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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
(check one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Three Months Ended September 30, 2004
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT OF 1934
Commission File Number 000-30486
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
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(Exact name of small business issuer as specified in its charter)
Florida
---------------------------------
(State or other jurisdiction
of incorporation or organization)
65-0738251
---------------------------------
(IRS Employer Identification No.)
420 Lexington Avenue, New York, NY 10170
----------------------------------------
(Address of principal executive offices)
(646)-227-1600
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(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 3 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes|X| No |_|
As of November 15, 2004, there were 2,004,247,731 shares of the registrant's no
par value common stock issued and outstanding
Transmittal Small Business Disclosure Format (check one):
Yes |_| No |X|
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ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
INDEX TO FORM 10-QSB
Part I-Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets As Of September 30, 2004
(Unaudited) And June 30, 2004
Condensed Consolidated Statements Of Operations For The Three Months
Ended September 30, 2004 And 2003 (Unaudited)
Condensed Consolidated Statement Of Stockholders' Equity For The
Three Months Ended September 30, 2004 (Unaudited)
Condensed Consolidated Statements Of Cash Flows For The Three Months
Ended September 30, 2004 And 2003 (Unaudited)
Notes To Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Item 3. Controls And Procedures
Part II-Other Information
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities And Use Of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission Of Matters To A Vote Of Security Holders
Item 5. Other Information
Item 6. Exhibits And Reports On Form 8-K
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in the "Management's Discussion and Analysis of Financial
Conditions and Results of Operation" and elsewhere in this quarterly report
constitute "forward-looking statements" (within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Act")) relating to us and our
business, which represent our current expectations or beliefs including, but not
limited to, statements concerning our operations, performance, financial
condition and growth. The Act may, in certain circumstances, limit our liability
in any lawsuit based on forward-looking statements we have made. All statements,
other than statements of historical facts, included in this quarterly report
that address activities, events or developments that we expect or anticipate
will or may occur in the future, including such matters as our projections,
future capital expenditures, business strategy, competitive strengths, goals,
expansion, market and industry developments and the growth of our businesses and
operations are forward looking statements. Without limiting the generality of
the foregoing, words such as "may," "anticipation," "intend," "could,"
"estimate," or "continue" or the negative or other comparable terminology are
intended to identify forward-looking statements. These statements by their
nature involve substantial risks and uncertainties, such as credit losses,
dependence on management and key personnel, variability of quarterly results,
our ability to continue our growth strategy and competition, certain of which
are beyond our control. Any or all of our forward-looking statements may turn
out to be wrong. They may be affected by inaccurate assumptions that we might
make or by known or unknown risks or uncertainties. Should one or more of these
risks or uncertainties materialize or should the underlying assumptions prove
incorrect, actual outcomes and results could differ materially from those
indicated in the forward-looking statements.
Because of the risks and uncertainties associated with forward-looking
statements, you should not place undo reliance on them. Further, any
forward-looking statement speaks only as of the date on which it is made, and we
undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement is made or to
reflect the occurrence of unanticipated events.
i
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2004 June 30, 2004
(Unaudited)
------------ ------------
ASSETS
Current Assets
Cash $ 1,111,289 $ 1,193,170
Accounts Receivable (less allowance for doubtful accounts of $12,219 and
$8,914) 313,955 400,747
Inventory 342,701 350,963
Other Receivables and Prepaid Expenses 49,483 81,863
------------ ------------
Total Current Assets 1,817,428 2,026,743
------------ ------------
Property and equipment (net of accumulated depreciation of $4,328 and
$1,082) 166,843 165,434
------------ ------------
Other Assets
Investment in Partnership 2,860,232 2,774,999
Investment in marketable securities 91,618 --
Licensed Intangibles and
rights 400,000 400,000
Excess of Purchase Price over Fair Market Value of Assets Acquired 2,611,055 2,611,055
Other Deferred Costs 38,834 18,108
------------ ------------
Total Other Assets 6,001,739 5,804,162
------------ ------------
TOTAL ASSETS $ 7,986,010 $ 7,996,339
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Accounts payable and accrued expenses $ 373,919 $ 194,540
Accrued compensation 127,751 152,343
Notes and Loans Payable-Current 3,308,568 3,488,567
10% Secured Convertible Debentures, net of discount of $13,539 and
$36,977 173,961 150,523
Accrued Interest payable 63,234 46,343
Warranty Reserve 119,597 120,977
Other Liabilities -- 71,117
------------ ------------
Total Current Liabilities 4,167,030 4,224,410
------------ ------------
Long-Term Liabilities
Notes and Loans Payable-Non Current 2,347,467 2,347,467
------------ ------------
Total Long Term Liabilities 2,347,467 2,347,467
------------ ------------
TOTAL LIABILITIES 6,514,496 6,571,877
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value, 25,000 shares authorized: Series A
Convertible Preferred stock, $.01 par value, 4,200 shares
issued 42 42
Series B Convertible Preferred stock, $.01 par value, 300 shares issued 3 3
Common stock, no par value, 5,000,000,000 shares authorized, ,004,247,731 and
21,994,365,845 shares issued and outstanding, respectively 28,839,381 28,745,253
Additional Paid in Capital 4,556,455 4,056,455
Deferred commitment and equity financing fees, net of accumulated
amortization (125,000) (135,432)
Deferred compensation, net of amortization of $62,500 (437,500) --
Accumulated deficit (31,361,867) (31,241,859)
------------ ------------
Total Stockholders' Equity 1,471,514 1,424,462
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,986,010 $ 7,996,339
============ ============
See accompany notes to condensed consolidated financial statements
1
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended September 30,
2004 2003
----------------------------------
REVENUE $ 1,825,184 $ --
COST OF SALES 1,151,428 --
--------------- ---------------
GROSS PROFIT $ 673,756 $ --
--------------- ---------------
OPERATING EXPENSES
Depreciation and amortization 70,306 106,875
Professional and consulting fees 212,159 69,020
Other selling, general and administrative expenses 687,266 38,023
--------------- ---------------
TOTAL OPERATING EXPENSES 969,731 213,918
--------------- ---------------
Loss From Operations (295,975) (213,918)
--------------- ---------------
OTHER INCOME (EXPENSES)
Forgiveness of debt -- 6,853
Distributable share of partnership income 215,233 --
Interest (expense), (39,266) (63,277)
net --
TOTAL OTHER INCOME (EXPENSE) 175,967 (56,424)
--------------- ---------------
NET LOSS $ (120,008) $ (270,342)
=============== ===============
Net loss per share-basic and dilutive $ (0.00) $ (0.001)
=============== ===============
Weighted average number of shares
outstanding during the period-basic and dilutive 1,996,621,493 210,796,603
=============== ===============
See accompany notes to condensed consolidated financial statements
2
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
(UNAUDITED)
COMMON STOCK PREFERRED STOCK
--------------------------------------------------------------------- ADDITIONAL PAID IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
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BALANCE AT JUNE 30, 2004 1,994,365,845 $ 28,745,253 4,500 $ 45 $ 4,056,455
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Reversal of escrowed stock
issued to pay short-term debt (162,999,640) -- -- -- --
Stock issued in partial payment
of short-term note 172,881,526 100,000 -- -- --
