U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
(check one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Three Months Ended December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT OF 1934
Commission File Number 000-30486
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
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(Exact name of small business issuer as specified in its charter)
Florida
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(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
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(Address of principal executive offices)
(646)-227-1600
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(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 January 31, 2003, there were 198,852,622 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. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets as of December 31, 2002 and June 30,
2002 (Audited)
Condensed Consolidated Statement of Operations for the three and six months
ended December 31, 2002 and December 31, 2001
Condensed Consolidated Statement of Cash Flows for the six months ended
December 31, 2002 and December 31, 2001
Notes to Unaudited Condensed 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 PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
2
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 JUNE 30, 2002
(UNAUDITED) (AUDITED)
------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 3,375 $ 11,093
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TOTAL CURRENT ASSETS 3,375 11,093
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PROPERTY AND EQUIPMENT (NET) 15,274 17,274
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OTHER ASSETS:
Security Deposits 7,700 13,225
Other Receivables 9,927 9,927
Deferred Financing Costs, net of accumulated
amortization 66,771 63,333
------------- -------------
TOTAL OTHER ASSETS 84,398 86,485
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TOTAL ASSETS $ 103,047 $ 114,852
- ------------ ============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
- ----------------------------------------
LIABILITIES
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 1,303,333 $ 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 87,584 62,917
------------- -------------
TOTAL CURRENT LIABILITIES 2,618,836 2,263,736
------------- -------------
LONG-TERM LIABILITIES
5% Convertible Debentures Due 1/04 1,000,000 1,000,000
10% Secured Convertible Debentures Due 11/04 250,000 -
8% Note Payable Due 12/05 173,494 -
Note Payable-Advanced Communications (Australia) 1,791,166 1,791,166
------------- -------------
TOTAL LONG TERM LIABILITIES 3,214,660 2,791,166
------------- -------------
TOTAL LIABILITIES $ 5,833,496 $ 5,054,902
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Preferred Stock, $.01 Par Value, 25,000,000 Shares
Authorized, none issued and outstanding - -
Common Stock, No Par Value, 200,000,000
Shares Authorized, 118,852,622 and 114,102,622
shares issued and outstanding, respectively 25,826,505 25,471,098
Deferred Commitment fees, net of accumulated
amortization (375,000) (562,500)
Accumulated Deficit (31,181,954) (29,848,648)
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TOTAL STOCKHOLDERS' DEFICIENCY (5,730,449) (4,940,050)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 103,047 $ 114,852
- ---------------------------------------------- ============= =============
The accompanying notes are an integral part
of these condensed consolidated financial statements
3
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
------------------------------- -----------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
--------------- ------------- -------------- -------------
OPERATING EXPENSES
Consulting Fees $ 1,667 $ 124,453 $ 18,439 $ 224,453
Amortization and Depreciation 106,312 101,000 211,062 202,000
Professional Fees 171,147 210,061 463,556 340,809
Other Selling, General and Administrative
Expenses 27,901 185,446 52,088 275,750
Stock-Based Compensation - 30,000 60,000
----------- ------------ ------------ -----------
TOTAL OPERATING EXPENSES 307,027 650,960 745,145 1,103,012
----------- ------------ ------------ -----------
(Loss) From Operations (307,027) (650,960) (745,145) (1,103,012)
----------- ------------ ------------ -----------
OTHER EXPENSES
Lawsuit Settlements (15,000) - (188,494) -
Interest expense (327,167) (1,000) (399,667) (5,206)
----------- ------------ ------------ -----------
TOTAL OTHER (EXPENSES) (342,167) (1,000) (588,161) (5,206)
----------- ------------ ------------ -----------
NET (LOSS) $ (649,194) $ (651,960) $ (1,333,306) $(1,108,218)
- ---------- =========== ============ ============ ===========
Net (Loss) Per Share- Basic and Dilutive $(0.005) $(0.007) $(0.01) $(0.01)
=========== ============ ============ ===========
Weighted Average Number of Shares
Outstanding During the Period- Basic and
Dilutive 118,798,274 98,157,087 116,947,051 96,898,056
=========== ============ ============ ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements
4
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net (loss) $ (1,333,306) $ (1,108,218)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 211,062 202,000
Expenses incurred in exchange for common stock 5,000 360,559
Accrued compensation - 87,500
Interest Expense attributable to beneficial conversion 250,000 -
Lawsuit Settlement 173,494 -
Changes in operating assets and liabilities:
(Increase) decrease in assets
Security deposits 5,525 (8,334)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 430,840 3,532
Interest payable 149,667 1,000
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Net cash used in operating activities (107,718) (461,961)
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CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Repayment of unaffiliated note payable - (25,000)
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Net cash used in investing activities - (25,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Loan proceeds from shareholder - 259,736
Proceeds from issuance of convertible debt, net 100,000 -
Repayment of note payable - (118,530)
Proceeds from issuance of short-term note - 325,000
Proceeds from issuance of common stock
and warrants net of offering costs - 130,000
------------- --------------
Net cash provided by financing activities 100,000 596,206
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Net increase (decrease)/increase in cash (7,718) 109,245
Cash at beginning of year 11,093 6,816
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CASH AT END OF PERIOD $ 3,375 $ 116,061
- --------------------- ============= ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- -------------------------------------------------
Interest Paid $ - $ 14,538
============= ==============
Income Taxes Paid 0 0
============= ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
- -----------------------------------------------------------
During the six months ended December 31, 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 six months ended December 31, 2002, the Company issued 500,000 shares
of common stock valued at $5,000 in partial settlement of unpaid prior legal and
consulting fees.
