, the Australian court entered
the interim order. 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. In addition, on May 7,
2002, ACT-Australia sent a termination notice formally terminating the license
agreement. Advanced Communications believes the notice of breach and the
termination notice are without merit and it is taking the necessary legal
actions to prevent ACT-Australia from terminating its rights under the License
Agreement. On May 8, 2002, the Australian court extended its April 26, 2002
order further restraining Advanced Communications (Australia) from "acting upon
or taking any further steps in reliance upon" the notice of breach and
termination notice. On May 27, 2002, the Court held a full hearing on the
injunction application, took the matter under advisement and indicated that it
would rule on the matter in the near future. The parties are currently awaiting
the judge's decision on this matter.
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.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2001 TO THE THREE
MONTHS ENDED SEPTEMBER 30, 2000
OVERALL RESULTS OF OPERATIONS
For the three months ended September 30, 2001, the Company incurred an
overall loss from operations of ($456,258) or ($.005) per share, which was 32%
less than the ($674,295) loss we incurred for the comparative three month period
ended September 30, 2000. Loss per share for the three months ended September
30, 2001 was ($.01).
REVENUE AND COST OF SALES
We did not generate any revenue for the quarter. Revenue for the three
months ended September 30, 2000 was $36,739 and was generated entirely from our
subsidiary's then operational U.S.-Pakistan international telephone distribution
network. Cost of sales attributable to telephone network revenue was $44,782 for
the quarterly period ended September 30, 2000.
OPERATING EXPENSES
Operating expenses, net of stock-based compensation charges of $30,000
for the three months ended September 30, 2001, were $452,052 and represents a
$91,478 or a 17% decrease as compared to the three months ended September 30,
2000. Included in operating expense for the quarter ended September 30, 2001 is
$101,000 of depreciation and amortization attributable to the quarterly
depreciation of our office property and equipment ($1,000) and amortization of
our investment in our Australian affiliates goodwill ($100,000). We incurred
$262,542 of depreciation and amortization for the comparative period ended
September 30, 2000.
Interest expense incurred for the three months ended September 30, 2001
was $4,206 and was attributable to accrued interest on the Grassland note
payable. We incurred no interest for the comparative three month period ended
September 30, 2000.
For the quarter ended September 30, 2001, we did not record our share
or $65,439 of our Australian affiliates consolidated quarterly loss of $327,193,
as expressed in U.S. dollars, because our equity investment in its underlying
net assets was written down to zero as of June 30, 2001.
For the comparative three months ended September 30, 2000, our share of
our Australian's affiliate's net loss for the quarter was $122,137. In
accordance with the equity method of accounting, we will no longer record our
share of future losses from our Australian affiliate until our investment
becomes positive.
(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 $2,900,000 before offering costs
14
through the sale of these securities and have borrowed $821,200 from Roger May,
a former officer and director of our company and a significant shareholder.
These loans are non-interest bearing, are unsecured and have no fixed date for
repayment.
At September 30, 2001, our cash and cash equivalents balance was
$54,594, an increase of $47,778 from the balance of $6,816 at June 30, 2001.
During the quarter, cash provided by (used in) operations amounted to
($102,422). No cash was provided by or used for investing activities. Cash
provided by financing activities during the quarter amounted to $150,200 and
consisted of $25,200 of unsecured loans from our principal shareholder and the
sale of common stock and warrants pursuant to our Reg. D Section 506 private
offering. For the comparative three month period ended September 30, 2000, no
cash was provided by operations as all of our operations were financed via
unsecured loans from our principal shareholder. The Company had a working
capital deficiency in the amount of ($2,427,753) and ($1,867,294) respectively,
for the three month periods ended September 30, 2001 and September 30, 2000.
On August 14, 2001, we filed an S-1 Registration Statement to register
37,500,000 of our shares in connection with our proposed $12,000,000 equity line
credit facility with Ladenburg Thalmann & Co., Inc. and Wanquay Limited. Based
on comments received by the SEC relating to the terms and conditions of the
proposed equity line and on advice of counsel, on November 30, 2001, we withdrew
the Registration Statement with the SEC. Advanced Communications intends to
terminate this equity line of credit facility.
