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Elandia International Inc. – ‘10-12G’ on 2/13/06

On:  Monday, 2/13/06, at 5:36pm ET   ·   Accession #:  1193125-6-29164   ·   File #:  0-51805

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 2/13/06  Elandia International Inc.        10-12G                40:11M                                    RR Donnelley/FA

Registration of Securities (General Form)   —   Form 10
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-12G      Form 10                                             HTML   3.42M 
 2: EX-2.1      Order Confirming Joint Plan of Reorganization and   HTML     79K 
                          Granting Debtor's Motion                               
 3: EX-2.2      Amended and Restated Agreement and Plan of Merger   HTML    247K 
 4: EX-2.3      Amended and Restated Arrangement Agreement          HTML    525K 
 5: EX-3.1      Certificate of Incorporation of the Company         HTML     58K 
 6: EX-3.2      Bylaws of the Company                               HTML     62K 
 7: EX-4.1      Co-Sale and First Refusal Agreement                 HTML     49K 
 8: EX-4.2      Security Agreement                                  HTML     58K 
 9: EX-4.3      Satisfaction and Release of Promissory Notes and    HTML     17K 
                          Security                                               
10: EX-9.1      Shareholder Voting Agreement                        HTML     16K 
11: EX-10.1     Government of American Samoa                        HTML     75K 
20: EX-10.10    Post Petition Loan and Security Agreement           HTML    285K 
21: EX-10.11    Security Agreement                                  HTML     58K 
22: EX-10.12    Form of Idemnification Agreement                    HTML     55K 
23: EX-10.13    Form of Lock-Up Agreement                           HTML     36K 
24: EX-10.14    Executive Employment Agreeement                     HTML     50K 
25: EX-10.15    Stock Subscription Agreement                        HTML     29K 
26: EX-10.16    Stock Purchase Agreement                            HTML     29K 
27: EX-10.17    Stock Subscription Agreement                        HTML     28K 
28: EX-10.18    Ibm New Zealand Limited                             HTML    154K 
29: EX-10.19    Distributor Agreement                               HTML    167K 
12: EX-10.2     Customer Solutions Agreement                        HTML   1.32M 
30: EX-10.20    Contract Between Sagric International Pty. Ltd and  HTML    293K 
                          Datec (Png) Ltd                                        
31: EX-10.21    Network Management Outsourcing Agreement            HTML    299K 
32: EX-10.22    Master Operating Lease                              HTML    346K 
33: EX-10.24    Lease Agreement, Dated April 1, 2005                HTML     51K 
34: EX-10.25    Lease Agreement, Dated April 1, 2005                HTML     52K 
35: EX-10.26    Lease Agreement, Dated October 13, 2004             HTML     37K 
36: EX-10.27    Lease Agreement Dated September 10, 2003            HTML    108K 
37: EX-10.28    Lease Agreement Dated December 1, 2004              HTML     33K 
38: EX-10.29    Lease Agreement, Dated December 1, 2004             HTML    108K 
13: EX-10.3     Employment Agreement                                HTML     66K 
39: EX-10.30    Constitution of Datec (Png) Limited                 HTML    468K 
40: EX-10.31    Shareholders' Agreement                             HTML    150K 
14: EX-10.4     Executive Employment Agreement                      HTML     49K 
15: EX-10.5     Stock Purchasing Agreement                          HTML     39K 
16: EX-10.6     Renewal Revolver Note                               HTML     21K 
17: EX-10.7     First Amendment to Loan and Security Agreement      HTML     28K 
18: EX-10.8     Centra Industries, Inc. Secured Revolver Note       HTML     21K 
19: EX-10.9     Secured Revolver Note                               HTML     21K 


10-12G   —   Form 10


This is an HTML Document rendered as filed.  [ Alternative Formats ]



  Form 10  

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10

 

GENERAL FORM FOR REGISTRATION OF SECURITIES

PURSUANT TO SECTION 12(b) OR 12(g) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

ELANDIA, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   517000   71-0861848

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

1500 Cordova Road

Suite 300

Fort Lauderdale, FL 33316

(954) 728-9090

(Address, including zip code, and telephone number, including area code, of

registrant’s principal executive offices)

 

Harley L. Rollins

Chief Financial Officer

Elandia, Inc.

1500 Cordova Road

Suite 300

Fort Lauderdale, FL 33316

(954) 728-9090

(Name, address, including zip code, and telephone number,

including area code, of agent for service)

 

Copies To:

 

Seth P. Joseph, Esq.

Adorno & Yoss LLP

2525 Ponce de Leon Boulevard

Suite 400

Coral Gables, FL 33134

(305) 460-1000

 


 

Securities to be registered pursuant to Section 12(b) of the Act: None

 


 

Securities to be registered pursuant to Section 12(g) of the Act:

 

Common Stock, par value $.00001 per share

 



Item 1. Business.

 

Unless otherwise indicated in this registration statement or the context otherwise requires, all references in this registration statement to “Elandia,” the “Company,” “us,” “our” or “we” are to Elandia, Inc., our predecessor company, Centra Industries, Inc., and their respective subsidiaries.

 

History of the Company

 

Centra Industries Inc.

 

Our company was organized on July 27, 2001 as a Delaware corporation under the name Centra Industries, Inc. (“Centra”). Centra served as a holding company for subsidiaries in the communications industry and the underground boring and construction business, including Midwest Cable Communications of Arkansas, Inc. (“Midwest”).

 

Reorganization

 

On August 1, 2003, our underground boring and construction business became insolvent and we filed for reorganization under Chapter 11 of Title 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Western District of Arkansas. On September 14, 2004, the Court confirmed our plan of reorganization. By virtue of the confirmation order, we emerged from bankruptcy and obtained a discharge pursuant to Section 1141 of the Bankruptcy Code. Pursuant to our plan of reorganization, we cancelled all then outstanding shares of our common stock, issued 180,000 new shares of our common stock and paid $100,000 to our unsecured creditors. Also, under our plan of reorganization, Stanford Venture Capital Holdings, Inc., our debtor-in-possession lender, converted approximately $2,600,000 of its secured claims into 3,397,500 shares of our common stock and warrants to purchase 3,127,500 shares of our common stock. These warrants, exercisable at $.0001 per share, were all subsequently exercised. Centra was renamed eLandia Solutions, Inc. and then renamed Elandia, Inc.

 

Elandia Technologies Merger

 

On December 31, 2004 we merged with Elandia Technologies (“Technologies”) through a one-for-one share exchange with the shareholders of Technologies. We issued 744,188 shares in connection with this merger. As a result of the merger, Technologies became a wholly-owned subsidiary of the Company.

 

Reverse Split

 

In August 2005, our Board of Directors authorized and our shareholders approved a 10-for-9 reverse stock split. Although the documents that have been previously filed by us as exhibits that pertain to the transactions set forth below contain pre-split numbers, in order to accurately reflect what is held by our shareholders currently, the numbers discussed below reflect the post-split number of shares.

 

Acquisition of AST Telecom, LLC

 

On January 31, 2006, we acquired AST Telecom, LLC (“AST”), a provider of wireless telephone services in American Samoa. In connection with this acquisition, we issued 4,565,012 shares of our common stock to Stanford International Bank for its 64.8% ownership interest in AST and 2,477,863 shares of our common stock to a limited partnership, the other member of AST, for its 35.2% ownership interest in AST.

 

Datec Merger

 

On February 1, 2006 we completed an arrangement under the laws of New Brunswick, Canada with Datec Group Ltd (“Datec”), a New Brunswick corporation, in which we acquired the South Pacific operations of Datec. In connection with the arrangement, we issued 6,808,542 shares of our common stock to the shareholders of Datec.

 

Operating Structure

 

As set forth in the following diagram, we conduct business operations through operating subsidiaries in four geographic segments: (1) The Samoas, which includes American Samoa and Samoa; (2) Papua New Guinea; (3) Fiji and Other Pacific Island Nations, which includes Fiji, New Zealand, Australia, Tonga, The Solomon Islands, Vanuatu and Cook Islands; and (4) North America, including The Caribbean.

 

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LOGO

 

Except as stated otherwise, these subsidiaries are wholly-owned, subject to nominal qualifying shares. We are a 50% shareholder in Datec PNG Pty Ltd. This joint venture, in turn, owns Datec Queensland, Ltd.

 

The Samoas

 

Wireless Service

 

We conduct our American Samoa operations primarily through our wholly-owned subsidiary, AST. As of the date of this registration statement, AST was the leading provider of mobile services in American Samoa, under the Blue Sky Communications brand (“Blue Sky”), and operated a global system for mobile communications, or GSM, network in the 1900 MHz band. AST has been a provider of mobile services in American Samoa since February 2003. Through AST, we are the dominant provider of wireless services throughout American Samoa, with more than 70% of the market share and over 16,000 subscribers. We acquired this operation pursuant to a merger agreement which was consummated on January 31, 2006. Our average revenue per user (ARPU) per month for the nine months ended September 30, 2005 was $36.11 per month. The average rate per minute charged to our customers for the nine months ended September 30, 2005 was $0.17 per minute.

