================================================================================
UNITED STATES
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 Quarterly Period Ended December 31, 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.
------------------------------------------
(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)
(212) 682-0244
--------------
(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 12 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 February 1, 2005, there were 2,016,247,731 shares of the registrant's no
par value common stock issued and outstanding
Transmittal Small Business Disclosure Format (check one):
Yes [_] No [X]
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 December 31, 2004 (Unaudited)
and June 30, 2004
Condensed Consolidated Statements of Operations for the Six Months Ended
December 31, 2004 and 2003 (Unaudited)
Condensed Consolidated Statement of Stockholders' Equity for the Six
Months Ended December 31, 2004 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
December 31, 2004 and 2003 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis or Plan of Operation.
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.
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 future capital
expenditures, business strategy, 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
December 31, 2004 June 30, 2004
(Unaudited)
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $ 1,376,917 $ 1,193,170
Restricted cash 505,000 --
Accounts receivable, net of allowance for doubtful accounts of $321,145
and $8,914 at December 31, 2004 and June 30, 2004, respectively 4,061,875 400,747
Inventories 3,111,440 350,963
Prepaid expenses and other current assets 235,228 81,863
------------ ------------
Total Current Assets 9,290,460 2,026,743
Property and equipment, net of accumulated depreciation of $7,574 and $1,082
as of December 31, 2004 and June 30, 2004, respectively 4,164,268 165,434
Other Assets
Partnership Investment 2,880,232 2,774,999
Licensed Intangibles and rights 400,000 400,000
Excess of purchase price over fair market value of assets acquired 2,836,155 2,611,055
Other assets 86,718 18,108
------------ ------------
Total Other Assets 6,203,105 5,804,162
------------ ------------
TOTAL ASSETS $ 19,657,833 $ 7,996,339
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Current portion of notes payable $ 2,973,388 $ 3,639,090
Floor plan inventory loans 2,243,100 --
Accounts payable and accrued expenses 6,238,618 194,540
Other current liabilities 233,791 390,780
------------ ------------
Total Current Liabilities 11,688,897 4,224,410
Notes and Loans Payable, less current portion 3,465,512 2,347,467
Minority Interest 227,166 --
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,
2,016,247,731 and 1,994,365,845 shares issued and outstanding, respectively 28,851,381 28,745,253
Additional paid in capital 4,556,455 4,056,455
Deferred commitment and equity financing fees, net of accumulated amortization (114,000) (135,432)
Deferred compensation, net of amortization of $125,000 (375,000) --
Accumulated deficit (28,642,623) (31,241,859)
------------ ------------
Total Stockholders' Equity 4,276,258 1,424,462
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 19,657,833 $ 7,996,339
============ ============
- --------------------------------------------------------------------------------
See accompany notes to condensed consolidated financial statements
1
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For The Three Months Ended For The Six Months Ended
December 31, December 31,
--------------------------------- ---------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
REVENUE $ 1,709,919 $ -- $ 3,535,103 $ --
COST OF SALES 1,111,547 -- 2,262,975 --
--------------- --------------- --------------- ---------------
GROSS PROFIT 598,372 -- 1,272,128 --
--------------- --------------- --------------- ---------------
OPERATING EXPENSES
Depreciation and amortization 76,746 106,875 147,052 213,750
Professional and consulting fees 109,267 122,527 321,426 191,547
Other selling, general and administrative expenses 684,425 16,294 1,372,681 54,317
--------------- --------------- --------------- ---------------
TOTAL OPERATING EXPENSES 870,438 245,696 1,841,159 459,614
--------------- --------------- --------------- ---------------
Loss From Operations (272,066) (245,696) (569,031) (459,614)
--------------- --------------- --------------- ---------------
OTHER INCOME (EXPENSES)
Forgiveness of debt 2,847,511 733,827 2,847,511 740,680
Distributable share of partnership income 170,000 -- 385,233 --
Interest expense, net (26,201) (37,730) (64,477) (101,007)
--------------- --------------- --------------- ---------------
TOTAL OTHER INCOME (EXPENSE) 2,991,310 696,097 3,168,267 639,673
--------------- --------------- --------------- ---------------
NET INCOME $ 2,719,244 $ 450,401 $ 2,599,236 $ 180,059
=============== =============== =============== ===============
Net loss per share-basic and dilutive $ 0.0014 $ 0.00 $ 0.0013 $ 0.00
=============== =============== =============== ===============
Weighted average number of shares
outstanding during the period-basic and dilutive 2,008,812,948 763,357,062 2,002,717,221 487,076,833
=============== =============== =============== ===============
- --------------------------------------------------------------------------------
See accompany notes to condensed consolidated financial statements
2
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004
(UNAUDITED)
COMMON STOCK PREFERRED STOCK ADDITIONAL
------------------------------------------------------------------------- PAID IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-------------- -------------- ------------- -------------- --------------
BALANCE AT JUNE 30, 2004 1,994,365,845 $ 28,745,253 4,500 $ 45 $ 4,056,455
-------------- -------------- ------------- -------------- --------------
Reversal of escrowed stock issued to
pay short-term debt (162,999,640) -- -- -- --
Stock issued in partial payment of
short-term debt 172,881,526 100,000 -- -- --
Deferred compensation -- -- -- 500,000 --
Amortization of deferred compensation -- -- -- -- --
Amortization of deferred commitment
and financing fees -- (5,872) -- -- --
Stock issued for convertible debt
and accrued interest 12,000,000 12,000 -- -- --
Net income for the period -- -- -- -- --
-------------- -------------- ------------- -------------- --------------
BALANCE AT DECEMBER 31, 2004 2,016,247,731 $ 28,851,381 4,500 $ 45 $ 4,556,455
============== ============== ============= ============== ==============
DEFERRED
COMMITMENT
ACCUMULATED AND EQUITY DEFERRED
DEFICIT FINANCING FEES COMPENSATION TOTAL
-------------- -------------- -------------- --------------
BALANCE AT JUNE 30, 2004 $ (31,241,859) $ (135,432) $ -- $ 1,424,462
-------------- -------------- -------------- --------------
Reversal of escrowed stock issued to
pay short-term debt -- -- -- --
Stock issued in partial payment of
short-term debt -- -- -- 100,000
Deferred compensation -- (500,000) --
Amortization of deferred compensation -- -- 125,000 125,000
Amortization of deferred commitment
and financing fees -- 21,432 -- 15,560
Stock issued for convertible debt
and accrued interest -- -- -- 12,000
Net income for the period 2,599,236 -- -- 2,599,236
-------------- -------------- -------------- --------------
BALANCE AT DECEMBER 31, 2004 $ (28,642,623) $ (114,000) $ (375,000) $ 4,276,258
============== ============== ============== ==============
- --------------------------------------------------------------------------------
See accompany notes to condensed consolidated financial statements
3
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended December 31,
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,599,236 $ 180,059
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 147,052 213,750
Debt discount expense 36,977 46,876
Forgiveness of debt (2,847,511) (740,680)
Distributive share of partnership income (385,233) --
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Deferred Costs and other receivables 103,220 --
Inventories (77) --
Prepaid expense/security deposits 16,470 (2,300)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 108,925 (303,143)
Interest payable 19,464 48,088
----------- -----------
Net cash used in operating activities (201,477) (557,350)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Partnership distributions 280,000 --
Cash from consolidation of equity affiliate 613,800 --
Purchase of investment securities (91,618) --
Purchase of fixed assets (14,126) --
----------- -----------
Net cash flow provided by investing activities 788,056 --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Restricted Cash (70,000) --
Proceeds from issuance of common stock, net -- 684,125
Repayment of short-term and installment notes (332,832) (92,831)
----------- -----------
Net cash provided by (used in) financing activities (402,832) 591,294
----------- -----------
Net increase in cash $ 183,747 $ 33,944
Cash at beginning of period 1,193,170 22,527
----------- -----------
CASH AT END OF PERIOD $ 1,376,917 $ 56,471
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended December 31, 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 six months ended December 31, 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.
On November 27, 2004 and December 27, 2004, the 10% secured convertible
debenture holder elected to convert $12,000 and $100,000, respectively, of
principal and accrued interest into 112,000,000 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 DECEMBER 31, 2004
(UNAUDITED)
NOTE 1. BASIS OF CONSOLIDATION AND SIGNIFICANT ACCOUNTING POLICIES
(A) Organization
Unless the context requires otherwise, "we", "us", "our" or the "Company"
refers to Advanced Communications Technologies, Inc. and its wholly and majority
owned subsidiaries on a consolidated basis.
We are a publicly traded New York City-based vertically integrated
technology and services holding company that, through our majority owned
subsidiary, Pacific Magtron International Corp. ("PMIC"), distributes hardware
components, computer systems and software products, and through our wholly owned
subsidiary and principal operating unit Encompass Group Affiliates, Inc.,
provide board-level repair of technical products to third party warranty
companies, OEMs, national retailers and national office equipment dealers.
