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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 March 31, 2005
[ ] 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 May 1, 2005, there were 2,121,247,731 shares of the registrant's no par
value common stock issued and outstanding
Transmittal Small Business Disclosure Format (check one):
Yes [ ] No [X]
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ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
INDEX TO FORM 10-QSB
Part I-Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited).
Condensed Consolidated Balance Sheets as of March 31, 2005 (Unaudited) and
June 30, 2004
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended March 31, 2005 and 2004 (Unaudited)
Condensed Consolidated Statement of Stockholders' Equity for the Nine
Months Ended March 31, 2005 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 2005 and 2004 (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.
i
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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.
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2005 June 30, 2004
(Unaudited)
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $ 1,960,692 $ 1,193,170
Restricted cash 338,400 --
Accounts receivable, net of allowance for doubtful accounts of $347,465
and $8,914 at March 31, 2005 and June 30, 2004, respectively 2,623,265 400,747
Inventories 742,544 350,963
Prepaid expenses and other current assets 293,817 81,863
Assets from discontinued operations 196,100 --
------------ ------------
Total Current Assets 6,154,818 2,026,743
Property and equipment, net of accumulated depreciation of $72,370 and $1,082
as of March 31, 2005 and June 30, 2004, respectively 4,055,767 165,434
Other Assets
Partnership Investment -- 2,774,999
Licensed Intangibles and rights 400,000 400,000
Excess of purchase price over fair market value of assets acquired 2,916,155 2,611,055
Other assets 28,600 18,108
------------ ------------
Total Other Assets 3,344,755 5,804,162
------------ ------------
TOTAL ASSETS $ 13,555,340 $ 7,996,339
` ` ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Current portion of notes payable $ 4,282,846 $ 3,639,090
Floor plan inventory loans 1,069,800 --
Accounts payable and accrued expenses 4,648,924 194,540
Liabilities from discontinued Pacific Magtron operations 198,300 390,780
------------ ------------
Total Current Liabilities 10,199,870 4,224,410
Notes and Loans Payable, less current portion 377,007 2,347,467
Minority Interest -- --
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,
2,121,247,731 and 1,994,365,845 shares issued and outstanding, respectively 28,958,881 28,745,253
Additional paid in capital 4,556,455 4,056,455
Deferred commitment and equity financing fees, net of accumulated amortization (25,000) (135,432)
Deferred compensation, net of amortization of $187,500 (312,500) --
Accumulated deficit (30,199,418) (31,241,859)
------------ ------------
Total Stockholders' Equity 2,978,463 1,424,462
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,555,340 $ 7,996,339
============ ============
See accompany notes to condensed consolidated financial statements
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1
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------------------------------------------------
2005 2004 2005 2004
------------------------------------------------------------------------
SALES $ 11,400,814 $ -- $ 14,935,917 $ --
COST OF SALES 10,347,116 -- 12,610,091 --
------------------------------------------------------------------------
GROSS PROFIT 1,053,698 -- 2,325,826 --
------------------------------------------------------------------------
OPERATING EXPENSES
Depreciation and amortization 216,296 13,125 363,348 226,875
Professional and consulting fees 261,505 64,369 557,931 255,916
Other selling, general and administrative expenses 1,820,160 4,667 3,192,842 58,984
------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 2,297,961 82,161 4,114,121 541,775
------------------------------------------------------------------------
Loss From Continuing Operations before Other Income
(Expense) (1,244,263) (82,161) (1,788,295) (541,775)
------------------------------------------------------------------------
OTHER INCOME (EXPENSES)
Forgiveness of debt -- 40,258 2,847,511 780,938
Loss on partnership redemption (255,232) -- (255,232) --
Distributable share of partnership income -- 199,420 385,233 199,420
Impairment of fixed
assets (112,400) -- (112,400) --
Other income, net 24,000 -- 24,000 --
Interest expense, net (69,298) (31,305) (133,774) (132,312)
------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) (412,930) 208,373 2,755,338 848,046
------------------------------------------------------------------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS $ (1,657,193) $ 126,212 $ 967,043 $ 306,271
LOSS FROM DISCONTINUED OPERATIONS (154,900) -- (154,900) --
------------------------------------------------------------------------
INCOME (LOSS) BEFORE MINORITY INTEREST $ (1,812,093) $ 126,212 $ 812,143 $ 306,271
MINORITY INTEREST 230,298 -- 230,298 --
------------------------------------------------------------------------
NET INCOME (LOSS) $ (1,581,795) $ 126,212 $ 1,042,441 $ 306,271
========================================================================
Net loss per share-basic and dilutive $ (0.0008) $ 0.0001 $ 0.0005 $ 0.0004
========================================================================
Weighted average number of shares
outstanding during the period-basic and dilutive 2,052,636,620 1,464,270,779 2,019,114,104 810,439,193
========================================================================
See accompany notes to condensed consolidated financial statements
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2
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 2005
(UNAUDITED)
COMMON STOCK PREFERRED STOCK ADDITIONAL
------------------------------------------------ PAID IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
----------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2004 1,994,365,845 $ 28,745,253 4,500 $ 45 $4,056,455 $(31,241,859)
----------------------------------------------------------------------------------
Reversal of escrowed stock
issued to pay
short term debt (162,999,640) -- -- -- -- --
Stock issued in partial
payment of short term note 172,881,526 100,000 -- -- -- --
Stock issued in exchange for services 5,000,000 7,500 -- -- -- --
Deferred compensation -- -- -- 500,000 -- --
Amortization of deferred
compensation -- -- -- -- -- --
Amortization of deferred
commitment & financing fees -- (5,872) -- -- -- --
Stock issued for convertible
debt and accrued interest 112,000,000 112,000 -- -- -- --
Net income for the period -- -- -- -- -- 1,042,441
----------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2005 2,121,247,731 $ 28,958,881 4,500 $ 45 $4,556,455 $(30,199,418)
==================================================================================
DEFFERED
COMMITMENT AND
EQUITY FINANCING DEFERRED
FEES COMPENSATION TOTAL
---------------------------------------------
BALANCE AT JUNE 30, 2004 $ 135,432) $ -- $1,424,462
---------------------------------------------
Reversal of escrowed stock
issued to pay
short term debt -- -- --
Stock issued in partial
payment of short term note -- -- 100,000
Stock issued in exchange for services -- -- 7,500
Deferred compensation (500,000) --
Amortization of deferred
compensation 187,500 187,500
Amortization of deferred
commitment & financing fees 110,432 -- 104,560
Stock issued for convertible
debt and accrued interest -- -- 112,000
Net income for the period -- -- 1,042,441
---------------------------------------------
BALANCE AT MARCH 31, 2005 $ (25,000) $(312,500) $2,978,463
=============================================
See accompany notes to condensed consolidated financial statements
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3
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS
ENDED MARCH 31,
2005 2004
----------- -----------
CASH FLOWS FROM CONTINUING OPERATIONS:
Net income from continuing operations $ 967,043 $ 306,271
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 363,348 226,875
Provision for doubtful accounts 24,900 --
Stock issued for services 7,500 2,810
Debt discount expense 36,977 70,314
Loss on asset impairment 112,400 --
Forgiveness of debt (2,847,511) (780,938)
Loss on partnership redemption 255,232 --
Distributive share of partnership income (385,233) (199,420)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivables 1,383,600 --
Deferred Costs and other receivables (7,170) --
Inventories 2,097,319 --
Prepaid expense/security deposits (16,400) (12,655)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (1,683,634) (434,420)
Interest payable 39,376 56,001
Other 3,134 --
----------- -----------
Net cash provided by (used in) continuing operating activities 350,879 (765,162)
----------- -----------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 250,800 --
CASH FLOWS FROM INVESTING ACTIVITIES:
Partnership investment -- (2,670,000)
Partnership distributions 280,000 160,000
Proceeds from partnership redemption 2,625,000 --
Cash from consolidation of equity affiliate 543,800 --
Purchase of investment securities (91,618) --
Purchase of fixed assets (174,821) --
----------- -----------
Net cash flow provided by investing activities 3,182,361 (2,510,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in restricted cash 166,600 --
Decrease in Floor Plan Inventory loan (1,173,300) --
Proceeds from short term promissory note -- 3,000,000
Proceeds from issuance of common stock, net -- 1,013,125
Repayment of short-term and installment notes (2,062,396) (592,831)
Repayment of mortgage notes (17,100) --
Proceeds from capitalized lease 69,678 --
----------- -----------
Net cash provided by (used in) financing activities (3,016,518) 3,420,294
----------- -----------
Net increase in cash $ 767,522 $ 145,132
Cash at beginning of period 1,193,170 22,527
----------- -----------
CASH AT END OF PERIOD $ 1,960,692 $ 167,659
=========== ===========
See accompany notes to condensed consolidated financial statements
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4
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended March 31, 2005, 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 nine months ended March 31, 2004, the Company recorded $240,000
representing 85,714,285 shares of common stock to be issued for prior unpaid
accrued professional fees.
