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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 Quarterly Period Ended December 31, 2005
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT OF 1934
Commission File Number 000-30486
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Florida
(State or other jurisdiction
of incorporation or organization)
65-0738251
(IRS Employer Identification No.)
420 Lexington Avenue, New York, NY 10170
(Address of principal executive offices)
(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 February 1, 2006, there were 3,373,323,403 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 December 31, 2005
(Unaudited) And June 30, 2005
Condensed Consolidated Statements Of Operations For The Three And
Six Months Ended December 31, 2005 And 2004 (Unaudited)
Condensed Consolidated Statement Of Stockholders' Equity For The
Six Months Ended December 31, 2005 (Unaudited)
Condensed Consolidated Statements Of Cash Flows For The Six
Months Ended December 31, 2005 And 2004 (Unaudited)
Notes To Condensed Consolidated Financial Statements As Of
December 31, 2005 (Unaudited)
Item 2. Management's Discussion And Analysis Or Plan Of Operation
Item 3. Controls And Procedures
Part II-Other Information
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities And Use Of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission Of Matters To A Vote Of Security Holders
Item 5. Other Information
Item 6. Exhibits
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
December 31,
2005
(Unaudited) June 30, 2005
------------ -------------
ASSETS
Current Assets
Cash and cash equivalents $ 636,647 $ 836,876
Accounts receivable, net of allowance for doubtful accounts of $20,084
and $4,723 at December 31, 2005 and June 30, 2005, respectively 480,862 364,285
Inventory 377,221 367,453
Prepaid expenses and other current assets 139,892 130,605
------------ -------------
Total Current Assets 1,634,622 1,699,219
------------ -------------
Property and equipment, net of accumulated depreciation of $55,855
and $20,697 as of December 31, 2005 and June 30, 2005, respectively 243,721 259,764
------------ -------------
Other Assets
Licensed intangibles and rights 400,000 400,000
Goodwill 2,611,055 2,611,055
------------ -------------
Total Other Assets 3,011,055 3,011,055
------------ -------------
TOTAL ASSETS $ 4,889,398 $ 4,970,038
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Current portion of notes payable $ 1,021,047 $ 1,020,028
Accounts payable and accrued expenses 1,237,778 818,554
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Total Current Liabilities 2,258,825 1,838,582
Long-term notes and loans payable, less current portion 194,137 205,367
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TOTAL LIABILITIES 2,452,962 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, 4,135 and 4,200
shares issued and outstanding, respectively 41 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,
3,307,533,929 and 3,151,773,731 shares issued and outstanding, respectively 29,851,907 29,751,907
Additional paid in capital 5,361,832 5,426,831
Deferred commitment and equity financing fees, net of accumulated amortization (25,000) (25,000)
Deferred compensation, net of amortization of $375,000 and $250,000 respectively (125,000) (250,000)
Accumulated deficit (32,627,345) (31,977,692)
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Total Stockholders' Equity 2,436,436 2,926,089
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,889,398 $ 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 For the Six Months Ended
December 31, December 31,
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
NET SALES $ 2,202,442 $ 1,709,919 $ 4,491,124 $ 3,535,103
COST OF SALES 1,389,326 1,111,547 2,941,648 2,262,975
--------------- --------------- --------------- ---------------
GROSS PROFIT 813,116 598,372 1,549,476 1,272,128
--------------- --------------- --------------- ---------------
OPERATING EXPENSES
Depreciation and amortization 80,520 76,746 160,158 147,052
Professional and consulting fees 182,023 109,267 257,769 321,426
Other selling, general and administrative
expenses 754,763 684,425 1,740,228 1,372,681
--------------- --------------- --------------- ---------------
TOTAL OPERATING EXPENSES 1,017,306 870,438 2,158,155 1,841,159
--------------- --------------- --------------- ---------------
Loss From Operations before Other Income (Expense) (204,190) (272,066) (608,678) (569,031)
--------------- --------------- --------------- ---------------
OTHER INCOME (EXPENSE)
Forgiveness of debt -- 2,847,511 -- 2,847,511
Distributable share of partnership income -- 170,000 -- 385,233
Interest expense, net (20,492) (26,201) (40,975) (64,477)
--------------- --------------- --------------- ---------------
TOTAL OTHER INCOME (EXPENSE), NET (20,492) 2,991,310 (40,975) 3,168,267
--------------- --------------- --------------- ---------------
NET INCOME (LOSS) $ (224,682) $ 2,719,244 $ (649,653) $ 2,599,236
=============== =============== =============== ===============
Net loss per share - basic $ -- $ -- $ -- $ --
=============== =============== =============== ===============
Weighted average number of shares
outstanding during the year - basic 3,270,559,613 2,008,812,948 3,211,676,183 2,002,717,221
=============== =============== =============== ===============
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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 SIX MONTHS ENDED DECEMBER 31, 2005
(UNAUDITED)
Preferred
Common Stock 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)
Stock issued on conversion of Series A
preferred stock 89,093,531 65,000 (65) (1) (64,999)
Escrow of Contingent stock 16,666,667 -- -- -- --
Stock issued for executive bonus's 50,000,000 35,000 -- -- --
Amortization of deferred compensation
Net loss for the period ( 649,653)
-------------- ------------ ---------- ---------- ------------- ---------------
BALANCE AT DECEMBER 31, 2005 3,307,533,929 $ 29,851,907 4,235 $ 42 $ 5,361,832 $ (32,627,345)
============== ============ ========== ========== ============= ===============
Deferred
Commitment
And Equity Deferred
Financing Fees Compensation Total
---------------- -------------- ------------
BALANCE AT JUNE 30, 2005 $ (25,000) $ (250,000) $ 2,926,089
Stock issued on conversion of Series A
preferred stock -- --
Escrow of Contingent stock -- --
Stock issued for executive bonus's -- 35,000
Amortization of deferred compensation 125,000 125,000