 

- 3 -


Wireless Technology

 

We own and operate a Nortel DMS-100 GSM1900 network, which includes 12 cell towers to provide primary wireless coverage across American Samoa and a number of smaller cell sites for coverage in areas of low reception. Commencing in March 2003, AST began upgrading its networks to enhance coverage reliability by relocating fiber optic cable to underground facilities. Our network is designed to be easily expanded with the growth of our customer base and modified to support future products and services, as new telecommunications technology becomes economically viable in American Samoa. We operate both circuit switched and Voice over Internet Provider (VoIP) circuits for voice transmissions, taking advantage of the latest technology in bandwidth management, compression and quality of service management where appropriate.

 

Strategy for Wireless Services

 

Our business strategy in American Samoa is to deliver high-quality and convenient wireless service, while maximizing our network coverage. We attract new customers by offering simple and affordable prepaid wireless services, with coverage anywhere on American Samoa’s main island of Tuitilia. Our commitment to customer service and network reliability provides consumers with a selection of wireless services that exceeds what is customary in the South Pacific region, including Short Message Service (SMS) messaging and a call center with directory assistance available 24 hours a day, 7 days a week. Our per-minute, prepaid wireless service enables customers to actively control their wireless usage and appeals to consumers who are otherwise deterred by the price and perceived complexity of traditional wireless services. New prepaid customers may purchase a phone from one of our retail locations in American Samoa or activate an existing phone. With the purchase of a prepaid Subscriber Identity Module (SIM) card, service can be activated and is available for as little as $5 per month. Our customers can replenish their prepaid wireless services by purchasing recharge cards from our Laufou plaza retail location or from our distribution partners at more than 200 retail locations throughout American Samoa. We also offer a more traditional post-paid wireless service, designed for our larger, business customers. Our post-paid services differ from those of most other wireless providers as we do not require long-term commitments or contracts. Our billing options and pricing plans are designed to be simple and easy for customers to understand. Monthly rates for our post-paid wireless plans range from $24.95 to $99.95 and do not include long distance charges, which vary by country.

 

Internet Access Service

 

In August 2000, we began offering full-service internet access in American Samoa. For our larger business customers, we are a reseller of high speed, internet access through Digital Subscriber Line (DSL) connection technology, which offers connection speeds significantly faster than a traditional dial-up modem connection. This dedicated, always-on internet connectivity does not interfere with telephone service. We also offer standard dial-up and broadband internet access service for smaller businesses and residential customers. We offer wireless internet access service for mobile computer users with wide-area wireless network interface cards, enabling access to local area or world-wide networks and providing full access to e-mail, intranet, corporate applications and full web browsing where General Packet Radio Service network service is available. For our residential customers, monthly rates for internet access services are $24.95 for dial-up service and $75.00 for DSL or broadband service. For our business customers, internet access is provided by bandwidth amounts. Monthly rates range from $150.00 for 128 kilobits per second to $800.00 for 1024 kilobits per second.

 

Internet Technology

 

The convergence of voice and data technology has resulted in lower costs for transmission and backhaul for our internet access operations. Through wireless technology, many of our remote and indoor cell sites are able to backhaul voice and data services on the same IP network. Our larger cell sites convert signals into an IP format for backhaul on a secure data Gig-E network. As a result of these two enhancements, we are able to reduce the number of our leased fiber circuits or replace our more expensive fiber circuits with wireless technology.

 

Strategy for Internet Services

 

Our market opportunity as an internet service provider (ISP) is linked to the growth of internet service demand in American Samoa. As the demand for connectivity to the internet continues to grow and the population recognizes that internet access significantly enhances communication, we will expand our services and product offerings to appeal to consumers. Our ISP operations are based in Laufou plaza and include a retail location and a direct sales team.

 

Equal Access Service

 

In September 2005, Blue Sky became one of two equal access long distance service providers to telephone landline customers in American Samoa. With equal access long distance, our customers choose Blue Sky as an alternative long distance company by dialing 1 + the area code + the telephone number (“1 + dialing”) to place their long distance calls on the Blue Sky network. As of January 1, 2006, Blue Sky managed 434 equal access long distance accounts.

 

- 4 -


Wireless Business Operations

 

Market Opportunity. As of 2000, the population of American Samoa was approximately 65,000. We believe that there were approximately 22,000 wireless subscribers on the island of American Samoa as of January 1, 2006. The majority of existing wireless customers in American Samoa utilize prepaid services. Based on our market penetration and the demographics of American Samoa, the market for wireless services is a mature one. We believe that future revenues for our wireless services in American Samoa will increase proportionally with economic improvements in the country. We will expand our wireless products and offerings and differentiate our business by further enhancing our customer service and network. Recognition of the Blue Sky brand and the likelihood of consumers to associate Blue Sky with high quality and value are essential to expanding our presence throughout American Samoa.

 

Sales and Distribution. Our sales approach is to increase our market penetration in American Samoa, while minimizing expenses associated with sales, distribution and marketing. Approximately 93% of our customers utilize prepaid wireless services. Our customers can activate new service by purchasing SIM cards and replenish their prepaid wireless services by purchasing recharge cards from our retail stores and authorized dealers. We have two retail stores in American Samoa and more than 200 authorized dealer distribution locations. Our post-paid customers, who are primarily long-standing businesses or individual customers, receive service and attention from our direct sales team and are billed each month. Access and use of the Blue Sky wireless services and products, network and services are designed to allow potential customers to make informed decisions with little or no sales assistance.

 

Marketing and Brand Recognition. We advertise in publications and on the radio in American Samoa and across the South Pacific region. Our brand recognition by consumers benefits from the small size of American Samoa. The success of our future advertising initiatives for new products and services will depend on a favorable response to the Blue Sky brand.

 

International Network Access. For network access to the United States and other international destinations, we own and operate two satellite earth stations with links to Hawaii and California through two downlink sites. To ensure backup capability and flexibility in routing traffic, these downlink sites are tied together by a leased fiber connection. We also offer long distance services through the sale of prepaid long distance cards.

 

 

- 5 -


Network Operations. The quality and value of our wireless service reflects our ability to offer customers a reliable, high quality wireless network that provides continuous coverage across American Samoa. In September 2003, AST began upgrading its networks to further enhance the quality of its coverage, in spite of the geographical challenges posed by the terrain of American Samoa. We believe that this strategy enables us to operate superior networks to support planned customer growth and high usage. In addition, this reduces our need to compete with other providers solely on wireless plan pricing. To increase overall usage of Blue Sky wireless services throughout American Samoa, we plan to attract new customers through the proven quality of our networks and to continue to encourage our existing customers to utilize Blue Sky wireless services for all of their telephone communications. If we are awarded a license to conduct wireless operations in Samoa, we plan to expand our existing network operations to support our potential customers.

 

Planned Samoa Wireless Services

 

On February 10, 2006, we applied for a new wireless telecommunications license for the island of Samoa. The award of this license for our operations on the island of Samoa, which is a jurisdiction separate and apart from American Samoa, is subject to our selection and approval by the Samoa Government. If awarded this license, we expect to commence development of a wireless network and to launch commercial operations on the island of Samoa in the fall of 2006. We cannot assure you that the Samoa Government will grant such approval. We expect to further expand our offerings in Samoa to include products and services currently offered by other Elandia subsidiaries. If awarded this license, our existing local management or American Samoa will utilize their experience in building wireless operations, their knowledge of local business culture and our existing internal administrative and support systems.

 

Competition

 

Generally, the telecommunications industry is very competitive. Our primary competitor in the American Samoa wireless market is American Samoa Telecommunications Authority (ASTCA), which is owned and operated by the American Samoa Government. ASTCA operates a Code Division Multiple Access (CDMA) network with approximately 4,000 subscribers ASTCA is also an ISP with approximately 3,000 dial-up and 100 DSL customers. We also face periodic competition from other resellers, who provide wireless services to customers but do not hold wireless licenses or own facilities in American Samoa. Instead, resellers buy wireless telephone capacity from a licensed carrier and resell services through their own distribution network to the public.

 

In addition, wireless providers increasingly are competing in the provision of both voice and non–voice services. Non–voice services, including data transmission, text messaging, e–mail and internet access, are also now available from Personal Communication Services (PCS) providers and enhanced specialized mobile radio carriers such as Nextel. In many cases, non–voice services are offered in conjunction with or as adjuncts to voice services.

 

We have observed an increasing trend toward consolidation of wireless service providers through joint ventures, reorganizations and acquisitions. Over time, we expect these types of consolidation to lead to the creation of larger competitors in American Samoa with considerable spectrum resources, extensive network coverage and vast financial resources. We may be unable to compete successfully with these larger companies.