On December 13, 2001, we entered into a 90-day $325,000 Promissory Note
(the "Note") with Cornell Capital Partners, LP. The Note had an interest rate of
12% and was secured by a Guaranty and Pledge Agreement executed by Messrs.
Danson, Lichtman and Prouty. We realized $269,000 of net proceeds after
financing costs and legal fees. The Note was repaid on January 14, 2002 with
proceeds from Advanced Communications' $1 million Convertible Debentures.
On January 10, 2002, we executed various financing agreements with
Cornell Capital Partners, LP ("Cornell"), a New Jersey-based hedge fund whereby
Cornell and certain other investors purchased from us $1 million of two-year
Convertible Debentures and Cornell entered into a $30 million structured equity
facility. Pursuant to the Convertible Debenture financing, we received $564,000
net of financing and closing costs and the repayment of the $325,000 ninety-day
note. Under the terms of the $30 million structured equity facility, we have the
right to require Cornell to make monthly purchases of up to $2 million of our
stock on a discounted basis.
Our anticipated cash needs over the next 12 months consist of general
working capital needs of $1,200,000, plus the repayment of outstanding
indebtedness of $2,482,347. These obligations include outstanding secured
convertible debentures in an amount of $200,750 that are subject of a pending
lawsuit brought by the lenders, as well as accounts payable and accrued expenses
of $806,111, accrued compensation of $531,550 and a loan payable to Global
Communications Technologies Pty Ltd of $821,200 and a note payable to Grassland
of $122,736.
In addition, our company has a note payable to Advanced Communications
(Australia) of $1,791,166 at December 31, 2001.
We anticipate that our cash needs over the next 12 months will come
primarily from the sale of securities or loans, including the Equity Line of
Credit. Pursuant to the Equity Line of Credit, we may periodically issue and
sell to Cornell Capital Partners, L.P. shares of common stock for a total
purchase price of $30 million. The amount of each advance is subject to an
aggregate maximum advance amount of $2 million in any thirty-day period. Cornell
Capital Partners, L.P. will purchase the shares of common stock for a 9%
discount to the lowest closing bid price of our common stock during the five
trading days after an advance notice. In addition, Cornell Capital Partners may
retain 3% of each advance under the Equity Line of Credit. Cornell Capital
Partners intends to sell any shares purchased under the Equity Line of Credit at
the then prevailing market price. Except for the Equity Line of Credit, we have
no commitments for capital.
Our ability to draw upon the Equity Line of Credit is conditioned upon
our company registering with the SEC the shares of common stock to be issued
under the Equity Line of Credit.
On September 30, 1999, Advanced Communications entered into secured
convertible debentures purchase agreement with two companies, which were
stockholders of Advanced Communications, whereby Advanced Communications sold
$500,000 of 12% Secured Convertible Debentures due April 1, 2000, which were
convertible into shares of Advanced Communications' Common Stock. In addition,
on September 30, 1999, Advanced Communications issued another convertible
debenture to an unrelated party in the amount of $150,000. The debentures were
15
convertible, at the holder's option, into shares of common stock in whole or in
part at any time after the original issue date. The number of shares of common
stock issuable upon a conversion was to be determined by dividing the
outstanding principal amount of the debenture to be converted, plus all accrued
interest, by the conversion price. The conversion price in effect on any
conversion date is 50% of the average of the bid price during the twenty trading
days immediately preceding the applicable conversion date.
The convertible debentures contained a beneficial conversion feature
computed at its intrinsic value which is the difference between the conversion
price and the fair value on the debenture issuance date of the common stock into
which the debt is convertible, multiplied by the number of shares into which the
debt is convertible at the commitment date. Since the beneficial conversion
feature is to be settled by issuing equity, the amount attributed to the
beneficial conversion feature, of $650,000, was recorded as an interest expense
and a component of equity on the issuance date during the fiscal year ended June
30, 2000.
During December 2000, holders of $412,800 of convertible debentures
elected to convert their notes into 1,803,545 of Advanced Communications'
restricted common stock. Advanced Communications further reduced these
convertible debentures by offsetting a related convertible debentures in the
amount of $36,450.