Net loss for the period (649,653)
---------------- -------------- ------------
BALANCE AT DECEMBER 31, 2005 $ (25,000) $ (125,000) $ 2,436,436
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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 Six Months
Ended December 31,
--------------------------
2005 2004
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (649,653) $ 2,599,236
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 160,158 147,052
Allowance for doubtful accounts 15,000 --
Debt discount expense -- 36,977
Stock issued for services 35,000 --
Forgiveness of debt -- (2,847,511)
Distributive share of partnership income -- (385,233)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivables (131,577) 103,220
Inventory (9,768) (77)
Prepaid expense/security deposits (9,286) 16,470
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 419,224 128,389
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Net cash used in operating activities (170,903) (201,477)
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CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:
Partnership distributions -- 280,000
Cash from consolidation of equity affiliate -- 613,800
Purchase of business/fixed assets (19,115) (14,126)
Purchase of investments -- (91,618)
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Net cash (used in) provided by investing activities (19,115) 788,056
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CASH FLOWS USED IN FINANCING ACTIVITIES:
Increase in restricted cash -- (70,000)
Repayment of short-term and installment notes (10,211) (332,832)
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Net cash used in financing activities (10,211) (402,832)
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Net (decrease) increase in cash and cash equivalents $ (200,229) $ 183,747
Cash and cash equivalents at beginning of period 836,876 1,193,170
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 636,647 $ 1,376,917
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SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended December 31, 2005, the Company issued 89,093,531
shares of common stock on the conversion of $65,000 of Series A Convertible
Preferred Shares.
During the six months ended December 31, 2005, the Company issued 50,000,000
shares of restricted common stock to officers of Cyber-Test, as additional
compensation in the amount of $35,000.
During the six months ended December 31 2004, the Company issued 172,881,526
shares of common stock in partial repayment of the short-term note payable due
to Cornell Capital Partners, L.P.
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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 DECEMBER 31, 2005
(UNAUDITED)
NOTE 1. BASIS OF CONSOLIDATION AND SIGNIFICANT ACCOUNTING POLICIES
(A) Organization
Unless the context requires otherwise, "we", "us", "our" or the "Company"
refers to Advanced Communications Technologies, Inc. and its wholly and
majority-owned subsidiaries on a consolidated basis.
We are a 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 and currently provides asset distribution and recovery 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.
On January 30, 2006, the court approved PMIC's Disclosure Statement that
allows for PMIC to distribute the proposed Plan of Reorganization and Disclosure
Statement to all creditors and shareholders for voting purposes. PMIC's proposed
Plan of Reorganization provides for an estimated payout of approximately 50% to
creditors holding valid claims and the merger of Herborium, Inc. into PMIC. The
Livewarehouse ("LW"), a wholly-owned subsidiary of PMIC, plan provides for up to
a 100% payment to those creditors of LW holding valid claims. Herborium, a
privately-held New Jersey-based bio-herbaceutical company, distributes
proprietary natural and complimentary healthcare solutions to consumers and
healthcare professionals seeking alternative answers to disease treatment,
management, and prevention. Its products address healthcare problems that are
not met satisfactorily by conventional ethical pharmaceuticals. Herborium's
reported revenue for fiscal 2005 was in excess of $800,000. After the merger,
PMIC is expected to change its name to Herborium.
PMIC's proposed Plan of Reorganization also provides for the cancellation
of all of the previously outstanding common and preferred shares of PMIC and the
distribution of unrestricted newly issued PMIC/Herborium stock to former PMIC
shareholders of record other than Advanced Communications on a one for one
basis. Advanced Communications' 62% majority interest in PMIC will be cancelled
and newly issued unrestricted shares of Herborium will be issued to all
shareholders of Advanced Communications directly as a special dividend. In
connection with the merger, the former shareholders of Herborium would receive
newly issued shares of PMIC/Herborium common stock representing 85% of the
outstanding common stock. The shares owned by PMIC's current common
shareholders, other than Advanced Communications, would represent 3.71% of the
post merger shares, Advanced Communications' shareholders would hold 10.55%, and
common shares representing less than 1% of the outstanding stock would be issued
to former PMIC preferred shareholders.
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5
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
(UNAUDITED)
Under the PMI and PMIGA Plans of Liquidation and the PMIC Plan of
Reorganization, Advanced Communications has been irrevocably appointed the
estate representative to prosecute any and all causes of action that may be
brought by the bankruptcy estates or PMIC against former officers Ted Li and
Cynthia Lee, the former board of directors and any other party or parties acting
in concert with the above. In this regard, Advanced Communications shall, as
estate representative prosecute such claims and claim objections for the benefit
of PMIC and the estates of PMI and PMIGA or the PMI or PMIGA Creditor Trusts,
and PMIC, PMI and PMIGA shall retain the right to receive an allocated portion
of the net proceeds of any such litigation (net of any reimbursements to
Advanced Communications for legal costs) to the extent that there is an
affirmative recovery. Under the bankruptcy plans, Advanced Communications has
agreed to bear the cost of this litigation, with such legal costs to be
reimbursed to Advanced Communications to the extent that there is an affirmative
recovery.