During the six months ended December 31, 2002, the Company converted $125,000 of
accrued interest into 10% Secured Convertible Debentures and incurred $25,000 of
financing costs associated with the issuance of its 10% Secured Convertible
Debentures.
During the six months ended December 31, 2001, the Company issued 1,190,000
shares of common stock, valued at $357,001, in partial payment of notes payable
held by Advanced Communications Technologies (Australia) Pty Ltd, in which the
Company owned a 20% interest.
The accompanying notes are an integral part
of these condensed consolidated financial statements
5
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
- ------------------------------------------------------------------
The accompanying unaudited condensed consolidated financial statements
include the results of Advanced Communications Technologies, Inc. ("ACT" or the
"Company") and its wholly-owned subsidiaries. The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
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 of America have been
condensed or omitted pursuant to the quarterly reporting rules of the Securities
and Exchange Commission. The financial statements reflect all adjustments of a
recurring nature that are, in the opinion of management, necessary for the fair
presentation of the financial statements.
Operating results for the three and six months ended December 31, 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
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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 July 1, 2001, AGC ceased operations and has
been inactive since this date. 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 ("Advanced Communications (Australia)"), an unconsolidated
affiliated entity, which on November 11, 2002 was unilaterally terminated by
Advanced Communications (Australia). On July 5, 2000, the Company entered into a
interim License and Distribution Agreement with Advanced Communications
(Australia) 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 Advanced Communications (Australia). Despite the
termination of the interim License Agreement, the Company still owns the North
and South American rights to market and distribute SpectruCell that it acquired
pursuant to the April 1999 merger with Advanced Communications (Nevada). 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 Advanced Communications (Australia). In November 2000,
the Company formed Advanced Network Technologies (USA), Inc. ("ANT"), a Delaware
corporation, owned 70% by the Company and 30% by Advanced Communications
(Australia). 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 Advanced
Communications (Australia), 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
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.
6
(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) PROPERTY AND EQUIPMENT
- --------------------------
Property and equipment are stated at cost and depreciated, using
accelerated methods, over the estimated useful lives of 5 years.
(F) 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.
(G) 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 and for the six months ended December 31, 2002 and 2001 due to net
operating losses in both periods. Any deferred tax asset arising from the future
benefit of the Company's net operating loss carryforward, of approximately
$15,500,000 as of December 31, 2002 has been fully reserved.
(H) 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..
(I) 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.
(J) LOSS PER SHARE
- ------------------
Basic and dilutive net loss per common share is computed based upon the
weighted average common shares outstanding.
7
(K) 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
- -------------------------------
December 31, 2002 June 30, 2002
------------------- -----------------
Computer and office equipment $ 32,909 $ 32,909
Less: Accumulated depreciation (17,635) (15,635)
-------------- --------------
Property and equipment - net $ 15,274 $ 17,274
============== ==============
Depreciation expense for each of the three months ended December 31, 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.
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 Advanced Communications (Australia), leaving a balance of $172,183
at December 31, 2002 and June 30, 2002.
NOTE 4. NOTES AND LOAN PAYABLE
- ------------------------------
(A) NOTE PAYABLE TO ADVANCED COMMUNICATIONS (AUSTRALIA)
- -------------------------------------------------------
The Company had a non-interest bearing and unsecured note payable to
Advanced Communications (Australia) of $7,500,000 as of April 5, 2000 . The note
was payable in three equal monthly installments commencing on May 31, 2000.
Under the terms of the Stock Purchase Agreement with Advanced Communications
(Australia), the monthly installment payments were extended indefinitely without
interest to allow 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
8
Stock Purchase Agreement. Upon raising funds pursuant to a private or public
offering, the Company was obligated to repay Advanced Communications
(Australia)'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.
