-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IC5b6RzPEoAYXGtvDvOuDCYMYlTHzyufoNtYTuHHChCLXJwm8161iq54mIRe1uSg mQLSeP3g8yI7HBOQkowcwg== 0001144204-05-030643.txt : 20051003 0001144204-05-030643.hdr.sgml : 20051003 20051003154928 ACCESSION NUMBER: 0001144204-05-030643 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20051003 DATE AS OF CHANGE: 20051003 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCED COMMUNICATIONS TECHNOLOGIES INC CENTRAL INDEX KEY: 0001100820 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 650738251 STATE OF INCORPORATION: FL FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-30486 FILM NUMBER: 051117579 BUSINESS ADDRESS: STREET 1: 420 LEXINGTON AVENUE CITY: NEW YORK STATE: NY ZIP: 10170 BUSINESS PHONE: 646-227-1600 MAIL ADDRESS: STREET 1: 420 LEXINGTON AVENUE CITY: NEW YORK STATE: NY ZIP: 10170 FORMER COMPANY: FORMER CONFORMED NAME: SMART INVESTMENT COM INC DATE OF NAME CHANGE: 19991209 10KSB 1 v026610-10ksb.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended June 30, 2005 Commission File No. 000-30486 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. (Name of small business issuer in its charter) FLORIDA 65-0738251 - ------------------------------- --------------------------------------- (State or other jurisdiction of (I.R.S. employer identification number) incorporation or organization) 420 Lexington Avenue, New York, NY 10170 (Address of principal executive office) (646) 227-1600 (Registrant's telephone number) Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Act: Common Stock, No Par Value, 5,000,000,000 shares authorized Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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|_| Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained in this form and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. |X| Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act) Yes |_| No |X| ================================================================================ ================================================================================ The issuer's revenue for fiscal year ended June 30, 2005 was $7,521,723. The aggregate market value as of September 1, 2005 of the voting common equity held by non-affiliates is $1,962,155. APPLICABLE ONLY TO ISSUER'S INVOLVED IN BANKRUPTCY PROCEEDINGS DURING PRECEDING FIVE YEARS Check whether the issuer has filed all documents and reports to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES ____ NO ____ APPLICABLE ONLY TO CORPORATE REGISTRANTS As of September 1, 2005, there were 3,151,773,731 shares of the Company's no par value common stock issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE None ================================================================================ ================================================================================ ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES FORM 10-KSB TABLE OF CONTENTS
PAGE #S ------- PART I ITEM 1. Description of Business............................................1-6 ITEM 2. Description of Property............................................6 ITEM 3. Legal Proceedings..................................................6 ITEM 4. Submission of Matters to a Vote of Security Holders................7 PART II ITEM 5. Market For Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities...............8-9 ITEM 6. Management's Discussion and Analysis or Plan of Operation..........10-21 ITEM 7. Financial Statements...............................................22 ITEM 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure...........................................22 ITEM 8A. Controls and Procedures............................................22 ITEM 8B. Other Information .................................................22 PART III ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.........23-26 ITEM 10. Executive Compensation.............................................26-30 ITEM 11. Security Ownership of Certain Beneficial Owners and Management.....30-32 ITEM 12. Certain Relationships and Related Transaction......................32 ITEM 13. Exhibits...........................................................33-37 ITEM 14. Principal Accountant Fees and Services.............................38-39 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2005...........................F-1-F-22
================================================================================ ================================================================================ As used herein, the terms the "Company", "Advanced Communications Technologies", "we", "us", or "our" refer to Advanced Communications Technologies, Inc., a Florida corporation. Forward-Looking Statements Certain statements in the "Description of Business" (Item 1), "Management's Discussion and Analysis of Financial Conditions and Results of Operation" (Item 6) and elsewhere in this Annual Report on Form 10-KSB constitute "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act")) relating to us and our business, which represent our current expectations or beliefs including, but not limited to, statements concerning our operations, performance, financial condition and growth. The Act may, in certain circumstances, limit our liability in any lawsuit based on forward-looking statements we have made. All statements, other than statements of historical facts, included in this Annual Report on Form 10-KSB that address activities, events or developments that we expect or anticipate will or may occur in the future, including such matters as our projections, future capital expenditures, business strategy, competitive strengths, goals, expansion, market and industry developments and the growth of our businesses and operations are forward looking statements. Without limiting the generality of the foregoing, words such as "may," "anticipation," "intend," "could," "estimate," or "continue" or the negative or other comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, such as credit losses, dependence on management and key personnel, variability of quarterly results, our ability to continue our growth strategy and competition, certain of which are beyond our control. Any or all of our forward-looking statements may turn out to be wrong. They may be affected by inaccurate assumptions that we might make or by known or unknown risks or uncertainties. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements. Additional factors that could affect future results are set forth throughout the "Description of Business" (Item 1) section, including the subsection entitled "Risks Related to Our Business," and elsewhere in this Annual Report on Form 10-KSB. 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. ================================================================================ PART I ITEM 1. DESCRIPTION OF BUSINESS Advanced Communications Technologies, Inc. ("we," "us," "our," or the "Company") is a New York-based public holding company specializing in the technology aftermarket service and supply chain, known as reverse logistics. Our wholly-owned subsidiary and principal operating unit, Encompass Group Affiliates, Inc. ("Encompass"), acquires and operates businesses that provide computer and electronics repair and end-of-life cycle services. Encompass owns Cyber-Test, Inc. ("Cyber-Test"), an electronic equipment repair company based in Florida and our principal operating business. Additionally, through our wholly-owned investment subsidiary, Hudson Street Investments, Inc. ("Hudson Street"), we seek to acquire minority investments in various privately-held profitable businesses. We are focused on becoming a full-service provider of repair, refurbishment and recycling services in the computer peripheral and consumer electronics market. We intend to provide single source life cycle management services for technology products to businesses and consumers worldwide. The Business Of Cyber-Test, Inc. 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, original equipment manufacturers ("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. Cyber-Test plans to offer repair and exchange services during fiscal 2006 on gaming products including Sony's PlayStation(TM), Microsoft's X-Box(TM) and Nintendo's Game Cube(TM) consoles. Programs are delivered nationwide through proprietary systems that feature real-time electronic data interchange ("EDI"), flexible analysis tools and repair tracking. The Business Of Encompass Group Affiliates, Inc. Encompass, a Delaware corporation, and our wholly-owned subsidiary and principal operating unit, owns Cyber-Test, our core operating computer repair business. 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. The Business Of Hudson Street Investments, Inc. Hudson Street a Delaware corporation, and our wholly-owned investment subsidiary, was formed to purchase and hold minority investments in selected financial and technology-based businesses. In addition to holding securities in both private and public companies, Hudson Street owned a minority interest in Yorkville Advisors Management, LLC ("Yorkville Advisors"), a privately-owned investment management firm. During the fiscal year ended June 30, 2005, Hudson Street redeemed, in full, its interest in Yorkville Advisors. Through Hudson Street, we will continue to seek investments in high growth-potential businesses in a variety of industries. The Business Of Pacific Magtron International Corporation, Inc. 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. 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". 1 Due to the bankruptcy filing of PMIC and its subsidiaries on May 11, 2005, and as of that date, the Company is no longer able to exercise management control over PMIC's business operations. Consequently, as of June 30, 2005, the Company accounted for the investment in PMIC under the cost method of accounting. 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. The Reverse Logistics And e-Recycle Industry The following Reverse Logistics and e-Recycle industry discussion is based on a report prepared by D.F. Blumberg & Associates published earlier this year relating to the 2004 calendar year: The $60 billion U.S. technology aftermarket services industry is highly fragmented and ripe for consolidation. The industry, known as "reverse logistics", encompasses all operations related to the reuse of products and materials, or the collection and disassembling process of used products, product parts, and/or materials in order to ensure an environmentally friendly recovery. The management of these operations is concerned with the care for products and materials after they have been used. The reverse logistics industry has seen a dramatic increase in demand for services such as technical support, repair, asset recovery, end-of-life product management, disposal and recycling. This rapidly emerging market is driven by environmental regulations, outsourcing trends, and accelerating product life cycles across numerous technologies. Electronic discards are among the fastest growing segments of our nation's waste stream and are increasingly being considered "toxic" waste when dumped into landfills. Industry estimates for the U.S. alone project that by 2006, more than 163,000 televisions and computers are expected to become obsolete every day. This translates into 3,500 tons of potentially hazardous material which would cost approximately $100 million a month to dispose of properly. Environmental concerns and regulatory momentum are contributing to rapid growth in the e-Recycle industry. Both producers and users of electronic products need a single source solution that efficiently disassembles this equipment and safely recovers the components for use in new material manufacturing. The Computer Repair/Warranty Management Industry Cyber-Test continues to operate within the office equipment and computer peripheral products repair/warranty management industry, with its primary focus on facsimile machines, printers, scanners, PDAs, laptop computers, monitors, and multi-function units. Warranty periods and longer product life cycles demand a maintenance/repair commitment that can typically support a product for up to ten (10) years. In addition, the industry relationship among OEMs, the integrator, and the third- and fourth-party service providers has become more complex. The end-user, or consumer, must have assurance that products are supported by an after-sales service team capable of providing preventive maintenance and/or an immediate remedy upon equipment failure. With the technological advances and associated cost reductions in shipping, the warranty manager's challenge is to meet and exceed customer's expectations with respect to speed of response. The repair/warranty industry has seen a shift towards outsourcing warranty service to companies whose primary purpose and core strength is to manage complex demands of the repair/warranty chain process. Warranty service companies are expected to be able to: o offer one-stop / turnkey service; o have the technical ability to repair multi-products for multi-vendors; o offer advance exchange of office equipment computer peripheral products; o offer distribution logistics from call management through delivery; and o demonstrate supply-line parts management logistics efficiencies. 2 In addition to existing warranty service companies, traditional distribution logistics providers (such as UPS, Airborne Express, etc.) are also entering this industry. Ultimately, the success or failure of meeting warranty commitments will depend on the ability of the warrantor or its service provider to have the right component in the right place at the right time and the right skills to affect the necessary repair at the most cost-effective price. Cyber-Test's Products and Services The following describes the individual components that make up the current Cyber-Test family of products and services. Repair and Exchange. Cyber-Test has offered board-level repair of technical products for more than 19 years, and offers service programs for equipment dealers, OEMs, extended warranty companies, retail outlets and end-users. The service programs include: o return to depot repair of office equipment and computer peripheral products; o advance exchange of office equipment and computer peripheral products; o board-level repair of circuit boards and sub assemblies; o return to depot repair for component-level circuit boards; o OEM warranty exchange and repair programs; o large volume repair and refurbishment; and o call center technical support. Cyber-Test's repair and exchange service is managed by a proprietary system designed and developed by the management team of Cyber-Test with software-tracking that allows customers or the call center function (whether it is onsite at Cyber-Test's facilities or at the customer's facility) to be able to track the repair status of the given unit, and provide a delivery date to the end-user, while allowing executives of Cyber-Test to manage the output volume and quality of the repair process. In addition, Cyber-Test's software allows its clients to view their inventory, parts, parts used per unit, and the status of all equipment on a real-time basis via its secure website. Clients may also change priorities and escalate orders directly from this proprietary, customized web portal. Parts And Sales. Cyber-Test stocks a full line of parts, accessories, and consumables for its in-house repair needs and offers these parts for sale as well. Cyber-Test stocks over 32,000 parts for printers, facsimile machines, scanners, monitors and PDAs. Customer's can view a full listing of parts at Cyber-Test's website (in the ADVANCEX(TM) section) and, if any part is not in stock, it can usually be made available in one business day. Cyber-Test's unique parts ordering system has the capability to search, order, and buy parts without an OEM part number. Cyber-Test's search feature will cross-reference other OEM parts that may fit the ordered part from other manufacturers or OEMs. In addition to repair services, Cyber-Test sells parts and consumable supplies to dealers and end-users and has a customer base of approximately 1,500 dealers and repair shops, two OEMs and four major extended warranty companies that service five (5) of the top office equipment /computer retail chains. In addition to parts, Cyber-Test stocks an extensive inventory of new and refurbished equipment available for purchase. New equipment is backed with a full OEM warranty, and 90 day warranties are offered by Cyber-Test for refurbished units. Call Center Technical Support. Cyber-Test offers partial or full (turnkey) Help Desk support through its Call Center. The Call Center has handled as many as 25,000 calls per month from its customers and currently averages approximately 5,000 calls per month. The Call Center has a greater than 50% phone-fix rate, which significantly reduces Cyber-Test's overall costs. Cyber-Test's Call Center is the sole technical help line for selected Xerox printers and fax machines. 3 Reverse Logistics and Outsourcing. Cyber-Test offers its customers an outsourcing service of inventory, warehousing, and shipping of parts and end products for warranty fulfillment, with full refurbishing and inspection programs including "A" and "B" goods logistics. OEMs can direct all store returns to Cyber-Test for inspection. If units have not been taken out of the box, those items can be inspected and resold out as "A" goods. Products that have been used or are defective are processed through the refurbishment process and repackaged and resold as "B" goods. Cyber-Test can assist the OEM with "B" goods distribution and resale. Cyber-Test also has a salvage division that receives extended warranty products that were "bought out" by the warranty provider. Products are received, sorted and palletized for resale to wholesalers worldwide. Service Contracts. In addition to OEMs and major retailers, Cyber-Test has established relationships with a number of insurance companies and third-party service providers to provide full repair and call center support service. Extended manufacturer's warranties sold at retail stores are typically backed by a third party insurance company. In other cases, the extended warranty is managed by the retailer itself. If a product covered in a service contract is determined to be in need of repair by the Call Center, a replacement unit may be sent directly to the end-user via ADVANCEX(TM). Cyber-Test manages the process from call receipt and receiving the defective product back from the customer, to tracking the product, repairing the returned units, and managing against customer fraud. Cyber-Test also offers an "Advance Exchange" program, known as ADVANCEX(TM), which provides same day service to its customers on all products Cyber-Test repairs. With the ADVANCEX(TM) program, Cyber-Test can ship an equivalent-to-new ("ETN") replacement product directly to the customer if phone support fails to correct the problem. The customer then returns the defective unit to Cyber-Test for repair and refurbishment and subsequent use for another customer. Its proprietary systems allow the OEM to gather failure analysis and failure trends critical to the release of new products. This information is collected online, while Cyber-Test provides level II and III technical support directly to the customer. Its telephone support achieves a current phone fix-rate of more than 50%, saving OEMs millions of dollars per year in unnecessary product exchange. Cyber-Test has a same-day fulfillment up to 5:00 p.m. Eastern Time on all ADVANCEX(TM) products, and ships approximately 6,500 repaired units per month. The ADVANCEX(TM) program has resulted in decreased product returns and increased customer satisfaction. Competition 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. According to a 2004 industry directory and yearbook published by National Electronics Service Dealers Association/International Society of Certified Electronic Technicians, there are more than 800 manufacturers of technical products in the U.S. of the type Cyber-Test repairs, more than 1,000 independent companies in the U.S. that repair products in a manner similar to Cyber-Test's, over 350 companies in the U.S. that supply parts and components for use in repair, and many tens of thousands of independent service technicians that do on-site repair. In addition, there are thousands of companies that sell technical products that may need repair, and many of these do their own repair or service work. Many of Cyber-Test's competitors are larger in size and have greater financial and other resources than does 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. Customers Cyber-Test currently relies on a few large customers to generate a significant portion of its revenues. The loss of one or more of these customers would have a material adverse effect on our business, results of operations and financial condition. Management believes it is essential to expand Cyber-Test's customer base to minimize this dependency. Cyber-Test's ability to do so 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. 4 Company History We were incorporated in Florida on April 30, 1998 under the name Media Forum International, Inc. ("Media Forum"). We were inactive from April 1998 to June 1998, except for the issuance of founders' shares during such time period. On April 7, 1999, Advanced Communications Technologies, Inc., a Nevada corporation ("Advanced Communications (Nevada)") merged with and into us. Pursuant to this merger, the shareholders of Advanced Communications (Nevada) received 90% of our outstanding common stock and we received all of Advanced Communications (Nevada)'s assets. These assets included all of the North and South American rights to market and distribute SpectruCell, a wireless software-defined radio ("SDR")-based communications platform under development in Australia by entities related to a founding shareholder, to offer mobile communications network providers the flexibility of processing and transmitting multiple wireless communications signals through one base station. We subsequently changed our name from Media Forum to Advanced Communications Technologies, Inc. Upon completion of the merger, we changed our trading symbol to "ADVC." As a result of the merger, Advanced Communications (Nevada) ceased to exist as a separate entity. In 2002, we closed operations relating to SpectruCell, significantly reduced our expenses, and shifted to a holding company structure, as it became uncertain whether SpectruCell's development would ever be completed and brought to market in the U.S. On December 17, 2003, we formed SpectruCell, Inc., a wholly-owned Delaware subsidiary, and transferred all of our rights in the SpectruCell technology to this subsidiary. SpectruCell, Inc. is presently inactive and the technology, to the best of our knowledge, has never been commercially developed and/or tested. On July 20, 1999, we formed Advanced Global Communications, Inc. ("AGC"), a Florida corporation. AGC was formed to develop and operate our international telecommunications network from the United States to Pakistan and India, as well as to acquire other switching and telecommunications companies. The network was established in 2000 and operated until 2001, when the regulatory climate in Pakistan and India made it legally and economically impractical to operate. During the fiscal year ended June 30, 2001, we ceased operating AGC's international telecommunications network and wrote-off our entire investment in various telephone equipment and network costs. AGC still exists as a separate entity, but has been inactive since July 1, 2001. On January 31, 2000, we acquired Smart Investments.com, Inc. through a stock exchange with Smart Investments' sole shareholder. Immediately upon completion of that acquisition, we elected successor issuer status in accordance with Rule 12g-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and consequently became a "reporting company" under the Exchange Act. On April 13, 2004, we formed Encompass Group Affiliates, Inc. ("Encompass"), a Delaware corporation, to be our wholly-owned subsidiary for the purpose of becoming our principal operating unit. Encompass is the direct parent company to Cyber-Test, Inc., our core operating business. On June 3, 2004, pursuant to the terms of an asset purchase agreement dated May 27, 2004, Encompass acquired 100% of the assets and core business of Cyber-Test, Inc. ("Cyber-Test"), a Delaware corporation, Upon consummation of the acquisition, Cyber-Test became the core operating business of Encompass with 85 employees and annual sales of approximately $6,000,000, at the time of acquisition. Cyber-Test, a 19 year old established electronic equipment repair company located in Longwood, Florida, specializes in the repair of computer peripheral products and provides a multitude of services that offer support at any level from repair, warranty exchange, to end-of-life product support to OEMs (Original Equipment Manufacturers), warranty companies, dealers and end-users. 5 Employees As of September 1, 2005, the Company had 100 full-time and 3 part-time employees. ITEM 2. DESCRIPTION OF PROPERTY 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. Our license agreement is on a month-to-month basis 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 ended on July 31, 2005, and provides for two one year options at a monthly lease obligation of $13,900. Cyber-Test exercised its one year option and extended its lease to July 31, 2006. The lease is renewable on a year-to-year basis by providing written notice 60 days prior to the expiration of the then current term. The Company's principal operating unit, Encompass is located at 1600 California Circle, Milpitas, California 95035. Encompass leases 2,000 square feet of office space on a month-to-month basis for $2,000 per month. The lease commenced on July 1, 2005. ITEM 3. 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 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 June 30, 2005, there were no threatened or pending legal matters that would have a material impact on the Company's consolidated results of operations, financial position or cash flows. On May 10, 2005, our majority-owned subsidiary, PMIC, terminated the employment agreements dated December 30, 2004 among PMIC, Encompass, us and each of Theodore S. Li and Hui Cynthia Lee (the "Employment Agreements') for "cause" pursuant to the terms of such agreements. The 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 us. 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 by PMIC. 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, misrepresentation and other counts in connection with the Stock Purchase Agreement dated December 10, 2004 between us and Mr. Li and Ms. Lee. On or about July 6, 2005, the defendants filed a motion for a more definite statement of our complaint. That motion remains under consideration by the court and discovery has not yet commenced. On February 5, 2004, we filed suit in Superior Court, Orange County, California against Advanced Communications (Australia), Roger May, Global Communications Technologies Limited and Global Communications Technologies Pty Ltd to recover damages incurred as a result of wrongful actions of such defendants against the Company and to clarify the status of the Company's obligations to such defendants under various agreements and other arrangements, from which the Company believes it has been relieved as a result of such wrongful actions. In May and August 2004, the court entered default judgments in favor of the Company and against all of the above defendants. On October 22, 2004, the court held a hearing to determine the amount the Company was entitled to recover against the defendants in the action. In November 2004, the court entered a judgment in favor of the Company in the approximate amount of $8 million. The Company offset against the judgment approximately $2,847,000 of debt carried on its books as owing to one or more of the defendants. Because of the uncertainty of collecting the balance of the judgment or approximately $5.1 million, we have not recorded the unliquidated portion of the judgment receivable and the related income in the June 30, 2005 financial statements. Additional debt forgiveness income will be recorded in the period or periods in which collection or seizure of assets is made. 6 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 7 PART II ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES Price Range Of Common Stock Our common stock is currently traded on the Over-the-Counter Bulletin Board ("OTCBB") under the symbol "ADVC." As of September 1, 2005, there were 3,151,773,731 common shares issued and outstanding and approximately 505 holders of record. We believe that the number of beneficial owners is substantially greater than the number of record holders because a large portion of our common stock is held in "broker" or "street names". The following table sets forth, for the fiscal periods indicated, the bid price range of our common stock, as reported by Bloomberg Financial Markets: High Bid Low Bid -------- ------- Fiscal Year 2005 Quarter Ended September 30, 2004 $ .00119 $ .0005 Quarter Ended December 31, 2004 .002 .00038 Quarter Ended March 31, 2005 .0015 .0009 Quarter Ended June 30, 2005 .0015 .0005 Fiscal Year 2004 Quarter Ended September 30, 2003 $ .007 $.00163 Quarter Ended December 31, 2003 .00363 .00169 Quarter Ended March 31, 2004 .0025 .00131 Quarter Ended June 30, 2004 .0015 .00081 Such market quotations reflect inter-dealer prices without retail mark-up, mark-down or commissions and may not represent actual transactions. We did not pay any dividends during fiscal 2005 and have never paid any dividends on our capital stock. We currently expect that we will retain future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Any decision on the future payment of dividends will depend on our earnings and financial position at that time and such other factors as our Board of Directors deems relevant. Recent Sales Of Unregistered Securities All issuances of restricted stock have been valued based on the closing price of the stock as of the date the Company's Board of Directors approved the grant of shares of our common stock or under the terms of our Convertible Debentures. On June 28, 2005, the Board of Directors approved the issuance of 12,500,000 shares of common stock to Martin Nielson, our Senior Vice President-Acquisitions and director, pursuant to the terms of Mr. Nielson's deferred compensation provision of his June 24, 2004 employment contract as amended on June 1, 2005. These shares represent the earned portion of Mr. Nielson's deferred compensation arrangement, the cost of which has been amortized as deferred compensation expense in the amount of $250,000 in fiscal 2005. The shares were issued on July 1, 2005 to Mr. Nielson. On January 12, 2005, the Company's Board of Directors approved the issuance of 5,000,000 shares of restricted common stock to Hawk Associates valued at $.0015 per share, or $7,500 pursuant to the terms of Hawk Associates' service agreement with us. The shares were issued on February 4, 2005. With respect to the sale of unregistered securities referenced above, all transactions were exempt from registration pursuant to Section 4(2) if the Securities Act of 1933 (the "Securities Act"). These offerings may have qualified for other exemptions as well. In each instance, the purchaser had access to sufficient information regarding the Company so as to make an informed investment decision. More specifically, the Company had a reasonable basis to believe that each purchaser was an "accredited investor" as defined in Regulation D under the Securities Act, which information was based on representations received from such investors, and otherwise had the requisite sophistication to make an investment in the Company's securities. 8 Issuer Purchases of Equity Securities We did not make any purchases of equity securities during the fiscal year ended June 30, 2005. Selected Financial Data The following selected financial data is derived from, and should be read in, conjunction with our financial statements and related notes, which appear elsewhere in this Annual Report on Form 10-KSB. Our financial statements for the years ended July 31, 2005, 2004 and 2003 were audited by Weinberg & Company, P.A.