(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.
(C) Interim Financial Statements
Financial statements as of December 31, 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 six months ended December 31, 2005, Cyber-Test's sales to two
customers accounted for approximately 90% and 92% of its sales and accounts
receivable, respectively. For the six months ended December 31, 2004, sales to
and accounts receivable from these two major customers represented 79% and 64%,
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.
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6
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
(UNAUDITED)
(F) Goodwill
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 goodwill. 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 December 31, 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 six months ended December 31, 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.
(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 six months ended December 31, 2005, the Company operated in two business
segments: the repair and depot exchange of office and consumer electronics, and
electronic asset recovery and distribution.
During the six months ended December 31, 2005, the results of the
Company's asset recovery and distribution services business was less than 1% of
total revenue and accordingly, the financial results have not been separately
reported as a business segment.
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7
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
(UNAUDITED)
(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 May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections"("SFAS 154") which replaces APB Opinion No. 20 Accounting Changes
and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements-An
Amendment of APB Opinion No. 28." SFAS 154 requires retrospective application to
prior periods' financial statement of a voluntary change in accounting principal
unless it is not practical. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005,
and is required to be adopted by the Company in the first quarter of fiscal
2007. Although the Company will continually evaluate its accounting policies,
management does not currently believe adoption will have a material impact on
the Company's results of operations, cash flows or financial position.
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.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, and
Amendment of ARB No. 43, Chapter 4". SAS 151 amends Accounting Research Bulletin
("ARB") No. 43 Chapter 4, to clarify that abnormal amounts of idle facility
expense, freight, handling costs and wasted materials (spoilage) should be
recognized as current period charges. In addition, SFAS No. 151 requires that
allocation of fixed production overhead to inventory be based on the normal
capacity of the production facilities. SFAS No. 151 is effective for inventory
costs incurred during the fiscal years beginning after September 15, 2005. The
Company is assessing the effect of SFAS 151 on its results of operations,
financial position or cash flows.
NOTE 2. PROPERTY AND EQUIPMENT
December 31, 2005 June 30, 2005
----------------- ------------------
Computer, office equipment and fixtures $ 198,723 $ 135,494
Machinery and equipment 41,901 23,731
Leasehold improvements 58,952 121,236
Less: Accumulated depreciation (55,855) (20,697)
----------------- ------------------
Property and equipment, net $ 243,721 $ 259,764
================= ==================
- --------------------------------------------------------------------------------
8
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
(UNAUDITED)
Depreciation expense for the six months ended December 31, 2005 was
$35,158.
NOTE 3. NOTES AND LOAN PAYABLE
December 31, 2005 June 30, 2005
----------------- ---------------
Current:
12% 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 22,059 21,040
---------------- ---------------
Notes Payable-Current $ 1,021,047 $ 1,020,028
================ ===============
Long-Term:
6% Unsecured Note $ 166,157 $ 166,157
Capitalized Lease 27,980 39,210
---------------- ---------------
Notes Payable-Long-Term $ 194,137 $ 205,367
================ ===============
(A) 12% 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. On December 2, 2005,
the Company entered into an Extension Agreement extending the maturity date of
the note to February 28, 2006 and effective December 1, 2005, increasing the
interest rate to 12% from 8%. As of December 31, 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. 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 December 31, 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").
- --------------------------------------------------------------------------------
9
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 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 matured 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)).
As of December 31, 2005, the Notes matured and remain unpaid pending the
outcome of the litigation against Mr. Li and Ms. Lee.
(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 December 31, 2005. Accumulated amortization of the leased equipment
was $11,586 as of December 31, 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 December 31, 2005, are as
follows:
Period Ending
December 31, Amount
---------------------- ---------------------
2006 $ 27,392
2007 27,392
2008 2,283
---------------------
Total minimum lease payments 57,067
Less: Amount representing interest (7,029)
---------------------
Present value of net minimum lease payments 50,038
Less: Current maturities of capital lease obligations (22,058)
---------------------
Long-term capital lease obligations $ 27,980
=====================
Future maturities of long-term debt as of December 31, 2005 are as
follows:
Date Amount
----------------------- -----------------------
December 31, 2006 1,021,047
December 31, 2007 194,137
Thereafter --
-----------------------
Total $ 1,215,184
=======================
- --------------------------------------------------------------------------------
10
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 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.
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.
On October 18, 2005, October 26, 2005 and November 3, 2005, holders of
Series A Preferred Shares converted an additional 50 shares, or $50,000 in the
aggregate, of Series A Preferred Shares at prices of $.00081, $.00069 and $.0006
per share into 24,691,358, 28,985,507 and 16,666,666 shares of common stock,
respectively. At December 31, 2005, 4,135 Series A Preferred Shares remain
issued and outstanding.
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 December
31, 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 or accrued.
- --------------------------------------------------------------------------------
11
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 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.
(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 December 31, 2005, there were no
threatened or pending legal matters that would have a material impact on the
Company's consolidated results of operations, financial position or cash flows.
On May 11, 2005, we filed a complaint in the United States District Court
for the Southern District of New York against Theodore S. Li and Hui Cynthia
Lee, the former officers and principal shareholders of PMIC, for the recovery of
damages and costs for securities fraud, breach of contract and other counts in
connection with the Stock Purchase Agreement dated December 10, 2004 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. By Order dated November
30, 2005, the Court denied defendants' motion for a more definite statement. On
December 8, 2005, defendants answered the complaint and asserted various
defenses to the claims set forth therein. By Order dated January 26, 2006, the
Court directed the parties to complete discovery and file dispositive motions,
if any, on or before June 30, 2006. The January 26, 2006 Order also directs the
parties to appear for a pre-trial conference on July 14, 2006.