Deferred Compensation -- -- -- -- 500,000
Amortization of deferred
compensation -- -- -- -- --
Amortization of deferred
commitment & financing fees -- (5,872) -- -- --
Net loss for the period -- -- -- -- --
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BALANCE AT SEPTEMBER 30, 2004 2,004,247,731 $ 28,839,381 4,500 $ 45 $ 4,556,455
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DEFERRED
COMMITMENT AND
ACCUMULATED EQUITY DEFERRED
DEFICIT FINANCING FEES COMPENSATION TOTAL
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BALANCE AT JUNE 30, 2004 $ (31,241,859) $ (135,432) $ -- $ 1,424,462
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Reversal of escrowed stock
issued to pay short-term debt -- -- -- --
Stock issued in partial payment
of short-term note -- -- -- 100,000
Deferred Compensation -- -- (500,000) --
Amortization of deferred
compensation -- -- 62,500 62,500
Amortization of deferred
commitment & financing fees -- 10,432 -- 4,560
Net loss for the period (120,008) -- -- (120,008)
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BALANCE AT SEPTEMBER 30, 2004 $ (31,361,867) $ (125,000) $ (437,500) $ 1,471,514
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See accompany notes to condensed consolidated financial statements
3
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended September 30,
2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net operating loss $ (120,008) $ (270,342)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 70,306 106,875
Debt discount expense 23,438 23,438
Forgiveness of debt -- (6,853)
Distributive share of partnership income (215,233) --
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Deferred Costs and Other Receivables 96,931 --
Inventory 8,262 --
Prepaid expense/security deposits 1,515 --
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 82,290 (254,029)
Interest payable 16,891 39,839
Common stock to be issued -- 240,000
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Net cash used in operating activities (35,608) (121,072)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities (91,618) --
Partnership distributions 130,000 --
Purchase of business assets (4,655) --
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Net cash flow provided by investing activities 33,727 --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- 50,000
Proceeds from common stock to be issued -- 50,000
Repayment of short term note (80,000) --
----------- -----------
Net cash provided by (used in) financing activities (80,000) 100,000
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Net decrease in cash $ (81,881) $ (21,072)
Cash at beginning of period 1,193,170 22,527
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CASH AT END OF PERIOD $ 1,111,289 $ 1,455
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SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the three months ended September 30, 2004, the Company issued
172,881,526 shares of common stock in partial repayment of the short-term
note payable due to Cornell Capital Partners, L.P.
During the three months ended September 30, 2003, the Company recorded
$240,000 representing 85,714,285 shares of common stock to be issued for
prior unpaid accrued professional fees.
On September 4, 2003, debenture holders converted $82,375 of debentures
into 59,692,027 shares of common stock.
See accompany notes to condensed consolidated financial statements
4
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
NOTE 1. BASIS OF CONSOLIDATION AND SIGNIFICANT ACCOUNTING POLICIES
(A) Organization
Unless the context requires otherwise, "we", "us", or "our" refers to
Advanced Communications Technologies, Inc. and its subsidiaries (the "Company")
on a consolidated basis.
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, a Florida corporation, in a
reverse merger. 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.
On December 9, 2003 and December 17, 2003, the Company formed Hudson Street
Investments, Inc. ("Hudson Street") and SpectruCell, Inc., respectively, both
wholly owned subsidiaries. Hudson Street was formed for the purpose of holding
the Company's investment in Yorkville Advisors Management LLC and other future
investments and SpectruCell, Inc. was formed for the purpose of holding the
Company's rights in the SpectruCell technology. In May 2004, the Company formed
Encompass Group Affiliates, Inc. (Encompass"), a Delaware corporation for the
purpose of (i) acquiring the business and assets of Cyber-Test, Inc.
("Cyber-Test"), a Delaware corporation based in Longwood, Florida; (ii)
acquiring certain assets of Hy-Tech Technology Group, Inc.; and (iii) to pursue
other acquisitions.
We are a New York City-based diversified public holding company. We
focus on high growth-potential businesses through both our wholly owned
operating subsidiaries in the technology services industry and our strategic
investments in diverse industries. Through our wholly owned subsidiary and
principal operating unit Encompass, we own Cyber-Test, an electronic equipment
repair company, and our core operating business. Additionally, through our
wholly owned subsidiary Hudson Street, an investment vehicle, we own a minority
interest in Yorkville Advisors Management, LLC, an investment management
partnership, and through our wholly owned subsidiary SpectruCell, Inc., we hold
the North and South American marketing and distribution rights, which we
acquired in 1999, to SpectruCell, a software-defined, radio-based wireless
technology that is currently under development in Australia by an unrelated
third party.
Cyber-Test operates as an independent service organization providing
repair service for facsimile machines, printers, scanners, monitors, laptop
computers, PDAs and multifunction units and other consumer electronics. The
repairs are performed on entire machines and/or circuit boards. A 90-day
warranty is given for all machine repairs and a one-year warranty for all
circuit board repairs. Cyber-Test provides office equipment dealers, original
manufacturers and third party warranty companies a turnkey alternative for
additional revenue by providing repair service for their customers.
(B) Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries, all of which are wholly owned. All
significant intercompany transactions and balances have been eliminated in
consolidation.
(C) Use of Estimates
The preparation of the consolidated financial statements of the Company
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the period. In particular, significant estimates
are required to value inventory and estimate the future cost associated with the
Company's warranties. If the actual value of the Company's inventories differs
from these estimates, the Company's operating results could be adversely
impacted. The actual results with regard to warranty expenditures could also
have an adverse impact on the Company if the actual rate of repair failure or
the cost to re-repair a unit is greater than what the Company has used in
estimating the warranty expense accrual.
5
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
(D) Inventory
Inventory consists primarily of repair parts, consumable supplies for
resale and used machines that are held for resale, and are stated at the lower
of weighted average cost or market. The weighted average cost of inventory
approximates the first-in, first-out ("FIFO") method. Management performs
periodic assessments to determine the existence of obsolete, slow-moving and
nonsalable inventory and records necessary provisions to reduce such inventory
to net realizable value.
(E) Property and Equipment
Property and equipment are stated at cost. Assets are depreciated using
the straight-line method for both financial statement and tax purposes based on
the following estimated useful lives:
Leasehold improvements 15 to 40 years
Machinery and equipment 3 to 7 years
Furniture and fixtures 5 to 7 years
Maintenance and repairs are charged to expense when incurred.
(F) Warranty Reserve
Refurbished peripheral computer equipment sold to customers and the
repair of customer owned equipment is guaranteed for a period of ninety (90)
days and the repair of circuit boards for a period of twelve (12) months. Any
defective refurbished equipment is replaced free of charge and customer owned
equipment is repaired without charge during the warranty period. Cyber-Test
provides a reserve for warranty repairs based on historical failure rates and
the estimated cost to repair.
(G) Fair Value of Financial Instruments
The carrying amounts of the Company's cash, accounts receivable,
accounts payable, accrued liabilities, debentures, and loans payable approximate
fair value due to the relatively short period to maturity for these instruments.