For the Years Ended June 30, --------------------------------------------------- 2005 2004 2003 --------------- --------------- ------------- Sales $ 7,521,723 $ 605,468 $ -- Cost of Sales 4,879,081 400,265 -- Gross Profit 2,642,642 205,203 -- Operating Expenses 4,449,536 788,261 1,216,776 Operating (Loss) (1,806,893) (583,058) (1,216,776) Income (Loss) from Investments (474,893) 439,999 -- Other Income (Expense) 2,741,327 618,879 (652,255) Income (Loss) Before Income Taxes 459,541 475,820 (1,869,031) Provision for Income Taxes -- -- -- (Loss) from Discontinued Operations, Net of minority interest (1,195,374) -- -- Net Income (Loss) (735,833) 475,820 (1,869,031) Net Income (Loss) Per Share: Basic and Diluted $ .00 $ .00 $ (.01) Weighted Average Shares: Basic and Dilutive 2,072,211,255 1,084,885,437 152,960,499 =============== =============== ============= Cash $ 836,876 $ 1,193,170 $ 22,527 Working Capital (Deficiency) (139,363) (2,197,667) (4,044,795) Total Assets 4,970,038 7,996,339 70,748 Total Liabilities 2,043,949 6,571,877 6,030,922 Stockholders' Equity (Deficiency) 2,926,089 1,424,462 (5,960,174)
9 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion should be read in conjunction with our financial statements and the related notes and the other financial information appearing elsewhere in this report. In addition to historical information, the following discussion and other parts of this Annual Report contain forward-looking information that involves risks and uncertainties including the use of words such as "estimates," "expects," "anticipates," "believes," "intends," "will," "seek" and other similar expressions, are intended to identify forward-looking information that involves risks and uncertainties. In addition, any statements that refer to expectations or other characterizations of future events or circumstances are forward-looking statements. Actual results and outcomes could differ materially as a result of important factors including, among other things, general economic conditions, the Company's ability to renew or replace key supply and credit agreements, fluctuations in operating results, committed backlog, public market and trading issues, risks associated with dependence on key personnel, competitive market conditions in the Company's existing lines of business and technological obsolescence, as well as other risks and uncertainties. General We are a New York-based public holding company specializing in the technology aftermarket service and supply chain, known as reverse logistics. Our wholly-owned subsidiary and principal operating unit, Encompass Group Affiliates, Inc. ("Encompass"), acquires and operates businesses that provide computer and electronics repair and end-of-life cycle services. Encompass owns Cyber-Test, Inc. ("Cyber-Test"), an electronic equipment repair company based in Florida and our principal operating business. Additionally, through our wholly-owned investment subsidiary, Hudson Street Investments, Inc. ("Hudson Street"), we seek to acquire minority investments in various privately-held, profitable businesses. We have three principal means of diversifying and growing our business, each of which is designed to give shareholders a strong value driver. As described further below, Encompass, our principal operating subsidiary, intends to acquire synergistic companies in support of its technology services strategy. Until February 2005, Hudson Street was a minority partner in the management firm of an institutional investment company. Through Hudson Street, we may seek opportunities to make minority investments in publicly and privately held companies in technology and other diverse industries. 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 the 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".. This industry is a highly fragmented, yet according to a report published by D.F. Blumberg & Associates earlier this year relating to 2004, its sales volumes account for more than $60 billion in sales in the United States market each year. 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. 10 We seek to differentiate ourselves by being the first company to provide a broad and complete scope of services and products in the reverse logistics consumer electronics industry and by providing exceptional and reliable customer service. The candidate companies that we have been pursuing for acquisition must demonstrate the following minimum financial and business criteria: i) obvious commercial synergies; ii) share our vision for the industry opportunity; iii) strong financial position-cash and other current assets, little or no debt, and strong cash flow; iv) accretive within the first year; v) superior growth prospects; vi) corporate culture and management team highly compatible with ours; vii) proprietary technologies or other superior differentiation strategic fit; viii) satisfactory owners' background checks; and ix) if applicable, Sarbanes-Oxley compliant. These criteria represent our business philosophy of acquiring financially strong, self-sufficient enterprises that will not depend on or require our financial support to operate and grow their business. Cyber-Test is an electronic equipment repair company and is our principal service business. A 19 year old company, Cyber-Test was acquired to be the platform from which our services business would expand. Cyber-Test's technicians are highly skilled at performing board-level repair for nearly all types of integrated circuit board products and in the timely and efficient repair of various consumer electronics. It is our expectation that this technical proficiency, combined with Cyber-Test's operational systems and blue-chip customer base will provide us with a suitable base for growth both by organic means and by acquiring complementary repair companies. As described above, we intend to continue to pursue the acquisition of, and investment in, technology and/or brand differentiated companies with significant growth-potential that complement our expansion plan of providing an integrated life cycle service for the consumer electronics industry. We seek to make the process of growth, through both organic and inorganic means, a core competency of each company that we acquire or in which we invest. Fiscal Year Ended June 30, 2005 Compared To Fiscal Year Ended June 30, 2004 Overall Results Of Operations During the fiscal year ended June 30, 2005, Cyber-Test, our core operating business unit continued to increase both revenue and profits, earning record revenues and strong profits of approximately $382,000 on sales of $7.5 million. Cyber-Test's net income was augmented by $194,000 of net investment income and $2.8 million of forgiveness of debt income as a result of a favorable judgment against our former CEO and his related entities that allowed us to discharge these obligations. However, we experienced a setback with our acquisition of PMIC which experienced a swift downturn in its financial condition and results of operations in the third and fourth quarters ultimately resulting in the Chapter 11 bankruptcy filing of PMIC and its subsidiaries, our filing of a federal lawsuit against the former shareholders and officers of PMIC for misrepresentation and breach of contract and the write-off of our entire investment in PMIC in the amount of $669,000. Because we owned a controlling interest in PMIC prior to the May 11, 2005 bankruptcy filing, our statement of operations includes the results of PMIC for the four and one-half month period of our equity ownership, January 1, 2005 through May 10, 2005. This loss of $1.2 million is shown as a Loss from Discontinued Operations, net of minority interest on our Statement of Operations... In addition to the one-time charge of $1.9 million attributable to our ownership and investment in PMIC, our consolidated results of operations also include $475,000 of compensation expense attributable to executive and director stock grants and bonus. During the fiscal year ended June 30, 2004, our financial results reflect an overall profit of $476,000 or $.00 per share which was a substantial increase of $2,345,000 from the net loss of $1,869,000 or $(.012) per share for the fiscal year ended June 30, 2003. The substantial turnaround in net earnings for the fiscal year ended June 30, 2004 was attributable to management's successful efforts in restructuring and settling substantially all of our obligations, significantly reducing our ongoing operating and interest costs and generating a source of ingoing earnings and cash flow through the purchase of an interest in a profitable financial services business and the purchase of Cyber-Test, our core operating business. Of the $2,345,000 increase in net income, $781,000 is a result of us negotiating and settling a majority of our accounts payable and other liabilities at a substantial discount which generated forgiveness of indebtedness income along with a $919,000 reduction in interest expense, lawsuit settlements and operating expense. An additional $440,000 of net investment income was also realized. 11 Overall Net Income (Loss) For The Year Ended June 30, 2005 For the fiscal year ended June 30, 2005, our financial results reflect an overall loss of $736,000 or $.00 per share which was a decrease of $1,212,000 from the net profit of $476,000 or $.00 per share for the fiscal year ended June 30, 2004. Our overall consolidated net loss was principally the result of reporting a $1.2 million loss from the discontinued operations of our 62% owned subsidiary, PMIC plus the $669,000 write-off of our investment in PMIC. Total consolidated net other income of $2.3 million was primarily attributable to forgiveness of debt income. The components of our consolidated net loss for the fiscal year ended June 30, 2005 as compared with the components of our consolidated net income for the fiscal year ended June 30, 2004 is described below Summary Of Results Of Operations
Fiscal Year Ended Period to Period June 30, % Change ------------------------ ---------------- 2005 2004 ----------- --------- Net income from Cyber-Test operations $ 381,760 $ -- -- % Net income from investments 193,941 439,999 (55)% Write-off of investment in PMIC (668,834) -- -- % Parent company and Encompass overhead (2,188,653) (583,058) 279 % Net interest expense (106,184) (162,059) (34)% Forgiveness of debt 2,847,511 780,938 265)% ----------- --------- ---------------- Consolidated net income from continuing operations $ 459,541 $ 475,820 (3)% Net (loss) from PMIC operations, net of minority interest (1,195,374) -- -- % ----------- --------- ---------------- Consolidated net (loss) income (735,833) 475,820 -- % =========== ========= ================
Overview Of Fiscal Year 2005 Results For the fiscal year ended June 30, 2005, we realized consolidated net income from continuing operations of $459,000 compared with net income of $476,000 for the fiscal year ended June 30, 2004, or a 3% decrease. The fiscal year ended June 30, 2005 is the first full fiscal year reflecting the results of Cyber-Test's operating business. During this period, Cyber-Test recorded record sales of $7.5 million relating to the repair, service and warranty and exchange of various office equipment, PDAs, laptop computers, monitors and multi-functional units. Gross margin was 35%. Cyber-Test's net profit from operations of $382,000 or 5.1% of sales was slightly below its net profit percentage as compared to the previous nine-month results. Cyber-Test continues to shift its sales mix from the repair of core products such as fax machines, printers and multifunction machines to PDA and laptop repair. For the fiscal year ended June 30, 2005, we reported a consolidated loss from continuing operations before other income of $1.8 million because of consolidated corporate overhead costs at the parent and Encompass levels in the net amount of $2.2 million versus a $583,000 loss from continuing operations before other income for the fiscal year ended June 30, 2004. Included in these overhead costs is $374,000 of non-cash charges for depreciation and amortization. Our consolidated loss from continuing operations was offset by $2.9 million of other investment and forgiveness of debt income. Revenue Consolidated revenue for the fiscal year ended June 30, 2005 was $7.5 million as compared to revenue of $605,000 for the fiscal year ended June 30, 2004. All revenue was entirely attributable to Cyber-Test's operations for the full fiscal year ended June 30, 2005 and for the one-month period from June 3 through June 30, 2004. All revenue was generated from the repair and service of office equipment and computer peripheral products, extended warranty sales and the sale of used electronic parts. Gross Profit Consolidated gross operating margin for the fiscal year ended June 30, 2005 was 35% from Cyber-Test's operations. Cyber-Test's gross profit percentage remained consistent throughout the year and dipped slightly overall from a gross margin of 37% for the one-month period in fiscal 2004. The decrease in gross margin is due to the change in product mix during the year from the higher margin service and repair of printers and fax machines to lower margin, higher volume service and repair of laptops and PDAs. 12 Operating Expenses Consolidated operating expenses for the fiscal year ended June 30, 2005 and 2004 were $4.4 million and $788,000, respectively, representing a $3.6 million increase from the fiscal year ended June 30, 2004. This increase was primarily attributable to an increase in selling, general and administrative costs of $3.3 million due to the addition of the Encompass and Cyber-Test operations and an increase of $183,000 in professional and consulting expense from the fiscal year ended June 30, 2004. Consolidated depreciation and amortization expense for the fiscal year ended June 30, 2005 increased by $145,000 to $374,000 from $229,000 for the fiscal year ended June 30, 2004 due to deferred commitment fees and financing costs being fully amortized in fiscal year 2004 and the amortization of deferred compensation and deferred financing fees in the amount of $355,000 and depreciation on property and equipment in the amount of $19,000 for the fiscal year ended June 30, 2005. Consolidated other general and administrative expenses amounted to $3.6 million for the fiscal year ended fiscal year ended June 30, 2005, which was a $3.3 million increase from the comparative prior period due, in part, to an increase in compensation related expenses in the amount of $805,000 and Cyber-Test's operating business overhead during the fiscal year ended June 30, 2005. Such overhead expenses include the overhead operation and cost associated with employing approximately 100 employees and operating an office and service/repair facility in Florida. Other Income (Expenses) During the fiscal year ended June 30, 2005, we realized $2.3 million of consolidated net other income of which $2.8 million was attributable to debt forgiveness income resulting from the favorable judgment against our former CEO and related entities that allowed us to discharge these obligations. This item of income was offset, in part, by net interest expense of $106,000. We also realized $385,000 of investment income from our partnership investment in Yorkville Advisors, which was offset, in part, by a $191,000 loss on redemption of our partnership interest. In addition, consolidated net other income was reduced by a one-time charge of $669,000 representing the complete write-off of our stock investment in PMIC. During the fiscal year ended June 30, 2004, we realized $1,059,000 of net other income due to the favorable results of our investment in Yorkville Advisors, which generated $440,000 of net income and $781,000 of forgiveness of indebtedness income generated from the successful settlement, at a discount, of certain of our debts. These items were offset, in part by, net interest expense of $162,000 attributable to $69,000 of accrued interest on our 10% Secured Convertible Debentures, the remaining 5% Convertible Debentures and the 8% Note Payable and $93,000 of debt discount expense treated as interest attributable to the beneficial conversion feature of our 10% Secured Convertible Debentures, net of $725 of interest income Overall consolidated net interest expense decreased by $56,000 to $106,000 from $162,000 for the fiscal year ended June 30, 2005 because of the substantial reduction in interest-bearing debt in fiscal 2005 compared to fiscal 2004. 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 was recently released by the SEC to require all companies to include a discussion to address, among other things, liquidity, off-balance sheet arrangements, contractual obligations and commercial commitments. 13 Use Of Estimates The preparation of the consolidated financial statements of the Company in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. In particular, significant estimates are required to value inventory and estimate the future cost associated with the Company's warranties. If the actual value of the Company's inventories differs from these estimates, the Company's operating results could be adversely impacted. The actual results with regard to warranty expenditures could also have an adverse impact on the Company if the actual rate of repair failure or the cost to re-repair a unit is greater than what the Company has used in estimating the warranty expense accrual. Inventory Inventory consists primarily of repair parts, consumable supplies for resale and used machines that are held for 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. Allowance For Doubtful Accounts We make judgments as to our ability to collect outstanding trade receivables and provide allowances for the portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are provided at differing rates, based upon the age of the receivable. In determining these percentages, we analyze our historical collection experience and current economic trends. If the historical data we use to calculate the allowance provided for doubtful accounts does not reflect our future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and the future results of operations could be materially affected. Long-Lived Assets Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such review indicates that the asset is impaired, when the carrying amount of an asset exceeds the sum of its expected future cash flows, on an undiscounted basis, the asset's carrying amount is written down to fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. Excess Of Cost Over Net Assets Acquired In accordance with SFAS No. 141, the Company allocates the purchase price of its acquisitions to the tangible assets, liabilities and intangible assets acquired based on their estimated fair values. The excess purchase price over those fair values is recorded as "Excess of Cost Over Net Assets Acquired". The fair value assigned to intangible assets acquired is either based on valuations prepared by independent third party appraisal firms using estimates and assumptions provided by management or negotiated at arms-length between the Company and the seller of the acquired assets. In accordance with SFAS No. 142, goodwill and purchased intangibles with indefinite lives acquired after June 30, 2001 are not amortized, but will be reviewed periodically for impairment. Purchased intangibles with finite lives will be amortized on a straight-line basis over their respective useful lives. 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 fiscal year ended June 30, 2005, shares of common stock that could have been issued upon conversion of convertible debt were excluded from the calculation of diluted earnings (loss) per share, as their effect would have been anti-dilutive. 14 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 fiscal year ended June 30, 2005. Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (R), "Share-Based Payment". SFAS No. 123 (R) revises SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS No. 123 (R) focuses primarily on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123 (R) requires companies to recognize in the statement of operations the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123 (R) is effective as of the first interim or annual reporting period that begins after June 15, 2005 for non-small business issuers and after December 15, 2005 for small business issuers. Accordingly, the Company will adopt SFAS No. 123 (R) in its quarter ending March 31, 2006. The Company is currently evaluating the provisions of SFAS No. 123 (R) and has not yet determined the impact, if any, that SFAS No. 123 (R) will have on its financial statement presentation or disclosures. 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 $836,876 at June 30, 2005. We have been exploring various alternative sources of financing to reduce our reliance on the Equity Line of Credit with Cornell Capital and the dilutive effect such facility has on our stock price. We have had various discussions with banking institutions and other institutional investors to secure up to a $30 million acquisition debt facility to be used by us for the purpose of acquiring private and/or public companies in the technology and service industry that we believe will be compatible with our business and accretive to our results of operations. We have recently 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. On November 22, 2002, we entered into a Securities Purchase Agreement with Cornell Capital, whereby we agreed to issue and sell a $250,000 10% Secured Convertible Debenture. The Secured Convertible Debenture had a term of two years and is convertible into shares of common stock at a conversion price equal to $.001 per share. The Secured Convertible Debenture accrued interest at a rate of 10% per year and is convertible at the holder's option. On November 22, 2004 and December 27, 2004, Cornell Capital elected to convert, at $.001 per share, $10,000 and $100,000 of principal and $2,000 of accrued interest, respectively, into 112,000,000 shares of common stock. On February 11, 2005, Cornell Capital indicated its intention to convert the balance of the convertible note, in the amount of $77,500 of principal at $.001 per share, into common stock. On May 12, 2005, Cornell Capital converted the $77,500 plus $40,526 of accrued interest at $.001 per share into 118,026,000 shares of common stock. No amount remains owed to Cornell Capital on the Secured Convertible Debenture. 15 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, a portion of these shares was transferred by Cornell Capital to unrelated parties. Holders of the Series A Preferred Shares are entitled to receive cash dividends on a cumulative basis, in arrears, at the annual rate of 5% when and if a dividend is scheduled by our Board of Directors. The Series A Preferred Shares are convertible, in whole or in part, on or after May 21, 2005 into shares of common stock at the fixed price of $.01 per share or 100% of the average of the three lowest closing bid prices for the ten trading days immediately preceding the date of conversion, whichever is lower. The Series A Preferred Shares are nonvoting and redeemable at the option of the Company, in whole or in part, at any time at a 20% premium to liquidation value. At June 30, 2005, no Series A Preferred Shares had been converted into common stock. In conjunction with our license of certain intangible assets, we 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 shares of Series B Convertible Preferred stock elected to convert $200,000 of preferred stock at a price of $.0005 per share into 400,000,000 shares of common stock. At June 30, 2005, 100 shares of Series B Convertible Preferred stock remain outstanding. During the fiscal year ended June 30, 2005, we made advances under the Equity Line of Credit in the aggregate amount of $100,000 in exchange for issuing 172,881,526 shares of common stock to Cornell Capital. These advances were used to pay down our short-term note to Cornell Capital. 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. Also during the fiscal year ended June 30, 2005, Hudson Street received $280,000 of membership cash distributions and $800,000 of net cash proceeds on the redemption of its partnership interest from Yorkville Advisors. Our existing sources of liquidity including cash resources and cash provided by operating activities will not provide us with sufficient resources to meet our present and future working capital and cash requirements for the next 12 months. Consequently, we and our investment banker are actively pursuing a short-term bridge facility in the amount of up to $750,000 to provide us with the necessary working capital over the next 12 months in the event we fail to secure a suitable acquisition and working capital debt facility. We do not anticipate making any further advances under the Equity Line of Credit. We had total liabilities of $2,043,949 as of June 30, 2005 versus $6,571,877 as of June 30, 2004. These contractual obligations, along with the dates on which such payments are due, are described below:
Payments Due by Period (from June 30, 2005) ------------------------------------------------------------ 1 2-3 4-5 After 5 Contractual Obligations Total Year or Less Years Years Years - ------------------------------------- ---------- ------------ --------- --------- -------- Notes Payable $1,225,395 $ 1,020,028 $ 205,367 $ -- $ -- Accounts Payable and Accrued Expenses 818,554 818,554 -- -- -- Other Current Liabilities -- -- -- -- -- ---------- ------------ --------- --------- -------- Total Contractual Obligations $2,043,949 $ 1,838,581 $ 205,367 $ -- $ -- ========== ============ ========= ========= ========