 

- 6 -


Competition for subscribers among wireless communications providers is based principally upon the services and features offered, the technical quality of wireless systems, customer service, system coverage, capacity and price. Competition has caused, and we anticipate that competition will continue to cause, market prices for two–way wireless products and services to decline. In addition, some competitors have announced unlimited service plans at rates similar to Blue Sky’s service plan rates in markets in which we have launched service.

 

Our ability to compete successfully will depend, in part, on our ability to distinguish our Blue Sky service from competitors through marketing and through our ability to anticipate and respond to other competitive factors affecting the industry, including new services that may be introduced, changes in consumer preferences, demographic trends, economic conditions, geographic-feasibility of the technology, competitors’ discount pricing, and bundling strategies, all of which could adversely affect our operating margins, market penetration and customer retention. Because some of the wireless operators in our market have substantially greater financial resources than we do, they may be able to offer prospective customers discounts or equipment subsidies that are substantially greater than those that we could offer. In addition, to the extent that our products or services, such as roaming capability, may depend upon the geographic terrain of American Samoa, negotiations with such wireless operators, discriminatory behavior by such operators or their refusal to negotiate with us, could adversely affect our business. While we believe that our cost structure and differentiated wireless services provide us with the means to react effectively to price competition, we cannot predict the effect of market forces or the conduct of other operators on our business.

 

Continuing technological advances in the communications field make it difficult for us to predict the nature and extent of additional future competition. As wireless service becomes a viable alternative to traditional landline phone service, we increasingly compete directly with traditional landline telephone companies for customers. Local and long distance wireline carriers have also begun to aggressively advertise in the face of increasing competition from wireless carriers, cable operators and other competitors.

 

We may also face future competition from companies that offer new technologies, such as Voice over Internet Protocol or VoIP, and other services, including cable television access, landline telephone service and internet access, that we do not currently intend to market. Some of our competitors offer these other services together with their wireless services, which may make their services more appealing to customers.

 

Government Regulation

 

The licensing, construction, modification, operation, sale, ownership and interconnection arrangements of wireless communications networks are regulated to varying degrees by Congress, the FCC and state/territorial and local governments. Decisions by these bodies could have a significant impact on the competitive market structure among wireless providers and on the relationships between wireless providers and other carriers. These mandates may impose significant financial obligations on us and other wireless providers. We are unable to predict the scope, pace or financial impact of legal or policy changes that could be adopted in these proceedings.

 

Licensing of PCS Systems. A broadband PCS system operates under a license granted by the FCC for a particular market on one of six frequency blocks (or subdivisions thereof) allocated for broadband PCS. Broadband PCS systems generally are used for two-way voice applications. Narrowband PCS systems, in contrast, generally are used for non-voice applications such as paging and data service and are separately licensed. American Samoa comprises one PCS market. The FCC originally awarded six broadband PCS licenses for each market, two on the basis of Major Trading Areas and four on the basis of Basic Trading Areas. The Major Trading Area licenses authorize the use of 30 MHz of spectrum. One of the basic trading area licenses is

 

- 7 -


for 30 MHz of spectrum, and the other three are for ten MHz of spectrum. The FCC permits licensees to split their licenses and assign a portion to a third party on either a geographic or frequency basis or both. Over time, the FCC has also further split licenses in connection with re-auctions of PCS spectrum, creating additional 15 MHz and 10 MHz licenses and has created an additional 10 MHz license as part of the re-banding of Sprint Nextel and public safety spectrum.

 

The FCC’s spectrum allocation for PCS includes two license types, 10, 15 and 30 MHz C-Block licenses acquired in “closed bidding” and 10 MHz F-Block licenses, that are designated as “Entrepreneurs’ Blocks.” The FCC generally requires holders of these licenses to meet certain threshold financial size qualifications for a specified period of time. A failure by an entity to maintain its qualifications to hold C and F Block licenses could cause a number of adverse consequences, including the ineligibility to hold licenses for which the FCC’s minimum coverage requirements have not been met, the triggering of FCC unjust enrichment rules and the acceleration of installment payments owed to the FCC. Our PCS license is in good standing with the FCC.

 

All PCS licenses are issued for a 10 -year term, at the end of which they must be renewed. Licenses acquired through transfer or assignment or from splitting a license are subject to the original license term. The FCC’s rules provide a formal presumption that a PCS license will be renewed, called a “renewal expectancy,” if the PCS licensee (1) has provided substantial service during its past license term, and (2) has substantially complied with applicable FCC rules and policies and the Communications Act of 1934, as amended (the Act).

 

PCS licensees are required to coordinate frequency usage with existing fixed microwave licensees in the 1850 to 1990 MHz band. In an effort to balance the competing interests of existing microwave users and newly authorized PCS licensees, the FCC adopted a transition plan to relocate such microwave operators to other spectrum blocks and a cost sharing plan so that if the relocation of an incumbent benefits more than one PCS licensee, those licensees will share the cost of the relocation. The transition and cost sharing plans expired on April 4, 2005, however, licensees subject to existing relocation or cost sharing obligations must continue to satisfy those obligations. Subsequent to that date, a PCS licensee may require incumbent microwave licensees to return their operating authorizations to the FCC following six months written notice from a PCS entity that such entity intends to turn on a PCS system within the interference range of the incumbent microwave licensee, absent an agreement with affected broadband PCS entities or an extension from the FCC. To secure a sufficient amount of unencumbered spectrum to operate our PCS systems efficiently and with adequate population coverage within an appropriate time period, we have previously needed to relocate one or more of these incumbent fixed microwave licensees and have also been required (and may continue to be required) to participate in the cost sharing related to microwave licenses that have been voluntarily relocated by other PCS licensees or the existing microwave operators.

 

PCS Construction Requirements. All PCS licensees must satisfy minimum geographic coverage requirements within five years of the license grant date, and 30-megahertz PCS licensees also must satisfy additional coverage requirements within ten years of the license grant date. These requirements are met for 10 MHz licenses when adequate service is offered to at least one-quarter of the population of the licensed area within five years, and for 30 MHz licenses when adequate service is offered to at least one-third of the population within five years and two-thirds of the population within ten years after the license grant date. As an alternative to the geographic coverage requirement, licensees may demonstrate that they are providing “substantial service” within the applicable five or ten-year period. In general, a failure to comply with FCC coverage requirements could cause the revocation of the relevant wireless license.

 

Transfer and Assignment of PCS Licenses. The Act and FCC rules require the prior FCC approval of the assignment or transfer of control of a license for a PCS system, with limited exceptions. The FCC may prohibit or impose conditions on assignments and transfers of control of licenses. Non-controlling interests in an entity that holds a FCC license generally may be bought or sold without FCC approval, but subject to applicable ownership eligibility restrictions. Although we cannot assure you that the FCC will approve or act in a timely fashion upon any pending or future requests for approval of assignment or transfer of control applications that we file, in general we believe the FCC will approve or grant such requests or applications in due course. Because an FCC license is necessary to lawfully provide PCS service (other than through resale), if the FCC were to disapprove any such filing, our business plans would be adversely affected.

 

- 8 -


General FCC Obligations. The FCC has a number of other complex requirements and proceedings that affect our operations and that could increase our cost or diminish our revenues. For example, the FCC requires wireless carriers to make available emergency call services, including enhanced emergency call services that provide the caller’s telephone number and detailed location information to emergency responders, as well as a requirement that emergency call services be made available to users with speech or hearing disabilities. Our obligations to implement these services occur on a market-by-market basis as emergency service providers request the implementation of enhanced emergency call services in their locales. Absent a waiver, a failure to comply with these requirements could subject us to significant penalties.

 

FCC rules also require that local exchange carriers and most commercial mobile radio service providers, including PCS providers like Blue Sky, allow customers to change service providers without changing telephone numbers. For wireless service providers, this mandate is referred to as wireless local number portability, or WLNP. The FCC also has adopted rules governing the porting of wireline telephone numbers to wireless carriers.

 

The FCC has the authority to order interconnection between commercial mobile radio service operators and incumbent local exchange carriers, and FCC rules provide that all local exchange carriers must enter into compensation arrangements with commercial mobile radio service carriers for the exchange of local traffic, whereby each originating carrier compensates the other, terminating carrier, for terminating local traffic originating on the originating carrier’s network. As a commercial mobile radio services provider, we are required to pay compensation to a wireline local exchange carrier that transports and terminates a local call that originated on our network. Similarly, we are entitled to receive compensation when we transport and terminate a local call that originated on a wireline local exchange network. We negotiate interconnection arrangements for our network with major incumbent local exchange carriers and other independent telephone companies. If an agreement cannot be reached, under certain circumstances, parties to interconnection negotiations can submit outstanding disputes to state authorities for arbitration. Negotiated interconnection agreements are subject to state approval. The FCC’s interconnection rules and rulings, as well as arbitration proceedings, will directly impact the nature and costs of facilities necessary for the interconnection of our network with other telecommunications networks. They will also determine the amount of revenue we receive for terminating calls originating on the networks of local exchange carriers and other telecommunications carriers. The FCC is currently considering changes to the local exchange-commercial mobile radio service interconnection rules and other intercarrier compensation arrangements, and the outcome of such proceedings may affect the manner in which we are charged or compensated for the exchange of traffic.