Service options include advance exchange, depot repair, call center support,
parts and warranty management for office equipment, fax machines, printers,
scanners, laptop computers, monitors, multi-function units, including high-end
consumer electronics such as PDAs and digital cameras. Additionally, through our
wholly owned investment subsidiary Hudson Street Investments, Inc., we make
strategic minority investments in both public and private companies.
On December 30, 2004 we completed the acquisition of 6,454,300 shares of
the common stock of PMIC (the "PMIC Shares") from Theodore S. Li and Hui Cynthia
Lee pursuant to the terms of a Stock Purchase Agreement, dated December 10,
2004, among the Company, Mr. Li and Ms. Lee . The PMIC Shares represent 61.56%
of the currently issued and outstanding common stock of PMIC. PMIC is primarily
engaged in the business of distributing computer peripheral products, such as
components and multimedia and systems networking products, through its wholly
owned subsidiaries. PMIC's common stock trades on the Over the Counter Bulletin
Board, and PMIC files separate periodic reports with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended.
On December 9, 2003 and December 17, 2003, we 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.
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.
Pacific Magtron, Inc.'s ("PMI") and Pacific Magtron International (GA),
Inc.'s ("PMICGA"), subsidiaries of PMIC, principal activity consists of the
importation and wholesale distribution of electronics products, computer
components, and computer peripheral equipment throughout the United States. Live
Warehouse, Inc. ("LWI") sells consumer computer products through the Internet
and distributes certain computer products to resellers.
(B) Financial Statement Presentation and Principles of Consolidation
The condensed consolidated financial statements include the Company and
all of its wholly and majority owned subsidiaries. The Company consolidates all
majority owned and controlled subsidiaries, uses the equity method of accounting
for investments in which the Company is able to exercise significant influence,
and uses the cost method for all other investments. The Company's condensed
consolidated financial statements include the consolidated financial results of
PMIC, a majority owned and controlled company, and its wholly owned
subsidiaries, PMI, PMIGA and LWI. All significant intercompany transactions have
been eliminated. Minority interests in the Company's subsidiaries are not
material.
- --------------------------------------------------------------------------------
5
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004
(UNAUDITED)
The financial information included herein is unaudited. The interim
condensed consolidated financial statements have been prepared on the same basis
as the annual financial statements and, in the opinion of management, reflect
all adjustments, which include only normal recurring adjustments, necessary for
a fair presentation of the Company's consolidated financial position and results
of operations for the periods presented. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been omitted. These condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and
accompanying notes presented in the Company's Form 10-K for the year ended June
30, 2004. Interim operating results are not necessarily indicative of operating
results expected for the entire year.
(C) Use of Estimates
The preparation of the condensed 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.
(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.
PMIC's inventories, consisting primarily of finished goods, are stated at
the lower of cost (moving weighted average method) or market. The Company
regularly reviews inventory turnover and quantities on hand for excess, slowing
moving and obsolete inventory based primarily on estimated forecasts of product
demand. Excess, obsolete and slow-moving inventory items, including items that
have no purchase and sales activities for more than one year, are written down
to their net realizable values. Due to a relatively high inventory turnover rate
and the inclusion of provisions in the vendor agreements common to industry
practice that provide us price protection or credits for declines in inventory
value and the right to return certain unsold inventory, we believe that our risk
for a decrease in inventory value is minimized. No assurance can be given,
however, that we can continue to turn over our inventory as quickly in the
future or that we can negotiate such provisions in each of our vendor contracts
or that such industry practice will continue.
(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:
Building and leasehold improvements 15 to 40 years
Machinery and equipment 3 to 7 years
Furniture and fixtures 5 to 7 years
Automobiles. 5 years
Software.... 3 years
Maintenance and repairs are charged to expense when incurred.
- --------------------------------------------------------------------------------
6
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004
(UNAUDITED)
(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. We provide 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.
The fair value of PMIC's long-term debt and floor plan inventory loans is
estimated based on current interest rates available to PMIC for debt instruments
with similar terms and remaining maturities. At December 31, 2004 and 2003, the
fair value of long-term debt, which consisted of a bank loan and an SBA loan
relating to PMIC's facility in Milpitas, California, was approximately
$3,205,100 and $3,316,000, respectively. The bank loan had an outstanding
balance of $2,331,700 and $2,360,900 as of December 31, 2004 and 2003,
respectively. The carrying value of the bank loan, which contains an adjustable
interest rate provision based on the market interest rate, approximates its fair
value. The SBA loan had an outstanding amount of $771,700 and $808,600 at
December 31, 2004 and 2003, respectively. The estimated fair value of the SBA
loan was $873,400 and $955,100 as of December 31, 2004 and 2003, respectively.
The fair value of the SBA loan was estimated based on the present value of the
future payments discounted by the market interest rate for similar loans at
December 31, 2004 and 2003. The fair values of accounts receivable, other
receivable, accounts payable and floor plan inventory loans approximates their
carrying values because of the short maturity of 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.
PMIC grants credit to its customers only after undertaking an
investigation of credit risk for all significant amounts. An allowance for
doubtful accounts is provided for estimated credit losses at a level deemed
appropriate to adequately provide for known and inherent risks related to such
amounts. The allowance is based on reviews of loss, adjustment history, current
economic conditions, level of credit insurance and other factors that deserve
recognition in estimating potential losses. Generally, our allowance for
doubtful accounts includes receivables past due over 90 days, returned checks
and an estimated percentage of the receivables currently due. While management
uses the best information available in making its determination, the ultimate
recovery of recorded accounts receivable is also dependent upon future economic
and other conditions that may be beyond management's control. In addition, it is
uncertain as to the continuing availability of cost-efficient credit insurance.
We are unable to project the future trend of our bad debt expense.
(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.
- --------------------------------------------------------------------------------
7
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004
(UNAUDITED)
(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.
(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 six months ended December 31, 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". During
the six months ended December 31, 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.
(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.
- --------------------------------------------------------------------------------
8
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004
(UNAUDITED)
The Company's majority owned subsidiary, PMIC, recognizes sales of
computer and related products upon shipment, when the customer takes ownership
and assumes risk of loss, provided no significant obligations remain and
collectibility is probable. A provision for estimated product returns is
established at the time of sale based upon historical return rates, which have
typically been insignificant, adjusted for current economic conditions. The
Company generally does not provide volume discounts or rebates to its resale
customers.
(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.
(Q) Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (R), "Share-Based Payment".
SFAS No. 123 (R) revises SFAS No. 123, "Accounting for Stock-Based Compensation"
and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees".
SFAS No. 123 (R) focuses primarily on the accounting for transactions in which
an entity obtains employee services in share-based payment transactions. SFAS
No. 123 (R) requires companies to recognize in the statement of operations the
cost of employee services received in exchange for awards of equity instruments
based on the grant-date fair value of those awards (with limited exceptions).
SFAS No. 123 (R) is effective as of the first interim or annual reporting period
that begins after June 15, 2005 for non-small business issuers and after
December 15, 2005 for small business issuers. Accordingly, the Company will
adopt SFAS No. 123 (R) in its quarter ending March 31, 2006. The Company is
currently evaluating the provisions of SFAS No. 123 (R) and has not yet
determined the impact, if any, that SFAS No. 123 (R) will have on its financial
statement presentation or disclosures.
NOTE 2. RESTRICTED CASH
As of December 31, 2004, we had restricted cash in the aggregate amount of
$435,000 that was held in escrow as a security and pledge to Wells Fargo Bank in
connection with our mortgage loan and Textron Financial in connection with our
Inventory Flooring Loans in the amounts of $180,000 and $255,000 respectively.
As a condition to extend loan default waivers through December 31, 2005, the
Company agreed to deposit an additional $70,000 with Wells Fargo Bank in
February 2005. This additional $70,000 is included in the restricted cash amount
of $505,000 appearing on the December 31, 2004 balance sheet.
NOTE 3. ACCOUNTS RECEIVABLE AGREEMENTS
On April 1, 2003, PMIC purchased a credit insurance policy from American
Credit Indemnity (ACI) covering certain accounts receivable up to $2,000,000 of
losses. PMIC also has an agreement with ENX, Inc. (ENX) to sell its past-due
accounts receivables from pre-approved customers with pre-approved credit limits
under certain conditions. The commission is 0.5% of the approved invoice amounts
with a minimum quarterly commission of $12,500. As of December 31, 2004,
approximately $1,059,000 of the outstanding receivables was approved by ENX. The
ACI policy expires on March 31, 2005 and the ENX policy expires on April 30,
2005.
NOTE 4. 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 six months
ended December 31, 2004, Hudson Street received $280,000 of cash distributions
from this investment and recorded $385,333 as its distributive share of
partnership net earnings. As of December 31, 2004, Hudson Street's investment in
Yorkville amounted to $2,880,232 under the equity method of accounting and is
reflected on the consolidated balance sheet in "Other Assets." On February 11,
2005, the partnership redeemed our partnership interest for $2,625,000 (See Note
14-Subsquent Events).