During the fiscal year ended June 30, 2005, the Company reduced its contractual obligations by $2,233,416 through cash payments. At June 30, 2005, we had a working capital deficiency of $139,363. On February 11, 2005,Hudson Street, our wholly-owned subsidiary became entitled to receive a distribution of $2,625,000 from Yorkville Advisors Management, LLC ("Yorkville") in exchange for all of Hudson Street's Preferential Rights Membership Interest in Yorkville, pursuant to the terms of Yorkville's Limited Liability Company Agreement, as amended. In connection with the above arrangements, we entered into a Letter Agreement, dated February 11, 2005, with Cornell Capital (the "Letter Agreement"), whereby Cornell Capital agreed to extend and set the maturity date of a past-due non-interest bearing Promissory Note, in the original principal amount of $3,000,000, issued by us to Cornell Capital on January 23, 2004 (the "Cornell Capital Note"). 16 In accordance with the terms of the Letter Agreement, we used $1,725,000 of the redemption proceeds received by Hudson Street to reduce our outstanding short-term obligation to Cornell Capital from $2,000,000 to $275,000, after paying extension and legal fees of $100,000. In addition, pursuant to the Letter Agreement, the Cornell Capital Note was extended to June 30, 2005 and bears interest at a rate of 10% commencing February 10, 2005. Previously, the Cornell Capital Note was non-interest bearing. We received $800,000 of cash proceeds from the redemption. The short-term interim Cornell Capital Note in the amount of $275,000 is currently in default. Yorkville was the investment advisor to Cornell Capital and has been our major source of investment funding and one of our significant creditors. 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 fiscal year ended June 30, 2005: Overall Net Change In Cash Flow For The Fiscal Year Ended June 30, 2005 During the fiscal year ended June 30, 2005, our cash decreased by $356,294. The net decrease in cash was due to the Company using $2.2 million of cash to repay short-term and installment debt obligations and $900,000 of net cash used in operating activities offset, in part, by the approximate $2.7 million of net cash that we received from investing activities. Net Cash (Used In) Operating Activities Net cash used in operating activities was $875,933 and $829,775 for the fiscal years ended June 30, 2005 and June 30, 2004, respectively. Net use of cash in operating activities for the fiscal year ended June 30, 2005 was principally from net income of $459,541 increased by an increase in accounts payable of $220,212 and offset by net non-cash income and charges of $1,563,710 attributable to depreciation, amortization, stock issued for services, the write off our investment in PMIC, forgiveness of debt income and net partnership income. The use of cash in operating activities for the fiscal year ended June 30, 2004 was principally from net income of $475,820 offset by a reduction in accounts payable in the amount of $419,696, and an increase in debt forgiveness income offset by non-cash charges for amortization and debt discount expense in the net aggregate amount of $458,083. Net Cash From (Used In) Investing Activities Cash provided from investing activities of $2.7 million for the fiscal year ended June 30, 2005 was attributable to $2.9 million of cash distributions and redemption proceeds from our partnership investment offset by $285,000 for the purchase of fixed assets and marketable investment securities. Cash used in investing activities for the fiscal year ended June 30, 2004 was $5,176,000 and was attributable to the Company's investment in a partnership for $2,670,000 reduced by $335,000 of cash distributions from this partnership investment and our purchase of the Cyber-Test business, net of cash acquired, in the amount of $2,841,000. Net Cash From (Used In) Provided by Financing Activities Net cash of $2.2 million used in financing activities for the fiscal year ended June 30, 2005 was for the repayment of our short-term and installment notes to Cornell Capital and others in the amount of $2,233,000 offset by $70,000 of proceeds from Cyber-Test's capital lease. Net cash of $7,177,000 provided by financing activities for the fiscal year ended June 30, 2004 was from net proceeds of $513,000 from the sale of shares of the Company's common stock to Cornell Capital, under the Company's Equity Line of Credit facility, proceeds of $3,000,000 from the issuance of a short-term promissory note to Cornell Capital, and net proceeds of $3,756,500 from the issuance of shares of the Company's Series A Convertible Preferred Stock to Cornell Capital offset by the repayment of short-term and installment debt in the amount of $93,000. 17 Off-Balance Sheet Arrangements There are no off-balance sheet arrangements between the Company and any other entity that have, or are reasonably likely to have, a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. The Company does not have any non-consolidated special purpose entities. Risks Related To Our Business In addition to historical facts or statements of current condition, this Annual Report on Form 10-KSB 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 Annual Report on Form 10-KSB. We Have A History Of Losses, And May Incur Additional Losses We are a holding company with a limited history of operations. We achieved profitability for the first time in fiscal year 2004. While we have achieved profitability in the prior year, we cannot be sure that we will maintain revenue sufficient for us to be profitable in future years. For the fiscal year ended 2005, we incurred an overall net loss of $735,833. 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 enable us to maintain currently planned operations through the next twelve (12) months. However, this expectation is based on our current operating plan, which could change as a result of many factors, and we may need additional funding sooner than anticipated. Because our operating and capital resources may be insufficient to meet future requirements, we may need to raise additional funds 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. 18 The Loss Of Any One Of Cyber-Test's Key Customers Could Have A Material Adverse Effect On Our Business Cyber-Test relies heavily on the business of a few key customers. While all these key customers are contractually committed to purchase parts or service from Cyber-Test, these contracts are terminable within 60 to 90 days. If any one (or all) of these key customers terminates its relationship with Cyber-Test, it could have a material adverse effect on our business. We And Our Subsidiaries Operate In Competitive Industries Cyber-Test's business is highly competitive. Cyber-Test competes with companies that provide repair services for office equipment and computer peripheral products, with companies that supply parts and consumables to end-users and repair companies of such equipment and products, and with resellers of such equipment and products. Competition within the office equipment and computer peripheral products service and repair industry is based on quality of service, depth of technical know-how, price, availability of parts, speed and accuracy of delivery, and the ability to tailor specific solutions to customer needs. Many of Cyber-Test's competitors are larger in size and have greater financial and other resources than Cyber-Test, such as Decision One, Depot America, Teleplan, DataTech America, and DEX. Cyber-Test also competes with manufacturers and OEMs that do their own repair work, as well as large distribution and logistics companies such as United Parcel Service and Airborne Logistics. Management believes Cyber-Test has a competitive advantage over many of its competitors, but Cyber-Test's ability to maintain such competitive advantage is dependent upon many variables, including its ability to successfully attract and retain technicians that are capable of performing repair on all brands and models of office equipment and computer peripherals at prices which remain competitive. We can provide no assurances that Cyber-Test will continue to have the resources to successfully compete in the technology repair service industry. Our Business Could Suffer If There Is A Prolonged Economic Downturn We derive a substantial amount of our net revenue from the repair and resale by Cyber-Test of office equipment and computer peripheral products. Revenue from the repair and resale of such equipment does not generally fluctuate widely with economic cycles. However, a prolonged national or regional economic recession could have a material adverse effect on our business. We also derive a substantial amount of our net revenue from cash distributions received by us from our investments in companies operating in diverse industries. A prolonged economic downturn could hinder the ability of these companies to provide us with a substantial, or any, return on our investments. Fluctuations In The Price Or Availability Of Office Equipment Parts And Computer Peripheral Products Could Materially Adversely Affect Us The price of office equipment parts and computer peripheral products may fluctuate significantly in the future. Changes in the supply of or demand for such parts and products could affect delivery times and prices. We cannot provide any assurances that Cyber-Test will continue to have access to such parts and products in the necessary amounts or at reasonable prices or that any increases in the cost of such parts and products will not have a material adverse effect on our business. We Could Be Materially Affected By Turnover Among Our Service Representatives Cyber-Test depends on its ability to identify, hire, train, and retain qualified service personnel as well as a management team to oversee the services that Cyber-Test provides. A loss of a significant number of these experienced personnel would likely result in reduced revenues for Cyber-Test and could materially affect our business. Cyber-Test's ability to attract and retain qualified service representatives depends on numerous factors, including factors that Cyber-Test cannot control, such as conditions in the local employment markets in which it operates. We cannot provide any assurances that Cyber-Test will be able to hire or retain a sufficient number of service representatives to achieve its financial objectives. 19 To Service Our Indebtedness, We Will Require A Significant Amount Of Cash; Our Ability To Generate Cash Depends On Many Factors Beyond Our Control Our ability to make payments on our indebtedness, and to fund planned capital expenditures will depend on our ability to generate cash from our operations in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on our current level of operations, we believe our cash flow from operations, available cash and anticipated borrowings from banks and other lending institutions will be adequate to meet our future liquidity needs for at least the next twelve (12) months. We cannot provide any assurances, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance or restructure all or a portion of our indebtedness on or before maturity. We cannot make any assurances that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances. We cannot make any assurances that any such actions, if necessary, could be effect on commercially reasonable terms, or at all. We Have A Working Capital Deficit, Which Means That Our Current Assets On June 30, 2005 Were Not Sufficient To Satisfy Our Current Liabilities On That Date We had a working capital deficit of $139,363 as of June 30, 2005, which means that our current liabilities exceeded our current assets by $139,363. 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 June 30, 2005 were not sufficient to satisfy all of our current liabilities on that date. Our Independent Auditors Have Added A Going Concern Opinion To Our Financial Statements, Which Means That We May Not Be Able To Continue Operations Unless We Obtain Additional Funding Our independent auditors have added an explanatory paragraph to their audit opinions issued in connection with the years 2005 and 2004 financial statements, which states that our ability to continue as a going concern depends upon our ability to resolve liquidity problems by generating sufficient operating profits to provide additional working capital. Our ability to obtain additional funding and pay off our obligations will determine our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. We Could Fail To Attract Or Retain Key Personnel Our success largely depends on the efforts and abilities of key executives, including Mr. Wayne Danson, our President, Chief Executive Officer and Chief Financial Officer, Mr. Martin Nielson, our Senior Vice President-Acquisitions and Ms. Lisa Welton, our President and Chief Executive Officer of Cyber-Test. The loss of the services of Mr. Danson, Mr. Nielson or Ms. Welton could materially adversely affect our business because of the cost and time necessary to replace and train a replacement. Such a loss would also divert management's attention away from operational issues. We maintain a $2,000,000 key-man life insurance policy for each of Mr. Danson, Mr. Nielson and Ms. Welton. Risks Related To Our Stock The Future Conversion Of Our Outstanding Series A And B Convertible Preferred Stock Will Cause Dilution To Our Existing Shareholders, Which Means That Our Per Share Income And Stock Price Could Decline 20 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. We currently have $4,300,000 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 430,000,000 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 430,000,000. 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 4,300,000,000 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. holds $2,700,000 of our Series A Convertible Preferred Stock, which if converted at current prices would result in the issuance of up to 2,700,000,000 shares of our common stock. After such conversions, Cornell Capital Partners, L.P. would own approximately 37% of our then outstanding shares of Common Stock, computed based on 5,000,000,000 shares that are currently authorized to be issued. In such event, Cornell Capital Partners, L.P. would be our largest shareholder and would be able to exercise control of us by electing directors, increasing the number of authorized shares of common stock that we could issue or otherwise. The Price of Our Common Stock May Be Affected By A Limited Trading Volume And May Fluctuate Significantly There is a limited public market for our common stock, and there can be no assurance that an active trading market will continue. An absence of an active trading market could adversely affect our stockholders' ability to sell our common stock in short time periods, or at all. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations that could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors, such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets, could cause the price of our common stock to fluctuate substantially. Our Common Stock Is Deemed To Be "Penny Stock," Which May Make It More Difficult For Investors To Sell Their Shares Due To Suitability Requirements Our common stock is deemed to be "penny stock" as that term is defined in Rule 3a51-1 promulgated under the 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. 21 ITEM 7. FINANCIAL STATEMENTS The financial statements required by item 7 are included in this Annual Report on Form 10-KSB beginning on page F-1. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL REPORTING None. ITEM 8A. CONTROLS AND PROCEDURES (A) Evaluation Of Disclosure Controls And Procedures As of June 30, 2005, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in ss.240.13a-15(e) or 240.15d-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the June 30, 2005 fiscal year, our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic reports that are filed with the SEC. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. (B) Changes In Internal Control Over Financial Reporting There were no changes in the Company's internal control over financial reporting (as defined in Section 240.13a-15(f) or 240.15d-15(f) of the Exchange Act) during our fourth fiscal quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 8B. OTHER INFORMATION Not applicable. 22 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The following table sets forth the names and ages of our current directors and executive officers, and their principal offices. Our executive officers are elected annually by the Board of Directors and serve terms of one year or until their death, resignation or removal by the Board of Directors. Our directors serve one-year terms until their successors are elected. There are no family relationships or understandings between any of the directors and executive officers. In addition, except for the arrangement with Mr. Nielson, as described in Mr. Nielson's profile set forth below, there was no arrangement or understanding between any executive officer and any other person pursuant to which any person was selected as an executive officer. Our directors and executive officers are as follows: Name and Address Age Position - ----------------------------- --- -------------------------------------- Wayne I. Danson 52 President, Chief Executive Officer, 420 Lexington Avenue Chief Financial Officer and Director New York, NY 10170 Dr. Michael Finch 57 Director 37 Walnut Street Wellesley, MA 02481 Jonathan J. Lichtman 53 Secretary and Director 120 Palmetto Park Road Boca Raton, FL 33432 Martin Nielson 53 Senior Vice President-Acquisitions and 420 Lexington Avenue Director New York, NY 10170 Randall Prouty 53 Director 420 Lexington Avenue New York, NY 10170 Wilbank J. Roche 59 Director 520 South Sepulveda Boulevard Los Angeles, CA 90049 The directors named above will serve until the next annual meeting of our shareholders or until their successors shall be elected and accept their positions. Wayne I. Danson, President, Chief Executive Officer, Chief Financial Officer and Director. Mr. Danson has served as our Chief Financial Officer since December 1, 1999, as a Director since January 3, 2000, as President since April 30, 2002, and was appointed Chief Executive Officer on June 7, 2005. Mr. Danson also serves as Chairman of the Board of Encompass. Mr. Danson has served as an officer and director of certain subsidiaries of Pacific Magtron International Corporation, Inc. Mr. Danson is the Managing Director and Founder of Danson Partners, LLC, a financial advisory firm specializing in middle market companies in the real estate and technology industries. Prior to forming Danson Partners, LLC in May 1999, Mr. Danson was co-head and Managing Director of PricewaterhouseCoopers LLP's Real Estate Capital Markets Group. Prior to rejoining PricewaterhouseCoopers in 1996, Mr. Danson was a Managing Tax Partner with Kenneth Leventhal & Company in New York and Washington D.C., where he was also Kenneth Leventhal's National Director of its International and Debt Restructure Tax Practices. Prior to his involvement with Kenneth Leventhal in 1988, Mr. Danson was a Managing Director with Wolper Ross & Co., Ltd. in New York, a closely held financial services company specializing in financial tax, pension consulting, designing financial instruments and providing venture capital and investment banking services. Mr. Danson graduated with honors from Bernard M. Baruch College with a BBA in Accounting and an MBA in Taxation. He is a certified public accountant and a member of the AICPA and the New York State Society of CPAs. 23 Martin Nielson, Senior Vice President-Acquisitions, Director. Mr. Nielson was appointed Senior Vice President-Acquisitions in June 2004 and Director in August 2004. Mr. Nielson also serves as Chief Executive Officer of Encompass, our wholly-owned subsidiary and principal operating unit. Mr. Nielson has served as President, Chief Executive Officer and director of Pacific Magtron International Corporation, Inc. and also has served as an officer and director of certain subsidiaries of Pacific Magtron International Corporation, Inc. From 2003 until his appointment to the foregoing offices, he was Chairman of Innova Holdings, Inc. (formerly known as Hy-Tech Technology Group, Inc.). He also served as Chairman of Inclusion Technologies, Inc. from 2000 to 2002. Since 1994, he has been the Chairman and Chief Executive Officer of Altos Bancorp, Inc., a privately-held mergers and acquisition company. In 1991, Mr. Nielson was founder and Chief Executive Officer of The Business Superstore, an office supply and computer superstore/telesales company in London that merged with Office World in 1993. In 1982, Mr. Nielson was part of the founding team and served until 1991 as Vice President of Businessland, Inc., a New York Stock Exchanged listed computer and networking reseller. From 1972 until 1981, Mr. Nielson was employed as a senior officer of The Gap Stores. Mr. Nielson graduated from San Jose State University with a BS in business management with a concentration in mathematics and engineering, and attended San Francisco State University's Graduate School of Business with a concentration in operations research. Jonathan J. Lichtman, Secretary and Director. Mr. Lichtman has served as a Director and Secretary since November 9, 1999 and is currently a partner with the Boca Raton law firm of Levinson & Lichtman, LLP, where he specializes in structuring corporate and partnership transactions, including real estate syndications. Mr. Lichtman is also currently a general partner of several real estate partnerships in New York, North Carolina and Florida. Prior to forming Levinson and Lichtman LLP, Mr. Lichtman was an attorney with English, McCaughan and O'Bryan, PA, where he performed legal work for domestic and international clients, as well as real estate partnerships and development. Mr. Lichtman obtained his J.D. degree, cum laude, from Syracuse University College of Law and his LLM degree in taxation from the University of Miami School of Law. He is also a certified public accountant and is licensed to practice law in Florida and New York. Dr. Michael Finch, Director. Dr. Finch has served as a Director since March 10, 1997. For the four years before that, he was employed by Media Forum (first in the UK, and then in the U.S.) as Director of Product Development. Since 1998, he has been Chief Technology Officer of New Media Solutions, responsible for the conception, planning, creation, execution and deployment of all software products and projects. He was responsible for developing and implementing Media Forum's software capabilities and strategy, managing technical and complex software projects for high-end clients, and pre-sales demonstrations to clients of Media Forum's software stance and expertise. From 1983 to 1993, Dr. Finch was a Financial Software Engineer, who designed, wrote and implemented sophisticated real-time computer programs for trading Financial Instruments and Commodities on the Chicago and New York Futures exchanges. Prior to 1983, Dr. Finch was a research scientist and mathematician, with an academic career at four UK universities. He obtained a Doctorate of Mathematics at Sussex University for original research into Einstein's Theory of General Relativity and its application to Neutron Stars. He lectured at Queen Mary's College London on advanced mathematics. Randall Prouty, Director. Mr. Prouty has served as a Director since March 10, 1997. Mr. Prouty served as our Chairman from November 30, 2001 until December 12, 2002. Mr. Prouty is also currently the President and CEO of World Associates, Inc., a publicly traded real estate development company. He is also the sole owner of Bristol Capital, Inc., a firm active in consulting and business development work for companies seeking access to capital markets, and through which he is incubating other e-business ventures. Mr. Prouty is a licensed real estate and mortgage broker in the State of Florida. His technical background includes being a qualified Webmaster and developing e-businesses on the web. Wilbank J. Roche, Director. Mr. Roche was appointed a Director on March 25, 1999 and is currently a principal with the law firm of Roche & Holt in Santa Monica, California. Mr. Roche was an honors graduate from the University of Southern California in 1976, as well as from Loyola University School of Law, Los Angeles, in 1979. He was admitted to the California State Bar in 1979 and has been practicing law actively since that time. Mr. Roche worked for law firms in the Los Angeles area from 1976 to 1983, when he opened his own office. In 1985, he formed Roche & Holt. Mr. Roche's law practice has revolved largely around representing small businesses and their owners. In that regard, he has provided legal services in connection with the formation, purchase, sale, and dissolution of numerous entities, as well as in connection with their on-going operations. 24 Other Significant Employees Lisa A. Welton, President and Chief Executive Officer of Cyber-Test, Inc. and Executive Vice President of Encompass Group Affiliates, Inc. From 1990 to June 3, 2004, Ms. Welton served as President and Chief Executive Officer of Cyber-Test, where she was responsible for overseeing the company's operational, marketing, contractual, and communications efforts, including business development and growth. Upon our acquisition of Cyber-Test's assets, Ms. Welton was appointed to the same offices and given the same responsibilities with Cyber-Test. Ms. Welton was appointed Executive Vice President of Encompass in June 2004 and assists in the overall vision and implementation of the business. From 1987 to 1989, Ms. Welton served as the National Director of Business Development for Charlan Brock and Associates, an International architectural firm specializing in hotels and high-end custom home developments, where she secured architectural contracts for the firm's clients in the United States and Europe. From 1985 to 1987, Ms. Welton was Senior Account Manager at Robison, Yesawich and Pepperdine, an advertising and public relations firm, where she coordinated hotel property grand openings and all subsequent press events. Ms. Welton graduated from the University of Wisconsin with a BS degree in advertising and marketing. Thomas Sutlive, Vice President of Cyber-Test, Inc. From August 1995 to June 3, 2004, Mr. Sutlive was employed by Cyber-Test, where he served as Vice President, since January 2004, and was responsible for the overall service structure and establishment of purchasing policies and procedures. Upon our acquisition of Cyber-Test's assets, Mr. Sutlive was appointed to the same offices and given the same responsibilities with Cyber-Test. Prior to Mr. Sutlive's appointment to Vice President, he served as Cyber-Test's Director of Operations from September 1999 to January 2004 and Purchasing Manager from August 1995 to September 1999. From 1989 to 1995, Mr. Sutlive was Lead Electric Technician with Sprague Electric, where he handled the operational readiness of specialized precision manufacturing equipment. Mr. Sutlive previously held the position of Systems Analyst with Dyncorp, a defense contractor, where he was responsible for generating failure analyses for naval missile tracking systems. Mr. Sutlive earned a bachelors degree from the University of Georgia and served six honorable years with the United States Navy. Meetings And Committees Of The Board Of Directors Our business affairs are managed under the direction of the Board of Directors. During the fiscal year ended June 30, 2005, our Board of Directors held four (4) meetings and took action by written consent three (3) times. During the fiscal year ended June 30, 2005, all of the directors attended all of the Board of Directors meetings that were held. The Board of Directors has established an Audit Committee and a Compensation Committee. The Audit Committee was established May 15, 2001. The Audit Committee reports to our Board of Directors regarding the appointment of our independent public accountants, the scope and results of our annual audits, compliance with our accounting and financial policies and management's procedures and policies relative to the adequacy of our internal accounting controls. The Audit Committee is comprised of Messrs. Prouty and Finch. The Compensation Committee was established May 15, 2001. The Compensation Committee of our Board of Directors reviews and makes recommendations to our Board of Directors regarding our compensation policies and all forms of compensation to be provided to our executive officers. In addition, the Compensation Committee will review bonus and stock compensation arrangements for all employees. The Compensation Committee is comprised of Messrs. Roche and Prouty. The Board of Directors also has established an Acquisitions Committee and a SpectruCell Committee. Messrs. Prouty, Danson, Lichtman and Roche currently serve on the Acquisitions Committee and Messrs. Prouty, Danson, Lichtman, Roche and Finch serve on the SpectruCell Committee, which will address and make all decisions relating to SpectruCell matters. 25 Audit Committee Financial Expert Our Audit Committee does not currently have an "audit committee financial expert" as defined under Item 401(e) of Regulation S-B. Our Board of Directors is actively seeking to appoint an individual to the Board of Directors and the Audit Committee who would be deemed an audit committee financial expert and who would be independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A. Corporate Governance In April 2004, we established a Code of Business Conduct and Ethics (the "Code"), applicable to all of our employees, including our principal executive, accounting and financial officers, which states that we are committed to the highest standards of legal and ethical conduct. This Code sets forth our policies with respect to the way we conduct ourselves individually and operate our business. The provisions of this Code are designed to deter wrongdoing and to promote honest and ethical conduct among our employees, officers and directors. The Code is attached hereto as Exhibit [14.1] and can also be found on our corporate website at www.advancedcomtech.net. We will satisfy our disclosure requirement under Item 5.05 of Form 8-K regarding certain amendments to, or waivers of, any provision of our Code by posting such information on our corporate website. We will provide a copy of the Code, without charge, upon request. You may request a copy of the Code by writing to the Company's corporate office located at 420 Lexington Avenue, Suite 2739, New York, NY 10170. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange requires that our directors and executive officers and any persons who own more than ten percent of our common stock file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Such persons are required by SEC regulations to furnish us with copies of all such reports that they file. To our knowledge, based upon our review of these reports, all Section 16 reports required to be filed by our directors and executive officers during the fiscal year ended June 30, 2005 were filed on a timely basis. ITEM 10. EXECUTIVE COMPENSATION Summary Compensation Table The following table shows all cash compensation accrued and/or paid by us to our two executive officers, as well as certain other compensation paid or accrued, for the fiscal years ended June 30, 2005, 2004 and 2003. Mr. Nielson became an executive officer in June 2004. Other than as set forth herein, no executive officer's cash salary and bonus exceeded $100,000 in any of the applicable years. The following information includes the dollar value of base salaries, bonus awards, the value of restricted shares issued in lieu of cash compensation and certain other compensation, if any, whether paid or deferred.