 

- 9 -


Country Information

 

Information concerning the geographic area of our Samoas operations is set forth in Appendix A to this registration statement.

 

Employees

 

As of January 1, 2006, we had 65 full time employees for our Samoas operations.

 

Seasonality

 

Our customer activity is influenced by seasonal effects related to traditional retail selling periods and other factors specific to AST’s target customer base. As a result, new sales activity is generally highest in the fourth quarter. However, our business is sensitive to promotional activity and competitive actions, which have the ability to reduce or outweigh certain seasonal effects.

 

Papua New Guinea, Fiji and Other Pacific Island Nations

 

An Overview

 

In Papua New Guinea, Fiji and Other Pacific Island Nations, we are the leading information solutions and services provider, offering technology products, internet access service and professional services. We conduct operations in Fiji and Other Pacific Island Nations through our wholly-owned subsidiaries, Datec Fiji Limited, Generic Technology Limited, Network Services Limited, Datec Vanuatu Limited, Datec Solomon Islands Limited, Datec Tonga Limited, Datec Investments Limited, Mobile Technology Solutions, Datec Samoa Limited and Datec Australia Pty Limited. We conduct operations in Papua New Guinea through our subsidiaries, Datec PNG Pty Limited and Datec Queensland Limited. We acquired all of these operating subsidiaries pursuant to a plan of arrangement that was consummated on February 1, 2006.

 

Technology Products

 

Our selection of technology products is one of the most comprehensive in Papua New Guinea, Fiji and Other Pacific Island Nations and these product offerings support multiple functional areas of businesses and professionals throughout the region. Our software application offerings include Microsoft products, database applications, accounting applications, PBX software and other system applications. We also offer peripheral products, including fax machines, copiers and consumable accessories, phone consumables, printers and accessories and general office products. Our hardware offerings include PBX hardware, servers, routers and switching systems.

 

Our experience and in-depth understanding of the markets in this region have enabled our management to be at the forefront of changes in the technology sector of Papua New Guinea, Fiji and Other Pacific Island Nations. This leadership provides us with a special understanding of the needs of our customers.

 

At January 1, 2006, for the following brands and their respective technology products, we were the only licensed reseller in Papua New Guinea, Fiji and Other Pacific Island Nations:

 

    IBM Canon: printers, copiers and reprographic equipment;

 

    Lexmark: printers;

 

    Oracle: databases;

 

    Epicor: enterprise resource planning software;

 

    Computer Associates: Accpac enterprise resource planning systems;

 

    Surfcontrol: enterprise network security products; and

 

    Samsung: PBX equipment

 

Additionally, we are the only Tier 1 Partner for IBM in the region. This status gives us direct access to those IBM products for which we are a certified reseller and warranty support provider. These products include IBM X series, P series and I series servers, PCs, printers, POS and storage devices. As Tier 1 Partners we also have direct access to IBM’s technical and IT consulting resources.

 

Strategy for Technology Products

 

Our objective is to continue to be the leading provider of technology products to customers in Papua New Guinea, Fiji and Other Pacific Island Nations under the Datec brand. We are a reseller of technology products and offer a sophisticated selection of computer hardware and software applications of a variety of global brands. In Papua New Guinea, Fiji and Other Pacific Island Nations, our product offerings include business software, hardware devices, computer peripherals, routers and switches and PBX systems. For many of these global brands, we are the only licensed reseller of technology products in Papua New Guinea, Fiji and Other Pacific Island Nations. We plan to expand our product offerings and continue to introduce new products to customers throughout this region by further developing our existing local partnerships with global brands.

 

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Data Services.

 

Internet access service is an expanding business in Papua New Guinea, positioned at the convergence of home computing, the internet and the growing demand for electronic communications. Our internet services were first introduced in Papua New Guinea in May 1997, when permission was granted by the government for the establishment of internet connections in the country. Through the operations of our 50% subsidiary, Datec PNG Pty Ltd., we are the leading internet service provider, or ISP, offering a selection of nine specialized, prepaid internet access packages to both home and corporate users. As of January 31, 2006 we had over 6,000 subscribers, including corporate subscribers in a variety of industries including mining, shipping, aviation, defense, government, banking, capital markets, entertainment and education. We also offer professional web design, development and hosting services to our subscribers. Monthly rates for our internet access packages range from $2.23 to $39.00 and offer customers with reliable connections, fast download speeds and generous connection times.

 

Our strategy is to differentiate our internet services from those of our competitors by offering a unique combination of high quality service, reliable technical management and available online customer support. We plan to leverage our position in the market along with the emergence of internet-based technology in Papua New Guinea, to provide a large variety of competitively priced internet services throughout the country.

 

We are a reseller of internet services and purchase our bandwidth in large amounts directly from Telikom PNG, Ltd, our distributor, and offer it to our end-user customers by the megabyte. We invest in our internet services by continuing to upgrade our link to the gateway in Papua New Guinea, which allows us to maintain our position as the ISP with the largest bandwidth, for incoming and outgoing data, in Papua New Guinea. The market for internet service providers in Papua New Guinea remains largely deregulated and we compete with three other providers of internet access services.

 

Professional Services

 

In Papua New Guinea, Fiji and Other Pacific Island Nations, our professional services offer strategic assistance and advice to clients seeking a more comprehensive approach to managing government and business operations in the region. We offer a broad range of professional services to assist our customers in implementing customized business solutions to meet their business needs. Our reputation as a provider of professional services is based on our experience and in-depth understanding of the South Pacific markets. We have significant expertise in multinational operations, regulation, and strategy, and have been at the forefront of changes in the South Pacific business markets. Our knowledge and information base covers a broad range of operations and our clients benefit from this detailed understanding of the efficiency challenges in government or business operations. Our professional services are designed to assist clients with innovation, cost reduction and customer relationship management. We have 12 offices in 7 countries in Papua New Guinea, Fiji and Other Pacific Island Nations. We offer application development, managed services, systems integration, training and maintenance and support.

 

Strategy for Professional Services

 

Our objective is to continue to be the leading provider of strategic professional services to customers throughout Papua New Guinea, Fiji and Other Pacific Island Nations. In these geographic markets, the professional services sector is dependent upon the development of local relationships throughout the region. We believe that our strong presence in the region gives us a significant advantage over our competitors and positions us for strong penetration of these and other markets. Since 2003, we have developed, maintained and expanded our own strategic relationships through the depth of our professional service offerings to government and business entities. We believe that our experience and continued in-depth understanding of trends in business operations throughout PNG, Fiji and Other Pacific Island nations will enable us to cater to existing clients and develop new strategic relationships. Our customers seek customized professional technology solutions that will enable them to compete in the rapidly changing business, technology and communications markets of the South Pacific. We believe we have established a differentiated market position based on our professional services personnel who have the market expertise and sophisticated knowledge necessary to tailor our professional services to the specific needs of a client. We intend to continue to direct our efforts toward workforce training to drive the proliferation of our professional services in Papua New Guinea, Fiji and Other Pacific Island Nations.

 

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Application Development. We implement a wide range of enterprise resource planning systems based largely on commercial off-the-shelf software for our customers in Papua New Guinea, Fiji and Other Pacific Island Nations. Enterprise resource planning is an information system or process that integrates all production and related applications across an entire organization. Enterprise resource planning systems provide tools to manage human resources and integrate systems in all areas of production including sales and order processing, accounts receivable, accounts payable, inventory, general ledger and payroll. Our consultants review and analyze these systems for customers and implement a timetable to integrate and implement enterprise resource planning applications into the customer’s operations. Our application development services insulate the end user from the sophistication of the underlying technology and allow them to derive the benefits of information systems applications with minimal effort.

 

When off-the-shelf enterprise resource planning systems are not available, accessible or suitable for a client we develop mission-critical applications to meet their needs. Mission-critical applications are those applications essential to the important functions and operations of an entity. We primarily rely upon commercial off-the-shelf software to develop mission-critical applications. We differentiate our mission-critical applications from competing products by combining our knowledge of enterprise applications with an in-depth understanding of the operations and operational priorities of the client.