As of December 31, 2001 and June 30, 2001, $200,750 of Secured
Convertible Debentures was outstanding. Advanced Communications is in default
based on the April 1, 2000 due date. The holders of these debentures are AJW
Partners, LLC, New Millennium Capital Partners II, LLC and Bank Insinger de
Beaufort, N.V. These debentures were convertible, at the holder's option, into
shares of common stock at a conversion price equal to 50% of the average of the
bid price during the twenty trading days immediately preceding the applicable
conversion date. These debentures had been the subject of litigation pending in
the Federal Court for the Eastern District of New York. On April 24, 2002, this
matter was settled. Pursuant to the terms of the settlement, we will issue a
total of 8,500,000 shares of common stock to the two debenture holders over a
180 day period.
During December 1997, MFI, Advanced Communications' former name, issued
75,000 of its common shares to settle the amounts due, which was $150,000 to a
company (the "Payee") pursuant to a convertible promissory note (the "Grassland
Note"). However, a dispute arose as to whether the Payee authorized the issuance
of the shares. The Payee filed a suit during December 1997 to enforce the
convertible promissory note. Total interest payable was $84,507 as of June 30,
2000 resulting in the total principal and accrued interest payable at June 30,
2000 of $234,507. In June 2000, the parties agreed to settle the matter for a
payment of $200,000. This resulted in a gain on extinguishment of debt in the
amount of $34,507. Advanced Communications made a payment of $50,000 by June 30,
2000. The $150,000 remainder was to be paid with proceeds from the 75,000 shares
of stock and any remaining balance to be paid by Advanced Communications. The
revised obligation was to be paid by August 14, 2000. Advanced Communications
defaulted on this revised payment obligation and a judgment against Advanced
Communications was entered. In October 2000, Advanced Communications sold the
75,000 shares of stock realizing $41,802 which it remitted in partial repayment
of its outstanding debt. As of June 30, 2001, Advanced Communications' remaining
balance and accrued interest on this obligation was $118,530. An additional
$4,206 of interest was accrued on this note and on October 19, 2001 Advanced
Communications paid the obligation in full. On October 24, 2001, the court
issued its notice of satisfaction and release.
Advanced Communications had a non-interest bearing note payable to
Advanced Communications Technologies (Australia) Pty Ltd of $7,500,000 as of
April 5, 2000. The following schedule represents payments on such debt by
issuance of restricted common stock to either the affiliate or creditors of the
affiliate. Such transactions were recorded at the market price of the stock at
date of issuance.
SHARES OF COMMON
DATE STOCK ISSUED VALUE
------------------ ------------------ -------------------
September 2000 5,000,000 $ 3,500,000
October 2000(1) 460,000 460,000
June 2001 1,137,000 567,100
September 2001 1,190,000 357,001
------------ ------------------
7,787,000 $ 4,884,101
============ ==================
(1) This transaction resulted in a gain on extinguishment of debt of $23,000.
16
During the year ended June 30, 2001 Advanced Communications repaid an
aggregate of $247,608 of the obligation in cash. During the three-month period
ended September 2001, Advanced Communications repaid $25,000 of the obligation
in cash. No payments on the note were made during the three months ended
December 31, 2001.
Pursuant to the terms of the April 5, 2000 Stock Purchase Agreement
between Advanced Communications and Advanced Communications (Australia),
Advanced Communications has elected to reduce its outstanding loan balance by
$552,125 for funds previously advanced to Advanced Communications (Australia).
As of December 31, 2001, the balance of Advanced Communications'
obligation to Advanced Communications (Australia) was $1,791,166. Advanced
Communications is currently in litigation with Advanced Communications
(Australia) regarding the timing for the repayment of Advanced Communications'
obligation.
As of December 31, 2001, Advanced Communications owed Roger May, a
former officer and director of our company and a significant shareholder,
$992,736 for funds advanced to Advanced Communications to provide working
capital and for the repayment of certain of Advanced Communications'
obligations. This loan is non-interest bearing and unsecured. This loan does not
have a scheduled date of repayment.