Long-Term Compensation ------------------------------------------------- Annual Compensation Awards Payouts ----------------------------------- ------------------------ ------- Other Restricted All Annual Stock Options/ LTIP Other Salary Bonus Compensation Award(s) SARs Payouts Compensation Name and ------- ------- ------------ ---------- -------- ------- ------------ Principal Position Year ($) ($) ($) ($) (#) ($) ($) - -------------------- ---- ------- ------- ------------ ---------- -------- ------- ------------ Wayne I. Danson, 2005 215,000 125,000 22,476(3) 140,000 President, CEO & CFO 2004 150,000 -- 9,122(1) -- -- -- -- 2003 190,138(2) -- -- -- -- -- -- Martin Nielson, 2005 225,000 15,000 -- 125,000(4) Sr. VP-Acquisitions 2004 16,667 15,000 -- -- -- -- -- 2003 -- -- -- -- -- -- --
- ------------ (1) Represents reimbursement of out-of-pocket expenses, net of a $35,000 write-off, received by Mr. Danson through Danson Partners, LLC, an entity owned and operated by Mr. Danson. (2) Represents accrued fees and out-of-pocket expenses. Mr. Danson received $3,000 in cash and $1,000 in stock for fiscal 2003 services rendered. (3) Represents reimbursement of out-of-pocket expenses. (4) Represents 12,500,000 shares of common stock valued at $.01 per share earned by Mr. Nielson pursuant to the deferred compensation provision of his June 24, 2004 employment contract, as amended. 26 We have no stock options, SAR or other bonus arrangements for our employees and/or directors. During the fiscal year ended June 30, 2005, all decisions concerning executive compensation were made by our Compensation Committee. Employment Agreements On June 7, 2005, the Company entered into a Services Agreement (the "Services Agreement") with Wayne I. Danson and Danson Partners, LLC , a limited liability company of which Mr. Danson is a principal ("DPL"). Under the Services Agreement, DPL will provide Mr. Danson's services to the Company and Mr. Danson will serve as Chief Executive Officer, President and Chief Financial Officer of the Company. In addition, the Company will take all necessary action to cause Mr. Danson to continue as a member of the Company's Board of Directors, and, if elected, Mr. Danson will continue to serve as a director of the Company. The Services Agreement further provides that, at the request of the Company's Board of Directors, Mr. Danson also will serve as a director or officer of any subsidiary of the Company without additional compensation. The Services Agreement is effective as of January 1, 2005 and expires on the second anniversary thereof unless earlier terminated in accordance with its terms. Under the Services Agreement, the Company will pay DPL an annual base fee of $250,000. Pursuant to the Services Agreement, DPL is also entitled to (i) a cash bonus of $250,000, including $50,000, which was paid in July 2004 and $75,000, which was paid in January 2005 with the remaining $125,000 to be earned as of August 1, 2005 and paid on or before August 31, 2005 (this remaining amount has not been paid as of the date of this report), and (ii) a share bonus of 200,000,000 fully vested shares of the Company's Common Stock issued contemporaneously with the execution of the Services Agreement. Mr. Danson has entered into a Lock-Up Agreement with the Company in connection with the issuance of the share bonus. For each fiscal year or portion therefore during the term of the Services Agreement, the Company may pay to DPL an annual performance bonus, in cash and/or restricted shares of Common Stock, in an amount determined at the sole discretion of the Compensation Committee, taking into account such factors as it considers appropriate, including but not necessarily limited to, Mr. Danson's contribution to the Company's consolidated net earnings and stock appreciation during such fiscal year. In addition, the Company may grant cash bonuses, restricted shares of Common Stock, or options to DPL in consideration for Mr. Danson's services, with a vesting schedule and other terms established by the Company's Compensation Committee in its sole discretion. Neither Mr. Danson nor DPL will receive additional consideration for Mr. Danson's service as a director of the Company. Under the Services Agreement, the Company is obligated to provide a $2,000,000 term life insurance policy on Mr. Danson, the beneficiary of which will be Mr. Danson's wife, and to insure Mr. Danson under a $2,000,000 key man life insurance policy, the beneficiary of which will be the Company. The Company may terminate the Services Agreement for "cause" or in the event that Mr. Danson becomes "Permanently Disabled." The Services Agreement automatically terminates upon Mr. Danson's death. In the event that the Company terminates the Services Agreement without cause or Mr. Danson or DPL terminate the Services Agreement for "Good Reason," the Company shall pay to DPL (i) any accrued annual base fees and reimbursements for business expenses incurred prior to the termination date and any unpaid bonus fees for a prior fiscal year, which amounts will be payable in a lump sum no later than 30 days after the termination date, and (ii) a severance payment equal to the annual base fee for the twelve-month period immediately following the termination date, payable in a lump sum within 30 days of the termination date if Mr. Danson or DPL terminates the Services Agreement for "Good Reason" or in twelve equal monthly installments if the Company terminates the Services Agreement without cause. If within three months prior to, or twelve months following, a "Change of Control," (i) the Company terminates the Services Agreement without cause or (ii) Mr. Danson or DPL terminate the Services Agreement for certain occurrences constituting "Good Reason," the severance payment will be increased to an amount which, when added to the annual base fees paid to DPL from the date of the "Change in Control" to the termination date, if any, equals 299% of the amount of annual base fees which would have been payable to DPL during the twelve-month period immediately following the termination date and will be payable in a lump sum within 30 days of the last to occur of the termination date or the "Change in Control," and (y) all unvested stock options or stock awards held by either DPL or Mr. Danson will immediately become accelerated and vested. Under the Services Agreement, the following terms have the meanings specified below: 27 o "cause" means (i) any act or omission by Mr. Danson that constitutes malfeasance, misfeasance or nonfeasance in the course of his duties thereunder, or in the judgment of the Board of Directors, Mr. Danson has been grossly negligent (including habitual neglect of duties), incompetent or insubordinate in carrying out his duties thereunder, (ii) a material breach of the Services Agreement by DPL or Mr. Danson that is not cured within ten (10) days of receipt of notice thereof, (iii) Mr. Danson's or DPL's breach of a fiduciary duty owed to the Company or its affiliates, or (iv) Mr. Danson's or DPL's conviction of, or pleading nolo contendere to, a criminal offense or crime constituting a misdemeanor or felony, or conviction in respect to any act involving fraud, dishonesty or moral turpitude (other than minor traffic infractions or similar minor offenses); o "Permanently Disabled" means becomes disabled or incapacitated as determined under the Company's Long Term Disability Policy, whether or not such Policy covers Mr. Danson, or, in the event the Company does not have a Long Term Disability Policy at the relevant time, Mr. Danson's inability to fully perform his duties and responsibilities thereunder to the full extent required by the Company by reason of illness, injury or incapacity for 120 consecutive days or for more than six months during any twelve month period; o "Good Reason" means the occurrence of any of the following without Mr. Danson's consent: (i) a material reduction in Mr. Danson's duties or authority, or a change in reporting relationship which requires Mr. Danson to report to any person or persons other than the Board of Directors or a Committee of the Board, (ii) a requirement that Mr. Danson be relocated to an office outside of the New York City metropolitan area, (iii) a reduction in the Base Fees, or (iv) the Company is a party to a merger or consolidation in which it is not the surviving entity, and the surviving or new entity does not undertake to assume and perform the Company's obligations under the Services Agreement; and o "Change in Control" means any one of the following: (i) Any "person" as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, officers and directors of the Company as of the date of the Services Agreement and certain other persons or entities) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing twenty five percent (25%) or more of the combined voting power of the Company's then outstanding securities; (ii) The share owners of the Company approve a merger or consolidation of the Company with any other company that results in a change of ownership of more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; (iii) The share owners of the Company approve a plan of liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets; or (iv) The Current Director Group constitutes less than 50% of the members of the Board of Directors. Notwithstanding the foregoing, a "Change in Control" shall not include any transaction under subparagraphs (ii) or (iii) unless Mr. Danson and DPL have voted their shares of the Company against such transaction, or any triggering change in the Current Director Group under subparagraph (iv), unless Mr. Danson, as a Director, shall not have had a vote with respect to, or shall have voted against, the members whose addition to the Board of Directors subsequent to the effective date causes the Current Director Group to "constitute less 50% of the members of the Board." 28 In connection with the execution of the Services Agreement, the Consulting Agreement in effect between Mr. Danson and the Company prior to June 7, 2005 expired. The Consulting Agreement initially covered the period September 1, 2000 through August 31, 2001 and was orally extended through December 31, 2001. Effective January 1, 2002, Mr. Danson agreed to orally extend the Consulting Agreement through December 31, 2003 at a monthly rate of $12,500, plus reimbursement for reasonable out of pocket expenses. On January 1, 2004, Mr. Danson agreed to extend his oral agreement indefinitely. While the Consulting Agreement was in effect, the Company provided Mr. Danson with a $2,000,000 life insurance policy for his benefit and also insured Mr. Danson under a $2,000,000 key man life insurance policy for the benefit of the Company. On June 24, 2004, the Company entered into a two year employment agreement with Martin Nielson, our Senior Vice President-Acquisitions (the "Nielson Agreement"). Under the terms of the Nielson Agreement, Mr. Nielson is employed as Encompass' President and Chief Executive Officer and a Senior Vice President-Acquisitions of the Company. Mr. Nielson is entitled to a $200,000 annual salary and the right to earn up to 50,000,000 shares of our restricted common stock valued at $.01 per share, or $500,000, to vest over a two-year period. Mr. Nielson is also entitled to receive an Incentive Bonus determined at the discretion of our Compensation Committee based on his contribution to our overall performance as well as a bonus based on the overall separate business and financial performance of Encompass and its wholly-owned operating subsidiaries. In addition, we have provided Mr. Nielson with a $1 million life insurance policy for his benefit and also insure Mr. Nielson under a $2 million key man life insurance policy. If Mr. Nielson's employment with us terminates for any reason other than by us for "cause," Mr. Nielson is entitled to receive an additional amount of base salary equal to the amount of base salary Mr. Nielson would have received during the six (6) month period immediately following the date of his termination. The severance payment is payable in cash in equal monthly installments of the first business day of each month during the six (6) month period immediately following the date of his termination. Under Mr. Nielson's employment agreement, "cause" means the following: (i) any act or omission by Mr. Nielson that constitutes malfeasance, misfeasance or nonfeasance in the course of his duties, or in the judgment of our Board of Directors or our Chief Executive Officer, Mr. Nielson has been grossly negligent (including habitual neglect of duties), incompetent or insubordinate in carrying out his duties, (ii) a material breach by Mr. Nielson of his employment agreement that is not cured within ten (10) days of receipt of notice thereof, (iii) Mr. Nielson's breach of a fiduciary duty owed to us or our affiliates, or (iv) Mr. Nielson's conviction of, or pleading nolo contendere to, a criminal offense or crime constituting a misdemeanor or felony, or conviction in respect to any act involving fraud, dishonesty or moral turpitude (other than minor traffic infractions or similar minor offenses). Mr. Nielson's contract was amended effective June 1, 2005 to provide that Mr. Nielson's annual compensation for fiscal 2005 and 2006 will be $225,000 and $175,000, respectively. The Company recorded $250,000 of amortization expense for the fiscal year ended June 30, 2005 in connection with the issuance of 12,500,000 shares of common stock that vested on July 1, 2005 under Mr. Nielson's employment agreement. On June 3, 2004, we entered into a three-year employment agreement with Lisa Welton. In accordance with the terms of Ms. Welton's employment agreement, Ms. Welton will hold the offices of President and Chief Executive Officer, and be a director, of Cyber-Test, as well as hold the office of Executive Vice-President of Encompass. Ms. Welton is entitled to a $120,000 annual salary. Ms. Welton is also entitled to receive an incentive bonus determined at the discretion of our Compensation Committee based on her contribution to our overall performance as well as a bonus based on the overall separate business and financial performance of Cyber-Test. In addition, we insure Ms. Welton under a $2 million key man life insurance policy. If Ms. Welton's employment with us terminates for any reason other than by us for "cause," Ms. Welton is entitled to receive an additional amount of base salary equal to the amount of base salary Ms. Welton would have received during the six (6) month period immediately following the date of her termination. The severance payment is payable in cash in equal monthly installments of the first business day of each month during the six (6) month period immediately following the date of her termination. Under Ms. Welton's employment agreement, "cause" means the following: (i) any act or omission by Ms. Welton that constitutes malfeasance, misfeasance or nonfeasance in the course of her duties, or in the judgment of our Board of Directors or our Chief Executive Officer, Ms. Welton has been grossly negligent (including habitual neglect of duties), incompetent or insubordinate in carrying out her duties, (ii) a material breach by Ms. Welton of her employment agreement that is not cured within ten (10) days of receipt of notice thereof, (iii) Ms. Welton's breach of a fiduciary duty owed to us or our affiliates, or (iv) Ms. Welton's conviction of, or pleading nolo contendere to, a criminal offense or crime constituting a misdemeanor or felony, or conviction in respect to any act involving fraud, dishonesty or moral turpitude (other than minor traffic infractions or similar minor offenses). 29 On June 3, 2004, we entered into a three-year employment agreement with Thomas Sutlive. In accordance with the terms of Mr. Sutlive's employment agreement, Mr. Sutlive will hold the office of Vice-President of Cyber-Test. Mr. Sutlive is entitled to a $110,000 annual salary. Mr. Sutlive is also entitled to receive an incentive bonus determined at the discretion of our Compensation Committee based on his contribution to our overall performance as well as a bonus based on the overall separate business and financial performance of Cyber-Test. If Mr. Sutlive's employment with us terminates for any reason other than by us for "cause," Mr. Sutlive is entitled to receive an additional amount of base salary equal to the amount of base salary Mr. Sutlive would have received during the six (6) month period immediately following the date of his termination. The severance payment is payable in cash in equal monthly installments of the first business day of each month during the six (6) month period immediately following the date of his termination. Under Mr. Sutlive's employment agreement, "cause" means the following: (i) any act or omission by Mr. Sutlive that constitutes malfeasance, misfeasance or nonfeasance in the course of his duties, or in the judgment of our Board of Directors or our Chief Executive Officer, Mr. Sutlive has been grossly negligent (including habitual neglect of duties), incompetent or insubordinate in carrying out his duties, (ii) a material breach by Mr. Sutlive of his employment agreement that is not cured within ten (10) days of receipt of notice thereof, (iii) Mr. Sutlive's breach of a fiduciary duty owed to us or our affiliates, or (iv) Mr. Sutlive's conviction of, or pleading nolo contendere to, a criminal offense or crime constituting a misdemeanor or felony, or conviction in respect to any act involving fraud, dishonesty or moral turpitude (other than minor traffic infractions or similar minor offenses). Each of the foregoing agreements contains standard confidentiality, noncompete and work-for-hire provisions. Compensation Of Directors Our directors did not receive any cash or stock compensation for their services as a director in fiscal 2004 or 2003, but were reimbursed for all of their out-of-pocket expenses incurred in connection with the rendering of services as a director. Under NASDAQ Rules and Regulations, each of the independent directors is entitled to $25,000 in cash compensation, payable $6,250 per quarter of services rendered. In fiscal 2005, each of the independent directors received $18,750 in cash compensation, payable $6,250 per quarter of service. Messer. Prouty received an additional $5,000 for serving as Chairman of the Compensation Committee. As of June 30, 2005, each independent director is owed $6,250, or $25,000 in the aggregate, for director services rendered during the three months ended June 30, 2005. These fees have not yet been paid. In addition, on June 29, 2005, each independent director received 75,000,000 shares of common stock having a value of $52,500 as compensation for prior services rendered. The stock grants were made under the Company's 2005 Stock Plan. Each independent director entered into a Lock-Up Agreement with the Company with respect to such stock grant. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table contains information about the beneficial ownership of our common stock as of September 1, 2005 for: o any person, who at June 30, 2005 owned more than five percent (5%) of our common stock; o each of our directors; o each of our executive officers named in the Summary Compensation Table in Part III - Item 10. Executive Compensation of this Annual Report on Form 10-KSB; and o all directors and executive officers as a group. Unless otherwise indicated, the address for each person or entity named below is c/o Advanced Communications Technologies, Inc., 420 Lexington Avenue, Suite 2738, New York, NY 10170. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The percentage of beneficial ownership is based on 3,151,773,731 shares of common stock outstanding as of September 1, 2005. 30 Common Stock Beneficially Owned ---------------------------- Name/Title Number Percent(1) - ----------------------------------------------- ------------- ---------- Wayne I. Danson, President, CEO, CFO & Director 248,658,832(2) 7.89% Martin Nielson, Sr. VP-Acq. & Director 22,500,000 * Jonathan J. Lichtman, Secretary & Director 105,710,334(3) 3.35% Dr. Michael Finch, Director 75,591,334 2.4% Randall Prouty, Director 88,527,080 2.81% Wilbank Roche, Director 93,507,143 2.97% David G. Boshart 555,124,500(4) 17.61% ------------- ---------- Total 1,189,619,223 37.74% ============= ========== All Executive Officers and Directors as a Group (6 persons) 634,494,723 20.13% ============= ========== - ------------ (1) Percentage of outstanding shares is based on 3,151,773,731 shares of common stock outstanding as of September 1, 2005, together with shares deemed beneficially owned by each shareholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. (2) Includes 63,308,832 shares beneficially owned by Mr. Danson's affiliated entity and spouse. Excludes 16,500,000 shares held by Mr. Danson's adult children. Mr. Danson has no beneficial ownership in these shares. (3) Excludes 396,666 shares held by various family trusts. Mr. Lichtman has no beneficial ownership in these shares. (4) Includes shares owned in trust for Mr. Boshart's adult child and shares held by tenants in common with Mr. Boshart's brother and sister. * Less than 1%. Although pursuant to the terms of our Series A Convertible Preferred Stock issued to Cornell Capital and other investors (the "Holders"), the Holders are not permitted to own more than 9.99% of our outstanding common stock at any one time, the Holders are permitted to waive such restriction, which waiver is effective on the 61st day after delivery of the waiver to us. Accordingly, there are a sufficient number of shares of our common stock issuable under the outstanding Series A Convertible Preferred Stock, such that by delivering such waiver the Holders could affect a change of control of the Company on or after the 61st day following delivery. Existing Stock Compensation Plans The following table sets forth information as of June 30, 2005 regarding our existing compensation plans and individual compensation arrangements pursuant to which our equity securities are authorized for issuance to employees or non-employees (such as directors, consultants and advisors) in exchange for consideration in the form of services: 31
Number of securities remaining available for future issuance under Number of securities to Weighted-average equity compensation be issued upon exercise exercise price of plans (excluding of outstanding options, outstanding options, securities reflected in Plan Category warrants and rights warrants and rights column (a)) - -------------------------------------- ----------------------- --------------------- ----------------------- (a) (b) (c) Equity compensation plans approved by security holders 0 0 0 Equity compensation plans not approved by security holders (1) 37,500,000 $ 0.01 200,000,000 ----------------------- --------------------- ----------------------- Total 37,500,000 $ 0.01 200,000,000 ======================= ===================== =======================
- ------------ (1) Pursuant to the terms of Mr. Nielson's employment agreement, Mr. Nielson is entitled to receive 50,000,000 shares of the Company's restricted common stock, priced at $.01 per share, of which (i) 12,500,000 shares vested on July 1, 2005; and (ii) 37,500,000 shares will fully vest on July 1, 2006, provided that Mr. Nielson is then employed by the Company. The 12,500,000 shares were issued to Mr. Nielson on July 1, 2005. The terms of Mr. Nielson's employment agreement are discussed in more detail under Part III - Item 10. Executive Compensation - Employment Agreements. (2) Pursuant to the Company's 2005 Stock Plan, 200,000,000 shares of the Company's common stock remain available for issuance as incentive stock options or as nonqualified stock options. A description of the 2005 Stock Plan is set forth in Note 11(E) of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-KSB. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Jonathan J. Lichtman, Secretary and a director of the Company, is a partner at Levinson & Lichtman, LLP, a law firm in Boca Raton, FL that the Company retained to provide legal services during fiscal years 2005 and 2004. The Company paid Levinson & Lichtman, LLP, $45,705 and $0 in cash and stock, respectively during fiscal 2005, and $93,612 and $105,000 in cash and stock, respectively, during fiscal 2004 for legal services rendered. As of June 30, 2005, the Company owes Levinson & Lichtman, LLP $340 in cash for current legal services. Wilbank Roche, a director of the Company, is a partner at Roche & Holt, a law firm in Los Angeles, CA that the Company retained to provide legal services during fiscal years 2005 and 2004. The Company paid Roche & Holt $31,177 and $0 in cash and stock, respectively during fiscal 2005, and $56,392 and $50,000 in cash and stock, respectively, during fiscal 2004 for legal services rendered. As of June 30, 2005, the Company had no amounts owed to Roche & Holt. During the fiscal year ended June 30, 2005, the Company paid Mr. Prouty $20,073 in cash for past services rendered. As of June 30, 2005, the Company had no amounts owed to Mr. Prouty. During the fiscal year ended June 30, 2004, the Company engaged the services of Dr. Michael Finch, a director, to evaluate certain third party software programs and proposed business and investment candidates. The Company incurred $10,000 of expenses to Dr. Finch for his services, of which $6,666 was paid as of June 30, 2004. The balance of $3,334 was paid to Dr. Finch during fiscal 2005. As of June 30, 2005, the Company had no amounts owed to Dr. Finch. 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 at 420 Lexington Avenue, New York, NY 10170, having a monthly lease obligation of $1,478, as adjusted annually. The Company's license agreement is on a month-to-month basis and is at fair market rental. 32 ITEM 13. EXHIBITS
Exhibit No. Description Location (1) - ----------- --------------------------------------------------- ----------------------------------------- 2.1 Asset Purchase Agreement dated May 27, 2004, by Incorporated by reference to Exhibit 10.1 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 4.1 10, 2004, among Advanced Communications to the Company's Form 8-K filed with the Technologies, Inc., Theodore S. Li and Hui 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 of Incorporated by reference to Exhibit 2.3 Media Forum International, Inc. to the Company's Form S-8 filed with the SEC on February 9, 2000 3(I)(d) Fourth Amendment to Articles of Incorporation Incorporated by reference to Exhibit 2.7 to the Form SB-2 filed with the SEC on March 5, 2002 3(I)(e) Fifth Amendment to Articles of Incorporation Incorporated by reference to Exhibit 2.8 to the Form SB-2 filed with the SEC on July 16, 2003 3(I)(f) Sixth Amendment to Articles of Incorporation Incorporated by reference to Exhibit 3.1.6 the Company's Form 10-KSB filed with the SEC on November 3, 2004 3(I)(g) Seventh Amendment to Articles of Incorporation Incorporated by reference to Exhibit 3.1.7 the Company's Form 10-KSB filed with the SEC on November 3, 2004 3(II) Bylaws of the Company Incorporated by reference to Exhibit 2.4 to the Company's Form S-8 filed with the SEC on February 9, 2000 4.1 6% Secured Convertible Promissory Note, dated Incorporated by reference to Exhibit 10.1 December 30, 2004, issued to Theodore S. Li. to the Company's Form 8-K filed with the SEC on January 5, 2005 4.2 6% Secured Convertible Promissory Note, dated Incorporated by reference to Exhibit 10.2 December 30, 2004, issued to Hui Cynthia Lee. to the Company's Form 8-K filed with the SEC on January 5, 2005