(H) Allowance for Doubtful Accounts
We make judgments as to our ability to collect outstanding trade
receivables and provide allowances for the portion of receivables when
collection becomes doubtful. Provisions are made based upon a specific review of
all significant outstanding invoices. For those invoices not specifically
reviewed, provisions are provided at differing rates, based upon the age of the
receivable. In determining these percentages, we analyze our historical
collection experience and current economic trends. If the historical data we use
to calculate the allowance provided for doubtful accounts does not reflect our
future ability to collect outstanding receivables, additional provisions for
doubtful accounts may be needed and the future results of operations could be
materially affected.
(I) Long-Lived Assets
Long-lived assets to be held and used are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If such review indicates that the asset is
impaired, when the carrying amount of an asset exceeds the sum of its expected
future cash flows, on an undiscounted basis, the asset's carrying amount is
written down to fair value. Long-lived assets to be disposed of are reported at
the lower of carrying amount or fair value less cost to sell.
(J) Excess of Cost Over Net Assets Acquired
In accordance with SFAS No. 141, the Company allocates the purchase
price of its acquisitions to the tangible assets, liabilities and intangible
assets acquired based on their estimated fair values. The excess purchase price
over those fair values is recorded as "Excess of Cost Over Net Assets Acquired".
The fair value assigned to intangible assets acquired is either based on
valuations prepared by independent third party appraisal firms using estimates
and assumptions provided by management or negotiated at arms-length between the
Company and the seller of the acquired assets. In accordance with SFAS No. 142,
goodwill and purchased intangibles with indefinite lives acquired after June 30,
2001 are not amortized, but will be reviewed periodically for impairment.
Purchased intangibles with finite lives will be amortized on a straight-line
basis over their respective useful lives.
6
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
(K) Income Taxes
The Company accounts for income taxes under SFAS No. 109 "Accounting
for Income Taxes". Under SFAS No. 109, 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. Under
SFAS No. 109, 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.
The Company has made no current provision (benefit) for Federal income
taxes because of financial statement and tax losses since its inception. A
valuation allowance has been used to offset the recognition of any deferred tax
assets arising from net operating loss carryforwards due to the uncertainty of
future realization. The use of any tax loss carryforward benefits may also be
limited as a result of changes in Company ownership.
(L) 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.
(M) Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing income (loss)
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution of securities, using the treasury stock method, that could share in the
earnings of an entity. During the three months ended September 30, 2004, shares
of common stock that could have been issued upon conversion of convertible debt
were excluded from the calculation of diluted earnings (loss) per share as their
effect would have been anti-dilutive.
(N) Business Segments
The Company applies Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information". The
Company operates in one segment and therefore segment information is not
presented.
Management has determined that it is not meaningful to provide
geographic segment disclosures for revenues and long-lived assets because the
Company performs services for and generates revenue from customers throughout
the U.S.
(O) Revenue Recognition
The Company recognizes revenue from the sale of refurbished computer
equipment and related products upon delivery of goods to a common carrier for
delivery to the customer. Revenue for the repair of customer owned equipment is
recognized upon completion of the repair. The Company assumes the risk of loss
due to damage or loss of products during shipment. The Company is reimbursed by
the common carriers for shipping damage and lost products. The Company also
sells extended warranty and product maintenance contracts. Revenue from these
contracts is deferred and recognized as income on a straight-line basis over the
life of the contract, which is typically for a period of one year. Service
warranty and product maintenance revenue represented less than 5% of the
Company's total revenue for the quarter.
7
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
(P) Investment in Unconsolidated Partnership
The Company accounts for its investment in an unconsolidated
partnership under the equity method of accounting, as the Company does not have
any management control over this entity. This investment was recorded initially
at cost and subsequently adjusted for equity in net earnings and cash
distributions (See Note 3).
NOTE 2...PROPERTY AND EQUIPMENT
9/30/04 6/30/04
--------- ---------
Computer, office equipment and fixtures $ 38,444 $ 38,123
Machinery and equipment 20,228 16,652
Leasehold improvements 112,499 111,741
Less: Accumulated depreciation (4,328) (1,082)
--------- ---------
Property and equipment, net $ 166,843 $ 165,434
========= =========
Depreciation expense for the three months ended September 30, 2004 was
$3,246.
NOTE 3. INVESTMENT IN UNCONSOLIDATED PARTNERSHIP
On January 14, 2004, the Company's wholly owned subsidiary, Hudson
Street, purchased a minority interest in Yorkville Advisors Management LLC,
("Yorkville"), a privately owned investment management partnership and the
portfolio manager of Cornell Capital Partners, L.P., for a purchase price of
$2,625,000. The purchase was effective as of January 1, 2004. Hudson Street
incurred $45,000 of legal and professional fees associated with the purchase of
the partnership interest, which have been capitalized. During the three months
ended September 30, 2004, Hudson Street received $130,000 of cash distributions
from this investment and recorded $215,233 as its distributive share of
partnership net earnings. As of September 30, 2004, Hudson Street's investment
in Yorkville amounted to $2,860,232 under the equity method of accounting and is
reflected on the consolidated balance sheet in "Other Assets."
NOTE 4. NOTES AND LOAN PAYABLE
September 30, June 30,
2004 2004
---- ----
Current:
8% Note Payable-Current $ 57,831 $ 57,831
Loan Payable-Shareholder 1,055,736 1,055,736
Note Payable-Cornell Capital 2,195,000 2,375,000
--------- -----------
Notes Payable-Current $3,308,568 $3,488,567
========== ==========
Long-Term:
6% Unsecured Note $ 498,469 $ 498,469
Note Payable-ACT Australia 1,791,166 1,791,166
8% Note Payable-Non Current 57,832 57,832
----------- ---------
Notes Payable-Long-Term $2,347,467 $2,347,467
========== ==========
Future maturities of long-term debt as of September 30, 2004, excluding
the note payable to ACT Australia, and the loan payable to shareholders are as
follows:
Date Amount
- ------------------- -----------
June 30, 2005 $2,418,988
June 30, 2006 223,988
June 30, 2007 166,156
-----------
Total $2,809,132
===========
8
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
NOTE 5. CONVERTIBLE DEBENTURES
10% Secured Convertible Debentures Due November 2004
On November 22, 2002, the Company entered into a Securities Purchase
Agreement with Cornell Capital Partners, L.P., whereby it agreed to issue and
sell Two Hundred Fifty Thousand Dollars ($250,000) of 10% secured convertible
debentures. These secured convertible debentures have a term of two years and
are convertible into shares of common stock at a conversion price equal to $.001
per share. These secured convertible debentures accrue interest at a rate of 10%
per year and are convertible at the holder's option. At the Company's option,
these debentures may be paid in cash or redeemed at a 50% premium prior to
November 2004. In connection with the Securities Purchase Agreement, the Company
entered into a Security Agreement in favor of Cornell Capital Partners, L.P.
whereby the Company granted to Cornell 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 the Company to Cornell Capital Partners, L.P.
whether arising before, on or after the date of the Security Agreement.