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.
During the nine months ended March 31, 2005, the Company issued 5,000,000 shares
valued at $7,500 for professional services rendered.
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4
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2005
(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 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.
Cyber-Test, Inc., a subsidiary of Encompass Group Affiliates, 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 ("PMIGA"), subsidiaries of Pacific Magtron International, Inc ("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. On May 11, 2005 (the "Petition Date"), PMIC, PMI, PMIGA and LWI
filed voluntary petitions to reorganize their businesses under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court for the
Southern District of Nevada, (the "Bankruptcy Court"). The Bankruptcy Court is
jointly administering these cases as "In re: Pacific Magtron International
Corporation, Inc., et al., Case No.BK-S-05-14326 LBR".
(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 which have been prepared in accordance with
American Institute of Certified Public Accountants' Statement of Position 90-7
("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code," and on a going-concern basis, which assumes continuity of
operations, realization of assets and satisfaction of liabilities in the
ordinary course of business. PMIGA ceased operations in April 2005 and its
results of operations and assets are shown in the condensed consolidated
financial statements as discontinued operations.
All significant intercompany transactions have been eliminated. Minority
interests in the Company's subsidiaries are not material.
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.
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5
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2005
(UNAUDITED)
(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) 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, PMIC's 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 PMIC's bad debt expense. No
adjustment has been made to the allowance for doubtful accounts based on PMIC's
bankruptcy filing. While a bankruptcy filing may make collection more difficult,
we are unable to predict the effect of the bankruptcy filing at this point.
(E) 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.
(F) 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.
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6
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2005
(UNAUDITED)
(G) 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.
(H) 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 nine months March 31, 2005, 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.
(I) Business Segments
The Company applies Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information". During
the nine months ended March 31, 2005, the Company operated in two segments,
Cyber-Test, Inc. and Pacific Magtron International Corp. as described below:
Cyber-Test, Inc. ("CTI" or "Cyber-Test"), a subsidiary of Encompass Group
Affiliates, 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 ("PMI-GA"), subsidiaries of Pacific Magtron International Corp. ("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.
The following table presents information about reported continuing segment
profit or loss for the nine months ended March 31, 2005:
2005
(in thousands)
--------------
Revenues from external customers:
CTI $ 5,566
PMIC 9,370
---------
Total $ 14,936
=========
Segment income (loss):
CTI $ 310
PMIC (856)
---------
Net loss for reportable segments $ (546)
Parent and Encompass net income 1,513
---------
Consolidated net income from continuing operations $ 967
=========
(J) 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.
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.
(K) Recent Accounting Pronouncements
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7
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2005
(UNAUDITED)
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. DISCONTINUED OPERATIONS
On April 30, 2005, Pacific Magtron (GA), Inc., a wholly owned subsidiary
of PMIC ceased its operations. The operating results of PMIGA for the three
months ended March 31, 2005 was as follows:
Three Months Ended
March 31, 2005
--------------
Net sales $ 988,900
Net loss $(154,900)
NOTE 3. RESTRICTED CASH
As of March 31, 2005, we had restricted cash in the aggregate amount of
$338,400 that was held in escrow as a security and pledge to Wells Fargo Bank in
connection with our mortgage loan and to Bank of America in connection with
Cyber-Test's fully secured inventory line of credit in the amounts of $238,400
and $100,000 respectively.
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 nine months
ended March 31, 2005, Hudson Street received $280,000 of cash distributions from
this investment and recorded $385,233 as its distributive share of partnership
net earnings.
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 recorded a loss of $255,232 on the
redemption of our partnership interest.
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 bears interest at a rate of
10% commencing February 10, 2005. Previously, the promissory note was
non-interest bearing. The Company received the balance of $800,000 of cash
proceeds from the redemption.
NOTE 5. 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.
- --------------------------------------------------------------------------------
8
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2005
(UNAUDITED)
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 March 31, 2005 financial statements. Additional
debt forgiveness income will be recorded in the period or periods in which
collection or seizure of assets is made.
NOTE 6. NOTES AND LOAN PAYABLE
3/31/05 6/30/04
---------- ----------
Current:
8% Note Payable-Current $ 57,832 $ 57,831
Loan Payable-Shareholder -- 1,055,736
Note Payable-Cornell Capital 275,000 2,375,000
6% Secured Note Due 12/05 500,000 --
Mortgage Loans Payable 3,185,939 --
6% Unsecured Note 166,156 --
10% Secured Convertible Note 77,500 150,523
Capitalized Lease 20,419 --
---------- ----------
Notes Payable-Current $4,282,846 $3,639,090
Long-Term:
6% Unsecured Note $ 332,313 $ 498,469
Note Payable-ACT Australia -- 1,791,166
8% Note Payable -- 57,832
Capitalized Lease 44,694 --
---------- ----------
Notes Payable-Long-Term $ 377,007 $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
(2.75% as of March 31, 2005) 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 more than two consecutive quarterly losses. In addition, PMI is
required to achieve a net income on an annual basis. PMI was in violation of the
annual income covenants and the minimum EBITA coverage ratio as of December 31,
2004. These covenant violations constituted an event of default under the loan
agreement and gave the bank the right to call the loan. A waiver of the loan
covenant violations was obtained from the bank through December 31, 2005. As a
condition for the waiver, the Company transferred an additional $70,000 to a
restricted account as a reserve for the debt service. As of March 31, 2005, the
balance of the restricted account was $238,400 which is included in Restricted
Cash in the accompanying condensed consolidated balance sheet. The Company has
not received a waiver of the loan covenant violations beyond December 31, 2005.