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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 Investors. with the SEC on December 6, 2002 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 and Incorporated by reference to Exhibit among Advanced Communications Technologies, 10.24 to the Company's Form 10-KSB filed 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 on to the Company's Form 8-K filed with the June 3, 2004 by Cyber-Test, Inc., a Delaware SEC on June 18, 2004 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 Note Incorporated by reference to Exhibit dated August 10, 2004. 10.35 to the Company's Form 10-KSB filed with the SEC on November 3, 2004
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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 Custodial and Stock Pledge Agreement, dated Incorporated by reference to Exhibit 10.3 December 30, 2004, among Advanced to the Company's Form 8-K filed with the Communications Technologies, Inc., Theodore S. SEC on January 5, 2005 Li and Hui Cynthia Lee, and Quarles & Brady Streich Lang LLP. 10.2 Employment Agreement, dated December 30, 2004, Incorporated by reference to Exhibit 10.4 among Pacific Magtron International to the Company's Form 8-K filed with the Corporation, Inc., Advanced Communications SEC on January 5, 2005 Technologies, Inc., Encompass Group Affiliates, Inc., and Theodore S. Li. 10.3 Employment Agreement, dated December 30, 2004, Incorporated by reference to Exhibit 10.5 among Pacific Magtron International to the Company's Form 8-K filed with the Corporation, Inc., Advanced Communications SEC on January 5, 2005 Technologies, Inc., Encompass Group Affiliates, Inc., and Hui Cynthia Lee. 10.4 Indemnity Agreement, dated December 30, 2004, Incorporated by reference to Exhibit 10.6 among Advanced Communications Technologies, to the Company's Form 8-K filed with the Inc., Theodore S. Li and Hui Cynthia Lee. SEC on January 5, 2005 10.5* 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
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10.6* 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 10.7* 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, 2006 10.8* Services Agreement entered into on June 7, 2005 Incorporated by reference to Exhibit 10.1 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. 10.9 Equity Line of Credit Agreement dated July Incorporated by reference to Exhibit 2003, by and between Cornell Capital Partners, 10.13 to the Company's Form SB-2 filed LP and Advanced Communications Technologies, with the SEC on July 16, 2003 Inc. 10.10 Registration Rights Agreement dated July 2003, Incorporated by reference to Exhibit by and between Advanced Communications 10.14 to the Company's Form SB-2 filed Technologies, Inc. and Cornell Capital with the SEC on July 16, 2003 Partners, LP. 10.11 Placement Agent Agreement dated July 2003, by Incorporated by reference to Exhibit and between Advanced Communications 10.15 to the Company's Form SB-2 filed Technologies, Inc. and Westrock Advisors, Inc. with the SEC on July 16, 2003 10.12 Escrow Agreement dated July 2003, by and among Incorporated by reference to Exhibit Advanced Communications Technologies, Inc., 10.16 to the Company's Form SB-2 filed Cornell Capital Partners, LP, Butler Gonzalez with the SEC on July 16, 2003 LLP and First Union National Bank. 10.13 Consulting Agreement dated July 1, 2002 between Incorporated by reference to Exhibit Advanced Communications Technologies, Inc. and 10.26 to the Company's Form 10-KSB/A Randall H. Prouty. filed on February 7, 2003 10.14 NonCompetition Agreement, dated June 3, 2004, Incorporated by reference to Exhibit 10.4 by and among Cyber-Test, Inc., a Delaware to the Company's Form 8-K filed with the corporation, Cyber-Test, Inc., a Florida SEC on June 18, 2004 corporation, and the shareholders of Cyber-Test. 10.15 Employment Agreement, dated June 3, 2004, by Incorporated by reference to Exhibit 10.5 and between Cyber-Test, Inc., a Delaware to the Company's Form 8-K filed with the corporation, and Lisa Welton. SEC on June 18, 2004
36
10.16 Employment Agreement, dated June 3, 2004, by Incorporated by reference to Exhibit 10.6 and between Cyber-Test, Inc., a Delaware to the Company's Form 8-K filed with the corporation, and Thomas Sutlive. SEC on June 18, 2004 10.17 Agreement, dated May 27, 2004, by and among Incorporated by reference to Exhibit Encompass Group Affiliates, Inc., Hy-Tech 10.36 to the Company's Form 10-KSB filed Technology Group, Inc. and Hy-Tech Computer with the SEC on November 3, 2004 Systems, Inc. 10.18 Customer Lists License Agreement, dated June Incorporated by reference to Exhibit 24, 2004, by and among Encompass Group 10.37 to the Company's Form 10-KSB filed Affiliates, Inc., Hy-Tech Technology Group, with the SEC on November 3, 2004 Inc. and Hy-Tech Computer Systems, Inc. 10.19 Websites License Agreement, dated June 24, Incorporated by reference to Exhibit 2004, by and among Encompass Group Affiliates, 10.38 to the Company's Form 10-KSB filed Inc., Hy-Tech Technology Group, Inc. and with the SEC on November 3, 2004 Hy-Tech Computer Systems, Inc. 10.20 Non-Competition and Nondisclosure Agreement by Incorporated by reference to Exhibit and among Encompass Group Affiliates, Inc., 10.39 to the Company's Form 10-KSB filed Hy-Tech Technology Group, Inc. and Hy-Tech with the SEC on November 3, 2004 Computer Systems, Inc. 10.21* Employment Agreement dated June 24, 2004 by and Incorporated by reference to Exhibit 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. 10.22* June 1, 2005 Amendment to Employment Agreement Provided herewith by and among Encompass Group Affiliates, Inc., Advanced Communications Technologies, Inc. and Martin Nielson. 14 Code of Business Conduct and Ethics for Incorporated by reference to Exhibit 14.1 Advanced Communications Technologies, Inc. to the Company's Form 10-KSB filed with the SEC on November 3, 2004 21 Subsidiaries of Advanced Communications Provided herewith Technologies, Inc. 31 Certification by Chief Executive Officer and Provided herewith Chief Financial Officer pursuant to Sarbanes-Oxley Section 302
37
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. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Audit Fees 38 The aggregate fees billed for professional services rendered by Weinberg & Company, P.A., the Company's independent auditors, was $96,520 and $59,795 for the audit of the Company's annual financial statements for the fiscal years ended June 30, 2005 and 2004, respectively, and the reviews of the financial statements included in the Company's Forms 10-QSB for those fiscal years. Audit-Related Fees The aggregate fees billed for professional services rendered was $12,785 and $15,271 in connection with due diligence services for PMIC and Cyber-Test, Inc. for the fiscal years ended June 30, 2005 and 2004, respectively. Tax Fees No fees were billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice and tax planning services. All Other Fees Other than the services described above, the aggregate fees billed for services rendered by the principal accountant was $0 and $2,818 for the fiscal years ended June 30, 2005 and 2004, respectively. These fees related to the review of the Company's 424B filing in fiscal 2004. Policy For Pre-Approval Of Audit And Non-Audit Services All engagements of our independent auditor to perform any audit services and non-audit services were approved by the Audit Committee in accordance with its normal functions. During the fiscal years ended June 30, 2005 and 2004, no audit services or non-audit services were approved by the Audit Committee pursuant to Rule 2-01(c)(7)(i)(C) of Regulation S-X. The Board of Directors and the Audit Committee are in the process of creating a policy to pre-approve all audit services and all non-audit services that our independent auditor will perform for us under applicable federal securities regulations. As permitted by the applicable regulations, we anticipate that the Audit Committee's policy will utilize a combination of specific pre-approval on a case-by-case basis of individual engagements of our independent auditor and general pre-approval of certain categories of engagements up to predetermined dollar thresholds that will be reviewed annually by the Audit Committee. 39 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this amended 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 and Chief Financial Officer Date: October 3, 2005 In accordance with the Exchange Act, this amended report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------- ----------------------------------------------- --------------- /s/ Wayne I. Danson - ------------------------- President, Chief Executive Officer(Principal Wayne I. Danson Executive Officer), Chief Financial Officer (Principal Accounting Officer) and Director October 3, 2005 /s/ Martin Nielson - ------------------------- Martin Nielson Senior Vice President-Acquisitions and Director October 3, 2005 /s/ Jonathan Lichtman - ------------------------- Jonathan Lichtman, Esq. Secretary and Director October 3, 2005 /s/ Dr. Michael Finch - ------------------------- Dr. Michael Finch Director October 3, 2005 /s/ Randall Prouty - ------------------------- Randall Prouty Director October 3, 2005 /s/ Wilbank J. Roche - ------------------------- Wilbank J. Roche, Esq. Director October 3, 2005
40 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 4.1 10, 2004, among Advanced Communications to the Company's Form 8-K filed with the Technologies, Inc., Theodore S. Li and Hui 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 of Incorporated by reference to Exhibit 2.3 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
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
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 Custodial and Stock Pledge Agreement, dated Incorporated by reference to Exhibit 10.3 December 30, 2004, among Advanced to the Company's Form 8-K filed with the Communications Technologies, Inc., Theodore S. SEC on January 5, 2005 Li and Hui Cynthia Lee, and Quarles & Brady Streich Lang LLP. 10.2 Employment Agreement, dated December 30, 2004, Incorporated by reference to Exhibit 10.4 among Pacific Magtron International to the Company's Form 8-K filed with the Corporation, Inc., Advanced Communications SEC on January 5, 2005 Technologies, Inc., Encompass Group Affiliates, Inc., and Theodore S. Li. 10.3 Employment Agreement, dated December 30, 2004, Incorporated by reference to Exhibit 10.5 among Pacific Magtron International to the Company's Form 8-K filed with the Corporation, Inc., Advanced Communications SEC on January 5, 2005 Technologies, Inc., Encompass Group Affiliates, Inc., and Hui Cynthia Lee. 10.4 Indemnity Agreement, dated December 30, 2004, Incorporated by reference to Exhibit 10.6 among Advanced Communications Technologies, to the Company's Form 8-K filed with the Inc., Theodore S. Li and Hui Cynthia Lee. SEC on January 5, 2005 10.5* 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
10.6* 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 10.7* 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, 2006 10.8* 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. 10.9 Equity Line of Credit Agreement dated July Incorporated by reference to Exhibit 2003, by and between Cornell Capital Partners, 10.13 to the Company's Form SB-2 filed LP and Advanced Communications Technologies, with the SEC on July 16, 2003 Inc. 10.10 Registration Rights Agreement dated July 2003, Incorporated by reference to Exhibit by and between Advanced Communications 10.14 to the Company's Form SB-2 filed Technologies, Inc. and Cornell Capital with the SEC on July 16, 2003 Partners, LP. 10.11 Placement Agent Agreement dated July 2003, by Incorporated by reference to Exhibit and between Advanced Communications 10.15 to the Company's Form SB-2 filed Technologies, Inc. and Westrock Advisors, Inc. with the SEC on July 16, 2003 10.12 Escrow Agreement dated July 2003, by and among Incorporated by reference to Exhibit Advanced Communications Technologies, Inc., 10.16 to the Company's Form SB-2 filed Cornell Capital Partners, LP, Butler Gonzalez with the SEC on July 16, 2003 LLP and First Union National Bank. 10.13 Consulting Agreement dated July 1, 2002 Incorporated by reference to Exhibit between Advanced Communications Technologies, 10.26 to the Company's Form 10-KSB/A Inc. and Randall H. Prouty. filed on February 7, 2003 10.14 NonCompetition Agreement, dated June 3, 2004, Incorporated by reference to Exhibit 10.4 by and among Cyber-Test, Inc., a Delaware to the Company's Form 8-K filed with the corporation, Cyber-Test, Inc., a Florida SEC on June 18, 2004 corporation, and the shareholders of Cyber-Test. 10.15 Employment Agreement, dated June 3, 2004, by Incorporated by reference to Exhibit 10.5 and between Cyber-Test, Inc., a Delaware to the Company's Form 8-K filed with the corporation, and Lisa Welton. SEC on June 18, 2004
10.16 Employment Agreement, dated June 3, 2004, by Incorporated by reference to Exhibit 10.6 and between Cyber-Test, Inc., a Delaware to the Company's Form 8-K filed with the corporation, and Thomas Sutlive. SEC on June 18, 2004 10.17 Agreement, dated May 27, 2004, by and among Incorporated by reference to Exhibit Encompass Group Affiliates, Inc., Hy-Tech 10.36 to the Company's Form 10-KSB filed Technology Group, Inc. and Hy-Tech Computer with the SEC on November 3, 2004 Systems, Inc. 10.18 Customer Lists License Agreement, dated June Incorporated by reference to Exhibit 24, 2004, by and among Encompass Group 10.37 to the Company's Form 10-KSB filed Affiliates, Inc., Hy-Tech Technology Group, with the SEC on November 3, 2004 Inc. and Hy-Tech Computer Systems, Inc. 10.19 Websites License Agreement, dated June 24, Incorporated by reference to Exhibit 2004, by and among Encompass Group Affiliates, 10.38 to the Company's Form 10-KSB filed Inc., Hy-Tech Technology Group, Inc. and with the SEC on November 3, 2004 Hy-Tech Computer Systems, Inc. 10.20 NonCompetition and Nondisclosure Agreement by Incorporated by reference to Exhibit and among Encompass Group Affiliates, Inc., 10.39 to the Company's Form 10-KSB filed Hy-Tech Technology Group, Inc. and Hy-Tech with the SEC on November 3, 2004 Computer Systems, Inc. 10.21* 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. 10.22* June 1, 2005 Amendment to Employment Agreement Provided herewith by and among Encompass Group Affiliates, Inc., Advanced Communications Technologies, Inc. and Martin Nielson. 14 Code of Business Conduct and Ethics for Incorporated by reference to Exhibit 14.1 Advanced Communications Technologies, Inc. to the Company's Form 10-KSB filed with the SEC on November 3, 2004 21 Subsidiaries of Advanced Communications Provided herewith Technologies, Inc. 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. ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2005 i ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES CONTENTS PAGE F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PAGE F-2 CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2005 AND 2004 PAGE F-3 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 PAGE F-4 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 PAGE F-5 -F- 6 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 PAGES F7 - F-22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2005 ii REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of: Advanced Communications Technologies, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Advanced Communications Technologies, Inc., and Subsidiaries ("Company") as of June 30, 2005 and 2004 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the financial position of Advanced Communications Technologies, Inc. and Subsidiaries as of June 30, 2005 and 2004, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 14 to the consolidated financial statements, the Company had a net loss of $735,833 and a negative cash flow from operations of $875,933 for the year ended June 30, 2005 and had a working capital deficiency of $139,363 at June 30, 2005. These matters raise substantial doubt about its ability to continue as a going concern. Management's plans in regards to these matters are also described in Note 14. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. WEINBERG & COMPANY, P.A. Boca Raton, Florida September 23, 2005 F-1 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
For The Years Ended June 30, ---------------------------- 2005 2004 ------------ ------------ ASSETS Current Assets Cash and cash equivalents $ 836,876 $ 1,193,170 Accounts receivable, net of allowance for doubtful accounts of $4,723 and $8,914 at June 30, 2005 and 2004, respectively 364,285 400,747 Inventories 367,453 350,963 Prepaid expenses and other current assets 130,605 81,863 ------------ ------------ Total Current Assets 1,699,219 2,026,743 ------------ ------------ Property and equipment, net of accumulated depreciation of $20,697 and $1,082, as of June 30, 2005 and 2004, respectively 259,764 165,434 ------------ ------------ Other Assets Partnership Investment -- 2,774,999 Licensed Intangibles and rights 400,000 400,000 Excess of cost over fair value of assets acquired 2,611,055 2,611,055 Other assets -- 18,108 ------------ ------------ Total Other Assets 3,011,055 5,804,162 ------------ ------------ TOTAL ASSETS $ 4,970,038 $ 7,996,339 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Current Liabilities Current portion of notes payable $ 1,020,028 $ 3,639,090 Accounts payable and accrued expenses 818,554 585,320 ------------ ------------ Total Current Liabilities 1,838,582 4,224,410 Long-term Notes and Loans Payable, less current portion 205,367 2,347,467 ------------ ------------ TOTAL LIABILITIES 2,043,949 6,571,877 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $.01 par value, 25,000 shares authorized: Series A convertible preferred stock, $.01 par value, 4,200 shares issued 42 42 Series B convertible preferred stock, $.01 par value, 100 and 300 shares issued and outstanding, respectively 1 3 Common stock, no par value, 5,000,000,000 shares authorized, 3,151,773,731 and 1,994,365,845 shares issued and outstanding, respectively 29,751,907 28,745,253 Additional paid in capital 5,426,831 4,056,455 Deferred commitment and equity financing fees, net of accumulated amortization (25,000) (135,432) Deferred compensation (250,000) -- Accumulated deficit (31,977,692) (31,241,859) ------------ ------------ Total Stockholders' Equity 2,926,089 1,424,462 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,970,038 $ 7,996,339 ============ ============
See accompanying notes to consolidated financial statements F-2 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended June 30, ---------------------------------- 2005 2004 --------------- --------------- GROSS SALES $ 7,521,723 $ 605,468 COST OF SALES 4,879,081 400,265 --------------- --------------- GROSS PROFIT 2,642,642 205,203 --------------- --------------- OPERATING EXPENSES Depreciation and amortization 374,175 229,103 Professional and consulting fees 476,718 292,633 Other selling, general and administrative expenses 3,598,643 266,525 --------------- --------------- TOTAL OPERATING EXPENSES 4,449,536 788,261 --------------- --------------- Loss From Continuing Operations before Other Income and Expenses (1,806,893) (583,058) --------------- --------------- OTHER INCOME AND (EXPENSES) Forgiveness of debt 2,847,511 780,938 Loss on partnership redemption (191,292) -- Distributable share of partnership income 385,233 439,999 Write-off of investment in Pacific Magtron International, Inc (668,834) -- Interest expense, net (106,184) (162,059) --------------- --------------- TOTAL OTHER INCOME, NET 2,266,434 1,058,878 --------------- --------------- INCOME FROM CONTINUING OPERATIONS $ 459,541 $ 475,820 LOSS FROM DISCONTINUED OPERATIONS, NET OF MINORITY INTEREST (1,195,374) -- --------------- --------------- NET (LOSS) INCOME $ (735,833) $ 475,820 =============== =============== Net (loss) income per share - basic and dilutive $ -- $ -- =============== =============== Weighted average number of shares outstanding during the year - basic and dilutive 2,072,211,255 1,084,885,437 =============== ===============
See accompanying notes to consolidated financial statements F-3 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
PREFERRED COMMON STOCK STOCK ADDITIONAL ------------------------------ ---------------- PAID IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT -------------- ------------ ------ ------ ----------- -------------- BALANCE AT JUNE 30, 2003 198,852,622 $ 25,945,005 -- $ -- $ -- $ (31,717,679) Common Stock issued for cash, net 361,956,145 648,557 -- -- -- -- Preferred Stock-Series A issued for cash, net -- -- 4,200 42 3,756,458 -- Stock issued for conversion of convertible debt and accrued interest 585,283,270 1,117,681 -- -- -- -- Amortization of deferred commitment fees -- -- -- -- -- -- Stock issued for professional services 16,000,000 17,810 -- -- -- -- Stock issued to settle trade creditors 125,297,618 335,000 -- -- -- -- Stock issued to settle creditor claims 26,976,190 56,200 -- -- -- -- Preferred Stock-Series B issued for licensed intangibles -- -- 300 3 299,997 -- Escrowed stock 162,999,640 -- -- -- -- -- Stock issued in partial payment of short term note 517,000,360 625,000 -- -- -- -- -------------- ------------ ------ ------ ----------- -------------- Net income for the year -- -- -- 475,820 BALANCE AT JUNE 30, 2004 1,994,365,845 $ 28,745,253 4,500 $ 45 $ 4,056,455 $ (31,241,859) Reversal of escrowed stock issued to pay short term debt (162,999,640) -- -- -- -- -- Stock issued in partial payment of short term note 172,881,526 100,000 -- -- -- -- Stock issued in exchange for services 505,000,000 357,500 -- -- -- -- Stock issued on conversion of Series B preferred stock 400,000,000 200,000 (200) (2) (199,998) Deferred compensation 12,500,000 125,000 -- -- 375,000 -- Amortization of deferred compensation -- -- -- -- -- -- Adjustment to reflect the effect of a change in accounting from the equity method to the cost method for the investment in Pacific Magtron International, Inc. -- -- -- -- 1,195,374 -- Amortization of deferred commitment and financing fees -- (5,872) -- -- -- -- Stock issued for convertible debt and accrued interest 230,026,000 230,026 -- -- -- -- Net (loss) for the year -- -- -- -- -- (735,833) -------------- ------------ ------ ------ ----------- -------------- BALANCE AT JUNE 30, 2005 3,151,773,731 $ 29,751,907 4,300 $ 43 $ 5,426,831 $ (31,977,692) ============== ============ ====== ====== =========== ============== DEFERRED COMMITMENT AND EQUITY DEFERRED FINANCING FEES COMPENSATION TOTAL -------------- -------------- ----------- BALANCE AT JUNE 30, 2003 $ (187,500) $ -- (5,960,174) Common Stock issued for cash, net (135,432) -- 513,125 Preferred Stock-Series A issued for cash, net -- -- -- Stock issued for conversion of convertible debt and accrued interest -- -- 1,117,681 Amortization of deferred commitment fees 187,500 -- 187,500 Stock issued for professional services -- -- 17,810 Stock issued to settle trade creditors -- -- 335,000 Stock issued to settle creditor claims -- -- 56,200 Preferred Stock-Series B issued for licensed intangibles -- -- 300,000 Escrowed stock -- -- -- Stock issued in partial payment of short term note -- -- 625,000 -------------- -------------- ----------- Net income for the year -- -- 475,820 BALANCE AT JUNE 30, 2004 $ (135,432) $ -- $ 1,424,462 Reversal of escrowed stock issued to pay short term debt -- -- -- Stock issued in partial payment of short term note -- -- 100,000 Stock issued in exchange for services -- -- 357,500 Stock issued on conversion of Series B preferred stock -- Deferred compensation -- (500,000) -- Amortization of deferred compensation -- 250,000 250,000 Adjustment to reflect the effect of a change in accounting from the equity method to the cost method for the investment in Pacific -- Magtron International, Inc. -- -- 1,195,374 Amortization of deferred commitment and financing fees 110,432 -- 104,560 Stock issued for convertible debt and accrued interest -- -- 230,026 Net (loss) for the year -- -- (735,833) -------------- -------------- ----------- BALANCE AT JUNE 30, 2005 $ (25,000) $ (250,000) $ 2,926,089 ============== ============== ===========
See accompanying notes to consolidated financial statements F-4 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended June 30, ---------------------------- 2005 2004 ----------- ----------- CASH FLOWS (USED IN) CONTINUING OPERATIONS: Net income from continuing operations $ 459,541 $ 475,820 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 374,175 229,103 Stock issued in payment of accrued interest 40,526 -- Stock issued for services 357,500 2,810 Debt discount expense 36,977 93,752 Forgiveness of debt (2,847,511) (780,938) Loss on partnership redemption 191,292 -- Distributive share of partnership income (385,233) (439,999) Write-off of investment in Pacific Magtron International Inc. 668,834 -- Changes in operating assets and liabilities: (Increase) decrease in assets: Accounts receivables 36,462 -- Deferred Costs and other receivables (37,252) (58,619) Inventories (16,490) (483) Prepaid expense/security deposits 12,011 5,486 Increase (decrease) in liabilities: Accounts payable and accrued expenses 220,212 (419,696) Interest payable 13,023 62,989 ----------- ----------- Net cash used in continuing operating activities (875,933) (829,775) ----------- ----------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Partnership investment -- (2,670,000) Partnership distributions 280,000 335,000 Purchase of business/fixed assets (193,945) (3,484,571) Cash acquired on business asset purchase -- 643,195 Proceeds from partnership redemption 2,688,940 -- Purchase of investment securities (91,618) -- ----------- ----------- Net cash flow provided by (used in) investing activities 2,683,377 (5,176,376) ----------- ----------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: -- -- Proceeds from the issuance of Series A Preferred Stock, net -- 3,756,500 Proceeds from issuance of common stock, net -- 513,125 Proceeds from short-term promissory note -- 3,000,000 Repayment of short-term and installment notes (2,233,416) (92,831) Proceeds from capitalized lease 69,678 -- ----------- ----------- Net cash (used in) provided by financing activities (2,163,738) 7,176,794 ----------- ----------- Net (decrease) increase in cash $ (356,294) $ 1,170,643 Cash at beginning of year 1,193,170 22,527 ----------- ----------- CASH AT END OF YEAR $ 836,876 $ 1,193,170 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest Paid $ 19,481 $ 6,043 Income Taxes Paid $ 0 $ 0
