Attached files
| file | filename |
|---|---|
| EX-31.2 - Encompass Group Affiliates, Inc | v188388_ex31-2.htm |
| EX-32.2 - Encompass Group Affiliates, Inc | v188388_ex32-2.htm |
| EX-31.1 - Encompass Group Affiliates, Inc | v188388_ex31-1.htm |
| EX-32.1 - Encompass Group Affiliates, Inc | v188388_ex32-1.htm |
U.S.
Securities And Exchange Commission
Washington,
D.C. 20549
Form
10-Q/A
(check
one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
Quarterly Period Ended September 30, 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 November 6, 2009
|
|
|
Common
Stock, no par value per share
|
13,286,151,226
shares
|
EXPLANATORY
NOTE
(Dollars
in thousands)
Encompass
Group Affiliates, Inc. (the “Company”) is filing this Amendment No. 1 (the
“Amendment” or “Form 10-Q/A”) to the Company’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2009, initially filed with the Securities and
Exchange Commission (“SEC”) on November 16, 2009 (the “Original Filing”), to
amend and restate financial statements and other financial information for the
period ended September 30, 2009.
During
preparation of the financial statements for the third quarter of fiscal 2010,
the Company discovered, and confirmed by performing a physical count of the
defective parts and returned core inventories in question, an inadvertent
overstatement of quantities, and associated value, of these categories of
inventory in the Company’s perpetual inventory records. The overstatement
resulted principally from two software system problems in the Company’s
enterprise-wide IT system, which have been identified and
corrected. The reductions in inventory amounts have a corresponding
increase in the cost of sales for the related periods, thereby increasing net
loss. The Company found no overstatement of its new parts
inventory.
After
completing an analysis of the materiality of these errors in accordance with
Staff Accounting Bulletin No. 99, Materiality (SAB 99) and Staff Accounting
Bulletin No. 108 (SAB 108) regarding the process of quantifying financial
statement misstatements, and considering both the qualitative and quantitative
effects of the errors, management and the Audit Committee of the Company’s Board
of Directors concluded that the unaudited condensed consolidated financial
statements as of and for the three months ended September 30, 2009 and as of and
for the three and six months ended December 31, 2009 previously filed by the
Company with the SEC on its Quarterly Reports on Form 10-Q would be restated for
a material misstatement in the Company’s financial statements due to an
estimated $1,800 overstatement of its defective parts and returned core
inventories. As a result, the consolidated financial statements for
the aforementioned periods should no longer be relied
upon. Accordingly, the Company is filing this Form 10-Q/A to restate
the unaudited condensed consolidated financial statements for the quarterly
period ended September 30, 2009, reflecting a deficiency decrease in inventory
and an increase in cost of sales and net loss as of and for the period ended
September 30, 2009 in the amount of $900. This restatement affects
the elements of cash flow, but does not have any impact to net cash flow from
operations as reported in the statement of cash flows.
For the
convenience of the reader, this Form 10-Q/A is presented in its entirety, as
modified and superseded where necessary to reflect the restatement. The
following items have been amended principally as a result of, and to reflect,
the restatement:
•
Part I — Item 1. Financial Statements;
•
Part I — Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations;
•
Part I — Item 4. Controls and Procedures;
•
Part II —Item 6. Exhibits.
In
accordance with applicable SEC rules, this Form 10-Q/A includes certifications
from the Company’s President and Chief Executive Officer and Chief Financial
Officer dated as of the date of this filing. The remaining Items contained
within this Form 10-Q/A consist of all other Items contained in the Original
Filing and are included for the convenience of the reader. The sections of the
Original Filing which were not amended are unchanged and continue in full force
and effect as originally filed. This Form 10-Q/A speaks as of the date of the
Original Filing on the Form 10-Q and has not been updated to reflect events
occurring subsequent to the original filing date other than the items discussed
above and resulting in the restatement of the Company’s unaudited condensed
consolidated financial statements.
Restatement
of Other Financial Statements
With the
filing of this Form 10-Q/A, we are concurrently filing an amendment to our
Quarterly Report on Form 10-Q filed on February 16, 2010 to restate our
unaudited condensed consolidated financial statements for the three and six
months ended December 31, 2009.
Encompass
Group Affiliates, Inc.