On May 11, 2005, the PMIC and subsidiaries filed voluntary petitions to
reorganize its business under Chapter 11 of the United States Bankruptcy Code in
the United States Bankruptcy Court for the District of Nevada. Consequently, the
Wells Fargo and the SBA mortgage loans have been classified as a current
liability in the accompanying condensed consolidated balance sheet as of March
31, 2005.
- --------------------------------------------------------------------------------
9
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2005
(UNAUDITED)
Future maturities of long-term debt as of March 31, 2005 are as follows:
Date Amount
--------------- ----------
June 30, 2005 $4,282,846
June 30, 2006 210,851
June 30, 2007 166,156
Thereafter --
----------
Total $4,659,853
==========
NOTE 7. 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 former officers of PMI, FNC and Lea, and may
be discontinued by Textron at any time at its sole discretion. Borrowings under
the inventory line are subject to 30 days repayment, at which time interest
accrues at the prime rate plus 6% (11.75% at March 31, 2005). PMI 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
PMI's eligible accounts receivable and 90% of the Textron-financed inventory and
100% of any cash assigned or pledged to Textron. PMI was also required to
maintain $250,000 in a restricted account as a pledge to Textron. During March
2005, Textron applied the entire $250,000 of restricted cash against the amounts
owed. 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. As of March 31, 2005, PMI
was out of compliance with those covenants and a waiver has not been obtained
from Textron. This gives Textron the option to terminate the credit facility and
accelerate the loan payments. Upon termination, PMI would have no other facility
to finance its inventory purchases. On May 11, 2005, PMIC and its subsidiaries
filed voluntary petitions to reorganize its business under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Nevada. As of May 20, 2005, Textron has not terminated this
agreement.
As of March 31, 2005, the outstanding balance of this loan was $1,069,800
and is classified as a current liability on the accompanying condensed
consolidated balance sheet.
NOTE 8. CONVERTIBLE DEBENTURE
10% Secured Convertible Debenture Due November 2004
On November 22, 2002, the Company entered into a Securities Purchase
Agreement with Cornell Capital Partners, L.P., whereby we agreed to issue and
sell a Two Hundred Fifty Thousand Dollars ($250,000) 10% secured convertible
debenture. The secured convertible debenture has a term of two years and is
convertible into shares of common stock at a conversion price equal to $.001 per
share. The secured convertible debenture accrues interest at a rate of 10% per
year and is convertible at the holder's option. At the Company's option, the
debenture 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 debenture, 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.
On November 22, 2004, the outstanding 10% secured convertible debenture in
the amount of $187,500 plus accrued interest of $38,588 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 March 31, 2005, $77,500 of principal and $40,526 of accrued interest
remain outstanding and in default.
- --------------------------------------------------------------------------------
10
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2005
(UNAUDITED)
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
common stock. On May 12, 2005, Cornell Capital Partners, L.P. converted the
$77,500 plus $40,526 of accrued interest at $.001 per share into 118,026,000
shares of common stock. No amount remains owed to Cornell Capital Partners, L.P.
on the convertible debenture.
NOTE 9. 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. At the time of the
acquisition, PMIC employed approximately 60 people in California and Georgia and
had 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").
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.
- --------------------------------------------------------------------------------
11
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2005
(UNAUDITED)
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
$168,834 of capitalized transaction costs for a total acquisition cost of
$668,834.
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 $11,798,000, and 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 $305,000. The
Company accounted 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 2
--------
Total liabilities assumed $ 11,207
========
Excess of assets acquired over
liabilities assumed 591
Minority interest (227)
Purchase price 669
--------
Goodwill $ 305
========
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)
- --------------------------------------------------------------------------------
12
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2005
(UNAUDITED)
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
=======
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 10. PACIFIC MAGTRON INTERNATIONAL CORP., INC. CHAPTER 11 BANKRUPTCY
On May 11, 2005 (the "Petition Date"), PMIC, PMI, PMI-GA and LWI filed
voluntary petitions to reorganize their businesses under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court for the
Southern District of Nevada, (the "Bankruptcy Court"). The Bankruptcy Court is
jointly administering these cases as "In re: Pacific Magtron International
Corporation, Inc., et al., Case No.BK-S-05-14325 LBR."
As required by the Bankruptcy Code, the United States Trustee will soon
appointed an official committee of unsecured creditors (the "Creditors'
Committee"). The Creditors' Committee and its legal representatives have a right
to be heard on all matters that come before the Bankruptcy Court concerning
PMIC's reorganization. There can be no assurance that the Creditors' Committee
will support PMIC's positions or PMIC's plan of reorganization, and any
disagreements between the Creditors' Committee and PMIC could protract the
Chapter 11 process, hinder its ability to operate during the Chapter 11 process,
and delay its emergence from Chapter 11.
- --------------------------------------------------------------------------------
13
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2005
(UNAUDITED)
PMIC expects to continue to operate its business as "debtor-in-possession"
under the jurisdiction of the Bankruptcy Court and in accordance with the
applicable provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy
Procedure and applicable court orders. In general, as debtor-in-possession, PMIC
is authorized under Chapter 11 to continue to operate as an ongoing business,
but may not engage in transactions outside the ordinary course of business
without the prior approval of the Bankruptcy Court. At hearings held on May 16,
2005, the Bankruptcy Court granted the Debtors first day interim motions for
various relief designed to stabilize operations and business relationships with
customers, vendors, suppliers, employees and others and entered into orders
granting the Debtors to, among other things: (a) pay pre-petition and
post-petition employee wages, salaries, benefits and other employee obligations;
(b) pay normal and reasonable operating expenses of the Debtors where the sum of
(a) and (b) is not to exceed $100,000 in the aggregate plus $21,000 of
pre-petition employee wages, salaries and other benefits; and (c) enter into the
proposed Interim Management Agreement with General Procurement, Inc to manage
and operate the business and to provide inventory to PMI on a secured basis, to
fulfill customer orders and generate new sales. The first day interim motions
approved by the Bankruptcy Court expire on June 2, 2005 at which time the
Debtors will attend another hearing before the Bankruptcy Court to seek
extension of these orders and approval of the Joint Venture Agreement.
All vendors will be paid for all goods furnished and services provided
after the Petition Date in the ordinary course of business. However, under
Section 362 of the Bankruptcy Code, actions to collect most of our pre-petition
liabilities are automatically stayed (except that liabilities under leases or
subject to a security interest may require PMIC to make "adequate protection"
payments). Absent an order of the Bankruptcy Court, substantially all
pre-petition liabilities are subject to settlement under a plan of
reorganization to be approved by the Bankruptcy court.
Under Section 365 of the Bankruptcy Code, PMIC may assume, assume and
assign, or reject certain executory contracts and unexpired leases, including
leases of real property, subject to the approval of the Bankruptcy Court and
certain other conditions. PMIC's Section 365 rights expire on the earlier of the
date of termination of PMIC's exclusive period to file a plan of reorganization
(currently, September 8, 2005) or the date of the conclusion of a disclosure
statement hearing in connection with a proposed plan of reorganization.
