Attached files
file | filename |
---|---|
EX-31.1 - Encompass Group Affiliates, Inc | v174544_ex31-1.htm |
EX-32.2 - Encompass Group Affiliates, Inc | v174544_ex32-2.htm |
EX-32.1 - Encompass Group Affiliates, Inc | v174544_ex32-1.htm |
EX-31.2 - Encompass Group Affiliates, Inc | v174544_ex31-2.htm |
U.S.
Securities And Exchange Commission
Washington,
D.C. 20549
Form
10-Q
(check
one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
Quarterly Period Ended December 31, 2009
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
EXCHANGE ACT OF 1934
Commission
File Number 000-30486
Encompass Group Affiliates,
Inc.
(Exact
name of registrant as specified in its charter)
Florida
(State or
other jurisdiction
of
incorporation or organization)
65-0738251
(IRS
Employer Identification No.)
420 Lexington Avenue, New
York, NY 10170
(Address
of principal executive offices)
(646)-227-1600
(Issuer’s
telephone number)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, non-accelerated filer or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
|
Accelerated filer ¨
|
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
|
Smaller reporting company 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
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Class
|
Outstanding as of February 15, 2010
|
||
Common
Stock, no par value per share
|
13,286,151,226
shares
|
Encompass
Group Affiliates, Inc.
Index
To Form 10-Q
Part
I - Financial Information (Dollars in thousands, except share
data)
|
||
Item
1.
|
Financial
Statements
|
2
|
Condensed
Consolidated Balance Sheets As Of December 31, 2009 (Unaudited) and June
30, 2009
|
2
|
|
Condensed
Consolidated Statements Of Operations (Unaudited) For The Three and Six
Months Ended December 31, 2009 and 2008
|
3
|
|
Condensed
Consolidated Statement Of Stockholders’ Equity (Unaudited) For The Six
Months Ended December 31, 2009
|
4
|
|
Condensed
Consolidated Statements Of Cash Flows (Unaudited) For The Six Months Ended
December 31, 2009 and 2008
|
5
|
|
Notes
To Condensed Consolidated Financial Statements (Unaudited)
|
6
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
16
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
21
|
Item
4.
|
Controls
and Procedures
|
22
|
Part
II - Other Information
|
||
Item
1.
|
Legal
Proceedings
|
23
|
Item
1A.
|
Risk
Factors
|
23
|
Item
2.
|
Unregistered Sales
of Equity Securities And Use Of Proceeds
|
23
|
Item
3.
|
Defaults
Upon Senior Securities
|
23
|
Item
4.
|
Submission
of Matters To A Vote Of Security Holders
|
23
|
Item
5.
|
Other
Information
|
23
|
Item
6.
|
Exhibits
|
23
|
As used
herein, the terms the “Company,” “Encompass Group Affiliates,” ”Encompass,”
“we,” “us” or “our” refer to Encompass Group Affiliates, Inc. , a Florida
corporation.
Unless
otherwise noted herein, dollars are presented in thousands, except for per share
amounts.
i
Cautionary
Statement Regarding Forward-Looking Statements
Certain
statements in the "Management’s Discussion and Analysis or Plan of Operation"
and elsewhere in this quarterly report constitute "forward-looking statements"
(within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Act")) relating to us and our business, which represent our current
expectations or beliefs including, but not limited to, statements concerning our
operations, performance, financial condition and growth. All
statements, other than statements of historical facts, included in this
quarterly report that address activities, events or developments that
we expect or anticipate will or may occur in the future, including such matters
as our projections, future capital expenditures, business strategy, competitive
strengths, goals, expansion, market and industry developments and the growth of
our businesses and operations are forward-looking statements. Without
limiting the generality of the foregoing, words such as "may,” “believes,”
”expects,” "anticipates,” "could,” "estimates,” “grow,” “plan,” "continue,"
“will,” “seek,” “scheduled,” “goal” or “future” or the negative or other
comparable terminology are intended to identify forward-looking
statements. These statements by their nature involve substantial
risks and uncertainties, such as credit losses, dependence on management and key
personnel, variability of quarterly results, our ability to continue our growth
strategy and competition, certain of which are beyond our
control. Any or all of our forward-looking statements may turn out to
be wrong. They may be affected by inaccurate assumptions that we
might make or by known or unknown risks or
uncertainties. Should one or more of these risks or
uncertainties materialize or should the underlying assumptions prove incorrect,
actual outcomes and results could differ materially from those indicated in the
forward-looking statements.
Because of the risks and uncertainties
associated with forward-looking statements, you should not place undo reliance
on them. Further, any forward-looking statement speaks only as of the
date on which it is made, and we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which the statement is made or to reflect the occurrence of unanticipated
events.
Encompass
has determined that it qualifies as a “smaller reporting company” as defined in
Rule 12-b2 of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), and that it will take advantage of the Securities and Exchange
Commission’s rules permitting a smaller reporting company to comply with scaled
disclosure requirements for smaller reporting companies on an item-by-item
basis. The Company has elected to comply with the scaled disclosure requirements
for smaller reporting companies with respect to Part I, Item 3 – Quantitative
and Qualitative Disclosures About Market Risk, which is not applicable to
smaller reporting companies.
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Dollars
in thousands, except per share data)
Part
I - Financial Information
Item
1. – Financial Statements
December 31, 2009
|
June 30, 2009
|
|||||||
(Unaudited)
|
(Note
2)
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 3,710 | $ | 5,536 | ||||
Restricted
cash
|
— | 1,509 | ||||||
Accounts
receivable, net of allowance for doubtful
|
||||||||
accounts
of $318 and $441, respectively
|
7,801 | 9,677 | ||||||
Inventory
|
13,152 | 12,267 | ||||||
Due
from vendors
|
2,430 | 2,487 | ||||||
Deferred
tax asset
|
1,700 | 1,400 | ||||||
Prepaid
expenses and other current assets
|
2,699 | 2,386 | ||||||
Total
Current Assets
|
31,492 | 35,262 | ||||||
Property
and equipment, net
|
1,230 | 1,227 | ||||||
Other
Assets
|
||||||||
Intangible
assets, net
|
12,461 | 13,248 | ||||||
Goodwill
|
20,627 | 20,627 | ||||||
Deferred
tax asset
|
4,672 | 4,170 | ||||||
Other
assets
|
615 | 1,836 | ||||||
Total
Other Assets
|
38,375 | 39,881 | ||||||
TOTAL
ASSETS
|
$ | 71,097 | $ | 76,370 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
LIABILITIES
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable and accrued expenses
|
$ | 9,443 | $ | 11,766 | ||||
Escrow
liability
|
— | 1,509 | ||||||
Notes
payable, current portion
|
552 | 1,596 | ||||||
Total
Current Liabilities
|
9,995 | 14,871 | ||||||
Long
Term-Liabilities
|
||||||||
Notes
payable, less current portion
|
36,846 | 37,056 | ||||||
Deferred
tax liability
|
1,738 | 1,836 | ||||||
Other
|
322 | 306 | ||||||
Series
E preferred stock
|
6,062 | 5,360 | ||||||
Total
Long-Term Liabilities
|
44,968 | 44,558 | ||||||
TOTAL
LIABILITIES
|
54,963 | 59,429 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Preferred
stock, $.01 par value, 25,000 authorized, 3,000 shares issued and
outstanding for Series C, Series D and Series E at December 31, 2009 and
June 30, 2009:
|
||||||||
Series
C convertible preferred stock, $.01 par value, 1,000 shares authorized,
1,000 shares issued and outstanding (liquidation value of $8,091 and
$7,713 at December 31, 2009 and June 30, 2009,
respectively)
|
— | — | ||||||
Series
D convertible preferred stock, $.01 par value, 1,000 shares authorized,
1,000 shares issued and outstanding (liquidation value of $814 and $776 at
December 31, 2009 and June 30, 2009, respectively)
|
— | — | ||||||
Common
stock, no par value, 230,000,000,000 shares authorized,
13,286,151,000
|
||||||||
shares
issued and outstanding at December 31, 2009 and June 30,
2009
|
36,152 | 36,152 | ||||||
Additional
paid-in capital
|
9,372 | 9,160 | ||||||
Accumulated
deficit
|
(29,390 | ) | (28,371 | ) | ||||
Total
Stockholders' Equity
|
16,134 | 16,941 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 71,097 | $ | 76,370 |
2
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars
in thousands, except per share data)
For The Three Months Ended
|
For The Six Months Ended
|
|||||||||||||||
December 31,
|
December 31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
NET
SALES
|
$ | 21,418 | $ | 30,060 | $ | 44,392 | $ | 57,546 | ||||||||
COST
OF SALES
|
15,370 | 22,275 | 31,890 | 43,856 | ||||||||||||
GROSS
PROFIT
|
6,048 | 7,785 | 12,502 | 13,690 | ||||||||||||
OPERATING
EXPENSES
|
||||||||||||||||
Depreciation
and amortization
|
557 | 537 | 1,109 | 956 | ||||||||||||
Selling,