- --------------------------------------------------------------------------------
9
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004
(UNAUDITED)
NOTE 5. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment as of December 31,
2004 and June 30, 2004:
12/31/04 6/30/04
----------- -----------
Building and improvements $ 2,778,999 $ 111,741
Land 1,158,500 --
Furniture and fixtures 182,777 14,565
Computers and equipment 52,000 40,210
----------- -----------
$ 4,172,276 $ 166,516
Less: Accumulated depreciation (8,008) (1,082)
----------- -----------
Property and equipment, net $ 4,164,268 $ 165,434
=========== ===========
NOTE 6. NOTES AND LOAN PAYABLE
12/31/04 6/30/04
----------- -----------
Current:
8% Note Payable-Current $ 57,832 $ 57,831
Loan Payable-Shareholder -- 1,055,736
Note Payable-Cornell Capital 2,000,000 2,375,000
6% Secured Note Due 12/05 500,000 --
Bank Loan-Current 71,900 --
6% Unsecured Note 166,156 --
10% Secured Convertible Note 77,500 150,523
Common Stock To Be Issued 100,000 --
----------- -----------
Notes Payable-Current $ 2,973,388 $ 3,639,090
=========== ===========
Long-Term:
6% Unsecured Note $ 332,313 $ 498,469
Note Payable-ACT Australia -- 1,791,166
8% Note Payable -- 57,832
Bank Loan 2,361,500 --
SBA Loan 771,700 --
----------- -----------
Notes Payable-Long-Term $ 3,465,513 $ 2,347,467
=========== ===========
The Company's majority owned subsidiary, PMI, obtained financing of
$3,498,000 for the purchase of its office and warehouse facility. Of the amount
financed, $2,500,000 was in the form of a 10-year bank loan utilizing a 30-year
amortization period. This loan bears interest at the bank's 90-day LIBOR rate
(2.25% as of December 31, 2004) plus 2.5%, and is secured by a deed of trust on
the property. The balance of the financing was obtained through a $998,000 Small
Business Administration ("SBA") loan due in monthly installments through April
2017. The SBA loan bears interest at 7.569% and is secured by the underlying
property. Under the bank loan, PMI is required, among other things, to maintain
a minimum debt service coverage, a maximum debt to tangible net worth ratio, and
to have no consecutive quarterly losses. In addition, PMI is required to achieve
net income on an annual basis. PMI was in technical violation of the annual
income covenant as of December 31, 2004 and was in violation of the annual
income and quarterly loss covenants as of December 31, 2003. These covenant
violations constituted an event of default under the loan agreement and gave the
bank the right to call the loan. Waivers of the loan covenant violations have
been obtained from the bank that extend through December 31, 2005. As a
condition for these past waivers, the Company maintained $180,000 and $250,000
in a restricted account as a reserve for debt service as of December 31, 2004
and 2003, respectively ,and agreed to deposit in February 2005, an additional
$70,000 in escrow to Wells Fargo Bank as a condition to the current Bank waiver
through December 31, 2005. These amounts have been reflected as restricted cash
in the accompanying condensed consolidated balance sheet. Based on anticipated
future results, it is probable that the Company will be out of compliance with
certain of these covenants. If this were to occur and a waiver for the violation
cannot be obtained, the Company would be required to classify the bank loan as
current, which would cause the Company to be out of compliance with another
financial covenant included in its inventory flooring facility with Textron
Financial Corporation as discussed in note 8 to the condensed consolidated
financial statements.
- --------------------------------------------------------------------------------
10
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004
(UNAUDITED)
Future maturities of long-term debt as of December 31, 2004 are as
follows:
Date Amount
---- ------
June 30, 2005 $ 2,415,556
June 30, 2006 800,588
June 30, 2007 2,478,356
June 30, 2008 49,900
June 30, 2009 53,800
Thereafter 640,700
---------------
Total $ 6,438,900
===============
NOTE 7. DEBT FORGIVENESS
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. On November 24, 2004, the court entered a
judgment in the approximate amount of $8 million in favor of the Company. The
Company offset approximately $2,847,000 of obligations it allegedly owed to the
defendants against the judgment and recognized debt forgiveness income. Because
of the uncertainty of collecting the balance of the judgment or approximately
$5.1 million, we have not recorded this receivable and income in the December
31, 2004 financial statements. Additional debt forgiveness income will be
recorded in the period or periods in which collection or seizure of assets is
made.
NOTE 8. FLOOR PLAN INVENTORY LOANS AND LETTER OF CREDIT
In May 2003, PMI obtained a $3,500,000 inventory financing facility, which
includes a $1 million letter of credit facility used as security for inventory
purchased on terms from vendors in Taiwan, from Textron. The credit facility is
guaranteed by PMIC, PMIGA, LW, two shareholders/officers of the Company, FNC and
Lea, and may be discontinued by Textron at any time at its sole discretion.
Under the agreement, the Company granted Textron a first priority lien on all of
its corporate assets. Borrowings under the inventory line are subject to 30 days
repayment, at which time interest accrues at the prime rate plus 6% (11.25% at
December 31, 2004). The Company is required to maintain collateral coverage
equal to 120% of the outstanding balance. A prepayment is required when the
outstanding balance exceeds the sum of 70% of the Company's eligible accounts
receivable and 90% of the Textron-financed inventory and 100% of any cash
assigned or pledged to Textron. The Company is also required to maintain
$255,000 in a restricted account as a pledge to Textron. This amount has been
reflected as restricted cash in the condensed consolidated financial statements.
PMI and PMIC are required to meet certain financial ratio covenants, including a
minimum current ratio, a maximum leverage ratio, a minimum tangible capital
funds and required levels of profitability. Beginning on September 30, 2003 and
through December 31, 2004, the Company was out of compliance with the maximum
leverage ratio covenant and the minimum tangible capital funds covenant for
which waivers have been obtained through December 31, 2004. Based on the
Company's anticipated future results, it is probable that the Company will
continue to be out of compliance with certain of these covenants. If this was to
occur and a waiver for the violation cannot be obtained, Textron might terminate
the credit facility and accelerate the loan payments. Upon termination, there is
no assurance that the Company would have the funding necessary to finance its
future inventory purchases at levels necessary to achieve profitability. As of
December 31, 2004, the outstanding balance of this loan was $2,243,100, which is
classified as a current liability on the accompanying consolidated balance
sheet.
- --------------------------------------------------------------------------------
11
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004
(UNAUDITED)
NOTE 9. 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 six months ended December 31, 2004 the Company accreted
$36,917 of debt discount as interest expense.
On November 22, 2004, the outstanding 10% secured convertible debentures
in the amount of $187,500 plus accrued interest of $40,588 held by Cornell
Capital Partners, L.P. matured.
On November 22, 2004 and December 27, 2004, Cornell Capital Partners, L.P.
elected to convert, at $.001 per share, $10,000 and $100,000 of principal and
$2,000 of accrued interest, respectively, into 112,000,000 shares of common
stock. At December 31, 2004, $77,500 of principal and $38,588 of accrued
interest remain outstanding and in default.
On February 11, 2005, Cornell Capital Partners, L.P. indicated their
intention to convert the balance of the convertible note, in the amount of
$77,500 of principal and $38,588 of accrued interest, at $.001 per share, into
116,088,000 shares of common stock. Upon conversion, the Company's obligations
under the Debenture will be satisfied in full.
NOTE 10. PURCHASE OF PACIFIC MAGTRON INTERNATIONAL CORP. AND SUBSIDIARIES
On December 30, 2004, we completed the acquisition of 6,454,300 shares of
the common stock of Pacific Magtron International Corp. (the "PMIC Shares") for
the aggregate purchase price of $500,000 from Theodore S. Li and Hui Cynthia Lee
(collectively, the "Stockholders") pursuant to the terms of a Stock Purchase
Agreement, dated December 10, 2004, among the Company, Mr. Li and Ms. Lee (the
"Stock Purchase Agreement"). The PMIC Shares represent 61.56% of the currently
issued and outstanding common stock of Pacific Magtron International Corp.
("PMIC"). PMIC is primarily engaged in the business of distributing computer
peripheral products, such as components and multimedia and systems networking
products, through its wholly owned subsidiaries. PMIC's common stock trades on
the Over the Counter Bulletin Board, and separately files periodic reports with
the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended.