During the fiscal years ended June 30, 2002 and 2001, the Company repaid in
both cash and common stock, $5,326,833 and $382,001 of the obligation,
respectively. As of December 31, 2002, the balance of the Company's obligation
to Advanced Communications (Australia) was $1,791,166.
On November 11, 2002, Advanced Communications (Australia) issued a Notice
of Termination to the Company which stated that the April 2000 Stock Purchase
Agreement was 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, has
ceased to do business as an operating entity, that its assets have been sold,
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. We believe that, subject to advice of
Australian counsel, as a result of Advanced Communications (Australia's)
insolvency proceeding and its purported termination of the Stock Purchase
Agreement, no further money is owed, and we have no further obligation to
Advanced Communications (Australia).
(B) LOAN PAYABLE TO SHAREHOLDER
- -------------------------------
As of December 31, 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
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.
Interest of $1,889 was accrued on the note payable as of December 31, 2002.
NOTE 5. CONVERTIBLE DEBENTURES
- -------------------------------
5% CONVERTIBLE DEBENTURES DUE JANUARY 2004
- ------------------------------------------
In January 2002, the Company issued, in the aggregate, $1 million of 5%
Convertible Debentures to Cornell Capital Partners, LP and other investors.
These debentures are convertible into shares of common stock at a price
equal to either (a) an amount equal to 120% of the closing bid price of the
common stock as of the closing date or $.40, whichever is higher, or (b) an
amount equal to 80% of the lowest closing bid price of the common stock for the
five trading days immediately preceding the conversion date. These Convertible
Debentures accrue interest at a rate of 5% per year and are convertible at the
holder's option. These Convertible Debentures have a term of two years. At the
Company's option, these debentures may be paid in cash 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.
9
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 and $20,000 was expensed for the three months and six
months ended December 31, 2002, respectively.
During the three months ended December 31, 2002, the Company converted
$125,000 of accrued interest on the Convertible Debentures into 10% Secured
Convertible Debentures issued on November 22, 2002.
As of December 31, 2002 and June 30, 2002, interest of $10,417 and $62,917,
respectively, is accrued on these debentures.
On January 22, 2003, bondholders elected to convert $56,000 of the
debentures at a price of $.0032 per share, into 17,500,000 shares of restricted
common stock.
10% SECURED CONVERTIBLE DEBENTURES DUE NOVEMBER 2004
- ----------------------------------------------------
On November 22, 2002, the Company 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
the Company's 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, the Company 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 the Company 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.
The Company incurred $25,000 of financing costs associated with the 10%
Secured Convertible Debentures that is being amortized over the life of the
debentures. Amortization expense of $1,562 was recorded for the three months
ended December 31, 2002.
As of December 31, 2002 interest of $2,778, is accrued on these debentures.
On January 22, 2003, Cornell Capital Partners, L.P. elected to convert
$62,500 of debentures into 62,500,000 shares of restricted common stock.
Future maturities of long-term debt as of December 31, 2002 are as follows:
YEAR AMOUNT
---- ------
2004 $1,307,831
2005 57,831
2006 57,831
--------------
Total $1,423,493
==============
10
NOTE 6. STOCKHOLDERS' DEFICIENCY
- ---------------------------------
(A) STOCK ISSUED FOR CONVERTIBLE DEBENTURES
- -------------------------------------------
During the six months ended December 31, 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.
(B) STOCK ISSUED FOR SERVICES
- -----------------------------
On October 10, 2002, the Company's Board of Directors approved the issuance
of 100,000 shares each or 500,000 shares in the aggregate to Messrs. Danson,
Prouty, Lichtman, Roche and Finch, having a value of $1,000 each or $5,000 in
the aggregate, in partial satisfaction of unpaid prior legal and consulting
fees. These shares were issued on December 5, 2002.
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 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.
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.
(B) 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.
11
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
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 AU$400,000 or US$220,000. 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 claims for
damages are 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.
(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
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 interim 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) 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
12
in excess of $50,000 in conjunction with the Company's alleged failure to
consummate a proposed merger with Star in January 2000. On January 13, 2003, the
Company settled the action by agreeing to remit $15,000 to Star Multicare
Services, Inc by March 15, 2003. In the event that the Company does not remit
the $15,000 on or before March 15, 2003, then the Company is obligated to remit
$20,000 to Star MultiCare on or before May 15, 2003. An additional $5,000
penalty is imposed if the Company fails to remit the $20,000 on or before May
15, 2003. In accordance with the provisions of FASB 5 paragraph 35, the Company
has recorded the expense of settlement and the associated liability in its
December 31, 2002 interim financial statements.
As of December 31, 2002, management has settled all of its outstanding
lawsuits and has recorded the financial statement impact of such settlements.
Moreover, management does not believe that the contingencies described above
will have a material adverse impact on the future financial condition of the
Company.