Index
To Form 10-Q
|
Page No.
|
||||
|
Part
I - Financial Information (Dollars in thousands, except share
data)
|
||||
|
Item
1.
|
Financial
Statements
|
|||
|
Condensed
Consolidated Balance Sheets As Of September 30, 2009 (Unaudited) and June
30, 2009
|
2
|
|||
|
Condensed
Consolidated Statements Of Operations (Unaudited) For The Three Months
Ended September 30, 2009 and 2008
|
3
|
|||
|
Condensed
Consolidated Statement Of Stockholders’ Equity (Unaudited) For The Three
Months Ended September 30, 2009
|
4
|
|||
|
Condensed
Consolidated Statements Of Cash Flows (Unaudited) For The Three Months
Ended September 30, 2009 and 2008
|
5
|
|||
|
Notes
To Condensed Consolidated Financial Statements (Unaudited)
|
6-15
|
|||
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
15-19
|
||
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
19
|
||
|
Item 4T.
|
|
Controls
and Procedures
|
|
19-20
|
|
Part
II - Other Information
|
||||
|
Item
1.
|
Legal
Proceedings
|
21
|
||
|
Item
1A.
|
Risk
Factors
|
21
|
||
|
Item
2.
|
Unregistered Sales
of Equity Securities And Use Of Proceeds
|
21
|
||
|
Item
3.
|
Defaults
Upon Senior Securities
|
21
|
||
|
Item
4.
|
Submission
of Matters To A Vote Of Security Holders
|
21
|
||
|
Item
5.
|
Other
Information
|
21
|
||
|
Item
6.
|
Exhibits
|
23-26
|
||
As used
herein, the terms the “Company,” “Encompass Group Affiliates,” ”Encompass,”
“we,” “us” or “our” refer to Encompass Group Affiliates, Inc. , a Florida
corporation.
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.
Compliance
with Smaller Reporting Company Disclosure Requirements
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 recently adopted 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.
1
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars
in thousands, except per share data)
Part
I - Financial Information
Item
1. – Financial Statements
|
September 30, 2009
|
June 30, 2009
|
|||||||
|
(Unaudited)
(Restated)
(See Note 12)
|
(Note 2)
|
|||||||
|
ASSETS
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 4,849 | $ | 5,536 | ||||
|
Restricted
cash
|
— | 1,509 | ||||||
|
Accounts
receivable, net of allowance for doubtful accounts of $476 and $441,
respectively
|
8,083 | 9,677 | ||||||
|
Inventory
|
11,516 | 12,267 | ||||||
|
Replacement
parts and equipment
|
302 | 297 | ||||||
|
Due
from vendors
|
2,358 | 2,487 | ||||||
|
Deferred
tax asset
|
2,300 | 1,400 | ||||||
|
Prepaid
expenses and other current assets
|
2,248 | 2,089 | ||||||
|
Total
Current Assets
|
31,656 | 35,262 | ||||||
|
Property
and equipment, net
|
1,203 | 1,227 | ||||||
|
Other
Assets
|
||||||||
|
Intangible
assets, net
|
12,854 | 13,248 | ||||||
|
Goodwill
|
20,627 | 20,627 | ||||||
|
Deferred
tax asset
|
4,121 | 4,170 | ||||||
|
Other
assets
|
682 | 1,836 | ||||||
|
Total
Other Assets
|
38,284 | 39,881 | ||||||
|
TOTAL
ASSETS
|
$ | 71,143 | $ | 76,370 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
LIABILITIES
|
||||||||
|
Current
Liabilities
|
||||||||
|
Accounts
payable and accrued expenses
|
$ | 9,115 | $ | 11,766 | ||||
|
Escrow
liability
|
— | 1,509 | ||||||
|
Notes
payable, current portion
|
1,579 | 1,596 | ||||||
|
Total
Current Liabilities
|
10,694 | 14,871 | ||||||
|
Long
Term-Liabilities
|
||||||||
|
Notes
payable, less current portion
|
36,953 | 37,056 | ||||||
|
Deferred
tax liability
|
1,787 | 1,836 | ||||||
|
Other
|
302 | 306 | ||||||
|
Series
E preferred stock
|
5,719 | 5,360 | ||||||
|
Total
Long-Term Liabilities
|
44,761 | 44,558 | ||||||
|
TOTAL
LIABILITIES
|
55,455 | 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 September 30, 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 $7,902 and
$7,713 at September 30, 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 $795 and $776 at
September 30, 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 September 30, 2009 and June 30,
2009
|
36,152 | 36,152 | ||||||
|
Additional
paid-in capital
|
9,286 | 9,160 | ||||||
|
Accumulated
deficit
|
(29,750 | ) | (28,371 | ) | ||||
|
Total
Stockholders' Equity
|
15,688 | 16,941 | ||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 71,143 | $ | 76,370 | ||||