general and administrative expenses
|
4,414 | 5,155 | 9,018 | 9,083 | ||||||||||||
Write
off of deferred transaction costs
|
— | — | 1,111 | — | ||||||||||||
TOTAL
OPERATING EXPENSES
|
4,971 | 5,692 | 11,238 | 10,039 | ||||||||||||
Income
From Operations
|
1,077 | 2,093 | 1,264 | 3,651 | ||||||||||||
OTHER
INCOME (EXPENSE)
|
||||||||||||||||
Other
income (expense)
|
(8 | ) | 58 | (3 | ) | 78 | ||||||||||
Interest
expense, net
|
(1,609 | ) | (1,663 | ) | (3,180 | ) | (2,943 | ) | ||||||||
TOTAL
OTHER INCOME (EXPENSE), NET
|
(1,617 | ) | (1,605 | ) | (3,183 | ) | (2,865 | ) | ||||||||
INCOME
(LOSS) BEFORE INCOME TAXES
|
(540 | ) | 488 | (1,919 | ) | 786 | ||||||||||
Income
tax benefit (provision)
|
— | (230 | ) | 900 | (370 | ) | ||||||||||
NET
INCOME (LOSS)
|
(540 | ) | 258 | (1,019 | ) | 416 | ||||||||||
Cumulative
dividend on preferred stock
|
(208 | ) | (208 | ) | (416 | ) | (416 | ) | ||||||||
NET
INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS
|
$ | (748 | ) | $ | 50 | $ | (1,435 | ) | $ | — | ||||||
Basic
net income (loss) per common share
|
$ | — | $ | — | $ | — | $ | — | ||||||||
Basic
weighted average number of common shares outstanding
|
13,286,151,000 | 16,286,151,000 | 13,286,151,000 | 15,815,047,000 | ||||||||||||
Diluted
net income (loss) per common share
|
$ | — | $ | — | $ | — | $ | — | ||||||||
Diluted
weighted average number of common shares outstanding
|
13,286,151,000 | 126,797,525,000 | 13,286,151,000 | 15,815,047,000 |
See
accompanying notes to unaudited condensed consolidated financial
statements
3
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR
THE SIX MONTHS ENDED DECEMBER 31, 2009
(UNAUDITED)
(Dollars
in thousands)
PREFERRED STOCK
|
COMMON STOCK
|
ADDITIONAL
PAID IN
|
ACCUMULATED
|
|||||||||||||||||||||||||
SHARES
|
AMOUNT
|
SHARES
|
AMOUNT
|
CAPITAL
|
DEFICIT
|
TOTAL
|
||||||||||||||||||||||
BALANCE
AT JULY 1, 2009
|
2,000 | $ | — | 13,286,151,000 | $ | 36,152 | $ | 9,160 | $ | (28,371 | ) | $ | 16,941 | |||||||||||||||
Stock-based
compensation
|
— | — | — | — | 212 | — | 212 | |||||||||||||||||||||
Net
loss for the period
|
— | — | — | — | — | (1,019 | ) | (1,019 | ) | |||||||||||||||||||
BALANCE
AT DECEMBER 31, 2009
|
2,000 | $ | — | 13,286,151,000 | $ | 36,152 | $ | 9,372 | $ | (29,390 | ) | $ | 16,134 |
See
accompanying notes to unaudited condensed consolidated financial
statements
4
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars
in thousands)
For the Six Months Ended
|
||||||||
December 31,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS USED IN OPERATIONS:
|
||||||||
Net
income (loss)
|
$ | (1,019 | ) | $ | 416 | |||
Adjustments
to reconcile net income (loss) to net cash used in operating
activities
|
||||||||
Depreciation
and amortization
|
1,174 | 1,054 | ||||||
Deferred
income taxes
|
(900 | ) | — | |||||
Allowance
for doubtful accounts
|
(123 | ) | 431 | |||||
Stock-based
compensation
|
212 | 194 | ||||||
Preferred
dividend classified as interest
|
702 | 438 | ||||||
Write
off of deferred transaction costs
|
1,111 | — | ||||||
Changes
in operating assets and liabilities:
|
||||||||
(Increase)
decrease in assets:
|
||||||||
Restricted
cash
|
1,509 | (1,112 | ) | |||||
Accounts
receivable
|
1,999 | (3,396 | ) | |||||
Inventory
|
(885 | ) | (4,249 | ) | ||||
Due
from vendors
|
57 | (217 | ) | |||||
Prepaid
expense and other assets
|
(303 | ) | (443 | ) | ||||
Increase
(decrease) in liabilities:
|
||||||||
Escrow
liability
|
(1,509 | ) | 1,112 | |||||
Accounts
payable and accrued expenses
|
(2,356 | ) | 3,181 | |||||
Net
cash used in operating activities
|
(331 | ) | (2,591 | ) | ||||
CASH
FLOWS USED IN INVESTING ACTIVITIES:
|
||||||||
Purchase
of business, net of cash acquired
|
— | (8,296 | ) | |||||
Acquisition
costs
|
— | (865 | ) | |||||
Purchase
of property and equipment
|
(225 | ) | (466 | ) | ||||
Net
cash used in investing activities
|
(225 | ) | (9,627 | ) | ||||
CASH
FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
|
||||||||
Principal
payments on notes payable
|
(1,270 | ) | (296 | ) | ||||
Proceeds
from issuance of preferred stock
|
— | 4,167 | ||||||
Proceeds
from issuance of senior and subordinated notes
|
— | 13,000 | ||||||
Payment
of debt and equity issuance costs
|
— | (272 | ) | |||||
Net
cash provided by (used in) financing activities
|
(1,270 | ) | 16,599 | |||||
Net
increase (decrease) in cash and cash equivalents
|
(1,826 | ) | 4,381 | |||||
Cash
and cash equivalents at beginning of period
|
5,536 | 4,008 | ||||||
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$ | 3,710 | $ | 8,389 |
See
accompanying notes to unaudited condensed consolidated financial
statements
5
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009
(UNAUDITED)
NOTE
1. ORGANIZATION
AND BUSINESS
Encompass
Group Affiliates, Inc., a Florida corporation ("we," "us," "our," “Encompass” or
the "Company"), specializes in the technology aftermarket service and supply
chain known as reverse logistics. Our wholly-owned subsidiaries and
principal operating units, Encompass Parts Distribution, Inc. ("Encompass Parts
Distribution") and Encompass Service Solutions, Inc., operate businesses that
provide parts procurement and distribution services, depot repair of consumer
electronics, computers and peripheral equipment, de-manufacturing and
reclamation services for flat panel display products, returns
management services and anticipates providing end-of-life cycle services for all
such products.
We are a
market leader in the consumer electronics segment of the reverse logistics
industry providing original equipment manufacturers (“OEMs”), retailers, third
party administrators (“TPAs”) and end-users with single-source, integrated life
cycle reverse logistic professional management services for technology
products. Our strategy addresses the overall market from both the
end-user driven product support and repair industry and from the
manufacturer-driven e-Waste recovery industry. While these two
industries have different characteristics, they have significant back-end
operational synergies. We are also focused on becoming a full-service
provider of repair, refurbishment, parts distribution and end-of-life cycle
services in other complimentary industries. To that end and to augment our
growth, we intend to continue to acquire additional businesses that either
repair and refurbish equipment or distribute parts typically used in the repair
and refurbishment process, as well as those that provide e-Waste recovery
services. We presently provide single source, value-added life cycle
professional management services for technology products to businesses and
consumers in the North American market, and, as described further below, have
expanded into Mexico and Canada.
On August
17, 2007, Encompass Parts Distribution completed the acquisition of Vance
Baldwin, Inc. (“Vance Baldwin”), an OEM parts distributor that has been a leader
in the industry for over fifty years. Vance Baldwin has operations in
southern Florida, suburban Atlanta and Las Vegas and distributes tens of
thousands of different parts (i.e., SKU’s) ranging from consumer electronics,
computers, printers, appliances and office supplies carried in stock or special
ordered from the five million parts that it has access to for
distribution. In addition, Vance Baldwin provides service aids and
industrial products such as cable, tools, test equipment, cleaners and other
installation equipment.
On July
14, 2008, Vance Baldwin entered into an agreement with Philips Consumer
Lifestyle North America (“Philips”), a division of Philips Electronics North
America Corporation. Under the terms of the agreement, Vance Baldwin,
as single primary authorized distributor, has assumed the management and
execution responsibilities for operational and order fulfillment of the
replacement parts business for Philips’ digital flat panel display
products. In this role the Company sells replacement parts to
independent service centers, as well as other parts distributors with whom it
competes. Under the terms of this agreement, the Company purchased
approximately $4,200 of inventory directly from Philips.
On August
1, 2008, Encompass Parts Distribution completed the acquisition of Tritronics,
Inc., (“Tritronics”) an OEM parts distributor that has been in business since
1975 and has operations in suburban Baltimore and Miami. Tritronics
similarly distributes tens of thousands of different parts (i.e., SKU’s) ranging
from consumer electronics, computers, printers, appliances and office supplies
carried in stock or special ordered from the five million parts that it has
access to for distribution. In addition, as with Vance Baldwin,
Tritronics also provides service aids and industrial products such as cable,
tools, test equipment, cleaners and other installation
equipment. Tritronics is a distributor of replacement parts in
the U.S. for substantially all of the major OEM manufacturers, with a
particularly strong market presence selling to the extensive network of
independent service centers that operate nationwide. Vance Baldwin and
Tritronics now conduct business as Encompass Parts Distribution.