On December 13, 2001 Advanced Communications entered into a 90-day
$325,000 Promissory Note (the "Note") with Cornell Capital Partners, LP. The
Note had an interest rate of 12% and was secured by a Guaranty and Pledge
Agreement executed by Messrs. Danson, Lichtman and Prouty. Advanced
Communications realized $269,000 of net proceeds after financing costs and legal
fees. The Note was repaid on January 14, 2002 with proceeds from Advanced
Communications' $1 million Convertible Debenture.
During the period of December 2000 to August 2001, pursuant to a
private placement under Regulation D, Rule 506, Advanced Communications issued
3,060,600 shares of common stock and 3,060,000 warrants at $.30 per share.
Advanced Communications received $1,168,180 from investors, which included
$250,000 for stock not yet issued as of June 30, 2001 and $275,454 for warrants.
Advanced Communications issued 250,000 shares of common stock, valued
at $75,000, in payment of offering costs incurred. The value assigned to this
stock was based on the private placement memorandum of $.30 per share. The value
of the common stock has been charged to equity as direct costs of the offering.
The fair market value of the warrants, aggregating $275,454 and
$110,000 at June 30, 2001 and September 30, 2001, respectively, was estimated on
the grant date using the Black-Scholes option pricing model as required under
FASB 123 with the following weighted average assumptions: expected dividend
yield 0%, volatility 49.84%, risk-free interest rate 4.22%, expected option life
2 years. At December 31, 2001, no warrants have been exercised.
During the three months ended September 30, 2001, Advanced
Communications received the balance of the offering proceeds and issued an
additional 1,233,333 shares of its restricted common stock and associated
warrants.
On February 27, 2002, our Board of Directors approved a resolution to
reprice the private placement offering from $0.30 per share to $0.20 per share.
This repricing will result in the issuance of an additional 2,146,967 shares of
common stock and warrants to the private placement investors. These additional
shares are included and are currently on file with the SEC. The exercise price
of the underlying warrants will remain at $0.30 per share.
During the three months ended December 31, 2001, Advanced
Communications issued 137,727 shares of common stock, valued at $41,318 in
payment of offering 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.
(c) ACQUISITIONS
On September 7, 2001 we entered into a Letter of Intent with our
Australian affiliate to acquire all of the intellectual property, including the
worldwide rights (other than rights to territories that we currently possess)
for the licensing and distribution of the SpectruCell product (the "IP Rights").
The Letter of Intent includes various conditions precedent to the transfer of
the IP Rights to us 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
17
definitive agreements. There can be no assurance that the proposed acquisition
of the IP Rights will be completed under the terms and conditions as expressed
in the Letter of Intent or at all.
(d) ACT'S QUARTERLY STOCK PRICE
FOR THE QUARTER ENDED HIGH LOW
------------------------- ------------- -------------
September 30, 2001 $ .41 $.25
June 30, 2001 .68 .27
March 31, 2001 1.03 .45
December 31, 2000 1.19 .48
September 30, 2000 1.25 .56
18
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PART II- OTHER INFORMATION
The statements in this quarterly report, Form 10-QSB, that are not
historical constitute "forward-looking statements". Such 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
We are a defendant in number of lawsuits as described below. We do not
believe that these matters will have a material adverse impact on our business.
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 Advanced
Communications are seeking damages and injunctive relief arising out of Advanced
Communications' 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. Advanced Communications has
filed a counterclaim to rescind all of the Plaintiffs' stock for lack and/or
failure of consideration and other damages. Advanced Communications 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, Advanced Communications 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 Advanced
Communications and the issuance of 500,000 shares of Advanced Communications'
stock to World's shareholders were rescinded effective November 10, 1999.
Further, World's shareholders were issued 320,000 shares of Advanced
Communications' 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.
On April 24, 2002, Advanced Communications 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, Advanced Communications 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. Advanced Communications has the option, until
July 23, 2002, to substitute cash in lieu of shares. On closing, Advanced
Communications 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.
