U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 2 To Form 10-QSB
(check one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Three Months Ended September 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT OF 1934
Commission File Number 000-30486
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
------------------------------------------
(Exact name of small business issuer as specified in its charter)
Florida
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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
--------------
(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 3 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of December 5, 2002, there were 118,852,622 shares of the registrant's
no par value common stock issued and outstanding
Transmittal Small Business Disclosure Format (check one):
Yes [ ] No [X]
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 JUNE 30, 2002
(UNAUDITED) (AUDITED)
--------------------------------------------
ASSETS
------
Current Assets:
Cash $ 415 $ 11,093
-
-------------------- --------------------
Total Current Assets 415 11,093
-------------------- --------------------
Property and Equipment (Net) 16,274 17,274
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Other Assets:
-
Security Deposits 7,700 13,225
Other Receivables 9,927 9,927
Deferred Bond Financing Costs, net of accumulated amortization 53,333 63,333
-------------------- --------------------
Total Other Assets 70,960 86,485
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TOTAL ASSETS $ 87,649 $ 114,852
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LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
LIABILITIES
CURRENT LIABILITIES
Accounts Payable $ 1,189,658 $ 872,493
Accrued Compensation 172,183 172,183
Loan Payable to Shareholder 1,055,736 1,055,736
12% Convertible Debentures - 100,407
Interest Payable 135,417 62,917
-------------------- --------------------
TOTAL CURRENT LIABILITIES 2,552,994 2,263,736
LONG-TERM LIABILITIES
5% Convertible Debentures 1,000,000 1,000,000
8% Note Payable 173,494 -
Note Payable-ACT-Australia 1,791,166 1,791,166
-------------------- --------------------
TOTAL OTHER LIABILITIES 2,964,660 2,791,166
-------------------- --------------------
TOTAL LIABILITIES 5,517,654 5,054,902
-------------------- --------------------
STOCKHOLDERS' DEFICIENCY
Preferred Stock, $.01 Par Value, 25,000,000 Shares Authorized,
none issued and outstanding - -
Common Stock, No Par Value, 200,000,000
Shares Authorized, 118,352,622 and 114,102,622
shares issued and outstanding, respectively 25,571,505 25,471,098
Deferred Commitment fees, net of accumulated amortization (468,750) (562,500)
Accumulated Deficit (30,532,760) (29,848,648)
-------------------- --------------------
TOTAL STOCKHOLDERS' DEFICIENCY (5,430,005) (4,940,050)
-------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 87,649 $ 114,852
- ---------------------------------------------- ==================== ====================
The accompanying notes are an integral part of these consolidated financial statements
2
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
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SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------------- ------------------------
OPERATING EXPENSES
Consulting Fees 16,772 100,000
Amortization and Depreciation 104,750 101,000
Professional Fees 292,409 130,748
Other Selling, General and Administrative Expenses 24,187 90,304
Stock-Based Compensation - 30,000
------------------------- ------------------------
TOTAL OPERATING EXPENSES 438,118 452,052
------------------------- ------------------------
(Loss) From Operations (438,118) (452,052)
------------------------- ------------------------
OTHER EXPENSES
Lawsuit settlement (173,494) -
Interest expense (72,500) (4,206)
------------------------- ------------------------
TOTAL OTHER (EXPENSES) (245,994) (4,206)
------------------------- ------------------------
NET (LOSS) $ (684,112) $ (456,258)
- ---------- ========================= ========================
Net (Loss) Per Share- Basic and Dilutive $ (0.006) $ (0.005)
========================= ========================
Weighted Average Number of Shares
Outstanding During the Period- Basic and Dilutive 115,095,829 95,639,024
========================= ========================
The accompanying notes are an integral part of these consolidated financial statements
3
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
-------------------------------------------------
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
---------------------- -----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net (loss) $ (684,112) $ (456,258)
Adjustments to reconcile net loss to net cash used:
Depreciation and amortization 104,750 101,000
Stock issued for services - 244,224
Accrued compensation - 52,500
Settlement of Lawsuit 173,494 -
Changes in operating assets and liabilities:
(Increase) decrease in assets
Prepaid expense 5,525 (10,000)
Increase (decrease) in liabilities:
Accounts payable 317,165 (101,094)
Interest payable 72,500 4,206
Other Advances 63,000
---------------------- -----------------------
Net cash used in operating activities (10,678) (102,422)
---------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Loan to unconsolidated affiliated company
Purchase of fixed assets
Repayment of loan to unconsolidated affiliate
---------------------- -----------------------
Net cash used in investing activities - -
---------------------- -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Loan proceeds from shareholder 25,200
Proceeds from issuance of common stock
and warrants net of offering costs 125,000
---------------------- -----------------------
Net cash provided by financing activities - 150,200
---------------------- -----------------------
Net increase (decrease) in cash (10,678) 47,778
Cash and cash equivalents at beginning of year 11,093 6,816
---------------------- -----------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 415 $ 54,594
- ------------------------------------------ ====================== =======================
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
During the three months ended September 30, 2002, the Company issued 4,250,000 shares of common stock valued at $100,407 in
full settlement of the September 1999 12% Senior Secured Convertible Debentures.
During the three months ended September 30, 2001, the Company issued 1,190,000 shares of common stock, valued at $357,001,
in partial payment of notes payable held by a related Australian corporation, in which we hold a 20% interest.
The accompanying notes are an integral part of these consolidated financial statements
4
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
- ------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements include the results
of Advanced Communications Technologies, Inc. ("ACT" or the "Company") and its
wholly owned subsidiaries. The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial statements. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to the quarterly reporting
rules of the Securities and Exchange Commission. The financial statements
reflect all adjustments of a recurring nature that are, in the opinion of
management, necessary for the fair presentation of the financial statements.
Operating results for the three months ended September 30, 2002 are not
necessarily indicative of the results that may be expected for the fiscal year
ending June 30, 2003. The interim financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the fiscal year ended June 30, 2002 included in the Company's Form 10-KSB as
filed with the Securities and Exchange Commission.
(A) ORGANIZATION
Advanced Communications Technologies, Inc., a Nevada corporation, was
incorporated on April 30, 1998 and was inactive from its date of formation until
April 1999 when it merged with and into the Company in a reverse merger. In
consideration for 90% of the stock of the Company, Advanced Communications
Technologies, Inc (Nevada) (of which Roger May, our former Chairman and CEO was
the principal shareholder) transferred all of its assets which included all of
the rights and interest in the SpectruCell technology for the North and South
American territories. For accounting purposes, the merger was treated as an
acquisition of all of the assets of the Company and as a recapitalization of the
Company. In July 1999, the Company formed Advanced Global Communications, Inc.
("AGC") as a wholly owned subsidiary to conduct its international telephone
network distribution business. On 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 ("ACT-AU"), an unconsolidated affiliated entity, which on
November 11, 2002 was unilaterally terminated by ACT-AU. See Note 8(E)(iv). On
July 5, 2000, the Company entered into a interim License and Distribution
Agreement with ACT-AU pursuant to which the Company had the exclusive rights to
market and distribute the SpectruCell technology in North, South and Central
America. 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). On October 25, 2002, the interim License and
Distribution Agreement was unilaterally terminated by ACT-AU. (See Note
8(E)(iv). In July 2000, the Company formed Australon USA, Inc. ("Australon"), a
Delaware corporation owned 50% by the Company and 50% by Australon Enterprises
Pty., Ltd., a publicly traded company listed on the Australian Stock Exchange
and a 66% owned subsidiary of ACT-AU. In November 2000, the Company formed
Advanced Network Technologies (USA), Inc. ("ANT"), a Delaware corporation, owned
70% by the Company and 30% by ACT-AU. Both Australon and ANT are inactive and
have never been operational. Australon Enterprises Pty Ltd is an Australian
public company that manufactures and distributes remote monitoring devices for
homes and businesses such as remote meter reading and residential automated
gateway devices. While Mr. May, our former CEO and Chairman of the Board has a
significant ownership interest in Australon Enterprise Pty, through his
ownership interest in ACT-AU, he is not involved in Australon `s daily
management or business operations and is not represented on its Board of
Directors. The joint venture relationship was established while Mr. May
controlled both companies. Presently, the company is not in negotiations with
Australon Enterprises Pty and does not intend to enter into any discussions with
Australon's management. Australon USA, Inc is inactive and will remain inactive
for the foreseeable future.
The Company will account for the future results of operations, if any, of
Australon on an equity basis and ANT on a consolidated basis.
5
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.