In
addition, Encompass Parts Distribution has, since June 2004, owned Cyber-Test,
Inc., a Delaware corporation ("Cyber-Test"). Cyber-Test, which is
also known as Encompass Service Solutions, Inc. (“Encompass Service”), is a
depot repair and refurbishment company based in Florida. Encompass Service
operates as an independent service organization with the expertise to provide
board-level repair of technical products to third-party warranty companies,
OEMs, national retailers and national office equipment dealers. Service options
include advance exchange, depot repair, call center support, parts supply and
warranty management. Encompass Service'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 GPS
devices, PDAs and digital cameras and de-manufacturing and reclamation services
for flat-panel display products. Services are delivered nationwide through
proprietary systems that feature real-time electronic data interchange (“EDI”),
flexible analysis tools and repair tracking. Given the
interrelationship of distribution and service functions, the Company anticipates
that service facilities will be located in most EPD distribution centers within
the next year.
6
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009
(UNAUDITED)
In
connection with its strategy of expanding internationally, Encompass Parts
Distribution has formed subsidiaries in Mexico and Canada to provide parts
procurement and distribution services, depot repair of consumer electronics,
computers and peripheral equipment, de-manufacturing and reclamation services
and returns management services. Both operations have hired
employees, outfitted warehouses and, in the case of Mexico, commenced shipping
to customers in Latin and South America. The Canadian operation is
expected to ramp up operations over the next several months.
NOTE
2. SIGNIFICANT
ACCOUNTING POLICIES
General
During
the quarter ended September 30, 2009, the Company adopted The FASB Accounting Standards
Codification (ASC or Codification) and the Hierarchy of Generally Accepted
Accounting Principles (GAAP) which establishes the Codification as the
sole source for authoritative accounting principles generally accepted in the
United States of America (“U.S. GAAP”) and will supersede all accounting
standards in U.S. GAAP, aside from those issued by the SEC. The Codification will include
relevant portions of authoritative SEC content relating to matters within the
basic financial statements, which are considered as sources of authoritative
GAAP for SEC registrants. The adoption of the Codification did not
have an impact on the Company’s results of operations, cash flows or financial
position. Following the adoption of the Accounting Standards Codification
(ASC), the Company’s notes to the consolidated financial statements will no
longer make reference to Statement of Financial Accounting Standards
(SFAS) or other U.S. GAAP pronouncements.
Interim
Financial Statements
The
condensed consolidated financial statements as of and for the three and six
months ended December 31, 2009 and 2008 are unaudited but in the opinion of
management include all adjustments consisting of normal accruals necessary for a
fair presentation of financial position and the comparative results of
operations and cash flows. Results of operations for interim periods
are not necessarily indicative of those to be achieved or expected for the
entire year. Certain information and footnote disclosures, normally
included in financial statements prepared in accordance with GAAP, have been
condensed or omitted. These condensed financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Company’s Annual Report on Form 10-K for the fiscal year ended June 30,
2009. The June 30, 2009 balance sheet has been derived from the
audited financial statements as of that date.
Principles of
Consolidation
The
consolidated financial statements include the Company and all of its
wholly-owned subsidiaries. All significant inter-company transactions
have been eliminated in consolidation.
Use
of Estimates
The
preparation of the consolidated financial statements of the Company in
conformity with U.S. GAAP 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. The most significant estimates used are in determining values
of intangible assets, sales return accruals, inventory obsolescence and tax
assets and tax liabilities. Actual results may differ from the
estimated results.
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.
7
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009
(UNAUDITED)
Inventory
Inventory
of OEM parts purchased for resale and returned parts that are repaired and also
held for resale within the reverse logistics industry, which consists solely of
finished goods, is valued at the lower of cost (average cost basis) or market,
using the first-in, first-out (“FIFO”) method.
Management
performs periodic assessments to determine the existence of obsolete,
slow-moving inventory and non-usable replacement parts and equipment and records
necessary provisions to reduce such inventory and replacement parts and
equipment to net realizable value.
Core
Charges
The
vendors of products distributed by the Company frequently add a "core charge" to
the cost of individual replacement parts that the Company distributes as a means
of encouraging the return of certain replaced components, most frequently
circuit boards, which are defective. These defective, replaced
components are ultimately repaired and re-enter the distribution
channel.
Core
charges borne by the Company associated with goods in inventory are not included
in inventory as cost, but are classified separately in prepaid expenses and
other current assets in the condensed consolidated balance
sheets. Core charges associated with goods in inventory in the amount
of $1,830 and $1,702 are included in prepaid expenses and other current assets
as of December 31, 2009 and June 30, 2009, respectively.
Customers
either receive a credit for cores when returned, or are obligated to pay the
billed core charge in the event a core is not returned. This payment
effectively compensates the Company for the core charge it is obligated to pay
vendors when a core is not returned. Upon shipping a returned core to
a vendor, the Company records an asset for the amount due from the
vendor.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated
depreciation. When equipment is sold or otherwise disposed of, the
cost and related accumulated depreciation are eliminated from the accounts and
any resulting gain or loss is reflected in operations. Assets are
depreciated using the straight-line method based on the following estimated
useful lives:
Machinery
and equipment
|
3
to 7 years
|
|
Furniture
and fixtures
|
5
to 7 years
|
|
Leasehold
improvements
|
Estimated
useful life or length of the lease, whichever is
shorter
|
Maintenance
and repairs are charged to expense when incurred.
Goodwill
and Intangible Assets
The
Company allocates the purchase price of its acquisitions to the tangible assets,
liabilities and identifiable intangible assets acquired based on their estimated
fair values. The excess purchase price over those fair values is
recorded as goodwill. Historically, the Company included transaction
costs such as investment banking fees, accounting fees, legal fees, appraisal
fees and Company-incurred direct out-of-pocket costs as part of the purchase
price of its acquisitions. Under U.S. GAAP effective July 1,
2009,
the Company is required to expense such costs as incurred.
The
Company reviews purchased intangibles with finite lives for impairment whenever
events or changes in circumstances indicate the carrying value may not be
recoverable. Such intangible assets are amortized over 10 years based
on the straight line method (which approximates the period in which the economic
benefits are consumed). Goodwill and purchased intangibles with
indefinite lives are not amortized, but are reviewed for impairment
annually at each fiscal year end and in interim periods if events indicate
that the carrying value may be impaired. Effective July 1, 2009, the
Company has one reporting unit for purposes of testing for
impairment.
8
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009
(UNAUDITED)
Revenue
Recognition
The
Company recognizes revenue upon delivery of goods to a common carrier for
delivery to the customer, at which point title passes, at a sales price that is
fixed and determinable and collectability is reasonably
assured. Provisions for product returns and core returns are
accounted for as sales reductions in determining sales in the same period that
the related sales are recorded. The Company also 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 refurbished products during shipment and
is reimbursed by the common carriers for shipping damage and lost
products.
Shipping
and Handling Costs
The
Company classified shipping costs associated with outbound freight as cost of
sales. Total shipping costs included in cost of sales for the six and
three months ended December 31, 2009 were $2,797 and $1,309, respectively, and
for the six and three months ended December 31, 2008 were $3,929 and $2,024,
respectively.
Loss
Per Share
Basic net
loss per share is computed by dividing loss available to common stockholders by
the weighted average number of common shares outstanding for the
period. Diluted net income per share is based upon the addition of
the effect of common stock equivalents (convertible preferred stock and
convertible notes payable, potentially dilutive stock options and warrants) to
the denominator of the basic net loss per share calculation using the treasury
stock method for stock options and warrants and the “if converted” method for
convertible securities, if their effect is dilutive.
For the
three months ended December 31, 2009 and the six months ended December 31, 2009
and 2008, potentially dilutive securities that could have been issued were
excluded from the calculation of diluted loss per share as their effect would
have been anti-dilutive. Potentially dilutive securities
for the three and six months ended December 31, 2009, and for the six months
ended December 31, 2008, totaled 121,434,899,000
shares. Potentially dilutive securities for the three months
ended December 31, 2008, totaled 10,923,525,000 shares.
For
three months ended December 31, 2008, diluted net income per share is calculated
as follows:
Income
|
Shares
|
Per Share
Amount
|
||||||||||
Basic
EPS
|
||||||||||||
Net
income available to common stockholders
|
$ | 50 | 16,286,151,000 | $ | — | |||||||
Effect
of Dilutive Securities
|
||||||||||||
Convertible
preferred stock
|
208 | 108,501,131,000 | ||||||||||
Convertible
notes
|
21 | 2,010,243,000 | ||||||||||
Diluted
EPS
|
||||||||||||
Net
income available to common stockholders
|
$ | 279 | 126,797,525,000 | $ | — |
9
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009
(UNAUDITED)
Concentration
of Credit Risk
Sales to
two customers in each period accounted for approximately 11.7% and 10.2% of net
sales for the three months ended December 31, 2009, and approximately 8.9% and
11.8% of net sales for the three months ended December 31,
2008. Sales to two customers in each period accounted for
approximately 9.6% and 8.8% of net sales for the six months ended December 31,
2009, and approximately 9.7% and 11.8% of net sales for the six months ended
December 31, 2008.