See accompanying notes to unaudited condensed
consolidated financial statements
2
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars
in thousands, except per share data)
|
For The Three Months Ended
|
||||||||
|
September 30,
|
||||||||
|
2009
(Restated)
(See Note 12)
|
2008
|
|||||||
|
NET
SALES
|
$ | 22,974 | $ | 27,486 | ||||
|
COST
OF SALES
|
17,420 | 21,581 | ||||||
|
GROSS
PROFIT
|
5,554 | 5,905 | ||||||
|
OPERATING
EXPENSES
|
||||||||
|
Depreciation
and amortization
|
552 | 419 | ||||||
|
Selling,
general and administrative expenses
|
4,604 | 3,928 | ||||||
|
Write
off of deferred transaction costs
|
1,111 | — | ||||||
|
TOTAL
OPERATING EXPENSES
|
6,267 | 4,347 | ||||||
|
Income
(loss) From Operations
|
(713 | ) | 1,558 | |||||
|
OTHER
INCOME (EXPENSE)
|
||||||||
|
Other
income
|
5 | 20 | ||||||
|
Interest
expense, net
|
(1,571 | ) | (1,280 | ) | ||||
|
TOTAL
OTHER INCOME (EXPENSE), NET
|
(1,566 | ) | (1,260 | ) | ||||
|
INCOME
(LOSS) BEFORE INCOME TAXES
|
(2,279 | ) | 298 | |||||
|
Income
tax benefit (provision)
|
900 | (140 | ) | |||||
|
NET
INCOME (LOSS)
|
(1,379 | ) | 158 | |||||
|
Cumulative
dividend on preferred stock
|
(208 | ) | (208 | ) | ||||
|
NET
LOSS AVAILABLE TO COMMON STOCKHOLDERS
|
$ | (1,587 | ) | $ | (50 | ) | ||
|
Basic
and diluted net loss per common share
|
$ | - | $ | - | ||||
|
Basic
and diluted weighted average number of common shares
outstanding
|
13,286,151,000 | 15,343,942,000 | ||||||
See accompanying notes to unaudited condensed
consolidated financial statements
3
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
(Dollars
in thousands)
|
PREFERRED STOCK
|
COMMON STOCK
|
ADDITIONAL
PAID IN
CAPITAL
|
ACCUMULATED
DEFICIT
|
|||||||||||||||||||||||||
|
SHARES
|
AMOUNT
|
SHARES
|
AMOUNT
|
TOTAL
|
||||||||||||||||||||||||
|
BALANCE
AT JULY 1, 2009
|
2,000 | $ | — | 13,286,151,000 | $ | 36,152 | $ | 9,160 | $ | (28,371 | ) | $ | 16,941 | |||||||||||||||
|
Stock-based
compensation
|
— | — | — | — | 126 | — | 126 | |||||||||||||||||||||
|
Net loss for the
period
(Restated)
(See Note 12)
|
— | — | — | — | — | (1,379 | ) | (1,379 | ) | |||||||||||||||||||
|
BALANCE AT SEPTEMBER
30, 2009
(Restated)
(See Note 12)
|
2,000 | $ | — | 13,286,151,000 | $ | 36,152 | $ | 9,286 | $ | (29,750 | ) | $ | 15,688 | |||||||||||||||
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 Three Months Ended
|
||||||||
|
September 30,
|
||||||||
|
2009
(Restated)
(See Note 12)
|
2008
|
|||||||
|
CASH
FLOWS USED IN OPERATIONS:
|
||||||||
|
Net
income (loss)
|
$ | (1,379 | ) | $ | 158 | |||
|
Adjustments
to reconcile net income (loss) to net cash used in operating
activities
|
||||||||
|
Depreciation
and amortization
|
585 | 485 | ||||||
|
Deferred
income taxes
|
(900 | ) | 140 | |||||
|
Allowance
for doubtful accounts
|
35 | 26 | ||||||
|
Stock-based
compensation
|
126 | 108 | ||||||
|
Preferred
dividend classified as interest
|
359 | 135 | ||||||
|
Write
off of deferred transaction costs
|
1,111 | — | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
(Increase)
decrease in assets:
|
||||||||
|
Restricted
Cash
|
1,510 | — | ||||||
|
Accounts
receivable
|
1,559 | (3,202 | ) | |||||
|
Inventory
|
751 | (2,616 | ) | |||||
|
Replacement
parts and equipment
|
(5 | ) | 106 | |||||
|
Due
from vendors
|
129 | (237 | ) | |||||
|
Prepaid
expense and other assets
|
(165 | ) | (47 | ) | ||||
|
Increase
(decrease) in liabilities:
|
||||||||
|
Escrow
liability
|
(1,510 | ) | — | |||||
|
Accounts
payable and accrued expenses
|
(2,673 | ) | 2,698 | |||||
|
Net
cash used in operating activities
|
(467 | ) | (2,246 | ) | ||||
|
CASH
FLOWS USED IN INVESTING ACTIVITIES:
|
||||||||
|
Purchase
of business, net of cash acquired
|
— | (8,296 | ) | |||||
|
Acquisition
costs
|
— | (865 | ) | |||||
|
Purchase
of plant and equipment
|
(85 | ) | (223 | ) | ||||
|
Net
cash used in investing activities
|
(85 | ) | (9,384 | ) | ||||
|
CASH
FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
|
||||||||
|
Principal
payments on notes payable
|
(135 | ) | (141 | ) | ||||
|
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