The 10% convertible debentures contain a beneficial conversion feature
computed at its intrinsic value, which is equal to the difference between the
conversion price of the debentures and the fair market value, at the date of
issuance of the debentures, of the shares of common stock issuable upon
conversion of the debentures, multiplied by the number of shares into which the
debentures are convertible at the commitment date. The amount attributable to
the beneficial conversion feature of $250,000 is recorded as a discount on the
debt and accreted over a 24-month period as interest expense in accordance with
EITF 00-27. For the three months ended September 30, 2004 the Company accreted
$23,438 of debt discount as interest expense.
The balance of the note payable of $187,500 ($173,961 net of discount)
plus accrued interest of $35,947 as of September 30, 2004 will be paid in full
and cancelled upon maturity.
NOTE 6. STOCKHOLDERS' EQUITY
Stock Issued for Note Payable to Cornell Capital Partners, L.P.
During the three months ended September 30, 2004, the Company issued
172,881,526 shares of common stock in partial repayment of the short-term note
payable due to Cornell Capital Partners, L.P.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company has been, and may in the future be involved as, a party to
various legal proceedings, which are incidental to the ordinary course of its
business. Management regularly analyzes current information and, as necessary,
provides accruals for probable liabilities on the eventual disposition of these
matters. In the opinion of management, as of September 30, 2004, there were no
threatened or pending legal matters that would have a material impact on the
Company's consolidated results of operations, financial position or cash flows.
On February 5, 2004, the Company filed suit in Superior Court, Orange
County, California, against Advanced Communications (Australia), Roger May,
Global Communications Technologies Limited and Global Communications
Technologies Pty Ltd to recover damages incurred as a result of wrongful actions
of such defendants against the Company and to clarify the status of the
Company's obligations to such defendants under various agreements and other
arrangements, from which the Company believes it has been relieved as a result
of such wrongful actions. In May and August 2004, the court issued an entry of
default judgment in favor of the Company and against all of the above
defendants. On October 22, 2004, the court held a hearing for final
determination of the above action. The court has not yet issued its final
determination based on that hearing.
Employment Agreement
On June 24, 2004, we entered into a two-year employment agreement with
Martin Nielson, our Senior Vice President-Acquisitions (the "Nielson
Agreement"). Under the terms of the Nielson Agreement, Mr. Nielson is employed
as Encompass' President and Chief Executive Officer and Senior Vice
9
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
President-Acquisitions of the Company. Mr. Nielson is entitled to a $200,000
annual salary and the right to earn up to 50,000,000 shares of our restricted
common stock valued at $.01 per share, or $500,000, to vest over a two-year
period. Mr. Nielson is also entitled to receive an Incentive Bonus determined at
the discretion of our Compensation Committee based on his contribution to our
overall performance as well as a bonus based on the overall separate business
and financial performance of Encompass and its wholly-owned operating
subsidiaries. In addition, we have provided Mr. Nielson with a $1 million life
insurance policy for his benefit and also insure Mr. Nielson under a $2 million
key man life insurance policy. The agreement contains standard confidentiality,
noncompete and work-for-hire provisions.
The Company recorded $62,500 of amortization expense for the three
months ended September 30, 2004 in connection with Mr. Nielson's employment
agreement.
NOTE 8. GOING CONCERN
The Company's condensed consolidated financial statements for the three
months ended September 30, 2004, have been prepared on a going concern basis,
which contemplates the realization of assets and the settlement of liabilities
in the normal course of business. The Company's negative cash flow from
operations of $35,608 and working capital deficiency of $2,349,602 as of
September 30, 2004, 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 resolve liquidity problems by generating sufficient
operating profits to provide an additional source of working capital. During
October 2004, the Company reduced its contractual obligations by making a cash
payment of $195,000 on its short-term note to Cornell Capital Partners, L.P.
The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis by management provides
information with respect to the Company's financial condition and results of
operations for the three-month periods ended September 30, 2004 and 2003. The
discussion should be read in conjunction with the information in the
consolidated financial statements and the notes pertaining thereto contained in
the Company's Annual Report on Form 10-KSB for the year ended June 30, 2004
("2004 10-KSB"), the information in the consolidated financial statements and
the notes pertaining thereto contained in Item 1 - Financial Statements - in
this Report on Form 10-QSB and the information discussed in our 2004 10-KSB
under Risk Factors. Unless the context otherwise requires, all references herein
to the "Company" refer to Advanced Communications Technologies, Inc. and its
subsidiaries. Operating results for the three months ended September 30, 2004
are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 2005.
In the following Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this quarterly report on
Form 10-Q, words such as "estimates," "expects," "anticipates," "believes,"
"intends," "will," "seek" and other similar expressions, are intended to
identify forward-looking information that involves risks and uncertainties. In
addition, any statements that refer to expectations or other characterizations
of future events or circumstances are forward-looking statements. Actual results
and outcomes could differ materially as a result of important factors including,
among other things, general economic conditions, geopolitical considerations,
the Company's ability to renew or replace key supply and credit agreements,
fluctuations in operating results, committed backlog, public market and trading
issues, risks associated with dependence on key personnel, competitive market
conditions in the Company's existing lines of business and technological
obsolescence, as well as other risks and uncertainties.
GENERAL
We are a New York City-based diversified public holding company. We
focus on high growth-potential businesses through our wholly owned operating
subsidiaries in the technology services industry and our strategic investments
in diverse industries. Through our wholly owned subsidiary and principal
operating unit, Encompass Group Affiliates, Inc. ("Encompass"), we own
Cyber-Test, Inc., a Delaware corporation ("Cyber-Test"). Cyber-Test is an
electronic equipment repair company based in Longwood, Florida, and is our core
operating business. Additionally, through our wholly-owned subsidiary, Hudson
Street Investments, Inc., an investment vehicle, we own a minority interest in
Yorkville Advisors Management, LLC, an investment management partnership, and
through our wholly-owned subsidiary, SpectruCell, Inc., we hold the North and
South American marketing and distribution rights, which we acquired in 1999, to
SpectruCell, a software-defined, radio-based wireless technology that is
currently under development in Australia by an unrelated third party.
Through our wholly owned subsidiaries, we specialize in the repair of
computer peripheral products and other electronic equipment, and seek to make
strategic minority investments in privately held companies in diverse
industries.
We intend to pursue the acquisition of, and investment in, technology
and/or brand differentiated companies with significant growth-potential. We seek
to make the process of growth, through both organic and inorganic means, a core
competency of each company that we acquire or in which we invest.