The
Company has certain financial instruments that potentially subject it to
significant concentrations of credit risk which consist principally of cash and
cash equivalents and accounts receivable. Certain deposits held with
banks may exceed the amount of insurance provided on such
deposits. At December 31, 2009, the amount of deposits in excess of
insurance provided was $0. Generally, these deposits may be redeemed
upon demand and therefore bear minimal risk. 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.
Cash,
Cash Equivalents and Restricted Cash
The
Company considers all short-term investments with a maturity date of three
months or less when acquired to be cash equivalents. Cash equivalents
include commercial paper, money market funds, savings accounts and certain
certificates of deposit maintained in short-term money market accounts with high
quality financial institutions.
Restricted
cash consists of funds representing a portion of the purchase price that is held
in escrow in connection with the acquisitions described in Note 3 to satisfy
possible indemnification obligations. Funds held in escrow since
August 2, 2008 in connection with such acquisition were paid on September 30,
2009.
Stock
Based Compensation
The
Company determines the value of grants of restricted common stock to employees
and others based on the closing price per share at the date of grant and
amortizes the value as compensation expense on a straight-line basis over the
period of vesting. The exercise price of stock options granted is
equal to or greater than fair market value at the date of grant as determined by
the closing price per share. The fair value of stock option grants is calculated
using the Black-Scholes Option Pricing Model. The Company recognizes
the fair value of stock option grants as compensation expense on a straight-line
basis over the period of vesting.
Deferred
Finance Costs
Costs
associated with the Company’s debt obligations are capitalized and amortized
using the interest method over the life of the related debt
obligation. As of December 31, 2009 and June 30, 2009, $682 of such
costs were capitalized, or $333 and $433, respectively, net of
amortization.
Classification
of Preferred Stock
Under
U.S. GAAP preferred stock must be classified as a liability rather than as a
component of stockholders’ equity if there is an unconditional obligation
requiring the issuer to redeem it at a specified or determinable date (or dates)
or upon the occurrence of an event that is certain to occur. The
Series E Certificate of Designation provides for the redemption of all
outstanding shares of Series E Preferred Stock upon, among other events, any
refinancing or repayment in full, redemption or other discharge or satisfaction
in full of the Senior Notes and Series A and Series B Senior Subordinated Notes
(Note 5). As of December 31, 2009 and June 30, 2009, the Company
was required to classify its Series E Preferred Stock as a liability rather than
as a component of stockholders’ equity for this reason..
Income
Taxes
Under
U.S. GAAP, 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
U.S. GAAP, 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. 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 future changes in
control of the Company.
10
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009
(UNAUDITED)
The
amount of income taxes a Company pays is subject to periodic audits by federal
and state tax authorities and these audits may result in proposed deficiency
assessments. U.S. GAAP prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return, and provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. The Company recognizes
interest and penalties, if any, related to uncertain tax positions in income tax
expense. The Company defines the federal jurisdiction as well as
various multi-state jurisdictions as “major” jurisdictions.
Subsequent
Events
The
Company performed its evaluation of subsequent events through February 16, 2010,
the date that these condensed consolidated financial statements were
issued.
Recent Accounting
Pronouncements
During
the fiscal first quarter of 2010, in accordance with U.S. GAAP, the Company
adopted the standards on business combinations whereby typical transaction costs
such as investment banking fees, accounting fees, legal fees, appraisal fees and
Company-incurred direct out-of-pocket costs incurred in business combinations
must be expensed as incurred and can no longer be effectively accounted for as
part of excess purchase price and intangible assets. The requirement
to expense acquisition-related transaction costs as incurred has had a material
impact on results of operations. The statement became effective for
the Company as of July 1, 2009; accordingly, capitalized transaction costs
associated with potential acquisitions in process and formerly included in other
non-current assets in the amount of $1,111 were written off in the quarter ended
September 30, 2009.
Management
does not believe that any other recently issued, but not yet effective,
accounting standards if currently adopted would have a material effect on the
accompanying condensed consolidated financial statements.
NOTE
3. ACQUISITION
On August
1, 2008, the Company acquired all of the outstanding equity interests in
Tritronics, Inc. (“Tritronics”), a privately-held Maryland C corporation engaged
in the distribution of replacement parts and accessories for consumer
electronics products. The results of operations include Tritronics
since the acquisition date.
The following unaudited pro forma
financial information presents the results of operations of the Company as if
the Tritronics acquisition had occurred at the beginning of fiscal
2009. Adjustments to the consolidated financial information related
to the acquisition that affect the results of operations include the interest
expense associated with the debt issued in conjunction with the acquisition,
amortization of the fair value of intangible assets and deferred debt financing
costs and stock-based compensation. This pro forma information for
the six months ended December 31, 2008 does not purport to be indicative of what
would have occurred had the acquisition occurred as of July 1, 2008 or of
results of operations that may occur in the future.
Net
sales
|
$ | 59,436 | ||
Operating
income
|
3,879 | |||
Net
loss available to common stockholders
|
(169 | ) | ||
Basic
and diluted net loss per share
|
$ | 0.00 |
11
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009
(UNAUDITED)
NOTE
4. GOODWILL
AND INTANGIBLE ASSETS
Goodwill
and intangible assets consisted of the following:
December 31, 2009
|
June 30, 2009
|
|||||||
Goodwill
|
$ | 20,627 | $ | 20,627 | ||||
Intangible
assets, primarily consisting of customer lists
|
$ | 15,750 | $ | 15,750 | ||||
Less
accumulated amortization
|
(3,289 | ) | (2,502 | ) | ||||
Total
net intangible assets
|
$ | 12,461 | $ | 13,248 |
Amortization
expense for intangible assets amounted to $393,000 and $388,000 for the three
months ended December 31, 2009 and 2008, respectively. For the six months ended
December 31, 2009 and 2008 this expense was $787,000 and $719,000,
respectively.
NOTE
5. SHORT-TERM
AND LONG-TERM DEBT
Short-term
and long-term debt obligations consisted of the following at December 31, 2009
and June 30, 2009:
December 31,
|
June 30,
|
|||||||
2009
|
2009
|
|||||||
Senior
notes, net
|
$ | 10,158 | $ | 11,390 | ||||
Series
A and Series B senior
|
||||||||
subordinated
notes, net
|
24,680 | 24,636 | ||||||
Convertible
notes
|
1,206 | 1,206 | ||||||
Other
notes payable
|
1,044 | 1,110 | ||||||
Note
payable to officer
|
310 | 310 | ||||||
Total
notes payable
|
37,398 | 38,652 | ||||||
Less:
current portion
|
(552 | ) | (1,596 | ) | ||||
Long-term
notes, less current portion
|
$ | 36,846 | $ | 37,056 |
NOTE
6. EQUITY
Dividends
in the amount of $342 and $304 were earned by holders of Series E Preferred but
not paid in the three month periods ended December 31, 2009 and 2008,
respectively. Dividends in the amount of $702 and $439 were earned by
holders of Series E Preferred but not paid in the six month periods ended
December 31, 2009 and 2008, respectively. Such dividends are included
in interest expense since the issue is classified as a liability rather than
equity, with the related liability included in the Series E preferred stock
balance in long-term liabilities in the condensed consolidated balance
sheet.
NOTE
7. COMMITMENTS
AND CONTINGENCIES
Legal
Matters
The
Company has been, and may in the future be involved as, a party to various legal
proceedings, which are incidental to the ordinary course of its
business. Management regularly analyzes current information and, as
necessary, provides accruals for probable liabilities on the eventual
disposition of these matters. In the opinion of management, as of
December 31, 2009, 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.
Lease
Obligations
In
connection with its expansion into the Canadian market, in September 2009 the
Company entered into a new lease for a 30,200 square foot office/warehouse
facility for a term expiring on December 31, 2012 and rent commencing at
approximately $120 per annum. In connection with its expansion
into the Mexican market, in September 2009 the Company entered into a new lease
for a 23,700 square foot office/warehouse facility for a term expiring on
October 15, 2013 and rent commencing at approximately $73 per
annum.
12
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009
(UNAUDITED)
As of
December 31, 2009, future minimum aggregate lease payments for the next five
fiscal years and in the aggregate are approximately as follows:
For
the year ending
|
June
30, 2010
|
$ | 1,482 | ||
June
30, 2011
|
1,587 | ||||
June
30, 2012
|
1,147 | ||||
June
30, 2013
|
920 | ||||
June
30, 2014
|
560 | ||||
$ | 5,696 |
Employment
Agreements
The
Company and certain executive officers entered into an amendment, effective
August 17, 2009, to each officers’ employment agreement dated August 17, 2007,
which, among other items, replaced a one-year option period and provided for
additional two-year employment periods and a one-year option at the Company’s
election. Under the terms of the amendments, the Company is obligated
to pay aggregate base salaries of $815 to the executive officers in each of the
first and second years and upon termination of an executive officer’s employment
without cause, the Company will pay the executive twelve months of
severance.