The Company accounted for this acquisition using the purchase method of
accounting in accordance with the provisions of SFAS 141. This acquisition
expands the Company's business into a vertically integrated technology and
service business to the consumer electronics industry. PMIC employs
approximately 60 people in California and Georgia and has annual sales of
approximately $70 million. Under the terms of the Stock Purchase Agreement, the
Company paid the purchase price for the PMIC Shares by delivering two
convertible promissory notes (the "Notes") in the principal amounts of $166,889
and $333,111 to Mr. Li and Ms. Lee, respectively. The Notes will mature on
December 29, 2005 and no principal or interest payments will be required prior
to such date. The Notes bear interest at 6.0% per annum. Upon the occurrence and
during the continuation of any Event of Default (as specified in the Notes), the
interest rate will increase to 10.0% per annum and the holders of the Notes may
declare the principal amount of the Notes and all accrued and unpaid interest
thereon to be immediately due and payable. The Company will be able to redeem
all or a portion of Mr. Li's Note on or prior to the maturity date at 110.0% of
the principal amount redeemed, plus all accrued and unpaid interest thereon. The
Company will be able to redeem all or a portion of Ms. Lee's Note prior to six
months following the Closing at 105.0% of the principal amount redeemed or
thereafter prior to the maturity date at 110.0% of the principal amount
redeemed, in each case, plus all accrued and unpaid interest thereon. The
holders of the Notes, at their option, may convert, at any time and from time to
time, until payment in full of all amounts due and owing under their Note, any
unpaid principal amount of their Note into shares of common stock of the Company
at a conversion price per share of $0.01. If the full original principal amount
of the Notes were converted, this would result in the issuance of an aggregate
of 50,000,000 shares of the Company's common stock to the Stockholders. The
conversion ratio is subject to customary adjustments for stock splits, reverse
stock splits and other recapitalizations effected by the Company. The Company
currently expects to use funds out of working capital to repay any and all
amounts due and owing under the Notes. The Company's payment obligations under
the Notes (the "Obligations") are secured by the PMIC Shares pursuant to a
Custodial and Stock Pledge Agreement, dated December 30, 2004, among the
Company, the Stockholders and Quarles & Brady Streich Lang LLP, as custodian
(the "Pledge Agreement").
- --------------------------------------------------------------------------------
12
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004
(UNAUDITED)
Unless and until an Event of Default under the Notes shall have occurred,
the Company shall be entitled to exercise all voting and other corporate rights
in respect of the PMIC Shares (except for the right to receive dividends and
distributions payable in kind, which are to be delivered to the custodian),
including, without limitation, all rights and privileges of conversion, exchange
and subscription, as though the Company were the absolute owner of the PMIC
Shares, subject to the pledge in the Pledge Agreement. Notwithstanding the
foregoing, the Company has agreed that it will not vote any of the PMIC Shares
in any way inconsistent with the provisions or intent of the Pledge Agreement.
All rights of the Company to vote and give consents, waivers and ratifications,
and to convert, exchange or subscribe (collectively referred to as the
"Corporate Rights"), shall cease if an Event of Default shall occur. If an Event
of Default shall occur, whether or not the PMIC Shares shall have been
registered in the Stockholders' names, the Stockholders then shall have the
right to exercise all Corporate Rights with respect to the PMIC Shares.
We acquired all of the operating assets, tangible and intangible property,
rights and licenses, goodwill and business of PMIC, for a total purchase price
of $500,000 consisting of a one year 6% secured note. The Company also incurred
$88,834 of capitalized transaction costs for a total acquisition cost of
$588,834.
This acquisition has been accounted for by the purchase method of
accounting and, accordingly, the operating results have been included in the
Company's consolidated results of operations from the date of acquisition. The
Company acquired total assets valued at $11,798,000and assumed liabilities of
$11,207,000. The excess of the consideration given over the fair value of net
assets acquired has been recorded as goodwill in the amount of $225,000. The
Company will account for the purchased goodwill in accordance with the
provisions of SFAS 142.
The purchase price allocation recorded for the acquisition of the assets
and liabilities assumed of PMIC is as follows:
(in thousands)
Cash $ 614
Restricted Cash 435
Accounts receivables, net 3,802
Inventory 2,760
Prepaid expenses and other assets 196
Building and equipment 3,991
Total assets $ 11,798
Liabilities assumed:
Accounts payable & accrued expenses 5,757
Floor plan inventory loan 2,243
Notes payable 3,205
Other current liabilities 9
Total liabilities assumed $ 11,207
Excess of assets acquired over liabilities assumed 591
Minority interest (227)
Purchase price 589
--------
Goodwill $ 225
========
- --------------------------------------------------------------------------------
13
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004
(UNAUDITED)
The following unaudited pro forma consolidated results of operations are
presented as if the acquisition of PMIC had been made at the beginning of the
periods presented:
Three Months Ended Six Months Ended Fiscal Year Ended
----------------------------- ----------------------------- ------------------------------
12/31/04 12/31/03 12/31/04 12/31/03 6/30/04 6/30/03
------------ ------------ ------------ ------------ ------------ ------------
Net sales $ 17,030,019 $ 19,715,500 $ 35,938,703 $ 39,229,600 $ 72,079,000 $ 74,985,000
Net income (loss) 2,646,480 265,721 2,357,880 (326,641) (658,000) (4,766,000)
Basic and diluted
earnings (loss)
per common stock $ .0013 $ .00 $ .0012 $ .00 $ (.00) $ (.03)
The following unaudited pro forma consolidated balance sheet as of June
30, 2004, is presented as if the acquisition of Pacific Magtron International
Corp. had been made at the beginning of the fiscal year ended June 30, 2004:
Proforma Consolidated Balance Sheet Data
as of June 30, 2004
(in thousands)
Cash and cash equivalents $ 1,807
Restricted cash 435
Accounts receivable, net 4,203
Inventory 3,110
Other receivables and prepaid expenses 253
Total Current Assets 9,808
Property and equipment, net 4,100
Other assets 3,218
Excess of purchase price over fair market
value of acquired assets 2,611
Total Assets $19,737
Accounts payable and accrued expenses 5,953
Notes and loans payable, current portion 3,711
Floor plan inventory loan 2,243
Other current liabilities 390
Total Current Liabilities 12,297
Notes payable, less current portion 5,379
Stockholders' Equity $ 2,061
Total Liabilities and Stockholders' Equity $19,737
=======
- --------------------------------------------------------------------------------
14
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004
(UNAUDITED)
The unaudited pro forma information is not necessarily indicative of the
results of operations that would have occurred had the purchase been made at the
beginning of the periods presented or the future results of the combined
operations.
NOTE 11. STOCKHOLDERS' EQUITY
Stock Issued For Note Payable To Cornell Capital Partners, L.P.
During the six months ended December 31, 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.
Stock Issued For Convertible Debt
During the six months ended December 31, 2004, the Company issued
12,000,000 shares of common stock valued at $12,000 in partial repayment of
principal and accrued interest on the 10% secured convertible debt.
Common Stock To Be Issued
During the six months ended December 31, 2004, the convertible debenture
holder elected to convert $100,000 of principal on the 10% secured convertible
debenture into 100,000,000 shares of common stock. At December 31, 2004, such
shares have not been issued.
NOTE 12. 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 December 31, 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, and on November 24, 2004, the court entered
judgment in the approximate amount of $8 million in favor of the Company.
Employment Agreements
On December 30, 2004, we entered into an employment agreement with each of
Mr. Ted Li and Ms. Cynthia Lee pursuant to which Mr. Li and Ms. Lee are to be
employed by PMIC. Unless terminated sooner, the initial term of Mr. Li's
Employment Agreement expires on the three-year anniversary of the closing, and
the initial term of Ms. Lee's Employment Agreement expires on the two-year
anniversary of the closing. The employment agreements also contain non-compete
provisions for a period of two years post termination. Either employment
agreement may be terminated by the Company at any time upon thirty days prior
written notice. In addition, Mr. Li or Ms. Lee, as the case may be, may
terminate their employment agreement immediately for any reason or for "Good
Reason" (as defined in each Employment Agreement). In the event of termination
without cause (as defined in each Employment Agreement) or for Good Reason, Mr.
Li or Ms. Lee, as the case may be, shall receive, in addition to accrued, but
unpaid compensation and other benefits, six months severance.
- --------------------------------------------------------------------------------
15
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004
(UNAUDITED)
Under the terms of each Employment Agreement, each of Mr. Li and Ms. Lee
shall receive a signing bonus of $225,000 within thirty days of the closing. The
Employment Agreements also contemplate an annual salary of not less than
$120,000 and other bonus and earn-out provisions, which may be paid in shares of
common stock of the Company. While any bonus paid in Company common stock will
be at the discretion of the Compensation Committee of the Company's Board of
Directors, the earn-out provisions are set forth in the Employment Agreements
and are based on achievement of certain financial milestones by certain
operating subsidiaries of PMIC. Under the earn-out provisions, Mr. Li and Ms.
Lee may earn the right to receive up to 66,666,666 shares and 33,333,333 shares
of the Company's common stock, respectively, which share amounts are subject to
adjustment for any stock splits or other recapitalizations effected by the
Company; provided that, the percentage of the outstanding common stock that Mr.