NOTE 9. GOING CONCERN
- ----------------------
The Company's consolidated financial statements for the six months ended
December 31, 2002, have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The Company's net loss of
$1,333,306 for the six months ended December 31, 2002, working capital
deficiency of $2,615,461 and stockholders' deficiency of $5,730,449, raise
substantial doubt about its ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent on
the Company's ability to raise additional capital, implement its business plan
and acquire an existing profitable business enterprise. Management anticipates
that the issuance of securities will generate sufficient resources for the
continuation of the Company's operations and the implementation of its business
plan.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
NOTE 10. SUBSEQUENT EVENTS
- ---------------------------
On January 22, 2003, holders of the Company's 5% and 10% Convertible
Debentures elected to convert $56,000 and $62,500 into 17,500,000 and 62,500,000
shares, respectively, of the Company's restricted common stock.
13
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 June 30, 2002 audited financial statements and notes
thereto included in the Company's Form 10-KSB.
FINANCIAL CONDITION
We had net losses of $4,332,693 and $19,732,566 during the years ended June
30, 2002 and 2001, respectively. For the six months ended December 31, 2002, we
had a net loss of $1,333,306. As of December 31, 2002, we had a net loss of
$1,333,306, cash of $3,375 and current liabilities of $2,618,836. 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 netted $100,000 after fees and expenses. The Company used the
funds from the 10% Secured Convertible Debentures to pay a portion of its legal
and accounting professionals outstanding fees and other critical operating
costs.
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), 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 DECEMBER 31, 2002 TO THE THREE MONTHS ENDED
DECEMBER 31, 2001
OVERALL RESULTS OF OPERATIONS
For the three months ended December 31, 2002 we incurred an overall loss of
($649,194) or ($.005) per share, which was a slight decrease from the loss of
($651,960) or ($0.007) per share for the comparable period in the prior year.
REVENUE
No revenues were generated during either the three months ended December
31, 2002 or December 31, 2001.
OPERATING EXPENSES
Operating expenses for the three months ended December 31, 2002, were
$307,027 and represent a substantial (53%) decrease in operating expenses of
$650,960 for the comparative period ended December 31, 2001. Included in
operating expenses for both periods is $106,312 and $101,000 respectively, of
depreciation and amortization attributable to the quarterly depreciation of our
office property and equipment ($1,000) and $105,312 of amortization attributable
to deferred financing and commitment fees for the three months ended December
31, 2002 and $100,000 of amortization of goodwill associated with our investment
in Advanced Communications (Australia) for the three months ended December 31,
2001. Because goodwill was completely written-off in our June 30, 2002 financial
statements, no amortization of goodwill was incurred for the three months ended
14
December 31, 2002. Consulting fees for the three months ended December 31, 2002
decreased by $122,786 from the comparative period due to the curtailment of our
operations commencing August 1, 2002. Professional fees for the three months
ended December 31, 2002 also decreased $38,914 over the comparable three-month
period ended December 31, 2001 due to the decrease in legal fees as a result of
the Company's settlement of all its remaining lawsuits and its withdrawal from
the Australian litigation with Roger May and Advanced Communications
(Australia).
Other selling, general and administrative expenses decreased $157,545 from
the comparative three month period ended December 31, 2001 due to the Company's
curtailment of its operations and relocation of its office to New York. In
particular, the Company has reduced its office rent, marketing and promotion,
and other office operating expenses by approximately $133,000 from the
comparative three month period ended December 31, 2001.
OTHER EXPENSE
Interest expense incurred for the three months ended December 31, 2002 was
$327,167 and was principally attributable to $250,000 of intrinsic interest on
the beneficial conversion feature of the Company's 10% Secured Convertible
Debentures due November 2004, $72,500 of accrued and default interest on the 5%
$1,000,000 Convertible Debentures due January 2004 and $1,889 of interest on the
8% Note Payable due 2005. During the quarter, the Company also repaid $125,000
of accrued and default interest on its 5% $1,000,000 Convertible Debentures due
January 2004 from proceeds on the Company's 10% $250,000 Secured Convertible
Debentures that it issued in November 2002. Interest of $1,000 for the
comparative three-month period ended December 31, 2001 was attributable entirely
to interest on the $325,000 short-term loan entered into on December 13, 2001
and repaid in January 2002. During the three month period ended December 31,
2002, the Company also recorded, in accordance with paragraphs 8(a) and 35 of
FASB 5, $15,000 of expense relating to the settlement of the Star MultiCare
lawsuit. No such expense was incurred during the comparative three month period
ended December 31, 2001.