NOTE 6. GOING CONCERN
The Company's consolidated financial statements for the six months ended
December 31, 2005 have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities in the
normal course of business. The Company's net loss of $649,653, negative cash
flow from operations of $170,903 for the six months ended December 31, 2005 and
working capital deficiency of $624,203 as of December 31, 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.
- --------------------------------------------------------------------------------
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis by management provides information
with respect to the Company's financial condition and results of operations for
the three and six-month periods ended December 31, 2005 and 2004. The discussion
should be read in conjunction with the information in the consolidated financial
statements and the notes pertaining thereto contained in the Company's Annual
Report on Form 10-KSB for the year ended June 30, 2005 (the "2005 10-KSB"), the
information in the consolidated financial statements and the notes pertaining
thereto contained in Item 1 - Financial Information - in this Report on Form
10-QSB and the information discussed in the 2005 Form 10-KSB under Risk Factors.
Unless the context otherwise requires, all references herein to the "Company"
refer to Advanced Communications Technologies, Inc. and its subsidiaries.
Operating results for the six months ended December 31, 2005 are not necessarily
indicative of the results that may be expected for the fiscal year ending June
30, 2006.
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 and through
Encompass Electronic Recovery, Inc. a dba, currently provides asset distribution
and recovery services to customers in Northern California. 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, established in 1986, 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.
- --------------------------------------------------------------------------------
13
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.
Results of Operations-Comparison of the Three Months Ended December 31, 2005 to
the Three Months Ended December 31, 2004
Summary of Results of Operations
Three Months Ended Period to
December 31, Period
2005 2004 % Change
--------------------- --------
(in thousands)
Net income from Cyber-Test operations $ 187 $ 62 202%
Net income from investments -- 170 (100)
Parent company and Encompass net operating loss (391) (334) 17
Net interest expense (21) (26) (19)
Forgiveness of debt income -- 2,847 (100)
------- ------- --------
Net Income (Loss) $ (225) $ 2,719 (108)%
======= ======= ========
Overview of Second Quarter Results
For the three months ended December 31, 2005, we incurred a consolidated
net loss from operations of $204,000 compared with a consolidated net loss of
$272,000 or a 25% decrease in our operating loss on a comparative basis. We
recorded record sales of $2.2 million during the quarter relating to the repair,
service and warranty and exchange of office equipment, PDAs, laptop computers,
IPods, monitors and multi-functional units, and asset and distribution recovery
services, which was a $492,000 or a 29% increase in revenue for the comparative
period, with gross margins increasing to 37% from 35%. Our overall gross profit
increased by $215,000 to $813,000 from $598,000 and was consistent with our
expectations. Cyber-Test's net profit from operations of $187,000 or 8.6% of
gross sales was 152% greater than its 3.4% net profit percentage for the
three-month period ended December 31, 2004. The marked improvement in
Cyber-Test's gross and net profit for the quarter reflects the increase in
production efficiencies and cost reductions that were put in place during the
last quarter of fiscal 2005 and the first quarter of fiscal 2006.
For the three months ended December 31, 2005, we reported a consolidated
net loss of $225,000 as compared to consolidated net income of $2,719,000 for
the three months ended December 31, 2004. Included in consolidated net (loss)
income is $115,000 and $76,000, respectively, of non-cash charges for
depreciation, amortization and stock grants. Consolidated operating costs
increased by $147,000, or 17%, to $1,017,000 from $870,000 principally due to an
increase in legal and professional expense. For the three months ended December
31, 2004, our overall loss from operations of $272,000 was offset by $170,000 of
other investment income from our investment in Yorkville Advisors through Hudson
Street and $2,847,000 of forgiveness of debt income in connection with the
judgment that we obtained against our former CEO and related entities.
Revenue
Consolidated revenue for the three months ended December 31, 2005 was $2.2
million as compared to consolidated revenue of $1.7 million for three months
ended December 31, 2004, a $500,000, or 29%, increase in revenue from the
comparative period. The increase in revenue was attributable to the continuing
increase in product repairs and service of laptops, PDAs and Blackberry units
which Cyber-Test commenced during the last quarter of fiscal 2005 and ramped up
into in full production during the second quarter of fiscal 2006. This increase
in production is expected to continue for the remainder of the fiscal year.
- --------------------------------------------------------------------------------
14
Gross Profit
Consolidated gross operating margin for the three months ended December
31, 2005 improved to 37% from 35% for the three months ended December 31, 2004
due to the increase in production efficiencies and related cost savings from the
investment that was made in the previous two quarters for the change in our
product mix. During this quarter, our production ramped up providing the
economies of scale and lower overall per product cost which increased our
overall margins.
Cost of Sales
Our cost of sales during the three months ended December 31, 2005
increased to $1,389,000 from $1,111,000, or $278,000, from the comparative
three-month period ended December 31, 2004 and represents a 25% increase in our
cost of sales versus a 29% increase in revenue. Our cost of sales increased not
only due to increased sales volume during the quarter but also due to the
increase in freight expense because of higher energy costs. Both direct labor
cost and the cost of parts remained virtually unchanged as a percentage of gross
revenue.