On December 6, 2001, Mr. Roger May, as Chairman and Chief Executive
Officer of Advanced Communications (Australia), sent a letter to Advanced
Communications demanding full payment of all amounts due under the Stock
Purchase Agreement between Advanced Communications and Advanced Communications
19
(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 Advanced
Communications (Australia) under its constitutional documents, which include
exercising Advanced Communications (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 Advanced Communications (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 Advanced
Communications (Australia). On January 23, 2002, Advanced Communications filed
suit against Advanced Communications (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 Advanced Communications (Australia) from
"transferring, dealing with, charging, diminishing, mortgaging, assigning or
disposing of" Advanced Communications' stock in Advanced Communications
(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. Advanced Communications (Australia) declined to contest the court
orders sought by Advanced Communications. Advanced Communications (Australia)
filed its Answer to the suit and the parties are currently conducting discovery
of material documents.
On March 15, 2002, Advanced Communications (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 Advanced Communications (Australia) and Advanced
Communications (Australia) would purchase a majority interest in EntrePort.
Further, on March 14, 2002, Advanced Communications (Australia) entered into an
Acquisition Agreement with EntrePort (the "Acquisition Agreement") which stated
that Advanced Communications (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 Advanced Communications (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 Advanced Communications (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. Advanced Communications
(Australia) refused to provide the undertaking sought by Advanced Communications
and, accordingly, Advanced Communications applied to the Court for an order
restraining Advanced Communications (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.,
Advanced Communications (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."
20
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On May 7, 2002, Advanced Communications received a notice alleging a
breach from Advanced Communications (Australia) stating that Advanced
Communications had breached its obligation under the License Agreement. In
addition, on May 7, 2002, ACT-Australia sent a termination notice formally
terminating the License Agreement. Advanced Communications believes that the
notice of breach and the termination are without merit and it is taking the
necessary legal actions to prevent Advanced Communications (Australia) from
terminating its rights under the License Agreement.
On May 8, 2002, the Court extended its April 26, 2002 order further
restraining Advanced Communications (Australia) from "acting upon or taking any
further steps in reliance upon" the notice of breach and termination notice. On
May 27, 2002, the Court held a full hearing on the injunction application, took
the matter under advisement and indicated that it would rule on the matter in
the near future. The parties are currently awaiting the judge's decision on this
matter.
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
Advanced Communications for alleged breach of contract and the recovery of a
break-up or termination fee in excess of $50,000 in conjunction with Advanced
Communications' alleged failure to consummate a proposed merger with Star in
January 2000. Advanced Communications believes that the suit is without basis
and is vigorously defending the alleged claim.
ITEM 2. CHANGES IN SECURITIES
In January 2002, Advanced Communications entered into the Equity Line
of Credit Agreement where Advanced Communications may, at its discretion,
periodically issue and sell to Cornell Capital Partners, L.P. shares of common
stock for a total purchase price of $30 million. The amount of each advance is
subject to an aggregate maximum advance amount of $2 million in any thirty-day
period. Cornell Capital Partners, L.P. will purchase the shares of common stock
for a 9% discount to the lowest closing bid price of our common stock during the
five trading days after an advance notice. In addition, Cornell Capital Partners
is entitled to retain 3% of each advance under the Equity Line of Credit,
together with a one-time commitment fee of $740,000, payable in shares of its
common stock. On January 28, 2002, we issued 2,960,000 shares of our restricted
common stock to Cornell Capital Partners, LP with a market value of $740,000 as
a commitment fee for the $30 million structured equity line facility. Cornell
Capital Partners intends to sell any shares purchased under the Equity Line of
Credit at the then prevailing market price. Additionally, Westrock Advisors,
Inc. was paid a fee of 40,000 shares of Advanced Communications' common stock,
which is equal to $10,000 at a closing bid of $0.25 on January 10, 2002 for
acting as the placement agent.