In general, if PMIC rejects an executory contract, or unexpired lease, it
is treated as a pre-petition breach of the lease or contract in question and,
subject to certain exceptions, relieves PMIC's of performing any future
obligations but entitles the lessor or contract counterparty to a pre-petition
general unsecured claim for damages caused by such deemed breach and
accordingly, the counterparty may file a claim against PMIC for such damages. As
a result, liabilities subject to compromise may increase in the future, as a
result of damage claims created by PMIC's rejection of various, executory
contracts and unexpired leases. Generally, if PMIC's assume an agreement,
executory contract or unexpired lease it is required to cure most existing
defaults under such contract or lease.
To successfully exit Chapter 11, PMIC must obtain confirmation by the
Bankruptcy Court of a plan of reorganization. A plan of reorganization would,
among other things, resolve PMIC's pre-petition obligations and other
liabilities subject to compromise and establish PMIC's corporate governance
subsequent to exit from bankruptcy. The plan of reorganization would also
address the terms and conditions of exit financing, if any. The rights and
claims of various creditors and security holders will also be determined by the
plan. At this time, it is not possible to predict accurately the effect of the
Chapter 11 reorganization process on PMIC's business, nor can PMIC make any
predictions concerning how certain claims will be valued in it's bankruptcy
case.
PMIC is currently operating under an "exclusive period" which expires
September 8, 2005, during which PMIC is the only party permitted to file a plan
of reorganization. The decision as to when PMIC will file a plan of
reorganization depends on the timing and outcome of numerous ongoing matters in
the Chapter 11 process. PMIC expects to file a plan of reorganization that
provides for PMIC's emergence from bankruptcy, but there can be no assurance
that the Bankruptcy Court will confirm a plan of reorganization or that any such
plan will be implemented successfully.
Proposed Joint Venture
In connection with PMIC's Chapter 11 case, PMIC negotiated a proposed
binding agreement to enter into a joint venture with a company in a similar line
of business, to allow PMIC to carry on its business, subject to approval by the
Bankruptcy Court ("JV"). The proposed JV, if approved, will assume PMIC's
customer list, trademarks, goodwill and other intangible assets, and will
continue the historical business of PMIC. PMIC will also contribute certain
employees, temporary use of its offices and warehouse in Milpitas, CA, and
related utilities, etc. Among other things, the JV partner will manage the
day-to-day operations of the business and use its supplier and other credit
lines to provide for product flow and inventory. The proposed JV will entitle
PMIC to receive 50% of the profits of the JV for a period of 24 months following
its effectiveness. For all other purposes, PMIC will be a minority shareholder
in the proposed JV. PMIC's interest in the JV would terminate at the end of the
24 month period. The JV will also use reasonable efforts to sell PMIC's
remaining inventory and collect its outstanding receivables. Revenue from these
activities will belong to PMIC. Profits generated by the proposed JV and
distributed to PMIC will first be used to repay the creditors of PMI and PMIC.
- --------------------------------------------------------------------------------
14
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2005
(UNAUDITED)
Proposed Interim Management Agreement
Simultaneously with the negotiation of the proposed JV, PMIC negotiated a
proposed interim management agreement with the JV partner ("Interim Agreement").
The Interim Agreement will provide for the payment of a management fee to the JV
partner in return for managing the business for the 60 day period of time that
PMIC expects the Bankruptcy Court will need to approve the proposed JV. The
management fee will be equal to 10% of the gross margin resulting from sales
made by PMIC with inventory supplied by the JV partner. The Interim Agreement is
post-petition, and provides security to the JV partner for any inventory
provided by it during the operating period. In addition, the operating agreement
contains a two-year non-compete provision to ensure that the neither the JV
partner nor any person or affiliate of the JV partner will engage in any
competitive activities involving the customers of PMI and its employees.
There can be no assurance that PMIC will enter into the proposed Interim
Agreement or proposed JV, that the Bankruptcy Court will approve the proposed
Interim Agreement or the proposed JV, nor can there be any assurance that future
profits from the JV will be sufficient to repay, in full or part, the creditors
of PMI, PMIC, PMI-GA and LWI.
NOTE 11. STOCKHOLDERS' EQUITY
Stock Issued For Note Payable To Cornell Capital Partners, L.P.
During the nine months ended March 31, 2005, 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 nine months ended March 31, 2005, the Company issued
112,000,000 shares of common stock valued at $112,000 in partial repayment of
principal and accrued interest on the 10% secured convertible debt. On May 12,
2005, Cornell Capital Partners, L.P. converted the balance of its obligation in
the amount of $77,500 plus $40,526 of accrued interest at $.001 per share into
118,026,000 shares of common stock. No amount remains owed to Cornell Capital
Partners, L.P. on the convertible debenture.
NOTE 12. COMMITMENTS AND CONTINGENCIES
Employment Agreement
On June 24, 2004, we entered into a two-year employment agreement with
Martin Nielson, our Senior Vice President-Acquisitions (the "Nielson
Agreement"). Under the terms of the Nielson Agreement, Mr. Nielson is employed
as Encompass' President and Chief Executive Officer and Senior Vice
President-Acquisitions of the Company. Mr. Nielson is entitled to a $200,000
annual salary and the right to earn up to 50,000,000 shares of our restricted
common stock valued at $.01 per share, or $500,000, to vest over a two-year
period. Mr. Nielson is also entitled to receive an Incentive Bonus determined at
the discretion of our Compensation Committee based on his contribution to our
overall performance as well as a bonus based on the overall separate business
and financial performance of Encompass and its wholly-owned operating
subsidiaries. In addition, we have provided Mr. Nielson with a $1 million life
insurance policy for his benefit and also insure Mr. Nielson under a $2 million
key man life insurance policy. The agreement contains standard confidentiality,
noncompete and work-for-hire provisions.
- --------------------------------------------------------------------------------
15
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2005
(UNAUDITED)
The Company recorded $187,500 of amortization expense for the nine months
ended March 31, 2005 in connection with Mr. Nielson's employment agreement.
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 March 31, 2005, 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 May 11, 2005, we filed a complaint in the United States District Court
for the Southern District of New York against Theodore S. Li and Hui Cynthia
Lee, the former officers and principal shareholders of PMIC, for the recovery of
damages and costs for securities fraud, breach of contract and other counts in
connection with the Stock Purchase Agreement dated December 10, 2004 between the
Company and Mr. Li and Ms. Lee.
NOTE 13. GOING CONCERN
The Company's condensed consolidated financial statements for the nine
months ended March 31, 2005, 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 working capital deficiency of
$4,045,052 as of March 31, 2005, principally from the classification of PMIC's
mortgages payable in the amount of $3,185,939 as a current liability, 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 and by
successfully emerging PMIC and its subsidiaries from Chapter 11 reorganization
proceedings.
