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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(check one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Three Months Ended September 30, 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.
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(Exact name of small business issuer as specified in its charter)
Florida
-------
(State or other jurisdiction
of incorporation or organization)
65-0738251
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(IRS Employer Identification No.)
420 Lexington Avenue, New York, NY 10170
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(Address of principal executive offices)
(646)-227-1600
--------------
(Issuer'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 |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes |_| No |X|
As of November 1, 2005, there were 3,290,867,263 shares of the registrant's no
par value common stock issued and outstanding.
Transmittal Small Business Disclosure Format (check one): Yes |_| No |X|
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ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
INDEX TO FORM 10-QSB
Part I-Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets As Of
September 30, 2005 (Unaudited) And June 30, 2005 1
Condensed Consolidated Statements Of Operations For
The Three Months Ended September 30, 2005 And 2004 (Unaudited) 2
Condensed Consolidated Statement Of Stockholders' Equity
For The Three Months Ended September 30, 2005 (Unaudited) 3
Condensed Consolidated Statements Of Cash Flows For The Three
Months Ended September 30, 2005 And 2004 (Unaudited) 4
Notes To Condensed Consolidated Financial Statements As Of
September 30, 2005 (Unaudited) 5
Item 2. Management's Discussion And Analysis Or Plan Of Operation 12
Item 3. Controls And Procedures 12
Part II-Other Information
Item 1. Legal Proceedings 23
Item 2. Unregistered Sales of Equity Securities And Use Of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission Of Matters To A Vote Of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits 24
As used herein, the terms the "Company," "Advanced Communications Technologies,"
"we," "us" or "our" refer to Advanced Communications Technologies, Inc., a
Florida corporation.
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i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in the "Management's Discussion and Analysis or Plan 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 that we have made. All statements, other than
statements of historical facts, included in this quarterly report that address
activities, events or developments that we expect or anticipate will or may
occur in the future, including such matters as our projections, future capital
expenditures, business strategy, competitive strengths, goals, expansion, market
and industry developments and the growth of our businesses and operations are
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may," "believes," "expects," "anticipates," "could," "estimates,"
"grow," "plan," "continue," "will," "seek," "scheduled," "goal" or "future" or
the negative or other comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, such as credit losses, dependence on management and key
personnel, variability of quarterly results, our ability to continue our growth
strategy and competition, certain of which are beyond our control. Any or all of
our forward-looking statements may turn out to be wrong. They may be affected by
inaccurate assumptions that we might make or by known or unknown risks or
uncertainties. Should one or more of these risks or uncertainties materialize or
should the underlying assumptions prove incorrect, actual outcomes and results
could differ materially from those indicated in the forward-looking statements.
Because of the risks and uncertainties associated with forward-looking
statements, you should not place undo reliance on them. Further, any
forward-looking statement speaks only as of the date on which it is made, and we
undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement is made or to
reflect the occurrence of unanticipated events.
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,
2005
(Unaudited) June 30, 2005
--------------- ---------------
ASSETS
Current Assets
Cash and cash equivalents $ 380,925 $ 836,876
Accounts receivable, net of allowance for doubtful accounts of
$12,584 and $4,723 at September 30, 2005 and June 30, 2005,
respectively 738,109 364,285
Inventories 367,138 367,453
Prepaid expenses and other current assets 147,435 130,605
--------------- ---------------
Total Current Assets 1,633,607 1,699,219
--------------- ---------------
Property and equipment, net of accumulated depreciation of $37,835
and $20,697 as of September 30, 2005 and June 30, 2005, respectively 246,562 259,764
--------------- ---------------
Other Assets
Licensed Intangibles and rights 400,000 400,000
Excess of cost over fair value of assets acquired 2,611,055 2,611,055
--------------- ---------------
Total Other Assets 3,011,055 3,011,055
--------------- ---------------
TOTAL ASSETS $ 4,891,224 $ 4,970,038
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Current portion of notes payable $ 1,020,712 $ 1,020,028
Accounts payable and accrued expenses 1,107,241 818,554
--------------- ---------------
Total Current Liabilities 2,127,953 1,838,582
Long-term Notes and Loans Payable, less current portion 199,653 205,367
--------------- ---------------
TOTAL LIABILITIES 2,327,606 2,043,949
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 25,000 shares authorized:
Series A convertible preferred stock, $.01 par value,
4,185 and 4,200 shares issued and outstanding, respectively 42 42
Series B convertible preferred stock, $.01 par value,
100 shares issued and outstanding 1 1
Common stock, no par value, 5,000,000,000 shares authorized:
3,170,523,731 and 3,151,773,731 shares issued and outstanding,
respectively 29,766,907 29,751,907
Additional paid in capital 5,411,831 5,426,831
Deferred commitment and equity financing fees, net of accumulated
amortization (25,000) (25,000)
Deferred compensation, net of amortization of $312,500 and $250,000,
respectively (187,500) (250,000)
Accumulated deficit (32,402,663) (31,977,692)
--------------- ---------------
Total Stockholders' Equity 2,563,618 2,926,089
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,891,224 $ 4,970,038
=============== ===============
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See accompany notes to condensed consolidated financial statements
1
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For The Three Months Ended
----------------------------------
September 30,
----------------------------------
2005 2004
--------------- ---------------
GROSS REVENUES $ 2,288,683 $ 1,825,184
COST OF REVENUES 1,552,322 1,151,428
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GROSS PROFIT 736,361 673,756
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OPERATING EXPENSES
Depreciation and amortization 79,638 70,306
Professional and consulting fees 75,746 212,159
Other selling, general and administrative expenses 985,465 687,266
--------------- ---------------
TOTAL OPERATING EXPENSES 1,140,849 969,731
--------------- ---------------
Loss From Operations before Other Income (Expense) (404,488) (295,975)
--------------- ---------------
OTHER INCOME (EXPENSE)
Distributable share of partnership income -- 215,233
Interest expense, net (20,483) (39,266)
--------------- ---------------
TOTAL OTHER INCOME (EXPENSE), NET (20,483) 175,967
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NET LOSS $ (424,971) $ (120,008)
=============== ===============
Net loss per share - basic and dilutive $ -- $ --
=============== ===============
Weighted average number of shares
outstanding during the year - basic and dilutive 3,152,792,753 1,996,621,493
=============== ===============
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See accompany notes to condensed consolidated financial statements
2
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
(UNAUDITED)
COMMON STOCK PREFERRED STOCK ADDITIONAL
-------------------------------- -------------------------------- PAID IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
-------------- -------------- -------------- -------------- -------------- --------------
BALANCE AT
JUNE 30, 2005 3,151,773,731 $ 29,751,907 4,300 $ 43 $ 5,426,831 $ (31,977,692)
Common stock issued on
conversion of Series
A preferred stock 18,750,000 15,000 (15) (15,000)
Amortization of deferred
compensation
Net loss for the period (424,971)
-------------- -------------- -------------- -------------- -------------- --------------
BALANCE AT
SEPTEMBER 30, 2005 3,170,523,731 $ 29,766,907 4,285 $ 43 $ 5,411,831 $ (32,402,663)
============== ============== ============== ============== ============== ==============
COMMITMENT
AND EQUITY DEFERRED
FINANCING FEES COMPENSATION TOTAL
-------------- -------------- --------------
BALANCE AT
JUNE 30, 2005 $ (25,000) $ (250,000) $ 2,926,089
Common stock issued on
conversion of Series
A preferred stock --
Amortization of deferred
compensation 62,500 62,500
Net loss for the period (424,971)
-------------- -------------- --------------
BALANCE AT
SEPTEMBER 30, 2005 $ (25,000) $ (187,500) $ 2,563,618
============== ============== ==============
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See accompany notes to condensed consolidated financial statements
3
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended
September 30,
----------------------------------
2005 2004
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CASH FLOWS USED IN CONTINUING OPERATIONS:
Net loss from operations $ (424,971) $ (120,008)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 79,638 70,306
Debt discount expense -- 23,438
Distributive share of partnership income -- (215,233)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivables (373,824) --
Deferred Costs and other receivables -- 96,931
Inventories 315 8,262
Prepaid expense/security deposits (16,830) 1,515
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 268,033 82,290
Interest payable 20,653 16,891
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Net cash used in operating activities (446,986) (35,608)
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CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:
Partnership distributions -- 130,000
Purchase of business/fixed assets (3,936) (4,655)
Purchase of investment securities -- (91,618)
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Net cash (used in) provided by investing activities (3,936) 33,727
--------------- ---------------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Repayment of short-term and installment notes (5,029) (80,000)
--------------- ---------------
Net cash used in financing activities (5,029) (80,000)
--------------- ---------------
Net decrease in cash $ (455,951) $ (81,881)
Cash at beginning of period 836,876 1,193,170
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CASH AT END OF PERIOD $ 380,925 $ 1,111,289
=============== ===============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the three months ended September 30, 2005, the Company issued 18,750,000
shares of common stock on the conversion of $15,000 of Series A Convertible
Preferred Shares.