 

In Papua New Guinea, Fiji and Other Pacific Island Nations, the internet and its underlying protocols have grown to positions of prominence in interactive communications supporting the daily operations of government entities. We have entered into contracts with the government of Fiji to develop customized web-based applications enabling the government of Fiji to cost-effectively provide web-based services to constituents. As internet computing continues to spread throughout the South Pacific, we believe governments and businesses will increasingly demand web-enabled versions of enterprise applications. Our ability to adapt and adjust to the rapid pace of computer-based technology will differentiate our application development services from those of our competitors.

 

In Australia, we entered into a contract to develop innovative information technology solutions and services for the utility sector to enable our clients to better compete in a deregulated utilities market. We will continue to offer such development services to accommodate the demand for such solutions in newly deregulated markets.

 

In 2004, we commenced development of a sophisticated suite of applications for sales force automation and service force automation. Our sales force automation applications offer contact management functionality for the direct sales force needs of an organization, including the automation of mailshots, proposal and quote generation, order-taking facilities, remote configuring of orders, access to corporate data and communications with a remote field sales force. Our service force automation applications offer job management functionality for an organization including dispatching, service tech activities monitoring, job scheduling, service call management, site management, and warehouse management. These applications, branded as “e-Breathe”, are designed to operate on the GPS networks of certain wireless providers in the region. We have entered into sales partnership and distribution agreements to offer our e-Breathe applications to channel partners.

 

Managed Services. We have entered into contracts with certain of our existing customers to provide managed support services for network infrastructure, mission-critical applications and enterprise resource planning applications. Our technology support services include the design, operation and monitoring of networks and equipment. We also offer installation and cabling services. This service enables our business customers to devote more attention and focus to revenue-generating business segments, rather than hire additional staff to perform technology support functions. Through our existing partnership with IBM Global Services Australia, we manage, operate and maintain the information technology infrastructure for multinational corporations in Papua New Guinea, Fiji and Other Pacific Island Nations. Although we have not customarily offered these managed services to new customers, we believe that the demand for a single cost-effective and comprehensive solution for information systems will lead to our increased investment in our managed services operations.

 

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Systems Integration. Our systems integration services provide our clients with access to some of the most sophisticated and innovative technologies in a manner that is relevant and effective to their particular operations. Systems integration refers to the implementation, custom development, and integration of new technologies and systems with our clients’ existing legacy systems and technology infrastructures. Our systems integration services primarily address issues related to systems architecture and web development. Our services enable our clients to link together networks, hardware, and software to create scaleable systems that will support their business models and strategies. We have recently extended our systems integration services to include voice, data and other telecommunications technologies.

 

Training. The demand for workforce training in the areas of business and information technology is increasing significantly in response to developments in the business and technology sectors throughout the South Pacific. We offer courses in these areas and have focused our business and information technology program offerings on the skills that we believe will be most marketable and useful in these sectors in the coming years. Our business and information technology programs include software applications technology, network and personal computer systems technology, network systems administration, business administration, and project management. We differentiate our training programs from other schools in the region by combining substantial hands-on training with traditional classroom-based training, led by experienced and certified instructors in fully-equipped facilities.

 

Maintenance and Support Services. Our maintenance and support services provide both product maintenance and technical support services in Papua New Guinea, Fiji and Other Pacific Island Nations for products we supply to customers. Our technical support staff is strategically located in our service centers. These maintenance and support services are typically sold as renewable one-year contracts to our customers but are also available on a “time and materials” basis. We employ 85 experienced hardware engineers to provide certified parts and services and warranty and post warranty support, including Midrange, ATM and Oracle Applications maintenance and UPS Sales Maintenance. We are the only certified service agent in Fiji and Other Island Nations for IBM, Canon, and Lexmark and one of two certified service agents for Hewlett-Packard and Cisco Systems.

 

Competition

 

In Papua New Guinea, Fiji and Other Pacific Island Nations our competitors by geographic location are as follows:

 

Fiji. In Fiji, our competitors for desktop server sales include Hewlett Packard, VT Solutions, Xtreme, Graphic Equipment and Clariti. In networking or large server sales, we compete with Hewlett Packard, VT Solutions, Xtreme, Graphic Equipment, Clariti, Exceed and GDC. Our retail competitors include Bondwell and Graphic Equipment. Our competitors in managed services include Clariti and Pacific Connex. Our competitors in software development include Software Factory and Pacific Connex. Our competitors in eCommerce include Connect and Pacific Connex.

 

Papua New Guinea. In Papua New Guinea, our competitors for ISP services include Daltron, Global and Data net. In desktop server sales, we compete with Able Computing and Daltron. In networking or large server sales, we compete with Able Computing and Daltron Our retail sales competitors are Able Computing and Daltron. We compete with Daltron in the area of managed services.

 

Vanuatu. In Vanuatu, our competitor for desktop server, networking or large server, and retail sales is Etech.

 

Tonga. In Tonga, we compete with Office Equipment in desktop server sales.

 

Cook Islands. In Cook Islands, we compete with CSL in ISP services and Raratonga Computers in managed services.

 

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New Zealand. In New Zealand, we compete with I-touch, Orbiz, and Gen-I for software development.

 

Geographical Information

 

Information concerning the geography of our operations in Papua New Guinea and Fiji and Other Pacific Island Nations is set forth in Appendices B and C to this registration statement.

 

Employees

 

As of January 1, 2006, we had approximately 371 full time employees in our Papua New Guinea and Fiji and Other Pacific Island Nations operations.

 

North America, including The Caribbean

 

The North America business segment consists of our wholly-owned subsidiary, Elandia Technologies, Inc. In September 2004, Elandia Technologies, Inc. acquired two wireless telecommunications licenses, issued by the FCC. While we may elect to launch commercial operations and commence build-out activities in the U.S. Virgin Islands, our licenses are currently for sale. We have also entered into an agreement with a cellular service provider to pay a fee to this cellular service provider upon a sale of our U.S. Virgin Island license.

 

Government Regulation

 

The licensing, construction, modification, operation, sale, ownership and interconnection arrangements of wireless communications networks are regulated to varying degrees by Congress, the FCC and state/territorial and local governments. Decisions by these bodies could have a significant impact on the competitive market structure among wireless providers and on the relationships between wireless providers and other carriers. These mandates may impose significant financial obligations on us and other wireless providers. We are unable to predict the scope, pace or financial impact of legal or policy changes that could be adopted in these proceedings.

 

Licensing of PCS Systems. A broadband PCS system operates under a license granted by the FCC for a particular market on one of six frequency blocks (or subdivisions thereof) allocated for broadband PCS. Broadband PCS systems generally are used for two-way voice applications. Narrowband PCS systems, in contrast, generally are used for non-voice applications such as paging and data service and are separately licensed. North America comprises PCS market. The FCC originally awarded six broadband PCS licenses for each market, two on the basis of Major Trading Areas and four on the basis of Basic Trading Areas. The Major Trading Area licenses authorize the use of 30 MHz of spectrum. One of the basic trading area licenses is for 30 MHz of spectrum, and the other three are for ten MHz of spectrum. The FCC permits licensees to split their licenses and assign a portion to a third party on either a geographic or frequency basis or both. Over time, the FCC has also further split licenses in connection with re-auctions of PCS spectrum, creating additional 15 MHz and 10 MHz licenses and has created an additional 10 MHz license as part of the re-banding of Sprint Nextel and public safety spectrum.

 

The FCC’s spectrum allocation for PCS includes two license types, 10, 15 and 30 MHz C-Block licenses acquired in “closed bidding” and 10 MHz F-Block licenses, that are designated as “Entrepreneurs’ Blocks.” The FCC generally requires holders of these licenses to meet certain threshold financial size qualifications for a specified period of time. A failure by an entity to maintain its qualifications to hold C and F Block licenses could cause a number of adverse consequences, including the ineligibility to hold licenses for which the FCC’s minimum coverage requirements have not been met, the triggering of FCC unjust enrichment rules and the acceleration of installment payments owed to the FCC. Our PCS licenses are in good standing with the FCC.

 

All PCS licenses are issued for a 10-year term, at the end of which they must be renewed. Licenses acquired through transfer or assignment or from splitting a license are subject to the original license term. The FCC’s rules provide a formal presumption that a PCS license will be renewed, called a “renewal expectancy,” if the PCS licensee (1) has provided substantial service during its past license term, and (2) has substantially complied with applicable FCC rules and policies and the Communications Act of 1934, as amended (the Act).

 

PCS licensees are required to coordinate frequency usage with existing fixed microwave licensees in the 1850 to 1990 MHz band. In an effort to balance the competing interests of existing microwave users and newly authorized PCS licensees, the FCC adopted a transition plan to relocate such microwave operators to other spectrum blocks and a cost sharing plan so that if the relocation of an incumbent benefits more than one PCS licensee, those licensees will share the cost of the relocation. The transition and cost sharing plans expired on April 4, 2005, however, licensees subject to existing relocation or cost sharing obligations must continue to satisfy those obligations. Subsequent to that date, a PCS licensee may require incumbent microwave licensees to return their operating authorizations to the FCC following six months written notice from a PCS entity that such entity intends to turn on a PCS system within the interference range of the incumbent microwave licensee, absent an agreement with affected broadband PCS entities or an extension from the FCC. To secure a sufficient amount of unencumbered spectrum to operate our PCS systems efficiently and with adequate population coverage within an appropriate time period, we have previously needed to relocate one or more of these incumbent fixed microwave licensees and have also been required (and may continue to be required) to participate in the cost sharing related to microwave licenses that have been voluntarily relocated by other PCS licensees or the existing microwave operators.