The condensed consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
NOTE 14. SUBSEQUENT EVENTS
Termination of Employment Agreements
On May 10, 2005, Pacific Magtron International Corp. terminated the
Employment Agreements, dated December 30, 2004, among Pacific Magtron
International Corp., Advanced Communications Technologies, Inc., and Encompass
Group Affiliates, Inc. and each of Theodore S. Li and Hui Cynthia Lee. The
Company has terminated these Employment Agreements and the employment of Mr. Li
and Ms. Lee with the Company and its subsidiaries for "cause" pursuant to the
terms of the Employment Agreements. These Employment Agreements became effective
contemporaneously with the sale of an aggregate of 6,454,300 shares of the
common stock of the Company by Mr. Li and Ms. Lee, representing 61.56% of the
then issued and outstanding common stock, to Advanced Communications
Technologies, Inc. In addition to base salaries and other compensation, the
Employment Agreements provided for payment of a signing bonus of $225,000 to
each of Mr. Li and Ms. Lee on or before January 29, 2005. No part of these
bonuses has been paid.
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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 nine-month periods ended March 31, 2005 and 2004. 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 nine months ended March 31, 2005 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 company which, through our
wholly owned subsidiary and principal operating unit, Encompass Group
Affiliates, Inc. ("Encompass"), acquired Cyber Test, Inc., a Delaware
corporation located in Longwood, Florida ("CTI" or "Cyber-Test")) on June 3,
2004. This transaction was the first step in our strategy to become a vertically
integrated technology and services company. CTI 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, and high-end consumer electronics such as PDA's and
digital cameras. It is our intent to expand CTI by both acquisition and organic
means.
On December 30, 2004, we completed the acquisition of approximately 62% of
the common stock of Pacific Magtron International Corporation, Inc., a Nevada
corporation headquartered in Milpitas, California ("PMIC") from its founders and
principal officers. PMIC has primarily been engaged in the business of
distributing computer peripheral products, such as components, multimedia and
systems networking products, through its wholly owned operating subsidiaries. It
was our intent to gradually transform PMIC's business to become a distribution,
logistics, and sourcing engine for our core business, and the next step in our
expansion strategy. PMIC's common stock trades on the Over the Counter Bulletin
Board, under the symbol OTCBB: PMIC, and PMIC files separate periodic reports
with the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended. On May 11, 2005 (the "Petition Date"), PMIC, PMI, PMIGA and
LWI filed voluntary petitions to reorganize their businesses under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
Southern District of Nevada, (the "Bankruptcy Court"). The Bankruptcy Court is
jointly administering these cases as "In re: Pacific Magtron International
Corporation, Inc., et al., Case No.BK-S-05-14326 LBR".
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. Hudson Street 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. Management is not presently pursuing other
investment strategies through Hudson Street, but may choose to do so in the
future.
We have three principal means of diversifying and growing our business,
each of which is designed to give shareholders a strong value driver. As
described further below, Encompass, our principal operating subsidiary, intends
to acquire synergistic companies in support of its technology services strategy.
Until February 2005, Hudson Street was a minority partner in the management firm
of an institutional investment company and may seek opportunities to make
minority investments in publicly and privately held companies in technology and
other diverse industries. We also continue to view PMIC, as a separate company
with the minority interest publicly held, as a separate opportunity to provide
value, although this is dependent upon PMIC's emergence from bankruptcy
reorganization with our equity intact.
17
Although we believe we can continue to grow through strategic acquisitions
and investments, there is no guarantee as to when, if ever, we would identify
prospective acquisitions or investments or complete such strategic acquisitions
or investments. Appropriate acquisition or investment candidates may require
more resources than are available to us. 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.
Encompass' Strategy - Integrated Technology Life Cycle Services
Our wholly owned subsidiary and principal operating unit Encompass, is the
operating company through which we expect to grow and implement our strategy in
the technology services industry. This industry, often broadly referred to as
Reverse Logistics, consists of companies which provide repair and upgrade
services; provide new and used parts in support of the repair and upgrades;
provide return services from resellers or for products no longer needed by the
original users (often called asset recovery); provide refurbishment and resale
services; and ultimately provide recycling or disposal services. These services
and processes are part of the end-of-life-cycle for technology products, and are
the opposite of `supply chain services'. Thus, the name Reverse Logistics.
This industry is a highly fragmented, yet its sales volumes presently
account for more than $60 billion in sales in the United States market each year
according to a recent survey by industry analysts, DF Blumberg & Associates.
It is Encompass' strategy to acquire, integrate, and grow complementary
companies in the reverse logistics field such that our customers and end users
can realize an extended life for their technology products, and can ultimately
replace these products cost effectively, efficiently and in accordance with the
legal and moral responsibility to recycle the products without damaging the
environment. It is our intent to acquire technology services companies with
significant growth-potential and which complement our expansion plan such that
we can provide a continuous expansion of these integrated life cycle services
for the technology products within the consumer electronics industry.
We seek to differentiate ourselves by being the first company to provide a
broad and complete scope of services and products in the reverse logistics
consumer electronics industry and by providing exceptional and reliable customer
service.
The candidate companies that we will pursue for acquisition must include
the following minimum financial and business criteria: i) obvious commercial
synergies; ii) share or buy into our vision for the industry opportunity; iii)
strong financial position-cash and other current assets, little or no debt,
strong cash flow; iv) accretive within the first year; v) superior growth
prospects; (vi) corporate culture and management team highly compatible with
ours; vii) proprietary technologies or other superior differentiation strategic
fit; viii) satisfactory owners' background checks; and (ix) Sarbanes-Oxley
compliant. These criteria represent our business philosophy of acquiring
financially strong, self-sufficient enterprises that will not depend on or
require our financial support to operate and grow their business.
CTI is an electronic equipment repair company, and is today our principal
service business. A seventeen year old company, CTI was acquired to be the
platform from which our services business would expand. Their technicians are
highly skilled at performing board-level repair for nearly all types of
integrated circuit board products and in the timely and efficient repair of
various consumer electronics. It is our expectation that this technical
proficiency, combined with their operational systems and blue-chip customer base
will provide us with a suitable base for growth both by organic means and by
acquiring complementary repair companies.
PMIC has three operating subsidiaries, all of which are currently in
bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code, and has for
over 14 years, imported and distributed computer accessories, multimedia
components, parts and software to retailers and other distributors throughout
the United States and other parts of the world. Pacific Magtron (Georgia), Inc.
("PMI-GA"), a wholly owned subsidiary of PMI, has been providing similar
services to customers on the East Coast of the US, has been selling and building
custom computer systems, and has served as the initial receiving entity for many
import shipments to PMI which arrived first at East Coast destinations.
Livewarehouse, Inc. has operated as PMIC's e-commerce business and has served
end users with product from the PMI offering under a variety of website
addresses, including those of Yahoo Shopping and Amazon. Both PMI-GA and
Livewarehouse ceased operations in April 2005.
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18
We acquired PMIC with the intent to make PMI the logistics and sourcing
engine for Encompass; for Livewarehouse to become the e-commerce engine of the
group; and for the PMIC building, a 44,000 square foot office and distribution
center, to serve as Encompass' headquarters within Silicon Valley.
