U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 1O-QSB
(check one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Three Months Ended September 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT OF 1934
Commission File Number 000-30486
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
------------------------------------------
(Exact name of small business issuer as specified in its charter)
Florida
-------
(State or other jurisdiction
of incorporation or organization)
65-0738251
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(IRS Employer Identification No.)
420 Lexington Avenue, New York, NY 10170
----------------------------------------
(Address of principal executive offices)
(646)-227-1600
--------------
(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 December 5, 2002, there were 118,852,622 shares of the registrant's no par
value common stock issued and outstanding
Transmittal Small Business Disclosure Format (check one):
YES [ ] NO [X]
PART I-FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets as of September 30, 2002 and June 30, 2002
(Audited)
Consolidated Statement of Operations for the three months ended
September 30, 2002 and September 30, 2001
Consolidated Statement of Cash Flows for the three months ended
September 30, 2002 and September 30, 2001
Notes to Unaudited Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 3. CONTROLS AND PROCEDURES
PART II-OTHER INFORMATION
ITEM 1. LEGAL MATTERS
ITEM 2. CHANGES IN SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
2
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER JUNE
30, 2002 30, 2002
(UNAUDITED) (AUDITED)
------------- -------------
ASSETS
CURRENT ASSETS:
Cash $ 415 $ 11,093
-
------------- -------------
TOTAL CURRENT ASSETS 415 11,093
------------- -------------
PROPERTY AND EQUIPMENT (NET) 16,274 17,274
------------- -------------
OTHER ASSETS:
-
Security Deposits 7,700 13,225
Other Receivables 9,927 9,927
Deferred Bond Financing Costs,
net of accumulated amortization 53,333 63,333
------------- -------------
TOTAL OTHER ASSETS 70,960 86,485
------------- -------------
TOTAL ASSETS $ 87,649 $ 114,852
- ------------
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
LIABILITIES
CURRENT LIABILITIES
Accounts Payable $ 1,189,658 $ 872,493
Accrued Compensation 172,183 172,183
Loan Payable to Shareholder 1,055,736 1,055,736
12% Convertible Debentures - 100,407
Interest Payable 135,417 62,917
------------- -------------
TOTAL CURRENT LIABILITIES 2,552,994 2,263,736
Long-Term Liabilities
5% Convertible Debentures 1,000,000 1,000,000
8% Note Payable 173,494 -
Note Payable-ACT-Australia 1,791,166 1,791,166
------------- -------------
Total Other Liabilities 2,964,660 2,791,166
------------- -------------
TOTAL LIABILITIES 5,517,654 5,054,902
------------- -------------
STOCKHOLDERS' DEFICIENCY
Preferred Stock, $.01 Par Value,
25,000,000 Shares Authorized,
none issued and outstanding - -
Common Stock, No Par Value,
200,000,000 and 100,000,000
Shares Authorized, 118,352,622
and 114,102,622 shares issued
and outstanding, respectively 25,571,505 25,471,098
Deferred Commitment fees, net
of accumulated amortization (468,750) (562,500)
Accumulated Deficit (30,532,760) (29,848,648)
------------- -------------
TOTAL STOCKHOLDERS' DEFICIENCY (5,430,005) (4,940,050)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 87,649 $ 114,852
- ---------------------------------------------- ============= =============
The accompanying notes are an integral part of these consolidated financial
statements
3
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
--------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
---------------- -----------------
OPERATING EXPENSES
Consulting Fees 16,772 100,000
Amortization and Depreciation 104,750 101,000
Professional Fees 292,409 130,748
Other Selling, General
and Administrative
Expenses 24,187 90,304
Stock-Based Compensation - 30,000
---------------- -----------------
TOTAL OPERATING EXPENSES 438,118 452,052
---------------- -----------------
(Loss) From Operations (438,118) (452,052)
---------------- -----------------
OTHER EXPENSES
Lawsuit settlement (173,494) -
Interest expense (72,500) (4,206)
---------------- -----------------
TOTAL OTHER (EXPENSES) (245,994) (4,206)
---------------- -----------------
NET (LOSS) $ (684,112) $ (456,258)
- ---------- ================ =================
Net (Loss) Per Share
- - Basic and Dilutive $ (0.006) $ (0.005)
================ =================
Weighted Average Number of Shares
Outstanding During the Period
- - Basic and Dilutive 115,095,829 95,639,024
================ =================
The accompanying notes are an integral part of these consolidated financial
statements
4
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
----------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net (loss) $ (684,112) $ (456,258)
Adjustments to reconcile net loss to net cash used:
Depreciation and amortization 104,750 101,000
Stock issued for services - 244,224
Accrued compensation - 52,500
Settlement of Lawsuit 173,494 -
Changes in operating assets and liabilities:
(Increase) decrease in assets
Prepaid expense 5,525 (10,000)
Increase (decrease) in liabilities:
Accounts payable 317,165 (101,094)
Interest payable 72,500 4,206
Other Advances 63,000
---------------- ----------------
Net cash used in operating activities (10,678) (102,422)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Loan to unconsolidated affiliated company
Purchase of fixed assets
Repayment of loan to unconsolidated affiliate
---------------- ----------------
Net cash used in investing activities - -
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- ------------------------------------
Loan proceeds from shareholder 25,200
Proceeds from issuance of common stock
and warrants net of offering costs 125,000
---------------- ----------------
Net cash provided by financing activities - 150,200
---------------- ----------------
Net increase (decrease) in cash (10,678) 47,778
Cash and cash equivalents at beginning of year 11,093 6,816
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 415 $ 54,594
- ------------------------------------------ ================ ================
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
During the three months ended September 30, 2002, the Company issued 4,250,000
shares of common stock valued at $100,407 in full settlement of the September
1999 12% Senior Secured Convertible Debentures.
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% interest.
The accompanying notes are an integral part of these consolidated financial
statements
5
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------------------
The accompanying unaudited consolidated financial statements include the results
of Advanced Communications Technologies, Inc. ("ACT" or the "Company") and its
wholly-owned subsidiaries. The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial statements. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to the quarterly reporting
rules of the Securities and Exchange Commission. The financial statements
reflect all adjustments of a recurring nature that are, in the opinion of
management, necessary for the fair presentation of the financial statements.
Operating results for the three months ended September 30, 2002 are not
necessarily indicative of the results that may be expected for the fiscal year
ending June 30, 2003. 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, 2002 included in the Company's Form 10-KSB as
filed with the Securities and Exchange Commission.
(A) ORGANIZATION
- ----------------
Advanced Communications Technologies, Inc., a Nevada corporation, was
incorporated on April 30, 1998 and was inactive from its date of formation until
April 1999 when it merged with and into the Company in a reverse merger. In
consideration for 90% of the stock of the Company, Advanced Communications
Technologies, Inc (Nevada) (of which Roger May, our former Chairman and CEO was
the principal shareholder) transferred all of its assets which included all of
the rights and interest in the SpectruCell technology for the North and South
American territories. For accounting purposes, the merger was treated as an
acquisition of all of the assets of the Company 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 Technologies
(Australia) Pty Ltd ("ACT-AU"), an unconsolidated affiliated entity, which on
November 11, 2002 was unilaterally terminated by ACT-AU. See Note 8(E)(iv). On
July 5, 2000, the Company entered into a interim License and Distribution
Agreement with ACT-AU pursuant to which the Company had the exclusive rights to
market and distribute the SpectruCell technology in North, South and Central
America. On October 25, 2002, the interim License and Distribution Agreement was
unilaterally terminated by ACT-AU. (See Note 8(E)(iv). 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 and have never been operational.
Australon Enterprises Pty Ltd is an Australian public company that manufactures
and distributes remote monitoring devices for homes and businesses such as
remote meter reading and residential automated gateway devices. While Mr. May,
our former CEO and Chairman of the Board has a significant ownership interest in
Australon Enterprise Pty, through his ownership interest in ACT-AU, he is not
involved in Australon `s daily management or business operations and is not
represented on its Board of Directors. The joint venture relationship was
established while Mr. May controlled both companies. Presently, the company is
not in negotiations with Australon Enterprises Pty and does not intend to enter
into any discussions with Australon's management. Australon USA, Inc is inactive
and will remain inactive for the foreseeable future.
The Company will account for the future results of operations, if any, of
Australon on an equity basis and ANT on a consolidated basis.
The Company is a marketing company whose primary asset is the ownership of the
rights to market and distribute the SpectruCell technology in the North and
South American territories. The Company expects to generate revenue from the
6
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
marketing and distribution of the SpectruCell technology when and if it becomes
available to the marketplace. The Company has not generated any meaningful
revenue to date.
(B) PRINCIPLES OF CONSOLIDATION
- -------------------------------
The accompanying consolidated financial statements include the accounts of the
Company and its inactive subsidiaries AGC, Australon and ANT. All significant
intercompany transactions and balances have been eliminated in consolidation.
(C) USE OF ESTIMATES
- ---------------------
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and revenues and expenses during the reported period.
Actual results could differ from those estimates.
(D) FAIR VALUE OF FINANCIAL INSTRUMENTS
- ---------------------------------------
The carrying amounts of the Company's accounts payable, accrued liabilities,
debentures, 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 fiscal years ended June 30, 2002
and 2001 due to net operating losses in both periods. Any deferred tax asset
arising from the future benefit of the Company's net operating loss
carryforward, of approximately $14,500,000 has been fully reserved.
7
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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) 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.
(K) LOSS PER SHARE
- ------------------
Basic and dilutive net loss per common share is computed based upon the weighted
average common shares outstanding.
(L) NEW ACCOUNTING PRONOUNCEMENTS
- ---------------------------------
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS
145 rescinds the provisions of SFAS No. 4 that requires companies to classify
certain gains and losses from debt extinguishments as extraordinary items,
eliminates the provisions of SFAS No. 44 regarding transition to the Motor
Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require that
certain lease modifications be treated as sale leaseback transactions. The
provisions of SFAS 145 related to classification of debt extinguishments are
effective for fiscal years beginning after May 15, 2002. Earlier application is
encouraged. The Company does not believe the adoption of this standard will have
a material impact the financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Restructuring
Costs." SFAS 146 applies to costs associated with an exit activity (including
restructuring) or with a disposal of long-lived assets. Those activities can
include eliminating or reducing product lines, terminating employees and
contracts and relocating plant facilities or personnel. Under SFAS 146, the
Company will record a liability for a cost associated with an exit or disposal
activity when that liability is incurred and can be measured at fair value. SFAS
146 will require the Company to disclose information about its exit and disposal
activities, the related costs, and changes in those costs in the notes to the
interim and annual financial statements that include the period in which an exit
activity is initiated and in any subsequent period until the activity is
completed. SFAS 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002, with earlier adoption encouraged. Under SFAS
146, a company cannot restate its previously issued financial statements and the
new statement grandfathers the accounting for liabilities that a company had
previously recorded under Emerging Issues Task Force Issue 94-3.
NOTE 2. PROPERTY AND EQUIPMENT
- ----------------------------------
September 30,
2002 June 30, 2002
-------------- ---------------
Computer and office equipment $ 32,909 $ 32,909
Less: Accumulated depreciation (16,635) (15,635)
-------------- ---------------
Property and equipment - net $ 16,274 $ 17,274
============== ============
Depreciation expense for each of the three months ended September 30, 2002 and
2001 was $1,000.
NOTE 3. ACCRUED COMPENSATION
- --------------------------------
The Company had an oral agreement with Mr. Roger May to serve as the Chief
Executive Officer of the Company. Mr. May agreed to defer payment of the amounts
owed him pursuant to the oral agreement due to the Company's lack of funds. The
Company owed Mr. May $479,050 at June 30, 2001. On November 30, 2001, Mr. May
was removed as the Company's Chief Executive Officer. Subsequent to that date,
Mr. May was not entitled to receive any additional compensation from the
Company.