During the three months ended September 30, 2004, the Company issued 172,881,526
shares of common stock in partial repayment of the short-term note payable due
to Cornell Capital Partners, L.P.
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See accompanying notes to consolidated financial statements
4
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 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 New York-based public holding company specializing in the
technology aftermarket service and supply chain, known as reverse logistics. Our
wholly-owned subsidiary and principal operating unit, Encompass Group
Affiliates, Inc. a Delaware corporation ("Encompass"), acquires and operates
businesses that provide computer and electronics repair and end-of-life cycle
services. Encompass owns Cyber-Test, Inc. ("Cyber-Test"), an electronic
equipment repair company based in Florida and our principal operating business.
Additionally, through our wholly-owned investment subsidiary, Hudson Street
Investments, Inc. ("Hudson Street"), we seek to acquire minority investments in
various profitable businesses.
Encompass seeks to become a leader in the integrated technology and
services industry through the acquisition of assets and companies in that
industry, and then instilling sustainable growth skills as a core competency.
Encompass is focused on eliminating the risks associated with environmental
compliance in the e-Recycle industry by repairing, refurbishing, sorting and
selling old components to specialized processors, such as smeltering plants.
Cyber-Test, a Delaware corporation and wholly-owned subsidiary of
Encompass, operates as an independent service organization. From its roots in
the space industry more than 19 years ago, Cyber-Test 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.
Cyber-Test's technical competency extends from office equipment and fax machines
to printers, scanners, laptop computers, monitors, multi-function units and
high-end consumer electronics, such as PDAs and digital cameras. Programs are
delivered nationwide through proprietary systems that feature real-time EDI,
flexible analysis tools and repair tracking.
Pacific Magtron International Corporation, Inc. ("PMIC") together with its
wholly-owned subsidiaries Pacific Magtron, Inc. ("PMI"), Pacific Magtron
International (GA), Inc. ("PMIGA") and Live Warehouse, Inc. ("LWI"), is our 62%
majority-owned subsidiary that we acquired as of December 30, 2004. PMIC's
principal business consisted of the importation and wholesale distribution of
electronics products, computer components and computer peripheral equipment
throughout the United States. LWI sold consumer computer products through the
Internet and distributed 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".
Because PMIC was unsuccessful in reaching an agreement with one of its
secured creditors, on June 23, 2005 it ceased all business activities except
those necessary to liquidate its remaining assets.
(B) Financial Statement Presentation And Principles Of Consolidation
The consolidated financial statements include the Company and all of its
wholly-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. In accordance with ARB51 and FAS94, the
Company's consolidated financial statements do not include the consolidated
financial results of PMIC, a majority-owned company, and its wholly-owned
subsidiaries, PMI, PMIGA and LWI.
Due to the bankruptcy filing of PMIC and its subsidiaries on May 11, 2005,
and as of that date, the Company no longer was able to exercise management
control over PMIC's business or operations. Effective May 11, 2005, the Company
accounted for its investment in PMIC under the cost method of accounting. At
June 30, 2005, the Company wrote off its entire investment in PMIC. All
significant intercompany transactions have been eliminated in consolidation.
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5
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2005
(UNAUDITED)
(C) Interim Financial Statements
Financial statements as of September 30, 2005 are unaudited but in the
opinion of management the consolidated financial statements include all
adjustments consisting of normal accruals necessary for a fair presentation of
financial position and the comparative results of operation. Results of
operations for interim periods are not necessarily indicative of those to be
achieved or expected for the entire year. These interim financial statements
should be read in conjunction with the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 2005 filed by the Company on October 3, 2005.
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America, have been condensed or omitted. It is
suggested that these condensed financial statements be read in conjunction with
the financial statements and notes thereto included in the Annual Report on Form
10-KSB for the fiscal year ended June 30, 2005.
(D) Concentration of Major Customers
During the three months ended September 30, 2005, Cyber-Test's sales to
two customers accounted for approximately 90% of its sales and accounts
receivable. For the three months ended September 30, 2004, sales to and accounts
receivable from these two major customers represented 79% and 68% respectively
of total sales and accounts receivable.
(E) 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.
(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. As of September 30, 2005 and June 30,
2005, these intangible assets were not impaired.
(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.
(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 three months ended September 30, 2005 and
2004, shares of common stock that could have been issued upon conversion of
convertible debt were excluded from the calculation of diluted earnings (loss)
per share, as their effect would have been anti-dilutive.
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6
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2005
(UNAUDITED)
(I) Property and Equipment
Property and equipment are stated at cost. Assets are depreciated using
the straight-line method for both financial statement and tax purposes based on
the following estimated useful lives:
Machinery and equipment 3 to 7 years
Furniture and fixtures 5 to 7 years
Leasehold improvements 2 years (lease life)
Maintenance and repairs are charged to expense when incurred.
(J) Business Segments
The Company applies Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information". During
the three months ended September 30, 2005, the Company operated in one business
segment.
(K) 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 year.
(L) Concentration of Credit Risk
The Company maintains its cash in bank deposit accounts, which, at times,
may exceed federally insured limits. The Company has not experienced any losses
in such accounts and believes it is not exposed to any significant credit risk
on cash and cash equivalents.
(M) 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 beginning with the first
interim or annual reporting period of the first fiscal year that begins after
June 15, 2005 for non-small business issuers or 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. PROPERTY AND EQUIPMENT
September 30, 2005 June 30, 2005
------------------ ------------------
Computer, office equipment and fixtures $ 196,639 $ 135,494
Machinery and equipment 30,706 23,731
Leasehold improvements 57,052 121,236
Less: Accumulated depreciation (37,835) (20,697)
------------------ ------------------
Property and equipment, net $ 246,562 $ 259,764
================== ==================
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7
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2005
(UNAUDITED)
Depreciation expense for the three months ended September 30, 2005 was
$17,138.
NOTE 3. NOTES AND LOAN PAYABLE
September 30, 2005 June 30, 2005
------------------ ------------------
Current:
--------
8% Note Payable-Current $ 57,831 $ 57,831
Note Payable-Cornell Capital 275,000 275,000
6% Secured Note Due 12/05 500,000 500,000
6% Unsecured Note due 6/07 166,157 166,157
Capitalized Lease 21,724 21,039
------------------ ------------------
Notes Payable-Current $ 1,020,712 $ 1,020,028
================== ==================
Long-Term:
----------
6% Unsecured Note $ 166,157 $ 166,157
Capitalized Lease 33,496 39,210
------------------ ------------------
Notes Payable-Long-Term $ 199,653 $ 205,367
================== ==================
(A) 8% Note Payable
On November 14, 2002, the Company settled its litigation with the
Needham/DuPont plaintiffs by agreeing to release the plaintiffs' stock from
restriction and issued a three-year unsecured 8% promissory note in the
principal amount of $173,494 to reimburse the plaintiffs for their legal costs.
The note is payable in three equal annual installments of principal and
interest, the first of which was due on December 1, 2003 with additional
installments due on December 1, 2004 and December 1, 2005. As of September 30,
2005, $57,831 is outstanding and is recorded as a current liability.
(B) Note Payable-Cornell Capital Partners, L.P.
During January 2004, the Company entered into a six-month unsecured
promissory note with Cornell Capital Partners, L.P. in the amount of $3,000,000,
of which the net proceeds of $2,829,000 were used to purchase the Company's
minority interest in the Yorkville Advisors partnership. Under the terms of the
promissory note, the Company agreed to repay the note either in cash or through
the net proceeds to be received by the Company under its Equity Line of Credit
facility over a 24-week period commencing February 23, 2004. The promissory note
is non-interest bearing and only becomes interest-bearing, at the rate of 24% or
the highest rate permitted by law, if lower, in the event that the note is not
repaid when due. As of June 30, 2004, the Company repaid $625,000 of the note
from proceeds on the issuance of 517,000,360 shares of common stock under its
Equity Line of Credit facility. During the fiscal year ended June 30, 2005, we
repaid a total of $2,100,000 of principal on the note, of which $100,000 was
repaid by issuing 172,881,526 shares of common stock and $2,000,000 was repaid
in cash leaving a balance of $275,000. No interest is accrued on or owed under
the terms of the original $3,000,000 short-term obligation. On February 10,
2005, the note was modified, extended to June 30, 2005, and bears interest at a
rate of 10%. The note was not paid when due and is currently in default.