We have three principal means of diversifying our business, each of
which is designed to give shareholders a strong value driver. Encompass, our
principal operating subsidiary, intends to acquire synergistic companies in the
technologies and services arena so that it becomes a vertically integrated
distribution, service and Internet based solutions provider. Hudson Street is a
minority partner in the management firm of an institutional investment company
and continues to make minority investments in privately held companies in
technology and other diverse industries. The Company itself also seeks to make
minority investments in technology specific or highly differentiated companies
with significant growth-potential
Results of Operations-Comparison of the Three Months Ended September 30, 2004 to
the Three Months Ended September 30, 2003
11
Summary of Results of Operations
Quarter Ended Period to Period
September 30, 2004 September 30, 2003 % Change
---------------------------------------- ------------
Net income from Cyber-Test operations $ 131,077 $ -- --
Net income from investments 215,233 -- --
Parent company and Encompass overhead (427,052) (213,918) 100%
Net interest expense (39,266) (63,277) (38%)
Forgiveness of debt -- 6,853 --
------------ ------------ ------------
Net Loss $ (120,008) $ (270,342) (56%)
============ ============ ============
Overview of First Quarter Results
The three months ended September 30, 2004 was the first full reporting
period reflecting Encompass' ownership of Cyber-Test`s operating business.
During this period, Cyber-Test recorded $1,825,184 of sales relating to the
repair, service and warranty and exchange of various office equipment such as
facsimile machines, printers and scanners and computer peripheral products such
as PDAs, laptop computers, monitors and multi-functional units. A gross profit
of $673,756 or 37% of sales for the quarter was realized after deducting cost of
sales in the amount of $1,151,428. For the three months ended September 30,
2004, Cyber-Test generated net profit from operations of $131,077 or 7.2% of
sales, which when taking into account the numerous disruptions in Cyber-Test's
operations during August and September because of the unprecedented hurricane
season throughout Florida, was above our expectations. Although Cyber-Test
experienced an increase in order fulfillment and an increase in backorders due
to power outages resulting from three hurricanes and the delays associated with
returning to full production, as of September 30, 2004 Cyber-Test has restored
its backorder and order fulfillment time to normal levels. Management expects no
long-term effects to its business. Conversely, during the three months ended
September 30, 2004, Cyber-Test was successful in negotiating several new
customer service agreements and has taken the necessary steps to implement this
new business during the remainder of fiscal year 2005.
For the three months ended September 30, 2004, we reported an overall
loss from operations of $295,975 because of consolidated overhead costs at the
parent and Encompass levels versus a $213,918 loss for the three months ended
September 30, 2003. These overhead costs amounted to $427,052 and include
$206,134 of professional fees and costs, $67,060 of amortization of deferred
compensation and depreciation and $153,858 of general and administrative costs.
Our overall loss from operations was offset by $215,233 of other investment
income from our investment in Yorkville Advisors Management, LLC. Our overall
net loss of $120,008 for the three months ended September 30, 2004 was 56% less
than our overall net loss of $270,342 for the comparative three-month period
ended September 30, 2003.
Revenue
Revenue for the three months ended September 30, 2004 was $1,825,184
and was entirely attributable to Cyber-Test's operations. We did not recognize
any revenue for the three months ended September 30, 2003. All revenue from
Cyber-Test's operations was from the repair and service of office equipment and
computer peripheral products, extended warranty sales and the sale of computer
parts and accessories.
Cost of Sales
Our cost of sales during the three months ended September 30, 2004, was
$1,151,428 and was comprised principally of purchased supplies and parts in the
amount of $340,134, direct labor costs of $327,011 and freight and shipping
expense in the amount of $345,650.
Gross Profit
Gross profit was 37% of gross sales from Cyber-Test's operations for
the three months ended September 30, 2004, which resulted in an operating income
margin of 7.2% of sales. Our gross profit percentage increased slightly from
Cyber-Test's one-month operations during June 2004 due to a reduction in the
number of replacement machines and parts required to fulfill orders during the
quarter, enhanced by the implementation of lower delivery charges which were
negotiated in June 2004. Also contributing to the slight increase in gross
profit percentage was Cyber-Test's successful hiring and training of new repair
technicians, allowing more orders to be fulfilled.
12
Operating Expenses
Total operating expenses for the three months ended September 30, 2004
and 2003 were $969,731 and $213,918, respectively, representing a $755,813 or
353% increase for the three months ended September 30, 2004 as compared to the
three months ended September 30, 2003. This increase was attributable to an
increase in professional fees in the amount of $143,139 during the three months
ended September 30, 2004 versus the same period in 2003 due to the increase in
investment and acquisition activity during the quarter, as well as an increase
in selling, general and administrative costs of $649,243 due to the addition of
the Encompass and Cyber-Test operations.
Depreciation and amortization expense for the three months ended
September 30, 2004 decreased by $36,569 to $70,306 from $106,875 from the three
months ended September 30, 2003 due to deferred commitment fees and financing
costs being fully amortized in fiscal year 2004 and the quarterly amortization
of deferred compensation for the three months ended September 30, 2004 in the
amount of $62,500.
Other general and administrative expenses amounted to $687,266 for the
three months ended September 30, 2004, which is a $649,243 increase from the
comparative prior period due principally to the addition of the Cyber-Test
operating business overhead during the quarter. Such overhead expenses include
the overhead operation and cost associated with employing approximately 90
employees and operating a 29,000 square foot office and warehouse facility. The
following is a breakdown of the components of other selling, general and
administrative costs:
Three Months Ended
September 30, Period to Period
2004 2003 % Change
------------------------ --------
Salaries and wages $376,286 $ -- --
Building facilities expense 76,701 -- --
Payroll and Unemployment taxes 28,040 -- --
Telephone and utilities 27,167 -- --
Marketing and Promotion 24,722 -- --
Other SG&A costs 154,350 38,023 305%
-------- -------- --------
$687,266 $ 38,023 1,707%
======== ======== ========
Other Income (Expenses)
During the three months ended September 30, 2004, we realized $175,967
of net other income due to the favorable results of our investment in Yorkville
Advisors, which generated $215,233 of income during the quarter ended September
30, 2004. This investment income was offset, in part by, net interest expense of
$39,266 inclusive of accrued interest on our 10% Secured Convertible Debentures,
our 8% Note Payable, our 6% Note Payable and $23,438 of debt discount expense,
net of $650 of interest income.
Interest expense incurred for the three months ended September 30, 2003
was $63,277 and was attributable to quarterly interest on the Company's 10%
Secured Convertible Debentures, the 5% $1,000,000 Convertible Debentures and the
8% Note Payable. Forgiveness of debt income of $6,853 for the three months ended
September 30, 2003 was attributable to the favorable settlement of certain
accounts payable.
Overall net interest expense decreased by $24,011 to $39,266 from
$63,277 for the three months ended September 30, 2004 to 2003. This decrease was
due primarily to the lower levels of interest bearing debt.
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. 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 arrangements, contractual obligations
and commercial commitments.
13
Use of Estimates
The preparation of the consolidated financial statements of the Company
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the period. In particular, significant estimates
are required to value inventory and estimate the future cost associated with the
Company's warranties. If the actual value of the Company's inventories differs
from these estimates, the Company's operating results could be adversely
impacted. The actual results with regard to warranty expenditures could also
have an adverse impact on the Company if the actual rate of repair failure or
the cost to re-repair a unit is greater than what the Company has used in
estimating the warranty expense accrual.
Inventory
Inventory consists primarily of repair parts, consumable supplies for
resale and used machines that are held for repair and/or resale, and are stated
at the lower of weighted average cost or market. The weighted average cost of
inventory approximates the first-in, first-out ("FIFO") method. Management
performs periodic assessments to determine the existence of obsolete,
slow-moving and nonsalable inventory and records necessary provisions to reduce
such inventory to net realizable value.