We did not acquire PMIC with the intent to grow or expand its legacy
computer components distribution business, a historically high volume low margin
business. Instead, the core business was expected to remain intact while
management implemented a series of new initiatives including the introduction of
new, higher margin products which directly support our strategy; expansion of
the sourcing capability to Asia, and the introduction of new reverse logistics
services. However, during the period leading up to and immediately following
announcement of our purchase of our majority ownership interest in PMIC, among
other things, PMI's suppliers began a process of methodically reducing its
credit lines, thus constraining product and cash flow, severely affecting PMI's
ability to operate and forcing management to reconsider its plans for PMI. As a
result, a reduction in work force was necessary, a scale down of operations
occurred, PMI-GA has now been closed, plans for expansion of the e-commerce
strategy have been shelved, and a proposed joint venture has been negotiated to
move the legacy business outside of the company. To implement this change in
business operations in an orderly manner, and reduce the imminent threats from
creditors, PMIC's board of directors approved the filing of a Chapter 11
Bankruptcy petition for PMIC, PMI, PMI-GA and Livewarehouse. Such petition was
filed with the Bankruptcy Court in the Southern District of Nevada on May 11,
2005.
As part of our strategy to transform PMIC into a full-service provider to
the reverse logistics industry, PMIC's management has recently contracted to act
as the West coast outsource supplier of distribution services for a private firm
presently operating from the East Coast, and which is currently engaged in the
sale of parts for repairing Lexmark and Hewlett Packard computers and printers.
Management also has held preliminary discussions with electronic recycling
companies in Silicon Valley about possibly expanding their businesses into the
PMIC building. Our future plans for PMIC are dependent on it emerging from the
bankruptcy reorganization with our equity intact.
As described above, 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.
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.
19
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.
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, PMIC's 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 PMIC's bad debt expense. No
adjustment has been made to the allowance for doubtful accounts based on PMIC's
bankruptcy filing. While a bankruptcy filing may make collection more difficult,
we are unable to predict the effect of the bankruptcy filing at this point.
Long-Lived Assets
Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If such review indicates that the asset is impaired,
when the carrying amount of an asset exceeds the sum of its expected future cash
flows, on an undiscounted basis, the asset's carrying amount is written down to
fair value. Long-lived assets to be disposed of are reported at the lower of
carrying amount or fair value less cost to sell.
Excess Of Cost Over Net Assets Acquired
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.
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 nine months ended March 31, 2005, 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.
20
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 March 31, 2005.
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.
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 March 31, 2005 to the
Three Months Ended March 31, 2004
Overall Net Income (Loss) For The Period
For the three months ended March 31, 2005, we realized a consolidated net
loss of $1,582,000 that is a $1,708,000 decrease from the net income of $126,000
reported for the comparable period in the prior year.
The substantial decrease in consolidated net income for the three months
ended March 31, 2005 over the comparative period was a result of PMIC's loss of
$786,000 net of minority interest, a $255,000 loss on the redemption of our
partnership interest in Yorkville Advisors and increased overhead primarily due
to the operations of PMIC and Cyber-Test.
Summary of Results of Operations
Three Months Ended
March 31,
-------------------- Period to Period
2005 2004 % Change
---- ---- --------
Net income from Cyber-Test operations $ 111,613 $ -- --%
Net (loss) from PMIC operations, net of minority interest (786,007) -- --%
Net income (loss) from investments (255,232) 199,420 (228)%
Parent company and Encompass overhead (582,871) (82,161) 609%
Net interest expense (69,298) (31,305) 121%
Forgiveness of debt -- 40,258 --%
----------- ----------- -----------
Consolidated net income (loss) $(1,581,795) $ 126,212 N/A
=========== =========== ===========
21
Overview of Third Quarter Results
For the three months ended March 31, 2005, we recorded consolidated sales
of $11.4 million relating to the repair, service and warranty and exchange of
various electronic office equipment and the sale and distribution of various
computer components, parts and accessories realizing a consolidated gross profit
of $1.1 million or 9.2 % of sales for the quarter. For the three months ended
March 31, 2005, CTI generated a net profit from operations of $112,000 or 5.5%
of sales, while PMIC generated a consolidated net loss of $800,000, net of
minority interest, on gross margins of 4%.
For the three months ended March 31, 2005, we reported a consolidated loss
from operations of $1.2 million because of consolidated overhead costs inclusive
of CTI and PMIC's operations versus a $82,000 loss for the three months ended
March 31, 2004. Consolidated overhead costs for the three months ended March 31,
2005 amounted to $2.3 million and include $216,000 of amortization of deferred
compensation and depreciation and $1.8 million of general and administrative
costs. For the three months ended March 13, 2005, our overall consolidated net
loss for the quarter increased an additional $400,000 from investment activities
and net interest expense as compared to a $200,000 increase in other income from
investment income for the comparative three-month period ended March 31, 2004.
Revenue
Consolidated revenue for the three months ended March 31, 2005 was $11.4
million and consisted of $2 million relating to CTI's operations and $9.4
million for the PMIC group. We did not recognize any revenue for the three
months ended March 31, 2004. CTI's revenue increased 19% from the previous
quarter.
Gross Profit
Consolidated gross operating margin was 9.2% consisting of a 33% gross
margin from CTI's operations and a 4% gross margin from PMIC's operations. CTI's
gross profit percentage decreased slightly from a second quarter margin of 35%
due to the steady change in its product mix as the repair and service of PDAs
and laptops increased as a percentage of revenue, which services have lower
gross margins. CTI's margin was also adversely affected by the increase in fuel
surcharges from freight carriers that cannot be passed through to customers.
PMIC's sales and margins suffered during this quarter because of the tightening
and reduction of credit by its suppliers and vendors resulting in lower margin
sales.
Operating Expenses
Consolidated operating expenses for the three months ended March 31, 2005
and 2004 were $2.3 million and $82,000, respectively, representing a $2.2
million increase for the three months ended March 31, 2005 as compared to the
three months ended March 31, 2004. This increase was primarily attributable to
an increase in selling, general and administrative costs of $1.8 million due to
the addition of the Encompass, CTI and PMIC operations.
Consolidated depreciation and amortization expense for the three months
ended March 31, 2005 increased by $213,000 to $216,000 from $13,000 for the
three months ended March 31, 2004 due to deferred commitment fees and financing
costs being fully amortized in fiscal year 2004 and the quarterly amortization
of deferred compensation and deferred financing fees in the amount of $151,000
and depreciation on property and equipment in the amount of $65,000 for the
three months ended March 31, 2005.
Consolidated other general and administrative expenses amounted to $1.8
million for the three months ended March 31, 2005, which was a $1.8 million
increase from the comparative prior period due principally to PMIC and CTI's
operating business overhead during the quarter ended March 31, 2005. Such
overhead expenses include the overhead operation and cost associated with
employing approximately 150 employees and operating two office and
warehouse/distribution facilities in California and Florida, respectively.
Other Income (Expense)
During the three months ended March 31, 2005, we realized a $255,000 loss
from the redemption of our interest in Yorkville Advisors and $160,000 of net
other loss due to net interest expense and PMIC's write-down of impaired fixed
assets.
During the three months ended March 31, 2004, we generated $208,000 of net
other income due principally to investment income from our partnership interest
in Yorkville Advisors.
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22
Overall consolidated net interest expense slightly increased by $38,000 to
$69,000 for the three months ended March 31, 2005 from $31,000 for the three
months ended March 31, 2004. This increase was due primarily to higher levels of
interest bearing debt for the three months ended March 31, 2005 compared to the
three months ended March 31, 2004.