(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 due to net operating losses in both periods. Any deferred tax asset
arising from the future benefit of the Company's net operating loss
carryforward, of approximately $14,500,000 has been fully reserved.
(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.
6
(J) LOSS PER SHARE
Basic and dilutive net loss per common share is computed based upon the weighted
average common shares outstanding.
(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
SEPTEMBER 30, JUNE 30,
2002 2002
-------------- ---------------
Computer and office equipment $ 32,909 $ 32,909
Less: Accumulated depreciation (16,635) (15,635)
-------------- ---------------
Property and equipment - net $ 16,274 $ 17,274
============== ===============
Depreciation expense for each of the three months ended September 30, 2002 and
2001 was $1,000.
NOTE 3. ACCRUED COMPENSATION
The Company had an oral agreement with Mr. Roger May to serve as the Chief
Executive Officer of the Company. Mr. May agreed to defer payment of the amounts
owed him pursuant to the oral agreement due to the Company's lack of funds. The
Company owed Mr. May $479,050 at June 30, 2001. On November 30, 2001, Mr. May
was removed as the Company's Chief Executive Officer. Subsequent to that date,
Mr. May was not entitled to receive any additional compensation from the
Company.
At the request of the Company's Board of Directors, the Compensation Committee
conducted a review of the nature of the past services provided by Mr. May to the
Company to determine whether a portion of such services are more properly
allocable to the Company's unconsolidated Australian affiliate. At the Company's
March 26, 2002 Board of Director's meeting, the Board of Directors unanimously
approved the recommendation of the Compensation Committee to reduce Mr. May's
prior accrued compensation by $394,361 representing services Mr. May performed
for ACT-AU, leaving a balance of $172,183 at September 30, 2002 and June 30,
2002.
NOTE 4. NOTES AND LOAN PAYABLE
(A) NOTE PAYABLE TO ACT-AUSTRALIA
The Company had a non-interest bearing and unsecured note payable to ACT-AU of
$7,500,000 as of April 5, 2000 (See Note 2). The note was payable in three equal
monthly installments commencing on May 31, 2000. Under the terms of the Stock
Purchase Agreement with ACT-AU, the monthly installment payments were extended
indefinitely without interest to allow us to raise the cash portion of the
7
purchase price through a private or public offering of securities. There are no
default or penalty provisions under the terms of the Stock Purchase Agreement.
Upon raising funds pursuant to a private or public offering, the Company was
obligated to repay ACT-AU's note with those funds remaining after deduction for
reserves needed for current operations, working capital and the development and
expansion of its operations and the operations of its subsidiaries, as
determined by the Company's Board of Directors.
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 September 30, 2002, the balance of the Company's obligation to ACT-AU 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 September 30, 2002 and June 30, 2002, the Company owed Global
Communications Technology Pty, an Australian company wholly-owned by Mr. May, a
former officer and director of the Company, $1,055,736, for funds advanced to
the Company to provide working capital. This loan is non-interest bearing and
unsecured, and has no scheduled date for repayment. The Company believes that
the loan is not due upon demand. However, since the actual repayment terms are
not known with any specificity because the terms are not confirmed in a written
document, the loan has been classified as a current liability.
(C) 8% NOTE PAYABLE
On November 14, 2002, the Company settled its litigation with the Needham/DuPont
plaintiffs by agreeing to release the plaintiffs' stock from restriction and
issuing a three year 8% promissory note for $173,494 to reimburse the plaintiffs
for their legal costs. The note is payable in three equal annual installments of
principal and interest commencing December 1, 2003 with additional installments
due on December 1, 2004 and December 1, 2005. In accordance with paragraphs 8(a)
and 35 of FASB 5, the Company has recorded in its September 30, 2002 financial
statements, an expense of $173,494 and the associated liability in connection
with the lawsuit settlement.
NOTE 5. CONVERTIBLE DEBENTURES
(A) 12% SECURED CONVERTIBLE DEBENTURES
On September 30, 1999, the Company entered into secured convertible debentures
purchase agreements with two investors, who were also stockholders of the
Company, whereby the Company sold $500,000 of 12% Secured Convertible Debentures
due April 1, 2000, which were convertible into shares of the Company's Common
Stock. In addition, on September 30, 1999, the Company issued another
convertible debenture to Bank Insinger de Beaufort N.V. in the amount of
$150,000. The debentures were convertible, at the holder's option, into shares
of common stock in whole or in part at any time after the original issue date.
The number of shares of common stock issuable upon a conversion was to be
determined by dividing the outstanding principal amount of the debenture to be
converted, plus all accrued interest, by the conversion price. The conversion
price in effect on any conversion date is 50% of the average of the bid price
during the twenty trading days immediately preceding the applicable conversion
date.
The convertible debentures contained a beneficial conversion feature computed at
its intrinsic value which is the difference between the conversion price and the
fair value on the debenture issuance date of the common stock into which the
debt is convertible, multiplied by the number of shares into which the debt is
convertible at the commitment date. Since the beneficial conversion feature is
to be settled by issuing equity, the amount attributed to the beneficial
conversion feature, of $650,000, was recorded as an interest expense and a
component of equity on the issuance date during the fiscal year ended June 30,
2000.
8
Between October and December 2000, AJW Partners, LLC and New Millennium Capital
Partners II, LLC elected to convert $262,800 of convertible debentures into
860,378 shares of the Company's restricted common stock. In December 2000, Bank
Insinger de Beaufort N.V. converted its $150,000 note, inclusive of accrued and
unpaid interest into 943,167 shares of the Company's restricted common stock.
On April 24, 2002 the Company entered into a Settlement Agreement with the two
note holders, AJW Partners, LLC and New Millennium Capital Partners II, LLC.
Under the terms of the Settlement Agreement, the note holders agreed to dismiss
their lawsuit and convert their remaining unpaid obligation, inclusive of
accrued and unpaid interest, into 8,500,000 shares of the Company's common
stock, payable over a 180-day period. On April 24, 2002 and June 4, 2002, the
Company issued a total of 2,921,450 and 1,328,550 shares of common stock to AJW
Partners, LLC and New Millennium Capital Partners II, LLC, respectively (See
Note 10(B)), for a total debt reduction of $100,343. As of June 30, 2002
$100,407 of 12% Secured Convertible Debentures remained outstanding. On August
26, 2002 and September 24, 2002 the Company issued a total of 2,921,450 and
1,328,550 shares of common stock to AJW Partners, LLC and New Millennium Capital
Partners, LLC, respectively, in full satisfaction of the remaining amount due
under the September 1999 12 % Secured Convertible Debentures.
(B) 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 16 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.
The Company incurred $80,000 of financing costs associated with the 5%
Convertible Debentures that is being amortized over the life of the debentures.
Amortization of $10,000 was expensed for the three months ended September 30,
2002.
As of September 30, 2002 and June 30, 2002, interest of $135,417 and $62,917,
respectively, is accrued on these debentures.
Future maturities of long-term debt as of September 30, 2002 are as follows:
Year Amount
---- ------
2004 $1,057,831
2005 57,831
2006 57,831
------------
Total $1,173,494
============
NOTE 6. STOCKHOLDERS' DEFICIENCY
(A) STOCK ISSUED FOR CONVERTIBLE DEBENTURES
During the three months ended September 30, 2002 the Company issued 4,250,000
shares of stock to the 12% Convertible Debenture holders in full settlement of
the Company's outstanding obligation of $100,407.
9
NOTE 7. RELATED PARTIES
(A) GLOBAL COMMUNICATIONS TECHNOLOGY PTY LTD
Global Communications Technologies Pty Ltd., a related party, is wholly owned by
Mr. May a principal stockholder of the Company.
(B) ADVANCED COMMUNICATIONS TECHNOLOGY (AUSTRALIA) PTY. LTD.
Advanced Communications Technology (Australia) Pty. Ltd., an Australian company,
is 70% owned by Mr. May's wholly owned company, Global Communications Technology
Pty Ltd. Advanced Communications Technologies (Australia) Pty Ltd placed itself
into voluntary administration on or about July 18, 2002.
(C) LEGAL COUNSEL
Certain of the Company's legal counsel are stockholders and directors of the
Company.
NOTE 8. COMMITMENTS AND CONTINGENCIES
(A) LEASE AGREEMENT
The Company is a party to a three-year office lease commencing January 1, 2002
and ending December 31, 2004. The monthly rent is $7,634 inclusive of the cost
of monthly parking. The minimum lease payment for the remaining life of the
lease is $229,020. On August 1, 2002, the Company notified the landlord that it
was relocating its office from California to New York. The Company has engaged
Grubb & Ellis to find a suitable subtenant to assume all or a portion of the
Company's remaining lease obligation.