Li or Ms. Lee would have had the right to receive prior to the adjustment shall
not be changed by any such adjustment. Upon earning any earn-out shares, the
shares will be placed in escrow pursuant to the terms of an Escrow Agreement
entered into among the Company, Mr. Li and Ms. Lee at Closing. In the event that
Mr. Li's or Ms. Lee's employment is terminated for "cause" (as defined in the
applicable Employment Agreement) prior to the expiration of the initial term of
the Employment Agreement all of the earn-out shares earned or to be earned by
Mr. Li or Ms. Lee, as applicable, will be forfeited. If, however, Mr. Li's or
Ms. Lee's employment is terminated for reasons other than "cause" prior to the
expiration of the initial term of the applicable Employment Agreement, Mr. Li
and Ms. Lee, as the case may be, will be entitled to receive any of the earn-out
shares earned and placed in escrow prior to such termination. Upon release from
escrow, the holders of earn-out shares will have certain rights to request the
Company to register the shares for resale under the Securities Act of 1933, as
amended (the "Securities Act").
NOTE 13. GOING CONCERN
The Company's condensed consolidated financial statements for the six
months ended December 31, 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 $201,477 and working capital deficiency of $2,398,437 as of
December 31, 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. On
February 11, 2005, the Company's partnership interest was redeemed, entitling
the Company to receive $800,000 in cash and reducing our current liabilities by
$1,725,000.
The condensed consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
NOTE 14. SUBSEQUENT EVENTS
On January 31, 2005, the Managing Member of Yorkville Advisors Management,
LLC, announced that the partnership will begin winding up its affairs and is
expected to dissolve later this year. Subsequently, on February 11, 2005, the
Company's partnership interest in Yorkville Advisors Management, LLC was
redeemed in full for $2,625,000.
The Company used $1,825,000 of redemption proceeds to reduce its
outstanding short-term obligation to Cornell Capital Partners, L.P. from
$2,000,000 to $275,000, after paying extension and legal fees of $100,000. The
promissory note was extended to June 30, 2005 and shall bear interest at a rate
of 10% commencing February 10, 2005. Previously, the promissory note was
non-interest bearing. The Company will receive $800,000 of cash proceeds from
the redemption.
On February 11, 2005, Cornell Capital Partners, L.P has indicated their
intent to convert the balance of the convertible note, in the amount of $77,500
of principal and $38,588 of accrued interest, at $.001 per share, into
116,088,000 shares of common stock.
- --------------------------------------------------------------------------------
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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 and six-month periods ended December 31, 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 (the "2004 10-KSB"), the
information in the consolidated financial statements and the notes pertaining
thereto contained in Item 1 - Financial Information - in this Report on Form
10-QSB and the information discussed in the 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 six months ended December 31, 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, 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 publicly traded New York City-based vertically integrated
technology and services holding company that, through our majority owned
subsidiary, Pacific Magtron International Corp. (PMIC), distributes hardware
components, computer systems and software products, and through our wholly owned
subsidiary and principal operating unit, Encompass Group Affiliates, Inc.
("Encompass"), provides board-level repair of technical products to third party
warranty companies, OEMs, national retailers and national office equipment
dealers. Service options include advance exchange, depot repair, call center
support, parts and warranty management for office equipment, fax machines,
printers, scanners, laptop computers, monitors, multi-function units, including
high-end consumer electronics such as PDAs and digital cameras. Additionally,
through our wholly owned investment subsidiary Hudson Street Investments, Inc.
("Hudson Street"), we have made, and seek to make, strategic minority
investments in both public and private companies.
On December 30, 2004, we completed the acquisition of 6,454,300 shares of
the common stock of PMIC (the "PMIC Shares") from Theodore S. Li and Hui Cynthia
Lee pursuant to the terms of a Stock Purchase Agreement, dated December 10,
2004, among the Company, Mr. Li and Ms. Lee. The PMIC Shares represent 61.56% of
the currently issued and outstanding common stock of PMIC. PMIC is primarily
engaged in the business of distributing computer peripheral products, such as
components and multimedia and systems networking products, through its wholly
owned operating subsidiaries. PMIC's common stock trades on the Over the Counter
Bulletin Board, and PMIC files separate periodic reports with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended.
We focus on high growth-potential businesses through our wholly and
majority 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, Inc., a
Delaware corporation ("Cyber-Test"), which Encompass acquired on June 3, 2004.
Cyber-Test is an electronic equipment repair company based in Longwood, Florida,
and is our core operating business.
Through our majority owned subsidiary, PMIC, we import and distribute
computer accessories, parts and components. Additionally, through our
wholly-owned subsidiary, Hudson Street, an investment vehicle, we owned a
minority interest in Yorkville Advisors Management, LLC ("Yorkville Advisors"),
an investment management limited liability company, until February 2005 when our
ownership interest was redeemed, 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, an
in-development software-defined, radio-based wireless technology.
- --------------------------------------------------------------------------------
17
Through our wholly and majority owned subsidiaries, we specialize in the
import and wholesale distribution of computer accessories, parts and components
and 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 continue to pursue the acquisition of, and investment in,
technology and/or brand differentiated companies with significant
growth-potential that complement our expansion plan of providing an integrated
life cycle service for the consumer electronics industry. 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. PMIC is an importer
and wholesale distributor of computer components, accessories and systems and
operates as the distribution engine for Encompass. Until February 2005, Hudson
Street was a minority partner in the management firm of an institutional
investment company and intends to continue to seek opportunities to make
minority investments in publicly and 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. Although we believe we can continue to grow
through strategic acquisitions and investments, there is no guarantee as to
when, if ever, we would complete such strategic acquisitions or investments.
Additionally, in the event we consummate an acquisition or investment, there is
no guarantee such acquisition would be successful or such investment would be
profitable for the Company.
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.
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 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.
PMIC's inventories, consisting primarily of finished goods, are stated at
the lower of cost (moving weighted average method) or market. The Company
regularly reviews inventory turnover and quantities on hand for excess, slowing
moving and obsolete inventory based primarily on our estimated forecast of
product demand. Excess, obsolete and slow-moving inventory items, including
items that have no purchase and sales activities for more than one year, are
written down to their net realizable values. Due to a relatively high inventory
turnover rate and the inclusion of provisions in the vendor agreements common to
industry practice that provide us price protection or credits for declines in
inventory value and the right to return certain unsold inventory, we believe
that our risk for a decrease in inventory value is minimized. No assurance can
be given, however, that we can continue to turn over our inventory as quickly in
the future or that we can negotiate such provisions in each of our vendor
contracts or that such industry practice will continue.
- --------------------------------------------------------------------------------
18
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:
Building and leasehold improvements 15 to 40 years
Machinery and equipment 3 to 7 years
Furniture and fixtures 5 to 7 years
Automobiles 5 years
Software 3 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 (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. We provide a reserve for
warranty repairs based on historical failure rates and the estimated cost to
repair.
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. The
fair value of PMIC's long-term debt and floor plan inventory loan is estimated
based on current interest rates available to PMIC for debt instruments with
similar terms and remaining maturities.
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.
PMIC grants credit to its customers only after undertaking an
investigation of credit risk for all significant amounts. An allowance for
doubtful accounts is provided for estimated credit losses at a level deemed
appropriate to adequately provide for known and inherent risks related to such
amounts. The allowance is based on reviews of loss, adjustment history, current
economic conditions, level of credit insurance and other factors that deserve
recognition in estimating potential losses. Generally, our allowance for
doubtful accounts includes receivables past due over 90 days, returned checks
and an estimated percentage of the receivables currently due. While management
uses the best information available in making its determination, the ultimate
recovery of recorded accounts receivable is also dependent upon future economic
and other conditions that may be beyond management's control. In addition, it is
uncertain as to the continuing availability of cost-efficient credit insurance.
We are unable to project the future trend of our bad debt expense.
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.
- --------------------------------------------------------------------------------
19
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.
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.
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.
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 six months ended December 31, 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.
Business Segments
The Company applies Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information". During
the six months ended December 31, 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 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 ended December 31, 2004.
- --------------------------------------------------------------------------------
20
The Company's majority owned subsidiary, PMIC, recognizes sales of
computer and related products upon shipment, when the customer takes ownership
and assumes risk of loss, provided no significant obligations remain and
collectibility is probable. A provision for estimated product returns is
established at the time of sale based upon historical return rates, which have
typically been insignificant, adjusted for current economic conditions. The
Company generally does not provide volume discounts or rebates to its resale
customers.
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.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (R), "Share-Based Payment".
SFAS No. 123 (R) revises SFAS No. 123, "Accounting for Stock-Based Compensation"
and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees".
SFAS No. 123 (R) focuses primarily on the accounting for transactions in which
an entity obtains employee services in share-based payment transactions. SFAS
No. 123 (R) requires companies to recognize in the statement of operations the
cost of employee services received in exchange for awards of equity instruments
based on the grant-date fair value of those awards (with limited exceptions).