Results of Operations-Comparison of the Nine Months Ended March 31, 2005 to the
Nine Months Ended March 31, 2004
Overall Net Income (Loss) For the Period
Our net income increased $736,000 in the nine month period ended March 31,
2005 as compared to the comparative period ended March 31, 2004, as described
below. The net income was primarily attributable to forgiveness of debt income.
In addition, because we closed the PMIC acquisition on December 30, 2004, this
is the first quarter where our consolidated operating results include PMIC's
results of operations, net of minority interest.
Summary of Results of Operations
Nine Months Ended
March 31,
-------------------- Period to Period
2005 2004 % Change
---- ---- --------
Net income from Cyber-Test operations $ 309,601 $ -- --
Net (loss) from PMIC operations, net of minority interest (786,007) -- --
Net income from investments 130,001 199,420 (35%)
Parent company and Encompass overhead (1,324,890) (541,775) 145%
Net interest expense (133,775) (132,312) 1%
Forgiveness of debt 2,847,511 780,938 (265%)
----------- ----------- -----------
Consolidated net income $ 1,042,441 $ 306,271 240%
=========== =========== ===========
Overview of Nine Months Results
For the nine months ended March 31, 2005, we realized consolidated net
income of $1,042,000 compared with net income of $306,000 for the nine months
ended March 31, 2004, or a 240% increase. The nine months ended March 31, 2005
is the first reporting period that reflects the consolidated results of both CTI
and PMIC's operating businesses. During this period, CTI recorded record sales
of $5.5 million relating to the repair, service and warranty and exchange of
various office equipment, PDAs, laptop computers, monitors and multi-functional
units while PMIC recorded depressed sales of $9.4 million due to the tightening
and/or reduction of vendor and supplier credit lines. Consolidated gross margin
was 15.6%. CTI's net profit from operations of $310,000 or 5.6% of sales was
slightly ahead of its net profit percentage as compared to the previous
six-month results. CTI continues to shift its sales mix from the repair of core
products such as fax machines, printers and multifunction machines to PDA and
laptop repair.
For the nine months ended March 31, 2005, we reported a consolidated loss
from operations of $1.8 million because of PMIC's consolidated loss from
operations in the amount of $786,000 and consolidated corporate overhead costs
at the parent and Encompass levels in the net amount of $1 million versus a
$542,000 loss from operations for the nine months ended March 31, 2004. Included
in these overhead costs is $363,000 of non-cash charges for depreciation and
amortization. Our consolidated loss from operations was offset by $2.9 million
of other investment and forgiveness of debt income.
Revenue
Consolidated revenue for the nine months ended March 31, 2005 was $14.9
million and consisted of $5.5 million relating to CTI's operations and $9.4
million for the PMIC group. We did not recognize any revenue for the nine months
ended March 31, 2004. All revenue was generated was from the repair and service
of office equipment and computer peripheral products, extended warranty sales
and the sale of computer parts and accessories and the sale/distribution of
computer parts, accessories and components.
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Gross Profit
Consolidated gross operating margin for the nine months ended March 31,
2005 was 15.6% consisting of a 35% gross margin from CTI's operations and a 4%
gross margin from PMIC's operations. CTI's gross profit percentage remained the
same from the second quarter margin of 35%. PMIC's sales and margins suffered
during this quarter because of the tightening and reduction of credit by its
suppliers and vendors resulting in lower margin sales.
Operating Expenses
Consolidated operating expenses for the nine months ended March 31, 2005
and 2004 were $4.1million and $542,000, respectively, representing a $3.6
million increase for the nine months ended March 31, 2005 as compared to the
nine months ended March 31, 2004. This increase was primarily attributable to an
increase in selling, general and administrative costs of $3.1 million due to the
addition of the Encompass, CTI and PMIC operations.
Consolidated depreciation and amortization expense for the nine months
ended March 31, 2005 increased by $136,000 to $363,000 from $227,000 for the
nine months ended March 31, 2004 due to deferred commitment fees and financing
costs being fully amortized in fiscal year 2004 and the amortization of deferred
compensation and deferred financing fees in the amount of $300,000 and
depreciation on property and equipment in the amount of $63,000 for the nine
months ended March 31, 2005.
Consolidated other general and administrative expenses amounted to $3.2
million for the nine months ended March 31, 2005, which was a $3.2 million
increase from the comparative prior period due principally to PMIC and CTI's
operating business overhead during the three and nine month periods ended March
31, 2005, respectively. Such overhead expenses include the overhead operation
and cost associated with employing approximately 150 employees and operating two
office and warehouse/distribution facilities in California and Florida,
respectively.
Other Income (Expenses)
During the nine months ended March 31, 2005, we realized $2.8 million of
consolidated net other income principally from debt forgiveness income resulting
from the favorable judgment against our former CEO and related entities that
allowed us to discharge these obligations. This item of income was offset, in
part, by net interest expense of $134,000.
During the nine month period ended March 31, 2004, we earned $199,000 from
our partnership interest in Yorkville Advisors that we purchased effective
January 1, 2004 and $781,000 of forgiveness of debt income 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. These items were offset, in part, by net
interest expense of $132,000 attributable to accrued interest on our short term
notes and installment obligations and debt discount expense treated as interest
attributable to the beneficial conversion feature of the 10% Debenture.
Overall consolidated net interest expense increased by $2,000 to $134,000
for the nine months ended March 31, 2005 from $132,000 compared to the nine
months ended March 31, 2004.
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 and
redemption proceeds received from (i) our investment in an investment management
partnership, and (ii) working capital generated by CTI. Our cash and cash
equivalents totaled $1,960,692 at March 31, 2005.
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 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. During the nine months ended March 31,
2005, 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 nine months ended March 31, 2005, Hudson Street
received $280,000 of membership cash distributions and $800,000 of net cash
proceeds on the redemption of its partnership interest from Yorkville Advisors.
We believe that our existing sources of liquidity including cash resources and
cash provided by operating activities 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.
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We had total liabilities of $10,576,877 as of March 31, 2005 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 March 31, 2005)
---------------------------------------------------------------------
1 2-3 4-5 After 5
Contractual Obligations Total Year or Less Years Years Years
- ----------------------- ----- ------------ ----- ----- -----
Notes Payable $ 4,659,853 $ 4,282,846 $ 377,007 $ -- $ --
Floor Plan Inventory Loans 1,069,800 1,069,800 -- -- --
Accounts Payable and Accrued Expenses 4,648,924 4,648,924 -- -- --
Other Current Liabilities 198,300 198,300 -- -- --
------------ ----------- --------- -------- -------
Total Contractual Obligations $ 10,576,877 $10,199,870 $ 377,007 $ -- $ --
============ =========== ========= ======== =======
During the nine months ended March 31, 2005, the Company reduced its
contractual obligations by $2,062,396 through cash payments. At March 31, 2005,
we had a working capital deficiency of $4,045,052.
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, we used $1,725,000
of the redemption proceeds received by Hudson Street to reduce our 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.
In addition, pursuant to the Letter Agreement, the promissory note was
extended to June 30, 2005 and bears interest at a rate of 10% commencing
February 10, 2005. Previously, the promissory note was non-interest bearing. The
Company received $800,000 of cash proceeds from the redemption.