The Company is a guarantor of Jason Webster's one-year residential lease which
expires January 25, 2003. The Guaranty which was executed in January 2002
requires the Company to reimburse the landlord in the event of a default by
Jason Webster, the former Director of Corporate Communications of the Company.
The rent under the residential lease is $1,600 per month. The Company has not
been required to perform under the Guaranty.
(B) INDEMNIFICATION OF DIRECTORS AND EMPLOYEES IN RE: ADVANCED COMMUNICATIONS
(AUSTRALIA) V. COMPANY DIRECTORS AND EMPLOYEES
On or about May 10, 2002, ACT-AU filed suit in the Superior court of Orange
County, California against the Company, all of its directors, its former
president, and some of its former and present employees, including the Company's
receptionist. On or about May 17, 2002, ACT-AU voluntarily dismissed the suit as
to the Company but not as to the individual defendants.
The complaint sets forth multiple causes of action against the defendants,
including various business torts. The basis of the complaint is that the
defendants improperly interfered with and conspired to ruin plaintiff's business
and conspired to force plaintiff into bankruptcy.
In the opinion of the Company, based on input from legal counsel, the complaint
is deficient and subject to attack on numerous procedural grounds. In the
opinion of the Company, based on its knowledge of the facts and circumstances
underlying the action, the complaint is also substantively deficient and
meritless.
Under the Company's articles of incorporation and applicable Florida law, the
Company is obligated to indemnify and defend its directors and the officer named
as defendants who have been served in the action. The Company might also be
under an obligation to indemnify and defend the other former and present
employees named as defendants who have not been served in the action, if and
when they are served. This determination will be made on a case-by-case basis.
(C) INDEMNIFICATION AGREEMENT BETWEEN THE COMPANY AND JACK HALPERIN RE:
NEEDHAM/DUPONT LAWSUIT
On or about July 2000, the Company entered into an indemnification agreement
with Jack Halperin, Esq., our then SEC counsel, whereby the Company agreed to
indemnify Mr. Halperin for all costs and damages incurred as a result of Mr.
Halperin being named a defendant in the Needham/DuPont lawsuit filed against the
Company, Mr. May and Mr. Halperin in July 2000. Mr. May executed this agreement
on behalf of the Company. The agreement includes a provision that prohibits the
10
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 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.
(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
under an exemption under Rule 144. The plaintiffs have not specified the amount
of damages they are seeking. The Company has filed a counterclaim to rescind all
of the Plaintiffs' stock for lack and/or failure of consideration and other
damages. In October 2001, the court denied summary judgment for the Plaintiffs.
On November 14, 2002, the Company settled the litigation with the Needham/DuPont
plaintiffs by agreeing to release the plaintiffs' stock from restriction and
issuing a three year promissory note for $173,494 to reimburse the plaintiffs
for its legal costs. The plaintiffs agreed to release the Company, it's
officers, and directors, except Mr. May and Mr. Halperin, the Company's former
SEC counsel from any claims for damages. On November 18, 2002 a Notice of
Voluntary Dismissal was filed with the court.
On or about July 2000, the Company entered into an indemnification agreement
with Jack Halperin, Esq., our then SEC counsel, whereby the Company agreed to
indemnify Mr. Halperin for all costs and damages incurred as a result of Mr.
Halperin being named a defendant in the Needham/DuPont lawsuit filed against the
Company, Mr. May and Mr. Halperin in July 2000. Mr. May executed this agreement
on behalf of the Company. The agreement includes a provision that prohibits the
Company from entering into any settlement agreement in the Needham/DuPont
lawsuit unless such settlement agreement provides for the unconditional release
of Mr. Halperin from any claim. On November 14, 2002, the Company settled the
Needham/DuPont lawsuit without obtaining a full release for Mr. Halperin. The
Company's Board of Directors is consulting with its current legal counsel to
determine the validity of the indemnification agreement.
(ii) AJW Partners, LLC and New Millennium Capital Partners II, LLC
On April 24, 2002, the Company entered into a Settlement Agreement with the two
remaining September 1999 Convertible Debenture holders, AJW Partners, LLC and
New Millennium Capital Partners II, LLC. Under the terms of the Settlement
Agreement, the Company is obligated to issue, over a 180 day period, 8,500,000
shares of its common stock in exchange for the dismissal of the lawsuit and in
satisfaction of the remaining outstanding principal and accrued interest. The
Company had the option, until July 23, 2002, to substitute cash in lieu of
shares. On closing, the Company issued 1,460,725 and 664,275 shares of its
common stock to AJW Partners, LLC and New Millennium Capital Partners II, LLC,
respectively. A Stipulation and Order of Discontinuance was filed with and
Ordered by the court on April 25, 2002. On June 4, 2002 the Company issued an
additional 1,460,725 and 664,275 shares of common stock to AJW Partners LLC and
New Millennium Capital Partners, II, LLC.
On both August 26, 2002 and September 24, 2002, the Company issued 1,460,725 and
664,275 shares of common stock to AJW Partners LLC and New Millennium Capital
Partners II, LLC, respectively, in full settlement of the Company's outstanding
obligation on the remaining September 30, 1999 12% Convertible Debenture.
11
(iii) Advanced Communications (Australia) Litigation
On December 6, 2001 and subsequently, the Company received notices from Advanced
Communications (Australia) claiming that the Company was in default under the
April 2000 Stock Purchase Agreement pursuant to which the Company acquired a 20%
stock interest in Advanced Communications (Australia). The notices threatened to
place a lien on or cancel the Company's shares. On January 23, 2002, the Company
filed suit against Advanced Communications (Australia) and Roger May in the
Supreme Court of Melbourne, Victoria, Australia and applied for and obtained a
temporary retraining order prohibiting Advanced Communications (Australia) from
"transferring, dealing with, charging, diminishing, mortgaging, assigning or
disposing of" the Company's stock in Advanced Communications (Australia) pending
a further hearing on the matter. The temporary restraining order was extended on
April 26, 2002 by the court pending a further hearing on the matter.
On May 7, 2002, the Company received a notice from Advanced Communications
(Australia) claiming that the Company had breached its obligations under the
interim License Agreement. In addition, on May 7, 2002, Advanced Communications
(Australia) sent a notice formally terminating the interim License Agreement.
The Company applied to the court for a temporary restraining order prohibiting
Advanced Communications (Australia) from terminating its rights under the
interim License Agreement. On May 8, 2002, the requested temporary restraining
order was issued by the court pending a further hearing on the matter.
On May 27, 2002 and May 28, 2002 the court held full hearings on the Company's
injunction applications and took the matter under submission. On August 23,
2002, the court issued a comprehensive temporary injunction granting all the
relief sought by the Company pending trial on the matters at issue. Among other
things, the injunction prohibited Advanced Communications (Australia), directly
or indirectly, from taking any action in the license territory with respect to
marketing, distributing, selling or otherwise dealing with the SpectruCell
technology (including the military applications thereof), except through and
with the prior written consent of the Company. In addition, the ruling granted
the Company a temporary injunction until trial prohibiting Advanced
Communications (Australia) from "transferring, dealing with, charging,
diminishing, mortgaging, assigning or disposing of" the Company's stock in
Advanced Communications (Australia).
In mid-October 2002, Mr. May and Advanced Communications (Australia) purportedly
terminated the interim License Agreement based on the assertion that the Company
was insolvent and that its insolvency constituted an irreparable event of
default thereunder. The Company made a strategic decision not to challenge the
termination. On October 25, 2002, the Company withdrew from the litigation
against Advanced Communications (Australia) and Mr. May. 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 mid-November 2002, Advanced Communications (Australia) purportedly terminated
the Stock Purchase Agreement based on the assertion that the Company was
insolvent and its insolvency constituted an irreparable event of default
thereunder. 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 referred to above, 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 purported termination of the Company rights is believed not to be
material.. The Company's position, which is subject to opinion by Australian
counsel, is that as a result of Advanced Communications (Australia's) purported
termination of the Stock Purchase Agreement, no further money is owed, and the
Company has no further obligation to Advanced Communications (Australia).
(iv) Star MultiCare Services, Inc.