(C) 6% Unsecured Note Payable
Pursuant to the terms of the Cyber-Test, Inc. acquisition, on June 2,
2004, the Company issued a $498,469 three-year 6% unsecured installment note to
the shareholders of Cyber-Test, Inc. as part of the purchase of the Cyber-Test
assets. The note matures on June 2, 2007 and is payable in three equal annual
installments of $166,156 plus accrued interest. During the fiscal year ended
June 30, 2005, we paid the first installment on the note in the amount of
$166,156, plus $9,970 of accrued interest. As of September 30, 2005, the balance
of the note was $332,313, of which $166,157 is reported as a current liability.
(D) 6% Secured Note Payable
On December 10, 2004, the Company entered into a Stock Purchase Agreement
with Theodore S. Li and Hui Cynthia Lee (collectively, the "Stockholders")
pursuant to which the Company agreed to purchase from the Stockholders, and the
Stockholders agreed to sell to the Company, an aggregate of 6,454,300 shares of
the common stock of Pacific Magtron International Corporation, Inc. (the "PMIC
Shares") for the aggregate purchase price of $500,000 (the "Stock Purchase
Agreement").
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8
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2005
(UNAUDITED)
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 the Notes on or prior to the maturity date at 110.0% of the principal amount
redeemed, 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
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").
On May 11, 2005, we filed suit against Mr. Li and Ms. Lee for various
breaches of the Stock Purchase Agreement (see Note 5(c)).
(E) Capitalized Lease Obligation-Future Minimum Lease Payments
The Company leases a telephone system, including software, under an
agreement that is classified as a capital lease. The cost of equipment purchase
was $69,678 and is included in the Balance Sheets as property, plant, and
equipment at September 30, 2005. Accumulated amortization of the leased
equipment was $6,968 as of September 30, 2005. Amortization of assets under
capital leases is included in depreciation expense.
The future minimum lease payments required under the capital lease and the
present value of the net minimum lease payments as of September 30, 2005, are as
follows:
Period Ending
September 30, Amount
------------------ ------------------
2006 $ 27,392
2007 27,392
2008 9,131
------------------
Total minimum lease payments 63,915
Less: Amount representing interest (8,695)
------------------
Present value of net minimum lease payments 55,220
Less: Current maturities of capital lease obligations (21,724)
------------------
Long-term capital lease obligations $ 33,496
==================
Future maturities of long-term debt as of September 30, 2005 are as
follows:
Date Amount
------------------ ------------------
June 30, 2006 1,020,712
June 30, 2007 199,653
Thereafter --
------------------
Total $ 1,220,365
==================
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9
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2005
(UNAUDITED)
NOTE 4. STOCKHOLDERS' EQUITY
(A) Preferred Stock
o Series A Convertible Preferred Stock
The Company has 25,000 shares of preferred stock authorized for issuance
in one or more series, at a par value of $.01 per share. In conjunction with the
acquisition of the Cyber-Test business, the Company issued 4,200 shares of
Series A Convertible Preferred Stock (the "Series A Preferred Shares") having a
liquidation value of $1,000 per share, to Cornell Capital Partners, L.P. During
fiscal 2005, a portion of these shares was transferred by Cornell Capital
Partners, L.P. to unrelated parties. Holders of the Series A Preferred Shares
are entitled to receive cash dividends on a cumulative basis, in arrears, at the
annual rate of 5% when and if a dividend is scheduled by the Company's board of
directors. The Series A Preferred Shares are convertible, in whole or in part,
on or after May 21, 2005 into shares of common stock at the fixed price of $.01
per share or 100% of the average of the three lowest closing bid prices for the
ten trading days immediately preceding the date of conversion, whichever is
lower.
The Series A Preferred Shares are nonvoting and redeemable at the option
of the Company, in whole or in part, at any time at a 20% premium to liquidation
value.
In any liquidation of the Company, each of the Series A Preferred Shares
will be entitled to a liquidation preference before any distribution may be made
on the Company's common stock or any series of capital stock that is junior to
the Series A Preferred Shares. In the event of a fundamental change in control
of the Company or its current management, each holder of the Series A Preferred
Shares has the immediate right to convert its Series A Preferred Shares into
common stock of the Company.
At June 30, 2005, no preferred shares had been converted into common
stock.
On September 26, 2005, a holder of the Series A Preferred Shares converted
$15,000 of its Series A Preferred Shares at a price of $.0008 per share into
18,750,000 shares of common stock. At September 30, 2005, 4,185 Series A
Preferred Shares remain issued and outstanding.
In addition, on October 18, 2005 and October 26, 2005, holders of Series A
Preferred Shares converted an additional 40 shares, or $40,000 in the aggregate,
of Series A Preferred Shares at a price of $.00081 and $.00069 per share into
24,691,358 and 28,985,507 shares of our common stock, respectively.
o Series B Convertible Preferred Stock
In conjunction with the Company's license of certain intangible assets,
the Company issued 300 shares of nonvoting Series B Convertible Preferred Stock
(the "Series B Preferred Shares"), having a liquidation value of $1,000 per
share. The Series B Preferred Shares have the same terms and privileges as the
Series A Preferred Shares, but are junior to the Series A Preferred Shares in
the event of a liquidation of the Company, and are convertible, in whole or in
part, on or after June 23, 2005 into shares of common stock on the same terms of
the Series A Preferred Shares. On June 23, 2005, holders of 200 Series B
Preferred Shares elected to convert such shares at a price of $.0005 per share
($200,000 in the aggregate) into 400,000,000 shares of common stock. At
September 30, 2005, 100 Series B Preferred Shares remain issued and outstanding.
NOTE 5. COMMITMENTS AND CONTINGENCIES
(A) Termination of Employment Agreements
On May 10, 2005, Pacific Magtron International Corp. ("PMIC") terminated
the Employment Agreements, dated December 30, 2004, among PMIC, Advanced
Communications Technologies, Inc., and Encompass Group Affiliates, Inc. and each
of Theodore S. Li and Hui Cynthia Lee. PMIC has terminated these Employment
Agreements and the employment of Mr. Li and Ms. Lee with PMIC 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 PMIC by Mr. Li and Ms.
Lee, representing 61.56% of the then issued and outstanding common stock, to the
Company. 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.
- --------------------------------------------------------------------------------
10
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2005
(UNAUDITED)
(B) Operating Lease Commitment
The Company's principal executive office is located at 420 Lexington
Avenue, Suite 2738, New York, New York 10170. The Company, through a license
agreement effective December 1, 2004 with Danson Partners, LLC, a party related
to our chief executive officer, occupies a 499 square foot office facility
having a monthly lease obligation of $1,478, as adjusted annually. The term of
the Company's license agreement is a month-to-month term and is at fair market
rental.
The Company's core operating business, Cyber-Test, is located at 448
Commerce Way, Longwood, Florida 32750. This 29,000 square foot office/warehouse
facility has a one-year triple net lease that commenced on August 1, 2004 and
ends on July 31, 2005, and carries two one-year options at a monthly lease
obligation of $13,900. Cyber-Test exercised its one year option and extended its
lease to July 31, 2006. The lease is renewable on a year-to-year basis by
providing written notice 60 days prior to the expiration of the then current
term.
The Company's principal operating unit, Encompass, is located at 1600
California Circle, Milpitas, California 95035. Encompass leases 2,000 square
feet of office space on a month-to-month basis for $2,000 per month. The lease
commenced on July 1, 2005.
(C) Legal Matters
The Company has been, and may in the future be involved as, a party to
various legal proceedings, which are incidental to the ordinary course of its
business. Management regularly analyzes current information and, as necessary,
provides accruals for probable liabilities on the eventual disposition of these
matters. In the opinion of management, as of September 30, 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 among the
Company and Mr. Li and Ms. Lee. On or about July 6, 2005, the defendants filed a
motion for a more definite statement of our complaint. That motion remains under
consideration by the court, and discovery has not yet commenced.
NOTE 6. GOING CONCERN
The Company's consolidated financial statements for the three months ended
September 30, 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 net loss of $424,971, negative cash
flow from operations of $446,986 for the three months ended September 30, 2005
and working capital deficiency of $494,346 as of September 30, 2005 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.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
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11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with our financial
statements and the related notes and the other financial information appearing
elsewhere in this report. In addition to historical information, the following
discussion and other parts of this quarterly report contain words such as "may,"
"estimates," "expects," "anticipates," "believes," "plan," "grow," "will,"
"could," "seek," "continue," "future," "goal," "scheduled" and other similar
expressions that 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. See "Risk
Related To Our Business" and "Risks Related To Our Stock" below.
General
We are a New York-based public holding company specializing in the
technology aftermarket service and supply chain, known as reverse logistics. Our
wholly-owned subsidiary and principal operating unit, Encompass Group
Affiliates, Inc. ("Encompass"), acquires and operates businesses that provide
computer and electronics repair and end-of-life cycle services. Encompass owns
Cyber-Test, Inc. ("Cyber-Test"), an electronic equipment repair company based in
Florida and our principal operating business. Additionally, through our
wholly-owned investment subsidiary, Hudson Street Investments, Inc. ("Hudson
Street"), we seek to acquire minority investments in various privately-held,
profitable businesses.