8
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At the request of the Company's Board of Directors, the Compensation Committee
conducted a review of the nature of the past services provided by Mr. May to the
Company to determine whether a portion of such services are more properly
allocable to the Company's unconsolidated Australian affiliate. At the Company's
March 26, 2002 Board of Director's meeting, the Board of Directors unanimously
approved the recommendation of the Compensation Committee to reduce Mr. May's
prior accrued compensation by $394,361 representing services Mr. May performed
for ACT-AU, leaving a balance of $172,183 at September 30, 2002 and June 30,
2002.
NOTE 4. NOTES AND LOAN PAYABLE
- ---------------------------------
(A) 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, on a best efforts basis, to raise the
cash portion of the purchase price through a private or public offering of
securities. There are no default or penalty provisions under the terms of the
Stock Purchase Agreement. Upon raising funds pursuant to a private or public
offering, the Company shall only be obligated to repay ACT-AU's note with those
funds remaining after deduction for reserves needed for current operations,
working capital and the development and expansion of its operations and the
operations of its subsidiaries, as determined by the Company's Board of
Directors.
The following schedule represents payments on such debt by issuance of
restricted common stock to either ACT-AU or creditors or employees of ACT-AU.
Such transactions were recorded at the market price of the stock at date of
issuance.
DATE SHARES OF VALUE
COMMON
STOCK ISSUED
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 fiscal years ended June 30, 2002 and 2001 the Company repaid $25,000
and $247,608 of the obligation in cash, respectively.
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 September 30, 2002, the balance of the Company's obligation to ACT-AU was
$1,791,166.
On November 11, 2002, ACT-AU issued a Notice of Termination to the Company
stating that the April 2000 Stock Purchase Agreement was terminated immediately
due to the Company's insolvency. The effect of the purported Notice of
Termination vis a vis the Stock Purchase Agreement was to cancel the Company's
stock ownership interest in ACT-AU. Consistent with our decision to withdraw
from the Australia litigation, we have not challenged the purported termination
of the Stock Purchase Agreement in the Australia Court. The Company is reviewing
its rights with Australian counsel to determine if its remaining obligation to
ACT-AU is similarly cancelled.
(B) LOAN PAYABLE TO SHAREHOLDER
- -------------------------------
As of September 30, 2002 and June 30, 2002, the Company owed Global
Communications Technology Pty, an Australian company wholly-owned by Mr. May, a
former officer and director of the Company, $1,055,736, for funds advanced to
the Company to provide working capital. This loan is non-interest bearing and
unsecured, and has no scheduled date for repayment. The Company believes that
the loan is not due upon demand. However, since the actual repayment terms are
9
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
not known with any specificity because the terms are not confirmed in a written
document, the loan has been classified as a current liability.
(C) 8% NOTE PAYABLE
- -------------------
On November 14, 2002, the Company settled its litigation with the Needham/DuPont
plaintiffs by agreeing to release the plaintiffs' stock from restriction and
issuing a three year 8% promissory note for $173,494 to reimburse the plaintiffs
for their legal costs. The note is payable in three equal annual installments of
principal and interest commencing December 1, 2003 with additional installments
due on December 1, 2004 and December 1, 2005. In accordance with paragraphs 8(a)
and 35 of FASB 5, the Company has recorded in its September 30, 2002 financial
statements, an expense of $173,494 and the associated liability in connection
with the lawsuit settlement.
NOTE 5. CONVERTIBLE DEBENTURES
- ----------------------------------
(A) AJW PARTNERS, LLC AND NEW MILLENNIUM CAPITAL PARTNERS II, LLC
- ------------------------------------------------------------------
On September 30, 1999, the Company entered into secured convertible debentures
purchase agreements with two investors, who were also stockholders of the
Company, whereby the Company sold $500,000 of 12% Secured Convertible Debentures
due April 1, 2000, which were convertible into shares of the Company's Common
Stock. In addition, on September 30, 1999, the Company issued another
convertible debenture to Bank Insinger de Beaufort N.V. in the amount of
$150,000. The debentures were convertible, at the holder's option, into shares
of common stock in whole or in part at any time after the original issue date.
The number of shares of common stock issuable upon a conversion was to be
determined by dividing the outstanding principal amount of the debenture to be
converted, plus all accrued interest, by the conversion price. The conversion
price in effect on any conversion date is 50% of the average of the bid price
during the twenty trading days immediately preceding the applicable conversion
date.
The convertible debentures contained a beneficial conversion feature computed at
its intrinsic value which is the difference between the conversion price and the
fair value on the debenture issuance date of the common stock into which the
debt is convertible, multiplied by the number of shares into which the debt is
convertible at the commitment date. Since the beneficial conversion feature is
to be settled by issuing equity, the amount attributed to the beneficial
conversion feature, of $650,000, was recorded as an interest expense and a
component of equity on the issuance date during the fiscal year ended June 30,
2000.
Between October and December 2000, AJW Partners, LLC and New Millennium Capital
Partners II, LLC elected to convert $262,800 of convertible debentures into
860,378 shares of the Company's restricted common stock.
In December 2000, Bank Insinger de Beaufort N.V. converted its $150,000 note,
inclusive of accrued and unpaid interest into 943,167 shares of the Company's
restricted common stock.
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. On April 24, 2002 and June 4, 2002, the
Company issued a total of 2,921,450 and 1,328,550 shares of common stock to AJW
Partners, LLC and New Millennium Capital Partners II, LLC, respectively (See
Note 10(B)), for a total debt reduction of $100,343. As of June 30, 2002
$100,407 of 12% Secured Convertible Debentures remained outstanding. On August
26, 2002 and September 24, 2002 the Company issued a total of 2,921,450 and
1,328,550 shares of common stock to AJW Partners, LLC and New Millennium Capital
Partners, LLC, respectively, in full satisfaction of the remaining amount due
under the September 1999 12 % Secured Convertible Debentures.
(B) CORNELL CAPITAL PARTNERS, LP
- --------------------------------
In January 2002, the Company issued, in the aggregate, $1 million of 5%
Convertible Debentures to Cornell Capital Partners, LP and other investors.
10
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These debentures are convertible into shares of common stock at a price equal to
either (a) an amount equal to 120% of the closing bid price of the common stock
as of the closing date or $.40, whichever is higher, or (b) an amount equal to
80% of the lowest closing bid price of the common stock for the five trading
days immediately preceding the conversion date. These convertible debentures
accrue interest at a rate of 5% per year and are convertible at the holder's
option. These convertible debentures have a term of two years. At the Company's
option, these debentures may be paid in cash at maturity or redeemed at a 20%
premium prior to January 2004.
The convertible debentures contain a beneficial conversion feature computed at
its intrinsic value that is the difference between the conversion price and the
fair value on the debenture issuance date of the common stock into which the
debt is convertible, multiplied by the number of shares into which the debt is
convertible at the commitment date. Since the beneficial conversion feature is
to be settled by issuing equity, the amount attributed to the beneficial
conversion feature, of $250,000, was recorded in the June 30, 2002 financial
statements as interest expense and a component of equity on the issuance date.
The Company incurred $80,000 of financing costs associated with the 5%
Convertible Debentures that is being amortized over the life of the debentures.
Amortization of $10,000 was expensed for the three months ended September 30,
2002.
As of September 30, 2002 and June 30, 2002, interest of $135,417 and $62,917,
respectively, is accrued on these debentures..
Future maturities of long-term debt as of September 30, 2002 are as follows:
YEAR AMOUNT
---- ------
2004 $1,057,831
2005 57,831
2006 57,831
----------
Total $1,173,494
NOTE 6. STOCKHOLDERS' DEFICIENCY
- ------------------------------------
(A) STOCK ISSUED FOR CONVERTIBLE DEBENTURES
- -------------------------------------------
During the three months ended September 30, 2002 the Company issued 4,250,000
shares of stock to the 12% Convertible Debenture holders in full settlement of
the Company's outstanding obligation of $100,407.
NOTE 7. RELATED PARTIES
- ---------------------------
(A) GLOBAL COMMUNICATIONS TECHNOLOGY PTY LTD
- --------------------------------------------
Global Communications Technologies Pty Ltd., a related party, is wholly owned by
Mr. May a principal stockholder of the Company.
(B) ADVANCED COMMUNICATIONS TECHNOLOGY (AUSTRALIA) PTY. LTD.
- ------------------------------------------------------------
Advanced Communications Technology (Australia) Pty. Ltd., an Australian company,
is 70% owned by Mr. May's wholly owned company, Global Communications Technology
Pty Ltd. Advanced Communications Technologies (Australia) Pty Ltd placed itself
into voluntary administration on or about July 18, 2002.
(C) LEGAL COUNSEL
- -----------------
Certain of the Company's legal counsel are stockholders and directors of the
Company.
11
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. COMMITMENTS AND CONTINGENCIES
- -----------------------------------------
(A) LEASE AGREEMENT
- --------------------
The Company is a party to a three-year office lease commencing January 1, 2002
and ending December 31, 2004. The monthly rent is $7,634 inclusive of the cost
of monthly parking. The minimum lease payment for the remaining life of the
lease is $229,020. On August 1, 2002, the Company notified the landlord that it
was relocating its office from California to New York. The Company has engaged
Grubb & Ellis to find a suitable subtenant to assume all or a portion of the
Company's remaining lease obligation.
The Company is a guarantor of Jason Webster's one-year residential lease which
expires January 25, 2003. The Guaranty which was executed in January 2002
requires the Company to reimburse the landlord in the event of a default by
Jason Webster, the former Director of Corporate Communications of the Company.
The rent under the residential lease is $1,600 per month. The Company has not
been required to perform under the Guaranty.
(B) INDEMNIFICATION OF DIRECTORS AND EMPLOYEES IN RE: ADVANCED COMMUNICATIONS
- --------------------------------------------------------------------------------
(AUSTRALIA) V. COMPANY DIRECTORS AND EMPLOYEES
- ----------------------------------------------
On or about May 10, 2002, ACT-AU filed suit in the Superior court of Orange
County, California against the Company, all of its directors, its former
president, and some of its former and present employees, including the Company's
receptionist. On or about May 17, 2002, ACT-AU voluntarily dismissed the suit as
to the Company but not as to the individual defendants.
The complaint sets forth multiple causes of action against the defendants,
including various business torts. The basis of the complaint is that the
defendants improperly interfered with and conspired to ruin plaintiff's business
and conspired to force plaintiff into bankruptcy.
In the opinion of the Company, based on input from legal counsel, the complaint
is deficient and subject to attack on numerous procedural grounds. In the
opinion of the Company, based on its knowledge of the facts and circumstances
underlying the action, the complaint is also substantively deficient and
meritless.
Under the Company's articles of incorporation and applicable Florida law, the
Company is obligated to indemnify and defend its directors and the officer named
as defendants who have been served in the action. The Company might also be
under an obligation to indemnify and defend the other former and present
employees named as defendants who have not been served in the action, if and
when they are served. This determination will be made on a case-by-case basis.
(C) INDEMNIFICATION AGREEMENT BETWEEN THE COMPANY AND JACK HALPERIN RE:
- --------------------------------------------------------------------------------
NEEDHAM/DUPONT LAWSUIT
- ----------------------
On or about July 2000, the Company entered into an indemnification agreement
with Jack Halperin, Esq., our then SEC counsel, whereby the Company agreed to
indemnify Mr. Halperin for all costs and damages incurred as a result of Mr.
Halperin being named a defendant in the Needham/DuPont lawsuit filed against the
Company, Mr. May and Mr. Halperin in July 2000. Mr. May executed this agreement
on behalf of the Company. The agreement includes a provision that prohibits the
Company from entering into any settlement agreement in the Needham/DuPont
lawsuit unless such settlement agreement provides for the unconditional release
of Mr. Halperin from any claim. On November 14, 2002, the Company settled the
Needham/DuPont lawsuit without obtaining a full release for Mr. Halperin. The
Company's Board of Directors is consulting with its current legal counsel to
determine the validity of the indemnification agreement (see Note 8(E)(i).