The Letter Agreement also contemplated that Cornell Capital would convert
the outstanding principal of, and accrued interest on, our 10% Debenture held by
Cornell Capital, into shares of the Company's common stock. On May 12, 2005,
Cornell Capital Partners, L.P. converted the balance of this obligation in the
amount of $77,500 plus $40,526 of accrued interest at $.001 per share into
118,026,000 shares of common stock.
Yorkville was the investment advisor to Cornell, which has been our major
source of investment funding and a significant creditor of the Company.
Below is a discussion of our sources and uses of funds for the nine months
ended March 31, 2005:
Overall Net Change In Cash Flow For The Nine Months Ended March 31, 2005
During the nine months ended March 31, 2005, our cash increased by
$767,522. This net increase in cash was due to the approximate $3.1 million of
net cash received from investing activities (including $543,800 of cash from
PMIC's operations) increased by $600,000 of cash provided by continuing and
discontinued operations reduced by $3 million of cash used to repay short-term
and installment obligations.
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Net Cash Provided By (Used In) Operating Activities
Net cash provided by operating activities was $350,000 for the nine months
ended March 31, 2005 and was principally from the collection of accounts
receivable and sales of PMIC inventory in excess of the payment of corporate
overhead expense. Net cash used in operating activities was $765,000 for the
nine months ended March 31, 2004 and was principally from a reduction in
accounts payable in the amount of $434,000, and an increase in debt forgiveness
income, offset by non-cash charges for depreciation and amortization, and debt
discount expense.
Net Cash From (Used In) Investing Activities
Cash provided from investing activities of $3.2 million for the nine
months ended March 31, 2005 was attributable to $600,000 of cash from the
consolidation of PMIC, $2.9 million of cash distributions and redemption
proceeds from our partnership investment offset by $267,000 for the purchase of
fixed assets and marketable investment securities. Cash used in investing
activities for the nine months ended March 31, 2004 was $2.5 million, net of
distributions, attributable to the purchase of our Yorkville Advisors
partnership interest in January 2004.
Net Cash From (Used In) Financing Activities
Net cash of $3 million used in financing activities for the nine months
ended March 31, 2005 was for the repayment of our short-term and installment
notes to Cornell Capital and others in the amount of $2.1million, the repayment
of PMIC's Floor Plan Inventory loan in the amount of $1.1million reduced by an
increase in restricted cash of $167,000. Net cash provided by financing
activities in the amount of $3.4 million for the nine months ended March 31,
2004 was from proceeds on the issuance of common stock under our Equity Line of
Credit in the amount of $1.0 million, proceeds in the amount of $3 million from
our short term promissory note to Cornell Capital, offset by the repayment of
short-term and installment notes in the amount of $600,000.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements between the Company and any
other entity that have, or are reasonably likely to have, a current or future
effect on the Company's financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures, or capital resources.
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 May 1, 2005, there were
2,121,247,731 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 March 31, 2005 $ .0015 $ .0009
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
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Such market quotations reflect the inter-dealer prices as reflected by the
OTCBB without retail mark-up, markdown or commissions and may not necessarily
represent actual transactions.
ITEM 3. CONTROLS AND PROCEDURES
As of March 31, 2005, 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 March 31, 2005 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 March 31, 2005 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.
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 May 11, 2005, we filed a complaint in the United States District Court
for the Southern District of New York against Theodore S. Li and Hui Cynthia
Lee, the former officers and principal shareholders of PMIC, for the recovery of
damages and costs for securities fraud, breach of contract and other counts in
connection with the Stock Purchase Agreement dated December 10, 2004 between the
Company and Mr. Li and Ms. Lee.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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. These shares were issued on March 2, 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.
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 $.0015 per share, or $7,500 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.
On May 12, 2005, Cornell Capital elected to convert the balance of the 10%
Debenture, in the amount of $77,500 of principal and $40,526 of accrued
interest, at $.001 per share, into 118,026,000 shares of common stock. We issued
these shares on May 12, 2005. No amount remains owed to Cornell Capital on this
debenture. 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 $38,588 on the 10% Debenture matured.
At March 31, 2005, $77,500 of principal and $40,526 of accrued interest
remain outstanding on the 10% Debenture for which we were in default. On May 12,
2005, Cornell Capital elected to convert the balance of the 10% Debenture, in
the amount of $77,500 of principal and $40,526 of accrued interest, at $.001 per
share, into 118,026,000 shares of common stock. We issued these shares on May
12, 2005 No amount remains owed to Cornell Capital on this debenture. 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.
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27
PMIC has defaulted under its inventory financing facility with Textron,
its mortgage loan with Wells Fargo Bank and its Small Business Administration
Loan as discussed in Notes 6 and 7 to our Condensed Consolidated Financial
Statements. In addition, all of PMIC's loan agreements contain provisions that
provide the filing of a voluntary petition in bankruptcy is a default under the
loans. However, under bankruptcy law, those provisions are unenforceable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On May 10, 2005, PMIC terminated the Employment Agreements, dated December
30, 2004, among Pacific Magtron International Corp., Advanced Communications
Technologies, Inc., and Encompass Group Affiliates, Inc. and each of Theodore S.
Li and Hui Cynthia Lee for "cause" pursuant to the terms of the Employment
Agreements. These Employment Agreements became effective contemporaneously with
the sale of an aggregate of 6,454,300 shares of the common stock of the Company
by Mr. Li and Ms. Lee, representing 61.56% of the then issued and outstanding
common stock, to Advanced Communications Technologies, Inc. In addition to base
salaries and other compensation, the Employment Agreements provided for payment
of a signing bonus of $225,000 to each of Mr. Li and Ms. Lee on or before
January 29, 2005. No part of these bonuses has been paid. On May 11, 2005, the
Company filed a complaint in the United States District Court for the Southern
District of New York against Theodore S. Li and Hui Cynthia Lee, the former
officers and principal shareholders of PMIC, for the recovery of damages and
costs for securities fraud, breach of contract and other counts in connection
with the acquisition of the Stock of PMIC.
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 the
and among the Company, Theodore S. Li and Hui Cynthia 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 the
International, Inc. 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 the
Telenetworx, Inc. 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 the
Forum International, Inc. 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
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28
Exhibit No. Description Location
- ----------- ----------- --------
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) to
December 30, 2004, issued to Theodore S. Li. the Company's Form 8-K filed with the SEC on
December 14, 2004
10.2 6% Secured Convertible Promissory Note, dated Incorporated by reference to Exhibit 2.4(i) to
December 30, 2004, issued to Hui Cynthia Lee. 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 the
30, 2004, among Advanced Communications Technologies, 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) to
Pacific Magtron International Corp., Advanced the Company's Form 8-K filed with the SEC on
Communications Technologies, Inc., Encompass Group 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) to
Pacific Magtron International Corp., Advanced the Company's Form 8-K filed with the SEC on
Communications Technologies, Inc., Encompass Group 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) to
Advanced Communications Technologies, Inc., Theodore the Company's Form 8-K filed with the SEC on
S. Li and Hui Cynthia Lee. 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
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29
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
By: /s/ Wayne I. Danson
Name: Wayne I. Danson
Title: President (Principal Executive Officer),
Chief Financial Officer
(Principal Accounting Officer) and Director
Date: May 23, 2005
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