|
(135 | ) | 16,754 | |||||
|
Net
increase (decrease) in cash and cash equivalents
|
(687 | ) | 5,124 | |||||
|
Cash
and cash equivalents at beginning of period
|
5,536 | 4,008 | ||||||
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$ | 4,849 | $ | 9,132 | ||||
See
accompanying notes to unaudited condensed consolidated financial
statements
5
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF SEPTEMBER 30, 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"), 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 expect to commence full-scale
operations in Mexico to serve the Latin American and Canadian markets within the
next quarter.
On August
17, 2007, Encompass Parts completed the acquisition of Vance Baldwin, Inc.
(“Vance Baldwin”), d/b/a Vance Baldwin Electronics, 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 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.
In
addition, Encompass Parts has, since June 2004, owned Cyber-Test, Inc., a
Delaware corporation ("Cyber-Test"). Cyber-Test, d/b/a Encompass
Service Solutions, Inc. (“Encompass Service”), a depot repair and refurbishment
company based in Florida, 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.
6
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF SEPTEMBER 30, 2009
(UNAUDITED)
In
connection with its strategy of expanding internationally in the future,
Encompass Parts Distribution has formed subsidiaries in Mexico and Canada, the
operations of which have not commenced as of November 16, 2009.
|
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 months ended
September 30, 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
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 SEPTEMBER 30, 2009
(UNAUDITED)
Inventory,
Replacement Parts and Equipment
Inventory
of OEM parts purchased 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.
Replacement
parts and equipment consist primarily of repair parts, as well as consumable
supplies for resale and used machines that are held for resale, that are stated
at the lower of weighted average cost or market. The weighted average
cost of replacement parts and equipment approximates the first-in, first-out
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 $1,810 and $1,702 are included in prepaid expenses and other current assets
as of September 30, 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, or
sooner if warranted.
8
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF SEPTEMBER 30, 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 includes shipping costs associated with outbound freight in cost of
sales. Total shipping costs included in cost of sales for the three
months ended September 30, 2009 and 2008 were $1,488 and $1,905,
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 September 30, 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. At
September 30, 2009 and 2008, potentially dilutive securities totalled
121,434,899,000 shares and 76,921,615,000 shares, respectively.
Concentration
of Credit Risk
Sales to
two customers in each period accounted for approximately 9.0% and 8.1% of
consolidated sales for the three months ended September 30, 2009, and
approximately 10.5% and 11.8% of consolidated sales for the three months ended
September 30, 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 September 30, 2009, the amount of deposits in excess of
insurance provided was $1,509. 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.
9
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF SEPTEMBER 30, 2009
(UNAUDITED)
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 September 30, 2009 and June 30, 2009, $682 and
$682, respectively, of such costs were capitalized, or $383 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 September 30 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, however
remote.
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.
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 November 16, 2009,
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 $1,194 were written off in the quarter ended
September 30, 2009.