NOTE
8. STOCK-BASED
COMPENSATION
The
Black-Scholes Option Pricing Model (which models the value over time of
financial instruments) was used to estimate the fair value of the options at an
assumed measurement date. The Black-Scholes Option Pricing Model uses several
assumptions to value an option, including the following:
Expected
Dividend Yield—because we do not currently pay dividends, our expected dividend
yield is zero.
Expected
Volatility in Stock Price—reflects the historical change in our stock price over
the expected term of the stock option.
Risk-free
Interest Rate—reflects the average rate on a United States Treasury bond with
maturity equal to the expected term of the option.
Expected
Life of Stock Awards—reflects the simplified method to calculate an expected
life based on the midpoint between the vesting date and the end of the
contractual term of the stock award.
The
weighted-average assumptions used in the option pricing model for stock option
grants awarded in the six months ended December 31, 2008 were as
follows:
Expected
Volatility in Stock Price
|
26.6 | % | ||
Risk-Free
Interest Rate
|
4.39 | % | ||
Expected
Life of Stock Awards—Years
|
6 | |||
Weighted
Average Fair Value at Grant Date
|
$ | .00005 |
There
were no stock option grants awarded in the six months ended December 31,
2009.
The
following table summarizes stock option activity for the six months ended
December 31, 2009:
13
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009
(UNAUDITED)
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term
|
||||||||||
Outstanding
at June 30, 2009
|
10,923,525,000 | $ | 0.00075 | |||||||||
Granted
|
— | — | ||||||||||
Exercised
|
— | — | ||||||||||
Canceled
or expired
|
— | — | ||||||||||
Outstanding
at December 31, 2009
|
10,923,525,000 | $ | 0.00075 | 7.8 | ||||||||
Exercisable
at December 31, 2009
|
8,228,225,000 | $ | 0.00075 | 7.7 | ||||||||
Expected
to vest
|
2,695,300,000 | $ | 0.00075 | 7.9 |
Stock-based
compensation expense for the six months ended December 31, 2009 and 2008
amounted to $212 and $194, respectively. As of December 31, 2009, the
aggregate intrinsic value of options outstanding and options exercisable was $0
as the Company’s market price of common stock was less than the exercise price
for all options.
NOTE
9. RETIREMENT
PLANS
The Company maintains 401K Profit
Sharing Plans for substantially all of its eligible employees. The
expense incurred for the three months ended December 31, 2009 and 2008 amounted
to $64 and $33, respectively. The expense incurred for the six months
ended December 31, 2009 and 2008 amounted to $116 and $67,
respectively.
NOTE
10. INCOME
TAXES
The
Company periodically assesses its ability to realize our deferred tax assets by
considering whether it is more likely than not that some portion or all of
deferred tax assets will be realized. Several factors are evaluated,
including the amount and timing of the scheduled expiration and reversals of net
operating loss carry forwards (NOLs) and deferred tax items, respectively, as
well as potential generation of future taxable income over the periods for which
the NOLs are applicable. Certain estimates used in this analysis are
based on the current beliefs and expectations of management, as well as
assumptions made by, and information currently available to, management.
Although the Company believes the expectations reflected in these estimates are
based upon reasonable assumptions, there can be no assurance that actual results
will not differ materially from these expectations. The Company
recorded a tax benefit of $0 and $900 for the three and six month periods
ended December 31, 2009, respectively, based on a re-evaluation of its valuation
allowance. The Company recorded an income tax provision of $230 and
$370, respectively, for the three and six months ended December 31, 2008, based
on our estimated effective tax rate and our pretax income, which resulted in a
reduction of the deferred tax asset of an equivalent amount. The
Company’s estimated effective tax rate for each period exceeds statutory rates
primarily because the dividend on the Series E preferred stock which is
classified as interest expense for book purposes under U.S. GAAP may not be
deductible for tax purposes.
NOTE
11. SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
The
following are the payments made during the six months ended December 31, 2009
and 2008 for income taxes and interest:
2009
|
2008
|
|||||||
Income
taxes
|
$ | 35 | $ | 24 | ||||
Interest
|
$ | 2,466 | $ | 1,848 |
14
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009
(UNAUDITED)
Six
Months Ended December 31, 2008:
|
(1)
|
In
connection with the Tritronics acquisition transaction, the Company
issued: (i) a noncash unsecured note of $1,000 to the stockholder of
Tritronics as part of the purchase price and (ii) 2,796,233,000
shares of common stock with a value of $1,119 to the stockholder of
Tritronics as part of the purchase
price.
|
|
(2)
|
In
connection with the debt financing for the acquisition of Tritronics, the
Company incurred Original Issue Discounts of $265 on Series B Senior
Subordinated Notes.
|
15
Item
2. Management’s Discussion And Analysis of Financial Condition and Results of
Operations
The
following discussion should be read in conjunction with our condensed
consolidated financial statements and the related notes and the other financial
information appearing elsewhere in this report. In addition to
historical information, the following discussion and other parts of this
quarterly report contain words such as “may,” "estimates," "expects,"
"anticipates," "believes," “plan,” "grow," "will," “could,” "seek," “continue,”
“future,” “goal,” “scheduled” and other similar expressions that are intended to
identify forward-looking information that involves risks and
uncertainties. In addition, any statements that refer to expectations
or other characterizations of future events or circumstances are forward-looking
statements. Actual results and outcomes could differ materially as a
result of important factors including, among other things, general economic
conditions, the Company's ability to renew or replace key supply and credit
agreements, fluctuations in operating results, committed backlog, public market
and trading issues, risks associated with dependence on key personnel,
competitive market conditions in the Company's existing lines of business and
technological obsolescence, as well as other risks and
uncertainties. See “Risk Factors” below.
Executive
Summary
As
Encompass Group Affiliates, Inc., a Florida corporation, we specialize in the
technology aftermarket service and supply chain known as reverse logistics. Our
wholly-owned subsidiaries and principal operating units, Encompass Parts
Distribution, Inc., a Delaware corporation ("Encompass Parts Distribution"), and
Encompass Service Solutions, Inc. (a Delaware corporation, also known as
Cyber-Test, Inc.) collectively operate businesses that, on a national level,
provide parts procurement and distribution services, depot repair of consumer
electronics, computer and peripheral equipment, board level repair,
de-manufacturing and reclamation services for flat panel display and computer
products, returns management services, and anticipates providing end-of-life
cycle services for all such products.
We are a
market leader in reverse logistics for the consumer electronics industry by
providing original equipment manufacturers (“OEMs”), retailers, third party
administrators (“TPAs”) and end-users with single-source, integrated life cycle
reverse logistic professional management services for technology
products.
Encompass
Parts Distribution owns Vance Baldwin, Inc. and Tritronics, Inc., jointly
operating as an integrated entity, and Cyber-Test, Inc. d/b/a Encompass Service
Solutions, which collectively engage in the distribution of replacement parts
for electronic equipment and the repair of such equipment. Encompass
Parts Distribution is headquartered in and operates out of two distribution and
repair facilities located in Lawrenceville, GA with additional distribution,
call center and administrative facilities located in Las Vegas, NV, Abington, MD
and Miami, FL. Encompass Service Solutions’ has its headquarters and
an operating facility located in Longwood, FL, near Orlando, FL, and an
operation located in one of the aforementioned Lawrenceville, GA
facilities. The Company operates as one segment in the reverse
logistics industry serving the electronics industry.
Financial
Condition
We
believe that our present and future sales levels will, notwithstanding current
poor economic conditions, generate cash flows that will be sufficient to fund
our operating working capital needs, as well as capital expenditures and
quarterly interest and principal payments that are required under our debt
facility. We have implemented and continue to implement internal
growth initiatives to expand our sales levels, increase profitability, and to
seek significant future business acquisitions, the latter which will likely
require additional equity and additional borrowings. Our debt
agreement requires an annual sweep of excess cash flow (as defined therein),
which may limit our ability to use operating cash flow to fund
acquisitions.
Critical
Accounting Policies, Estimates and Judgments
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions to apply certain of these critical accounting
policies. Actual results may differ from estimates. For a
discussion of the Company’s critical accounting policies, see in Note 1 in the
Notes to Consolidated
Financial Statements included in Part II, Item 8 –Financial
Statements and Supplementary Data included in the Company’s Annual Report
on Form 10-K for the year ended June 30, 2009.
16
Business
Combination
On
August 1, 2008, the Company acquired all of the outstanding equity interests in
Tritronics, Inc., a company engaged in the distribution of replacement parts and
accessories for consumer electronics products (“Tritronics”). The
results of operations for the six months ended December 31, 2009, include
Tritronics for the full period; the results of operations for the six months
ended December 31, 2008, include Tritronics since the acquisition date
only.