Although we believe we can continue to grow through strategic
acquisitions, there is no guarantee as to when, if ever, we would identify
prospective acquisitions or complete such strategic acquisitions. Appropriate
acquisition candidates may require more resources than are available to us.
Additionally, in the event we consummate an acquisition, there is no guarantee
such acquisition would be successful.
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 that provide repair and upgrade
services, new and used parts in support of repair and upgrades, return services
from resellers or for products no longer needed by the original users (often
called asset recovery), refurbishment and resale services, and ultimately
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".
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.
Cyber-Test is an electronic equipment repair company and is our principal
service business. Cyber-Test, a 19-year old company, was acquired to be the
platform from which our services business would expand. Cyber-Test's 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 Cyber-Test's 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.
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.
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12
Results of Operations-Comparison of the Three Months Ended September 30, 2005 to
the Three Months Ended September 30, 2004
Summary of Results of Operations
Three Months Ended Period to
September 30, Period
2005 2004 % Change
-------------------- --------
(in thousands)
Net income from Cyber-Test operations $ 115 $ 131 (12)%
Net income from investments -- 215 --
Parent company and Encompass overhead (520) (427) 22
Net interest expense (20) (39) (49)
-------- -------- --------
Net Loss $ (425) $ (120) 254%
======== ======== ========
Overview of First Quarter Results
For the three months ended September 30, 2005, we incurred a consolidated
net loss from continuing operations of $425,000 compared with a consolidated net
loss of $120,000 or a 254% increase in our operating loss on a comparative
basis. While we recorded record sales of $2.3 million relating to the repair,
service and warranty and exchange of office equipment, PDAs, laptop computers,
IPods, monitors and multi-functional units, which was a $500,000 or 28% increase
in revenue for the comparative period, our gross margins decreased from 37% to
32%. Our overall gross profit increased only by $62,000 to $736,000 from
$674,000 and was below expectations. Cyber-Test's net profit from operations of
$115,000 or 5.1% of gross sales was below its 7.3% net profit percentage for the
three-month period ended September 30, 2004 and was down from a $131,000 net
profit from operations for the three-month period ended September 30, 2004.
Cyber-Test's gross and net profit was below expectations due to a variety of
factors including (i) an increase in cost of sales due to the shift in sales mix
from the repair of higher margin core products, such as fax machines, printers
and multifunction machines, to higher volume, lower margin repairs of PDA and
laptops, (ii) the incurrence of non-recurring upfront costs of entering new
product lines (PDAs and Blackberry units), and (iii) a one-time inventory
write-down due to machine part obsolescence. We expect higher gross margins and
lower cost of sales throughout the remainder of fiscal 2006 due to greater
production efficiencies and reduced costs of the new product line.
For the three months ended September 30, 2005, we reported a consolidated
loss of $405,000 from continuing operations before other expense as compared to
a $296,000 loss from continuing operations before other income for the three
months ended September 30, 2004. Included in these overhead costs is $80,000 and
$70,000, respectively, of non-cash charges for depreciation and amortization.
Consolidated operating costs increased by $170,000, or 18%, to $1,140,000 from
$970,000 principally due to a one-time increase in employment costs offset by a
substantial reduction in professional and consulting cost. For the three months
ended September 30, 2004, our overall loss from operations was offset by
$215,000 of other investment income from our investment in Yorkville Advisors,
which was redeemed during our fiscal year ended June 30, 2005.
Revenue
Consolidated revenue for the three months ended September 30, 2005 was
$2.3 million as compared to revenue of $1.8 million for three months ended
September 30, 2004, a $500,000, or 28%, increase in revenue from the comparative
period. The increase in revenue was attributable to new contracts for the repair
and service of laptops, PDAs and Blackberry units which Cyber-Test entered into
during the last quarter of fiscal 2005 and ramped up into in full production
during the first quarter of fiscal 2006.
Gross Profit
Consolidated gross operating margin for the three months ended September
30, 2005 was 32% versus a gross margin of 37% for the three months ended
September 30, 2004 and dipped due to the impact of a change in product mix from
the higher margin service and repair of printers and fax machines to lower
margin, higher volume service and repair of laptops and PDAs. Moreover, one-time
upfront non-recurring costs of entering new product repair lines, such as
technical training, purchase of seed stock and certain replacement parts for
PDAs and Blackberry units that are not readily available in the aftermarket and
need to be purchased directly from the original equipment manufacturer,
increased our cost of sales and reduced gross profit margins. Once these upfront
costs are fully incurred (generally over a three-month period), we expect that
overall gross margins will increase because of production efficiencies and lower
costs of sales.
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13
Cost of Sales
Our cost of sales during the three months ended September 30, 2005
increased to $1,552,000 from $1,151,000, or $401,000, from the comparative
three-month period ended September 30, 2004 and represents a 35% increase in our
cost of sales. Our cost of sales increased not only due to increased sales
volume during the quarter but also due to a substantial increase in freight
expense in the amount of $150,000 because of higher energy costs, an increase in
direct labor costs of $65,000 due to overtime costs, and a $100,000 write-down
in inventory due to obsolescence of certain machine parts.
Operating Expenses
Consolidated operating expenses for the three months ended September 30,
2005 and 2004 were $1.140 million and $970,000, respectively, representing an
increase of $170,000 from the three months ended September 30, 2004. This
overall increase was primarily attributable to an increase in selling, general
and administrative costs of $298,000 that was offset, in part, by a decrease of
$136,000 in professional and consulting expense compared to the three months
ended September 30, 2004.
Consolidated depreciation and amortization expense for the three months
ended September 30, 2005 increased by $10,000 to $80,000 from $70,000 for the
three months ended September 30, 2004 due to an increase in depreciation expense
on property and equipment and leasehold improvements for the three months ended
September 30, 2005 as a result of reducing the useful life of certain fixed
assets during the quarter.
Consolidated other selling, general and administrative expenses amounted
to $985,000 for three months ended September 30, 2005, which was a $298,000
increase from the comparative prior period and was due to a nonrecurring
increase in consolidated compensation related expenses in the amount of $304,000
and a slight decrease in Cyber-Test's operating business overhead during the
three months ended September 30, 2005. Such overhead expenses include the
overhead operation and cost associated with employing approximately 110
employees and operating an office and service/repair facility in Florida. The
following is a breakdown of the components of consolidated other selling,
general and administrative costs:
Three Months Ended Period to
September 30, Period
2005 2004 % Change
-------------------- --------
(in thousands)
Salaries and wages $ 680 $ 376 80.85%
Building facilities 78 77 1.30
Payroll and unemployment taxes 37 28 32.14
Telephone and utilities 26 27 (3.70)
Marketing and promotion 14 25 (44.00)
Other SG&A costs 150 154 (2.60)
-------- -------- --------
$ 985 $ 687 43.38%
======== ======== ========
Other Income (Expenses)
Consolidated other income (expense) for the three months ended September
30, 2005 amounted to $20,000 of net other expense and was entirely attributable
to net interest expense.
During the three months ended September 30, 2004, we realized $176,000 of
consolidated net other income due to the favorable results of our investment in
Yorkville Advisors, which generated $215,000 of income during the quarter ended
September 30, 2004. This investment income was offset, in part by, net interest
expense of $39,000 inclusive of accrued interest on our 10% Secured Convertible
Debentures, our 8% Note Payable, our 6% Note Payable and $23,000 of debt
discount expense, net of $650 of interest income.
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14
Consolidated interest expense decreased by $18,000, or 46%, to $20,000
from $39,000 for the three months ended September 30, 2005 compared to 2004.
This decrease was due primarily to substantially lower levels of
interest-bearing debt during the quarter as compared to the prior year.
Significant Accounting Policies
Financial Reporting Release No. 60, which was recently released by the
SEC, 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 requires 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 is 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.
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.
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.
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15
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing income (loss)
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution of securities, using the treasury stock method that could share in the
earnings of an entity. During the three months ended September 30, 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.
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 three months ended September 30, 2005.
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 Cyber-Test. Our cash and cash
equivalents totaled $380,295 at September 30, 2005.
We have been 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 have had various discussions
with banking institutions and institutional investors to secure an 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
compatible with our business and accretive to our results of operations. During
the quarter, we engaged a New York based investment banking firm to assist us in
securing an acquisition debt facility and/or long-term strategic equity
investors, for the purpose of providing us with acquisition funds and funds for
ongoing working capital needs and a planned recapitalization of our common and
preferred stock. Although we and our investment bankers intend to find
alternative financing to our Equity Line of Credit, there can be no assurance
that we will be able to find investors or lenders that would provide us with
financing at suitable valuations or 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.