10
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF SEPTEMBER 30, 2009
(UNAUDITED)
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., a privately-held Maryland C corporation engaged in the
distribution of replacement parts and accessories for consumer electronics
products (“Tritronics”). 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 three months ended September 30, 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
|
$ | 29,375 | ||
|
Operating
income
|
1,697 | |||
|
Net
loss available to common stockholders
|
(218 | ) | ||
|
Basic
and diluted net loss per share
|
$ | 0.00 |
|
NOTE
4.
|
GOODWILL
AND INTANGIBLE ASSETS
|
Goodwill
and intangible assets consisted of the following:
|
September 30, 2009
|
June 30, 2009
|
|||||||
|
Goodwill
|
$ | 20,627 | $ | 20,627 | ||||
|
Intangible
assets, primarily consisting of customer lists
|
$ | 15,750 | $ | 15,750 | ||||
|
Less
accumulated amortization
|
(2,896 | ) | (2,502 | ) | ||||
|
Total
net intangible assets
|
$ | 12,854 | $ | 13,248 | ||||
Amortization
expense for intangible assets amounted to $394 and $331 for the three months
ended September 30, 2009 and 2008.
|
NOTE
5.
|
SHORT-TERM
AND LONG-TERM DEBT
|
Short-term
and long-term debt obligations consisted of the following at September 30, 2009
and June 30, 2009:
|
September
30,
|
June
30,
|
|||||||
|
2009
|
2009
|
|||||||
|
Senior
notes, net
|
$ | 11,273 | $ | 11,390 | ||||
|
Series
A and Series B senior subordinated notes, net
|
24,658 | 24,636 | ||||||
|
Convertible
notes
|
1,206 | 1,206 | ||||||
|
Other
notes payable
|
1,085 | 1,110 | ||||||
|
Note
payable to officer
|
310 | 310 | ||||||
|
Total
notes payable
|
38,532 | 38,652 | ||||||
|
Less:
current portion
|
(1,579 | ) | (1,596 | ) | ||||
|
Long-term
notes, less current portion
|
$ | 36,953 | $ | 37,056 | ||||
11
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF SEPTEMBER 30, 2009
(UNAUDITED)
NOTE
6. EQUITY
Dividends
in the amount of $360 and $142 were earned by Series E Preferred Stockholders
but not paid in the three month periods ended September 30, 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
September 30, 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.
As of
September 30, 2009, future minimum aggregate lease payments for the next five
fiscal years 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. In addition, upon termination without cause,
12 months of severance would become due.
|
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.
12
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF SEPTEMBER 30, 2009
(UNAUDITED)
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 three months ended September 30, 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 three months ended September 30,
2009.
The
following table summarizes stock option activity for the three months ended
September 30, 2009:
|
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 September 30, 2009
|
10,923,525,000 | $ | 0.00075 | 8.0 | ||||||||
|
Exercisable
at September 30, 2009
|
7,893,115,000 | $ | 0.00075 | 8.0 | ||||||||
|
Expected
to vest
|
3,030,410,000 | $ | 0.00075 | 8.1 | ||||||||
Stock-based
compensation expense for the three months ended September 30, 2009 and 2008
amounted to $126 and $108, respectively. As of September 30, 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 September 30, 2009 and 2008 amounted
to $52 and $33, 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. Accordingly, as
of June 30, 2009 and 2008, the Company re-evaluated its deferred tax asset
balance and determined that $1,330 and $4,500, respectively, should be
recognized.
13
ENCOMPASS
GROUP AFFILIATES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF SEPTEMBER 30, 2009
(UNAUDITED)
For the
three months ended September 30, 2009, the Company recorded a tax benefit of
$900, or 65.3% of our pretax loss. The Company recorded an increase
to its net deferred tax assets of $900 as of September 30, 2009 reflecting the
realization of this future tax benefit.
For the
three months ended September 30, 2008, the Company recorded an income tax
provision of $140, or 47.1% of 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 of the dividend on the Series E preferred stock 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 three months ended September 30, 2009
and 2008 for income taxes and interest:
|
2009
|
2008
|
|||||||
|
Income
taxes
|
$ | 35 | $ | 22 | ||||
|
Interest
|
$ | 1,328 | $ | 750 | ||||
Three
Months Ended September 30, 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.
|
|
NOTE
12.
|
RESTATEMENT
|
After completing an analysis of the
materiality of these errors in accordance with Staff Accounting Bulletin No. 99,
Materiality (SAB 99) and Staff Accounting Bulletin No. 108 (SAB 108) regarding
the process of quantifying financial statement misstatements, and considering
both the qualitative and quantitative effects of the errors, management and the
Audit Committee of the Company’s Board of Directors concluded that the unaudited
condensed consolidated financial statements as of and for the three months ended
September 30, 2009 and as of and for the three and six months ended December 31,
2009 previously filed by the Company with the SEC on its Quarterly Reports on
Form 10-Q would be restated for a material misstatement in the Company’s
financial statements due to a $1,800 overstatement of its defective parts and
returned core inventories. As a result, the consolidated financial
statements for the aforementioned periods should no longer be relied
upon. Accordingly, the Company is filing this Form 10-Q/A to restate
the financial statements for the quarterly period ended September 30, 2009,
reflecting a deficiency decrease in inventory and an increase in cost of sales
and net loss as of and for the period ended September 30, 2009 in the amount of
$900.