(D) PENDING CLAIM BY ADVANCED COMMUNICATIONS (AUSTRALIA) FOR COSTS OF AUSTRALIA
- --------------------------------------------------------------------------------
LITIGATION AND FOR DAMAGES
- --------------------------
Following our withdrawal from the Australia litigation against Mr. May and
ACT-AU, ACT-AU applied to the court for an order awarding its costs of the
litigation against the Company. ACT-AU has indicated that its costs of
litigation were approximately Aus $400,000. The Company believes a cost award
will be made by the Australia Court in favor of ACT-AU but it does not know in
what amount. ACT-AU has also applied for an order awarding damages against the
Company in the amount of Aus $6,000,000 or approximately US$3,200,000 as a
result of the Company notifying third parties in the U.S. with which ACT-AU was
dealing in regard to SpectruCell, of the Australia Court's August 23, 2002
injunctive orders referred to in Note 8(E)(iv). Management believes that based
on information made available to it, ACT-AU proposed AU$6,000,000 or
approximately US $3,200,000 claim for damages is without merit. As far as the
Company knows, the Australia Court has not awarded any costs and has not awarded
12
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
any damages against the Company. It is not known if such awards will be made
and, if they are made, what their amounts will be.
(E) LEGAL MATTERS
- -----------------
(i) NANCY J. NEEDHAM AND EDMUND R. DUPONT LAWSUIT
In Nancy J. Needham; Edmund R. DuPont et al v. Advanced Communications
Technologies, Inc., et al, an action filed July 2000 in the Fifteenth Judicial
Circuit in the State of Florida, two former officers and directors of the
Company are seeking damages and injunctive relief arising out of the Company's
refusal to provide legal opinion letters and to take other actions necessary to
allow the former officers to convert restricted stock into unrestricted stock by
an exemption under Rule 144 of the Securities and Exchange regulations. The
plaintiffs have not specified the amount of damages they are seeking. The
Company has filed a counterclaim to rescind all of the Plaintiffs' stock for
lack and/or failure of consideration and other damages. In October 2001, the
court denied summary judgment for the Plaintiffs. On November 14, 2002, the
Company settled the litigation with the Needham/DuPont plaintiffs by agreeing to
release the plaintiffs' stock from restriction and issuing a three year
promissory note for $173,494 to reimburse the plaintiffs for its legal costs.
The plaintiffs agreed to release the Company, its officers, and directors,
except Mr. May and Mr. Halperin, the Company's former SEC counsel from any
claims for damages. On November 18, 2002 a Notice of Voluntary Dismissal was
filed with the court. In accordance with the provisions of FASB 5 paragraph 35,
the Company has recorded the expense of settlement and the associated liability
in its September 30, 2002 financial statements.
On or about July 2000, the Company entered into an indemnification agreement
with Jack Halperin, Esq., our then SEC counsel, whereby the Company agreed to
indemnify Mr. Halperin for all costs and damages incurred as a result of Mr.
Halperin being named a defendant in the Needham/DuPont lawsuit filed against the
Company, Mr. May and Mr. Halperin in July 2000. Mr. May executed this agreement
on behalf of the Company. The agreement includes a provision that prohibits the
Company from entering into any settlement agreement in the Needham/DuPont
lawsuit unless such settlement agreement provides for the unconditional release
of Mr. Halperin from any claim. On November 14, 2002, the Company settled the
Needham/DuPont lawsuit without obtaining a full release for Mr. Halperin. The
Company's Board of Directors is consulting with its current legal counsel to
determine the validity of the indemnification agreement (see Note 8(C).
(ii) ACT-AUSTRALIA LITIGATION
- ---------------------------------
On December 6, 2001, Mr. Roger May, as Chairman and Chief Executive Officer of
ACT-AU, sent a letter to the Company demanding full payment of all amounts due
under the Stock Purchase Agreement between the Company and ACT-AU (the "Stock
Purchase Agreement). This letter was dated six days after Mr. May was removed by
the Board of Directors of the Company from all executive capacities including as
President and Chief Executive Officer. Mr. May sent additional demand letters on
December 11, 2001, and December 21, 2001. These demand letters threatened to
exercise the rights granted to ACT-AU under its constitutional documents, which
include exercising ACT-AU's lien over the shares registered in the name of the
Company or declaring that those shares be forfeited. The Company believes that
it has fully met its obligation under the Stock Purchase Agreement, which states
that payments are only required to be paid to ACT-AU 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, the Company
does not have sufficient funds available to pay to ACT-AU. On January 23, 2002,
the Company filed suit against ACT-AU 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 injunction effectively
enjoining and prohibiting Advanced Communications (Australia) from
"transferring, dealing with, charging, diminishing, mortgaging, assigning or
disposing of" the Company's stock in Advanced Communications (Australia). The
interim injunction was recently extended by the court until a final
determination is made at trial.
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
13
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the Company's Board of Directors one day before
entering into the Acquisition Agreement.
The Company believes that the transaction with EntrePort as described in the
Acquisition Agreement was inconsistent with our ownership rights to SpectruCell
in North and South America acquired in the 1999 merger with Advanced
Communications (Nevada) and under the interim License and Distribution Agreement
dated July 5, 2000 which we entered into with Advanced Communications
(Australia) to facilitate implementation of our rights in SpectruCell acquired
in the 1999 merger. The Company 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 interim
License Agreement. Advanced Communications (Australia) refused to provide the
undertaking sought by the Company and, accordingly, the Company 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."
In mid-July 2002, Mr. May placed Advanced Communications (Australia) into an
administrative insolvency proceeding in Australia, as a result of which the
Company's stock interest in Advanced Communications (Australia) became
worthless. Shortly thereafter, Mr. May appointed a receiver over the assets of
Advanced Communications (Australia), including SpectruCell, based on a blanket
security interest he had created in December 2001, in favor of Global
Communications Technology Pty Ltd ("Global"), an entity owned and controlled by
Mr. May and his son, Jason May. In mid-September 2002, Mr. May proposed a plan
of company arrangement in the insolvency proceeding pursuant to which Advanced
Communications (Australia)'s two main assets (its shares in Australon
Enterprises Pty Ltd ("Australon") and the SpectruCell technology) will be
disposed of with no benefit to the minority shareholders of Advanced
Communications (Australia), which includes the Company. Advanced Communications
(Australia)'s shares in Australon will be sold and a portion of the sale
proceeds will go to third party creditors and to pay the expenses of
administration. The balance of the sale proceeds will go to Global, the majority
shareholder of Advanced Communications (Australia). Further, the SpectruCell
technology will be transferred by the receiver to an entity owned and controlled
by Mr. May. The plan of company arrangement was approved at a meeting of
creditors held on September 26, 2002. The Company voted against the plan.
Shortly after the plan of company arrangement was adopted, Mr. May and Advanced
Communications (Australia) filed a motion with the Australian Court to terminate
the Court's injunctions in favor of the Company regarding the interim License
Agreement. The motion to terminate the injunctions was based on statements made
by Mr. May under oath to the effect that the SpectruCell technology in its
current form had evolved from the original licensed technology and was no longer
subject to the interim License Agreement and had not been subject to the interim
License Agreement for the last two years. Neither Mr. May nor Advanced
Communications (Australia) addressed the Company' ownership rights to
SpectruCell in North and South America acquired in the 1999 merger with Advanced
Communications (Nevada). This contention was directly contrary to numerous
statements made by Mr. May, Advanced Communications (Australia) and others in
various forums, including Internet posts, press releases, SEC filings and
documents exchanged between the parties. Several days later, Advanced
Communications (Australia) acting on Mr. May's instructions, sent a letter to
the Company purportedly terminating the interim License Agreement on the basis
14
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
that the Company is insolvent, as determined under Australian law, and that the
Company's insolvency constitutes an irreparable event of default under the
interim License Agreement.
The Company's initial response to the receiver's motion to terminate the
injunctions and the receiver's purported termination of the interim License
Agreement was to oppose them and seek leave of the Australian Court to apply for
an injunction to prohibit Advanced Communications (Australia) from acting on the
purported termination pending trial. The Australian Court granted the Company
leave to do so. However, after considering the situation further and receiving
advice of counsel, the Company made the strategic decision to alter its approach
and withdraw from the Australian litigation. This decision was based on various
factors, including the following: (i) the actions of Mr. May against the Company
over the past 10 months, which in the Company's view demonstrated a consistent
lack of good faith on his part that was unlikely to change; (ii) Mr. May's
recent statement made under oath to the Australian Court that "It is important
from the outset to understand that there was no SpectruCell product in 1999 and
today there still is no SpectruCell product as it is clearly still in the
development stage and at least 12 to 18 months from the final product stage.",
which was contrary to previous information consistently provided by Mr. May to
the Company and the public on that subject; (iii) the completion of the research
and development of SpectruCell that is currently projected to require an
additional U.S.$12 to $15 million; (iv) the Company's opinion that development
of SpectruCell is unlikely to be completed and a product brought to successful
commercialization under Mr. May's leadership; (v) the Company's limited
resources at the present time are insufficient to enable it take all of the
legal actions that would be necessary to defend and enforce its rights in
Australia; and (vi) the need for the Company to use available funds to continue
current operations so that its rights and viability will be meaningfully
preserved for the future.
On October 25, 2002, we withdrew from the Australian litigation against Mr. May
and Advanced Communications (Australia). The effect of the Company's decision to
withdraw from the Australia litigation is that the interim License Agreement has
been terminated and the existing injunctions issued by the Australia Court have
been lifted and the purported termination of the interim License Agreement is
not being challenged in the Australia Court.. Notwithstanding this, the Company
retains its rights to bring an action or actions for damages and other available
legal and equitable relief against Mr. May, Advanced Communications (Australia)
and other related and unrelated parties who have damaged it. In addition, we
still retain ownership of the rights to SpectruCell and related technology
acquired in the 1999 merger with Advanced Communications (Nevada), which were
neither created by nor subject to cancellation under the interim License
Agreement. The Company intends to protect these rights to the fullest extent it
is able to do so, and anticipates that Mr. May and Advanced Communications
(Australia) will not acknowledge these rights.
On November 11, 2002, Advanced Communications (Australia) issued a Notice of
Termination to the Company stating that the April 2000 Stock Purchase Agreement
is terminated immediately due to the Company's insolvency. The effect of the
purported Notice of Termination is to cancel the Company's stock interest in
Advanced Communications (Australia). Consistent with our decision to withdraw
from the Australia litigation, we have not challenged the purported termination
of the Stock Purchase Agreement in the Australia Court. Given that Advanced
Communications (Australia) is in an insolvency proceeding in Australia, is
unlikely to emerge as an operating entity, and that the Company has written off
its entire investment in Advanced Communications (Australia), the future
financial impact of this on the Company is not believed to be significant.
(iii) STAR MULTICARE SERVICES, INC.
In Star Multi Care Services, Inc. v. Advanced Communications Technologies, Inc.,
an action filed September 18, 2000 in the Fifteenth Judicial Circuit in the
State of Florida, Star Multi Care Services, Inc. ("Star") sued the Company for
alleged breach of contract and the recovery of a break-up or termination fee in
excess of $50,000 in conjunction with the Company's alleged failure to
consummate a proposed merger with Star in January 2000.
NOTE 9. GOING CONCERN
- -------------------------
The Company's consolidated financial statements for the three months ended
September 30, 2002, have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The Company's net loss of $684,112
for the three months ended September 30, 2002, working capital deficiency of
$2,552,579 and stockholders' deficiency of $5,430,005, raise substantial doubt
about its ability to continue as a going concern.
15
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The ability of the Company to continue as a going concern is dependent on the
Company's ability to raise additional capital and implement its business plan.
Management anticipates that the issuance of securities will generate sufficient
resources for the continuation of the Company's operations.
Based on the Company's loss from operations, working capital deficiency and
stockholders' deficiency, there is doubt regarding its ability to continue as a
going concern. Of the $4,332,693 loss incurred during the fiscal year ended June
30, 2002, $3,229,439 was non-cash, a major portion of which was a non-recurring
charge for the impairment of a long-lived asset. Cash required by operations
amounted to $1,103,254. The Company raised $1,459,206 by issuing stock and debt.