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 2002 TO THE SIX MONTHS ENDED
DECEMBER 31, 2001
OVERALL RESULTS OF OPERATIONS
For the six months ended December 31, 2002, the Company incurred an overall
net loss of ($1,333,306) or ($.01) per share, as compared to an overall net loss
of ($1,108,218) or ($.01) per share, for the comparative six months ended
December 31, 2001. The overall net loss for the six months ended December 31,
2002 was 20% more than the net loss for the six months ended December 31, 2001.
REVENUE
No revenues were generated during either the six months ended December 31,
2002 or December 31, 2001.
OPERATING EXPENSES
Operating expenses for the six months ended December 31, 2002, were
$745,145 and represent a substantial (32%) decrease in operating expenses of
$1,103,012 for the comparative period ended December 31, 2001. Included in
operating expenses for both periods is $211,062 and $202,000 respectively, of
depreciation and amortization attributable to the quarterly depreciation of our
office property and equipment ($2,000) and $209,062 of amortization attributable
to deferred financing and commitment fees for the six months ended December 31,
2002 and $200,000 of amortization of goodwill associated with our investment in
Advanced Communications (Australia) for the six months ended December 31, 2001.
Because goodwill was completely written-off in our June 30, 2002 financial
statements, no amortization expense for goodwill was recorded for the six months
ended December 31, 2002. Consulting fees for the six months ended December 31,
2002 decreased by $206,014 from the comparative period due to the curtailment of
our operations commencing August 1, 2002. Professional fees for the six months
ended December 31, 2002 increased by $122,747 over the comparable six month
period ended December 31, 2001 due to the increase in legal fees associated with
the Company's settlement of all its remaining lawsuits and its litigation with
Roger May and Advanced Communications (Australia).
OTHER EXPENSE
Interest expense incurred for the six months ended December 31, 2002 was
$399,667 and was principally attributable to $250,000 of intrinsic interest on
the beneficial conversion feature of the Company's 10% Secured Convertible
Debentures due November 2004, $145,000 of accrued and default interest on the 5%
$1,000,000 Convertible Debentures due January 2004, $1,889 of interest on the 8%
15
Note Payable due 2005 and $2,778 of interest on the 10% $250,000 Secured
Convertible Debentures issued November 2002. Interest of $5,206 for the
comparative six-month period ended December 31, 2001 was attributable to the
Grassland Capital note payable of $118,530 which was paid in October 2001 and
interest on the $325,000 short-term loan issued in December 2001 that was repaid
in early January 2002. During the six month period ended December 31, 2002, the
Company settled its remaining two lawsuits and recorded $188,494 of settlement
expense in accordance with paragraphs 8(a) and 35 of FASB 5. No such expense was
incurred during the comparative six month period ended December 31, 2001.
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 1 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.
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.
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.
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.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated, using
accelerated methods, over the estimated useful lives of 5 years.
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.
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.
16
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..
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.
LOSS PER SHARE
Basic and dilutive net loss per common share is computed based upon the
weighted average common shares outstanding.
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.
(B) LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, our principal source of liquidity was $3,375 of cash.
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, for a period of two years
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
be paid a fee of 3% of each advance under the Equity Line of Credit. In
addition, we engaged Westrock Advisors, Inc., a registered broker-dealer, to
advise us in connection with the Equity Line of Credit. For its services,
Westrock Advisors, Inc. received 40,000 shares of our common stock. The
effectiveness of the sale of the shares under the Equity Line of Credit is
conditioned upon us (i) increasing the number of shares of common stock that we
are authorized to issue and (ii) 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. Based
upon the current price of the Company's stock, we will only be able to draw down
a fraction of the maximum $30 million under the Equity Line of Credit.
17
In January 2003, the holders of our 5% and 10% Convertible Debentures
converted $56,000 and $62,500 into 17,500,000 and 62,500,000 shares,
respectively, of our common stock. As a result of these conversions, we have
198,852,622 shares of common stock outstanding. Pursuant to our Articles of
Incorporation, we are authorized to issue 200,000,000 shares of common stock. As
a result, we do not have a sufficient number of authorized shares of common
stock to issue to raise capital under the Equity Line of Credit, to honor
conversions of outstanding debentures or for any other purpose. We intend to
seek the approval of our shareholders to increase our authorized common stock.
Such an increase would provide additional shares of common stock to issue to
honor existing commitments, such as the conversion of outstanding debentures,
and for capital raising purposes. Our inability to obtain shareholder approval
to increase our authorized common stock will materially hamper our ability to
raise capital and to continue operations.