Balance
Sheet
|
September
30, 2009
|
||||||||||||
|
As Previously Reported
|
Adjustment
|
As Restated
|
||||||||||
|
Inventory
|
$ | 12,416 | $ | (900 | ) | $ | 11,516 | |||||
|
Total
Current Assets
|
$ | 32,556 | $ | (900 | ) | $ | 31,656 | |||||
|
Total
Assets
|
$ | 72,043 | $ | (900 | ) | $ | 71,143 | |||||
|
Accumulated
deficit
|
$ | (28,850 | ) | $ | (900 | ) | $ | (29,750 | ) | |||
|
Total
Stockholders' Equity
|
$ | 16,588 | $ | (900 | ) | $ | 15,688 | |||||
|
Total
Liabilities and Stockholders' Equity
|
$ | 72,043 | $ | (900 | ) | $ | 71,143 | |||||
|
Statement
of Operations
|
||||||||||||
|
For
The Three Months Ended September 30, 2009
|
||||||||||||
|
As Previously Reported
|
Adjustment
|
As Restated
|
||||||||||
|
Cost
of Sales
|
$ | 16,520 | $ | 900 | $ | 17,420 | ||||||
|
Gross
Profit
|
$ | 6,454 | $ | (900 | ) | $ | 5,554 | |||||
|
Income (Loss)
from Operations
|
$ | 187 | $ | (900 | ) | $ | (713 | ) | ||||
|
Loss
before Income Taxes
|
$ | (1,379 | ) | $ | (900 | ) | $ | (2,279 | ) | |||
|
Net
Loss
|
$ | (479 | ) | $ | (900 | ) | $ | (1,379 | ) | |||
|
Net
Loss Available to Common Stockholders
|
$ | (687 | ) | $ | (900 | ) | $ | (1,587 | ) | |||
14
|
Statement
of Cash Flows
|
||||||||||||
|
For
The Three Months Ended September 30, 2009
|
||||||||||||
|
As Previously Reported
|
Adjustment
|
As Restated
|
||||||||||
|
Net
Loss
|
$ | (479 | ) | $ | (900 | ) | $ | (1,379 | ) | |||
|
Inventory
|
$ | (149 | ) | $ | 900 | $ | 751 | |||||
|
Net
Cash Used In Operating Activities
|
$ | (467 | ) | — | $ | (467 | ) | |||||
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
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"),
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 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. Vance Baldwin is
headquartered in Ft. Lauderdale, FL, and operates out of two warehouse
facilities located in Lawrenceville, GA and one in Las Vegas, NV; Tritronics is
headquartered in Abington, MD, near Baltimore, MD, with its warehouse facilities
located in Abingdon and Miami, FL; and Encompass Service Solutions’ headquarters
and operating facilities are based in Longwood, FL, near Orlando,
FL. 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.
Restatement
This Amendment No. 1 reflects the
restatement of our unaudited condensed consolidated financial statements as of
and for the three months ended September 30, 2009, which were included in
the Original Filing. See Note 12—Restatement of the Notes to the
unaudited condensed consolidated financial statements in this Amendment No. 1
for information on the restatement.
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.
15
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 three months ended September 30, 2009, include
Tritronics for the full period; the results of operations for the three months
ended September 30, 2008, include Tritronics since the acquisition date
only.
RESULTS
OF OPERATIONS-COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2009 TO THE
THREE MONTHS ENDED SEPTEMBER 30, 2008
Summary
of Results of Operations
Net sales
for the three months ended September 30, 2009 amounted to $22,974 as compared to
net sales of $27,486 for the three months ended September 30, 2008, a decrease
of $4,512, or 16.4%. Gross profit decreased by 5.9% to $5,554 in the
current period from $5,905 in the earlier period as a result of the decrease in
net sales, offset in part by improved gross margin. The Company
recorded a net loss of $1,379 in the three months ended September 30,
2009 compared to net income of $158 for the three months ended September 30,
2008, due in large part to a one–time write off of deferred transaction costs to
conform with recently promulgated U.S. GAAP. Further, the current
period included net interest expense of $1,571 and noncash items including
depreciation and amortization expense of $552 and stock-based compensation
expense of $126, all of which aggregate $2,249; in the prior year period such
expenses amounted to an aggregate of $1,807.