Operating Expenses
Consolidated operating expenses for the three months ended December 31,
2005 and 2004 were $1.017 million and $870,000, respectively, representing an
increase of $147,000 from the three months ended December 31, 2004. This overall
increase was primarily attributable to a $70,000 increase in selling, general
and administrative costs and an increase of $73,000 in professional fees due to
the Pacific Magtron litigation.
Consolidated depreciation and amortization expense for the three months
ended December 31, 2005 remained unchanged from the three months ended December
31, 2004. Consolidated other selling, general and administrative expenses
amounted to $755,000 for three months ended December 31, 2005, and increased
slightly from the comparative prior period. The following is a breakdown of the
components of consolidated other selling, general and administrative costs:
Three Months Ended Period to
December 31, Period
2005 2004 % Change
------------------ --------
(in thousands)
Salaries and wages $ 487 $ 373 30.56%
Building facilities 98 78 25.64
Payroll and unemployment taxes 35 23 52.17
Telephone and utilities 23 27 (14.81)
Marketing and promotion 13 20 (35.00)
Other SG&A costs 99 163 (39.26)
------ ------ --------
$ 755 $ 684 10.38%
====== ====== ========
Other Income (Expenses)
Consolidated other income (expense) for the three months ended December
31, 2005 amounted to $20,000 and was entirely attributable to net interest
expense.
During the three months ended December 31, 2004, we realized $2,991,000 of
net other income due to $2,847,000 of forgiveness of debt income, and $170,000
of partnership income from our investment in Yorkville Advisors which was
redeemed in February 2005. This income was offset, in part by, net interest
expense of $26,000.
Consolidated interest expense decreased by $5,000, or 19%, to $21,000 from
$26,000 for the three months ended December 31, 2005 compared to 2004. This
decrease was due primarily to lower levels of interest-bearing debt during the
quarter as compared to the prior year.
- --------------------------------------------------------------------------------
15
Results of Operations-Comparison of the Six Months Ended December 31, 2005 to
the Six Months Ended December 31, 2004
Summary of Results of Operations
Six Months Ended Period to
December 31, Period
2005 2004 % Change
------------------- --------
(in thousands)
Net income from Cyber-Test operations $ 302 $ 193 56.48%
Net income from investments -- 385 (100)
Parent company and Encompass net operating loss (911) (762) 19.55
Net interest expense (41) (64) (35.94)
Forgiveness of debt income -- 2,847 (100)
------- ------- --------
Net (loss) income $ (650) $ 2,599 (125)%
======= ======= ========
Overview of First Six Months Results
For the six months ended December 31, 2005, we incurred a consolidated net
loss from operations of $609,000 compared with a consolidated net loss of
$569,000 or a 7% increase in our operating loss on a comparative basis. We
recorded record sales of $4.5.million relating to the repair, service and
warranty and exchange of office equipment, PDAs, laptop computers, IPods,
monitors and multi-functional units and fees from asset recovery and
distribution services, which was a $1,000,000 or 29% increase in revenue from
the comparative period. Consolidated gross margins decreased slightly from 36%
to 35%. Overall gross profit increased by $278,000 to $1,550,000 from $1,272,000
and was consistent with our expectations. Cyber-Test's net profit from
operations of $302,000 or 6.8% of gross sales was 24% above its 5.5% net profit
percentage for the six months ended December 31, 2004 and reflects, in part, on
management's successful efforts to increase production efficiencies, reduce
parts costs and increase both operating and net margins from historic levels.
For the six months ended December 31, 2005, we reported a consolidated net
loss of $650,000 as compared to consolidated net income of $2,599,000 for the
six months ended December 31, 2004. Included in consolidated net (loss) income
is $195,000 and $147,000, respectively, of non-cash charges for depreciation,
amortization and stock grants. Consolidated operating costs increased by
$318,000, or 17%, to $2,158,000 from $1,842,000 principally due to a one-time
increase in employment costs and an increase in legal and professional expense.
For the six months ended December 31, 2004, we reported a consolidated net loss
from operations of $569,000 because of consolidated corporate overhead costs at
the parent and Encompass levels offset by $385,000 of other investment income
from our investment in Yorkville Advisors and $2,847,000 of forgiveness of debt
income.
Revenue
Consolidated revenue for the six months ended December 31, 2005 was $4.5
million as compared to revenue of $3.5 million for the six months ended December
31, 2004, a $1,000,000, or 29%, 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 that Cyber-Test entered into
during the last quarter of fiscal 2005 and ramped up into in full production
during the second quarter of fiscal 2006. This increase in production is
expected to continue for the remainder of the fiscal year.
Gross Profit
Consolidated gross operating margin for the six months ended December 31,
2005 was 35% versus a gross margin of 36% for the six months ended December 31,
2004 and improved from the quarter ended September 30, 2005. Although gross
margins for the six months ended December 31, 2005 was slightly less than the
comparative period, it represents an increase in production efficiencies and
related cost savings from the investment that was made in the previous two
quarters for the change in our 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. During this quarter, our production ramped up
providing the economies of scale and lower overall per product cost that
increased our overall margins. We expect to continue to improve our gross
margins over the remainder of the fiscal year as our investment in new product
parts and training made during the past two quarters is realized via improved
margins and profits.
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16
Cost of Sales
Our cost of sales during the six months ended December 31, 2005 increased
to $2.9 million from $2.3 million, or $600,000, from the comparative six
month-period ended December 31, 2004 and represents a 26% increase vs. a 29%
increase in gross revenue. Our cost of sales increased not only due to increased
sales volume during the six months ended December 31, 2005, but also due to a
substantial increase in freight expense because of higher energy costs, and the
increase in PDA and laptop repairs which require multiple freight shipments.