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 $2,618,836. These obligations include accounts payable and
accrued expenses in the amount of $1,303,333, accrued interest of $87,584,
accrued compensation of $172,183 and an unsecured, non-interest-bearing loan in
the amount of $1,055,736 payable to an entity wholly-owned by Roger May, a
former officer and director . In addition, we have a note payable to Advanced
Communications (Australia) in the amount of $1,791,166 at December 31, 2002 that
was the subject of a lawsuit by us against Roger May and Advanced Communications
(Australia). Management believes that subject to advice of Australian counsel,
as a result of the unilateral cancellation of the stock purchase agreement by
Advanced Communications (Australia) Pty Ltd., no further money is owed and we
have no further obligation to Advanced Communications (Australia). As of
December 31, 2002, we had a working capital deficiency of $2,615,461. 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 December 31, 2002, we had an accumulated deficit of $31,181,954. Cash used in
operations for the fiscal years ended June 30, 2002 and 2001 was $1,103,254 and
$1,479,999, respectively. At December 31, 2002, our only source of liquidity was
$3,375 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
relocated our office in California to New York and terminated all of our
consultants. Unless we are able to raise additional capital through the draw
down of our equity line once it is declared effective by the SEC, we will be
unable to continue our operations. We have no other sources of internal or
external capital.
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
which the Company netted $100,000 after fees and expenses. The Company used the
funds from the 10% Secured Convertible Debentures to pay a portion of its legal
and accounting professionals outstanding fees and other critical operating
costs. In January 2003, holders of the 5% and 10% Convertible Debentures
converted $56,000 and $62,5000 into 17,5000,000 and 62,500,000 shares,
respectively, of our common stock.
If we are unable to obtain additional funding through our Equity Line of
Credit facility, 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.
The Company has total liabilities of $5,833,496 as of December 31, 2002.
Included in this total are contractual obligations of $2,814,411. These
contractual obligations, along with the dates on which such payments are due,
are described below:
Payments Due By Period
------------------------------------------------------------------------
1 Yr. Or 2-3 4-5 After
Contractual Obligations Total Or Less Years Years 5 Years
- ----------------------- ------------------------------------------------------------------------
Note Payable $ 173,494 * $ 57,813 $ 115,681 $ -- $ --
18
Convertible Debentures 1,337,584 -- 1,337,584 -- --
Accounts Payable and
Accrued Expenses 1,303,333 1,303,333 -- -- --
Total Contractual Obligations $2,814,411 $ 1,361,146 $1,453,265 $ -- $ --
* Excludes $1,791,166 due to Advanced Communications (Australia). The
Company believes that this obligation has been cancelled by Advanced
Communications (Australia) due to Advanced Communications
(Australia)'s unilateral revocation of the Stock Purchase Agreement
and is no longer obligated to pay this.
Our only source of funds to repay these obligations will come from our
Equity Line of Credit facility. We have no other source of funds, internal or
external with which to repay our contractual obligations.
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 shares of common stock to be issued 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. Pursuant to
our Articles of Incorporation, we are authorized to issue up to 200,000,000
shares of common stock, of which 198,852,622 are outstanding. 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. In order to
access funds under the Equity Line of Credit, we must 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, Cornell
Capital Partners, L.P. agrees to release any and all security interests it has
in SpectruCell and all of the Company's real and intangible assets. 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. In January 2003, Cornell Capital
Partners converted $62,500 of the debentures into 62,500,000 shares of common
stock.
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
19
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
stock at a price equal to either (a) an amount equal to one hundred twenty
percent (120%) of the closing bid price of the common stock as of the closing
date or $0.40, whichever is higher, or (b) an amount equal to eighty percent
(80%) of the lowest closing bid price of the common stock for the five trading
days immediately preceding the conversion date. If such conversion had taken
place at $0.008 (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. We do not have a sufficient number of authorized shares of common stock
to honor these conversions. Accordingly, we intend to seek approval form our
shareholders to increase our authorized shares of common stock. These
Convertible Debentures accrue interest at a rate 5% per year and are convertible
at the holder's option. These Convertible Debentures have a term 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.
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net cash used in operating activities was $232,718 and $461,961 for the six
months ended December 31, 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 in accounts payable,
accrued interest and the settlement of lawsuits for the six months ended
December 31, 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 six
months ended December 31, 2002. For the six months ended December 31, 2001,
$25,000 of cash was used to repay a portion of the loan to Advanced
Communications (Australia).
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
During the six months ended December 31, 2002, the Company generated
$100,000 of net cash from financing activities from proceeds on the $250,000 10%
Secured Convertible Debenture that we issued on November 22, 2002. During the
six months ended December 31, 2001, the Company generated $596,206 of net cash
from financing activities which was attributable to $130,000 of proceeds
received from the sale of equity securities pursuant to a private placement that
commenced December 2000 and ended August 2001, $259,736 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, and $325,000 of
proceeds from a short-term loan from Cornell Capital Partners, L.P. issued on
December 13, 2001 and repaid in early January 2002 from proceeds of the 5%
$1,000,000 Convertible Debentures. During the six months ended December 31,
2001, the Company used $118,520 to pay, in full, the remaining balance on the
Grassland note payable.