SFAS No. 123 (R) is effective as of the first interim or annual reporting period
that begins after June 15, 2005 for non-small business issuers and after
December 15, 2005 for small business issuers. Accordingly, the Company will
adopt SFAS No. 123 (R) in its quarter ending March 31, 2006. The Company is
currently evaluating the provisions of SFAS No. 123 (R) and has not yet
determined the impact, if any, that SFAS No. 123 (R) will have on its financial
statement presentation or disclosures.
Results of Operations-Comparison of the Three Months Ended December 31, 2004 to
the Three Months Ended December 31, 2003
Overall Results of Operations
For the three months ended December 31, 2004, we generated net income of
$2,719,244, which was a $2,268,843 increase from net income of $450,401 for the
comparable period in the prior year.
The substantial increase in net income for the three months ended December
31, 2004 over the comparative period was a result of the Company generating
$2,847,511 of forgiveness of debt income due to the judgment we obtained against
our former CEO and related entities.
Summary of Results of Operations
Three Months Ended
December 31,
---------------------------- Period to Period
2004 2003 % Change
----------- ----------- -----------
Net income from Cyber-Test operations $ 61,701 $ -- --
Net income from investments 170,000 -- --
Parent company and Encompass overhead (333,767) (245,696) 36%
Net interest expense (26,201) (37,730) (31%)
Forgiveness of debt 2,847,511 733,827 288%
----------- ----------- -----------
Net income $ 2,719,244 $ 450,401 504%
=========== =========== ===========
- --------------------------------------------------------------------------------
21
Overview of Second Quarter Results
For the three months ended December 31, 2004, we recorded $1,709,919 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 $598,372 or 35% of sales for the
quarter was realized after deducting cost of sales in the amount of $1,111,547.
For the three months ended December 31, 2004, Cyber-Test generated a net profit
from operations of $61,701 or 3.6% of sales, which is consistent with the last
quarter of the calendar year being the slowest in Cyber-Test's business cycle.
For the three months ended December 31, 2004, we reported an overall loss
from operations of $272,066 because of consolidated overhead costs at the parent
and Encompass levels versus a $245,696 loss for the three months ended December
31, 2003. Overhead costs for the three months ended December 31, 2004 amounted
to $870,438 and include $109,267 of professional fees and costs, $76,746 of
amortization of deferred compensation and depreciation and $684,425 of general
and administrative costs. Our overall loss from operations was offset by
$170,000 of other investment income from our investment in Yorkville Advisors
through Hudson Street and $2,847,511 of forgiveness of debt income in connection
with the judgment that we obtained against our former CEO and related entities.
Overall net income of $2,719,244 for the three months ended December 31, 2004
was 504% greater than our overall net income of $450,401 for the comparative
three-month period ended December 31, 2003.
Revenue
Revenue for the three months ended December 31, 2004 was $1,709,919 and
was entirely attributable to Cyber-Test's operations. We did not recognize any
revenue for the three months ended December 31, 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 December 31, 2004 was
$1,111,547 and was comprised principally of purchased supplies and parts in the
amount of $309,696, direct labor costs of $311,373 and freight and shipping
expense in the amount of $171,447.
Gross Profit
Gross profit was 35% of gross sales from Cyber-Test's operations for the
three months ended December 31, 2004, which resulted in an operating income
margin of 3.6% of sales. Our gross profit percentage decreased from a first
quarter margin of 7.2% of sales due to the last quarter traditionally being the
slowest of the calendar year. Also contributing to the slight decrease in gross
profit percentage was a steady change in our product mix as the repair and
service of PDAs and laptops are increased as a percentage of revenue, which
services have lower gross margins.
Operating Expenses
Total operating expenses for the three months ended December 31, 2004 and
2003 were $870,438 and $245,696, respectively, representing a $624,742 or 254%
increase for the three months ended December 31, 2004 as compared to the three
months ended December 31, 2003. This increase was primarily attributable to an
increase in selling, general and administrative costs of $668,131 to $684,425
from $16,294 due to the addition of the Encompass and Cyber-Test operations.
Depreciation and amortization expense for the three months ended December
31, 2004 decreased by $30,129 to $76,746 from $106,875 for the three months
ended December 31, 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 December 31, 2004 in the amount
of $62,500.
Other general and administrative expenses amounted to $684,425 for the
three months ended December 31, 2004, which was a $668,131 increase from the
comparative prior period due principally to Cyber-Test operating business
overhead during the quarter ended December 31, 2004. Such overhead expenses
include the overhead operation and cost associated with employing approximately
100 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:
- --------------------------------------------------------------------------------
22
Three Months Ended
December 31,
--------------------- Period to Period
2004 2003 % Change
-------- -------- --------
Salaries and wages $373,000 $ -- --
Building facilities expense 77,820 -- --
Payroll and Unemployment taxes 23,025 -- --
Telephone and utilities 27,243 -- --
Marketing and Promotion 20,198 -- --
Other SG&A costs 163,139 16,294 901%
-------- -------- --------
$684,425 $ 16,294 1,707%
======== ======== ========
Other Income (Expense)
During the three months ended December 31, 2004, we realized $2,991,310 of
net other income due to $2,847,511 of forgiveness of debt income, and $170,000
of partnership income from our investment in Yorkville Advisors. This income was
offset, in part by, net interest expense of $26,201.
During the three months ended December 31, 2003, the Company incurred
interest expense of $37,730 that was attributable to an aggregate of $14,292 of
accrued interest on the Company's 10% Secured Convertible Debenture dated
November 22, 2002, held by Cornell Capital (the "10% Debenture"), the Company's
5% Convertible Debenture (the "5% Debenture") and the Company's 8% Note Payable
(the "8% Note") and $23,438 of debt discount expense treated as interest
attributable to the beneficial conversion feature of the 10% Debenture.
Forgiveness of debt income of $733,827 for the three months ended December 31,
2003 was attributable to the favorable settlement of a majority of the Company's
accounts payable and accrued expenses in the amount of $648,455 and the
forgiveness of interest expense in the amount of $85,372 by certain holders of
the 5% Debenture.
Overall net interest expense decreased by $11,529 to $26,201 for the three
months ended December 31, 2004 from $37,730 for the three months ended December
31, 2003. This decrease was due primarily to the lower levels of interest
bearing debt for the three months ended December 31, 2004 compared to the three
months ended December 31, 2003.
Results of Operations-Comparison of the Six Months Ended December 31, 2004 to
the Six Months Ended December 31, 2003
Overall Results of Operations
The significant increase in net income of $2,419,177 from the prior
comparative period is described below and is principally from $2,847,511 of
forgiveness of debt income associated with the favorable judgment that we
obtained against our former CEO and related entities. In addition, because we
closed the PMIC acquisition on December 30, 2004, the results of our operations
do not include PMIC's results of operations, which were negligible for our one-
day of ownership during the six months ended December 13, 2004.
Summary of Results of Operations
Six Months Ended
December 31,
---------------------------- Period to Period
2004 2003 % Change
----------- ----------- -----------
Net income from Cyber-Test operations $ 192,778 $ -- --
Net income from investments 385,233 -- --
Parent company and Encompass overhead (761,809) (459,614) 66%
Net interest expense (64,477) (101,007) (36%)
Forgiveness of debt 2,847,511 740,680 284%
----------- ----------- -----------
Net income $ 2,599,236 $ 180,059 1,344%
=========== =========== ===========
- --------------------------------------------------------------------------------
23
Overview of Six Months Results
For the six months ended December 31, 2004, we realized net income of
$2,599,236 compared with net income of $180,059 for the six months ended
December 31, 2003, or a 1,344% increase. The six months ended December 31, 2004
includes two reporting periods reflecting Encompass' ownership of Cyber-Test`s
operating business. During this period, Cyber-Test recorded $3,535,103 of sales
relating to the repair, service and warranty and exchange of various office
equipment, PDAs, laptop computers, monitors and multi-functional units. A gross
profit of $1,272,128 or 36% of sales for the six-month period was realized after
deducting cost of sales in the amount of $2,262,975. Cyber-Test's net profit
from operations of $192,778 or 5.4% of sales was 25% less than the 7.2% net
sales margin as compared with the first quarter. This reduction in net sales
margin is a result of the seasonality of Cyber-Test's business as the last
quarter of the calendar year is traditionally the slowest quarter of the year
due to holidays and consumer buying habits.
Sales margins for the six months also slightly decreased from 37% during
the first quarter to 36% for the six months ended December 31, 2004. This slight
decrease is due to a shift in product lines via the implementation of new PDA
and laptop repair and service contracts that have slightly lower margins than
the repair of our core products such as fax machines, printers and multifunction
machines. With the advent of these new repair and services contracts, a gradual
but steady change in our product mix will reduce overall gross margins. However,
while overall gross margins will slightly decrease, it is expected that our
overall net income, as a percentage of sales, will increase due to the higher
profit element inherent in the laptop, PDA product mix.