Management is of the opinion that funds for the next fiscal year can be obtained
by issuing additional stock and debt. Management anticipates that future
operations will generate sufficient cash to offset operating expense.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
NOTE 10. SUBSEQUENT EVENTS
- -----------------------------
On October 10, 2002, the Company's Board of Directors approved the issuance of
100,000 shares each to Messrs. Danson, Prouty, Lichtman, Roche and Finch, having
a value of $1,000 each in partial satisfaction of unpaid prior legal and
consulting fees. These shares were issued on December 5, 2002.
In November 2002, Advanced Communications entered into a Securities Purchase
Agreement with Cornell Capital Partners, L.P., whereby it agreed to issue and
sell Two Hundred Fifty Thousand Dollars ($250,000) of secured convertible
debentures. These secured convertible debentures have a term of two years and
are convertible into shares of common stock at a price equal to $.001 per share
commencing on December 31, 2002. These secured convertible debentures accrue
interest at a rate 10% per year and are convertible at the holder's option. At
Advanced Communications' option, these debentures may be paid in cash or
redeemed at a 20% premium on or before December 15, 2002 and at a 50% premium
after December 15, 2002 and prior to November 2004. In connection with the
Securities Purchase Agreement, Advanced Communications entered into a Security
Agreement in favor of Cornell Capital Partners, L.P. whereby it granted a
security interest in all of its assets as security for its obligations under the
secured convertible debentures, as well as all other obligations of Advanced
Communications to Cornell Capital Partners, L.P. whether arising before, on or
after the date of the Security Agreement, including, without limitation, those
obligations of Advanced Communications to Cornell Capital Partners, L.P. under
the convertible debentures dated January 2002.
The convertible debentures contain a beneficial conversion feature computed at
its intrinsic value that is the difference between the conversion price and the
fair value on the debenture issuance date of the common stock into which the
debt is convertible, multiplied by the number of shares into which the debt is
convertible at the commitment date. Since the beneficial conversion feature is
to be settled by issuing equity, the amount attributed to the beneficial
conversion feature, of $250,000, was recorded as an interest expense and a
component of equity on the issuance date.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors that will have affected our financial condition and results
of operations. Certain statements under this section may constitute
"forward-looking statements. The following discussion should be read in
conjunction with the unaudited financial statements and notes thereto.
FINANCIAL CONDITION
We had net losses of $4,332,693 and $19,732,566 during the years ended June
30, 2002 and 2001, respectively. As of September 30, 2002, we had a net loss of
$684,112, cash of $415 and current liabilities of $2,552,994. We do not have
sufficient cash or other assets to meet our current liabilities. In order to
meet those obligations, we will need to raise cash from the sale of securities
or from borrowings. Our independent auditors have added an explanatory paragraph
to their audit opinions issued in connection with the years 2002 and 2001
financial statements, which states that our ability to continue as a going
concern depends upon our ability to resolve liquidity problems, principally by
obtaining capital, commencing sales and generating sufficient revenues to become
profitable. Our ability to obtain additional funding will determine our ability
to continue as a going concern. Our financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
On November 22, 2002, we entered into a Securities Purchase Agreement with
Cornell Capital Partners, LP, whereby we agreed to issue and sell $250,000 of
10% Secured Convertible Debentures. These Secured Convertible Debentures have a
term of two years and are convertible into shares of common stock at a price
equal to $.001 per share commencing on December 31, 2002. $125,000 of the 10%
Secured Convertible Debentures was issued in exchange for accrued and unpaid
interest (including default interest) on the Company's January 2002 5%
$1,000,000 Convertible Debentures with $125,000 issued in exchange for cash of
which the Company will net $100,000 after fees and expenses. The Company will
use the funds from the 10% Secured Convertible Debentures to pay a portion of
its legal and accounting professionals outstanding fees thereby enabling the
Company to continue to prepare and file with the SEC the necessary documents to
have its Equity Line of Credit facility declared effective.
If we are unable to obtain additional funding through our Equity Line of
Credit facility (as described in the Management Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this Annual
Report) until such time as the SpectruCell product is ready to be sold within
our exclusive markets, then the failure to obtain this funding will have a
material adverse effect on our business and our ability to continue as a going
concern. As a consequence, we may be forced to seek protection under the
bankruptcy laws. In that event, it is unclear whether we could successfully
reorganize our capital structure and operations, or whether we could realize
sufficient value for our assets to satisfy our creditors in full. Accordingly,
should we be forced to file for bankruptcy protection, there is no assurance
that our stockholders would receive any value.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2002 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2001
OVERALL RESULTS OF OPERATIONS
For the three months ended September 30, 2002 we incurred an overall loss
of ($684,112) or ($.006) per share, which was an increase of $227,854 over the
loss of ($456,258) or ($0.005) per share for the comparable period in the prior
year.
REVENUE
No revenues were generated during the three months ended September 30, 2002
or September 30, 2001.
OPERATING EXPENSES
Operating expenses for the three months ended September 30, 2002, were
$438,118 and represent a modest decrease in operating expenses of $452,052 for
the comparative period ended September 30, 2001. Included in operating expenses
for both periods is $104,750 and $101,000 respectively, of depreciation and
amortization attributable to the quarterly depreciation of our office property
17
and equipment ($1,000) and $103,750 of amortization attributable to deferred
financing and commitment fees for the three months ended September 30, 2002 and
$100,000 of amortization of goodwill for the three months ended September 30,
2001. Consulting fees for the three months ended September 30, 2002 decreased by
$83,228 from the comparative period due to the curtailment of our operations
during the quarter. Professional fees for the three months ended September 30,
2002 increased $161,661 over the comparable three-month period ended September
30, 2001 due to the increase in legal fees associated with the Company's
Australian litigation with Roger May and Advanced Communications (Australia).
OTHER EXPENSE
Interest expense incurred for the three months ended September 30, 2002 was
$72,500 and was attributable to accrued and default interest on the $1 million
5% Convertible Debentures we issued in January 2002. Interest of $4,206 for the
comparative three-month period ended September 30, 2001 was attributable to the
Grassland Capital note payable of $118,530 which was paid in October 2001.
During the three month period ended September 30, 2002, the Company recorded, in
accordance with paragraphs 8(a) and 35 of FASB 5, $173,494 of expense relating
to the settlement of the Needham/DuPont lawsuit. No such expense was incurred
during the comparative three month period ended September 30, 2001.
(B) LIQUIDITY AND CAPITAL RESOURCES
SIGNIFICANT ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 2 of the Notes to the Financial Statements includes a
summary of the significant accounting policies and methods used in the
preparation of our Financial Statements. The following is a brief discussion of
the more significant accounting policies and methods used by us. In addition,
Financial Reporting Release No. 61 was recently released by the Securities and
Exchange Commission to require all companies to include a discussion to address,
among other things, liquidity, off-balance sheet arrangement, contractual
obligations and commercial commitments.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS 145 rescinds the provisions of SFAS No. 4 that requires companies to
classify certain gains and losses from debt extinguishments as extraordinary
items, eliminates the provisions of SFAS No. 44 regarding transition to the
Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require
that certain lease modifications be treated as sale leaseback transactions. The
provisions of SFAS 145 related to classification of debt extinguishments are
effective for fiscal years beginning after May 15, 2002. Earlier application is
encouraged. The Company does not believe the adoption of this standard will have
a material impact the financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Restructuring
Costs." SFAS 146 applies to costs associated with an exit activity (including
restructuring) or with a disposal of long-lived assets. Those activities can
include eliminating or reducing product lines, terminating employees and
contracts and relocating plant facilities or personnel. Under SFAS 146, the
Company will record a liability for a cost associated with an exit or disposal
activity when that liability is incurred and can be measured at fair value. SFAS
146 will require the Company to disclose information about its exit and disposal
activities, the related costs, and changes in those costs in the notes to the
interim and annual financial statements that include the period in which an exit
activity is initiated and in any subsequent period until the activity is
completed. SFAS 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002, with earlier adoption encouraged. Under SFAS
146, a company cannot restate its previously issued financial statements and the
new statement grandfathers the accounting for liabilities that a company had
previously recorded under Emerging Issues Task Force Issue 94-3.
OVERVIEW
Since our inception, we have financed our operations through the private
sales of common stock and convertible debentures and from unsecured loans from
an entity controlled by Mr. Roger May, a former officer and director of our
company and a significant shareholder. We have raised approximately $4,000,000
before offering costs through the sale of these securities and have borrowed
$1,055,736 from an entity wholly owned by Mr. May. These loans are non-interest
bearing, are unsecured, and have no fixed date for repayment. Advanced
Communications does not believe that the loans are due upon demand. However, the
18
actual repayment terms are not known with any specificity since the terms are
not contained in a written document. At September 30, 2002, our principal source
of liquidity was $415 of cash and cash equivalents. We have no credit facilities
in place. On January 10, 2002, we entered into an Equity Line of Credit
Agreement with Cornell Capital Partners, L.P. Pursuant to the Equity Line of
Credit, we may, at our discretion, periodically sell to Cornell Capital Partners
shares of common stock for a total purchase price of up to $30.0 million. For
each share of common stock purchased under the Equity Line of Credit, Cornell
Capital Partners will pay 91% of the lowest closing bid price of our common
stock on the Over-the-Counter Bulletin Board or other principal market on which
our common stock is traded for the 5 days immediately following the notice date.
Cornell Capital Partners is a private limited partnership whose business
operations are conducted through its general partner, Yorkville Advisors, LLC.
Further, Cornell Capital Partners will retain a fee of 3% of each advance under
the Equity Line of Credit as a fee. In addition, we engaged Westrock Advisors,
Inc., a registered broker-dealer, to advise us in connection with the Equity
Line of Credit. For its services, Westrock Advisors, Inc. received 40,000 shares
of our common stock. The effectiveness of the sale of the shares under the
Equity Line of Credit is conditioned upon us registering the shares of common
stock with the Securities and Exchange Commission. Our Equity Line of Credit is
not yet effective and the Company has not drawn down any funds from this
facility. Except for the Equity Line of Credit, we have no commitments for
capital.
We anticipate that our cash needs over the next 12 months consist of
general working capital needs of $600,000, plus the repayment of outstanding
indebtedness of $2,552,994. These obligations include accounts payable and
accrued expenses in the amount of $1,189,658, accrued compensation of $172,183
and an unsecured, non-interest-bearing loan payable to an entity wholly-owned by
Roger May, a former officer and director and a significant shareholder. In
addition, we have a note payable to Advanced Communications (Australia) in the
amount of $1,791,166 at September 30, 2002 that was the subject of a lawsuit by
us against Roger May and Advanced Communications (Australia). As of September
30, 2002, we had a working capital deficiency of $2,552,579. We will attempt to
satisfy our cash needs over the next 12 months from the sale of securities or
loans, including the Equity Line of Credit.
Our financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business; and as a consequence, the financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should we be unable to continue as a going concern. We have
experienced net operating losses and negative cash flows since inception and, as
of September 30, 2002, we had an accumulated deficit of $30,532,760. Cash used
in operations for the fiscal years ended June 30, 2002 and 2001 was $1,103,254
and $1,479,999, respectively. At September 30, 2002, our only source of
liquidity was $415 of cash. Such conditions raise substantial doubt that we will
be able to continue as a going concern for a reasonable period of time.
Subsequent to the end of the fiscal year, we have substantially curtailed our
overhead and have closed our office in California. Unless we are able to raise
additional capital through the issuance of stock or convertible debentures or
commence drawing down on our Equity Line of Credit once it is declared effective
by the SEC, we will be unable to continue our operations. Unless we are able to
raise additional capital through our Equity Line of Credit or from other
sources, we will be unable to continue as a going concern. Considering the
depressed state of the private and public capital markets, we believe that our
only reasonable chance of raising additional capital is through our Equity Line
of Credit with Cornell Capital Partners, L.P., if it is declared effective by
the SEC.