RESULTS
OF OPERATIONS - COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2009 TO THE
THREE MONTHS ENDED DECEMBER 31, 2008
The
following table sets forth certain selected financial data as a percentage of
sales for the three months ended December 31, 2009 and 2008:
2009
|
2008
|
|||||||||||||||
Net
sales
|
$ | 21,418 | 100.0 | % | $ | 30,060 | 100.0 | % | ||||||||
Cost
of sales
|
15,370 | 71.8 | 22,275 | 74.1 | ||||||||||||
Gross
profit
|
6,048 | 28.2 | 7,785 | 25.9 | ||||||||||||
Operating
expenses
|
4,971 | 23.2 | 5,692 | 19.0 | ||||||||||||
Income
from operations
|
1,077 | 5.0 | 2,093 | 6.9 | ||||||||||||
Other
income (expense), net
|
(1,617 | ) | (7.5 | ) | (1,605 | ) | (5.3 | ) | ||||||||
Income
(loss) before taxes
|
(540 | ) | (2.5 | ) | 488 | 1.6 | ||||||||||
Income
tax benefit (provision)
|
— | — | (230 | ) | (0.7 | ) | ||||||||||
Net
income (loss)
|
$ | (540 | ) | (2.5 | )% | $ | 258 | 0.9 | % |
Net
Sales
Net sales for the three months ended
December 31, 2009 amounted to $21,418 as compared to net sales of $30,060 for
the three months ended December 31, 2008, a decrease of $8,642, or
28.8%. The decrease in net sales was principally attributable to the
(i) lower sales by Encompass Parts Distribution as a result of the 2008-2009
economic downturn, the loss of a key customer that began liquidation proceedings
in February 2009, and, in the three months ended December 31, 2008, the effect
of a short-term, high level of shipments of Philips products as the Company’s
filled back orders as the then recently authorized distributor for Philips, and
(ii) lower sales by Encompass Service Solutions was principally attributable to
the loss of a contract with a major customer which has only partially been
offset by other new business.
Encompass
Parts Distribution has been awarded a substantial amount of additional business
with existing customers that will commence in February 2010, which management
believes may result in approximately $2 million in monthly net sales, but at a
lower gross margin.
Cost
of Sales and Gross Profit
Our cost
of sales totaled $15,370 for the three months ended December 31, 2009, as
compared to $22,275 for the three months ended December 31, 2008, a decrease of
$6,905, or 31%. Our gross profit decreased to $6,048 for the three
months ended December 31, 2009 as compared to $7,785 for the three months ended
December 31, 2008, with gross margin increasing to 28.2% from 25.9% for the
comparable period in the prior year.
The
decrease in cost of sales was primarily attributable to the decline in sales as
described above, partially offset by improved gross margin.
The
increase in gross margin in the three months ended December 31, 2009 is
primarily attributable to the effect of a change in product and customer mix,
continuing a trend that began in the fiscal year ended June 30,
2009. Gross margin for the current quarter benefited to an extent
from certain business activities associated with a strategic contractual
relationship with a third party which the Company entered into in the current
quarter. Gross margin experienced in the current period may not
be indicative of gross margin to be achieved in future periods.
17
Operating
Expenses
Total
operating expenses for the three months ended December 31, 2009 and 2008 were
$4,971 and $5,692, respectively, representing a decrease of $721, or
12.7%. The net change was primarily attributable to due to cost
reductions in light of lower sales volume.
Depreciation
and amortization for the three months ended December 31, 2009 amounted to $557
compared to $537 for the three months ended December 31, 2008.
Selling,
general and administrative expenses decreased to $4,414 for the three months
ended December 31, 2009 from $5,155 for the three months ended December 31,
2008, for a decrease of $741, or 14.4%, due to cost reductions in light of lower
sales volume, offset in part by the inclusion of costs associated with the Las
Vegas distribution center in the current quarter compared to $0 in the prior
year period.
Other
Income (Expense)
Interest
expense, net, for the three months ended December 31, 2009 was $1,609 compared
to $1,663 for the three months ended December 31, 2008. Included in
interest expense for three months ended December 31, 2009 is $343 of non-cash
interest accrued but not currently payable in connection with Series E preferred
stock compared to $304 for three months ended December 31, 2008.
RESULTS
OF OPERATIONS - COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 2009 TO THE SIX
MONTHS ENDED DECEMBER 31, 2008
The
following table sets forth certain selected financial data as a percentage of
sales for the six months ended December 31, 2009 and 2008:
2009
|
2008
|
|||||||||||||||
Net
sales
|
$ | 44,392 | 100.0 | % | $ | 57,546 | 100.0 | % | ||||||||
Cost
of sales
|
31,890 | 71.8 | 43,856 | 76.2 | ||||||||||||
Gross
profit
|
12,502 | 28.2 | 13,690 | 23.8 | ||||||||||||
Operating
expenses
|
10,127 | 22.8 | 10,039 | 17.5 | ||||||||||||
Write
off of deferred transaction costs
|
1,111 | 2.5 | — | — | ||||||||||||
Total
operating expenses
|
11,238 | 25.3 | 10,039 | 17.5 | ||||||||||||
Income
from operations
|
1,264 | 2.9 | 3,651 | 6.3 | ||||||||||||
Other
income (expense), net
|
(3,183 | ) | (7.2 | ) | (2,865 | ) | (5.0 | ) | ||||||||
Income
(loss) before taxes
|
(1,919 | ) | (4.3 | ) | 786 | 1.3 | ||||||||||
Income
tax benefit (provision)
|
900 | 2.0 | (370 | ) | (0.6 | ) | ||||||||||
Net
income (loss)
|
$ | (1,019 | ) | (2.3 | )% | $ | 416 | 0.7 | % |
Net
Sales
Net sales for the six months ended
December 31, 2009 amounted to $44,392 as compared to net sales of $57,546 for
the six months ended December 31, 2008, a decrease of $13,154, or
22.9%. The decrease in net sales was due principally to the (i) lower
sales by Encompass Parts Distribution which were attributable to the
2008-2009 economic downturn, the loss of a key customer
that began liquidation proceedings in February 2009, and, in the three months
ended December 31, 2008, the positive effect of a short-term, high level of
shipments of Philips products as the Company filled back orders as the then
recently authorized distributor for Philips, partially offset by the inclusion
of six months of Tritronics’ results in the current six months versus five
months in the six months ended December 31, 2008, and (ii) lower sales by
Encompass Service Solutions due principally to the loss of a contract with a
major customer which has only partially been offset by other new
business.
Encompass
Parts Distribution has been awarded a substantial amount of additional business
with existing customers that will commence in February 2010, which management
believes may result in approximately $2 million in monthly net sales, but at
lower gross margin.
18
Cost
of Sales and Gross Profit
Our cost
of sales totaled $31,890 for the six months ended December 31, 2009, as compared
to $43,856 for the six months ended December 31, 2008, a decrease of $11,966, or
27.3%. Our gross profit decreased to $12,502 for the six months ended
December 31, 2009 as compared to $13,690 for the six months ended December 31,
2008, with gross margin increasing to 28.2% from 23.8% for the comparable period
in the prior year.
The
decrease in cost of sales was attributable to the decline in sales as described
above, partially offset by improved gross margin.
The
increase in gross margin is primarily attributable to the effect of a change in
product and customer mix, continuing a trend that began in the fiscal year ended
June 30, 2009. Gross margin for the six months ended December 31,
2009 benefited to an extent from certain business activities associated with a
strategic contractual relationship with a third party which the Company entered
into in the first quarter of the current fiscal year. Gross margin
experienced in the current period may not be indicative of gross margin to be
achieved in future periods.
Operating
Expenses
Total
operating expenses for the six months ended December 31, 2009 and 2008 were
$11,238 and $10,039, respectively, representing an increase of $1,199, or
11.9%. The net change was primarily attributable to a write off of
deferred transaction costs to conform to U.S. GAAP that became effective in the
first quarter of the current fiscal year, which resulted in the Company
recording a non-cash expense in the amount of $1,111. This charge
reduced operating income, but did not have an impact on liquidity or financial
condition.
Depreciation
and amortization for the six months ended December 31, 2009 amounted to $1,109
compared to $956 for the six months ended December 31, 2008. The
slight increase is attributable to higher amortization expense in the current
period associated with intangible assets recorded in connection with the
Tritronics acquisition.
Selling,
general and administrative expenses decreased to $9,018 for the six months ended
December 31, 2009 from $9,083 for the six months ended December 31, 2008, for a
decrease of $65, or .7%, due to cost reductions in light of lower sales
volume. The inclusion of expenses of Tritronics for all six months in
the current period compared to five months in the year ago period following its
acquisition as described above, as well as the inclusion of costs associated
with the Las Vegas and Georgia returns and distribution centers for all six
months in the current period, inflated selling, general and administrative
expenses compared to the six months ended December 31, 2008, which included $0
of such costs for the Las Vegas distribution center and five months of such
costs for the Georgia returns center.