For the six months ended December 31, 2004, we reported an overall loss
from operations of $569,031 because of consolidated corporate overhead costs at
the parent and Encompass levels versus a $459,614 loss from operations for the
six months ended December 31, 2003. These overhead costs amounted to $1,841,159
and include $321,426 of professional fees and costs, $147,052 of amortization of
deferred compensation and depreciation and $1,372,681 of general and
administrative costs. Our overall loss from operations was offset by $385,233 of
other investment income from our investment in Yorkville Advisors through Hudson
Street and $2,847,511 of forgiveness debt income.
Revenue
Revenue for the six months ended December 31, 2004, was $3,535,103 and was
entirely attributable to Cyber-Test's operations. We did not recognize any
revenue for the six months ended December 31, 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 six months ended December 31, 2004, was
$2,262,975 and was comprised principally of purchased supplies and parts in the
amount of $309,696, direct labor costs of $313,373 and freight and shipping
expense in the amount of $171,447.
Gross Profit
Gross profit was 36% of gross sales from Cyber-Test's operations for the
six months ended December 31, 2004, which resulted in an operating income margin
of 5.5% of sales. Our gross profit percentage decreased slightly from the first
quarter due to the last quarter traditionally being the slowest of the calendar
year. Also contributing to the slight decrease in gross profit percentage was a
steady change in our product mix as the repair and service of PDAs and laptops
are increasing as a percentage of revenue, which has a lower gross margin.
Operating Expenses
Total operating expenses for the six months ended December 31, 2004 and
2003 were $1,841,159 and $459,614, respectively, representing a $1,381,545 or
300% increase for the six months ended December 31, 2004 as compared with the
six months ended December 31, 2003. This increase was attributable to an
increase in professional fees in the amount of $129,879 during the six months
ended December 31, 2004 versus the same period in 2003 due to the increase in
investment and acquisition activity during the six month period, as well as an
increase in selling, general and administrative costs of $1,318,364 due to the
addition of the Encompass and Cyber-Test operations.
Depreciation and amortization expense for the six months ended December
31, 2004 decreased by $66,698, or 31%, to $147,052 from $213,750 for the six
months ended December 31, 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 six months ended December 31, 2004 in the
amount of $125,000.
- --------------------------------------------------------------------------------
24
Other general and administrative expenses amounted to $1,372,681 for the
six months ended December 31, 2004, which is a $1,318,364 increase from the
comparative prior period due principally to the addition of the Cyber-Test
operating business overhead during the period. Such overhead expenses include
the overhead operation and cost associated with employing approximately 100
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:
Six Months Ended
December 31,
------------------------- Period to Period
2004 2003 % Change
---------- ---------- ----------
Salaries and wages $ 749,286 $ -- --
Building facilities expense 154,521 -- --
Payroll and Unemployment taxes 51,065 -- --
Telephone and utilities 54,410 -- --
Marketing and Promotion 44,790 -- --
Other SG&A costs 318,609 54,317 487%
---------- ---------- ----------
$1,372,681 $ 54,317 2,427%
========== ========== ==========
Other Income (Expenses)
During the six months ended December 31, 2004, we realized $3,168,267 of
net other income due to the favorable results of our investment in Yorkville
Advisors, which generated $385,233 of income during the six months ended
December 31, 2004, and $2,847,5711 of debt forgiveness income resulting from the
favorable judgment against our former CEO and related entities that allowed us
to discharge these obligations. These items of income were offset, in part, by
net interest expense of $64,477 inclusive of $29,572 of accrued interest on our
notes payable and $36,977 of debt discount expense, net of $2,072 of interest
income.
Interest expense incurred for the six months ended December 31, 2003 was
$101,077 and was attributable to $54,131 of accrued interest on the 10%
Debenture, the Company's 5% Debenture and the 8% Note and $46,876 of debt
discount expense treated as interest attributable to the beneficial conversion
feature of the 10% Debenture. Forgiveness of debt income of $740,680 for the six
months ended December 31, 2003 was attributable to the favorable settlement of a
majority of the Company's accounts payable and accrued expenses at a substantial
discount and the forgiveness of accrued interest by certain holders of the 5%
Debenture.
Overall net interest expense decreased by $36,600 to $64,477 for the six
months ended December 31, 2004 from $101,077 compared to the six months ended
December 31, 2003. This decrease was due primarily to the lower levels of
interest bearing debt.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our acquisitions and investments principally with
short-term borrowings through our Equity Line of Credit with Cornell Capital
Partners, L.P. ("Cornell Capital") and cash received in exchange for the
issuance of 4,200 shares of our Series A Convertible Preferred Stock to Cornell
Capital. We have funded our ongoing operations through cash distributions
received from (i) our investment in an investment management partnership, and
(ii) working capital generated by Cyber-Test, our core operating business. Our
cash and cash equivalents totaled $1,376,917 at December 31, 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.
Although we intend to find alternative financing to our Equity Line of Credit,
there can be no assurance that we will be able to find a lender or lenders that
would provide us with financing at suitable rates of interest, if at all. In
addition, there is no guarantee that we will be able to secure financing to
permit us to pursue strategic acquisitions and investments.
- --------------------------------------------------------------------------------
25
During the six months ended December 31, 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. These advances
were used to pay down our short-term note to Cornell Capital. Also during the
six months ended December 31, 2004, Hudson Street received $280,000 of
membership cash distributions from Yorkville Advisors. We believe that our
existing sources of liquidity including cash resources, cash provided by
operating activities and cash to be received from the redemption of our
Yorkville Advisors membership interest will provide sufficient resources to meet
our present and future working capital and cash requirements for at least the
next 12 months. We do not anticipate making any further advances under the
Equity Line of Credit.
We had total liabilities of $15,154,409 as of December 31, 2004 versus
$6,571,877 as of June 30, 2004. These contractual obligations, along with the
dates on which such payments are due, are described below:
Payments Due by Period (from December 31, 2004)
---------------------------------------------------------------------------
1 2-3 4-5 After 5
Contractual Obligations Total Year or Less Years Years Years
- ----------------------- ----------- ----------- ----------- ----------- -----------
Notes Payable $ 6,438,900 $ 2,415,556 $ 3,278,944 $ 103,700 $ 640,700
Floor Plan Inventory Loans 2,243,100 2,243,100 -- -- --
Accounts Payable and Accrued Expenses 6,238,618 6,238,618 -- -- --
Other Current Liabilities 233,791 233,791 -- -- --
----------- ----------- ----------- ----------- -----------
Total Contractual Obligations $15,154,409 $11,131,065 $ 3,278,944 $ 103,700 $ 640,700
=========== =========== =========== =========== ===========
During the six months ended December 31, 2004, the Company reduced its
contractual obligations by $332,832 through cash payments. At December 31, 2004,
we had a working capital deficiency of $2,398,437.
On February 11, 2005, Hudson Street Investments, Inc. ("Hudson Street"), a
wholly owned subsidiary of Advanced Communications Technologies, Inc. (the
"Company"), became entitled to receive a distribution of $2,625,000 from
Yorkville Advisors Management, LLC ("Yorkville") in exchange for all of Hudson
Street's Preferential Rights Membership Interest in Yorkville, pursuant to the
terms of Yorkville's Limited Liability Company Agreement, as amended. In
connection with the above arrangements, the Company entered into a Letter
Agreement, dated February 11, 2005, with Cornell Capital, whereby Cornell
Capital agreed to extend and set the maturity date of a past-due non-interest
bearing Promissory Note, in the original principal amount of $3,000,000, issued
by the Company to Cornell Capital on January 23, 2004 (the "Cornell Capital
Note"). In accordance with the terms of the Letter Agreement, the Company also
agreed to use $1,725,000 of the distribution proceeds to be received by Hudson
Street to repay a portion of the remaining $2,000,000 of principal outstanding
under the Cornell Capital Note.
The Letter Agreement also contemplates that Cornell Capital will convert
$77,500 of outstanding principal of, plus $38,588 of accrued interest on, the
10% Debenture, into 116,088,000 shares of the Company's common stock. As of the
date hereof, Cornell Capital has not exercised such conversion right; however,
upon conversion, the Company's payment obligations under the10% Debenture will
be satisfied in full.
Below is a discussion of our sources and uses of funds for the six months
ended December 31, 2004:
Overall Net Change In Cash Flow For The Six Months Ended December 31, 2004
During the six months ended December 31, 2004, our cash increased by
$183,747. This net increase in cash was due to the approximate $800,000 of net
cash from investing activities (including $613,800 of cash from PMIC's
operations) reduced by $201,477 of cash used in operations and $332,832 of cash
used to repay short-term and installment notes.
Net Cash Used In Operating Activities
Net cash used in operating activities was $201,477 for the six months
ended December 31, 2004. The use of cash in operating activities for the six
months ended December 31, 2004 was principally from corporate overhead expenses
in excess of cash from operations. This cash shortfall was offset, in full, by
$280,000 of cash received from investments. Net cash used in operating
activities was $557,350 for the six months ended December 31, 2003 and was
principally from a reduction in accounts payable in the amount of $303,143, and
an increase in debt forgiveness income, offset by non-cash charges for
depreciation and amortization, and debt discount expense.