(D) ACQUISITIONS
None
(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 January 31, 2003, there were
198,852,622 common shares outstanding and approximately 443 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".
20
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
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
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
Quarter Ended December 31, 2002 .015 .004
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.
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.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS
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.
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.
21
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 Company 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) STAR MULTI CARE 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. On January 13, 2003, the
Company settled the action by agreeing to remit $15,000 to Star Multicare
Services, Inc by March 15, 2003. In the event that the Company does not remit
the $15,000 on or before March 15, 2003, then the Company is obligated to remit
$20,000 to Star MultiCare on or before May 15, 2003. An additional $5,000
penalty is imposed if the Company fails to remit the $20,000 on or before May
15, 2003.
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.
22
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 AU $400,000 or approximately US$220,000. Advanced
Communications (Australia) has also applied for an order awarding damages
against the Company in the amount of AU$6,000,000 or approximately US$3,300,000
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. The Company believes based
on information made available to it, that Advanced Communications (Australia)'s
proposed claims for damages are 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 AND USE OF PROCEEDS
All issuances of restricted stock have been valued based on the closing
price of the stock as of the date the Company's Board of Directors approved the
grant of shares.
On October 10, 2002, the Company's Board of Directors approved the issuance
of 100,000 shares each or 500,000 in the aggregate to Messrs. Danson, Prouty,
Lichtman, Roche and Finch, having a value of $1,000 each or $5,000 in the
aggregate 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.
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.
23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On January 22, 2003, holders of the Company's 5% and 10% Convertible
Debentures elected to convert $56,000 and $62,500 into 17,500,000 and 62,500,000
shares, respectively, of the Company's restricted common stock.
Effective December 12, 2002, Mr. Prouty resigned his position as Chairman
of the Board. Mr. Prouty remains a director of the Company and is a member of
the Company's audit, compensation and acquisitions committee. The Company has
not yet replaced Mr. Prouty as Chairman.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
- --------------------------------------------------------------------------------
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ------------------------------ ----------------------------------
- --------------------------------------------------------------------------------
1.1 Exchange Agreement between Incorporated by reference to
MRC Legal Services Exhibit 1.1 to Company's Form 8-K
Corporation and Advanced filed on February 4, 2000
Communications Technologies,
Inc. dated as of January 31,
2000
2.1 Articles of Incorporation of Incorporated by reference to
Media Forum International, Exhibit 2.1 to the Company's Form
Inc. S-8 filed on February 9, 2000
2.2 Second Amendment to Articles Incorporated by reference to
of Incorporation of Exhibit 2.2 to the Company's Form
Telenetworx, Inc. S-8 filed on February 9, 2000
2.3 Third Amendment to Articles Incorporated by reference to
of Incorporation of Media Exhibit 2.3 to the Company's Form
Forum International, Inc. 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 Exhibit 3.1 to Form S-1
Company 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 Incorporated by reference to
of Incorporation Exhibit 2.7 to the Form SB-2 filed
with the SEC on March 5, 2002
10.1 Lease Agreement dated as of Incorporated by reference to
November 27, 2001 between the Exhibit 10.1 to the Form SB-2
Company and Continental filed with the SEC on March 5,
Development, L. P. II 2002
24
- --------------------------------------------------------------------------------
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ------------------------------ ----------------------------------
- --------------------------------------------------------------------------------
10.2 Stock Purchase Agreement Incorporated by reference to
between Advanced Exhibit 10.2 to the Company's
Communications Technologies, Form S-1 Registration Statement
Inc. and Advanced filed on August 14, 2001
Communications Technologies
(Australia) Pty Ltd.
10.3 Agreement dated June 27, Incorporated by reference to
2000, between Ladenburg Exhibit 10.3 to the Company's Form
Thalmann & Co. and the S-1 Registration Statement filed
Company on August 14, 2001
10.4 Common Stock Purchase Incorporated by reference to
Agreement dated December 14, Exhibit 10.4 to the Company's Form
2000, between the Company and S-1 Registration Statement filed
Wanquay Ltd. on August 14, 2001
10.5 Registration Rights Agreement Incorporated by reference to
dated December 14, 2000, Exhibit 10.5 to the Company's Form
between the Company and S-1 Registration Statement filed
Wanquay Ltd. on August 14, 2001
10.6 Escrow Agreement dated Incorporated by reference to
December 14, 2000, among the Exhibit 10.6 to the Company's Form
Company, Wanquay Ltd. and S-1 Registration Statement filed
Epstein Becker & Green on August 14, 2001
10.7 Consulting Agreement with M. Incorporated by reference to
Richard Cutler dated January Exhibit 10.1 to the Company's Form
31, 2000 S-8 filed on February 9, 2000
10.8 Stock Purchase Agreement Incorporated by reference to
dated April 5, 2000, between Exhibit 10.5 to the Company's Form
Advanced Communications 10-QSB filed on May 24, 2000
Technologies, Inc. and
Advanced Communications
Technologies Pty Ltd.