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: During the fiscal year ended June 30, 2005, the Company issued 230,026,000 of common stock in full repayment of $187,500 of principal and $42,526 of accrued interest on the 10% Secured Convertible Debenture. During the fiscal year ended June 30, 2005, the Company issued 172,881,526 of common stock valued at $100,000 in partial repayment of its short-term promissory note. See accompanying notes to consolidated financial statements F-5 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS continued... During the fiscal year ended June 30, 2005, the Company issued 5,000,000 shares of common stock valued at $7,500 for professional services. During the fiscal year ended June 30, 2005, the Company issued 400,000,000 shares of common stock valued at $200,000 to various Series B Convertible Preferred shareholders upon conversion of their shares. During the fiscal year ended June 30, 2005, the Company issued 500,000,000 shares of common stock valued at $350,000 to certain officers and directors as compensation. During the fiscal year ended June 30, 2005, the Company issued 12,500,000 shares of common stock as the earned portion of deferred compensation. During the fiscal year ended June 30, 2004, the Company recorded $391,200 representing 152,273,808 shares of restricted common stock issued for prior unpaid accrued professional fees and various creditor settlements. During the fiscal year ended June 30, 2004, debenture holders converted $944,000 and $173,681 of principal and interest, respectively, into 492,801,173 and 92,482,097 shares of common stock respectively in full payment of this debt. During the fiscal year ended June 30, 2004, the 5% convertible debenture holders forgave $85,372 of accrued interest. During the fiscal year ended June 30, 2004, the Company issued 16,000,000 shares of restricted common stock valued at $17,810 for professional services rendered, of which $2,810 was expensed and $15,000 was capitalized as part of the Hy-Tech acquisition. During the year ended June 30, 2004, the Company issued 517,000,360 shares of common stock for the repayment of $625,000 of short-term loans and escrowed 162,999,640 shares of common stock for future payment of such loan. See accompanying notes to consolidated financial statements F-6 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2005 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. ("Encompass"), acquires and operates businesses that provide computer and electronics repair and end-of-life cycle services. Encompass owns Cyber-Test, Inc. ("Cyber-Test"), an electronic equipment repair company based in Florida and our principal operating business. Additionally, through our wholly-owned investment subsidiary, Hudson Street Investments, Inc. ("Hudson Street"), we seek to acquire minority investments in various profitable businesses. Encompass, a Delaware corporation, and our wholly-owned subsidiary and principal operating unit, 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 (See Notes 6 and 7). 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 was acquired as of December 30, 2004 (See Note 8). PMIC's principal business consisted of the importation and wholesale distribution of electronics products, computer components, and computer peripheral equipment throughout the United States. LWI sold consumer computer products through the Internet and distributed certain computer products to resellers. On May 11, 2005 (the "Petition Date"), PMIC, PMI, PMIGA and LWI filed voluntary petitions to reorganize their businesses under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Nevada, (the "Bankruptcy Court"). The Bankruptcy Court is jointly administering these cases as "In re: Pacific Magtron International Corporation, Inc., et al., Case No.BK-S-05-14326 LBR". Because PMIC was unsuccessful in reaching an agreement with one of its secured creditors, on June 23, 2005 it ceased all business activities except those necessary to liquidate its remaining assets. (B) Financial Statement Presentation And Principles Of Consolidation The consolidated financial statements include the Company and all of its wholly-owned subsidiaries. The Company consolidates all majority-owned and controlled subsidiaries, uses the equity method of accounting for investments in which the Company is able to exercise significant influence, and uses the cost method for all other investments. In accordance with ARB51 and FAS94, the Company's consolidated financial statements include the consolidated financial results of PMIC, a majority-owned and controlled company, and its wholly-owned subsidiaries, PMI, PMIGA and LWI for the period January 1, 2005 through May 11, 2005, the date PMIC and its subsidiaries filed voluntary petitions to reorganize their businesses under Chapter 11 of the U.S. Bankruptcy Code. PMIC's results of operations are shown in the consolidated financial statements as discontinued operations (See Note 2). F-7 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2005 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 (See Note 8). All significant intercompany transactions have been eliminated in consolidation. (C) Concentration of Major Customers During the fiscal year ended June 30, 2005, Cyber-Test sales to two customers accounted for approximately 89% of its sales. As of June 30, 2005 and 2004, accounts receivable from two major customers aggregated $284,000 and $253,847 or 78% and 63% of accounts receivable, respectively. (D) 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. (E) 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. During the fiscal years ended June 30, 2005 and 2004, the Company established an allowance for doubtful accounts of $4,723 and $8,914, respectively. (F) 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. (G) Excess Of Cost Over Net Assets Acquired In accordance with SFAS No. 141, the Company allocates the purchase price of its acquisitions to the tangible assets, liabilities and intangible assets acquired based on their estimated fair values. The excess purchase price over those fair values is recorded as "Excess of Cost Over Net Assets Acquired". The fair value assigned to intangible assets acquired is either based on valuations prepared by independent third party appraisal firms using estimates and assumptions provided by management or negotiated at arms-length between the Company and the seller of the acquired assets. In accordance with SFAS No. 142, goodwill and purchased intangibles with indefinite lives acquired after June 30, 2001 are not amortized, but will be reviewed periodically for impairment. Purchased intangibles with finite lives will be amortized on a straight-line basis over their respective useful lives. As of June 30, 2005, these intangible assets were not impaired. F-8 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2005 (H) 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. (I) 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 fiscal years ended June 30, 2005 and 2004, shares of common stock that could have been issued upon conversion of convertible debt were excluded from the calculation of diluted earnings (loss) per share, as their effect would have been anti-dilutive. (J) 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 Maintenance and repairs are charged to expense when incurred. (K) Warranty Reserve Refurbished peripheral computer equipment sold to customers and the repair of customer owned equipment is guaranteed for a period of ninety days and a period of 12 months for the repair of circuit boards. Any defective refurbished equipment is replaced free of charge and customer owned equipment is repaired without charge during the warranty period. Cyber-Test provides a reserve for warranty repairs based on historical failure rates and the estimated cost to repair. (L) Fair Value of Financial Instruments The carrying amounts of the Company's accounts payable, accrued liabilities, debentures, and loans payable approximate fair value due to the relatively short period to maturity for these instruments. (M) Business Segments The Company applies Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information". During the fiscal year ended June 30, 2005, the Company operated in two segments, Cyber-Test, Inc. and Pacific Magtron International Corporation, Inc., as described below: Cyber-Test, Inc. ("Cyber-Test"), a 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. F-9 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2005 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. LWI sold consumer computer products through the Internet and distributed certain computer products to resellers. PMIC's principal business through May 11, 2005, consisted of the importation and wholesale distribution of electronics products, computer components, and computer peripheral equipment throughout the United States. The following table presents information about reported continuing segment profit or loss for the fiscal year ended June 30, 2005: 2005 (in thousands) -------------- Revenues from external customers: --------------------------------- Cyber-Test $ 7,521 ======= Segment income (loss): ---------------------- Cyber-Test $ 400 PMIC (loss from discontinued operations) (See Note 2) (1,195) ------- Net loss for reportable segments $ (795) Parent and Encompass net income 59 ------- Consolidated net loss from continuing and discontinued operations $ (736) ======= (N) 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. (O) 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. F-10 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2005 (P) 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. (Q) Investment in Unconsolidated Partnership The Company accounts for its investment in an unconsolidated partnership under the equity method of accounting, as the Company does not have any management control over this entity. This investment was recorded initially at cost and subsequently adjusted for equity in net earnings and cash distributions (See Note 4). (R) Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123 (R), "Share-Based Payment". SFAS No. 123 (R) revises SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS No. 123 (R) focuses primarily on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123 (R) requires companies to recognize in the statement of operations the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123 (R) is effective as of the first interim or annual reporting period that begins after June 15, 2005 for non-small business issuers and after December 15, 2005 for small business issuers. Accordingly, the Company will adopt SFAS No. 123 (R) in its quarter ending March 31, 2006. The Company is currently evaluating the provisions of SFAS No. 123 (R) and has not yet determined the impact, if any, that SFAS No. 123 (R) will have on its financial statement presentation or disclosures. NOTE 2. DISCONTINUED OPERATIONS On May 11, 2005, PMIC and its wholly-owned subsidiaries ceased operations. The operating results for the four and one-half month period ended May 11, 2005 was as follows: January 1 - May 11, 2005 (in thousands) ------------------------ Net sales $ 10,701 Net loss $ (1,195) Consolidated Balance Sheet (Going Concern Basis) as of June 30, 2005 (in thousands) ------------------------ Assets: Current Assets $ 7,531 Property and Equipment 3,907 Other 303 ------------------------ $ 11,741 ======================== Liabilities and Shareholders' Equity: Current Liabilities $ 8,074 Mortgages Payable 3,032 Shareholders' Equity 635 ------------------------ $ 11,741 ======================== F-11 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2005 NOTE 3. PROPERTY AND EQUIPMENT 2005 2004 --------- --------- Computer, office equipment and fixtures $ 135,494 $ 38,123 Machinery and equipment 23,731 16,652 Leasehold improvements 121,236 111,741 Less: Accumulated depreciation (20,697) (1,082) --------- --------- Property and equipment, net $ 259,764 $ 165,434 ========= ========= Depreciation expense for the years ended June 30, 2005 and 2004 was $19,615 and $1,082 respectively. NOTE 4. INVESTMENT IN UNCONSOLIDATED PARTNERSHIP On January 14, 2004, the Company's wholly-owned subsidiary, Hudson Street, purchased a minority interest in Yorkville Advisors Management LLC, ("Yorkville"), a privately-owned investment management partnership and the portfolio manager of Cornell Capital Partners, L.P., for a purchase price of $2,625,000. The purchase was effective as of January 1, 2004. Hudson Street incurred $45,000 of legal and professional fees associated with the purchase of the partnership interest, which were capitalized. During the fiscal years ended June 30, 2005 and 2004, Hudson Street received $280,000 and $335,000 of cash distributions from this investment and recorded $385,233 and $439,999 as its distributive share of partnership net earnings. On January 31, 2005, the Managing Member of Yorkville Advisors Management, LLC, announced that Yorkville will begin winding up its affairs and is expected to dissolve later this year. Subsequently, on February 11, 2005, the Company's partnership interest in Yorkville Advisors Management, LLC was redeemed in full for $2,625,000. We recorded a loss of $191,292 on the redemption of our Yorkville interest. The Company used $1,825,000 of redemption proceeds to reduce its outstanding short-term obligation to Cornell Capital Partners, L.P. from $2,000,000 to $275,000, after paying extension and legal fees of $100,000. The promissory note was extended to June 30, 2005 and bears interest at a rate of 10% commencing February 10, 2005. Previously, the promissory note was non-interest bearing (See Note 9(D). The Company received the balance of $800,000 of cash proceeds from the redemption. NOTE 5. DEBT FORGIVENESS On February 5, 2004, the Company filed suit in Superior Court, Orange County, California, against Advanced Communications (Australia), Roger May, Global Communications Technologies Limited and Global Communications Technologies Pty Ltd to recover damages incurred as a result of wrongful actions of such defendants against the Company and to clarify the status of the Company's obligations to such defendants under various agreements and other arrangements, from which the Company believes it has been relieved as a result of such wrongful actions. In May and August 2004, the court entered default judgments in favor of the Company and against all of the above defendants. On October 22, 2004, the court held a hearing to determine the amount the Company was entitled to recover against the defendants in the action. In November 2004, the court entered a judgment in favor of the Company in the approximate amount of $8 million. The Company offset against the judgment approximately $2,847,000 of debt carried on its books as owing to one or more of the defendants and the Company recognized debt forgiveness income in that amount. Because of the uncertainty of collecting the balance of the judgment approximately $5.1 million, we have not recorded the unliquidated portion of the judgment receivable and the related income in the June 30, 2005 financial statements. Additional debt forgiveness income will be recorded in the period or periods in which collection or seizure of assets is made. (See Note 9(B) and (C)). During the fiscal year ended June 30, 2004, the Company negotiated, settled and/or converted approximately $2,250,000 of accounts payable and accrued liabilities and convertible debentures at a discount, generating $780,938 of forgiveness of debt income. The Company settled these liabilities, in part, with cash and in part, through the issuance of restricted common stock. F-12 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2005 NOTE 6. ACQUISITION OF CYBER-TEST, INC. On June 2, 2004, our wholly-owned subsidiary, Encompass Group Affiliates, Inc. ("Encompass"), acquired the business and assets of Cyber-Test, Inc., a Florida-based, electronic equipment repair company. Cyber-Test became the core operating business of Encompass with 85 employees and annual sales of approximately $6,000,000. The Company accounted for this acquisition using the purchase method of accounting in accordance with the provisions of SFAS 141.This acquisition is the Company's first step in expanding the businesses of the Company's subsidiaries into an integrated technology and service business. Under the terms of the Asset Purchase Agreement between Cyber-Test and Encompass, Encompass acquired all of the operating assets, tangible and intangible property, rights and licenses, good-will and business of Cyber-Test, for a total purchase price of $3,498,469 consisting of $3,000,000 in cash, and a $498,469 three year 6% unsecured installment note. The Company also incurred $234,108 of capitalized transaction costs inclusive of $125,000 of broker fees for a total acquisition cost of $3,732,577. This acquisition has been accounted for by the purchase method of accounting and, accordingly, the operating results have been included in the Company's consolidated results of operations from the date of acquisition. The Company acquired net tangible assets valued at $1,286,985. The excess of the consideration given over the fair value of net assets acquired has been recorded as goodwill of $2,445,592. The Company accounts for the purchased goodwill in accordance with the provisions of SFAS 142. NOTE 7. LICENSED INTANGIBLES On May 27, 2004 the Company's wholly-owned subsidiary, Encompass Group Affiliates, Inc. entered into an Agreement with Hy-Tech Technology Group, Inc and Hy-Tech Computer Systems, Inc (collectively "Hy-Tech") to license and use on an exclusive, worldwide, royalty-free, perpetual, non-terminable and irrevocable right basis various intangible assets of Hy-Tech including its customer lists and corporate web addresses. In addition, and as part of the Agreement, Encompass acquired all of Hy-Tech's rights to negotiate and acquire certain business and assets of three independent companies in the technology and service business as well as the exclusive right to extend an offer of employment to Martin Nielson, to become an executive officer of Encompass. In exchange for the above, Encompass agreed to assume $503,300 of Hy-Tech's convertible debentures. On June 23, 2004, the Company closed on the Agreement and entered into an Exchange Agreement with the Hy-Tech debenture holders wherein the Company paid $203,300 to the debenture holders in cash and issued 300 shares of its non-voting Convertible Preferred Shares having a liquidation value of $1,000 per share in full satisfaction of the convertible debentures (See Note 11(B)). The Company recorded $400,000 of licensed intangibles and $165,463 of goodwill (inclusive of $62,163 of capitalized transaction costs) as Other Assets on its June 30, 2005 and 2004 balance sheets. NOTE 8. PACIFIC MAGTRON INTERNATIONAL CORPORATION, INC. AND SUBSIDIARIES On December 30, 2004, we completed the acquisition of 6,454,300 shares of the common stock of Pacific Magtron International Corporation, Inc. ("PMIC") (the "PMIC Shares") for the aggregate purchase price of $500,000 from Theodore S. Li and Hui Cynthia Lee (collectively, the "Stockholders") pursuant to the terms of a Stock Purchase Agreement, dated December 10, 2004, among the Company, Mr. Li and Ms. Lee (the "Stock Purchase Agreement"). The PMIC Shares represented 61.56% of the currently issued and outstanding common stock of PMIC. PMIC was primarily engaged in the business of distributing computer peripheral products, such as components and multimedia and systems networking products, through its wholly-owned subsidiaries. PMIC's common stock trades on the Over the Counter Bulletin Board, and separately files periodic reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. The Company accounted for this acquisition using the purchase method of accounting in accordance with the provisions of SFAS 141. This acquisition expanded the Company's business into a vertically integrated technology and service business to the consumer electronics industry. At the time of the acquisition, PMIC employed approximately 60 people in California and Georgia and had annual sales of approximately $70 million. F-13 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2005 We acquired all of the operating assets, tangible and intangible property, rights and licenses, goodwill and business of PMIC, for a total purchase price of $500,000 consisting of two one-year 6% secured notes (See Note 9 (F)). The Company also incurred $168,834 of capitalized transaction costs for a total acquisition cost of $668,834. On May 11, 2005, PMIC and its subsidiaries 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. Also on May 11, 2005, we filed a complaint in the United States District Court for the Southern District of New York against Theodore S. Li and Hui Cynthia Lee, the former officers and principal shareholders of PMIC, for the recovery of damages and costs for securities fraud, breach of contract and other counts in connection with the Stock Purchase Agreement dated December 10, 2004 between the Company and Mr. Li and Ms. Lee. As of June 30, 2005, our entire investment of $668,834 in PMIC has been written off and is recorded under Other Income (Loss) in the Company's consolidated statement of operations. NOTE 9. NOTES AND LOAN PAYABLE June 30, 2005 June 30, 2004 ------------- ------------- Current: 8% Note Payable-Current $ 57,832 $ 57,831 Loan Payable-Shareholder -- 1,055,736 Note Payable-Cornell Capital 275,000 2,375,000 6% Secured Note Due 12/05 500,000 -- 6% Unsecured Note due 6/07 166,157 -- 10% Secured Convertible Note -- 150,523 Capitalized Lease 21,039 -- ------------- ------------- Notes Payable-Current $ 1,020,028 $ 3,639,090 ============= ============= Long-Term: 6% Unsecured Note $ 166,157 $ 498,469 Note Payable-ACT Australia -- 1,791,166 8% Note Payable -- 57,832 Capitalized Lease 39,210 -- ------------- ------------- Notes Payable-Long-Term $ 205,367 $ 2,347,467 ============= ============= (A) 8% Note Payable On November 14, 2002, the Company settled its litigation with the Needham/DuPont plaintiffs by agreeing to release the plaintiffs' stock from restriction and issued a three-year unsecured 8% promissory note in the principal amount of $173,494 to reimburse the plaintiffs for their legal costs. The note is payable in three equal annual installments of principal and interest, the first of which was due on December 1, 2003 with additional installments due on December 1, 2004 and December 1, 2005. As of June 30, 2005, $57,832 is outstanding and is recorded as a current liability. (B) Note Payable to Advanced Communications (Australia) The Company had a non-interest bearing and unsecured note payable to Advanced Communications (Australia) of $7,500,000 as of April 5, 2000. The note was payable in three equal monthly installments commencing on May 31, 2000. Under the terms of an April 5, 2000 Stock Purchase Agreement with Advanced Communications (Australia) (the `Stock Purchase Agreement"), the monthly installment payments were extended indefinitely without interest to allow the Company, on a best efforts basis, to raise the cash portion of the purchase price through a private or public offering of securities. There were no default, penalty or acceleration provisions under the terms of the Stock Purchase Agreement. F-14 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2005 On November 11, 2002, Advanced Communications (Australia) issued a Notice of Termination to the Company which stated that the Stock Purchase Agreement was terminated immediately due to the Company's insolvency. The effect of the Notice of Termination was to cancel the Company's stock interest in Advanced Communications (Australia). In February 2004, the Company filed suit in Superior Court, Orange County, California, against Advanced Communications (Australia), Mr. May, our former Chairman and CEO, Global Communications Technologies, Limited and Global Communications Technologies Pty Ltd. to recover damages incurred as a result of wrongful actions by such defendants against the Company and to clarify the status of the Company's obligations to such defendants under the above arrangement. In May and August 2004, the court entered default judgments in favor of the Company and against all of the above defendants. On October 22, 2004, the court held a hearing to determine the amount the Company was entitled to recover against the defendants in the action. In November 2004, the court entered a judgment in favor of the Company in the approximate amount of $8 million. The Company offset against the judgment approximately $2,847,000 of debt carried on its books as owing to one or more of the defendants and the Company recognized debt forgiveness income in that amount. Because of the uncertainty of collecting the balance of the judgment approximately $5.1 million, we have not recorded the unliquidated portion of the judgment receivable and the related income in the June 30, 2005 financial statements. Additional debt forgiveness income will be recorded in the period or periods in which collection or seizure of assets is made. (C) Loan Payable to Shareholder As of June 30, 2004, the Company owed Global Communications Technology Pty, an Australian company wholly-owned by Mr. May, a former officer and director of the Company, $1,055,736, for funds advanced to the Company to provide working capital. This loan was non-interest bearing and unsecured, and had no scheduled date for repayment. The Company believed that the loan was not due upon demand. However, since the actual repayment terms were not known with any specificity because the terms are not confirmed in a written document, the loan was classified as a current liability. In February 2004, the Company filed suit in Superior Court, Orange County, California, against Advanced Communications (Australia), Mr. May, Global Communications Technologies, Limited and Global Communications Technologies Pty Ltd. to recover damages incurred as a result of wrongful actions by such defendants against the Company and to clarify the status of the Company's obligations to such defendants under the above arrangement. In May and August 2004, the court entered default judgments in favor of the Company and against all of the above defendants. On October 22, 2004, the court held a hearing to determine the amount the Company was entitled to recover against the defendants in the action. In November 2004, the court entered a judgment in favor of the Company in the approximate amount of $8 million. The Company offset against the judgment approximately $2,847,000 of debt carried on its books as owing to one or more of the defendants and the Company recognized debt forgiveness income in that amount. Because of the uncertainty of collecting the balance of the judgment approximately $5.1 million, we have not recorded the unliquidated portion of the judgment receivable and the related income in the June 30, 2005 financial statements. Additional debt forgiveness income will be recorded in the period or periods in which collection or seizure of assets is made. (D) 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 its minority interest in the Yorkville Advisors partnership. Under the terms of the promissory note, the Company agreed to repay the note either in cash or through the net proceeds to be received by the Company under its Equity Line of Credit facility over a 24-week period commencing February 23, 2004. The promissory note is non-interest bearing and only becomes interest-bearing, at the rate of 24% or the highest rate permitted by law, if lower, in the event that the note is not repaid when due. As of June 30, 2004, the Company repaid $625,000 of the note from proceeds on the issuance of 517,000,360 shares of common stock under its Equity Line of Credit facility. During the fiscal year ended June 30, 2005, we repaid a total of $2,100,000 of principal on the note, of which $100,000 was repaid by issuing 172,881,526 shares of common stock and $2,000,000 was repaid in cash leaving a balance of $275,000. No interest is accrued on or owed under the terms of the original $3,000,000 short-term obligation. On February 10, 2005, the note was modified, extended to June 30, 2005, and bears interest at a rate of 10%. The note was not paid when due and is currently in default. F-15 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2005 (E) 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 June 30, 2005, the balance of the note is $332,313, of which $166,157 is reported as a current liability. (F) 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"). 