 

PCS Construction Requirements. All PCS licensees must satisfy minimum geographic coverage requirements within five years of the license grant date, and 30-megahertz PCS licensees also must satisfy additional coverage requirements within ten years of the license grant date. These requirements are met for 10 MHz licenses when adequate service is offered to at least one-quarter of the population of the licensed area within five years, and for 30 MHz licenses when adequate service is offered to at least one-third of the population within five years and two-thirds of the population within ten years after the license grant date. As an alternative to the geographic coverage requirement, licensees may demonstrate that they are providing “substantial service” within the applicable five or ten-year period. In general, a failure to comply with FCC coverage requirements could cause the revocation of the relevant wireless license.

 

Transfer and Assignment of PCS Licenses. The Act and FCC rules require the prior FCC approval of the assignment or transfer of control of a license for a PCS system, with limited exceptions. The FCC may prohibit or impose conditions on assignments and transfers of control of licenses. Non-controlling interests in an entity that holds a FCC license generally may be bought or sold without FCC approval, but subject to applicable ownership eligibility restrictions. Although we cannot assure you that the FCC will approve or act in a timely fashion upon any pending or future requests for approval of assignment or transfer of control applications that we file, in general we believe the FCC will approve or grant such requests or applications in due course. Because an FCC license is necessary to lawfully provide PCS service (other than through resale), if the FCC were to disapprove any such filing, our business plans would be adversely affected.

 

General FCC Obligations. The FCC has a number of other complex requirements and proceedings that affect our operations and that could increase our cost or diminish our revenues. For example, the FCC requires wireless carriers to make available emergency call services, including enhanced emergency call services that provide the caller’s telephone number and detailed location information to emergency responders, as well as a requirement that emergency call services be made available to users with speech or hearing disabilities. Our obligations to implement these services occur on a market-by-market basis as emergency service providers request the implementation of enhanced emergency call services in their locales. Absent a waiver, a failure to comply with these requirements could subject us to significant penalties.

 

FCC rules also require that local exchange carriers and most commercial mobile radio service providers, including PCS providers like Florida Technologies, Inc., allow customers to change service providers without changing telephone numbers. For wireless service providers, this mandate is referred to as wireless local number portability, or WLNP. The FCC also has adopted rules governing the porting of wireline telephone numbers to wireless carriers.

 

The FCC has the authority to order interconnection between commercial mobile radio service operators and incumbent local exchange carriers, and FCC rules provide that all local exchange carriers must enter into compensation arrangements with commercial mobile radio service carriers for the exchange of local traffic, whereby each originating carrier compensates the other, terminating carrier, for terminating local traffic originating on the originating carrier’s network. As a commercial mobile radio services provider, we are required to pay compensation to a wireline local exchange carrier that transports and terminates a local call that originated on our network. Similarly, we are entitled to receive compensation when we transport and terminate a local call that originated on a wireline local exchange network. We negotiate interconnection arrangements for our network with major incumbent local exchange carriers and other independent telephone companies. If an agreement cannot be reached, under certain circumstances, parties to interconnection negotiations can submit outstanding disputes to state authorities for arbitration. Negotiated interconnection agreements are subject to state approval. The FCC’s interconnection rules and rulings, as well as arbitration proceedings, will directly impact the nature and costs of facilities necessary for the interconnection of our network with other telecommunications networks. They will also determine the amount of revenue we receive for terminating calls originating on the networks of local exchange carriers and other telecommunications carriers. The FCC is currently considering changes to the local exchange-commercial mobile radio service interconnection rules and other intercarrier compensation arrangements, and the outcome of such proceedings may affect the manner in which we are charged or compensated for the exchange of traffic.

 

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Item 1A. Risk Factors.

 

RISK FACTORS

 

You should consider carefully the following information about the risks described below, together with the other information contained in this registration statement. If any of the following risks actually occurs, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock.

 

Risks Related to Our Business and Industry

 

We have no combined operating history and have only recently merged several disparate businesses together.

 

Elandia emerged from reorganization under the Bankruptcy Act in September 2004 as a provider of telecommunications construction services. Since then, that business was determined not to be profitable so the assets associated with that business were sold to unrelated third parties for cash and all related operations discontinued. Prior to the consummation of the merger with AST and the plan of arrangement with Datec, Elandia was not actively engaged in operations, but held a wireless spectrum license in Bloomington, Illinois for potential sale or future development and a wireless spectrum license in the United States Virgin Islands for potential sale or future development.

 

On September 15, 2004, Elandia and Technologies were combined by virtue of a common control merger. On January 31, 2006, Elandia acquired AST. Until that time, AST had operated as an independent entity. Also on February 1, 2006, Elandia acquired all of the operating subsidiaries of Datec. Until that time, Datec, a Canadian holding company, oversaw the operations of those operating subsidiaries. Prior to February 1, 2006, AST and the Datec operating companies had separate management, business plans and prospects that were unrelated to each other. We may not be able to effectively integrate these businesses and their managements or to derive any benefit by linking them with Elandia’s management or assets.

 

Until we establish centralized accounting, finance and other administrative systems, we must rely upon the separate systems of the operating companies. Our success will depend, in part, upon centralizing these functions effectively. Further, we must effectively utilize the technical know how of the two South Pacific based operations (the former Datec subsidiaries and AST) in order to realize any benefit from these acquisitions. These organizations have different missions and business plans that will continue to be their priorities. We will also need to integrate such operating companies and any additional businesses we may acquire.

 

Our management group has been assembled only recently and the management control structure is still in its formative stages. Management may not be able to oversee the combined entity effectively or to implement our operating strategies across business segments. Any failure to do so could have a material adverse effect on our business, financial condition and results of operations. The pro forma combined financial results included in this registration statement cover periods when Elandia, AST and the Datec operating companies were not under common control or management and may not be indicative of our future financial or operating results.

 

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We may not be able to enhance the operating results of AST or the Datec operating subsidiaries as planned.

 

A key element of our business strategy is to improve the profitability of our operating subsidiaries and any subsequently acquired businesses. Our ability to improve profitability will be affected by various factors including:

 

    our cost of, and ability to obtain, capital;

 

    our ability to achieve operating efficiencies;

 

    the level of continued demand for the services our subsidiaries offer; and

 

    our ability to expand the range of services that we offer and our ability to enter new markets successfully.

 

Many of these factors are beyond our control and our strategies may not be successful. Moreover, we may be unable to generate cash flow adequate to sustain our operations and to support internal growth.

 

Another key component of our strategy is to operate on a decentralized basis, with local management retaining responsibility for day-to-day operations, profitability and the growth of the business. We cannot assure you that these individuals can operate effectively as the operations grow, face new challenges or endeavor to offer new services offered by their new sister companies. Our subsidiaries are operating with management, sales, and support personnel that may be insufficient to support growth in their respective businesses without significant central oversight and coordination. The loss of the services of any such personnel could have a material adverse effect upon our business, financial condition, and results of operations. If proper overall business controls are not implemented, our decentralized operating strategy could result in inconsistent operating and financial practices at the operating subsidiaries and subsequently acquired businesses, which could materially and adversely affect our overall profitability, and ultimately our business, financial condition, and results of operations.

 

In connection with the acquisitions, various key customers or suppliers of the acquired entities may have the right to terminate their agreements with the acquired businesses. For example, various agreements that our newly acquired South Pacific subsidiaries have with their customers require the subsidiaries to provide notice of a change of control and provide the customers or suppliers the right to terminate the agreements if the customer or supplier is displeased with the change in control. As a result, acquisitions pose the risk that revenues of the acquired entities may decline as a result of the combination.

 

We may be unable to run our key businesses without the continuing efforts of our senior executives and their employees.

 

Our success depends to a significant degree upon the continued contributions of key management, selling and marketing, and operations personnel, certain of whom would be difficult to replace. In particular, we believe that our future success is highly dependent on Michael Ah Koy, our acting chief executive officer and chief operating officer, Harley Rollins, our chief financial officer, Michael McCutcheon, General Manager, Datec PNG Pty Ltd. and Barry and Fay Rose, the senior executives of AST. We do not maintain key man life insurance covering our key personnel. This group of executives only began working together on February 1, 2006 upon the consummation of the merger of Elandia and AST and the arrangement between Elandia and Datec. Our success will depend to a significant extent on the retention of these executive officers, their successful performance, the ability of these executive officers to integrate themselves into our daily operations, and for all personnel to work effectively together as a team. In addition, we have key employees on each of the island markets that we service who are part of the local culture and who are highly trained to perform their technical duties. The loss or unavailability of any of these individuals may interrupt our business in these markets.