Other
Income (Expense)
Interest
expense, net, for the six months ended December 31, 2009 was $3,180 compared to
$2,943 for the six months ended December 31, 2008, an increase of $237 due to
interest on higher average amounts of senior and subordinated debt financing
entered into in connection with the acquisition of Tritronics as described
above, an increase in expense recorded for the Series E Preferred Stock dividend
and an increase in expense recorded to amortize additional deferred financing
costs incurred in connection with such debt, offset by a reduction in the
effective interest rate incurred in the current period compared to the prior
year period. Included in interest expense is $702 of non-cash
interest accrued but not currently payable in connection with Series E preferred
stock.
LIQUIDITY
AND CAPITAL RESOURCES
At
December 31, 2009, the Company had cash and cash equivalents of $3,710 available
to meet its working capital and operational needs. We believe
that our present and future sales levels will, for the foreseeable future,
generate cash flows that will be sufficient to fund our short-term and long-term
operating working capital needs, as well as capital expenditures and quarterly
interest and principal payments that are required under our debt
facility. Since concluding a series of transactions in August
2007 and August 2008, to, among other things, effect a recapitalization and
complete two major acquisitions, the Company’s cash flows have been consistent
and stable from quarter to quarter based on the level of net earnings and EBITDA
generated by our operating units. The bankruptcy filing and
liquidation of a major parts customer that occurred in the third quarter of our
prior fiscal year, and the loss of certain laptop service work performed for a
major parts and service customer, negatively impacted the amount, but not the
certainty, of our cash flows. While these two events have had an
impact on sales, operating income and cash flows the Company’s overall liquidity
and financial condition nonetheless remain strong.
19
Working
capital needed to fund increases in inventory and accounts receivable or capital
expenditures has been provided by operations.
We intend
to seek significant business acquisitions in the future and to continue the
expansion of our product and service offerings as well as our international
operations. Such potential acquisitions and anticipated future
business and international expansion activities will require additional working
capital, which we anticipate obtaining from our majority shareholder and/or
existing lender. We expect that such form of further investment on the part of
our principal shareholder or lender would be a combination of additional equity
or senior indebtedness, but there is no assurance that we could obtain financing
on such terms. In the unlikely event our majority shareholder or our senior
lender are unwilling to provide the necessary working capital or acquisition
funding on terms acceptable to us, the Company anticipates obtaining this growth
capital from other financing sources. If we are unable to obtain
growth capital from either our existing majority shareholder or another source
acceptable to us, we would be unable to aggressively expand our business
operations and/or make one or more significant acquisitions.
The
interest rate on the Company’s senior subordinated notes, which has a floor of
13% and a ceiling of 17%, is determined by the Company’s maximum EBITDA leverage
ratio, as defined, on the first day of each quarter. For the quarter
ended June 30, 2009, this ratio was less than 3.50:1:00 for the initial time;
accordingly, the interest rate on the senior subordinated notes decreased to 15%
from 17% for the quarter ended September 30, 2009, the rate which remained
applicable for the quarters ended September 30, 2009 and December 31,
2009.
Our debt
agreement requires an annual sweep of excess cash flow, as defined in the debt
agreement, which may limit our ability to use operating cash flow to fund
acquisitions. For the fiscal year ending June 30, 2009, although no
payment was required under the definition of a cash flow sweep in the debt
agreement, the Company agreed under an amendment to such agreement to pay a
one-time, additional $1,000 principal payment. This Company paid this
additional principal on October 2, 2009. The Company currently does
not believe that a payment will be required for fiscal 2010 under the cash flow
sweep in the debt agreement.
In the
event the Company failed to meet one or more of the financial covenants set
forth in our debt agreement, it would be required to obtain a waiver from the
lender or renegotiate certain terms to prevent an Event of Default from
occurring.
Net cash
used in operating activities of $331 for the six months ended December 31, 2009
was principally due to a decrease in accounts payable and accrued expenses of
$2,356, attributable to a lower sales level in the current period, offset by a
decrease in accounts receivable of $1,999, also attributable to a lower sales
level in the current period, and non-cash charges of $1,385, principally
consisting of depreciation and amortization, deferred income taxes and the
aforementioned one-time write off of deferred transaction costs. Net
cash used in operating activities of $2,591 for the six months ended December
31, 2008 was principally due to increase in accounts receivable and inventory of
$3,396 and $4,249, respectively, attributable to the growth in the business,
partially offset by net income of $416 and an increase in accounts payable and
accrued expenses of $3,181 also attributable to the growth in the
business.
Net cash
used in investing activities of $225 for the six months ended December 31, 2009
was attributable to capital expenditures of $225 for property and
equipment. Net cash used in investing activities of $9,627 for the
six months ended December 31, 2008 was attributable almost entirely to the
acquisition of Tritronics for $8,296, net of cash acquired, plus related
transaction costs in the amount of $865 and capital expenditures of $466 for
property and equipment.
Net cash
used in financing activities of $1,270 for the six months ended December 31,
2009 was attributable to principal payments of that amount. Net cash
provided by financing activities of $16,599 for the six months ended December
31, 2008 was attributable to proceeds of $4,167 and $13,000 from the sale of
Series E Preferred Stock and senior and subordinated notes, respectively, in
connection with the acquisition of Tritronics and the Philips transactions,
offset by payments of principal on notes and capital lease payments of
$296. In addition, financing costs of $272 were incurred in
connection with the debt issuance.
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.
20
RISKS
FACTORS
Unless so
noted, there has been no material change in the information provided in Item 1A of Form 10-K
Annual Report for the year ended June 30, 2009, a listing of which is provided
below:
|
·
|
We
Will Need Additional Capital to Achieve Our Business
Plans.
|
|
·
|
Making
and Integrating Acquisitions Could Impair the Company’s Operating
Results.
|
|
·
|
To
Service Our Indebtedness, We Will Require A Significant Amount Of Cash;
Our Ability To Generate Cash Depends On Many Factors Beyond Our
Control.
|
|
·
|
Failure
To Meet Certain Financial Covenant Tests Required By Our Debt Agreements
Would Result In An Event Of
Default.
|
|
·
|
New
Equity Financing Could Dilute Current
Stockholders.
|
|
·
|
The
Loss Of Any One Of Our Key Customers Could Have A Material Adverse Effect
On Our Business.
|
|
·
|
Our
Business Could Suffer If There Is A Prolonged Economic
Downturn.
|
|
·
|
Fluctuations
In The Price Or Availability Of Office Equipment Parts And Computer
Peripheral Products Could Materially Adversely Affect
Us.
|
|
·
|
We
Could Be Materially Affected By Turnover Among Our Service Qualified
Technical And Other Personnel.
|
|
·
|
We
Could Fail To Attract Or Retain Key
Personnel.
|
|
·
|
The
Company’s Issuances Of Preferred Stock Has Significantly Diluted the
Equity Ownership Of Our Stockholders And The Future Conversion Of Our
Outstanding Preferred Stock Will Also Cause Significant Dilution To Our
Existing Stockholders.
|
|
·
|
The
Price of Our Common Stock May Be Affected By A Limited Trading Volume And
May Fluctuate Significantly And May Not Reflect the Actual Value of Our
Business.
|
|
·
|
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.
|
|
·
|
The
Holders Of Preferred Stock Are Entitled To Rights And Preferences That Are
Significantly Greater Than The Rights And Preferences Of The Holders Of
Our Common Stock, Including Preferential Payments Upon A Sale Or
Liquidation Of The Company.
|
|
·
|
Certain
Private Stockholders, Such As ACT-DE, LLC And Some Of Our Directors And
Officers, Control A Substantial Interest In The Company And Thus May
Influence Certain Actions, Including Actions Requiring A Shareholder
Vote.
|
Item
3. Quantitative and Qualitative Disclosure about Market Risk
As a
smaller reporting company, we have elected scaled disclosure reporting
obligations and therefore are not required to provide the information in this
Item 3.
21
Item
4. Controls And Procedures
(A) Evaluation
Of Disclosure Controls And Procedures
Prior to
the filing of this Quarterly Report on Form 10-Q, an evaluation was performed
under the supervision of and with the participation of the Company’s management,
including the Chief Executive Officer (“CEO”) and Chief Financial Officer
(“CFO”), of the effectiveness of the Company’s disclosure controls and
procedures. Based on the evaluation, the CEO and CFO have concluded that, as of
December 31, 2009, the Company’s disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms, and is accumulated and communicated to the Company’s management, as
appropriate, to allow timely decisions regarding required disclosure. 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 13a-15(f) or 15d-15(f) of the
Exchange Act) during our fiscal quarter ended December 31, 2009 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
22
PART
II
OTHER
INFORMATION
Item
1. Legal Proceedings
None.
Item
1A. Risk Factors
In
addition to the other information included in this Quarterly Report on Form
10-Q, you should carefully review and consider the factors discussed in Part I, Item 1A - Risk
Factors of our Annual Report on Form 10-K for the year ended June 30, 2009 and
filed with the SEC on September 28, 2009. These factors materially
affect our business, financial condition or future results of operations. The
risks, uncertainties and other factors described in our Annual Report on Form
10-K are not the only ones facing our company. Additional risks, uncertainties
and other factors not presently known to us or that we currently deem immaterial
may also impair our business operations, financial condition or operating
results. Any of the risks, uncertainties and other factors could cause the
trading price of our common stock to decline substantially.