The
following table sets forth certain selected financial data as a percentage of
sales for the three months ended September 30, 2009 and 2008:
|
2009
|
2008
|
|||||||
|
(Restated)
|
||||||||
|
Net
sales
|
100.0 | % | 100.0 | % | ||||
|
Cost
of sales
|
75.8 | 78.5 | ||||||
|
Gross
profit margin
|
24.2 | 21.5 | ||||||
|
Operating
expenses
|
27.2 | 15.8 | ||||||
|
Income
(loss) from operations
|
(3.0 | ) | 5.7 | |||||
|
Interest
expense, net of other income
|
(6.9 | ) | (4.6 | ) | ||||
|
Income
(loss) before taxes
|
(9.9 | ) | 1.1 | |||||
|
Income
tax benefit (provision)
|
3.9 | (.5 | ) | |||||
|
Net
income (loss)
|
(6.0 | ) % | 0.6 | % | ||||
Net
Sales
Net sales
for the three months ended September 30, 2009 amounted to $22,974 as compared to
net sales of $27,486 for the three months ended September 30, 2008, a decrease
of $4,512, or 16.4%. The decrease in net sales was due principally to
the (i) lower sales by Encompass Parts as a result of the current economic
downturn, the loss of a major customer that began liquidation proceedings in
February 2009, partially offset by the inclusion of three months of Tritronics’
results in the current quarter versus two months in the quarter ended September
30, 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.
Cost
of Sales and Gross Profit
Our cost
of sales totaled $17,420 for the three months ended September 30, 2009, as
compared to $21,581 for the three months ended September 30, 2008, a decrease of
$4,161, or 19.3%. Our gross profit decreased to $5,554 for the three
months ended September 30, 2009 as compared to $5,905 for the three months ended
September 30, 2008, with gross margin increasing to 24.2% from 21.5% for the
comparable period in the prior year.
16
The
decrease in cost of sales was primarily attributable to the decline in sales as
described above.
The
overall 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 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 this quarter.
Operating
Expenses
Total
operating expenses for the three months ended September 30, 2009 and 2008 were
$6,267 and $4,347, respectively, representing an increase of $1,920, or
44.1%. The net change was primarily attributable to a write off of
deferred transaction costs in the amount of $1,111 to conform to recently
effective U.S. GAAP, and an increase of $676 in selling, general and
administrative expenses for the three months ended September 30, 2009 as
compared to the three months ended September 30, 2008.
Depreciation
and amortization for the three months ended September 30, 2009 amounted to $552
compared to $419 for the three months ended September 30, 2008. The
increase is attributable to higher amortization expense associated with
intangible assets recorded in connection with the Tritronics
acquisition.
Selling,
general and administrative expenses increased to $4,604 for the three months
ended September 30, 2009 from $3,928 for the three months ended September 30,
2008, for an increase of $676, or 17.2%, due to the inclusion of expenses of
Tritronics for three months in the current period compared to two 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 center
warehouses in the current quarter.
Other
Income (Expense)
Interest
expense for the three months ended September 30, 2009 was $1,571 compared to
$1,280 for the three months ended September 30, 2008, an increase of $291 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.
LIQUIDITY
AND CAPITAL RESOURCES
At
September 30, 2009, the Company had cash and cash equivalents of $4,849
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 operating
working capital needs, as well as capital expenditures and quarterly interest
and principal payments that are required under our debt facility. We
intend to seek significant business acquisitions in the future which will likely
require additional equity and additional borrowings. 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, the Company
agreed under an amendment to the debt agreement to an additional $1,000
principal payment, paid on October 2, 2009, although but no payment was required
under the definition of a cash flow sweep in the debt agreement. It
is not known at the present time if any payment will be required for fiscal
2010.
Net
Cash Used In Operating Activities
Net cash
used in operating activities of $467 for the three months ended September 30,
2009 was principally due to a decrease in accounts payable and accrued expenses
of $2,673, attributable to a lower level business in the current period, offset
by a decrease in accounts receivable of $1,559, also attributable to a lower
level business in the current period, and non-cash charges of $1,316,
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 $2,246 for the three months ended September 30,
2008 was principally due to increase in accounts receivable and inventory of
$3,202 and $2,616, respectively, attributable to the growth in the business, as
well as non-cash charges of $894 principally consisting of depreciation,
amortization, provision for doubtful accounts, stock-based compensation and
preferred dividends classified as interest, partially offset by net income of
$158 and an increase in accounts payable and accrued expenses of $2,698, also
attributable to the growth in the business.