In January 2002, Advanced Communications entered into a Securities
Purchase Agreement with the Buyers (as listed in Schedule 1 of the Securities
Purchase Agreement), pursuant to which we issued and sold to the Buyers One
Million Dollars of convertible debentures. These debentures are convertible into
shares of common stock at a price equal to equal to either (a) an amount equal
to one hundred twenty percent (120%) of the closing bid price of the common
stock as of the closing date or $0.40, whichever is higher, or (b) an amount
equal to eighty percent (80%) of the lowest closing bid price of the common
stock for the five trading days immediately preceding the conversion date. If
such conversion had taken place at $0.16 (i.e., 80% of the recent price of
$0.20), then the holders of the convertible debentures would have received
7,812,500 shares of common stock. These convertible debentures accrue interest
at a rate 5% per year and are convertible at the holder's option. These
convertible debentures have a term two years. At Advanced Communications'
option, these debentures may be paid in cash or redeemed at a 20% premium prior
to January 2004.
On January 22, 2002, our directors, excluding Mr. May and Roberts,
pursuant to a January 4, 2002 Board of Directors Meeting, were each issued
200,000 shares for a total of 1,000,000 shares of our restricted common stock
for services rendered to us as directors for the 2001 and 2002 fiscal years.
During the quarter ended December 31, 2001, we issued 557,408 shares of
our restricted common stock, of which 419,681 shares valued at $116,335 were
issued in exchange for professional services and 137,727 shares were issued to
our placement agent for placement fees in connection with the 504(d) private
placement.
During the quarter ended September 30, 2001, Advanced Communications
issued 3,203,573 shares of its restricted common stock, of which 780,240 shares
valued at $244,224 were issued in exchange for services and 1,190,000 shares
valued at $357,001 were issued to various employees and vendors of Advanced
Communications (Australia) in partial repayment of amounts payable.
As of September 30, 2001 and June 30, 2001, $200,750 of Secured
Convertible Debentures were outstanding. Advanced Communications was in default
based on the April 1, 2000 due date. On April 24, 2002, Advanced Communications
agreed to settle this matter by issuing a total of 8,500,000 shares of common
stock over a 180-day period.
21
During the year ended June 30, 2001, Advanced Communications issued
1,051,491 shares of common stock for services. The stock was valued based on the
quoted trading price on the grant dates, which aggregated $328,870.
During the quarter ending June 30, 2001, Advanced Communications issued
780,240 shares of restricted common stock for services. The stock was valued
based on the quoted trading price on the grant dates, which aggregated $244,224.
During the period of December 2000 to August 2001, pursuant to a
private placement under Regulation D, Rule 506, Advanced Communications issued
3,060,600 shares of common stock and 3,060,000 warrants at $.30 per share.
Advanced Communications received $1,168,180 from investors, which included
$250,000 for stock not yet issued as of June 30, 2001 and $275,454 for warrants.
Advanced Communications issued 250,000 shares of common stock, valued at
$75,000, in payment of offering costs incurred. The value assigned to this stock
was based on the private placement memorandum of $.30 per share. The value of
the common stock has been charged to equity as direct costs to the offering. The
fair market value of the warrants, aggregating $275,454, was estimated on the
grant date using the Black-Scholes option pricing model as required under FASB
123 with the following weighted average assumptions: expected dividend yield 0%,
volatility 49.84%, risk-free interest rate 4.22%, expected option life 2 years.
To date, no warrants have been exercised.
During the quarter ended September 30, 2001, we issued an additional
1,233,333 shares of restricted common stock for cash and warrants at $0.30 per
share that were subscribed for prior to August 2001. On February 27, 2002, our
Board of Directors approved a resolution to reprice the private placement
offering from $0.30 per share to $0.20 per share. This repricing will result in
the issuance of an additional 2,146,967 shares of common stock and warrants to
the private placement investors. These additional shares are included in the
Registration Statement currently on file with the SEC. The exercise price of the
underlying warrants will remain at $0.30 per share.
During December 2000, holders of $412,800 of convertible debentures
elected to convert their notes into 1,803,545 of Advanced Communications'
restricted common stock. Advanced Communications further reduced these
convertible debentures by offsetting a related convertible debentures in the
amount of $36,450.
As of April 5, 2000, Advanced Communications had a non-interest bearing
note payable to Advanced Communications Technologies (Australia) of $7,500,000.
The following schedule represents payments on such debt by issuance of
restricted common stock to either the affiliate or creditors of the affiliate.