Item
2. Unregistered Sales of equity Securities And Use Of
Proceeds
None.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Submission Of Matters To A Vote Of Security Holders
None.
Item
5. Other Information
None.
Item
6. Exhibits
Exhibits
are incorporated herein by reference or are filed with this quarterly report as
set forth in the Exhibit Index beginning on page 25 hereof.
23
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Encompass
Group Affiliates,
Inc.
|
||
Date: February
16, 2010
|
By:
|
/s/ Wayne I. Danson
|
Name:
|
Wayne
I. Danson
|
|
Title:
|
President,
Chief Executive Officer (Principal Executive Officer) and
Director
|
|
Date: February
16, 2010
|
By:
|
/s/ John E. Donahue
|
Name:
|
John
E. Donahue
|
|
Title:
|
Vice
President and Chief Financial Officer (Principal Accounting
Officer)
|
24
Exhibit No.
|
Description
|
Location (1)
|
|||
2.1
|
Asset
Purchase Agreement dated May 27, 2004, by and between Cyber-Test, Inc., a
Delaware corporation, and Cyber-Test, Inc., a Florida
corporation.
|
Incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed with the SEC on June 18,
2004
|
|||
2.2
|
Stock
Purchase Agreement entered into by and between Encompass Group Affiliates,
Inc. and Fred V. Baldwin, dated as of August 17, 2007
|
Incorporated
by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K
filed with the SEC on August 21, 2007
|
|||
2.3
|
Stock
Purchase Agreement entered into by and between Encompass Group Affiliates,
Inc., a Florida corporation, Encompass Group Affiliates, Inc., a Delaware
corporation, Tritronics, Inc., Tritronics, LLC and the members of
Tritronics, LLC listed on Schedule 2 thereto, dated as of August 1,
2008
|
Incorporated
by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K
filed with the SEC on August 7, 2008
|
|||
3(i)(a)
|
Restated
Articles of Incorporation of Advanced Communications Technologies,
Inc.
|
Incorporated
by reference to Exhibit 3(i) to the Company’s Annual Report on Form 10-KSB
filed with the SEC on September 28, 2007
|
|||
3(i)(b)
|
Articles
of Amendment to the Articles of Incorporation of Advanced Communications
Technologies, Inc. filed with the Secretary of State of Florida on May 6,
2008
|
Incorporated
by reference to Exhibit 3(i)(b) to the Company’s Annual Report on Form
10-KSB filed with the SEC on September 28, 2007
|
|||
3(i)(c)
|
Articles
of Amendment to the Articles of Incorporation of Advanced Communications
Technologies, Inc. filed with the Secretary of State of Florida on August
1, 2008
|
Incorporated
by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K
filed with the SEC on August 7, 2008
|
|||
3(ii)
|
Amended
Bylaws of Advanced Communications Technologies, Inc.
|
Incorporated
by reference to Exhibit 3(ii) to the Company’s Current Report on Form 8-K
filed with the SEC on August 21, 2007
|
|||
4.1
|
Form
of Exchange Agreement, dated June 24, 2004, by and among Advanced
Communications Technologies, Inc. and certain debenture holders of Hy-Tech
Technology Group, Inc.
|
Incorporated
by reference to Exhibit 10.40 to the Company’s Annual Report on Form
10-KSB filed with the SEC on November 3, 2004
|
|||
4.2
|
Form
of Convertible Promissory Note issued in connection with Exhibit
2.2
|
Incorporated
by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K
filed with the SEC on August 21, 2007
|
25
4.3.1
|
Note
Purchase Agreement, dated as of August 17, 2007, by and among Encompass
Group Affiliates, Inc. as Issuer, and Advanced Communications
Technologies, Inc., Cyber-Test, Inc., Vance Baldwin, Inc., Hudson Street
Investments, Inc. and SpectruCell, Inc. as Guarantors, the Note Purchasers
listed therein, and Sankaty Advisors, LLC
|
Incorporated
by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K
filed with the SEC on August 21, 2007
|
|||
4.3.2
|
Form
of Senior Note issued in connection with Exhibit 4.3.1
|
Incorporated
by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K
filed with the SEC on August 21, 2007
|
|||
4.3.3
|
Form
of Subordinated Note issued in connection with Exhibit
4.3.1
|
Incorporated
by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K
filed with the SEC on August 21, 2007
|
|||
4.3.4
|
First
Lien Pledge and Security Agreement, dated as of August 17, 2007, between
Encompass Group Affiliates, Inc., Advanced Communications Technologies,
Inc., SpectruCell, Inc., Hudson Street Investments, Inc., Cyber-Test,
Inc., Vance Baldwin, Inc. and Sankaty Advisors, LLC
|
Incorporated
by reference to Exhibit 4.5 to the Company’s Current Report on Form 8-K
filed with the SEC on August 21, 2007
|
|||
4.3.5
|
Second
Lien Pledge and Security Agreement , dated August 17, 2007, between
Encompass Group Affiliates, Inc., Advanced Communications Technologies,
Inc., SpectruCell, Inc., Hudson Street Investments, Inc., Cyber-Test,
Inc., Vance Baldwin, Inc. and Sankaty Advisors, LLC
|
Incorporated
by reference to Exhibit 4.6 to the Company’s Current Report on Form 8-K
filed with the SEC on August 21, 2007
|
|||
4.4
|
Form
of Subordinated Promissory Note issued in connection with Exhibit
2.3
|
Incorporated
by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K
filed with the SEC on August 7, 2008
|
|||
4.5.1
|
Amended
and Restated Note Purchase Agreement, dated as of August 1, 2008, by and
among Encompass Group Affiliates, Inc., a Delaware corporation as Issuer,
Encompass Group Affiliates, Inc., a Florida corporation, Tritronics, Inc.,
Cyber-Test, Inc., Vance Baldwin, Inc., Hudson Street Investments, Inc. and
SpectruCell, Inc. as Guarantors, the Note Purchasers listed therein, and
Sankaty Advisors, LLC.
|
Incorporated
by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K
filed with the SEC on August 7, 2008
|
|||
4.5.2
|
Form
of Series B Subordinated Note issued in connection with Exhibit
4.5.1.
|
Incorporated
by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K
filed with the SEC on August 7, 2008
|
26
4.5.3
|
Amended
and Restated First Lien Pledge and Security Agreement, dated as of August
1, 2008, between Encompass Group Affiliates, Inc., a Delaware corporation,
Encompass Group Affiliates, Inc., a Florida corporation, Tritronics, Inc.,
SpectruCell, Inc., Hudson Street Investments, Inc., Cyber-Test, Inc.,
Vance Baldwin, Inc. and Sankaty Advisors, LLC
|
Incorporated
by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K
filed with the SEC on August 7, 2008
|
|||
4.5.4
|
Amended
and Restated Second Lien Pledge and Security Agreement, dated August 1,
2008, between Encompass Group Affiliates, Inc., a Delaware corporation,
Encompass Group Affiliates, Inc., a Florida corporation, Tritronics, Inc.,
SpectruCell, Inc., Hudson Street Investments, Inc., Cyber-Test, Inc.,
Vance Baldwin, Inc. and Sankaty Advisors, LLC.
|
Incorporated
by reference to Exhibit 4.5 to the Company’s Current Report on Form 8-K
filed with the SEC on August 7, 2008
|
|||
4.5.5
|
Amendment
No. 1 to the Amended and Restated Note Purchase Agreement, dated as of
August 1, 2008, by and among Encompass Group Affiliates, Inc., a Delaware
corporation as Issuer, Encompass Group Affiliates, Inc., a Florida
corporation, Tritronics, Inc., Cyber-Test, Inc., Vance Baldwin, Inc.,
Hudson Street Investments, Inc. and SpectruCell, Inc. as Guarantors, the
Note Purchasers listed therein, and Sankaty Advisors, LLC, dated January
12, 2009.
|
Incorporated
by reference to Exhibit 4.5.5 to the Company’s Quarterly Report
on Form 10-Q filed with the SEC on February 13, 2009
|
|||
10.1
|
Amendment
No. 2 to Employment Agreement between Wayne Danson and Encompass Group
Affiliates, Inc., effective as of August 17, 2009
|
Incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K/A
filed with the SEC on November 9, 2009
|
|||
10.2
|
Amendment
No. 2 to Employment Agreement between John Donahue and Encompass Group
Affiliates, Inc., effective as of August 17, 2009
|
Incorporated
by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K/A
filed with the SEC on November 9, 2009
|
|||
10.3
|
Amendment
No. 2 to Employment Agreement between Steven Miller and Encompass Group
Affiliates, Inc., effective as of August 17, 2009
|
Incorporated
by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K/A
filed with the SEC on November 9, 2009
|
|||
31.2
|
Certification
by Principal Financial Officer pursuant to Sarbanes-Oxley Section
302
|
Filed
herewith
|
|||
32.1
|
Certification
by Chief Executive Officer pursuant to 18 U.S.C. Section
1350
|
Filed
herewith
|
|||
32.2
|
Certification
by Chief Financial Officer pursuant to 18 U.S.C. Section
1350
|
Filed
herewith
|
(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.
27