17
Net Cash Used In Investing
Activities
Net cash used in investing activities of $85 for the
three months ended September 30, 2009 was attributable to capital expenditures
of $85 for property and equipment.
Net cash used in investing activities of $9,384 for the
three months ended September 30, 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.
Net Cash Provided By (Used In) Financing
Activities
Net cash used in financing activities of $135 for the
three months ended September 30, 2009 was attributable to principal
payments of that
amount.
Net cash provided by financing activities of $16,754 for
the three months ended September 30, 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 principal
and capital lease payments of
$141. 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.
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.
|
18
|
|
·
|
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.
|
Except
as set forth in this Form 10-Q/A, this Form 10-Q/A does not reflect any events
that occurred after the filing of the Form 10-Q or modify, amend or update any
disclosures contained in the Form 10-Q to reflect any subsequent
events. Except as set forth in this Form 10-Q/A, the Company is not
making any changes to, or updating any disclosures contained in, the Form
10-Q.
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.
Item
4t. Controls And Procedures
(A) Evaluation
Of Disclosure Controls And Procedures
Prior to
the filing of the Original Filing, 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 (as defined
under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange
Act of 1934, as amended) as of the end of the period covered by this
report. Based on the evaluation, the CEO and CFO concluded that, as
of September 30, 2009, the Company’s disclosure controls and procedures were
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.
Subsequent
to the date of that evaluation, management, including our President and CEO and
our CFO, have re-evaluated the effectiveness of the design and operation of the
disclosure controls and procedures as of the end of the period covered by this
report and have concluded that the Company’s disclosure controls and procedures
were not effective to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements because of the
identification of a material weakness relating to the proper carrying value of
certain components of inventory and the result of a certain key controls in
place not operating effectively. The material misstatement of
inventory was not prevented or detected on a timely basis due to lack of
adequate testing of perpetual inventory records for the subject components of
inventory and the failure of entity level controls in place, such as the
analyses of balance sheet account balance fluctuations, gross profit and gross
margin, which were designed to detect the overstatement of inventory and gross
profit.
Remediation
To
remediate the material weakness described above in future periods, management
intends to perform periodic verification of the accuracy of the perpetual
records by cycle counting quantities of the subject components of inventory
reported as being on hand and to conduct more in-depth analysis of all the
various factors impacting balance sheet account balance fluctuations, monthly
gross profit and gross margin.
19
|
(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 September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
20
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 23 hereof.
21
Signatures
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
Encompass
Group Affiliates,
Inc.
|
||
|
By:
|
/s/ Wayne I. Danson
|
|
|
Name:
|
Wayne
I. Danson
|
|
|
Title:
|
President,
Chief Executive Officer (Principal Executive Officer) and
Director
|
|
| Date: June 22, 2010 |
|
|
|
By:
|
/s/ John E. Donahue
|
|
|
Name:
|
John
E. Donahue
|
|
|
Title:
|
Vice
President and Chief Financial Officer (Principal Accounting
Officer)
|
|
|
Date:
June 22, 2010
|
|
|
22
|
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
|
23
|
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
|
24
|
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
|
|
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.
1 to Employment Agreement between Wayne Danson and Encompass Group
Affiliates, effective as of July 31, 2009
|
Incorporated
by reference
to Exhibit 10.22 to the Company’s Annual
Report on Form 10-K filed with the SEC on September 28,
2009
|
|
10.2
|
Amendment No.
1 to Employment Agreement between John Donahue and Encompass Group
Affiliates, Inc., effective as of July 31,
2009
|
Incorporated by
reference to Exhibit 10.23 to the Company’s Annual
Report on Form 10-K filed with the SEC on September 28,
2009
|
|
10.3
|
Amendment No.
1 to Employment Agreement between Steven Miller and Encompass Group
Affiliates, Inc., effective as of July 31,
2009
|
Incorporated
by reference to Exhibit 10.24 to the Company’s Annual
Report on Form 10-K filed with the SEC on September 28,
2009
|
|
10.4
|
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
|
25
|
10.5
|
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
|
|
10.6
|
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
|
|
31.1
|
Certification
by Chief
Executive Officer pursuant to Sarbanes–Oxley Section
302
|
Filed
herewith
|
|
31.2
|
Certification
by Chief 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.
26