On November 22, 2002, we entered into a Securities Purchase Agreement with
Cornell Capital Partners, LP, whereby we agreed to issue and sell $250,000 of
10% Secured Convertible Debentures. These Secured Convertible Debentures have a
term of two years and are convertible into shares of common stock at a price
equal to $.001 per share commencing on December 31, 2002. $125,000 of the 10%
Secured Convertible Debentures was issued in exchange for accrued unpaid
interest (including default interest) on the Company's January 2002 5%
$1,000,000 Convertible Debentures with $125,000 issued in exchange for cash of
which the Company will net $100,000 after fees and expenses. The Company will
use the funds from the 10% Secured Convertible Debentures to pay a portion of
its legal and accounting professionals outstanding fees thereby enabling the
Company to continue its pursuit of seeking its Equity Line of Credit facility to
be declared effective by the SEC.
If we are unable to obtain additional funding through our Equity Line of
Credit facility or alternate sources of funding, this will have a material
adverse effect on our business and our ability to continue as a going concern.
As a consequence, we may be forced to seek protection under the bankruptcy laws.
In that event, it is unclear whether we could successfully reorganize our
capital structure and operations, or whether we could realize sufficient value
for our assets to satisfy our creditors in full. Accordingly, should we be
forced to file for bankruptcy protection, there is no assurance that our
stockholders would receive any value.
19
CAPITAL RESOURCES
Pursuant to the Equity Line of Credit, we may periodically sell shares of
common stock to Cornell Capital Partners, L.P. to raise capital to fund our
working capital needs. The periodic sale of shares is known as an advance. We
may request an advance every 5 trading days. A closing will be held 7 trading
days after such written notice at which time we will deliver shares of common
stock and Cornell Capital Partners, L.P. will pay the advance amount, less the
3% retention. We may request advances under the Equity Line of Credit once the
underlying shares are registered with the Securities and Exchange Commission.
Thereafter, we may continue to request advances until Cornell Capital Partners
has advanced $30.0 million or two years after the effective date of the
accompanying registration statement, whichever occurs first. The amount of each
advance is subject to an aggregate maximum advance amount of $2 million in any
thirty-day period. The amount available under the Equity Line of Credit is not
dependent on the price or volume of our common stock.
We are attempting to register 70,000,000 shares of common stock in
connection with the Equity Line of Credit and upon conversion of the debentures.
We cannot predict the actual number of shares of common stock that will be
issued pursuant to the Equity Line of Credit, in part, because the purchase
price of the shares will fluctuate based on prevailing market conditions and we
have not determined the total amount of advances we intend to draw. Nonetheless,
if we issued all 70,000,000 shares of common stock at a recent price of $0.005
per share (which assumes that no shares would need to be issued upon conversion
of debentures), then we would receive $339,500 under the Equity Line of Credit
(after deducting a 3% retention payable to Cornell). This is $9,650,000 less
than is available under the Equity Line of Credit. Our stock price would have to
rise substantially for us to have access to the full amount available under the
Equity Line of Credit. These shares would represent 37% of our outstanding
common stock upon issuance. Accordingly, we would need to register additional
shares of common stock in order to fully utilize the $30.0 million available
under the Equity Line of Credit at the current price of $0.005 per share. In
addition, we would be required to obtain the approval of our shareholders to
increase the number of authorized shares of common stock. Pursuant to our
Articles of Incorporation, we are authorized to issue up to 200,000,000 shares
of common stock. At a recent price of $0.005 per share, we would be required to
issue 6,000,000,000 shares of common stock in order to fully utilize the $30.0
million available. We would be required to obtain a vote of at least a majority
of the outstanding shares in order to increase our authorized shares of common
stock for this purpose. Our inability to obtain such approval would prohibit us
from increasing our authorized shares of common stock and from issuing any
additional shares under the Equity Line of Credit or to otherwise raise capital
from the sale of capital stock.
In November 2002, Advanced Communications entered into a Securities
Purchase Agreement with Cornell Capital Partners, L.P., whereby it agreed to
issue and sell Two Hundred Fifty Thousand Dollars ($250,000) of secured
convertible debentures. These secured convertible debentures have a term of two
years and are convertible into shares of common stock at a price equal to $.001
per share commencing on December 31, 2002. These secured convertible debentures
accrue interest at a rate 10% per year and are convertible at the holder's
option. At Advanced Communications' option, these debentures may be paid in cash
or redeemed at a 20% premium on or before December 15 2002 and at a 50% premium
after December 15, 2002 and prior to November 2004. In connection with the
Securities Purchase Agreement, Advanced Communications entered into a Security
Agreement in favor of Cornell Capital Partners, L.P. whereby it granted a
security interest in all of its assets as security for its obligations under the
secured convertible debentures, as well as all other obligations of Advanced
Communications to Cornell Capital Partners, L.P. whether arising before, on or
after the date of the Security Agreement, including, without limitation, those
obligations of Advanced Communications to Cornell Capital Partners, L.P. under
the convertible debentures dated January 2002. The security agreement provides,
however, that upon the payment in full by Advanced Communications of its
obligations to Cornell Capital Partners, L.P. arising from the Securities
Purchase Agreement dated November 2002, and the related documents of even date
therewith, Cornell Capital Partners, L.P. agrees to release any and all security
interests it may then maintain on SpectruCell and the related License and
Distribution Agreement dated July 5, 2000, between the Advanced Communications
and Advanced Communications Technologies (Australia) Pty., Ltd. The issuance of
the secured convertible debentures is expected to contain a beneficial
conversion feature computed at its intrinsic value that is the difference
between the conversion price and the fair value on the debenture issuance date
of the common stock into which the debt is convertible, multiplied by the number
of shares into which the debt is convertible at the commitment date. The
convertible debentures contain a beneficial conversion feature computed at its
intrinsic value that is the difference between the conversion price and the fair
value on the debenture issuance date of the common stock into which the debt is
convertible, multiplied by the number of shares into which the debt is
convertible at the commitment date. Since the beneficial conversion feature is
to be settled by issuing equity, the amount attributed to the beneficial
conversion feature, of $250,000, was recorded as an interest expense and a
component of equity on the issuance date.
On January 10, 2002, we executed various financing agreements with Cornell
Capital Partners, LP whereby Cornell and certain other investors purchased from
us $1 million of two-year Convertible Debentures and Cornell entered into a $30
million Equity Line of Credit. 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. The debentures are convertible into shares of common
20
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 $0.008 (i.e., 80% of the recent price of $0.01), then the holders
of the convertible debentures would have received 125,000,000 shares of common
stock leaving no stock available to be issued under the Equity Line of Credit.
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 of
two years. At our option, these debentures may be paid in cash or redeemed at a
20% premium prior to January 2004. The issuance of shares upon conversion of the
Debentures or pursuant to the Equity Line of Credit will have a dilutive impact
on our existing stockholders. As a result, our net income per share could
decrease in future periods, and the market price of our common stock could
decline. In addition, the lower our stock price is the more shares of common
stock we will have to issue upon conversion of the debentures or under the
Equity Line of Credit. If our stock price were lower, then our existing
stockholders would experience greater dilution. The convertible debentures
contain a beneficial conversion feature computed at its intrinsic value that is
the difference between the conversion price and the fair value on the debenture
issuance date of the common stock into which the debt is convertible, multiplied
by the number of shares into which the debt is convertible at the commitment
date. Since the beneficial conversion feature is to be settled by issuing
equity, the amount attributed to the beneficial conversion feature, of $250,000,
was recorded as an interest expense for the fiscal year ended June 30, 2002 and
a component of equity on the issuance date.
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.
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 terminated this
equity line of credit facility.
During the period of December 2000 to August 2001, pursuant to a private
placement under Regulation D, Rule 506, Advanced Communications issued 4,293,933
shares of common stock and 4,293,933 warrants at $.30 per share. Advanced
Communications received $1,288,180 from investors, which included $250,000 for
stock not yet issued as of June 30, 2001 and $275,454 for warrants. Advanced
Communications issued 137,729 and 250,000 shares of common stock, valued at
$41,318 and $75,000, in payment of offering costs incurred respectively. 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. 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.
The Board of Directors repriced these shares due to the delay in registering the
shares sold to investors in the private placement. The Company did not receive
any consideration for the repricing of the shares. This repricing resulted in
the issuance of an additional 2,146,967 shares of common stock and warrants to
the private placement investors. These additional shares are included in the
number of shares that we are registering for these selling shareholders. The
exercise price of the underlying warrants remains at $0.30 per share.
Between October and December 2000, AJW Partners, LLC and New Millennium
Capital Partners II, LLC elected to convert $262,800 of their September 30, 1999
12% Convertible Debentures into 860,378 shares of Advanced Communications'
restricted common stock. The Company is in default of its remaining obligations
to AJW Partners, LLC and New Millennium Capital Partners II, LLC and on April
24, 2002 entered into a Settlement Agreement. Under the terms of the Settlement
Agreement, the Company is obligated to issue, over a 180 day period, 8,500,000
shares of its common stock in exchange for the dismissal of the lawsuit and in
satisfaction of the remaining outstanding principal and accrued interest. The
Company had the option, until July 23, 2002, to substitute cash in lieu of
shares. On closing, the Company issued 1,460,725 and 664,275 shares of its
common stock to AJW Partners, LLC and New Millennium Capital Partners II, LLC,
respectively. A Stipulation and Order of Discontinuance was filed with and
Ordered by the court on April 25, 2002. On June 4, 2002 the Company issued an
additional 1,460,725 and 664,275 shares of common stock to AJW Partners LLC and
New Millennium Capital Partners, II, LLC. On both August 22, 2002 and September
24, 2002 we issued 1,460,725 and 664,275 shares of common stock each to AJW
Partners, LLC and New Millennium Capital Partners II, LLC respectively, in full
satisfaction of the September 30, 1999 12% Convertible Debentures.
21
During December 2000, Bank Insinger de Beauford, N.V. converted its $150,000
September 30, 1999 12% convertible debenture, inclusive of accrued and unpaid
interest into 943,167 shares of restricted common stock.
On September 30, 1999, Advanced Communications entered into a 12% secured
convertible debentures purchase agreement with AJW Partners, LLC and New
Millennium Capital Partners II, LLC, which were stockholders of Advanced
Communications, whereby Advanced Communications sold $500,000 of 12% Secured
Convertible Debentures due April 1, 2000, convertible into shares of Advanced
Communications' Common Stock. In addition, on September 30, 1999, Advanced
Communications issued another convertible debenture to Bank Insinger de
Beauford, N.V. in the amount of $150,000. The debentures were convertible, at
the holder's option, into shares of common stock in whole or in part at any time
after the original issue date. The number of shares of common stock issuable
upon a conversion was to be determined by dividing the outstanding principal
amount of the debenture to be converted, plus all accrued interest, by the
conversion price. The conversion price in effect on any conversion date is 50%
of the average of the bid price during the twenty trading days immediately
preceding the applicable conversion date. The convertible debentures contained a
beneficial conversion feature computed at its intrinsic value which is the
difference between the conversion price and the fair value on the debenture
issuance date of the common stock into which the debt is convertible, multiplied
by the number of shares into which the debt is convertible at the commitment
date. Since the beneficial conversion feature is to be settled by issuing
equity, the amount attributed to the beneficial conversion feature, of $650,000,
was recorded as an interest expense and a component of equity on the issuance
date during the fiscal year ended June 30, 2000.
The Company's predecessor, MFI (as previously defined) was obligated to pay
$150,000 to Grassland Capital Group (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 in the open market on behalf of
the Payee 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.
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net cash used in operating activities was $10,678 and $102,422 for the
three months ended September 30, 2002 and 2001, respectively. The use of cash by
operating activities was principally the result of net losses during both
reporting periods together with a corresponding increase/(decrease) in accounts
payable and accrued interest for the three months ended September 30, 2002 and
2001, respectively.
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
No net cash was provided by or used in investing activities for the three
months ended September 30, 2002 or 2001.
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
No net cash was provided by financing activities for the three months ended
September 30, 2002. Net cash provided by financing activities for the three
months ended September 30, 2001 was $150,200 and was attributable to $125,000 of
proceeds received from the sale of equity securities pursuant to a private
placement that commenced December 2000 and ended August 2001 and $25,000 of loan
proceeds received from Global Communications Technology Pty Ltd, an entity
wholly owned by Roger May, a former officer and director of the company.