 

We plan to acquire other businesses as a key part of our growth strategy and these acquisitions involve numerous risks.

 

As part of our strategy, we plan to pursue additional acquisitions of complementary businesses in the markets in which we have a presence, businesses in other geographic markets, or to obtain services and technologies to enhance our existing services, expand our services offerings or enlarge our customer base. If

 

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we complete future acquisitions, we may be required to incur or assume additional debt, and make capital expenditures, and issue additional equity, which will dilute our existing stockholders’ ownership interest and may adversely affect our results of operations. Our ability to grow through acquisitions involves a number of additional risks including the following:

 

    the ability to identify appropriate acquisition candidates;

 

    the possibility that we may not be able to successfully integrate the operations, personnel, technologies, products and services of the acquired companies in a timely and efficient manner;

 

    the diversion of management’s attention from normal daily operations to negotiate acquisitions and integrate acquired businesses;

 

    insufficient revenues to offset significant unforeseen costs and increased expenses associated with the acquisitions;

 

    challenges in completing products associated with in-process research and development being conducted by the acquired businesses;

 

    risks associated with our entrance into markets in which we have little or no prior experience and where competitors have a stronger market presence;

 

    deferral of purchasing decisions by current and potential customers as they evaluate the likelihood of success of our acquisitions;

 

    incurrence and/or assumption of significant debt, contingent liabilities and amortization expenses; and

 

    loss of key employees of the acquired companies.

 

We will require substantial amounts of external financing to pursue our long-term business plan. Our business plan includes coupling video, data and long distance to our existing wireless service by acquiring or developing cable systems in each market where we provide wireless services. We currently offer wireless services in American Samoa and have applied for a wireless license in Samoa. Substantial capital is required to build a wireless network, to provide working capital to maintain the system and operations while endeavoring to grow a subscriber base, and to market the services. We do not expect to generate all of these funds internally.

 

Further, we may use a significant portion of our resources for acquisitions. The timing, size and success, if at all, of our acquisition efforts and any associated capital commitments cannot be readily predicted. We currently intend to finance future acquisitions by using shares of our common stock, cash from borrowings or a combination of equity and cash. If our equity does not achieve or maintain a sufficient market value, or if potential acquisition candidates are otherwise unwilling to accept common stock as part or all of the consideration for the sale of their businesses, we may be required to utilize more borrowings, if available, in order to initiate and maintain our acquisition program.

 

If we do not have sufficient cash resources, our growth could be limited unless we are able to obtain additional capital through debt or equity financings. We may be unable to obtain additional financing on

 

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favorable terms, if at all. Any failure by us to do so could have a material adverse effect on our business, financial condition and results of operations. To the extent that we use equity for all or a portion of the consideration to be paid for future acquisitions, existing stockholders may experience dilution.

 

We may not be able to compete successfully against current and future competitors.

 

Our operating subsidiaries must be able to favorably differentiate the services that they offer from existing and future competitors. In the case of our the managed services provided by the former Datec operating subsidiaries, we must compete with local and out of area providers of managed services. Competitors outside of the South Pacific have much larger and more robust infrastructures available to their customers, providing them with access to lower cost carriers and more varied storage networking ancillary services. Because of their greater financial resources, some of our competitors have the ability to adopt aggressive pricing policies. As a result, in the future, we may suffer from pricing pressure that would adversely affect our ability to generate revenues and adversely affect our operating results. Some of these competitors may also provide our target customers with additional benefits, including bundled communication services, before we are able to do so, or in a manner that is better than our offering if it becomes available.

 

In the case of our wireless telecommunications business, we face competition from the government owned carrier in American Samoa. If we are successful in obtaining licenses in Samoa, we will face competition from a number of established carriers with substantial name recognition. In general, the telecommunications industry is very competitive. Local and long distance carriers compete on rate, features and service plans in addition to the quality of service that is offered. In addition, the competitive pressures of the wireless telecommunications market have caused other carriers to offer service plans with large numbers of minutes of use at low prices. These competitive offerings could adversely affect our ability to maintain our pricing and market penetration. Our competitors may attract more customers because of their stronger market presence and geographic reach. Potential customers may perceive our service to be less appealing than other wireless plans, which offer more features and options.

 

We compete as a mobile alternative to landline service providers in the telecommunications industry. Wireline carriers have begun to advertise aggressively in the face of increasing competition from wireless carriers, cable operators and other competitors. Wireline carriers are also offering unlimited calling plans and bundled offerings that include wireless and data services. We may not be successful in our efforts to persuade potential customers to adopt our wireless service in addition to, or in replacement of, their current landline service.

 

Many competitors have substantially greater financial and other resources than we have, and we may not be able to compete successfully. Because of their size and bargaining power, our larger competitors may be able to purchase equipment, supplies and services at lower prices. As consolidation in the industry creates even larger competitors, any purchasing advantages our competitors have may increase.

 

Our success in retaining key employees is an important factor in our ability to remain competitive.

 

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We derive a significant portion of our managed services revenues and data delivery revenues from a few clients; accordingly, a reduction in our clients’ demand for our services or the loss of clients would likely impair our financial performance.

 

During the nine months ended September 30, 2005, the Datec operating subsidiaries derived approximately 95% of their managed services revenues from one customer. Because we derive a large percentage of our managed services revenues from a single customer, our managed services revenues could significantly decline if we lose this customer or if the amount of business we obtain from them is reduced. Since most of the gross profit of the Datec operating subsidiaries is derived from the managed services business, this customer is critical to the viability of the Datec operating subsidiaries.

 

During the nine months ended September 30, 2005, our operations in Papua New Guinea derived approximately 48% of their data delivery revenues from one customer (this is the same customer referred to in the immediately preceding paragraph). Because we derive a large percentage of our data delivery revenues from a few major customers, our data delivery revenues could significantly decline if we lose one or more of these customers or if the amount of business we obtain from them is reduced. Since most of the gross profit of the Papua New Guinea operations is derived from the data delivery business, these customers are critical to the viability of our Papua New Guinea operations.

 

We may not be successful in increasing our customer base which would force us to change our business plans and financial outlook and would likely negatively affect the price of our stock.

 

We must increase our base of wireless, internet service and data center customers in order to generate the internal funds necessary to support growth. There are many factors that could prevent us from adding new customers or result in a net loss of customers including:

 

    seasonal trends in customer activity;

 

    promotional activity;

 

    competition in the wireless telecommunications market;

 

    our level of spending on capital investments and advertising; and

 

    varying national economic conditions.

 

Our current business plans assume that we will increase our customer base over time, providing us with increased economies of scale. If we are unable to attract and retain a growing customer base, we would be forced to change our current business plans and financial outlook and there would likely be a material negative affect on the price of our common stock.

 

If we experience high rates of customer turnover or bad debt, our operating results will suffer.

 

Customer turnover, frequently referred to as “churn,” is an important business metric in our wireless and internet services businesses because it can have significant financial effects. Because we do not require wireless and internet services subscribers to sign long-term commitments or pass a credit check, our service is available to a broader customer base than many other wireless providers and, as a result, some of our customers may be more likely to have their service terminated due to an inability to pay than the average industry customer. In addition, our rate of customer turnover may be affected by other factors, including the size of our calling areas, handset issues, customer care concerns, number portability and other competitive factors. Our strategies to address customer turnover may not be successful. A high rate of customer turnover would reduce revenues and increase the total marketing expenditures required to attract the minimum number of replacement customers required to sustain our business plan, which, in turn, could have a material adverse effect on our business, financial condition, and results of operations.

 

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Our operating costs can also increase substantially as a result of customer credit card fraud and subscription fraud and dealer fraud. We have implemented a number of strategies and processes to detect and prevent efforts to defraud us, and we believe that our efforts have substantially reduced the types of fraud we have identified. However, if our strategies are not successful in detecting and controlling fraud in the future, it would have a material adverse impact on our financial condition and results of operations.

 

If we cannot effectively manage international operations, our revenues may decrease and our business and results of operations would be harmed.

 

At the present time, most of our operations are conducted outside North America. We anticipate that for the foreseeable future, most of our revenue will be derived from sources outside North America.

 

We may experience gains and losses resulting from fluctuations in foreign currency exchange rates. The majority of revenues and costs in our international operations are denominated in the Papua New Guinea Kina and the Fijian Dollar. The functional currency of American Samoa is the United States dollar. We have not undertaken foreign exchange hedging transactions and are completely exposed to foreign currency transaction risk for all of our operations outside American Samoa. Our international operations are generally subject to a number of additional risks including:

 

    protectionist laws and business practices favoring our competitors;

 

    greater difficulty or delay in accounts receivable collection;

 

    difficulties in staffing and managing foreign operations;

 

    political and economic instability;

 

    ability to obtain, transfer, or maintain licenses required by governmental entities with respect to the combined business; and

 

    compliance with evolving governmental regulation with which we have little experience.