In conjunction with our acquisition of the Cyber-Test business, we issued
4,200 shares of Series A Convertible Preferred Stock (the "Series A Preferred
Shares") having a liquidation value of $1,000 per share to Cornell Capital.
During fiscal 2005, Cornell Capital transferred a portion of these shares to
unrelated parties. Holders of the Series A Preferred Shares are entitled to
receive cash dividends on a cumulative basis, in arrears, at the annual rate of
5% when and if a dividend is scheduled by our Board of Directors. The Series A
Preferred Shares are convertible, in whole or in part, on or after May 21, 2005
into shares of common stock at the fixed price of $.01 per share or 100% of the
average of the three lowest closing bid prices for the ten trading days
immediately preceding the date of conversion, whichever is lower. The Series A
Preferred Shares are nonvoting and redeemable at the option of the Company, in
whole or in part, at any time at a 20% premium to liquidation value. At
September 30, 2005, 15 Series A Preferred Shares with a par value of $15,000 had
been converted at a price of $.0008 per share, into 18,750,000 shares of common
stock. On October 18, 2005 and October 26, 2005, holders of Series A Preferred
Shares converted an additional 40 shares, or $40,000 in the aggregate, of Series
A Preferred Shares at a price of $.00081 and $.00069 per share into 24,691,358
and 28,985,507 shares of common stock, respectively.
In conjunction with our license of certain intangible assets, we issued
300 shares of our nonvoting Series B Convertible Preferred Stock (the "Series B
Preferred Shares"), having a liquidation value of $1,000 per share. The Series B
Preferred Shares have the same terms and privileges as the Series A Preferred
Shares, but are junior to the Series A Preferred Shares in the event of a
liquidation of the Company and are convertible, in whole or in part, on or after
June 23, 2005 into shares of common stock on the same terms of the Series A
Preferred Shares. On June 23, 2005, holders of 200 Series B Preferred Shares
elected to convert $200,000 of such shares at a price of $.0005 per share into
400,000,000 shares of common stock. At September 30, 2005, 100 Series B
Preferred Shares remain outstanding.
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16
During the three months ended September 30, 2005, we made no advances
under the Equity Line of Credit. We entered into the $30 million Equity Line of
Credit facility with Cornell Capital in July 2003. Pursuant to the Equity Line
of Credit, we may, at our discretion, periodically issue and sell to Cornell
Capital shares of common stock for a total purchase of $30 million. The amount
of each advance is subject to an aggregate monthly maximum advance amount of $2
million in any 30-day period. Cornell Capital will purchase the shares of common
stock for a 9% discount to the lowest closing bid price of our common stock
during the five trading days after a notice date. Cornell Capital intends to
sell any shares under the Equity Line of Credit at the then prevailing market
price.
Our existing sources of liquidity, including cash resources and cash
provided by operating activities, will not provide us with sufficient resources
to meet our present and future working capital and cash requirements for the
next 12 months. Consequently, we and our investment banker are actively pursuing
a short-term secured working capital facility in the amount of up to $750,000 to
provide us with the necessary working capital over the next 12 months in the
event we fail to secure a suitable acquisition and working capital debt
facility. We do not anticipate making any further advances under the Equity Line
of Credit.
We had total liabilities of $2,327,606 as of September 30, 2005 versus
$2,043,949 as of June 30, 2005. These contractual obligations, along with the
dates on which such payments are due, are described below:
Payments Due by Period (from September 30, 2005)
------------------------------------------------------------------------
1 2-3 4-5 After 5
Contractual Obligations Total Year or Less Years Years Years
- ----------------------- ------------ ------------ ------------ ------------ ------------
Notes Payable $ 1,220,365 $ 1,020,712 $ 199,653 $ -- $ --
Accounts Payable and Accrued Expenses 1,107,241 1,107,241 -- -- --
Other Current Liabilities -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total Contractual Obligations $ 2,327,606 $ 2,127,953 $ 199,653 $ -- $ --
============ ============ ============ ============ ============
During the three months ended September 30, 2005, the Company's
contractual obligations increased by $283,657. At September 30, 2005, we had a
working capital deficiency of $494,346.
Our independent auditors have added an explanatory paragraph to their
audit opinions issued in connection with the years 2005 and 2004 financial
statements, which states that our ability to continue as a going concern depends
upon our ability to resolve liquidity problems by generating sufficient
operating profits to provide additional working capital. Our ability to obtain
additional funding and pay off our obligations will determine our ability to
continue as a going concern. Our financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Below is a discussion of our sources and uses of funds for the three
months ended September 30, 2005:
Overall Net Change In Cash Flow For The Three Months Ended September 30, 2005
During the three months ended September 30, 2005, our cash decreased by
$456,000. The net decrease in cash was principally the result of a change in the
billing process by a major Cyber-Test customer that caused a temporary delay in
the billing and collection of accounts receivable. These receivables were
collected after the quarter's close.
Net Cash Used In Operating Activities
Net cash used in operating activities was $447,000 and $36,000 for the
three months ended September 30, 2005 and 2004, respectively. Net use of cash in
operating activities for the three months ended September 30, 2005 was
principally from our consolidated net loss of $425,000 increased by an increase
in accounts receivable in the amount of $374,000 offset by non-cash charges of
$80,000 and an increase in accounts payable and accrued expenses of $289,000.
Net cash used in operating activities was $36,000 for the three months ended
September 30, 2004 and was principally the result of our consolidated net loss
of $120,000 offset by non-cash charges for amortization and debt discount
expense in the aggregate amount of $94,000.
- --------------------------------------------------------------------------------
17
Net Cash (Used In) Provided by Investing Activities
Cash used in investing activities for the three months ended September 30,
2005 was $4,000 and was for the purchase of fixed assets. Cash provided from
investing activities of $34,000 for the three months ended September 30, 2004
was attributable to $130,000 of cash distributions received from our partnership
investment offset by $5,000 for the purchase of business assets by Cyber-Test
and the purchase by Hudson Street of $92,000 of marketable investment securities
in public and private companies.
Net Cash Used In Financing Activities
Net cash of $5,000 used in financing activities for the three months ended
September 30, 2005 was for the repayment by Cyber-Test of its equipment
financing lease. Net cash of $80,000 used in financing activities for the three
months ended September 30, 2004 was for the repayment of our short-term note to
Cornell Capital Partners, L.P.
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, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures, or
capital resources. The Company does not have any non-consolidated special
purpose entities.
Risks Related To Our Business
In addition to historical facts or statements of current condition, this
quarterly report on Form 10-QSB contains forward-looking statements.
Forward-looking statements provide our current expectations or forecasts of
future events.
The following discussion outlines certain factors that we think could
cause our actual outcomes and results to differ materially from our
forward-looking statements as well as impact our future overall performance.
These factors are in addition to those set forth elsewhere in this quarterly
report on Form 10-QSB.
We Have A History Of Losses, And May Incur Additional Losses
We are a holding company with a limited history of operations. We achieved
profitability for the first time in fiscal year 2004. While we have achieved
profitability, we cannot be sure that we will maintain revenue sufficient for us
to continue to remain profitable. For the fiscal year ended 2005, we incurred an
overall net loss of $735,833. For the quarterly period ending September 30,
2005, we incurred an overall net loss of $425,000.
We Will Need Additional Capital
To pursue our growth objectives, we will need additional capital, which
may not be available to us. This may delay or inhibit our progress in achieving
our goals.
We will require funds in excess of our existing cash resources:
o to seek out and find investment opportunities in high
growth-potential companies;
o to acquire the assets or stock of technology-related companies in
the reverse logistics arena;
o to hire and retain highly skilled employees who understand, and can
implement, our business model; and
o to finance the growth of our current operations.
In the past, we have funded all of our growth through equity and debt
financings. We anticipate that our existing capital resources will not be
sufficient to enable us to maintain currently planned operations through the
next twelve (12) months, and we will need to raise additional funds or obtain a
working capital facility in the near future to continue our business expansion
plans.
It is possible that we will be unable to obtain additional funding as and
when we need it. If we are unable to obtain additional funding as and when
needed, we could be forced to delay the progress of our business expansion
plans.
- --------------------------------------------------------------------------------
18
New Equity Financing Could Dilute Current Stockholders
If we raise funds through equity financing to meet the needs discussed
above, it will have a dilutive effect on existing holders of our shares by
reducing their percentage ownership. The shares may be sold at a time when the
market price is low because we need the funds. This will dilute existing holders
more than if our stock price was higher. In addition, equity financings often
involve shares sold at a discount to the current market price.
The Loss Of Any One Of Cyber-Test's Key Customers Could Have A Material Adverse
Effect On Our Business
Cyber-Test relies heavily on the business of a few key customers. While
all these key customers are contractually committed to purchase parts or service
from Cyber-Test, these contracts are terminable within 60 to 90 days. If any one
(or all) of these key customers terminates its relationship with Cyber-Test, it
could have a material adverse effect on our business.