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 (See Note 8). The Notes will mature on December 29, 2005 and no principal or interest payments will be required prior to such date. The Notes bear interest at 6.0% per annum. Upon the occurrence and during the continuation of any Event of Default (as specified in the Notes), the interest rate will increase to 10.0% per annum and the holders of the Notes may declare the principal amount of the Notes and all accrued and unpaid interest thereon to be immediately due and payable. The Company will be able to redeem all or a portion of the Notes on or prior to the maturity date at 110.0% of the principal amount redeemed, plus all accrued and unpaid interest thereon. The holders of the Notes, at their option, may convert, at any time and from time to time, until payment in full of all amounts due and owing under their Note, any unpaid principal amount of their Note into shares of common stock of the Company at a conversion price per share of $0.01. If the full original principal amount of the Notes were converted, this would result in the issuance of an aggregate of 50,000,000 shares of the Company's common stock to the Stockholders. The Company's payment obligations under the Notes (the "Obligations") are secured by the PMIC Shares pursuant to a Custodial and Stock Pledge Agreement, dated December 30, 2004, among the Company, the Stockholders and Quarles & Brady Streich Lang LLP, as custodian (the "Pledge Agreement"). On May 11, 2005, we filed suit against Mr. Li and Ms. Lee for various breaches of the Stock Purchase Agreement (See Note 12(D)). (G) 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 June 30, 2005. Accumulated amortization of the leased equipment was $3,484 as of June 30, 2005. Amortization of assets under capital leases is included in depreciation expense. The future minimum lease payments required under the capital lease and the present value of the net minimum lease payments as of June 30 2005, are as follows: Year Ending June 30, Amount ----------- -------- 2006 $ 27,392 2007 27,392 2008 15,978 -------- Total minimum lease payments 70,762 Less: Amount representing interest (10,513) -------- Present value of net minimum lease payments 60,249 Less: Current maturities of capital lease obligations (21,039) -------- Long-term capital lease obligations $ 39,210 ======== F-16 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2005 Future maturities of long-term debt as of June 30, 2005 are as follows: Date Amount ------------- ---------- June 30, 2006 1,020,028 June 30, 2007 205,367 Thereafter -- ---------- Total $1,225,395 ========== NOTE 10. CONVERTIBLE DEBENTURE (A) 10% Secured Convertible Debenture Due November 2004 On November 22, 2002, the Company entered into a Securities Purchase Agreement with Cornell Capital Partners, L.P., whereby we agreed to issue and sell a Two Hundred Fifty Thousand Dollars ($250,000) 10% secured convertible debenture. The secured convertible debenture had a term of two years and is convertible into shares of common stock at a conversion price equal to $.001 per share. The secured convertible debenture accrued interest at a rate of 10% per year and is convertible at the holder's option. At the Company's option, the debenture may be paid in cash or redeemed at a 50% premium prior to November 2004. In connection with the Securities Purchase Agreement, the Company entered into a Security Agreement in favor of Cornell Capital Partners, L.P. whereby the Company granted to Cornell a security interest in all of its assets as security for its obligations under the secured convertible debenture, as well as all other obligations of the Company to Cornell Capital Partners, L.P. whether arising before, on or after the date of the Security Agreement. At June 30, 2004, the outstanding principal balance of the 10% secured convertible debenture amounted to $187,500 net of debt discount of $36,777, which totaled $150,523. On November 22, 2004, the outstanding 10% secured convertible debenture in the amount of $187,500 plus accrued interest of $38,588 held by Cornell Capital Partners, L.P. matured. On November 22, 2004 and December 27, 2004, Cornell Capital Partners, L.P. elected to convert, at $.001 per share, $10,000 and $100,000 of principal and $2,000 of accrued interest, respectively, into 112,000,000 shares of common stock. On February 11, 2005, Cornell Capital Partners, L.P. indicated their intention to convert the balance of the convertible note, in the amount of $77,500 of principal at $.001 per share, into common stock. On May 12, 2005, Cornell Capital Partners, L.P. converted the $77,500 plus $40,526 of accrued interest at $.001 per share into 118,026,000 shares of common stock. At June 30, 2005, no amount remains owed to Cornell Capital Partners, L.P. on the convertible debenture. NOTE 11. STOCKHOLDERS' EQUITY (A) Equity Line of Credit Facility In July 2003, the Company entered into a $30 million Equity Line of Credit facility with Cornell Capital Partners, LP. Pursuant to the Equity Line of Credit, the Company may, at its discretion, periodically issue and sell to Cornell Capital Partners, LP 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 Partners, LP will purchase the shares of common stock for a 9% discount to the lowest closing bid price of the Company's common stock during the 5 trading days after a notice date. Cornell Capital Partners, LP intends to sell any shares under the Equity Line of Credit at the then prevailing market price. On July 31, 2003, the SEC declared effective the Company's Registration Statement. F-17 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2005 (B) 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, the Holder of the Series A Preferred Shares has the immediate right to convert their Series A Preferred Shares into common stock of the Company. At June 30, 2005, no preferred shares have been converted into common stock. 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 shares of Series B Convertible Preferred stock elected to convert $200,000 of preferred stock at a price of $.0005 per share into 400,000,000 shares of common stock. At June 30, 2005, 100 shares of Series B Convertible Preferred stock remain outstanding. (C) Stock Issued For Note Payable To Cornell Capital Partners, L.P. During the fiscal year ended June 30, 2005, the Company issued 172,881,526 shares of common stock having a value of $100,000 in partial repayment of the short-term note payable due to Cornell Capital Partners, L.P. (D) Stock Issued For Convertible Debt During the fiscal year ended June 30, 2005, the Company issued 230,026,000 shares of common stock valued at $187,500 and $42,526 of principal and accrued interest, respectively, in full payment on the 10% secured convertible debt. No amount remains owed to Cornell Capital Partners, L.P. on the convertible debenture. (E) Stock Issued Under 2005 Stock Plan During the fiscal year ended June 30, 2005, the Company's Board of Directors adopted the Company's 2005 Stock Plan (the "Plan") to provide designated employees of the Company and its subsidiaries, certain independent consultants and advisors and non-employee members of the Board of Directors with the opportunity to receive grants of incentive stock options, nonqualified stock options and restricted stock. The Company believes that the Plan will encourage the participants to contribute materially to the growth of the Company and its business thereby benefiting the Company's stockholders and will align the economic interests of the participants with those of the stockholders. F-18 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2005 Subject to adjustment for stock dividends, splits or recapitalization, the aggregate number of shares of common stock of the Company that may be issued or transferred under the Plan or upon which awards under the Plan may be granted is 700,000,000 shares, (i) 500,000,000 of which may be issued as Restricted Stock and (ii) 200,000,000 of which may be issued as incentive stock options or non-incentive stock options, some of all of which may be incentive stock options when issued to individuals entitled to receive incentive stock options. The shares may be authorized but unissued shares of common stock or reacquired shares of common stock, including shares purchased by the Company on the open market for purposes of the Plan. If and to the extent Options granted under the Plan terminate, expire, or are canceled, forfeited, exchanged or surrendered without having been exercised, or if any Restricted Stock is forfeited, the shares subject to such Grants shall again be available for purposes of the Plan, unless otherwise provided by the Board. On May 24, 2005, the Board of Directors approved the issuance of 75,000,000 shares of the Company's common stock to each of the four non-employee directors of the Company, or 300,000,000 in the aggregate, having a value of $52,500 each or $210,000 in the aggregate, in recognition of the considerable time and effort that each non-employee director has devoted to the Company's business since at least October 1999 without adequate compensation and without the protection of directors and officers liability insurance (the "Stock Grants"). The Stock Grants were formally issued pursuant to the terms and conditions of the Plan on June 29, 2005. Pursuant to the terms of the June 7, 2005 Services Agreement between Mr. Danson, Danson Partners, LLC and the Company, (See Note 12(A)), Mr. Danson was to receive a share bonus of 200,000,000 restricted, fully vested shares of the Company's Common Stock (the "Stock Bonus"). On June 29, 2005, the Stock Bonus was formally issued pursuant to the terms and conditions of the Plan. These shares had a value of $140,000 and together with the Stock Grants above, have an aggregate value of $350,000 that was charged to earnings as compensation expense for the fiscal year ended June 30, 2005. (F) Stock Issued For Services During the fiscal year ended June 30, 2005, the Company issued 5,000,000 shares of our common stock having a value of $7,500 for professional services rendered. NOTE 12. COMMITMENTS AND CONTINGENCIES (A) Employment Agreements On June 7, 2005, the Company entered into a Services Agreement (the "Services Agreement") with Wayne I. Danson and Danson Partners, LLC , a limited liability company of which Mr. Danson is a principal ("DPL"). Prior to entering into the Services Agreement, Mr. Danson had served as the Company's President and Chief Financial Officer pursuant a Consulting Agreement. Under the Services Agreement, DPL will provide Mr. Danson's services to the Company and Mr. Danson will serve as Chief Executive Officer, President and Chief Financial Officer of the Company. In addition, the Company will take all necessary action to cause Mr. Danson to continue as a member of the Company's Board of Directors, and, if elected, Mr. Danson will continue to serve as a director of the Company. The Services Agreement further provides that, at the request of the Company's Board of Directors, Mr. Danson also will serve as a director or officer of any subsidiary of the Company without additional compensation. The Services Agreement is effective as of January 1, 2005 and expires on the second anniversary thereof unless earlier terminated in accordance with its terms. Under the Services Agreement, the Company will pay DPL an annual base fee of $250,000. Pursuant to the Services Agreement, DPL is also entitled to (i) a cash bonus of $250,000, including $50,000, which was paid in July 2004 and $75,000, which was paid in January 2005 with the remaining $125,000 to be earned as of August 1, 2005 and paid on or before August 31, 2005 (this remaining amount has not been paid as of the date of this report), and (ii) a share bonus of 200,000,000 fully vested shares of the Company's Common Stock issued contemporaneously with the execution of the Services Agreement. Mr. Danson has entered into a Lock-Up Agreement with the Company in connection with the issuance of the share bonus. For each fiscal year or portion therefore during the term of the Services Agreement, the Company may pay to DPL an annual performance bonus, in cash and/or restricted shares of Common Stock, in an amount determined at the sole discretion of the Compensation Committee, taking into account such factors as it considers appropriate, including but not necessarily limited to, Mr. Danson's contribution to the Company's consolidated net earnings and stock appreciation during such fiscal year. In addition, the Company may grant cash bonuses, restricted shares of Common Stock, or options to DPL in consideration for Mr. Danson's services, with a vesting schedule and other terms established by the Company's Compensation Committee in its sole discretion. Neither Mr. Danson nor DPL will receive additional consideration for Mr. Danson's service as a director of the Company. Under the Services Agreement, the Company is obligated to provide a $2,000,000 term life insurance policy on Mr. Danson, the beneficiary of which will be Mr. Danson's wife, and to insure Mr. Danson under a $2,000,000 key man life insurance policy, the beneficiary of which will be the Company. F-19 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2005 On June 24, 2004, we entered into a two year employment agreement with Martin Nielson, our Senior Vice President-Acquisitions (the "Nielson Agreement"). Under the terms of the Nielson Agreement, Mr. Nielson is employed as Encompass' President and Chief Executive Officer and a Senior Vice President-Acquisitions of the Company. Mr. Nielson is entitled to a $200,000 annual salary and the right to earn up to 50,000,000 shares of our restricted common stock valued at $.01 per share, or $500,000, to vest over a two-year period. As of June 30, 2005, Mr. Nielson has received 12,500,000 shares of common stock and is entitled to receive the balance of 37,500,000 shares when the stock fully vests in June 2006. Mr. Nielson is also entitled to receive an Incentive Bonus determined at the discretion of our Compensation Committee based on his contribution to our overall performance as well as a bonus based on the overall separate business and financial performance of Encompass and its wholly-owned operating subsidiaries. In addition, we have provided Mr. Nielson with a $1 million life insurance policy for his benefit and also insure Mr. Nielson under a $2 million key man life insurance policy. Mr. Nielson's contract was amended on June 1, 2005 to provide that Mr. Nielson's annual compensation for fiscal 2005 and 2006 will be $225,000 and $175,000, respectively. The Company recorded amortization of deferred compensation expense in the amount of $250,000 for the fiscal year ended June 30, 2005 in connection with Mr. Nielson's employment agreement. On June 3, 2004, we entered into a three-year employment agreement with Lisa Welton. In accordance with the terms of Ms. Welton's employment agreement, Ms. Welton will hold the offices of President and Chief Executive Officer, and be a director, of Cyber-Test, as well as hold the office of Executive Vice-President of Encompass. Ms. Welton is entitled to a $120,000 annual salary. Ms. Welton is also entitled to receive an incentive bonus determined at the discretion of our Compensation Committee based on her contribution to our overall performance as well as a bonus based on the overall separate business and financial performance of Cyber-Test. In addition, we insure Ms. Welton under a $2 million key man life insurance policy. On June 3, 2004, we entered into a three-year employment agreement with Thomas Sutlive. In accordance with the terms of Mr. Sutlive's employment agreement, Mr. Sutlive will hold the office of Vice-President of Cyber-Test. Mr. Sutlive is entitled to a $110,000 annual salary. Mr. Sutlive is also entitled to receive an incentive bonus determined at the discretion of our Compensation Committee based on his contribution to our overall performance as well as a bonus based on the overall separate business and financial performance of Cyber-Test. (B) Termination of Employment Agreements On May 10, 2005, Pacific Magtron International Corp. terminated the Employment Agreements, dated December 30, 2004, among Pacific Magtron International Corp., Advanced Communications Technologies, Inc., and Encompass Group Affiliates, Inc. and each of Theodore S. Li and Hui Cynthia Lee. 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. F-20 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2005 (C) Operating Lease Commitment The Company's principal executive office is located at 420 Lexington Avenue, Suite 2738, New York, New York 10170. The Company, through a license agreement effective December 1, 2004 with Danson Partners, LLC, a party related to our chief executive officer, occupies a 499 square foot office facility having a monthly lease obligation of $1,478, as adjusted annually. The term of the Company's license agreement is a month-to-month term and is at fair market rental. The Company's core operating business, Cyber-Test is located at 448 Commerce Way, Longwood, Florida 32750. This 29,000 square foot office/warehouse facility has a one-year triple net lease that commenced on August 1, 2004 and ends on July 31, 2005, and carries two one year options at a monthly lease obligation of $13,900. Cyber-Test exercised its one year option and extended its lease to July 31, 2006. The lease is renewable on a year-to-year basis by providing written notice 60 days prior to the expiration of the then current term. The Company's principal operating unit, Encompass is located at 1600 California Circle, Milpitas, California 95035. Encompass leases 2,000 square feet of office space on a month-to-month basis for $2,000 per month. The lease commenced on July 1, 2005. (D) 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 June 30, 2005, there were no threatened or pending legal matters that would have a material impact on the Company's consolidated results of operations, financial position or cash flows. On May 11, 2005, we filed a complaint in the United States District Court for the Southern District of New York against Theodore S. Li and Hui Cynthia Lee, the former officers and principal shareholders of PMIC, for the recovery of damages and costs for securities fraud, breach of contract and other counts in connection with the Stock Purchase Agreement dated December 10, 2004 between the Company and Mr. Li and Ms. Lee. On or about July 6, 2005, the defendants filed a motion for a more definite statement of our complaint. That motion remains under consideration by the court and discovery has not yet commenced. NOTE 13. RELATED PARTIES (A) Legal Counsel Certain of the Company's legal counsel are stockholders and directors of the Company. The Company has paid these attorneys, for current and prior legal services, an aggregate of $76,882 in cash and $0 in stock during the fiscal year 2005 and $150,004 in cash and $155,000 in stock during the fiscal year 2004. At June 30, 2005, the Company had no balance owed to these attorneys. (B) President, Chief Executive Officer and Chief Financial Officer The Company's President, Chief Executive Officer and Chief Financial Officer, who is also a director and stockholder of the Company, and Managing Director and Founder of a separate company, has been contracted to provide executive and financial consulting services to the Company. The Company paid this executive, for current and prior executive and financial services, $362,476 in cash and $140,000 in stock during the fiscal year 2005 and $279,794 in cash and $150,000 in stock during the fiscal year 2004. At June 30, 2005, the Company had no balance owed to this executive. (C) Independent Directors Certain of the Company's independent directors were contracted to provide business services to the Company. The Company paid these independent directors, for current and prior business services, an aggregate of $23,406 in cash and $0 in stock during the fiscal year 2005 and $24,666 in cash and $30,000 in stock during the fiscal year 2004. At June 30, 2005, the Company did not have any remaining obligation to these independent directors. F-21 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2005 NOTE 14. GOING CONCERN The Company's consolidated financial statements for the fiscal year ended June 30, 2005, have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company's net loss of $735,833 and negative cash flow from operations of $875,933 for the year ended June 30, 2005 and working capital deficiency of $139,363 as of June 30, 2005, raise substantial doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company's ability to resolve liquidity problems by generating sufficient operating profits to provide an additional source of working capital. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. EX-10.22 2 v026610-ex10_22.txt AMENDMENT TO EMPLOYMENT AGREEMENT AMENDED EMPLOYMENT AGREEMENT ---------------------------- AMENDED EMPLOYMENT AGREEMENT (this "Agreement"), dated as of the 1st day of June, 2005 ("Effective Date"), by and among Encompass Group Affiliates, Inc., a Delaware corporation ("Encompass"), Advanced Communication Technologies, Inc., a Florida Corporation ("ACT"), and Martin Nielson, an individual whose address is 12111 Hilltop Drive, Los Altos Hills, CA ("Executive"). Encompass and ACT, together with any and all of their respective subsidiaries, shall be referred to collectively herein as the "Company." This Amended Employment Agreement amends and replaces the Employment Agreement ("Original Agreement") between Executive and the Company dated as of June 24, 2004 ("Original Effective Date"). WITNESSETH WHEREAS, on December 30, 2004, ACT acquired a majority of the outstanding common stock of Pacific Magtron International Corp. ("PMIC"). NOW, THEREFORE, in consideration of the mutual covenants and promises herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Employment. (a) Encompass hereby employs Executive, and Executive accepts employment with Encompass, as Chief Executive Officer, or such other executive position with similar responsibilities and duties of a chief executive officer of a company. (b) ACT hereby employs Executive, and Executive hereby accepts employment with ACT, as Senior Vice President, or such other executive position with similar responsibilities and duties of a senior vice president of a company as may be determined by the Board of Directors of ACT (the "Board") from time to time during the Employment Period (as defined below). (c) Executive is currently a member of the Board. (d) In addition to his duties set forth in this Paragraph 1 and in Paragraph 3 below, Executive shall at the request of the ACT CEO (as defined below) or the Board serve as an officer or director of subsidiary of ACT, without additional compensation and subject to any policy of the Compensation Committee of the Board (the "Compensation Committee") with regard to directors' fees. 2. Term. The initial term of this Agreement commenced on the Original Effective Date and will expire on the second anniversary thereof (the "Initial Employment Period"), unless earlier terminated in accordance with its terms; provided, however, that the Company shall have the option of retaining the services of Executive, on the terms set forth in this Agreement, for an additional one-year period by providing Executive with written notice thereof not less than thirty (30) days prior to the expiration of the Initial Employment Period (the "Option Period" and together with the Initial Employment Period, the "Employment Period"). Unless earlier terminated in accordance herewith, upon expiration of the Option Period, this Agreement shall be deemed to have been extended for additional terms of successive one year periods commencing on the day after the expiration of the then current Employment Period. 3. Employment and Duties. 3.1 Duties and Responsibilities. (a) Executive's area of responsibility during the Employment Period shall be that of Chief Executive Officer of Encompass and such senior executive position of ACT to which the Board might appoint him. Executive shall directly report to the Chief Executive Officer of ACT (the "ACT CEO"), or such other senior executive officer of ACT, as determined from time to time by the Company. The services to be rendered by Executive pursuant to this Agreement shall consist of such services as defined and directed by the Board or the ACT CEO. (b) During the Employment Period, Executive shall serve the Company faithfully and to the best of his ability; shall devote his entire working time, attention, energy and skill to his employment and the benefit and business of the Company; and shall use his best efforts, skills and ability to promote its interests and to perform such duties as from time to time may be reasonably assigned to him and are consistent with his titles and positions with the Company. (c) During the Employment Period, in addition to any other duties or responsibilities the Company gives to Executive, Executive shall be required to sign, and shall sign, all certifications and such other documents or instruments required of an executive of a public company or otherwise by (i) the Securities and Exchange Commission, (ii) any exchange or association on which the Company's shares of capital stock are listed, (iii) any federal, state or local authority, (iv) any other governmental, quasi-governmental or non-governmental entity or organization (foreign or domestic) that regulates or has authority over the Company, and/or (v) the Company in connection with any of the foregoing. 3.2 Observance of Rules and Regulations. Executive agrees to observe and comply with all applicable laws and regulations, as well as the rules and regulations of the Company, with respect to the performance of his duties. 3.3 Resignation from Other Positions. Executive has resigned from any and all other positions he may hold as an officer or director with any other company prior to the Original Effective Date, other than the Company; provided, however, that notwithstanding the foregoing, Executive shall be permitted to remain as (i) an outside director, but not as Chairman, of Hy-Tech Technology Group, Inc. and Emerging Delta Corp., and (ii) Chairman of Altos Bancorp, Inc. ("Altos") for so long as Altos remains a privately held company that is not required to file periodic and other reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. 2 4. Compensation; Benefits and Expenses. 