In Star Multi Care Services, Inc. v. Advanced Communications Technologies, Inc.,
an action filed September 18, 2000 in the Fifteenth Judicial Circuit in the
State of Florida, Star Multi Care Services, Inc. ("Star") sued the Company for
alleged breach of contract and the recovery of a break-up or termination fee in
excess of $50,000 in conjunction with the Company's alleged failure to
consummate a proposed merger with Star in January 2000.
As of December 1, 2002, management has settled, or is in the process of
settling, 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.
12
NOTE 9. GOING CONCERN
The Company's consolidated financial statements for the three months ended
September 30, 2002, have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The Company's net loss of $684,112
for the three months ended September 30, 2002, working capital deficiency of
$2,552,579 and stockholders' deficiency of $5,430,005, raise substantial doubt
about its ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent on the
Company's ability to raise additional capital and implement its business plan.
The Company's business plan is to market, license and distribute SpectruCell
when the product is developed and made available to the commercial and military
market. The Company currently does not perform any activities in connection with
marketing, licensing or distributing SpectruCell.
Based on the Company's loss from operations, working capital deficiency and
stockholders' deficiency, there is doubt regarding its ability to continue as a
going concern. Of the $4,332,693 loss incurred during the fiscal year ended June
30, 2002, $3,229,439 was non-cash, a major portion of which was a non-recurring
charge for the impairment of a long-lived asset. Cash required by operations
amounted to $1,103,254. The Company raised $1,459,206 by issuing stock and debt.
Management is of the opinion that funds for the next fiscal year can be obtained
by issuing additional stock and debt. Management anticipates that future
operations will generate sufficient cash to offset operating expense.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
NOTE 10. SUBSEQUENT EVENTS
On October 10, 2002, the Company's Board of Directors approved the issuance of
100,000 shares each 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.
In November 2002, Advanced Communications entered into a Securities Purchase
Agreement with Cornell Capital Partners, L.P., whereby it agreed to issue and
sell Two Hundred Fifty Thousand Dollars ($250,000) of secured convertible
debentures. These secured convertible debentures have a term of two years and
are convertible into shares of common stock at a price equal to $.001 per share
commencing on December 31, 2002. These secured convertible debentures accrue
interest at a rate 10% per year and are convertible at the holder's option. At
Advanced Communications' option, these debentures may be paid in cash or
redeemed at a 20% premium on or before December 15, 2002 and at a 50% premium
after December 15, 2002 and prior to November 2004. In connection with the
Securities Purchase Agreement, Advanced Communications entered into a Security
Agreement in favor of Cornell Capital Partners, L.P. whereby it granted a
security interest in all of its assets as security for its obligations under the
secured convertible debentures, as well as all other obligations of Advanced
Communications to Cornell Capital Partners, L.P. whether arising before, on or
after the date of the Security Agreement, including, without limitation, those
obligations of Advanced Communications to Cornell Capital Partners, L.P. under
the convertible debentures dated January 2002.
The convertible debentures contain a beneficial conversion feature computed at
its intrinsic value that is the difference between the conversion price and the
fair value on the debenture issuance date of the common stock into which the
debt is convertible, multiplied by the number of shares into which the debt is
convertible at the commitment date. Since the beneficial conversion feature is
to be settled by issuing equity, the amount attributed to the beneficial
conversion feature, of $250,000, was recorded as an interest expense and a
component of equity on the issuance date.
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 unaudited financial statements and notes thereto.
FINANCIAL CONDITION
The Company has limited resources, has incurred cumulative net operating
losses of $30,532,760 and expects to incur additional losses unless the
SpectruCell product, when developed, is made available to us for sale to
military and commercial customers in North and South America. Based on the prior
litigation with Advanced Communications (Australia) and the current situation,
it is unclear if this will ever occur. We currently do not have any marketing or
promotional employees or engineers to market and sell SpectruCell. Moreover,
given the prior litigation between the Company, Mr. May and Advanced
Communications (Australia), we have no reliable information on the status of the
SpectruCell product and when it will be available, if at all, to military users
and be field tested for commercial applications. In the interim, in order for us
to continue operating, we will require additional funding. Assuming that the
SpectruCell product will be developed and made available to us for marketing and
distribution in our exclusive territory, we believe that we will need funds to
re-build our marketing and sales team, hire qualified engineers and pay our
debts which include $1,189,658 of accounts payable and accrued expenses,
$1,135,417 of convertible debentures and other obligations of $1,401,413. Our
plans with regard to these matters include continuing to minimize the company's
infrastructure costs while seeking additional capital through the draw down of
our Equity Line of Credit facility until such time as the SpectruCell product
becomes available to us for marketing and distribution to military and
commercial customers. Although we continue to pursue these plans, there is no
assurance that SpectruCell will ever be completed and become a commercially
viable product, that we will be able to exercise our rights to market and
distribute SpectruCell in North and South America, or that we will be successful
in obtaining sufficient financing on terms acceptable to us, or establish the
marketing team and network necessary to enable us to do so. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. Unless the company is able to activate its Equity Line of
Credit facility within the near future, management will be unable to continue
operating the company. The Company does not have any internal or external
sources of cash other than the Equity Line of Credit facility.
Since April 1999, our efforts have been principally devoted to describing
and marketing the to- be developed SpectruCell technology to U.S. based
customers, building an infrastructure of marketing, technical and administrative
support staff to support our future sales efforts at such time as SpectruCell
became available to the military and commercial marketplaces and raising
capital. Since inception through June 30, 2002, we have sustained cumulative net
losses of $29,848,648, including non-cash charges in the amount of $19,350,000
for the write-off of our investment in Advanced Communications (Australia). In
addition, a non-cash charge of $4,580,762 was incurred in connection with the
issuance of stock for services. Our losses have resulted primarily from
expenditures incurred in connection with costs associated with unsuccessful
acquisitions, office infrastructure costs and general and administrative
expenses. From inception through June 30, 2002, the cost associated with
unsuccessful acquisitions amounted to $961,340 and general and administrative
costs amounted to $4,956,546. From inception we have earned $50,000 in revenues
from the sale of international wholesale telephone minutes and effective July 1,
2001, we terminated this business.
No sales of SpectruCell have been made by Advanced Communications
(Australia) or us, as SpectruCell is currently under development. We are a
marketing company whose primary focus has been the licensing and distribution of
a product for the wireless telecommunications industry known as SpectruCell.
SpectruCell was being developed by Advanced Communications Technologies
(Australia) Pty Ltd ("Advanced Communications (Australia)"), an insolvent
development stage company in which we owned a 20% interest.. We own the North
and South America rights to market and distribute SpectruCell, which we acquired
in our 1999 merger with Advanced Communications (Nevada). The Company's business
plan is to market, license and distribute SpectruCell when the product is
developed and made available to the commercial and military market. The Company
currently does not perform any activities in connection with marketing,
licensing or distributing SpectruCell. The SpectruCell product is still in
development and it is uncertain when its development will be completed and the
product available to the marketplace.
14
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2002 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2001
OVERALL RESULTS OF OPERATIONS
For the three months ended September 30, 2002 we incurred an overall loss
of ($684,112) or ($.006) per share, which was an increase of $227,854 over the
loss of ($456,258) or ($0.005) per share for the comparable period in the prior
year.
REVENUE
No revenues were generated during the three months ended September 30, 2002
or September 30, 2001.
OPERATING EXPENSES
Operating expenses for the three months ended September 30, 2002, were
$438,118 and represent a modest decrease in operating expenses of $452,052 for
the comparative period ended September 30, 2001. Included in operating expenses
for both periods is $104,750 and $101,000 respectively, of depreciation and
amortization attributable to the quarterly depreciation of our office property
and equipment ($1,000) and $103,750 of amortization attributable to deferred
financing and commitment fees for the three months ended September 30, 2002 and
$100,000 of amortization of goodwill associated with our investment in Advanced
Communications (Australia) for the three months ended September 30, 2001.
Consulting fees for the three months ended September 30, 2002 decreased by
$83,228 from the comparative period due to the curtailment of our operations
during the quarter. Professional fees for the three months ended September 30,
2002 increased $161,661 over the comparable three-month period ended September
30, 2001 due to the increase in legal fees associated with the Company's
Australian litigation with Roger May and Advanced Communications (Australia).
OTHER EXPENSE
Interest expense incurred for the three months ended September 30, 2002 was
$72,500 and was attributable to accrued and default interest on the $1 million
5% Convertible Debentures we issued in January 2002. Interest of $4,206 for the
comparative three-month period ended September 30, 2001 was attributable to the
Grassland Capital note payable of $118,530 which was paid in October 2001.