Both direct labor cost and parts cost remained virtually unchanged as a
percentage of gross revenue due to the realization of production efficiencies.
Operating Expenses
Consolidated operating expenses for the six months ended December 31, 2005
and 2004 were $2.158 million and $1.841 million, respectively, representing an
increase of $317,000 from the six months ended December 31, 2004. This overall
increase was primarily attributable to an increase in selling, general and
administrative costs of $367,000 that was offset, in part, by a $63,000 decrease
in professional and consulting expense compared to the six months ended December
31, 2004.
Consolidated depreciation and amortization expense for the six months
ended December 31, 2005 increased slightly to $160,000 from $147,000 for the six
months ended December 31, 2004 due to an increase in depreciation expense on
property and equipment and leasehold improvements for the six months ended
December 31, 2005 as a result of reducing the useful life of certain fixed
assets during the six months ended December 31, 2005.
Consolidated other selling, general and administrative expenses amounted
to $1.7 million for the six months ended December 31, 2005, which was a $367,000
increase from the comparative prior period and was due to a nonrecurring
increase in consolidated compensation related expense and a slight decrease in
overall operating overhead during the six months ended December 31, 2005. The
following is a breakdown of the components of consolidated other selling,
general and administrative costs:
Six Months Ended Period to
December 31, Period
2005 2004 % Change
------------------ --------
(in thousands)
Salaries and wages $1,166 $749 55.67%
Building facilities 176 154 14.29
Payroll and unemployment taxes 72 51 41.18
Telephone and utilities 49 54 (9.26)
Marketing and promotion 27 45 (40.00)
Other SG&A costs 250 320 (21.88)
------ ----- -------
$1,740 $1,373 26.73%
====== ====== =======
Other Income (Expenses)
Consolidated other income (expense) for the six months ended December 31,
2005 amounted to $41,000 and was entirely attributable to net interest expense.
During the six months ended December 31, 2004, we realized $3,168,000 of
net other income due to the favorable results of our investment in Yorkville
Advisors, which generated $385,000 of income during the six months ended
December 31, 2004, and $2,847,000 of debt forgiveness income resulting from the
favorable judgment against our former CEO and related entities that allowed us
to discharge these obligations. These items of income were offset, in part, by
net interest expense of $64,000 inclusive of $29,000 of accrued interest on our
notes payable and $37,000 of debt discount expense, net of $2,000 of interest
income.
Consolidated interest expense decreased by $23,000, or 36%, to $41,000
from $64,000 for the six months ended December 31, 2005 compared to 2004. This
decrease was due primarily to substantially lower levels of interest-bearing
debt during the six months ended December 31, 2005, as compared to the prior
year.
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17
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.
Recent Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections"("SFAS 154") which replaces APB Opinion No. 20 Accounting Changes
and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements-An
Amendment of APB Opinion No. 28." SFAS 154 requires retrospective application to
prior periods' financial statement of a voluntary change in accounting principal
unless it is not practical. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005,
and is required to be adopted by the Company in the first quarter of fiscal
2007. Although the Company will continually evaluate its accounting policies,
management does not currently believe adoption will have a material impact on
the Company's results of operations, cash flows or financial position.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, and
Amendment of ARB No. 43, Chapter 4". SAS 151 amends Accounting Research Bulletin
("ARB") No. 43 Chapter 4, to clarify that abnormal amounts of idle facility
expense, freight, handling costs and wasted materials (spoilage) should be
recognized as current period charges. In addition, SFAS No. 151 requires that
allocation of fixed production overhead to inventory be based on the normal
capacity of the production facilities. SFAS No. 151 is effective for inventory
costs incurred during the fiscal years beginning after September 15, 2005. The
Company is assessing the effect of SFAS 151 on its results of operations,
financial position or cash flows.
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.
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18
Goodwill
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 "Goodwill". The fair value assigned to
intangible assets acquired is either based on valuations prepared by independent
third-party appraisal firms using estimates and assumptions provided by
management or negotiated at arms-length between the Company and the seller of
the acquired assets. In accordance with SFAS No. 142, goodwill and purchased
intangibles with indefinite lives acquired after June 30, 2001 are not
amortized, but will be reviewed periodically for impairment. Purchased
intangibles with finite lives will be amortized on a straight-line basis over
their respective useful lives.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing income (loss)
available to common stockholders, less cumulative dividends on preferred stock,
by the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflect the potential dilution of securities, using
the treasury stock method that could share in the earnings of an entity. During
the six months ended December 31, 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 six months ended December 31, 2005.
Income Taxes
The Company accounts for income taxes under SFAS No. 109 "Accounting for
Income Taxes". Under SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS No. 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
The Company has made no current provision (benefit) for Federal income
taxes because of financial statement and tax losses since its inception. A
valuation allowance has been used to offset the recognition of any deferred tax
assets arising from net operating loss carryforwards due to the uncertainty of
future realization. The use of any tax loss carryforward benefits may also be
limited as a result of changes in Company ownership.
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 $636,647 at December 31, 2005.