Property and Equipment
Property, plant and equipment are stated at cost. Assets are
depreciated using the straight-line method for both financial statement and tax
purposes based on the following estimated useful lives:
Leasehold improvements 15 to 40 years
Machinery and equipment 3 to 7 years
Furniture and fixtures 5 to 7 years
Maintenance and repairs are charged to expense when incurred.
Warranty Reserve
Refurbished peripheral computer equipment sold to customers and the
repair of customer owned equipment is guaranteed for a period of ninety days and
the repair of circuit boards is guaranteed for a period of 12 months. Any
defective refurbished equipment is replaced free of charge and customer owned
equipment is repaired without charge during the warranty period. Cyber-Test
provides a reserve for warranty repairs based on historical failure rates and
the estimated cost to repair.
Allowance for Doubtful Accounts
The Company makes judgments as to its ability to collect outstanding
receivables and provides allowances for the portion of receivables when
collection becomes doubtful. Provisions are made based upon a specific review of
all significant outstanding invoices. For those invoices not specifically
reviewed, provisions are provided at differing rates, based upon the age of the
receivable. In determining these percentages, the Company analyzes its
historical collection experience and current economic trends. If the historical
data the Company uses to calculate the allowance provided for doubtful accounts
does not reflect the future ability to collect outstanding receivables,
additional provisions for doubtful accounts may be needed and the future results
of operations could be materially affected.
Long-Lived Assets
Long-lived assets to be held and used are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If such review indicates that the asset is
impaired, when the carrying amount of an asset exceeds the sum of its expected
future cash flows, on an undiscounted basis, the asset's carrying amount is
written down to fair value. Long-lived assets to be disposed of are reported at
the lower of carrying amount or fair value less cost to sell.
Excess of Cost Over Net Assets Acquired
14
In accordance with SFAS No. 141, the Company allocates the purchase
price of its acquisitions to the tangible assets, liabilities and intangible
assets acquired based on their estimated fair values. The excess purchase price
over those fair values is recorded as "Excess of Cost Over Net Assets Acquired".
The fair value assigned to intangible assets acquired is either based on
valuations prepared by independent third party appraisal firms using estimates
and assumptions provided by management or negotiated at arms-length between the
Company and the seller of the acquired assets. In accordance with SFAS No. 142,
goodwill and purchase intangibles with indefinite lives acquired after June 30,
2001, are not amortized but will be reviewed periodically for impairment.
Purchased intangibles with finite lives will be amortized on a straight-line
basis over their respective useful lives.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing income (loss)
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution of securities, using the treasury stock method that could share in the
earnings of an entity. Shares of common stock that could have been issued upon
conversion of convertible debt were excluded from the calculation of diluted
earnings (loss) per share, as their effect would have been anti-dilutive.
Business Segments
The Company applies Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information". During
the three months ended September 30, 2004, the Company operated in one segment
and therefore segment information is not presented.
Management has determined that it is not meaningful to provide
geographic segment disclosures for revenues and long-lived assets because the
Company performs services for and generates revenue from customers throughout
the U.S.
Revenue Recognition
The Company recognizes revenue from the sale of refurbished computer
equipment and related products upon delivery of goods to a common carrier for
delivery to the customer. Revenue for the repair of customer owned equipment is
recognized upon completion of the repair. The Company assumes the risk of loss
due to damage or loss of products during shipment. The Company is reimbursed by
the common carriers for shipping damage and lost products. The Company sells
extended warranty and product maintenance contracts. Revenue from these
contracts is deferred and recognized as income on a straight-line basis over the
life of the contract, which typically is for a period of one year. Service
warranty and product maintenance revenue represented less than 5% of the
Company's total revenue for the three months ended September 30, 2004.
Investment in Unconsolidated Partnership
The Company accounts for its investment in an unconsolidated
partnership under the equity method of accounting, as the Company does not have
any management control over this entity. This investment is recorded initially
at cost and subsequently adjusted for equity in net earnings and cash
distributions.
LIQUIDITY AND CAPITAL RESOURCES
On July 16, 2003, we entered into an Equity Line of Credit Agreement
with Cornell Capital Partners, L.P., a private limited partnership ("Cornell
Capital"). Pursuant to the Equity Line of Credit, the Company may, at its
discretion, periodically sell to Cornell Capital shares of our common stock for
a total purchase price of up to $30,000,000. For each share of common stock
purchased under the Equity Line of Credit, Cornell Capital will pay 91% of the
lowest closing bid price of our common stock on the Over-the-Counter Bulletin
Board, or such other principal market on which common stock is traded, for the
five (5) trading days immediately following the date we give notice to Cornell
Capital of a requested draw down. 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. On July 31, 2003, the
Securities and Exchange Commission declared effective our registration statement
filed on Form SB-2. In accordance with the terms of the Equity Line of Credit,
Cornell Capital is not permitted to own more than 9.99% of our outstanding
common stock at any one time; however Cornell Capital is permitted to waive such
restriction, which waiver is effective on the 61st day after delivery of the
waiver to us.
15
We have financed our acquisitions and investments principally with
short-term borrowings through our equity line with Cornell Capital and cash
received in exchange for the issuance of 4,200 shares of our Series A Preferred
Stock to Cornell Capital. We have funded our ongoing operations through cash
distributions received from (i) our investment in Yorkville Advisors, an
investment management partnership, and (ii) working capital generated by
Cyber-Test, our core operating business. Our cash and cash equivalents totaled
$1,111,289 at September 30, 2004.
We are currently in the process of exploring various alternative
sources of financing to reduce our reliance on the Equity Line of Credit with
Cornell Capital and the dilutive effect such facility has on our stock price. We
are also currently in discussions with Cornell Capital, banking institutions and
other institutional investors to secure up to a $20 million acquisition debt
facility to be used by us for the purpose of acquiring private and/or public
companies in the technology and service industry that we believe will be
accretive to our business. These discussions are in the preliminary stages.
During the three months ended September 30, 2004, we made advances
under the Equity Line of Credit in the aggregate amount of $100,000 in exchange
for issuing 172,881,526 shares of common stock to Cornell Capital Partners.
These advances were used to pay down our short-term note to Cornell Capital
Partners, L.P. Also during the quarter, Hudson Street received $130,000 of
partnership cash distributions from Yorkville Advisors. We believe that our
existing sources of liquidity including cash resources and cash provided by
operating activities, supplemented by distributions from Hudson Street's
investment will provide sufficient resources to meet our present and future
working capital and cash requirements for at least the next 12 months.