(D) ACQUISITIONS
On September 7, 2001 we entered into a Letter of Intent with Advanced
Communications Technologies (Australia) to acquire all of the intellectual
property, including the worldwide rights (other than rights to territories that
we currently possess) for the licensing and distribution of the SpectruCell
product (the "IP Rights"). The Letter of Intent which was executed by Messrs.
22
Roberts and May on behalf of Advanced Communications (Australia) and us,
respectively, includes various conditions precedent to the transfer of the IP
Rights including, but not limited to, the raising by us of $80 million in the US
capital markets, appropriate regulatory approvals, approval by both our Board of
Directors and shareholders, appropriate due diligence and definitive agreements.
During the period from January 2002 to present, we, along with our Australian
financial and legal advisors, have attempted to negotiate with Mr. May in good
faith to enter into a Non-Disclosure Agreement to allow us to commence our due
diligence on the financial, legal and technological affairs of Advanced
Communications (Australia). In addition, during this period we filed two
lawsuits against Mr. May and Advanced Communications (Australia) for breach of
our April 5, 2000 Stock Purchase Agreement and July 5, 2000 Interim License and
Distribution Agreement. Consequently, we have been unable to execute any
Non-Disclosure Agreement nor commence any active or meaningful negotiations with
Mr. May for the acquisition of the SpectruCell technology pursuant to the terms
of the September 7, 2001 Letter of Intent. On September 7, 2002, the September
7, 2001 Letter of Intent that the Company entered into with Advanced
Communications (Australia) to acquire all of the intellectual property,
including the worldwide rights (other than the rights to territories that the
Company currently possess) for the licensing and distribution of the SpectruCell
product, expired.
Due to the litigation with Mr. May and Advanced Communications (Australia),
the restrictions on foreign ownership and Advanced Communications (Australia)
voluntary administration described above, the Company will no longer pursue the
acquisition of Advanced Communications (Australia)'s intellectual property.
(E) COMPANY QUARTERLY STOCK PRICE
PRICE RANGE OF COMMON STOCK
Our common stock is currently traded on the Over-the-Counter Bulletin Board
("OTCBB") under the symbol "ADVC". As of December 5, 2002, there were
118,852,622 common shares outstanding and approximately 414 holders of record.
We believe that the number of beneficial owners is substantially greater than
the number of record holders because a large portion of our common stock is held
in "broker" or "street names".
The following table sets forth, for the fiscal periods indicated, the bid
price range of our common stock:
HIGH BID LOW BID
-------- -------
2001
----
Quarter Ended September 30, 2000 $1.25 $ .56
2000
----
Quarter Ended December 31, 2000 1.19 .48
Quarter Ended March 31, 2001 1.03 .45
Quarter Ended June 30, 2001 .68 .27
2002
----
Quarter Ended September 30, 2001 $ .41 $ .25
2001
----
Quarter Ended December 31, 2001 .38 .17
Quarter Ended March 31, 2002 .26 .06
Quarter Ended June 30, 2002 .08 .02
2003
----
Quarter Ended September 30, 2002 .08 .005
- --------------------------------------------------------------------------------
Such market quotations reflect the high bid and low prices as reflected by
the OTCBB or by prices, without retail mark-up, markdown or commissions and may
not necessarily represent actual transactions.
We did not pay any dividends during fiscal 2002 and have never paid any
dividends on our capital stock. We currently expect that we will retain future
earnings for use in the operation and expansion of our business and do not
anticipate paying any cash dividends in the foreseeable future. Any decision on
the future payment of dividends will depend on our earnings and financial
position at that time and such other factors as the Board of Directors deems
relevant.
23
ITEM 3. CONTROLS AND PROCEDURES
QUARTERLY EVALUATION OF DISCLOSURE CONTROLS AND INTERNAL CONTROLS. Within
the 90 days prior to the date of this Quarterly Report on Form 10-QSB, the
company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" (Disclosure Controls), and its "internal
controls and procedures for financial reporting" (Internal Controls). This
evaluation (the Controls Evaluation) was done under the supervision and with the
participation of management, including our Chief Executive Officer (CEO) and
Chief Financial Officer (CFO). Rules adopted by the SEC require that in this
section of the Quarterly Report we present the conclusions of the CEO and the
CFO about the effectiveness of our Disclosure Controls and Internal Controls
based on and as of the date of the Controls Evaluation.
CEO AND CFO CERTIFICATIONS. Appearing immediately following the Signatures
section of this Quarterly Report there are two separate forms of
"Certifications" of the CEO and the CFO. The first form of Certification is
required in accord with Section 302 of the Sarbanes-Oxley Act of 2002 (the
Section 302 Certification). This section of the Quarterly Report which you are
currently reading is the information concerning the Controls Evaluation referred
to in the Section 302 Certifications and this information should be read in
conjunction with the Section 302 Certifications for a more complete
understanding of the topics presented.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS. Disclosure Controls are
procedures that are designed with the objective of ensuring that information
required to be disclosed in our reports filed under the Securities Exchange Act
of 1934 (Exchange Act), such as this Quarterly Report, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's (SEC) rules and forms. Disclosure Controls are also
designed with the objective of ensuring that such information is accumulated and
communicated to our management, including the CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure. Internal Controls are
procedures which are designed with the objective of providing reasonable
assurance that (1) our transactions are properly authorized; (2) our assets are
safeguarded against unauthorized or improper use; and (3) our transactions are
properly recorded and reported, all to permit the preparation of our financial
statements in conformity with generally accepted accounting principles.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. The company's management,
including the CEO and CFO, does not expect that our Disclosure Controls or our
Internal Controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
SCOPE OF THE CONTROLS EVALUATION. The CEO/CFO evaluation of our Disclosure
Controls and our Internal Controls included a review of the controls' objectives
and design, the controls' implementation by the company and the effect of the
controls on the information generated for use in this Quarterly Report. In the
course of the Controls Evaluation, we sought to identify data errors, controls
problems or acts of fraud and to confirm that appropriate corrective action,
including process improvements, were being undertaken. This type of evaluation
will be done on a quarterly basis so that the conclusions concerning controls
effectiveness can be reported in our Quarterly Reports on Form 10-QSB and Annual
Report on Form 10-KSB. The overall goals of these various evaluation activities
are to monitor our Disclosure Controls and our Internal Controls and to make
modifications as necessary; our intent in this regard is that the Disclosure
Controls and the Internal Controls will be maintained as dynamic systems that
change (including with improvements and corrections) as conditions warrant.
Among other matters, we sought in our evaluation to determine whether there
were any "significant deficiencies" or "material weaknesses" in the company's
Internal Controls, or whether the company had identified any acts of fraud
involving personnel who have a significant role in the company's Internal
Controls. This information was important both for the Controls Evaluation
generally and because items 5 and 6 in the Section 302 Certifications of the CEO
and CFO require that the CEO and CFO disclose that information to our Board and
to our independent auditors and to report on related matters in this section of
the Quarterly Report. In the professional auditing literature, "significant
deficiencies" are referred to as "reportable conditions"; these are control
issues that could have a significant adverse effect on the ability to record,
process, summarize and report financial data in the financial statements. A
24
"material weakness" is defined in the auditing literature as a particularly
serious reportable condition where the internal control does not reduce to a
relatively low level the risk that misstatements caused by error or fraud may
occur in amounts that would be material in relation to the financial statements
and not be detected within a timely period by employees in the normal course of
performing their assigned functions. We also sought to deal with other controls
matters in the Controls Evaluation, and in each case if a problem was
identified, we considered what revision, improvement and/or correction to make
in accord with our on-going procedures.
In accord with SEC requirements, the CEO and CFO note that, since the date
of the Controls Evaluation to the date of this Quarterly Report, there have been
no significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Conclusions. Based upon the Controls Evaluation, our CEO and CFO have
concluded that, subject to the limitations noted above, our Disclosure Controls
are effective to ensure that material information relating to the Company is
made known to management, including the CEO and CFO, particularly during the
period when our periodic reports are being prepared, and that our Internal
Controls are effective to provide reasonable assurance that our financial
statements are fairly presented in conformity with generally accepted accounting
principles.
25
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".
ITEM 1. LEGAL PROCEEDINGS
(i) NANCY J. NEEDHAM AND EDMUND R. DUPONT LAWSUIT
In Nancy J. Needham; Edmund R. DuPont et al v. Advanced Communications
Technologies, Inc., et al, an action filed July 2000 in the Fifteenth Judicial
Circuit in the State of Florida, two former officers and directors of the
Company are seeking damages and injunctive relief arising out of the Company's
refusal to provide legal opinion letters and to take other actions necessary to
allow the former officers to convert restricted stock into unrestricted stock
under an exemption under Rule 144. The plaintiffs have not specified the amount
of damages they are seeking. The Company has filed a counterclaim to rescind all
of the Plaintiffs' stock for lack and/or failure of consideration and other
damages. In October 2001, the court denied summary judgment for the Plaintiffs.
On November 14, 2002, the Company settled the litigation with the Needham/DuPont
plaintiffs by agreeing to release the plaintiffs' stock from restriction and
issuing a three year promissory note for $173,494 to reimburse the plaintiffs
for its legal costs. The plaintiffs agreed to release the Company, its officers,
and directors, except Mr. May and Mr. Halperin, the Company's former SEC counsel
from any claims for damages. On November 18, 2002 a Notice of Voluntary
Dismissal was filed with the court.
On or about July 2000, the Company entered into an indemnification
agreement with Jack Halperin, Esq., our then SEC counsel, whereby the Company
agreed to indemnify Mr. Halperin for all costs and damages incurred as a result
of Mr. Halperin being named a defendant in the Needham/DuPont lawsuit filed
against the Company, Mr. May and Mr. Halperin in July 2000. Mr. May executed
this agreement on behalf of the Company. The agreement includes a provision that
prohibits the Company from entering into any settlement agreement in the
Needham/DuPont lawsuit unless such settlement agreement provides for the
unconditional release of Mr. Halperin from any claim. On November 14, 2002, the
Company settled the Needham/DuPont lawsuit without obtaining a full release for
Mr. Halperin. The Company's Board of Directors is consulting with its current
legal counsel to determine the validity of the indemnification agreement.
(ii) AJW PARTNERS, LLC AND NEW MILLENNIUM CAPITAL PARTNERS II, LLC
On April 24, 2002, the Company entered into a Settlement Agreement with the
two remaining September 1999 Convertible Debenture holders, AJW Partners, LLC
and New Millennium Capital Partners II, LLC. Under the terms of the Settlement
Agreement, the Company is obligated to issue, over a 180 day period, 8,500,000
shares of its common stock in exchange for the dismissal of the lawsuit and in
satisfaction of the remaining outstanding principal and accrued interest. The
Company had the option, until July 23, 2002, to substitute cash in lieu of
shares. On closing, the Company issued 1,460,725 and 664,275 shares of its
common stock to AJW Partners, LLC and New Millennium Capital Partners II, LLC,
respectively. A Stipulation and Order of Discontinuance was filed with and
Ordered by the court on April 25, 2002. On June 4, 2002 the Company issued an
additional 1,460,725 and 664,275 shares of common stock to AJW Partners LLC and
New Millennium Capital Partners, II, LLC.
On both August 26, 2002 and September 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, in full satisfaction of the
Company's outstanding obligation on the remaining September 30, 1999 12%
Convertible Debenture.
(iii) ADVANCED COMMUNICATIONS (AUSTRALIA) LITIGATION
On December 6, 2001, Mr. Roger May, as Chairman and Chief Executive Officer
of Advanced Communications (Australia), sent a letter to the Company demanding
full payment of all amounts due under the Stock Purchase Agreement between the
Company and Advanced Communications (Australia) (the "Stock Purchase Agreement).