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19
We have been exploring various alternative sources of financing as a
replacement to the Equity Line of Credit with Cornell Capital that we have not
used since fiscal 2005 and do not intend to use in the future. 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 fiscal year, 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. To date, no
dividend has been scheduled or approved 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. During the
six months ended December 31, 2005, 65 Series A Preferred Shares with a par
value of $65,000 had been converted at prices of $.0008, $.00081, $.00069 and
$.0006 per share, into an aggregate of 89,093,531 shares of common stock. On
January 26, 2006, a holder of the Series A Preferred Shares converted an
additional 25 shares, or $25,000 of Series A Preferred Shares at a price of
$.00038 per share into 65,789,474 shares of common stock.
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 December 31, 2005, 100 Series B Preferred
Shares remain outstanding.
During the six months ended December 31, 2005, we made no advances under
the Equity Line of Credit. We do not intend to make any further 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 are actively pursuing and have not yet secured
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.
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20
We had total liabilities of $2,452,962 as of December 31, 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 December 31, 2005)
--------------------------------------------------------------------------
1 2-3 4-5 After 5
Contractual Obligations Total Year or Less Years Years Years
- ----------------------- ----------- ------------ ---------- ---------- ---------
Notes Payable $ 1,215,184 $ 1,021,047 $ 194,137 $ -- $ --
Accounts Payable and Accrued Expenses 1,237,778 1,237,778 -- -- --
Other Current Liabilities -- -- -- -- --
----------- ------------ ---------- ---------- ---------
Total Contractual Obligations $ 2,452,962 $ 2,258,825 $ 194,137 $ -- $ --
=========== ============ ========== ========== =========
During the six months ended December 31, 2005, the Company's contractual
obligations increased by $409,013. At December 31, 2005, we had a working
capital deficiency of $624,203.
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 six months
ended December 31, 2005:
Overall Net Change In Cash Flow For The Six Months Ended December 31, 2005
During the six months ended December 31, 2005, our cash decreased by
$200,000. The net decrease in cash was principally the result of the collection
of certain accounts receivable after the close of the quarter.
Net Cash Used In Operating Activities
Net cash used in operating activities was $171,000 and $201,000 for the
six months ended December 31, 2005 and 2004, respectively. Net use of cash in
operating activities during the six months ended December 31, 2005 was
principally from our consolidated net loss of $650,000 increased by an increase
in accounts receivable in the amount of $117,000 offset by non-cash charges of
$195,000 and an increase in accounts payable and accrued expenses of $419,000.
Net cash used in operating activities was $201,000 for the six months ended
December 31, 2004 and was principally from corporate overhead expenses in excess
of cash from operations.
Net Cash (Used In) Provided by Investing Activities
Cash used in investing activities for the six months ended December 31,
2005 was $19,000 and was for the purchase of fixed assets. Cash provided from
investing activities of $788,000 for the six months ended December 31, 2004 was
attributable to $280,000 of cash distributions received from our partnership
investment and from cash of $614,000 from the consolidation of an equity
affiliate, offset by $14,000 for the purchase of business assets and the
purchase of $92,000 of investment securities in public and private companies.
Net Cash Used In Financing Activities
Net cash of $10,000 used in financing activities for the six months ended
December 31, 2005 was for the repayment of our equipment financing lease. Net
cash of $403,000 used in financing activities for the six months ended December
31, 2004 was for the repayment of our short-term note to Cornell Capital
Partners, L.P. in the amount of $332,000 and the increase in restricted cash of
$70,000 by Pacific Magtron International, Inc, our then equity affiliate.
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.
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21
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. For the
fiscal year ended 2005, we incurred an overall net loss of $736,000. For the
six-month period ending December 31, 2005, we incurred an overall net loss of
$650,000.
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.
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.
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22
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.
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.
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23
We Have A Working Capital Deficit, Which Means That Our Current Assets On
December 31, 2005 Were Not Sufficient To Satisfy Our Current Liabilities On That
Date
We had a working capital deficit of $624,203 as of December 31, 2005,
which means that our current liabilities exceeded our current assets by
$624,203. 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
December 31, 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 December 31, 2005, we had
$4,235,000 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 423,500,000 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 423,500,000. 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 4,235,000,000 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.
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 $2,635,000 of our Series A Convertible Preferred Stock,
which if converted at current prices would result in the issuance of up to
2,635,000,000 shares of our common stock. After such conversions, Cornell
Capital Partners, L.P. would own approximately 33% 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.
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24
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.
ITEM 3. CONTROLS AND PROCEDURES
(A) Evaluation Of Disclosure Controls And Procedures
As of December 31, 2005, we carried out an evaluation, under the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (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 December 31, 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 the six months ended December 31, 2005 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
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25
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 December 31, 2005, there were no
threatened or pending legal matters that would have a material impact on the
Company's consolidated results of operations, financial position or cash flows.
On May 11, 2005, we filed a complaint in the United States District Court
for the Southern District of New York against Theodore S. Li and Hui Cynthia
Lee, the former officers and principal shareholders of PMIC, for the recovery of
damages and costs for securities fraud, breach of contract and other counts in
connection with the Stock Purchase Agreement dated December 10, 2004 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. By Order dated November
30, 2005, the Court denied defendants' motion for a more definite statement. On
December 8, 2005, defendants answered the complaint and asserted various
defenses to the claims set forth therein. By Order dated January 26, 2006, the
Court directed the parties to complete discovery and file dispositive motions,
if any, on or before June 30, 2006. The January 26, 2006 Order also directs the
parties to appear for a pre-trial conference on July 14, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On October 12, 2005 our Board of Directors approved the issuance of
50,000,000 shares of restricted common stock to two officers of Cyber-Test, Inc
as incentive compensation for fiscal 2006. The shares were valued at $.0007 per
share or $35,000 in the aggregate. The shares were issued to the two executives
on October 19, 2005.