During the three month period ended September 30, 2002, the Company recorded, in
accordance with paragraphs 8(a) and 35 of FASB 5, $173,494 of expense relating
to the settlement of the Needham/DuPont lawsuit. No such expense was incurred
during the comparative three month period ended September 30, 2001.
SIGNIFICANT ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 2 of the Notes to the Financial Statements includes a
summary of the significant accounting policies and methods used in the
preparation of our Financial Statements. The following is a brief discussion of
the more significant accounting policies and methods used by us. In addition,
Financial Reporting Release No. 61 was recently released by the Securities and
Exchange Commission to require all companies to include a discussion to address,
among other things, liquidity, off-balance sheet arrangement, contractual
obligations and commercial commitments.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS 145 rescinds the provisions of SFAS No. 4 that requires companies to
classify certain gains and losses from debt extinguishments as extraordinary
items, eliminates the provisions of SFAS No. 44 regarding transition to the
Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require
that certain lease modifications be treated as sale leaseback transactions. The
provisions of SFAS 145 related to classification of debt extinguishments are
effective for fiscal years beginning after May 15, 2002. Earlier application is
encouraged. The Company does not believe the adoption of this standard will have
a material impact the financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Restructuring
Costs." SFAS 146 applies to costs associated with an exit activity (including
restructuring) or with a disposal of long-lived assets. Those activities can
include eliminating or reducing product lines, terminating employees and
15
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 September 30, 2002, our principal source of liquidity was $415 of cash
and cash equivalents. We have no credit facilities in place nor any source of
internal or external capital other than our Equity Line of Credit facility .On
January 10, 2002, we entered into an Equity Line of Credit Agreement with
Cornell Capital Partners, L.P. Pursuant to the Equity Line of Credit, we may, at
our discretion, periodically sell to Cornell Capital Partners shares of common
stock for a total purchase price of up to $30.0 million. For each share of
common stock purchased under the Equity Line of Credit, Cornell Capital Partners
will pay 91% of the lowest closing bid price of our common stock on the
Over-the-Counter Bulletin Board or other principal market on which our common
stock is traded for the 5 days immediately following the notice date. Cornell
Capital Partners is a private limited partnership whose business operations are
conducted through its general partner, Yorkville Advisors, LLC. Further, Cornell
Capital Partners will retain a fee of 3% of each advance under the Equity Line
of Credit as a fee. In addition, we engaged Westrock Advisors, Inc., a
registered broker-dealer, to advise us in connection with the Equity Line of
Credit. For its services, Westrock Advisors, Inc. received 40,000 shares of our
common stock. The effectiveness of the sale of the shares under the Equity Line
of Credit is conditioned upon us registering the shares of common stock with the
Securities and Exchange Commission. Our Equity Line of Credit is not yet
effective and the Company has not drawn down any funds from this facility.
Except for the Equity Line of Credit, we have no commitments for capital. As of
February 25, 2003, substantially all of our authorized shares of common stock
were outstanding. As a result, we do not have any shares of common stock
available to issue under the Equity Line of Credit, in other capital raising
transactions or otherwise. This means that we will not be able to raise capital
from the sale of common stock, whether under the Equity Line of Credit or
otherwise, unless the majority of our outstanding shares of common stock vote to
approve an increase to the number of shares of common stock that we are
authorized to issue. We plan to seek approval from our shareholders to increase
our authorized common stock, although no assurances can be given that such
approval will be obtained. Our failure to obtain such approval will mean that we
will not be able to raise capital under the Equity Line of Credit or from the
sale of our stock. In addition, we do not anticipate being able to obtain loans
given our financial position. We will not be able to re-commence operations and
may be forced to liquidate if we are unable to obtain such shareholder approval.
We anticipate that our cash needs over the next 12 months consist of
general working capital needs of $600,000, plus the repayment of outstanding
indebtedness of $2,552,994. These obligations include accounts payable and
accrued expenses in the amount of $1,189,658, accrued compensation of $172,183
and an unsecured, non-interest-bearing loan payable to an entity wholly-owned by
Roger May, a former officer and director and shareholder. As of September 30,
2002, we had a working capital deficiency of $2,552,579. As a result of our
working capital shortfalls, we have ceased virtually all business operations,
except for minimal operations in attempting to raise capital and to file reports
with the Securities and Exchange Commission.
Our financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business; and as a consequence, the financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should we be unable to continue as a going concern. We have
experienced net operating losses and negative cash flows since inception and, as
of September 30, 2002, we had an accumulated deficit of $30,532,760. Cash used
in operations for the fiscal years ended June 30, 2002 and 2001 was $1,103,254
and $1,479,999, respectively. At September 30, 2002, our only source of
liquidity was $415 of cash. Such conditions raise substantial doubt that we will
be able to continue as a going concern for a reasonable period of time.
Subsequent to the end of the fiscal year, we have substantially curtailed our
overhead and have relocated our office in California to New York, and terminated
all of our consultants. Unless we are able to raise additional capital through
the issuance of stock or convertible debentures or commence drawing down on our
Equity Line of Credit once our Registration Statement is declared effective by
the SEC, we will be unable to continue our even our minimal operations and may
be required to liquidate. Unless we are able to raise additional capital through
our Equity Line of Credit or from other sources, we will be unable to continue
as a going concern. Considering the depressed state of the private and public
capital markets, we believe that our only reasonable chance of raising
16
additional capital is through our Equity Line of Credit with Cornell Capital
Partners, L.P., if our shareholders approve an increase to our authorized common
stock and our Registration Statement is declared effective by the SEC.
On November 22, 2002, we entered into a Securities Purchase Agreement with
Cornell Capital Partners, LP, whereby we agreed to issue and sell $250,000 of
10% Secured Convertible Debentures. These Secured Convertible Debentures have a
term of two years and are convertible into shares of common stock at a price
equal to $.001 per share commencing on December 31, 2002. $125,000 of the 10%
Secured Convertible Debentures was issued in exchange for accrued unpaid
interest (including default interest) on the Company's January 2002 5%
$1,000,000 Convertible Debentures with $125,000 issued in exchange for cash of
which the Company will net $100,000 after fees and expenses. The Company will
use the funds from the 10% Secured Convertible Debentures to pay a portion of
its legal and accounting professionals outstanding fees thereby enabling the
Company to continue its pursuit of seeking its Equity Line of Credit facility to
be declared effective by the SEC.
The Company has total liabilities of $5,517,654 as of September 30, 2002.
Included in this total are contractual obligations of $4,289,735. These
contractual obligations, along with the dates on which such payments are due,
are described below:
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------------------
1 2-3 4-5 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR OR LESS YEARS YEARS YEARS
- ----------------------- ------------- --------------- ----------- ------------- -----------
Notes Payable $ 1,791,166 * $ -- $ -- $ 1,791,166 * $ --
Convertible Debentures 1,308,911 57,813 1,251,079 -- --
Accounts Payable and Accrued Expenses 1,189,658 1,189,658 -- -- --
------------- --------------- ----------- ------------- -----------
Total Contractual Obligations $ 4,289,735 $ 1,247,471 $ 1,251,079 $ 1,791,166 * $ --
============= =============== =========== ============= ===========
* 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.
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
17
obligations to Cornell Capital Partners, L.P. arising from the Securities
Purchase Agreement dated November 2002, and the related documents of even date
therewith, Cornell Capital Partners, L.P. agrees to release any and all security
interests it may then maintain on SpectruCell and the related License and
Distribution Agreement dated July 5, 2000, between the Advanced Communications
and Advanced Communications Technologies (Australia) Pty., Ltd. The issuance of
the secured convertible debentures contains a beneficial conversion feature
computed at its intrinsic value that is the difference between the conversion
price and the fair value on the debenture issuance date of the common stock into
which the debt is convertible, multiplied by the number of shares into which the
debt is convertible at the commitment date. The convertible debentures contain a
beneficial conversion feature computed at its intrinsic value that is the
difference between the conversion price and the fair value on the debenture
issuance date of the common stock into which the debt is convertible, multiplied
by the number of shares into which the debt is convertible at the commitment
date. Since the beneficial conversion feature is to be settled by issuing
equity, the amount attributed to the beneficial conversion feature, of $250,000,
was recorded as an interest expense and a component of equity on the issuance
date.