We And Our Subsidiaries Operate In Competitive Industries
Cyber-Test's business is highly competitive. Cyber-Test competes with
companies that provide repair services for office equipment and computer
peripheral products, with companies that supply parts and consumables to
end-users and repair companies of such equipment and products, and with
resellers of such equipment and products.
Competition within the office equipment and computer peripheral products
service and repair industry is based on quality of service, depth of technical
know-how, price, availability of parts, speed and accuracy of delivery, and the
ability to tailor specific solutions to customer needs. Many of Cyber-Test's
competitors are larger in size and have greater financial and other resources
than Cyber-Test, such as Decision One, Depot America, Teleplan, DataTech
America, and DEX. Cyber-Test also competes with manufacturers and OEMs that do
their own repair work, as well as large distribution and logistics companies
such as United Parcel Service and Airborne Logistics.
Management believes Cyber-Test has a competitive advantage over many of
its competitors, but Cyber-Test's ability to maintain such competitive advantage
is dependent upon many variables, including its ability to successfully attract
and retain technicians that are capable of performing repair on all brands and
models of office equipment and computer peripherals at prices which remain
competitive. We can provide no assurances that Cyber-Test will continue to have
the resources to successfully compete in the technology repair service industry.
Our Business Could Suffer If There Is A Prolonged Economic Downturn
We derive a substantial amount of our net revenue from the repair and
resale by Cyber-Test of office equipment and computer peripheral products.
Revenue from the repair and resale of such equipment does not generally
fluctuate widely with economic cycles. However, a prolonged national or regional
economic recession could have a material adverse effect on our business.
We also derive a substantial amount of our net revenue from cash
distributions received by us from our investments in companies operating in
diverse industries. A prolonged economic downturn could hinder the ability of
these companies to provide us with a substantial, or any, return on our
investments.
Fluctuations In The Price Or Availability Of Office Equipment Parts And Computer
Peripheral Products Could Materially Adversely Affect Us
The price of office equipment parts and computer peripheral products may
fluctuate significantly in the future. Changes in the supply of or demand for
such parts and products could affect delivery times and prices. We cannot
provide any assurances that Cyber-Test will continue to have access to such
parts and products in the necessary amounts or at reasonable prices or that any
increases in the cost of such parts and products will not have a material
adverse effect on our business.
We Could Be Materially Affected By Turnover Among Our Service Representatives
Cyber-Test depends on its ability to identify, hire, train, and retain
qualified service personnel, as well as a management team to oversee the
services that Cyber-Test provides. A loss of a significant number of these
experienced personnel would likely result in reduced revenues for Cyber-Test and
could materially affect our business. Cyber-Test's ability to attract and retain
qualified service representatives depends on numerous factors, including factors
that Cyber-Test cannot control, such as conditions in the local employment
markets in which it operates. We cannot provide any assurances that Cyber-Test
will be able to hire or retain a sufficient number of service representatives to
achieve its financial objectives.
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19
To Service Our Indebtedness, We Will Require A Significant Amount Of Cash. Our
Ability To Generate Cash Depends On Many Factors Beyond Our Control
Our ability to make payments on our indebtedness and to fund planned
capital expenditures will depend on our ability to generate cash from our
operations in the future. This, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond our control. Based on our current level of operations, we believe our
cash flow from operations and available cash will not be adequate to meet our
future liquidity needs for the next twelve (12) months. We are currently working
with our investment banker to obtain a short-term working capital facility to
provide us with the necessary working capital over the next 12 months in the
event that we fail to secure a suitable acquisition and working capital debt
facility.
We cannot provide any assurances, however, that we will obtain any such
facility or that future borrowings will be available to us in an amount
sufficient to enable us to pay our indebtedness or to fund our other liquidity
needs. We may need to refinance or restructure all or a portion of our
indebtedness on or before maturity. We cannot make any assurances that we will
be able to refinance any of our indebtedness on commercially reasonable terms or
at all. If we cannot service our indebtedness, we may have to take actions such
as selling assets, seeking additional equity or reducing or delaying capital
expenditures, strategic acquisitions, investments and alliances. We cannot make
any assurances that any such actions, if necessary, could be effect on
commercially reasonable terms, or at all.
We Have A Working Capital Deficit, Which Means That Our Current Assets On
September 30, 2005 Were Not Sufficient To Satisfy Our Current Liabilities On
That Date
We had a working capital deficit of $494,346 as of September 30, 2005,
which means that our current liabilities exceeded our current assets by
$494,346. Current assets are assets that are expected to be converted into cash
within one year and, therefore, may be used to pay current liabilities as they
become due. Our working capital deficit means that our current assets on
September 30, 2005 were not sufficient to satisfy all of our current liabilities
on that date.
Our Independent Auditors Have Added A Going Concern Opinion To Our Financial
Statements, Which Means That We May Not Be Able To Continue Operations Unless We
Obtain Additional Funding
Our independent auditors have added an explanatory paragraph to their
audit opinions issued in connection with the years 2005 and 2004 financial
statements, which states that our ability to continue as a going concern depends
upon our ability to resolve liquidity problems by generating sufficient
operating profits to provide additional working capital. Our ability to obtain
additional funding and pay off our obligations will determine our ability to
continue as a going concern. Our financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
We Could Fail To Attract Or Retain Key Personnel
Our success largely depends on the efforts and abilities of key
executives, including Mr. Wayne Danson, our President, Chief Executive Officer
and Chief Financial Officer, Mr. Martin Nielson, our Senior Vice
President-Acquisitions and Ms. Lisa Welton, our President and Chief Executive
Officer of Cyber-Test. The loss of the services of Mr. Danson, Mr. Nielson or
Ms. Welton could materially adversely affect our business because of the cost
and time necessary to replace and train a replacement. Such a loss would also
divert management's attention away from operational issues. We maintain a
$2,000,000 key-man life insurance policy for each of Mr. Danson, Mr. Nielson and
Ms. Welton.
Risks Related To Our Stock
The Future Conversion Of Our Outstanding Series A And B Convertible Preferred
Stock Will Cause Dilution To Our Existing Shareholders, Which Means That Our Per
Share Income And Stock Price Could Decline
The issuance of shares upon any future conversion of the outstanding
Series A Convertible Preferred Stock and B Convertible Preferred Stock will have
a dilutive impact on our stockholders. As of September 30, 2005, we had
$4,285,000 of outstanding shares of Series A Convertible Preferred Stock and B
Convertible Preferred Stock that are convertible into shares of our common
stock. Both the Series A Convertible Preferred Stock and B Convertible Preferred
Stock are convertible at a price of $0.01 per share or 100% of the average of
the three lowest closing bid prices for the ten trading days immediately
preceding the date of conversion, whichever is lower. If our share price is
equal to or greater than $.01 per share at the time of conversion, the Series A
Convertible Preferred Stock and B Convertible Preferred Stock would be
convertible into an aggregate of 428,500,000 shares of our common stock. In the
event the price of our common stock is less than $.01 per share at the time of
conversion, the number of shares of our common stock issuable would be greater
than 428,500,000. If such conversions had taken place at $0.001, our recent
stock price, then holders of our Series A Convertible Preferred Stock and B
Convertible Preferred Stock would have received 4,285,000,000 shares of our
common stock. As a result, our net income per share could decrease in future
periods, and the market price of our common stock could decline.
- --------------------------------------------------------------------------------
20
The Conversion Of Our Series A Convertible Preferred Stock Could Cause A Change
Of Control
The issuance of shares upon the conversion of our Series A Convertible
Preferred Stock could result in a change of control. Cornell Capital Partners,
L.P. currently holds $2,660,000 of our Series A Convertible Preferred Stock,
which if converted at current prices would result in the issuance of up to
2,660,000,000 shares of our common stock. After such conversions, Cornell
Capital Partners, L.P. would own approximately 34% of our then outstanding
shares of Common Stock, computed based on 5,000,000,000 shares that are
currently authorized to be issued. In such event, Cornell Capital Partners, L.P.
would be our largest shareholder and would be able to exercise control of us by
electing directors, increasing the number of authorized shares of common stock
that we could issue or otherwise.
The Price of Our Common Stock May Be Affected By A Limited Trading Volume And
May Fluctuate Significantly
There is a limited public market for our common stock, and there can be no
assurance that an active trading market will continue. An absence of an active
trading market could adversely affect our stockholders' ability to sell our
common stock in short time periods, or at all. Our common stock has experienced,
and is likely to experience in the future, significant price and volume
fluctuations that could adversely affect the market price of our common stock
without regard to our operating performance. In addition, we believe that
factors, such as quarterly fluctuations in our financial results and changes in
the overall economy or the condition of the financial markets, could cause the
price of our common stock to fluctuate substantially.