10.9 Securities Purchase Agreement Incorporated by reference to
dated January 10, 2002, by Exhibit 10.9 to the Company's Form
and among Advanced 10-QSB filed on February 12, 2002
Communications Technologies,
Inc. and Buyers
10.10 Investor Registration Rights Incorporated by reference to
Agreement dated January 10, Exhibit 10.10 to the Company's
2002, by and among Advanced Form 10-QSB filed on February 12,
Communications Technologies, 2002
Inc. and Investors
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 Incorporated by reference to
January 10, 2002, by and Exhibit 10.12 to the Company's
among Advanced Communications Form 10-QSB filed on February 12,
Technologies, Inc., Buyers 2002
and First Union National Bank
10.13 Equity Line of Credit Incorporated by reference to
Agreement dated January 10, Exhibit 10.13 to the Company's
2002, by and between Cornell Form 10-QSB filed on February 12,
Capital Partners, LP and 2002
Advanced Communications
Technologies, Inc.
10.14 Registration Rights Agreement Incorporated by reference to
dated January 10, 2002, by Exhibit 10.14 to the Company's
and between Advanced Form 10-QSB filed on February 12,
Communications Technologies, 2002
Inc.
10.15 Placement Agent Agreement Incorporated by reference to
dated January 10, 2002, by Exhibit 10.15 to the Company's
and between Advanced Form 10-QSB filed on February 12,
Communications Technologies, 2002
Inc. and Westrock Advisors,
Inc.
25
- --------------------------------------------------------------------------------
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ------------------------------ ----------------------------------
- --------------------------------------------------------------------------------
10.16 Escrow Agreement dated Incorporated by reference to
January 10, 2002, by and Exhibit 10.16 to the Company's
among Advanced Communications Form 10-QSB filed on February 12,
Technologies, Inc., Cornell 2002
Capital Partners, LP, Butler
Gonzalez LLP and First Union
National Bank
10.17 License and Distribution Incorporated by reference to
Agreement dated as of July 5, Exhibit 10.17 to the Company's
2000, between Advanced Amendment to Form 10-KSB filed on
Communications Technologies, May 23, 2002
Inc. and Advanced
Communications Technologies
(Australia) Pty. Ltd.
10.18 Letter of Intent dated Incorporated by reference to
September 7, 2001 re: Exhibit 10.18 to Amendment No. 1
Purchase of Advanced to the Company's Form 10-QSB for
Communications (Australia) the quarter ended December 31,
2001.
10.19 Securities Purchase Incorporated by reference to
Agreement, dated November Exhibit 10.19 to the Company's
2002, by and among Advanced Form 10-KSB for the year ended
Communications and Buyers June 30, 2002 filed on December 6,
2002.
10.20 Investor Registration Rights Incorporated by reference to
Agreement, dated November Exhibit 10.20 to the Company's
2002, by and among Advanced Form 10-KSB for the year ended
Communications and 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 Incorporated by reference to
November 2002, by and among Exhibit 10.22 to the Company's
Advanced Communications, Form 10-KSB for the year ended
Buyers, and Wachovia Bank, June 30, 2002 filed on December 6,
N.A. 2002.
10.23 Irrevocable Transfer Agent Incorporated by reference to
Instructions, dated November Exhibit 10.23 to the Company's
2002 Form 10-KSB for the year ended
June 30, 2002 filed on December 6,
2002.
10.24 Security Agreement, dated Incorporated by reference to
November 2002, by and among Exhibit 10.24 to the Company's
Advanced Communications and Form 10-KSB for the year ended
Buyers June 30, 2002 filed on December 6,
2002.
10.25 Middletons Lawyers Letter, Incorporated by reference to
dated November 11, 2002, Exhibit 10.25 to the Company's
terminating the April 2000 Form 10-KSB for the year ended
Stock Purchase Agreement June 30, 2002 filed on December 6,
between Advanced 2002.
Communications Technologies,
Inc. and Advanced
Communications (Australia)
(b) REPORTS ON FORM 8-K.
(ii) Reports on Form 8-K:
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.
26
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: February 20, 2003
27
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
December 31, 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: February 20, 2003 /s/ Wayne I. Danson
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Wayne I. Danson
President and Chief Financial Officer
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 December 31, 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: February 20, 2003 By: /s/ Wayne I. Danson
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Wayne I. Danson
President and Chief Financial Officer