Such transactions were recorded at the market price of the stock at date of
issuance.
SHARES OF
COMMON
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
December 2001
-------------- --------------
7,787,000 $ 4,884,101
============== ==============
(1) This transaction resulted in a gain on extinguishment of debt of $23,000.
In April 2000, Advanced Communications acquired 20% of the common stock
of Advanced Communications (Australia). The purchase price of the investment
amounted to $19,350,000, and was comprised of a note payable for $7,500,000 and
the issuance of 5,000,000 shares of restricted common stock valued at
$11,850,000. The shares issued were valued at the average quoted trading price
during the acquisition period. The fair value of the investment at the
acquisition date was determined to be $3,657,472. The excess of the purchase
price over the fair value of the investment in the amount of $15,692,528 was
accounted for as goodwill.
In April 2000, Advanced Communications' 20% interest in Advanced
Communications (Australia) 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 Advanced
Communications (Australia) was adjusted for the amortization of the goodwill, as
22
discussed above. Amortization was computed on a straight-line basis over fifteen
years. The amortization of goodwill charged to income for each of the three
months ended September 30, 2001 and September 30, 2000 was $261,542.
On September 30, 1999, Advanced Communications entered into secured
convertible debentures purchase agreement with two companies, which were
stockholders of Advanced Communications, whereby Advanced Communications sold
$500,000 of 12% Secured Convertible Debentures due April 1, 2000, which were
convertible into shares of Advanced Communications' Common Stock. In addition,
on September 30, 1999, Advanced Communications issued another convertible
debenture to an unrelated party in the amount of $150,000. The debentures were
convertible, at the holder's option, into shares of common stock in whole or in
part at any time after the original issue date. The number of shares of common
stock issuable upon a conversion was to be determined by dividing the
outstanding principal amount of the debenture to be converted, plus all accrued
interest, by the conversion price. The conversion price in effect on any
conversion date is 50% of the average of the bid price during the twenty trading
days immediately preceding the applicable conversion date. The convertible
debentures contained a beneficial conversion feature computed at its intrinsic
value which is the difference between the conversion price and the fair value on
the debenture issuance date of the common stock into which the debt is
convertible, multiplied by the number of shares into which the debt is
convertible at the commitment date. Since the beneficial conversion feature is
to be settled by issuing equity, the amount attributed to the beneficial
conversion feature, of $650,000, was recorded as an interest expense and a
component of equity on the issuance date during the fiscal year ended June 30,
2000. Currently, none of these secured convertible debentures are outstanding.
MFI (as previously defined) was obligated to pay $150,000 to a company
(the "Payee") pursuant to a convertible promissory note. During December 1997,
MFI issued 75,000 of its common shares to settle the amounts due to the Payee.
However, a dispute arose as to whether the Payee authorized the issuance of the
shares. The Payee filed a suit during December 1997 to enforce the convertible
promissory note. Total interest payable was $84,507 as of June 30, 2000
resulting in the total principal and accrued interest payable at June 30, 2000
of $234,507. In June 2000, the parties agreed to settle the matter for a payment
of $200,000. This resulted in a gain on extinguishment of debt in the amount of
$34,507. Advanced Communications made a payment of $50,000 by June 30, 2000. The
$150,000 remainder was to be paid with proceeds from the 75,000 shares of stock
and any remaining balance to be paid by Advanced Communications. The revised
obligation was to be paid by August 14, 2000. Advanced Communications defaulted
on this revised payment obligation and a judgment against Advanced
Communications was entered. In October 2000, Advanced Communications sold the
75,000 shares of stock realizing $41,802 which it remitted in partial repayment
of its outstanding debt. As of June 30, 2001, Advanced Communications' remaining
balance and accrued interest on this obligation was $118,530. An additional
$4,206 of interest was accrued on this note and on October 19, 2001 Advanced
Communications paid the obligation in full. On October 24, 2001 Advanced
Communications received notice from the court that its judgment has been
satisfied.