On January 10, 2002, we executed various financing agreements with Cornell
Capital Partners, LP whereby Cornell and certain other investors purchased from
us $1 million of two-year Convertible Debentures and Cornell entered into a $30
million Equity Line of Credit. Pursuant to the Convertible Debenture financing,
we received $564,000 net of financing and closing costs and the repayment of the
$325,000 ninety-day note. The debentures are convertible into shares of common
stock at a price equal to equal to either (a) an amount equal to one hundred
twenty percent (120%) of the closing bid price of the common stock as of the
closing date or $0.40, whichever is higher, or (b) an amount equal to eighty
percent (80%) of the lowest closing bid price of the common stock for the five
trading days immediately preceding the conversion date. If such conversion had
taken place at $0.008 (i.e., 80% of the recent price of $0.01), then the holders
of the convertible debentures would have received 125,000,000 shares of common
stock leaving no stock available to be issued under the Equity Line of Credit.
These convertible debentures accrue interest at a rate 5% per year and are
convertible at the holder's option. These convertible debentures have a term of
two years. At our option, these debentures may be paid in cash or redeemed at a
20% premium prior to January 2004. The issuance of shares upon conversion of the
Debentures or pursuant to the Equity Line of Credit will have a dilutive impact
on our existing stockholders. As a result, our net income per share could
decrease in future periods, and the market price of our common stock could
decline. In addition, the lower our stock price is the more shares of common
stock we will have to issue upon conversion of the debentures or under the
Equity Line of Credit. If our stock price were lower, then our existing
stockholders would experience greater dilution. The convertible debentures
contain a beneficial conversion feature computed at its intrinsic value that is
the difference between the conversion price and the fair value on the debenture
issuance date of the common stock into which the debt is convertible, multiplied
by the number of shares into which the debt is convertible at the commitment
date. Since the beneficial conversion feature is to be settled by issuing
equity, the amount attributed to the beneficial conversion feature, of $250,000,
was recorded as an interest expense for the fiscal year ended June 30, 2002 and
a component of equity on the issuance date.
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net cash used in operating activities was $10,678 and $102,422 for the
three months ended September 30, 2002 and 2001, respectively. The use of cash by
operating activities was principally the result of net losses during both
reporting periods together with a corresponding increase/(decrease) in accounts
payable and accrued interest for the three months ended September 30, 2002 and
2001, respectively.
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
No net cash was provided by or used in investing activities for the three
months ended September 30, 2002 or 2001.
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
No net cash was provided by financing activities for the three months ended
September 30, 2002. Net cash provided by financing activities for the three
months ended September 30, 2001 was $150,200 and was attributable to $125,000 of
proceeds received from the sale of equity securities pursuant to a private
placement that commenced December 2000 and ended August 2001 and $25,000 of loan
proceeds received from Global Communications Technology Pty Ltd, an entity
wholly owned by Roger May, a former officer and director of the company.
(D) ACQUISITIONS
On September 7, 2001 we entered into a Letter of Intent with Advanced
Communications Technologies (Australia) to acquire all of the intellectual
property, including the worldwide rights (other than rights to territories that
we currently possess) for the licensing and distribution of the SpectruCell
18
product (the "IP Rights"). The Letter of Intent which was executed by Messrs.
Roberts and May on behalf of Advanced Communications (Australia) and us,
respectively, includes various conditions precedent to the transfer of the IP
Rights including, but not limited to, the raising by us of $80 million in the US
capital markets, appropriate regulatory approvals, approval by both our Board of
Directors and shareholders, appropriate due diligence and definitive agreements.
During the period from January 2002 to present, we, along with our Australian
financial and legal advisors, have attempted to negotiate with Mr. May in good
faith to enter into a Non-Disclosure Agreement to allow us to commence our due
diligence on the financial, legal and technological affairs of Advanced
Communications (Australia). In addition, during this period we filed two
lawsuits against Mr. May and Advanced Communications (Australia) for breach of
our April 5, 2000 Stock Purchase Agreement and July 5, 2000 Interim License and
Distribution Agreement. Consequently, we have been unable to execute any
Non-Disclosure Agreement nor commence any active or meaningful negotiations with
Mr. May for the acquisition of the SpectruCell technology pursuant to the terms
of the September 7, 2001 Letter of Intent. On September 7, 2002, the September
7, 2001 Letter of Intent that the Company entered into with Advanced
Communications (Australia) to acquire all of the intellectual property,
including the worldwide rights (other than the rights to territories that the
Company currently possess) for the licensing and distribution of the SpectruCell
product, expired.
Due to the litigation with Mr. May and Advanced Communications (Australia),
the restrictions on foreign ownership and Advanced Communications (Australia)
voluntary administration described above, the Company will no longer pursue the
acquisition of Advanced Communications (Australia)'s intellectual property.
(E) COMPANY QUARTERLY STOCK PRICE
PRICE RANGE OF COMMON STOCK
Our common stock is currently traded on the Over-the-Counter Bulletin Board
("OTCBB") under the symbol "ADVC". As of December 5, 2002, there were
118,852,622 common shares outstanding and approximately 414 holders of record.
We believe that the number of beneficial owners is substantially greater than
the number of record holders because a large portion of our common stock is held
in "broker" or "street names".
The following table sets forth, for the fiscal periods indicated, the bid
price range of our common stock:
HIGH BID LOW BID
-------- --------
2001
Quarter Ended September 30, 2000 $1.25 $ .56
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
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.
19
ITEM 3. CONTROLS AND PROCEDURES
Based on their evaluation of the effectiveness of our disclosure controls
and procedures within 90 days of the filing date of this report, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures are effective for gathering, analyzing and disclosing
the information we are required to disclose in our reports filed under the
Securities and Exchange Act of 1934. There have not been significant changes in
our controls or in other factors that could significantly affect these controls
subsequent to the evaluation date.
20
PART II
OTHER INFORMATION
The statements in this quarterly report, Form 10-QSB, that are not
historical constitute "forward-looking statements". Such forward-looking
statements involve risks and uncertainties that may cause the actual results,
performance or achievements of the Company and its subsidiary to be materially
different from any future results, performances or achievements, express or
implied by such forward-looking statements. These forward-looking statements are
identified by their use of such terms and phrases as "expects", "intends",
"goals", "estimates", "projects", "plans", "anticipates", "should", "future",
"believes", and "scheduled".
ITEM 1. LEGAL PROCEEDINGS
(i) Nancy J. Needham and Edmund R. Dupont Lawsuit
In Nancy J. Needham; Edmund R. DuPont et al v. Advanced Communications
Technologies, Inc., et al, an action filed July 2000 in the Fifteenth Judicial
Circuit in the State of Florida, two former officers and directors of the
Company are seeking damages and injunctive relief arising out of the Company's
refusal to provide legal opinion letters and to take other actions necessary to
allow the former officers to convert restricted stock into unrestricted stock
under an exemption under Rule 144. The plaintiffs have not specified the amount
of damages they are seeking. The Company has filed a counterclaim to rescind all
of the Plaintiffs' stock for lack and/or failure of consideration and other
damages. In October 2001, the court denied summary judgment for the Plaintiffs.
On November 14, 2002, the Company settled the litigation with the Needham/DuPont
plaintiffs by agreeing to release the plaintiffs' stock from restriction and
issuing a three year promissory note for $173,494 to reimburse the plaintiffs
for its legal costs. The plaintiffs agreed to release the Company, it's
officers, and directors, except Mr. May and Mr. Halperin, the Company's former
SEC counsel from any claims for damages. On November 18, 2002 a Notice of
Voluntary Dismissal was filed with the court.
On or about July 2000, the Company entered into an indemnification
agreement with Jack Halperin, Esq., our then SEC counsel, whereby the Company
agreed to indemnify Mr. Halperin for all costs and damages incurred as a result
of Mr. Halperin being named a defendant in the Needham/DuPont lawsuit filed
against the Company, Mr. May and Mr. Halperin in July 2000. Mr. May executed
this agreement on behalf of the Company. The agreement includes a provision that
prohibits the Company from entering into any settlement agreement in the
Needham/DuPont lawsuit unless such settlement agreement provides for the
unconditional release of Mr. Halperin from any claim. On November 14, 2002, the
Company settled the Needham/DuPont lawsuit without obtaining a full release for
Mr. Halperin. The Company's Board of Directors is consulting with its current
legal counsel to determine the validity of the indemnification agreement.