Our Common Stock Is Deemed To Be "Penny Stock," Which May Make It More Difficult
For Investors To Sell Their Shares Due To Suitability Requirements
Our common stock is deemed to be "penny stock" as that term is defined in
Rule 3a51-1 promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). These requirements may reduce the potential market for our
common stock by reducing the number of potential investors. This may make it
more difficult for investors in our common stock to sell shares to third parties
or to otherwise dispose of them. This could cause our stock price to decline.
Penny stocks:
o have a price of less than $5.00 per share;
o are not traded on a "recognized" national exchange;
o are not quoted on the Nasdaq automated quotation system (Nasdaq
listed stock must still have a price of not less than $5.00 per
share); or
o include stock in issuers with net tangible assets of less than $2.0
million (if the issuer has been in continuous operation for at least
three years) or $5.0 million (if in continuous operation for less
than three years), or with average revenues of less than $6.0
million for the last three years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor.
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21
ITEM 3. CONTROLS AND PROCEDURES
(A) Evaluation Of Disclosure Controls And Procedures
As of September 30, 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 (as defined in ss.240.13a-15(e) or
240.15d-15(e) under the Exchange Act). Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as of the end of
the September 30, 2005 quarterly period, our disclosure controls and procedures
are effective in timely alerting them to material information required to be
included in our periodic reports that are filed with the SEC. 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.
(B) Changes In Internal Control Over Financial Reporting
There were no changes in the Company's internal control over financial
reporting (as defined in Section 240.13a-15(f) or 240.15d-15(f) of the Exchange
Act) during our first fiscal quarter ended September 30, 2005 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
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22
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been, and may in the future be, involved as a party to
various legal proceedings which are incidental to the ordinary course of its
business. Management regularly analyzes current information and, as necessary,
provides accruals for probable liabilities on the eventual disposition of these
matters. In the opinion of management, as of September 30, 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 among the
Company and Mr. Li and Ms. Lee. On or about July 6, 2005, the defendants filed a
motion for a more definite statement of our complaint. That motion remains under
consideration by the court, and discovery has not yet commenced.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On June 30, 2005, we failed to pay the unsecured term note payable to
Cornell Capital Partners, L.P. when due. The note, which was modified on
February 10, 2005 and which has a principal balance of $275,000, bears interest
at the rate of 10%. The total arrearage as of the date hereof is $295,777.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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23
ITEM 6. EXHIBITS
Exhibit
No. Description Location (1)
- ------- ----------- ------------
2.1 Asset Purchase Agreement dated May 27, 2004, Incorporated by reference to Exhibit 10.1
by and between Cyber-Test, Inc., a Delaware to the Company's Form 8-K filed with the
corporation, and Cyber-Test, Inc., a Florida SEC on June 18, 2004
corporation.
2.2 Stock Purchase Agreement, dated as of December Incorporated by reference to Exhibit
10, 2004, among Advanced Communications 4.1 to the Company's Form 8-K filed
Technologies, Inc., Theodore S. Li and Hui with the SEC on December 14, 2004
Cynthia Lee.
3(I)(a) Articles of Incorporation of Media Forum Incorporated by reference to Exhibit 2.1
International, Inc. to the Company's Form S-8 filed with the
SEC on February 9, 2000
3(I)(b) Second Amendment to Articles of Incorporation Incorporated by reference to Exhibit 2.2
of Telenetworx, Inc. to the Company's Form S-8 filed with the
SEC on February 9, 2000
3(I)(c) Third Amendment to Articles of Incorporation Incorporated by reference to Exhibit 2.3
of Media Forum International, Inc. to the Company's Form S-8 filed with the
SEC on February 9, 2000
3(I)(d) Fourth Amendment to Articles of Incorporation Incorporated by reference to Exhibit 2.7
to the Form SB-2 filed with the SEC on
March 5, 2002
3(I)(e) 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(I)(f) 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(I)(g) 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(II) 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
4.1 6% Secured Convertible Promissory Note, dated Incorporated by reference to Exhibit 10.1
December 30, 2004, issued to Theodore S. Li. to the Company's Form 8-K filed with the
SEC on January 5, 2005
4.2 6% Secured Convertible Promissory Note, dated Incorporated by reference to Exhibit 10.2
December 30, 2004, issued to Hui Cynthia Lee. to the Company's Form 8-K filed with the
SEC on January 5, 2005
- --------------------------------------------------------------------------------
24
Exhibit
No. Description Location (1)
- ------- ----------- ------------
4.3 Secured Convertible Debenture Incorporated by reference to Exhibit
10.21 to the Company's Form 10-KSB filed
with the SEC on December 6, 2002
4.4 Securities Purchase Agreement, dated November Incorporated by reference to Exhibit
2002, by and among Advanced Communications 10.19 to the Company's Form 10-KSB filed
Technologies, Inc. and Buyers. with the SEC on December 6, 2002
4.5 Investor Registration Rights Agreement, dated Incorporated by reference to Exhibit
November 2002, by and among Advanced 10.20 to the Company's Form 10-KSB filed
Communications Technologies, Inc. and with the SEC on December 6, 2002
Investors.
4.6 Escrow Agreement, dated November 2002, by and Incorporated by reference to Exhibit
among Advanced Communications Technologies, 10.22 to the Company's Form 10-KSB filed
Inc., Buyers, and Wachovia Bank, N.A. with the SEC on December 6, 2002
4.7 Irrevocable Transfer Agent Instructions, dated Incorporated by reference to Exhibit
November 2002 10.23 to the Company's Form 10-KSB filed
with the SEC on December 6, 2002
4.8 Security Agreement, dated November 2002, by Incorporated by reference to Exhibit
and among Advanced Communications 10.24 to the Company's Form 10-KSB filed
Technologies, Inc. and Buyers with the SEC on December 6, 2002
4.9 6% Senior Unsecured Promissory Note, in the Incorporated by reference to Exhibit 10.2
original principal amount of $547,000 issued to the Company's Form 8-K filed with the
on June 3, 2004 by Cyber-Test, Inc., a SEC on June 18, 2004
Delaware corporation, in favor of Cyber-Test,
Inc., a Florida corporation.
4.10 Escrow Agreement, dated June 3, 2004, by and Incorporated by reference to Exhibit 10.3
between Cyber-Test, Inc., a Delaware to the Company's Form 8-K filed with the
corporation, and Cyber-Test, Inc., a Florida SEC on June 18, 2004
corporation.
4.11 Amendment No. 1 to 6% Unsecured Promissory Incorporated by reference to Exhibit
Note dated August 10, 2004. 10.35 to the Company's Form 10-KSB filed
with the SEC on November 3, 2004
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25
Exhibit
No. Description Location (1)
- ------- ----------- ------------
4.12 Form of Exchange Agreement, dated June 24, Incorporated by reference to Exhibit
2004, by and among Advanced Communications 10.40 to the Company's Form 10-KSB filed
Technologies, Inc. and certain debenture with the SEC on November 3, 2004
holders of Hy-Tech Technology Group, Inc.
4.13 Escrow Agreement dated May 28, 2004 by and Incorporated by reference to Exhibit
among Advanced Communications Technologies, 10.42 to the Company's Form 10-KSB filed
Inc., Buyers and Butler Gonzalez, LLP, Escrow with the SEC on November 3, 2004
Agent.
4.14 Investment Agreement dated May 28, 2004 by and Incorporated by reference to Exhibit
between Advanced Communications Technologies, 10.43 to the Company's Form 10-KSB filed
Inc. and Cornell Capital Partners, LP. with the SEC on November 3, 2004
4.15 Registration Rights Agreement dated May 28, Incorporated by reference to Exhibit
2004 by and between Advanced Communications 10.44 to the Company's Form 10-KSB filed
Technologies, Inc. and Cornell Capital with the SEC on November 3, 2004
Partners, LP.
10.1* Form of Grant Instrument under Advanced Incorporated by reference to Exhibit 10.1
Communications Technologies, Inc. 2005 Stock to the Company's Form 8-K filed with the
Plan for Non-Employee Director. SEC on July 6, 2005
10.2* Form of Lock-Up Agreement for Executive Incorporated by reference to Exhibit 10.2
Officer/Director of Advanced Communications to the Company's Form 8-K filed with the
Technologies, Inc. SEC on July 6, 2005
10.3* Form of Grant Instrument under Advanced Incorporated by reference to Exhibit 10.3
Communications Technologies, Inc. 2005 Stock to the Company's Form 8-K filed with the
Plan for Executive Officer/Employee. SEC on July 6, 2005
10.4* Services Agreement entered into on June 7, Incorporated by reference to Exhibit 10.1
2005 by and among Advanced Communications to the Company's Form 8-K filed with the
Technologies, Inc., Wayne I. Danson and Danson SEC on July 13, 2005
Partners, LLC.