We had total liabilities of $6,514,496 as of September 30, 2004 versus
$6,040,942 as of September 30, 2003. Included in the total for September 30,
2004 are contractual obligations of $3,667,594. These contractual obligations,
along with the dates on which such payments are due, are described below:
Payments Due by Period (from September 30, 2004)
-----------------------------------------------------------------------------------
1 2-3 4-5 After 5
Contractual Obligations Total Year or Less Years Years Years
- ------------------------------------------- ------------ ------------- -------------- ------------ ----------
Notes Payable and Interest Thereon $2,836,419* $2,430,992 $ 405,427 $ -- $ --
Convertible Debentures and Interest Thereon 209,908 209,908 -- -- --
Accounts Payable and Accrued Expenses 501,670 501,670 -- -- --
Other Current Liabilities 119,597 119,597 -- -- --
---------- ---------- ---------- ---------- ----------
Total Contractual Obligations $3,667,594 $3,262,167 $ 405,427 $ -- $ --
========== ========== ========== ========== ==========
- ----------
* Excludes $1,791,166 due to Advanced Communications (Australia) under the Stock
Purchase Agreement dated April 5, 2000. The Company believes that this
obligation is not enforceable as a result of Advanced Communications
(Australia)'s improper unilateral revocation of the Stock Purchase Agreement and
other wrongful acts of Advanced Communications (Australia), Roger May and
related parties. Also excludes $1,055,736 due to Roger May and/or Global
Communications Technologies Limited and/or Global Communications Technologies
Pty Ltd for monies provided to the Company. The Company believes it is not
obligated to pay these amounts as a result of wrongful acts of such parties
against the Company. On February 5, 2004, the Company filed suit in Superior
Court, Orange County, California seeking a judgment against Advanced
Communications (Australia), Roger May, Global Communications Technologies
Limited and Global Communications Technologies Pty Ltd to recover damages
related to their wrongful acts against the Company. The Company's damages claims
exceed the $2,846,902 allegedly due such defendants. The Company also seeks in
the action to have its obligations under the Stock Purchase Agreement and other
arrangements clarified as to such defendants. In May and August 2004, the court
issued an entry of default judgment in favor of the Company and against all of
the above defendants. On October 22, 2004, the court held a hearing for final
determination of the above action. The court has not yet issued its final
determination based on that hearing.
During the three months ended September 30, 2004, the Company reduced
its contractual obligations by $57,380 through cash payments. At September 30,
2004, we had a working capital deficiency of $2,349,602. In October 2004, the
Company repaid $195,000 of its short-term note payable to Cornell Capital
Partners, L.P. through the payment of cash.
Below is a discussion of our sources and uses of funds for the three
months ended September 30, 2004:
Overall Net Change In Cash Flow For The Three Months Ended September 30, 2004
During the quarter, we had an overall net decrease in cash in the
amount of $81,881. This overall net decrease in cash was due to the payment of
$80,000 on our short-term note to Cornell Capital Partners, L.P. Our negative
cash flow from operations in the amount of $35,608 was offset by $33,727 of net
cash flow from our investment activities.
16
Net Cash Used In Operating Activities
Net cash used in operating activities was $35,608 for the three months
ended September 30, 2004. The use of cash in operating activities for the three
months ended September 30, 2004 was principally the result of our consolidated
net loss of $120,008 offset by non-cash charges for amortization and debt
discount expense in the aggregate amount of $93,744. Net cash used in operating
activities was $121,072 for the three months ended September 30, 2003 and was
principally the result of net losses during the period together with a reduction
in accounts payable, offset by non cash charges for depreciation and
amortization, debt discount expense and common stock to be issued in the
aggregate amount of $370,313.
Net Cash From Investing Activities
Cash provided from investing activities of $33,727 for the three months
ended September 30, 2004 was attributable to $130,000 of cash distributions from
our partnership investment offset by $4,655 for the purchase of business assets
by Cyber-Test and the purchase by Hudson Street of $91,618 of marketable
investment securities in public and private companies. No cash was provided by
or used in investing activities for the three months ended September 30, 2003.
Net Cash From (Used In) Financing Activities
Net cash of $80,000 used in financing activities for the three months
ended September 30, 2004 was from the repayment of our short-term note to
Cornell Capital Partners, L.P. Net cash from financing activities of $100,000
for the three months ended September 30, 2003 was from proceeds on the sale of
common stock to Cornell Capital Partners, L.P., under the Company's Equity Line
of Credit facility.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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 November 15, 2004, there were
2,004,247,731 common shares outstanding and approximately 550 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
-------- -------
2005
Quarter Ended September 30, 2004 $ .00119 $ .0005
2004
Quarter Ended September 30, 2003 $ .007 $.00163
Quarter Ended December 31, 2003 .00363 .00169
Quarter Ended March 31, 2004 .0025 .00131
Quarter Ended June 30, 2004 .0015 .00081
Such market quotations reflect the inter-dealer prices as reflected
by the OTCBB without retail mark-up, markdown or commissions and may not
necessarily represent actual transactions.
ITEM 3. CONTROLS AND PROCEDURES
As of September 30, 2004, we carried out an evaluation, under the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on this evaluation, our Chief
17
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective in timely alerting them to material
information required to be included in our periodic reports that are filed with
the Securities and Exchange Commission. It should be noted that the design of
any system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions,
regardless of how remote. In addition, we reviewed our internal controls, and
there have been no significant changes in our internal controls or in other
factors that could significantly affect those controls subsequent to the date of
our last evaluation.