This letter was dated six days after Mr. May was removed by the Board of
Directors of the Company from all executive capacities including as President
26
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 the Company or declaring that those
shares be forfeited. The Company 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, the Company
does not have sufficient funds available to pay to Advanced Communications
(Australia). On January 23, 2002, the Company 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 injunction effectively
enjoining and prohibiting Advanced Communications (Australia) from
"transferring, dealing with, charging, diminishing, mortgaging, assigning or
disposing of" the Company's stock in Advanced Communications (Australia). The
interim injunction was extended by the court until a final determination is made
at trial.
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 the Company's Board of Directors one day before
entering into the Acquisition Agreement.
The Company believes that the transaction with EntrePort as described in
the Acquisition Agreement was inconsistent with our ownership rights to
SpectruCell in North and South America acquired in the 1999 merger with Advanced
Communications (Nevada) and under the interim License and Distribution Agreement
dated July 5, 2000 which we entered into with Advanced Communications
(Australia) to facilitate implementation of our rights in SpectruCell acquired
in the 1999 merger. The Company 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 interim
License Agreement. Advanced Communications (Australia) refused to provide the
undertaking sought by the Company and, accordingly, the Company 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)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."
EntrePort was added as a defendant to the proceedings.
On May 7, 2002, the Company received a notice alleging a breach from
Advanced Communications (Australia) stating that Advanced Communications had
breached its obligation under the interim License Agreement. In addition, on May
7, 2002, Advanced Communications (Australia) sent a termination notice formally
27
terminating the interim License Agreement. We believed that the notice of breach
and the termination notice were without merit and immediately took the necessary
legal action to protect our interests acting on either notice. On May 8, 2002,
the court extended its April 26, 2002 order and further restrained Advanced
Communications (Australia) from "acting upon or taking any further steps in
reliance upon" the notice of breach and termination notice.
A dispute also arose between Advanced Communications (Australia) and the
Company as to whether our rights in SpectruCell included military applications
as well as commercial applications. Contrary to previous statements and
understandings, Mr. May and Advanced Communications (Australia) claimed for the
first time in or about March 2002 that military applications were not included
under the Company's SpectruCell license, and that these rights were exclusively
reserved to Advanced Communications (Australia). A dispute also arose between
Advanced Communications (Australia) and the Company as to whether our rights in
SpectruCell included marketing rights, in addition to distribution rights.
Contrary to previous statement and understandings, Mr. May and Advanced
Communications (Australia) claimed for the first time in or about March 2002
that the Company's rights in SpectruCell did not include marketing rights, and
that these rights were exclusively reserved to Advanced Communications
(Australia).
The Company disputed these claims and requested the court to expand the
existing injunctions against Advanced Communications (Australia) to include
marketing rights and military applications of SpectruCell technology in the
Exclusive Territory and to continue the existing injunctions in effect until the
trial on the case.
The above-mentioned matters were argued before the Australia court at a two
day hearing on May 27 and 28, 2002. The court took the matters under submission.
On August 23, 2002, the Australia court issued its ruling in which the judge
concluded:
"It is preferable, in my opinion, that all activity
[related to SpectruCell] on behalf of ACT (Australia)
in the Exclusive Territory pending the trial be
carried out by ACT Inc. [Advanced Communications]."
Based on this conclusion, the court issued a comprehensive preliminary
injunction granting all the relief sought by the Company. Among other things,
the injunction prohibits Advanced Communications (Australia), directly or
indirectly, from taking any action in the Exclusive Territory with respect to
marketing, distributing, selling or otherwise dealing with the SpectruCell
technology (including the military applications thereof), except through and
with the prior written consent of the Company. Quoted below is the text of one
of one of the sections of the court's order:
"...the Firstnamed Defendant [i.e., ACT Australia],
whether by itself or by its officers, employees
agents, attorneys, or any of them or howsoever
otherwise, be restrained from itself marketing,
distributing, selling, supplying, offering to sell or
supply or otherwise dealing in or with the Product
including any military applications or uses of the
SpectruCell technology, in the Exclusive Territory
without the prior written consent of [Advanced
Communications]."
The court's order also prohibited Advanced Communications (Australia) from
licensing, marketing, distributing, selling or otherwise dealing with the
SpectruCell technology, including military applications of the product, and from
offering to do any of the foregoing, in the Exclusive Territory through any
third party without the Company's prior written consent. The court's order also
prohibited Advanced Communications (Australia) from entering into a license or
sub-license agreement to market, distribute, sell, provide promotional material
or otherwise deal with the SpectruCell technology, including military
applications thereof, in the Exclusive Territory except to the company or at its
request. The court's order also prohibited Advanced Communications (Australia)
from granting any license to any third party to use, sub-license or reproduce
the product in the Exclusive Territory, except at the request of the Company.
In mid-July 2002, Mr. May placed Advanced Communications (Australia) into
an administrative insolvency proceeding in Australia, as a result of which the
Company's stock interest in Advanced Communications (Australia) became
worthless. Shortly thereafter, Mr. May appointed a receiver over the assets of
Advanced Communications (Australia), including SpectruCell, based on a blanket
28
security interest he had created in December 2001, in favor of Global
Communications Technology Pty Ltd ("Global"), an entity owned and controlled by
Mr. May and his son, Jason May. In mid-September 2002, Mr. May proposed a plan
of company arrangement in the insolvency proceeding pursuant to which Advanced
Communications (Australia)'s two main assets (its shares in Australon
Enterprises Pty Ltd ("Australon") and the SpectruCell technology) will be
disposed of with no benefit to the minority shareholders of Advanced
Communications (Australia), which includes the Company. Advanced Communications
(Australia)'s shares in Australon will be sold and a portion of the sale
proceeds will go to third party creditors and to pay the expenses of
administration. The balance of the sale proceeds will go to Global, the majority
shareholder of Advanced Communications (Australia). Further, the SpectruCell
technology will be transferred by the receiver to an entity owned and controlled
by Mr. May. The plan of company arrangement was approved at a meeting of
creditors held on September 26, 2002. The Company voted against the plan.
Shortly after the plan of company arrangement was adopted, Mr. May and
Advanced Communications (Australia) filed a motion with the Australian Court to
terminate the Court's injunctions in favor of the Company regarding the interim
License Agreement. The motion to terminate the injunctions was based on
statements made by Mr. May under oath to the effect that the SpectruCell
technology in its current form had evolved from the original licensed technology
and was no longer subject to the interim License Agreement and had not been
subject to the interim License Agreement for the last two years. Neither Mr. May
nor Advanced Communications (Australia) addressed the Company' ownership rights
to SpectruCell in North and South America acquired in the 1999 merger with
Advanced Communications (Nevada). This contention was directly contrary to
numerous statements made by Mr. May, Advanced Communications (Australia) and
others in various forums, including Internet posts, press releases, SEC filings
and documents exchanged between the parties. Several days later, Advanced
Communications (Australia) acting on Mr. May's instructions, sent a letter to
the Company purportedly terminating the interim License Agreement on the basis
that the Company is insolvent, as determined under Australian law, and that the
Company's insolvency constitutes an irreparable event of default under the
interim License Agreement.
The company's initial response to the receiver's motion to terminate the
injunctions and the receiver's purported termination of the interim License
Agreement was to oppose them and seek leave of the Australian Court to apply for
an injunction to prohibit Advanced Communications (Australia) from acting on the
purported termination pending trial. The Australian Court granted the Company
leave to do so. However, after considering the situation further and receiving
advice of counsel, the Company made the strategic decision to alter its approach
and withdraw from the Australian litigation. This decision was based on various
factors, including the following: (i) the actions of Mr. May against the Company
over the past 10 months, which in the Company's view demonstrated a consistent
lack of good faith on his part that was unlikely to change; (ii) Mr. May's
recent statement made under oath to the Australian Court that "It is important
from the outset to understand that there was no SpectruCell product in 1999 and
today there still is no SpectruCell product as it is clearly still in the
development stage and at least 12 to 18 months from the final product stage.",
which was contrary to previous information consistently provided by Mr. May to
the Company and the public on that subject; (iii) the completion of the research
and development of SpectruCell that is currently projected to require an
additional U.S.$12 to $15 million; (iv) the Company's opinion that development
of SpectruCell is unlikely to be completed and a product brought to successful
commercialization under Mr. May's leadership; (v) the Company's limited
resources at the present time are insufficient to enable it take all of the
legal actions that would be necessary to defend and enforce its rights in
Australia; and (vi) the need for the Company to use available funds to continue
current operations so that its rights and viability will be meaningfully
preserved for the future.
On October 25, 2002, we withdrew from the Australian litigation against Mr.
May and Advanced Communications (Australia). The effect of the Company's
decision to withdraw from the Australia litigation is that the interim License
Agreement has been terminated and the existing injunctions issued by the
Australia Court have been lifted and the purported termination of the interim
License Agreement is not being challenged in the Australia Court.
Notwithstanding this, the Company retains its rights to bring an action or
actions for damages and other available legal and equitable relief against Mr.
May, Advanced Communications (Australia) and other related and unrelated parties
who have damaged it. In addition, we still retain ownership of the rights to
SpectruCell and related technology acquired in the 1999 merger with Advanced
Communications (Nevada), which were neither created by nor subject to
cancellation under the interim License Agreement. The Company intends to protect
these rights to the fullest extent it is able to do so, and anticipates that Mr.
May and Advanced Communications (Australia) will not acknowledge these rights.
(iv) STAR MULTICARE SERVICES, INC.
In Star Multi Care Services, Inc. v. Advanced Communications Technologies,
Inc., an action filed September 18, 2000 in the Fifteenth Judicial Circuit in
the State of Florida, Star Multi Care Services, Inc. ("Star") sued the Company
for alleged breach of contract and the recovery of a break-up or termination fee
in excess of $50,000 in conjunction with the Company's alleged failure to
consummate a proposed merger with Star in January 2000.
29
CONTINGENCIES
INDEMNIFICATION OF DIRECTORS AND EMPLOYEES IN RE: ADVANCED COMMUNICATIONS
(AUSTRALIA) V. COMPANY DIRECTORS AND EMPLOYEES
On or about May 10, 2002, Advanced Communications (Australia) filed suit in
the Superior court of Orange County, California against the Company, all of its
directors, its former president, and some of its former and present employees,
including the Company's receptionist. On or about May 17, 2002, Advanced
Communications (Australia) voluntarily dismissed the suit as to the Company but
not as to the individual defendants.
The complaint sets forth multiple causes of action against the defendants,
including various business torts. The basis of the complaint is that the
defendants improperly interfered with and conspired to ruin plaintiff's business
and conspired to force plaintiff into bankruptcy.
In the opinion of the Company, based on input from legal counsel, the
complaint is deficient and subject to attack on numerous procedural grounds. In
the opinion of the Company, based on its knowledge of the facts and
circumstances underlying the action, the complaint is also substantively
deficient and meritless.
Under the Company's articles of incorporation and applicable Florida law,
the Company is obligated to indemnify and defend its directors and the officer
named as defendants who have been served in the action. The Company might also
be under an obligation to indemnify and defend the other former and present
employees named as defendants who have not been served in the action, if and
when they are served. This determination will be made on a case-by-case basis.
INDEMNIFICATION AGREEMENT BETWEEN THE COMPANY AND JACK HALPERIN RE:
NEEDHAM/DUPONT LAWSUIT
On or about July 2000, the Company entered into an indemnification
agreement with Jack Halperin, Esq., our then SEC counsel, whereby the Company
agreed to indemnify Mr. Halperin for all costs and damages incurred as a result
of Mr. Halperin being named a defendant in the Needham/DuPont lawsuit filed
against the Company, Mr. May and Mr. Halperin in July 2000. Mr. May executed
this agreement on behalf of the Company. The agreement includes a provision that
prohibits the Company from entering into any settlement agreement in the
Needham/DuPont lawsuit unless such settlement agreement provides for the
unconditional release of Mr. Halperin from any claim. On November 14, 2002, the
Company settled the Needham/DuPont lawsuit without obtaining a full release for
Mr. Halperin. The Company's Board of Directors is consulting with its current
legal counsel to determine the validity of the indemnification agreement.