On October 12, 2005, our Board of Directors approved the issuance of
16,666,667 shares of restricted and escrowed stock to Lisa Welton as the first
traunche of the Earn-Out Stock pursuant to the Purchase Agreement between the
Company and Cyber-Test, Inc. In accordance with Section 3.5.1.3 of the Purchase
Agreement, the stock has been placed in escrow with Eckert Seamans Cherin &
Mellott, LLC until June 2007 when all rights of forfeiture will lapse.
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 $302,854.
On December 31, 2005, the 6% secured convertible notes having an aggregate
principal balance in the amount of $500,000 issued to Mr. Li and Ms. Lee matured
and remains unpaid pending the outcome of the litigation against Mr. Li and Ms.
Lee. The notes are secured by the pledge of our shares in Pacific Magtron
International Corporation, Inc., pursuant to the Custodial and Stock Pledge
Agreement dated December 30, 2004.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On December 30, 2004, we acquired a 62% majority interest in 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"). 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 and its subsidiaries have ceased all
business activities except those necessary to liquidate its remaining assets.
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26
On January 30, 2006, the court signed an order confirming PMI's and
PMIGA's Plans of Liquidation which will be effective on February 9, 2006. The
PMI and PMIGA Plans of Liquidation which were overwhelmingly approved by a
majority of each company's creditors, provides for the complete liquidation of
PMIC's former operating entities, the sale of PMI's building in Milpitas,
California, an estimated payout of approximately 50% before preference payment
recoveries, if any, to each PMI creditor holding a valid claim, and the
establishment of a Creditor Trust to prosecute preference litigation against
certain creditors for the recovery of payments received from PMI within the 90
day period prior to the commencement of the bankruptcy case. It is estimated
that creditors of PMIGA that hold allowed claims will receive a dividend on
their claims of approximately 20-25% before the collection of any preference
recoveries. A separate Creditor Trust will also be established for the PMIGA
creditors for the purpose of prosecuting preference litigation. Under the Plans
of Liquidation, Tim S Cory has been appointed Trustee for both the PMI and PMIGA
Creditors Trust.
The court also approved on January 30, 2006, PMIC's Disclosure Statement
which allows for PMIC to distribute the proposed Plan of Reorganization and
Disclosure Statement to all creditors and shareholders for voting purposes. The
proposed Disclosure Statement and Plan of Reorganization was distributed to all
creditors and shareholders on January 30, 2006. PMIC's proposed Plan of
Reorganization provides for an estimated payout of approximately 50% to
creditors holding valid claims and the merger of Herborium, Inc. into PMIC. The
Livewarehouse ("LW") plan provides for up to a 100% payment to those creditors
of LW holding valid claims. Herborium, a privately-held New Jersey-based
bio-herbaceutical company, distributes proprietary natural and complimentary
healthcare solutions to consumers and healthcare professionals seeking
alternative answers to disease treatment, management, and prevention. Its
products address healthcare problems that are not met satisfactorily by
conventional ethical pharmaceuticals. Herborium's reported revenue for fiscal
2005 was in excess of $800,000. After the merger, PMIC is expected to change its
name to Herborium.
PMIC's proposed Plan of Reorganization also provides for the cancellation
of all of the previously outstanding common and preferred shares of PMIC and the
distribution of unrestricted newly issued PMIC/Herborium stock to former PMIC
shareholders of record other than Advanced Communications on a one for one
basis. Advanced Communications' 62% majority interest in PMIC will be cancelled
and newly issued unrestricted shares of Herborium will be issued to all
shareholders of Advanced Communications directly as a special dividend. In
connection with the merger, the former shareholders of Herborium would receive
newly issued shares of PMIC/Herborium common stock representing 85% of the
outstanding common stock. The shares owned by PMIC's current common
shareholders, other than Advanced Communications, would represent 3.71% of the
post merger shares, Advanced Communications' shareholders would hold 10.55%, and
common shares representing less than 1% of the outstanding stock would be issued
to former PMIC preferred shareholders. PMIC/Herborium will attempt to obtain
approximately $2,000,000 in new financing coincident with the merger. Assuming
this occurs and consists of equity financing, each of the percentages set forth
above will be reduced proportionately.
Under the PMI and PMIGA Plans of Liquidation and the PMIC Plan of
Reorganization, Advanced Communications has been irrevocably appointed the
estate representative to prosecute any and all causes of action that may be
brought by the bankruptcy estates or PMIC against former officers Ted Li and
Cynthia Lee, the former board of directors and any other party or parties acting
in concert with the above. In this regard, Advanced Communications shall, as
estate representative prosecute such claims and claim objections for the benefit
of PMIC and the estates of PMI and PMIGA or the PMI or PMIGA Creditor Trusts,
and PMIC, PMI and PMIGA shall retain the right to receive an allocated portion
of the proceeds (net of reimbursement of legal costs) of any such litigation to
the extent that there is an affirmative recovery. Under the Plans, Advanced
Communications has agreed to bear the cost of this litigation, with such legal
costs to be reimbursed to Advanced Communications to the extent that there is an
affirmative recovery.
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27
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
- --------------------------------------------------------------------------------
28
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
- --------------------------------------------------------------------------------
29
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.
- --------------------------------------------------------------------------------
30
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.
- --------------------------------------------------------------------------------
31
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: February 10, 2006
- --------------------------------------------------------------------------------
32
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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------