- --------------------------------------------------------------------------------
26
Net Cash From Investing Activities
Cash provided from investing activities of $788,056 for the six months
ended December 31, 2004 was attributable to $613,800 of cash from the
consolidation of PMIC, $280,000 of cash distributions from our partnership
investment offset by $14,126 for the purchase of fixed assets and the purchase
of $91,618 of marketable investment securities in public and private companies.
No cash was provided by or used in investing activities for the six months ended
December 31, 2003.
Net Cash From (Used In) Financing Activities
Net cash of $402,832 used in financing activities for the six months ended
December 31, 2004 was for the repayment of our short-term note to Cornell
Capital in the amount of $275,000, the repayment of the 8% installment note in
the amount of $57,832 and an increase in restricted cash of $70,000. Net cash
provided by financing activities in the amount of $591,294 for the six months
ended December 31, 2003 was from proceeds on the issuance of common stock under
our Equity Line of Credit offset by the repayment of short-term and installment
notes.
Change In Net Assets
As of and through December 31, 2004, the Company experienced material
changes to its net assets from the six-month period ended June 30, 2004. During
the six months ended December 31, 2004, the Company purchased a majority
interest in the business and operating assets of PMIC. As a result of the PMIC
acquisition, the Company acquired total assets of approximately $11,700,000,
consisting principally of cash ($1,048,800), accounts receivable ($3,800,000),
inventory ($2,800,000) and fixed assets ($3,900,000) and assumed $11,200,000 of
liabilities, which consisted principally of accounts payable and accrued
expenses, ($5,800,000), floor plan inventory loans ($2,200,000) and mortgages
payable ($3,200,000). The Company also recorded goodwill in the amount of
$225,000 associated with the PMIC acquisition. In addition, during this period,
we discharged approximately $2,900,000 of obligations in connection with our
California judgment resulting in $2,900,000 of forgiveness of debt income. The
net effect of these transactions on the balance sheet was to increase our net
assets by approximately $11,700,000 during the six months ended December 31,
2004.
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 February 1, 2005, there were
2,016,247,731 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
-------- -------
Fiscal Year 2005
Quarter Ended September 30, 2004 $ .00119 $ .0005
Quarter Ended December 31, 2004 .002 .00038
Fiscal Year 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.
- --------------------------------------------------------------------------------
27
ITEM 3. CONTROLS AND PROCEDURES
As of December 31, 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
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were as of December 31, 2004 effective in timely
alerting the appropriate persons 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, during the fiscal quarter ended December 31, 2004 there were no
changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
- --------------------------------------------------------------------------------
28
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 subsidiaries 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 intends, plans,
anticipates, should and believes.
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, and on November 24, 2004, the court entered
judgment in the approximate amount of $8 million in favor of the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On November 22, 2004, Cornell Capital converted $10,000 of principal of,
and $2,000 of accrued interest on, the 10% Debenture, at $.001 per share, into
12,000,000 shares of our common stock. These shares were issued on November 30,
2004. We issued these shares relying upon Rule 506 of Regulation D and Section
18(b)(4)(D) of the Securities Act of 1933, as amended.
On December 27, 2004, Cornell Capital elected to convert $100,000 of
outstanding principal of the 10% Debenture, at $.001 per share, into 100,000,000
shares of common stock. At December 31, 2004, such shares were not yet issued
and as of February 15, 2005, have not yet been issued pending the receipt of
opinion of counsel for our stock transfer agent.
On January 12, 2005, the Company's Board of Directors approved the
issuance of 5,000,000 shares of restricted common stock to Hawk Associates
valued at $.0016 per share, or $8,000 pursuant to the terms of Hawk Associates'
service agreement with us. The shares were issued on February 4, 2005. We issued
these shares relying upon Rule 506 of Regulation D and Section 18(b)(4)(D) of
the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On November 22, 2004, the remaining $187,500 of principal of, plus accrued
interest of $40,588 on the 10% Debenture matured.
On November 22, 2004 and December 27, 2004, Cornell Capital elected to
convert $10,000 and $100,000, respectively, of principal and $2,000 of accrued
interest on the 10% Debenture at $.001 per share, into 112,000,000 shares of
common stock. The shares of common stock issuable as of November 22, 2004, have
been issued. We issued these shares relying upon Rule 506 of Regulation D and
Section 18(b)(4)(D) of the Securities Act of 1933, as amended. The shares of
common stock issuable at December 27, 2004, have not been issued pending the
receipt of an opinion of counsel for our stock transfer agent. At December 31,
2004, $77,500 of principal and $38,588 of accrued interest remain outstanding on
the 10% Debenture for which we were in default. On February 11, 2005, Cornell
Capital indicated its intention to convert the balance of the 10% Debenture, in
the amount of $77,500 of principal and $38,588 of accrued interest, at $.001 per
share, into 116,088,000 shares of common stock. Upon conversion, the Company's
payment obligations under the debenture will be satisfied in full.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
- --------------------------------------------------------------------------------
29
ITEM 5. OTHER INFORMATION
On January 31, 2005, the Managing Member of Yorkville Advisors announced
that the partnership will begin winding up its affairs and is expected to
dissolve later this year. Subsequently, on February 11, 2005, the Company's
membership interest in Yorkville Advisors was redeemed in full for $2,625,000.
The Company used $1,825,000 of redemption proceeds to reduce its
outstanding short-term obligation to Cornell Capital Partners, L.P. from
$2,000,000 to $275,000, after paying extension and legal fees of $100,000. The
promissory note was extended to June 30, 2005 and shall bear interest at a rate
of 10% commencing February 10, 2005. Previously, the promissory note was
non-interest bearing. The Company will receive $800,000 of cash proceeds from
the redemption.
ITEM 6. EXHIBITS
(a) Exhibits.
Exhibit No. Description Location
- ----------- ----------- --------
2.1 Asset Purchase Agreement dated May 27, 2004, by and Incorporated by reference to Exhibit 10.1 to
between Cyber-Test, Inc., a Delaware corporation and the Company's Form 8-K filed with the SEC on
Cyber-Test, Inc., a Florida corporation. June 3, 2004
2.2 Stock Purchase Agreement, dated December 10, 2004, by Incorporated by reference to Exhibit 2.1 to
and among the Company, Theodore S. Li and Hui Cynthia the Company's Form 8-K filed with the SEC on
Lee December 14, 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 with the SEC on
February 9, 2000
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 with the SEC 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 with the SEC 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 Exhibit 3.1.6
the Company's Form 10-KSB filed with the SEC
on November 3, 2004
3.1.7 Seventh Amendment to Articles of Incorporation Incorporated by reference to Exhibit 3.1.7
the Company's Form 10-KSB filed with the SEC
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 with the SEC on
February 9, 2000
10.1 6% Secured Convertible Promissory Note, dated Incorporated by reference to Exhibit 2.4(i)
December 30, 2004, issued to Theodore S. Li. to the Company's Form 8-K filed with the SEC
on December 14, 2004
- --------------------------------------------------------------------------------
30
Exhibit No. Description Location
- ----------- ----------- --------
10.2 6% Secured Convertible Promissory Note, dated Incorporated by reference to Exhibit 2.4(i)
December 30, 2004, issued to Hui Cynthia Lee. to the Company's Form 8-K filed with the SEC
on December 14, 2004
10.3 Custodial and Stock Pledge Agreement, dated December Incorporated by reference to Exhibit 2.1 to
30, 2004, among Advanced Communications Technologies, the Company's Form 8-K filed with the SEC on
Inc., Theodore S. Li and Hui Cynthia Lee, and Quarles December 14, 2004
& Brady Streich Lang LLP.
10.4 Employment Agreement, dated December 30, 2004, among Incorporated by reference to Exhibit 5.9(a)
Pacific Magtron International Corp., Advanced to the Company's Form 8-K filed with the SEC
Communications Technologies, Inc., Encompass Group on December 14, 2004
Affiliates, Inc., and Theodore S. Li.
10.5 Employment Agreement, dated December 30, 2004, among Incorporated by reference to Exhibit 5.9(b)
Pacific Magtron International Corp., Advanced to the Company's Form 8-K filed with the SEC
Communications Technologies, Inc., Encompass Group on December 14, 2004
Affiliates, Inc., and Hui Cynthia Lee.
10.6 Indemnity Agreement, dated December 30, 2004, among Incorporated by reference to Exhibit 2.4(i)
Advanced Communications Technologies, Inc., Theodore to the Company's Form 8-K filed with the SEC
S. Li and Hui Cynthia Lee. on December 14, 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
- --------------------------------------------------------------------------------
31
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
By: /s/ Wayne I. Danson
------------------------------------------
Name: Wayne I. Danson
Title: President (Principal Executive Officer), Chief
Financial Officer (Principal Accounting Officer)
and Director
Date: February 22, 2005
- --------------------------------------------------------------------------------
32