PENDING CLAIM BY ADVANCED COMMUNICATIONS (AUSTRALIA) FOR COSTS OF AUSTRALIA
LITIGATION AND FOR DAMAGES
Following our withdrawal from the Australia litigation against Mr. May and
Advanced Communications (Australia), Advanced Communications (Australia) applied
to the court for an order awarding its costs of the litigation against the
Company. Advanced Communications (Australia) has indicated that its costs of
litigation were approximately Aus $400,000. The Company believes a cost award
will be made by the Australia Court in favor of Advanced Communications
(Australia) but it does not know in what amount. Advanced Communications
(Australia) has also applied for an order awarding damages against the Company
in the amount of Aus $6,000,000 or approximately US$3,200,000 as a result of the
Company notifying third parties in the U.S. with which Advanced Communications
(Australia) was dealing in regard to SpectruCell, of the Australia Court's
August 23, 2002 injunctive orders. Management believes that based on information
made available to it, Advanced Communications (Australia) proposed AU$6,000,000
or approximately US $3,200,000 claim for damages is without merit. As far as the
Company knows, the Australia Court has not awarded any costs and has not awarded
any damages against the Company. It is not known if such awards will be made
and, if they are made, what their amounts will be.
ITEM 2. CHANGES IN SECURITIES
On October 10, 2002, the Company's Board of Directors approved the issuance
of 100,000 shares each to Messrs. Danson, Prouty, Lichtman, Roche and Finch,
having a value of $1,000 each in partial satisfaction of unpaid prior legal and
consulting fees. These shares were issued on December 5, 2002.
On both August 26, 2002 and September 24, 2002, we issued a total of
2,921,450 and 1,328,550 shares of common stock to AJW Partners LLC and New
Millennium Capital Partners II, LLC, respectively, in full satisfaction of the
Company's outstanding obligation on the remaining September 30, 1999 12%
Convertible Debenture.
30
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 December 31, 2001, $200,750 of Secured Convertible Debentures were
outstanding. The Company is in default of its remaining obligations to AJW
Partners, LLC and New Millennium Capital Partners II, LLC, the two noteholders,
and on April 24, 2002 entered into a Settlement Agreement. Under the terms of
the Settlement Agreement, the Company is obligated to issue, over a 180 day
period, 8,500,000 shares of its common stock in exchange for the dismissal of
the lawsuit and in satisfaction of the remaining outstanding principal and
accrued interest. The Company had the option, until July 23, 2002, to substitute
cash in lieu of shares. On closing, the Company issued 1,460,725 and 664,275
shares of its common stock to AJW Partners, LLC and New Millennium Capital
Partners II, LLC, respectively. A Stipulation and Order of Discontinuance was
filed with and Ordered by the court on April 25, 2002. On June 4, 2002 the
Company issued an additional 1,460,725 and 664,275 shares of common stock to AJW
Partners LLC and New Millennium Capital Partners, II, LLC. On both August 26,
2002 and September 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, in full settlement of the Company's outstanding obligation on the
remaining September 30, 1999 12% Convertible Debenture.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
EXHIBIT
NO. DESCRIPTION LOCATION
1.1 Exchange Agreement between MRC Legal Incorporated by reference to
Services Corporation and Advanced Exhibit 1.1 to Company's Form
Communications Technologies, Inc. 8-K filed on February 4, 2000
dated as of January 31, 2000
2.1 Articles of Incorporation of Media Incorporated by reference to
Forum International, Inc. Exhibit 2.1 to the Company's
Form S-8 filed on February 9,
2000
2.2 Second Amendment to Articles of Incorporated by reference to
Incorporation of Telenetworx, Inc. Exhibit 2.2 to the Company's
Form S-8 filed on February 9,
2000
2.3 Third Amendment to Articles of Incorporated by reference to
Incorporation of Media Forum Exhibit 2.3 to the Company's
International, Inc. Form S-8 filed on February 9,
2000
2.4 Bylaws of the Company Incorporated by reference to
Exhibit 2.4 to the Company's
Form S-8 filed on February 9,
2000
2.5 Articles of Incorporation as Incorporated by reference to
currently in effect for the Company Exhibit 3.1 to Form S-1
Registration Statement filed on
August 14, 2001
2.6 Bylaws, as currently in effect Incorporated by reference to
Exhibit 3.2 to Form S-1
Registration Statement filed on
August 14, 2001
2.7 Fourth Amendment to Articles of Incorporated by reference to
Incorporation Exhibit 2.7 to the Form SB-2
filed with the SEC on March 5,
2002
10.1 Lease Agreement dated as of November Incorporated by reference to
27, 2001 between the Company and Exhibit 10.1 to the Form SB-2
Continental Development, L. P. II filed with the SEC on March 5,
2002
10.2 Stock Purchase Agreement between Incorporated by reference to
Advanced Communications Technologies, Exhibit 10.2 to the Form S-1
Inc. and Advanced Communications Registration Statement filed on
Technologies (Australia) Pty Ltd. August 14, 2001
10.3 Agreement dated June 27, 2000, Incorporated by reference to
between Ladenburg Thalmann & Co. and Exhibit 10.3 to the Company's
the Company Form S-1 Registration Statement
filed on August 14, 2001
10.4 Common Stock Purchase Agreement dated Incorporated by reference to
December 14, 2000, between the Exhibit 10.4 to the Company's
Company and Wanquay Ltd. Form S-1 Registration Statement
filed on August 14, 2001
10.5 Registration Rights Agreement dated Incorporated by reference to
December 14, 2000, between the Exhibit 10.5 to the Company's
Company and Wanquay Ltd. Form S-1 Registration Statement
filed on August 14, 2001
10.6 Escrow Agreement dated December 14, Incorporated by reference to
2000, among the Company, Wanquay Ltd. Exhibit 10.6 to the Company's
and Epstein Becker & Green Form S-1 Registration Statement
filed on August 14, 2001
10.7 Consulting Agreement with M. Richard Incorporated by reference to
Cutler dated January 31, 2000 Exhibit 10.1 to the Company's
Form S-8 filed on February 9,
2000
10.8 Stock Purchase Agreement dated April Incorporated by reference to
5, 2000, between Advanced Exhibit 10.5 to the Company's
Communications Technologies, Inc. and Form 10-QSB filed on May 24,
Advanced Communications Technologies 2000
Pty Ltd.
10.9 Securities Purchase Agreement dated Incorporated by referenced to
January 10, 2002, by and among Exhibit 10.9 to the Company's
Advanced Communications Technologies, Form 10-QSB filed on February
Inc. and Buyers 12, 2002
10.10 Investor Registration Rights Incorporated by reference to
Agreement dated January 10, 2002, by Exhibit 10.10 to the Company's
and among Advanced Communications Form 10-QSB filed on February
Technologies, Inc. and Investors 12, 2002
10.11 Transfer Agent Instructions Incorporated by reference to
Exhibit 10.11 to the Company's
Form 10-QSB filed on February
12, 2002
10.12 Escrow Agreement dated January 10, Incorporated by reference to
2002, by and among Advanced Exhibit 10.12 to the Company's
Communications Technologies, Inc., Form 10-QSB filed on February
Buyers and First Union National Bank 12, 2002
10.13 Equity Line of Credit Agreement dated Incorporated by reference to
January 10, 2002, by and between Exhibit 10.13 to the Company's
Cornell Capital Partners, LP and Form 10-QSB filed on February
Advanced Communications Technologies, 12, 2002
Inc.
10.14 Registration Rights Agreement dated Incorporated by reference to
January 10, 2002, by and between Exhibit 10.14 to the Company's
Advanced Communications Technologies, Form 10-QSB filed on February
Inc. 12, 2002
10.15 Placement Agent Agreement dated Incorporated by reference to
January 10, 2002, by and between Exhibit 10.15 to the Company's
Advanced Communications Technologies, Form 10-QSB filed on February
Inc. and Westrock Advisors, Inc. 12, 2002
10.16 Escrow Agreement dated January 10, Incorporated by reference to
2002, by and among Advanced Exhibit 10.16 to the Company's
Communications Technologies, Inc., Form 10-QSB filed on February
Cornell Capital Partners, LP, Butler 12, 2002
Gonzalez LLP and First Union National
Bank
10.17 License and Distribution Agreement Incorporated by reference to
dated as of July 5, 2000, between Exhibit 10.17 to the Company's
Advanced Communications Technologies, Amendment to Form 10-KSB filed
Inc. and Advanced Communications on May 23, 2002
Technologies (Australia) Pty. Ltd.
10.18 Letter of Intent dated September 7, Incorporated by reference to
2001 re: Purchase of Advanced Exhibit 10.18 to Amendment No.
Communications (Australia) 1 to the Company's Form 10-QSB
for the quarter ended December
31, 2001.
10.19 Securities Purchase Agreement, dated Incorporated by reference to
November 2002, by and among Advanced Exhibit 10.19 to the Company's
Communications and Buyers Form 10-KSB for the year ended
June 30, 2002 filed on
December 6, 2002.
10.20 Investor Registration Rights Incorporated by reference to
Agreement, dated November 2002, by Exhibit 10.20 to the Company's
and among Advanced Communications and Form 10-KSB for the year ended
Investors June 30, 2002 filed on December
6, 2002.
10.21 Secured Convertible Debenture Incorporated by reference to
Exhibit 10.21 to the Company's
Form 10-KSB for the year ended
June 30, 2002 filed on December
6, 2002.
10.22 Escrow Agreement, dated November Incorporated by reference to
2002, by and among Advanced Exhibit 10.22 to the Company's
Communications, Buyers, and Wachovia Form 10-KSB for the year ended
Bank, N.A. June 30, 2002 filed on December
6, 2002.
10.23 Irrevocable Transfer Agent Incorporated by reference to
Instructions, dated November 2002 Exhibit 10.23 to the Company's
Form 10-KSB for the year
ended June 30, 2002 filed
on December 6, 2002.
10.24 Security Agreement, dated November Incorporated by reference to
2002, by and among Advanced Exhibit 10.24 to the Company's
Communications and Buyers Form 10-KSB for the year ended
June 30, 2002 filed on
December 6, 2002.
10.25 Middletons Lawyers Letter, dated Incorporated by reference to
November 11, 2002, terminating the Exhibit 10.25 to the Company's
April 2000 Stock Purchase Agreement Form 10-KSB for the year ended
between Advanced Communications June 30, 2002 filed on December
Technologies, Inc. and Advanced 6, 2002.
Communications (Australia)
- -------------------------------------------------------------------------------
(b) REPORTS ON FORM 8-K.
(ii) REPORTS ON FORM 8-K:
On May 10, 2002, the Company filed a Form 8-K disclosing an update to its
pending litigation with Advanced Communications (Australia), the resignation of
Gary Ivaska, as President and Chief Executive Officer, and the appointment of
Wayne Danson as President.
On July 23, 2002, the Company filed a Form 8-K disclosing an update to its
pending litigation with Advanced Communications (Australia) and its voluntary
administration.
On September 4, 2002, the Company filed a Form 8-K disclosing an update to
its pending litigation with Advanced Communications (Australia).
On November 6, 2002, the Company filed a Form 8-K disclosing an update on
the status of its litigation against Advanced Communication (Australia) and the
termination of the License and Distribution Agreement.
31
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
By: /s/ Wayne I. Danson
-----------------------------------
Name: Wayne I. Danson
Title: President (Principal Executive Officer),
Chief Financial Officer (Principal Accounting
Officer)and Director
Date: December 11, 2002
32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Advanced Communications
Technologies, Inc. (the "Company") on Form 10-QSB for the quarterly period ended
September 30, 2002 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), each of the undersigned, in the capacities and on
the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to
his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operation of the
Company.
Date: December 11, 2002 /s/ Wayne I. Danson
-------------------------------------
Wayne I. Danson
President and Chief Financial Officer
33
FORM OF OFFICER'S CERTIFICATE
PURSUANT TO SECTION 302
I, Wayne I. Danson, President of Advanced Communications Technologies, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-QSB of September 30, 2002;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 11, 2002 By: /s/ Wayne I. Danson
-------------------
Wayne I. Danson
President and Chief Financial Officer