(ii) AJW Partners, LLC and New Millennium Capital Partners II, LLC
On April 24, 2002, the Company entered into a Settlement Agreement with the
two remaining September 1999 Convertible Debenture holders, AJW Partners, LLC
and New Millennium Capital Partners II, LLC. Under the terms of the Settlement
Agreement, the Company is obligated to issue, over a 180 day period, 8,500,000
shares of its common stock in exchange for the dismissal of the lawsuit and in
satisfaction of the remaining outstanding principal and accrued interest. The
Company had the option, until July 23, 2002, to substitute cash in lieu of
shares. On closing, the Company issued 1,460,725 and 664,275 shares of its
common stock to AJW Partners, LLC and New Millennium Capital Partners II, LLC,
respectively. A Stipulation and Order of Discontinuance was filed with and
Ordered by the court on April 25, 2002. On June 4, 2002 the Company issued an
additional 1,460,725 and 664,275 shares of common stock to AJW Partners LLC and
New Millennium Capital Partners, II, LLC.
On both August 26, 2002 and September 24, 2002, the Company issued
1,460,725 and 664,275 shares of common stock to AJW Partners LLC and New
Millennium Capital Partners II, LLC, respectively, in full settlement of the
Company's outstanding obligation on the remaining September 30, 1999 12%
Convertible Debenture.
(iii) Advanced Communications (Australia) Litigation
On December 6, 2001 and subsequently, the Company received notices from
Advanced Communications (Australia) claiming that the Company was in default
under the April 2000 Stock Purchase Agreement pursuant to which the Company
acquired a 20% stock interest in Advanced Communications (Australia). The
21
notices threatened to place a lien on or cancel the Company's shares. On January
23, 2002, the Company filed suit against Advanced Communications (Australia) and
Roger May in the Supreme Court of Melbourne, Victoria, Australia and applied for
and obtained a temporary retraining order prohibiting Advanced Communications
(Australia) from "transferring, dealing with, charging, diminishing, mortgaging,
assigning or disposing of" the Company's stock in Advanced Communications
(Australia) pending a further hearing on the matter. The temporary restraining
order was extended on April 26, 2002 by the court pending a further hearing on
the matter.
On May 7, 2002, the Company received a notice from Advanced Communications
(Australia) claiming that the Company had breached its obligations under the
interim License Agreement. In addition, on May 7, 2002, Advanced Communications
(Australia) sent a notice formally terminating the interim License Agreement.
The Company applied to the court for a temporary restraining order prohibiting
Advanced Communications (Australia) from terminating its rights under the
interim License Agreement. On May 8, 2002, the requested temporary restraining
order was issued by the court pending a further hearing on the matter.
On May 27, 2002 and May 28, 2002 the court held full hearings on the
Company's injunction applications and took the matter under submission. On
August 23, 2002, the court issued a comprehensive temporary injunction granting
all the relief sought by the Company pending trial on the matters at issue.
Among other things, the injunction prohibited Advanced Communications
(Australia), directly or indirectly, from taking any action in the license
territory with respect to marketing, distributing, selling or otherwise dealing
with the SpectruCell technology (including the military applications thereof),
except through and with the prior written consent of the Company. In addition,
the ruling granted the Company a temporary injunction until trial prohibiting
Advanced Communications (Australia) from "transferring, dealing with, charging,
diminishing, mortgaging, assigning or disposing of" the Company's stock in
Advanced Communications (Australia).
In mid-October 2002, Mr. May and Advanced Communications (Australia)
purportedly terminated the interim License Agreement based on the assertion that
the Company was insolvent and that its insolvency constituted an irreparable
event of default thereunder. The Company made a strategic decision not to
challenge the termination. On October 25, 2002, the Company withdrew from the
litigation against Advanced Communications (Australia) and Mr. May. 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 mid-November 2002, Advanced Communications (Australia) purportedly
terminated the Stock Purchase Agreement based on the assertion that the Company
was insolvent and its insolvency constituted an irreparable event of default
thereunder. 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 referred to above, 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 purported termination of the Company rights is believed not to be
material. The Company's position, which is subject to opinion by Australian
counsel, is that as a result of Advanced Communications (Australia's) purported
termination of the Stock Purchase Agreement, no further money is owed, and the
Company has no further obligation to Advanced Communications (Australia).
(iv) Star MultiCare Services, Inc.
In Star Multi Care Services, Inc. v. Advanced Communications Technologies,
Inc., an action filed September 18, 2000 in the Fifteenth Judicial Circuit in
the State of Florida, Star Multi Care Services, Inc. ("Star") sued the Company
for alleged breach of contract and the recovery of a break-up or termination fee
in excess of $50,000 in conjunction with the Company's alleged failure to
consummate a proposed merger with Star in January 2000.
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.
22
The complaint sets forth multiple causes of action against the defendants,
including various business torts. The basis of the complaint is that the
defendants improperly interfered with and conspired to ruin plaintiff's business
and conspired to force plaintiff into bankruptcy.
In the opinion of the Company, based on input from legal counsel, the
complaint is deficient and subject to attack on numerous procedural grounds. In
the opinion of the Company, based on its knowledge of the facts and
circumstances underlying the action, the complaint is also substantively
deficient and meritless.
Under the Company's articles of incorporation and applicable Florida law,
the Company is obligated to indemnify and defend its directors and the officer
named as defendants who have been served in the action. The Company might also
be under an obligation to indemnify and defend the other former and present
employees named as defendants who have not been served in the action, if and
when they are served. This determination will be made on a case-by-case basis.
INDEMNIFICATION AGREEMENT BETWEEN THE COMPANY AND JACK HALPERIN RE:
NEEDHAM/DUPONT LAWSUIT
On or about July 2000, the Company entered into an indemnification
agreement with Jack Halperin, Esq., our then SEC counsel, whereby the Company
agreed to indemnify Mr. Halperin for all costs and damages incurred as a result
of Mr. Halperin being named a defendant in the Needham/DuPont lawsuit filed
against the Company, Mr. May and Mr. Halperin in July 2000. Mr. May executed
this agreement on behalf of the Company. The agreement includes a provision that
prohibits the Company from entering into any settlement agreement in the
Needham/DuPont lawsuit unless such settlement agreement provides for the
unconditional release of Mr. Halperin from any claim. On November 14, 2002, the
Company settled the Needham/DuPont lawsuit without obtaining a full release for
Mr. Halperin. The Company's Board of Directors is consulting with its current
legal counsel to determine the validity of the indemnification agreement.
PENDING CLAIM BY ADVANCED COMMUNICATIONS (AUSTRALIA) FOR COSTS OF AUSTRALIA
LITIGATION AND FOR DAMAGES
Following our withdrawal from the Australia litigation against Mr. May and
Advanced Communications (Australia), Advanced Communications (Australia) applied
to the court for an order awarding its costs of the litigation against the
Company. Advanced Communications (Australia) has indicated that its costs of
litigation were approximately 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
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 to Messrs. Danson, Prouty, Lichtman, Roche and Finch,
having a value of $1,000 each in partial satisfaction of unpaid prior legal and
consulting fees. These shares were issued on December 5, 2002.
On both August 26, 2002 and September 24, 2002, we issued a total of
2,921,450 and 1,328,550 shares of common stock to AJW Partners LLC and New
Millennium Capital Partners II, LLC, respectively, in full satisfaction of the
Company's outstanding obligation on the remaining September 30, 1999 12%
Convertible Debenture.