10.5* Employment Agreement dated June 24, 2004 by Incorporated by reference to Exhibit
and among Encompass Group Affiliates, Inc., 10.41 to the Company's Form 10-KSB filed
Advanced Communications Technologies, Inc. and with the SEC on November 3, 2004
Martin Nielson.
10.6* January 1, 2005 Amendment to Employment Incorporated by reference to Exhibit
Agreement by and among Encompass Group 10.22 to the Company's Form 10-KSB filed
Affiliates, Inc., Advanced Communications with the SEC on October 3, 2005
Technologies, Inc. and Martin Nielson.
- --------------------------------------------------------------------------------
26
Exhibit
No. Description Location (1)
- ------- ----------- ------------
31 Certification by Chief Executive Officer and Provided herewith
Chief Financial Officer pursuant to
Sarbanes-Oxley Section 302
32 Certification by Chief Executive Officer and Provided herewith
Chief Financial Officer pursuant to 18 U.S.C.
Section 1350
* Management contract or management compensatory plan or arrangement.
(1) In the case of incorporation by reference to documents filed by the Company
under the Exchange Act, the Company's file number under the Exchange Act is
000-30486.
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27
SIGNATURES
In accordance with the requirements 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, Chief Executive Officer
(Principal Executive Officer),
Chief Financial Officer
(Principal Accounting Officer)
and Director
Date: November 11, 2005
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28
EXHIBIT INDEX
Exhibit
No. Description Location (1)
- ------- ----------- ------------
2.1 Asset Purchase Agreement dated May 27, 2004, Incorporated by reference to Exhibit 10.1
by and between Cyber-Test, Inc., a Delaware to the Company's Form 8-K filed with the
corporation, and Cyber-Test, Inc., a Florida SEC on June 18, 2004
corporation.
2.2 Stock Purchase Agreement, dated as of December Incorporated by reference to Exhibit
10, 2004, among Advanced Communications 4.1 to the Company's Form 8-K filed
Technologies, Inc., Theodore S. Li and Hui with the SEC on December 14, 2004
Cynthia Lee.
3(I)(a) Articles of Incorporation of Media Forum Incorporated by reference to Exhibit 2.1
International, Inc. to the Company's Form S-8 filed with the
SEC on February 9, 2000
3(I)(b) Second Amendment to Articles of Incorporation Incorporated by reference to Exhibit 2.2
of Telenetworx, Inc. to the Company's Form S-8 filed with the
SEC on February 9, 2000
3(I)(c) Third Amendment to Articles of Incorporation Incorporated by reference to Exhibit 2.3
of Media Forum International, Inc. to the Company's Form S-8 filed with the
SEC on February 9, 2000
3(I)(d) Fourth Amendment to Articles of Incorporation Incorporated by reference to Exhibit 2.7
to the Form SB-2 filed with the SEC on
March 5, 2002
3(I)(e) 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(I)(f) 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(I)(g) 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(II) 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
4.1 6% Secured Convertible Promissory Note, dated Incorporated by reference to Exhibit 10.1
December 30, 2004, issued to Theodore S. Li. to the Company's Form 8-K filed with the
SEC on January 5, 2005
4.2 6% Secured Convertible Promissory Note, dated Incorporated by reference to Exhibit 10.2
December 30, 2004, issued to Hui Cynthia Lee. to the Company's Form 8-K filed with the
SEC on January 5, 2005
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Exhibit
No. Description Location (1)
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4.3 Secured Convertible Debenture Incorporated by reference to Exhibit
10.21 to the Company's Form 10-KSB filed
with the SEC on December 6, 2002
4.4 Securities Purchase Agreement, dated November Incorporated by reference to Exhibit
2002, by and among Advanced Communications 10.19 to the Company's Form 10-KSB filed
Technologies, Inc. and Buyers. with the SEC on December 6, 2002
4.5 Investor Registration Rights Agreement, dated Incorporated by reference to Exhibit
November 2002, by and among Advanced 10.20 to the Company's Form 10-KSB filed
Communications Technologies, Inc. and with the SEC on December 6, 2002
Investors.
4.6 Escrow Agreement, dated November 2002, by and Incorporated by reference to Exhibit
among Advanced Communications Technologies, 10.22 to the Company's Form 10-KSB filed
Inc., Buyers, and Wachovia Bank, N.A. with the SEC on December 6, 2002
4.7 Irrevocable Transfer Agent Instructions, dated Incorporated by reference to Exhibit
November 2002 10.23 to the Company's Form 10-KSB filed
with the SEC on December 6, 2002
4.8 Security Agreement, dated November 2002, by Incorporated by reference to Exhibit
and among Advanced Communications 10.24 to the Company's Form 10-KSB filed
Technologies, Inc. and Buyers with the SEC on December 6, 2002
4.9 6% Senior Unsecured Promissory Note, in the Incorporated by reference to Exhibit 10.2
original principal amount of $547,000 issued to the Company's Form 8-K filed with the
on June 3, 2004 by Cyber-Test, Inc., a SEC on June 18, 2004
Delaware corporation, in favor of Cyber-Test,
Inc., a Florida corporation.
4.10 Escrow Agreement, dated June 3, 2004, by and Incorporated by reference to Exhibit 10.3
between Cyber-Test, Inc., a Delaware to the Company's Form 8-K filed with the
corporation, and Cyber-Test, Inc., a Florida SEC on June 18, 2004
corporation.
4.11 Amendment No. 1 to 6% Unsecured Promissory Incorporated by reference to Exhibit
Note dated August 10, 2004. 10.35 to the Company's Form 10-KSB filed
with the SEC on November 3, 2004
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Exhibit
No. Description Location (1)
- ------- ----------- ------------
4.12 Form of Exchange Agreement, dated June 24, Incorporated by reference to Exhibit
2004, by and among Advanced Communications 10.40 to the Company's Form 10-KSB filed
Technologies, Inc. and certain debenture with the SEC on November 3, 2004
holders of Hy-Tech Technology Group, Inc.
4.13 Escrow Agreement dated May 28, 2004 by and Incorporated by reference to Exhibit
among Advanced Communications Technologies, 10.42 to the Company's Form 10-KSB filed
Inc., Buyers and Butler Gonzalez, LLP, Escrow with the SEC on November 3, 2004
Agent.
4.14 Investment Agreement dated May 28, 2004 by and Incorporated by reference to Exhibit
between Advanced Communications Technologies, 10.43 to the Company's Form 10-KSB filed
Inc. and Cornell Capital Partners, LP. with the SEC on November 3, 2004
4.15 Registration Rights Agreement dated May 28, Incorporated by reference to Exhibit
2004 by and between Advanced Communications 10.44 to the Company's Form 10-KSB filed
Technologies, Inc. and Cornell Capital with the SEC on November 3, 2004
Partners, LP.
10.1* Form of Grant Instrument under Advanced Incorporated by reference to Exhibit 10.1
Communications Technologies, Inc. 2005 Stock to the Company's Form 8-K filed with the
Plan for Non-Employee Director. SEC on July 6, 2005
10.2* Form of Lock-Up Agreement for Executive Incorporated by reference to Exhibit 10.2
Officer/Director of Advanced Communications to the Company's Form 8-K filed with the
Technologies, Inc. SEC on July 6, 2005
10.3* Form of Grant Instrument under Advanced Incorporated by reference to Exhibit 10.3
Communications Technologies, Inc. 2005 Stock to the Company's Form 8-K filed with the
Plan for Executive Officer/Employee. SEC on July 6, 2005
10.4* Services Agreement entered into on June 7, Incorporated by reference to Exhibit 10.1
2005 by and among Advanced Communications to the Company's Form 8-K filed with the
Technologies, Inc., Wayne I. Danson and Danson SEC on July 13, 2005
Partners, LLC.
10.5* Employment Agreement dated June 24, 2004 by Incorporated by reference to Exhibit
and among Encompass Group Affiliates, Inc., 10.41 to the Company's Form 10-KSB filed
Advanced Communications Technologies, Inc. and with the SEC on November 3, 2004
Martin Nielson.
10.6* January 1, 2005 Amendment to Employment Incorporated by reference to Exhibit
Agreement by and among Encompass Group 10.22 to the Company's Form 10-KSB filed
Affiliates, Inc., Advanced Communications with the SEC on October 3, 2005
Technologies, Inc. and Martin Nielson.
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Exhibit
No. Description Location (1)
- ------- ----------- ------------
31 Certification by Chief Executive Officer and Provided herewith
Chief Financial Officer pursuant to
Sarbanes-Oxley Section 302
32 Certification by Chief Executive Officer and Provided herewith
Chief Financial Officer pursuant to 18 U.S.C.
Section 1350
* Management contract or management compensatory plan or arrangement.
(1) In the case of incorporation by reference to documents filed by the Company
under the Exchange Act, the Company's file number under the Exchange Act is
000-30486.
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