With respect to the sale of unregistered securities referenced above,
all transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 (the "1933 ACT"), and Regulation D promulgated under the
1933 Act. In each instance, the purchaser had access to sufficient information
regarding Advanced Communications so as to make an informed investment decision.
More specifically, Advanced Communications had a reasonable basis to believe
that each purchaser was an "accredited investor" as defined in Regulation D of
the 1933 Act and otherwise had the requisite sophistication to make an
investment in Advanced Communications' securities.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
As of September 30, 2001 and June 30, 2001, $200,750 of Secured
Convertible Debentures were outstanding. Advanced Communications is in default
based on the April 1, 2000 due date. On April 24, 2002, Advanced Communications
agreed to settle this matter by issuing a total of 8,500,000 shares of common
stock over a 180-day period.
We were obligated to pay $150,000 to a company (the "Payee") pursuant
to a convertible promissory note. During December 1997, we issued 75,000 of its
common shares to settle the amounts due to the Payee. However, a dispute arose
as to whether the Payee authorized the issuance of the shares. The Payee filed a
suit during December 1997 to enforce the convertible promissory note. Total
interest payable was $84,507 as of June 30, 2000 resulting in the total
principal and accrued interest payable at June 30, 2000 of $234,507. In June
2000, the parties agreed to settle the matter for a payment of $200,000. This
resulted in a gain on extinguishment of debt in the amount of $34,507. Advanced
Communications made a payment of $50,000 by June 30, 2000. The $150,000
remainder was to be paid with proceeds from the 75,000 shares of stock and any
remaining balance to be paid by Advanced Communications. The revised obligation
was to be paid by August 14, 2000. Advanced Communications defaulted on this
revised payment obligation and a judgment against Advanced Communications was
entered. In October 2000, Advanced Communications sold the 75,000 shares of
23
stock realizing $41,802 which it remitted in partial repayment of its
outstanding debt. As of June 30, 2001, Advanced Communications' remaining
balance and accrued interest on this obligation was $118,530. An additional
$4,206 of interest was accrued on this note and on October 19, 2001 Advanced
Communications paid the obligation in full. On October 24, 2001 Advanced
Communications received notice from the court that its judgment has been
satisfied.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 11, 2001 a Special Meeting of Stockholders was held in
Irvine, California. At this meeting, our stockholders authorized the following
changes to our Articles of Incorporation:
1- To increase our authorized shares of common stock from 100,000,000
shares to 200,000,000;
2- To provide for a class of 25,000,000 shares of Preferred Stock which
will have such terms as the Board of Directors shall determine from time to
time; and
3- To provide for indemnification of our officers, directors, employees
and agents to the full extent permitted by law.
A Certificate of Amendment to our Articles of Incorporation embodying
the above changes was filed in Florida on September 27, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
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
24
EXHIBIT NO. DESCRIPTION LOCATION
- -------------------- ------------------------------------------------------- ----------------------------------------------
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 Incorporated by reference to Exhibit 2.7 to
the Form SB-2 filed with the SEC on March 5,
2002
10.1 Lease Agreement dated as of November 27, 2001 between Incorporated by reference to Exhibit 10.1 to
the Company and Continental Development, L. P. II the Form SB-2 filed with the SEC on March 5,
2002
10.2 Stock Purchase Agreement between Advanced Incorporated by reference to Exhibit 10.2 to
Communications Technologies, Inc. and Advanced the Form S-1 Registration Statement filed on
Communications Technologies (Australia) Pty Ltd. August 14, 2001
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
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
25
EXHIBIT NO. DESCRIPTION LOCATION
- -------------------- ------------------------------------------------------- ----------------------------------------------
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, Incorporated by reference to Exhibit 10.17 to
2000, between Advanced Communications Technologies, the Company's Amendment to Form 10-KSB filed
Inc. and Advanced Communications Technologies on May 23, 2002.
(Australia) Pty. Ltd.
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
(b) REPORTS ON FORM 8-K.
None.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. (REGISTRANT)
/s/ Wayne I. Danson June 5, 2002
- ----------------------------------------------------- ------------
Wayne I. Danson Date
President (Principal Executive Officer), Chief Financial
Officer (Principal Accounting Officer) and Director