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 ON SENIOR SECURITIES
As of December 31, 2001, $200,750 of Secured Convertible Debentures were
outstanding. The Company is in default of its remaining obligations to AJW
Partners, LLC and New Millennium Capital Partners II, LLC, the two noteholders,
and on April 24, 2002 entered into a Settlement Agreement. Under the terms of
the Settlement Agreement, the Company is obligated to issue, over a 180 day
period, 8,500,000 shares of its common stock in exchange for the dismissal of
the lawsuit and in satisfaction of the remaining outstanding principal and
accrued interest. On closing, the Company issued 1,460,725 and 664,275 shares of
its common stock to AJW Partners, LLC and New Millennium Capital Partners II,
LLC, respectively. A Stipulation and Order of Discontinuance was filed with and
Ordered by the court on April 25, 2002. On June 4, 2002 the Company issued an
additional 1,460,725 and 664,275 shares of common stock to AJW Partners LLC and
New Millennium Capital Partners, II, LLC. On both August 26, 2002 and September
24, 2002, the Company issued 1,460,725 and 664,275 shares of common stock to AJW
Partners LLC and New Millennium Capital Partners II, LLC, respectively, in full
settlement of the Company's outstanding obligation on the remaining September
30, 1999 12% Convertible Debenture.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
1.1 Exchange Agreement between MRC Legal Services Incorporated by reference to Exhibit 1.1 to
Corporation and Advanced Communications Technologies, Company's Form 8-K filed on February 4, 2000
Inc. dated as of January 31, 2000
2.1 Articles of Incorporation of Media Forum Incorporated by reference to Exhibit 2.1 to
International, Inc. the Company's Form S-8 filed on February 9,
2000
2.2 Second Amendment to Articles of Incorporation of Incorporated by reference to Exhibit 2.2 to
Telenetworx, Inc. the Company's Form S-8 filed on February 9,
2000
2.3 Third Amendment to Articles of Incorporation of Media Incorporated by reference to Exhibit 2.3 to
Forum International, Inc. the Company's Form S-8 filed on February 9,
2000
2.4 Bylaws of the Company Incorporated by reference to Exhibit 2.4 to
the Company's Form S-8 filed on February 9,
2000
2.5 Articles of Incorporation as currently in effect for Incorporated by reference to Exhibit 3.1 to
the Company Form S-1 Registration Statement filed on
August 14, 2001
2.6 Bylaws, as currently in effect Incorporated by reference to Exhibit 3.2 to
Form S-1 Registration Statement filed on
August 14, 2001
2.7 Fourth Amendment to Articles of Incorporation Incorporated by reference to Exhibit 2.7 to
the Form SB-2 filed with the SEC on March 5,
2002
24
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
10.1 Lease Agreement dated as of November 27, 2001 between Incorporated by reference to Exhibit 10.1 to
the Company and Continental Development, L. P. II the Form SB-2 filed with the SEC on March 5,
2002
10.2 Stock Purchase Agreement between Advanced Incorporated by reference to Exhibit 10.2 to
Communications Technologies, Inc. and Advanced the Form S-1 Registration Statement filed on
Communications Technologies (Australia) Pty Ltd. August 14, 2001
10.3 Agreement dated June 27, 2000, between Ladenburg Incorporated by reference to Exhibit 10.3 to
Thalmann & Co. and the Company the Company's Form S-1 Registration Statement
filed on August 14, 2001
10.4 Common Stock Purchase Agreement dated December 14, Incorporated by reference to Exhibit 10.4 to
2000, between the Company and Wanquay Ltd. the Company's Form S-1 Registration Statement
filed on August 14, 2001
10.5 Registration Rights Agreement dated December 14, 2000, Incorporated by reference to Exhibit 10.5 to
between the Company and Wanquay Ltd. the Company's Form S-1 Registration Statement
filed on August 14, 2001
10.6 Escrow Agreement dated December 14, 2000, among the Incorporated by reference to Exhibit 10.6 to
Company, Wanquay Ltd. and Epstein Becker & Green the Company's Form S-1 Registration Statement
filed on August 14, 2001
10.7 Consulting Agreement with M. Richard Cutler dated Incorporated by reference to Exhibit 10.1 to
January 31, 2000 the Company's Form S-8 filed on February 9,
2000
10.8 Stock Purchase Agreement dated April 5, 2000, between Incorporated by reference to Exhibit 10.5 to
Advanced Communications Technologies, Inc. and the Company's Form 10-QSB filed on May 24, 2000
Advanced Communications Technologies Pty Ltd.
10.9 Securities Purchase Agreement dated January 10, 2002, Incorporated by referenced to Exhibit 10.9 to
by and among Advanced Communications Technologies, the Company's Form 10-QSB filed on February
Inc. and Buyers 12, 2002
10.10 Investor Registration Rights Agreement dated January Incorporated by reference to Exhibit 10.10 to
10, 2002, by and among Advanced Communications the Company's Form 10-QSB filed on February
Technologies, Inc. and Investors 12, 2002
10.11 Transfer Agent Instructions Incorporated by reference to Exhibit 10.11 to
the Company's Form 10-QSB filed on February
12, 2002
10.12 Escrow Agreement dated January 10, 2002, by and among Incorporated by reference to Exhibit 10.12 to
Advanced Communications Technologies, Inc., Buyers and the Company's Form 10-QSB filed on February
First Union National Bank 12, 2002
10.13 Equity Line of Credit Agreement dated January 10, Incorporated by reference to Exhibit 10.13 to
2002, by and between Cornell Capital Partners, LP and the Company's Form 10-QSB filed on February
Advanced Communications Technologies, Inc. 12, 2002
10.14 Registration Rights Agreement dated January 10, 2002, Incorporated by reference to Exhibit 10.14 to
by and between Advanced Communications Technologies, the Company's Form 10-QSB filed on February
Inc. 12, 2002
25
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
10.15 Placement Agent Agreement dated January 10, 2002, by Incorporated by reference to Exhibit 10.15 to
and between Advanced Communications Technologies, Inc. the Company's Form 10-QSB filed on February
and Westrock Advisors, Inc. 12, 2002
10.16 Escrow Agreement dated January 10, 2002, by and among Incorporated by reference to Exhibit 10.16 to
Advanced Communications Technologies, Inc., Cornell the Company's Form 10-QSB filed on February
Capital Partners, LP, Butler Gonzalez LLP and First 12, 2002
Union National Bank
10.17 License and Distribution Agreement dated as of July 5, Incorporated by reference to Exhibit 10.17 to
2000, between Advanced Communications Technologies, the Company's Amendment to Form 10-KSB filed
Inc. and Advanced Communications Technologies on May 23, 2002
(Australia) Pty. Ltd.
10.18 Letter of Intent dated September 7, 2001 re: Purchase Incorporated by reference to Exhibit 10.18 to
of Advanced Communications (Australia) Amendment No. 1 to the Company's Form 10-QSB
for the quarter ended December 31, 2001
10.19 Securities Purchase Agreement, dated November 2002, by Incorporated by reference to Exhibit 10.19 to
and among Advanced Communications and Buyers the Company's Form 10-KSB for the year ended
June 30, 2002 filed on December 6, 2002
10.20 Investor Registration Rights Agreement, dated November Incorporated by reference to Exhibit 10.20 to
2002, by and among Advanced Communications and the Company's Form 10-KSB for the year ended
Investors June 30, 2002 filed on December 6, 2002
10.21 Secured Convertible Debenture Incorporated by reference to Exhibit 10.21 to
the Company's Form 10-KSB for the year ended
June 30, 2002 filed on December 6, 2002
10.22 Escrow Agreement, dated November 2002, by and among Incorporated by reference to Exhibit 10.22 to
Advanced Communications, Buyers, and Wachovia Bank, the Company's Form 10-KSB for the year ended
N.A. June 30, 2002 filed on December 6, 2002
10.23 Irrevocable Transfer Agent Instructions, dated Incorporated by reference to Exhibit 10.23 to
November 2002 the Company's Form 10-KSB for the year ended
June 30, 2002 filed on December 6, 2002
10.24 Security Agreement, dated November 2002, by and among Incorporated by reference to Exhibit 10.24 to
Advanced Communications and Buyers the Company's Form 10-KSB for the year ended
June 30, 2002 filed on December 6, 2002
10.25 Middletons Lawyers Letter, dated November 11, 2002, Incorporated by reference to Exhibit 10.25 to
terminating the April 2000 Stock Purchase Agreement the Company's Form 10-KSB for the year ended
between Advanced Communications Technologies, Inc. and June 30, 2002 filed on December 6, 2002
Advanced Communications (Australia)
26
(B) REPORTS ON FORM 8-K.
(ii) Reports on Form 8-K:
On July 23, 2002, the Company filed a Form 8-K disclosing an update to its
pending litigation with Advanced Communications (Australia) and its voluntary
administration.
On September 4, 2002, the Company filed a Form 8-K disclosing an update to
its litigation with Advanced Communications (Australia).
On November 6, 2002, the Company filed a Form 8-K disclosing an update on
the status of its litigation against Advanced Communication (Australia) and the
termination of the License and Distribution Agreement.
27
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: May 2, 2003
28
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 Amendment No. 2 to the Quarterly Report of Advanced
Communications Technologies, Inc. (the "Company") on Form 10-QSB/A for the
quarterly period ended September 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), each of the undersigned,
in the capacities and on the dates indicated below, hereby certifies pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operation of the Company.
Date: May 2, 2003 /s/ Wayne I. Danson
-------------------------------------
Wayne I. Danson
President and Chief Financial Officer
1
OFFICER'S CERTIFICATE
PURSUANT TO SECTION 302
I, Wayne I. Danson, President of Advanced Communications Technologies,
Inc., certify that:
1. I have reviewed this amended quarterly report on Form 10-QSB/A of
September 30, 2002;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 2, 2003 By: /s/ Wayne I. Danson
-------------------------------------
President and Chief Financial Officer
1