4.1 Acquisition Bonuses. (a) Upon execution of the Original Agreement, ACT granted to Executive, and Executive shall receive, 50,000,000 shares of ACT's restricted common stock, priced at $.01 per share, of which (i) 12,500,000 shares will fully vest on July 1, 2005, and (ii) 37,500,000 shares will fully vest on July 1, 2006 (together, the "ACT Shares"); provided, as to each vesting traunch, that Executive is then employed by the Company; and provided further that the number of ACT Shares shall be adjusted accordingly for stock splits, reverse stock splits and other recapitalizations effected by ACT. Notwithstanding the foregoing, in the event Executive's employment with the Company is terminated by the Company without "cause" prior to the expiration of the Initial Employment Period, a pro-rata amount of otherwise unvested ACT Shares, based on the number of days elapsed during the applicable fiscal year, shall become fully vested and payable by the Company. (b) Within five (5) business days after the consummation of the transaction contemplated by that certain Agreement, dated May 27, 2004, by and among Encompass and HYTT, Encompass paid to Executive $15,000 in cash. (c) Within five (5) business days after the later to occur of (i) the consummation of the acquisition of a majority of the outstanding stock of Pacific Magtron International Corp., Encompass paid to Executive $15,000 in cash. 4.2 Base Salary. (a) As compensation for the services to be rendered hereunder, during agreement year ending on June 23, 2005, Encompass shall pay to Executive an annual base salary (the "Base Salary") of $225,000; during the agreement year ending June 23, 2006, the Base Salary shall be $175,000; and during the Option Period, the Base Salary shall be $200,000. The Base Salary shall be payable in accordance with usual payroll practices of the Company. (b) The Base Salary payable by Encompass for any period shall be reduced by any cash compensation for such period paid to Executive by PMIC (or its subsidiaries) or any other indirect or direct majority or wholly owned subsidiary of Encompass or ACT. 4.3 Bonus. (a) For each fiscal year or portion thereof after the Original Effective Date and during the Employment Period, the Company shall pay to Executive an annual performance bonus, in cash and/or restricted stock of ACT, in an amount determined at the sole discretion of the Compensation Committee, taking into account Executive's contribution to ACT's consolidated net earnings and stock appreciation during such fiscal year (the "Overall Performance Bonus"). (b) Immediately following each fiscal year, Encompass shall set aside for the payment of Encompass executive bonuses, an amount equal to five percent (5%) of net income of Encompass during such fiscal year (the "Encompass Bonus Pool"). For each fiscal year or portion thereof after the Effective Date and during the Employment Period, the Company shall pay to Executive an annual performance bonus, in cash and/or restricted stock of ACT, equal to a portion of the Encompass Bonus Pool, as determined by the Compensation Committee, in its sole discretion (the "Encompass Performance Bonus" and together with the ACT Performance Bonus, the "Performance Bonuses"). The Performance Bonuses shall be paid by Encompass to the extent payable in cash and by ACT to the extent payable in stock. 3 For purposes hereof, "net income" shall mean, with respect to Encompass, for any fiscal year, the net income (loss) of Encompass for such fiscal year, determined on a consolidated basis (consolidated basis shall include Encompass and all of its wholly-owned subsidiaries) in accordance with generally accepted accounting principals, consistently applied; provided, however, that there shall be excluded from net income (a) the net income (loss) of any person in which Encompass has a joint interest with a third party, except to the extent such net income is actually paid to Encompass by dividend or other distribution during such fiscal year, (b) the net income (or loss) of any person accrued prior to the date it becomes a subsidiary of Encompass or is merged into or becomes consolidated with Encompass or its assets are purchased by Encompass, and (c) the net income (if positive) of any subsidiary of Encompass to the extent that the declaration or payment of dividends or similar distributions of such net income by such subsidiary (i) is not at that time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order statute, rule or governmental regulation or (ii) would be subject to any taxes payable on such dividends or distributions. (c) In addition to the Performance Bonuses, the Company may grant restricted shares of common stock of ACT to Executive, with a vesting schedule and other terms established by the Compensation Committee, in its sole discretion (the "Incentive Bonus"). (d) Executive acknowledges that the amount of the Performance Bonuses and the amount of the Incentive Bonus shall at all times be determined by the Compensation Committee, in its sole discretion. The Company shall pay each of the Performance Bonuses and the Incentive Bonus to Executive within thirty (30) days after the Company's audited results for the applicable fiscal year are delivered to the Company, but in no event later than October 15 of the immediately following fiscal year. 4.4 Life Insurance. (a) During the Employment Period, the Company shall provide Executive with term life insurance with a death benefit equal to $1,000,000, provided that Executive is insurable. The Company shall pay all premiums with respect to such life insurance. Such life insurance may be provided either through the Company's group life insurance programs, by an individual policy, or by a combination of both group and individual policies. Executive shall at all times designate the beneficiary(ies) of such life insurance. (b) In addition to Section 4(a) above, the Company shall maintain "key man" life insurance on the life of Executive with a death benefit equal to $2,000,000. The Company shall pay all premiums with respect to such life insurance. The Company shall at all times designate the beneficiary(ies) of such "key man" life insurance. 4 4.5 Other Benefits. Executive shall also be eligible to participate in any life and health insurance programs that the Company makes available to all of its executives of similar seniority. Executive shall also be eligible to receive discretionary performance based bonuses as approved and authorized by the Compensation Committee, including any incentive stock programs approved by ACT's shareholders. 4.6 Business Expenses. Executive will be reimbursed, in accordance with the Company's expense reimbursement policy, for business expenses that have been pre-approved by the Board or the ACT CEO upon presentation of vouchers or other documents reasonably necessary to verify the expenditures and sufficient, in form and substance, to satisfy Internal Revenue Service requirements for such expenses. 4.7 Vacation. Executive shall be entitled to take up to four (4) weeks of vacation per calendar year, which shall be taken in accordance with the Company's vacation policy in effect from time to time for executives of comparable seniority. 5. No Competitive Activities; Confidentiality; Invention 5.1 General Restriction. During the Employment Period and for a period of two (2) years thereafter (the "Restricted Period"), Executive covenants and agrees that, except on behalf of the Company, he will not, directly or indirectly: (a) Competing Business. Own, manage, operate, control, participate in the ownership, management, operation or control of, be employed by, or provide services as a consultant to, any individual or business that is involved in business activities that are the same as, similar to or in competition with, directly or indirectly, with any business activities conducted, or actively being planned, by the Company during the Restricted Period (it being acknowledged that the Company's business is national in scope). The ownership of less than one percent (1%) of the outstanding stock of any public corporation shall not be deemed a violation of this provision. (b) Soliciting Customers. Attempt in any manner to contact or solicit any individual, firm, corporation or other entity (i) that is or has been, a customer of the Company at any time during the Restricted Period, (ii) to which a proposal has been made by the Company during the Restricted Period or (iii) appearing on the Company's new business target list on the date of Executive's termination (as such list has been prepared and maintained in accordance with the Company's past practice), for the purpose of providing services or products similar to the services and products provided by the Company, or engaging in any activity which could be, directly or indirectly, competitive with the business of the Company. (c) Interfering with Other Relations. Persuade or attempt to persuade any supplier, vendor, licensor or other entity or individual doing business with the Company to discontinue or reduce its business with the Company or otherwise interfere in any way with the business relationships and activities of the Company. (d) Employees. Attempt in any manner to solicit any individual, who is at the time of such attempted solicitation, or at any time during the one (1) year period preceding the termination of Executive's employment, an employee or consultant of the Company, to terminate his or her employment or relationship with the Company, or engage such individual, as an employee or consultant. Cooperate with any other person in persuading, enticing or aiding, or attempting to persuade, entice or aid, any employee of or consultant to the Company to terminate his or her employment or business relationship with the Company, or to become employed as an employee or retained as a consultant by any person other than the Company. 5 5.2 Confidentiality Agreement. Executive shall not, either during the Employment Period or at any time thereafter, use or disclose to any third person any Confidential Information of the Company, other than at the direction of the Company, or pursuant to a court order or subpoena, provided that Executive will give notice of such court order or subpoena to the Company prior to such disclosure. Upon the termination of Executive's employment with the Company for any reason, Executive shall return any notes, records, charts, formulae or other materials (whether in hard copy or computer readable form) containing Confidential Information, and will not make or retain any copies of such materials. Without limiting the generality of the foregoing, the parties acknowledge that the Company from time to time may be subject to agreements with its customers, suppliers or licensors to maintain the confidence of such other persons' confidential information. The terms of such agreements may require that the Company's employees, including Executive, be bound by such agreements, and Executive shall be deemed so bound upon notice to him of the terms of such agreements. The term "Confidential Information" as used herein shall mean any confidential or proprietary information of the Company whether of a technical, engineering, operational, financial or economic nature, including, without limitation, all prices, discounts, terms and conditions of sale, trade secrets, know-how, customers, inventions, business affairs or practices, systems, products, product specifications, designs, plans, manufacturing and other processes, data, ideas, details and other information of the Company. Confidential Information shall not include information which can be proven by Executive to have been developed by his own work as of the Effective Date completely independent of its disclosure by the Company or which is in the public domain, provided such information did not become available to the general public as a result of Executive's breach of this Paragraph 5.2. 5.3 Disclosure of Innovations. Executive shall make prompt and full written disclosure to the Company and solely the Company of all writings, inventions, processes, methods, plans, developments, improvements, procedures, techniques and other innovations of any kind that Executive may make, develop or reduce to practice, alone or jointly with others, at any time during the Employment Period and for a period of one (1) year thereafter, whether during working hours or at any other time and whether at the request or upon the suggestion of the Company or otherwise, and whether or not they are eligible for patent, copyright, trademark, trade secret or other legal protection (collectively, "Innovations"). Examples of Innovations shall include, but are not limited to, discoveries, research, formulas, tools, know-how, marketing plans, new product plans, production processes, advertising, packaging and marketing techniques and improvements to computer hardware or software. The written disclosures provide for herein shall be made to the ACT CEO or the Board. 5.4 Assignment of Ownership of Innovations. All Innovations shall be the sole and exclusive property of the Company. Executive hereby assigns all rights, title or interest in and to the Innovations to the Company. At the Company's request and expense, during the Employment Period and at any time thereafter, Executive will assist and cooperate with the Company in all respects and will execute documents and give testimony to obtain, maintain, perfect and enforce for the Company any and all patent, copyright, trademark, trade secret and other legal protections for the Innovations. 6 5.5 Remedies. Executive acknowledges that the restrictions contained in the foregoing paragraphs 5.1 through 5.4, in view of the nature of the business in which the Company is engaged, are reasonable and necessary in order to protect the legitimate interests of the Company, and that the legal remedies for a breach of any of the provisions of this section 5 will be inadequate and that such provisions may be enforced by restraining order, injunction, specific performance or other equitable relief. Such equitable remedies shall be cumulative and in addition to any other remedies which the injured party or parties may have under applicable law, equity, this Agreement or otherwise. Executive shall not, in any action or proceeding to enforce any of the provisions of this Paragraph 5, assert the claim or defense that an adequate remedy at law exists. The prevailing party shall be entitled to recover its legal fees and expenses in any action or proceeding for breach of this section 5. 5.6 Company Property. All Confidential Information; all Innovations; and all correspondence, files, documents, advertising, sales, manufacturers' and other materials or articles or other information of any kind, in any media, form or format furnished to Executive by the Company, which may not deemed confidential, shall be and remain the sole property of the Company ("Company Property"). Upon termination or at the Company's request, whichever is earlier, Executive shall immediately deliver to the Company all such Company Property. 5.7 Public Policy/Severability. The parties do not wish to impose any undue or unnecessary hardship upon Executive following his departure from the Company's employment. The parties have attempted to limit the provisions of this section 5 to achieve such a result, and the parties expressly intend that all provisions of this section 5 be construed to achieve such result. If, contrary to the effort and intent of the parties, any covenant or other obligation contained in this section 5 shall be found not to be reasonably necessary for the protection of the Company, to be unreasonable as to duration, scope or nature of restrictions, or to impose an undue hardship on Executive, then it is the desire of the parties that such covenant or obligation not be rendered invalid thereby, but rather that the duration, scope or nature of the restrictions be deemed reduced or modified, with retroactive effect, to render such covenant or obligation reasonable, valid and enforceable. The parties further agree that in the event a court, despite the efforts and intent of the parties, declares any portion of the covenants or obligations in this section 5 invalid, the remaining provisions of this section 5 shall nonetheless remain valid and enforceable. 6. Termination. 6.1 Termination For Cause. Notwithstanding anything to the contrary contained herein, this Agreement may be terminated prior to the expiration of the Employment Period upon seven (7) days' prior written notice from the Company to Executive for "cause," at which time the Company shall have no further obligations or liabilities to Executive whether under this Agreement or otherwise and Executive's right to further compensation and benefits hereunder (including, but not limited to, unvested stock) shall immediately cease, other than payment to Executive of Base Salary accrued, and reimbursement of expenses incurred in accordance with Paragraph 4.6, prior to the effective date of termination of this Agreement (the "Termination Date"). As used herein and throughout this Agreement, the term "cause" shall mean (i) any act or omission by Executive that constitutes malfeasance, misfeasance or nonfeasance in the course of Executive's duties hereunder, or in the judgment of the Board or the ACT CEO, Executive has been grossly negligent (including habitual neglect of duties), incompetent or insubordinate in carrying out his duties hereunder, (ii) a material breach of this Agreement that is not cured within ten (10) days of receipt of notice thereof, (iii) Executive's breach of a fiduciary duty owed to the Company or its affiliates, or (iv) Executive's conviction of, or pleading nolo contendere to, a criminal offense or crime constituting a misdemeanor or felony, or conviction in respect to any act involving fraud, dishonesty or moral turpitude (other than minor traffic infractions or similar minor offenses). 7 6.2 Termination without Cause. (a) Without Cause. This Agreement may be terminated by the Company without cause and for any reason or no reason prior to the expiration of the Employment Period upon thirty (30) days' prior written notice from the Company to the Executive. (b) Severance. In the event that the Company terminates Executive's employment without cause, the Company shall pay to Executive (i) Base Salary accrued, and expenses incurred in accordance with Paragraph 4.6, prior to the Termination Date, (ii) any unpaid bonus owed to Executive for a prior fiscal year ((i) and (ii) together, the "Accrued Payments"), which Accrued Payments shall be paid to Executive in accordance with Sections 4.2, 4.3 and 4.6, as applicable, and (iii) an additional amount of Base Salary which would have been payable to Executive during the six (6) month period immediately following the Termination Date (the "Severance Payment"), which Severance Payment shall be payable in cash to Executive in equal monthly installments on the first business day of each calendar month during the six (6) month period immediately following the Termination Date. Except as provided in the preceding sentence, the Company shall have no further obligations or liabilities to Executive whether under this Agreement or otherwise and Executive's right to further compensation and benefits hereunder (including, but not limited to, unvested stock) shall immediately cease. 6.3 Termination of Other Positions. Upon the Termination Date, Executive hereby resigns as Chief Executive Officer of Encompass and any and all other positions as officer or director Executive may then hold with the Company, and as fiduciary of any benefit plan of the Company. Executive shall promptly execute any further documentation as requested by the Company and, if Executive is to receive any payments from the Company, execution of such further documentation shall be a condition thereof. 8 7. Disability or Death. 7.1 Disability. If, during the Employment Period, Executive becomes disabled or incapacitated as determined under the Company's Long Term Disability Policy ("Permanently Disabled"), the Company shall have the right at any time thereafter (but in no event less than 120 days after the event causing such disability or incapacity), so long as Executive is then still Permanently Disabled, to terminate this Agreement upon thirty (30) days' prior written notice to Executive. In the event the Company does not have a Long Term Disability Policy at the time of the event causing the Executive to become Permanently Disabled, "Permanently Disabled" shall mean Executive's inability to fully perform his duties and responsibilities hereunder to the full extent required by the Company by reason of illness, injury or incapacity for 120 consecutive days or for more than six (6) months during any twelve (12) month period. If the Company elects to terminate this Agreement in the event that Executive becomes Permanently Disabled, the Company shall have no further obligations or liabilities to Executive, whether under this Agreement or otherwise (including, but not limited to, unvested stock) , other than payment to Executive of the Accrued Payments, which Accrued Payments shall be paid to Executive in accordance with Sections 4.2, 4.3 and 4.6, as applicable. 7.2 Death. If Executive dies during the Employment Period, this Agreement shall automatically terminate as of the date of Executive's death, and the Company shall have no further obligations or liabilities to Executive, whether under this Agreement or otherwise (including, but not limited to, unvested stock), other than payment to Executive's estate of the Accrued Payments, which Accrued Payments shall be paid to Executive in accordance with Sections 4.2, 4.3 and 4.6, as applicable. 8. Indemnification. Each of the Company and Executive shall indemnify the other for any losses, damages, liabilities, judgments, claims, costs, penalties and expenses incurred by such other party (including, without limitation, costs and reasonable attorneys' fees and costs), resulting from the indemnifying party's failure to perform any of their obligations contained in this Agreement. The Company shall be obligated to indemnify Executive against those liabilities incurred by him in connection with any proceeding to which he is made a party as the result of his performing his duties hereunder solely in accordance with, and as permitted by, the Company's bylaws. As soon as practicable, ACT shall use commercially reasonable efforts to obtain directors' and officers' insurance in amounts equal to amounts maintained by publicly companies similarly situated to that of ACT. 9. Governing Law. This Agreement shall be governed by the internal laws of the State of Delaware. Any action to enforce any term hereof shall be brought exclusively within the state or federal courts of Delaware to which jurisdiction and venue all parties hereby submit themselves. 10. Binding Effect. Except as otherwise herein expressly provided, this Agreement shall be binding upon, and shall inure to the benefit of the parties hereto, their respective heirs, legal representatives, successors and assigns. 11. Assignment. Any assignee of the Company shall have the right to enforce the restrictive covenants set forth in this Agreement, and the Company shall have the right to assign this Agreement and the right to enforce such covenants to any successor or assign of the Company. 12. Notices. All notices, designations, consents, offers, acceptances, waivers or any other communication provided for herein, or required hereunder, shall be sufficient if in writing and if sent by registered or certified mail, return receipt requested, overnight courier, or delivered by hand to (i) Executive at his last known address on the books of the Company or (ii) the Company at its principal place of business. 9 13. Additional Documents. Each of the parties hereto agrees to execute and deliver, without cost or expense to any other party, any and all such further instruments or documents and to take any and all such further action reasonably requested by such other of the parties hereto as may be necessary or convenient in order to effectuate this Agreement and the intents and purposes thereof. 14. Counterparts. This Agreement may be executed simultaneously in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument, and such counterparts may be delivered by facsimile transmission, which facsimile copies shall be deemed originals. 15. Entire Agreement. This Agreement contains the sole and entire agreement and understanding of the parties and supersedes any and all prior agreements, discussions, negotiations, commitments and understandings among the parties hereto with respect to the subject matter hereof. There are no representations, agreements, arrangements or understandings, oral or written, between or among the parties concerning the subject matter hereto, which are not fully expressed herein or in any supplemental written agreements of even or subsequent date hereof. 16. Severability. If any provision of this Agreement, or the application thereof to any person or circumstances, shall, for any reason and to any extent, be invalid or unenforceable, the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected thereby, but rather shall be enforced to the greatest extent permitted by law. 17. Modification. This Agreement cannot be changed, modified or discharged orally, but only if consented to in writing by both parties. 18. Contract Headings. All headings of the Paragraphs of this Agreement have been inserted for convenience of reference only, are not to be considered a part of this Agreement, and shall in no way affect the interpretation of any of the provisions of this Agreement. 19. Waiver. Failure to insist upon strict compliance with any of the terms, covenants, or conditions hereof shall not be deemed a waiver of such term, covenant, or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one time or more times be deemed a waiver or relinquishment of such right or power at any other time or times. 20. Representation of Executive. Executive, with the full knowledge that the Company is relying thereon, represents and warrants that he has not made any commitment inconsistent with the provisions hereof and that he is not under any disability which would prevent him from entering into this Agreement and performing all of his obligations hereunder. 10 21. Joint Participation in Drafting. Each party to this Agreement participated in the drafting of this Agreement. As such, the language used herein shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction shall be applied against any party to this Agreement. [SIGNATURE PAGE FOLLOWS] 11 IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the day and year first above written. ENCOMPASS GROUP, INC. By: /s/ Wayne I. Danson --------------------------------------- Name: Wayne I. Danson Title: Chairman ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. By: /s/ Wayne I. Danson --------------------------------------- Name: Wayne I. Danson Title: CEO EXECUTIVE: /s/ MARTIN NIELSON --------------------------------------- MARTIN NIELSON EX-21 3 v026610-ex21.txt Exhibit 21 Subsidiaries of ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. at June 30, 2005 ---------------- Encompass Group Affiliates, Inc. 420 Lexington Avenue New York, NY 10170 EIN: 20-1088535 State of Incorporation: Delaware Hudson Street Investments, LLC 420 Lexington Avenue New York, NY 10170 EIN: 54-2137152 State of Incorporation: Delaware Cyber-Test, Inc. 448 Commerce Way Longwood, FL 32750 EIN: 20-1106218 State of Incorporation: Delaware SpectruCell, Inc. 420 Lexington Avenue New York, NY 10170 EIN: 56-2425121 State of Incorporation: Delaware Advanced Global Communications, Inc. 420 Lexington Avenue New York, NY 10170 EIN: 58-2486173 State of Incorporation: Florida * * * * EX-31 4 v026610-ex31.txt CERTIFICATION BY CEO AND CFO EXHIBIT 31 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. OFFICER'S CERTIFICATE PURSUANT TO SECTION 302 I, Wayne I. Danson, the President, Chief Executive Officer and Chief Financial Officer of Advanced Communications Technologies, Inc. certify that: 1. I have reviewed this Form 10-KSB of Advanced Communications Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Omitted; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting. 5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: October 3, 2005 /s/ Wayne I. Danson - ------------------- Wayne I. Danson President, Chief Executive Officer and Chief Financial Officer EX-32 5 v026610-ex32.txt CERTIFICATION BY CEO AND CFO EXHIBIT 32 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Advanced Communications Technologies, Inc. (the Company) on Form 10-KSB for the period ended June 30, 2005 as filed with the SEC on the date hereof (the Report), I, Wayne I. Danson, President, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to Advanced Communications Technologies, Inc. and will be retained by Advanced Communications Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. Date: October 3, 2005 /s/ Wayne I. Danson - ------------------- Wayne I. Danson President, Chief Executive Officer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----