18
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
On February 5, 2004, the Company filed suit in Superior Court, Orange
County, California, against Advanced Communications (Australia), Roger May,
Global Communications Technologies Limited and Global Communications
Technologies Pty Ltd to recover damages incurred as a result of wrongful actions
of such defendants against the Company and to clarify the status of the
Company's obligations to such defendants under various agreements and other
arrangements, from which the Company believes it has been relieved of as a
result of such wrongful actions. In May and August 2004, the court issued an
entry of default judgment in favor of the Company and against all of the above
defendants. On October 22, 2004, the court held a hearing for final
determination of the above action. The court has not yet issued its final
determination based on that hearing.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
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 Asset Purchase Agreement dated May 27, 2004, by and
between Cyber-Test, Inc., a Delaware corporation and Incorporated by reference to Exhibit 10.1 to
Cyber-Test, Inc., a Florida corporation. the Company's Form 8-K filed on June 3, 2004
3.1.1 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
19
Exhibit No. Description Location
----------------------------------------------------- -------------------------------------------
3.1.2 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
3.1.3 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
3.1.4 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
3.1.5 Fifth Amendment to Articles of Incorporation Incorporated by reference to Exhibit 2.8 to
the Form SB-2 filed with the SEC on July 16,
2003
3.1.6 Sixth Amendment to Articles of Incorporation Incorporated by reference to the Company's
Form 10-KSB filed on November 3, 2004
3.1.7 Seventh Amendment to Articles of Incorporation Incorporated by reference to the Company's
Form 10-KSB filed on November 3, 2004
3.2 Bylaws of the Company Incorporated by reference to Exhibit 2.4 to
the Company's Form S-8 filed on February 9,
2000
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, Incorporated by reference to Exhibit 10.5 to
2000, 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
20
Exhibit No. Description Location
----------------------------------------------------- -------------------------------------------
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,
Advanced Communications Technologies Pty Ltd. 2000
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 the Company's Form 10-QSB filed on February
and First Union National Bank 12, 2002
10.13 Equity Line of Credit Agreement dated July 2003, by Incorporated by reference to Exhibit 10.13 to
and between Cornell Capital Partners, LP and Advanced the Form SB-2 filed with the SEC on July 16,
Communications Technologies, Inc. 2003
10.14 Registration Rights Agreement dated July 2003, by and Incorporated by reference to Exhibit 10.14 to
between Advanced Communications Technologies, Inc. the Form SB-2 filed with the SEC on July 16,
2003
10.15 Placement Agent Agreement dated July 2003, by and Incorporated by reference to Exhibit 10.15 to
between Advanced Communications Technologies, Inc. the Form SB-2 filed with the SEC on July 16,
and Westrock Advisors, Inc. 2003
10.16 Escrow Agreement dated July 2003, by and among Incorporated by reference to Exhibit 10.16 to
Advanced Communications Technologies, Inc., Cornell the Form SB-2 filed with the SEC on July 16,
Capital Partners, LP, Butler Gonzalez LLP and First 2003
Union National Bank
10.17 License and Distribution Agreement dated as of Incorporated by reference to Exhibit 10.17 to
July 5, 2000, between Advanced Communications the Company's Amendment to Form 10-KSB filed
Technologies, Inc. and Advanced Communications on May 23, 2002
Technologies (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
21
Exhibit No. Description Location
----------------------------------------------------- -------------------------------------------
10.19 Securities Purchase Agreement, dated November 2002, Incorporated by reference to Exhibit 10.19 to
by 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 Incorporated by reference to Exhibit 10.20 to
November 2002, by and among Advanced Communications the Company's Form 10-KSB for the year ended
and Investors June 30, 2002 filed on December 6, 2002
10.21 Secured Convertible Debenture Incorporated by reference to Exhibit 10.21 to
the Company's Form 10-KSB for the year ended
June 30, 2002 filed on December 6, 2002
10.22 Escrow Agreement, dated 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. June 30, 2002 filed on December 6, 2002
and Advanced Communications (Australia)
10.26 Consulting Agreement dated July 1, 2002, between Incorporated by reference to Exhibit 10.26 to
Advanced Communications and Randall H. Prouty the Company's Third Amended Form 10-KSB for
the year ended June 30, 2002 filed on
June 13, 2003
10.27 Proxy Statement, dated March 25, 1999 Incorporated by reference to Exhibit 10.27 to
the Company's Third Amended Form 10-KSB for
the year ended June 30, 2002 filed on
June 13, 2003
10.28 Termination of Lease Agreement, dated November 25,
2003, by and between Continental Development, L.P. II Incorporated by reference to Exhibit 10.28 to
(Lessor) and Advanced Communications the Company's Form 10-QSB filed on February
13, 2004
10.29 6% Senior Unsecured Promissory Note, in the original
principal amount of $547,000 issued on June Incorporated by reference to Exhibit 10.2 to
3, 2004 by Cyber-Test, Inc., a Delaware corporation the Company's Form 8-K filed on June 3, 2004
in favor of Cyber-Test, Inc., a Florida corporation.
10.30 Escrow Agreement, June 3, 2004, by and between
Cyber-Test, Inc., a Delaware corporation and Incorporated by reference to Exhibit 10.3 to
Cyber-Test, Inc., a Florida corporation. the Company's Form 8-K filed on June 3, 2004
22
Exhibit No. Description Location
----------------------------------------------------- -------------------------------------------
10.31 NonCompetition Agreement, June 3, 2004, by and
between Cyber-Test, Inc., a Delaware corporation, and Incorporated by reference to Exhibit 10.4 to
Cyber-Test, Inc., a Florida corporation and the the Company's Form 8-K filed on June 3, 2004
shareholders of Cyber-Test Florida.
10.32 Employment Agreement, June 3, 2004, by and between
Cyber-Test, Inc., a Delaware corporation and Lisa Incorporated by reference to Exhibit 10.5 to
Welton. the Company's Form 8-K filed on June 3, 2004
10.33 Employment Agreement, June 3, 2004, by and between
Cyber-Test, Inc., a Delaware corporation and Thomas Incorporated by reference to Exhibit 10.6 to
Sutlive. the Company's Form 8-K filed on June 3, 2004
10.34 [RESERVED]
10.35 Amendment No. 1 to 6% Unsecured Promissory Note dated
August 10, 2004 Incorporated by reference to the Company's
------------------------------------------------------ Form 10-KSB filed on November 3, 2004
10.36 Agreement, dated May 27, 2004, by and among
Encompass Group Affiliates, Inc. , Hy-Tech Technology Incorporated by reference to the Company's
Group, Inc. and Hy-Tech Computer Systems, Inc. Form 10-KSB filed on November 3, 2004
10.37 Customers Lists License Agreement, dated June 24,
2004, by and among Encompass Group Affiliates, Inc., Incorporated by reference to the Company's
Hy-Tech Technology Group, Inc. and Hy-Tech Computer Form 10-KSB filed on November 3, 2004
Systems, Inc.
10.38 Websites License Agreement, dated June 24, 2004, by
and among Encompass Group Affiliates, Inc. , Hy-Tech Incorporated by reference to the Company's
Technology Group, Inc. and Hy-Tech Computer Systems, Form 10-KSB filed on November 3, 2004
Inc.
10.39 NonCompetition and Nondisclosure Agreement by and
among Encompass Group Affiliates, Inc. , Hy-Tech Incorporated by reference to the Company's
Technology Group, Inc. and Hy-Tech Computer Systems, Form 10-KSB filed on November 3, 2004
Inc.
10.40 Form of Exchange Agreement, dated June 24, 2004, by
and between Advanced Communication and certain Incorporated by reference to the Company's
debenture holders of Hy-Tech Technology Group, Inc. Form 10-KSB filed on November 3, 2004
10.41 Employment Agreement dated June 24, 2004 by and Incorporated by reference to the Company's
between Encompass Group Affiliates, Inc., Advanced Form 10-KSB filed on November 3, 2004
Communications Technologies, Inc. and Martin Nielson
10.42 Escrow Agreement dated May 28, 2004 by and among Incorporated by reference to the Company's
Advanced Communications Technologies, Inc., Buyers Form 10-KSB filed on November 3, 2004
and Butler Gonzalez, LLP, Escrow Agent
10.43 Investment Agreement dated May 28, 2004 by and among Incorporated by reference to the Company's
Advanced Communications Technologies, Inc. and Form 10-KSB filed on November 3, 2004
Cornell Capital Partners, L.P.
23
Exhibit No. Description Location
----------------------------------------------------- -------------------------------------------
10.44 Registration Rights Agreement dated May 28, 2004 by Incorporated by reference to the Company's
and among Advanced Communications Technologies, Inc. Form 10-KSB filed on November 3, 2004
and Cornell Capital Partners, L.P.
14.1 Code of Business Conduct and Ethics for Advanced
Communications Incorporated by reference to the Company's
Form 10-KSB filed on November 3, 2004
31.1 Certification by President and Chief Financial
Officer pursuant to Sarbanes-Oxley Section 302 Provided herewith
32.1 Certification by President and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350: Provided herewith
(b) Reports on Form 8-K.
None.
24
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: November 18, 2004
25