 

We serve markets that are less developed than North America, lack certain infrastructure and have lower standards of living. We depend upon significant increases in the standard of living in these markets to occur in order to achieve forecasted levels of growth. Further, these regions are subject to natural disasters such as tsunamis and hurricanes that can destroy our infrastructure and harm the general economies. The recovery time following such natural disasters can be extended due to the lack of services and materials on these islands and long shipping times. The volcanic terrain of certain of these islands increases the difficulties of repair following natural disasters.

 

We have identified the potential for material weaknesses in our internal control over financial reporting, and our business and stock price may be adversely affected if we do not remediate all of these material weaknesses, or if we have other material weaknesses in our internal control over financial reporting.

 

A “material weakness” is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. In connection with the evaluation of our disclosure controls and procedures as related to the acquisitions consummated on January 31, 2006 and February 1, 2006, we have concluded that the potential for certain material weaknesses in our accounting and financial reporting departments exists with respect to internal control over financial reporting and our ability to issue efficient and effective financial reports, consistent with U.S. GAAP requirements. These potential material weaknesses are primarily attributable to the geographic distances between our operating locations, limited staffing levels and our

 

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staff’s limited familiarity with reporting requirements under U.S. GAAP. We expect that any potential material weaknesses will be remediated in the second half of 2006. The existence of one or more material weaknesses could result in errors in our financial statements, and substantial costs and resources may be required to rectify any internal control deficiencies. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our stock could decline significantly, we may be unable to obtain additional financing to operate and expand our business, and our business and financial condition could be harmed.

 

If our internal control over financial reporting does not comply with the requirements of the Sarbanes-Oxley Act of 2002, our business and stock price may be adversely affected.

 

Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to do a comprehensive evaluation of their internal control over financial reporting. To comply with this statute, we will be required to document and test our internal control over financial reporting; our management will be required to assess and issue a report concerning our internal control over financial reporting; and our independent registered public accounting firm will be required to attest to and report on management’s assessment. Reporting on our compliance with Section 404 of the Sarbanes-Oxley Act will first be required in connection with the filing of our Annual Report on Form 10-K for the fiscal year ending December 31, 2007. We plan to commence a review of our internal control over financial reporting for each acquired entity promptly in order to become compliant with the requirements of Section 404. However, the standards that must be met for management to assess our internal control over financial reporting are new and require significant documentation and testing. Our assessment may identify the need for remediation of our internal control over financial reporting.

 

Our inventory might become obsolete resulting in substantial losses.

 

Our technology products businesses are subject to the risk that the value of our inventory will be affected adversely by suppliers’ price reductions or by product changes affecting the usefulness or desirability of the products comprising the inventory. For example, during 2004 and 2005, the Datec operating subsidiaries wrote down an aggregate of $887,000 of inventory that reduced gross margins 1.3% in 2004 and 1.3% in the nine months ended September 30, 2005.

 

Any failure of our managed services could lead to significant costs and disruptions that could reduce our revenue and harm our business reputation and financial results.

 

Our business depends on providing customers with highly reliable service. In our managed services business we must also protect our customers’ infrastructure and their equipment. The managed services we provide are subject to failure resulting from numerous factors including:

 

    human error;

 

    physical or electronic security breaches;

 

    fire, earthquake, flood and other natural disasters;

 

    water damage;

 

    fiber cuts;

 

    power loss;

 

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    sabotage and vandalism; and

 

    failure of business partners who provide our resale products.

 

Problems at one or more data centers, whether or not within our control, could result in service interruptions or significant equipment damage. We have service level commitment obligations to certain of our customers, including our significant customers. If our customers suffer a loss of service or we fail to meet service level commitment obligations, we will be subject to financial penalties and loss of confidence of our customers which could consequently impair our ability to obtain and retain customers, and could adversely affect both our ability to generate revenues and our operating results.

 

Furthermore, we are dependent upon internet service providers, telecommunications carriers and other website operators in the South Pacific, the United States, Asia and elsewhere, some of which have experienced significant system failures and electrical outages in the past. Users of our services may in the future experience difficulties due to system failures unrelated to our systems and services. If for any reason, these providers fail to provide the required services, our business, financial condition, and results of operations could be materially adversely impacted.

 

There is no known prevention or defense against denial of service attacks. During a prolonged denial of service attack, internet service may not be available for several hours, thus negatively impacting hosted customers’ on-line business transactions. Affected customers might file claims against us under such circumstances. Our property and liability insurance may not be adequate to cover these customer claims.

 

The geographic regions in which we offer wireless service are susceptible to severe weather and natural disasters.

 

Our ability to provide wireless service on a continuous basis is essential to the efficient and profitable operation of our business. We conduct wireless operations in regions that are vulnerable to significant damage or destruction from severe weather or natural disasters. Any disruption or damage to our wireless networks, equipment or facilities due to cyclone, hurricane, or other natural disaster could interrupt our business operations and impair our ability to serve customers. The economic effects of severe weather or a natural disaster affecting our wireless service could increase our operating expenses, impair our cash flows and reduce our revenues, which could negatively impact the market price of our common stock.

 

The industries in which we compete are experiencing rapid technological change, and we may lose customers if we fail to keep up with these changes.

 

The wireless communications industry is experiencing significant technological change, as evidenced by ongoing improvements in the capacity and quality of digital technology, development and commercial acceptance of wireless data services, shorter development cycles for new products and enhancements, and changes in end-user requirements and preferences. The cost of implementing future technological innovations may be prohibitive to us, and we may lose customers if we fail to keep up with these innovations. Similarly, with advances in networking, data switching and computing technologies, the data storage and internet services businesses are rapidly evolving. We will be required to make substantial capital expenditures to remain competitive in these markets and to provide quality services to our customers.

 

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The loss of key personnel and difficulty attracting and retaining qualified personnel could harm our business.

 

We believe our success depends heavily on the contributions of our employees and on maintaining an experienced workforce. We do not, however, generally provide employment contracts to our employees and the uncertainties associated with the recent change of ownership of AST and the Datec operating subsidiaries may have caused employees to consider or pursue alternative employment. The loss of key individuals, and particularly the cumulative effect of such losses, may have a material adverse impact on our ability to effectively manage and operate our business.

 

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Risks associated with wireless handsets could pose product liability, health and safety risks that could adversely affect our business.

 

We do not manufacture handsets or other equipment sold by us and generally rely on our suppliers to provide us with safe equipment. Our suppliers are required by applicable law to manufacture their handsets to meet certain governmentally imposed safety criteria. However, even if the handsets we sell meet the regulatory safety criteria, we could be held liable with the equipment manufacturers and suppliers for products we sell if they are later found to have design or manufacturing defects. We generally have indemnification agreements with the manufacturers who supply us with handsets to protect us from direct losses associated with product liability, but we cannot guarantee that we will be fully protected against all losses associated with a product that is found to be defective.

 

Media reports have suggested that the use of wireless handsets may be linked to various health concerns, including cancer, and may interfere with various electronic medical devices, including hearing aids and pacemakers. Malfunctions have caused at least one major handset manufacturer to recall certain batteries used in its handsets.

 

Concerns over radio frequency emissions and defective products may discourage the use of wireless handsets, which could decrease demand for our services. In addition, if one or more of our customers were harmed by a defective product provided to us by the manufacturer and subsequently sold in connection with our services, our ability to add and maintain customers for our services could be materially adversely affected by negative public reactions.

 

There also are some safety risks associated with the use of wireless handsets while driving. Concerns over these safety risks and the effect of any legislation that has been and may be adopted in response to these risks could limit our ability to sell our wireless services.

 

We rely heavily on third parties to provide specialized services; a failure by such parties to provide the agreed services could materially adversely affect our business, results of operations and financial condition.

 

We depend heavily on suppliers and contractors with specialized expertise in order for us to efficiently operate our business. In the past, our suppliers, contractors and third-party retailers have not always performed at the levels we expect or at the levels required by their contracts. If key suppliers, contractors or third-party retailers fail to comply with their contracts, fail to meet our performance expectations or refuse to supply us in the future, our business could be severely disrupted. Generally, there are multiple sources for the types of products we purchase. However, some suppliers, including software suppliers, are the exclusive sources of their specific products. Because of the costs and time lags that can be associated with transitioning from one supplier to another, our business could be substantially disrupted if we were required to replace the products or services of one or more major, specialized suppliers with products or services from another source, especially if the replacement became necessary on short notice. Any such disruption could have a material adverse affect on our business, results of operations and financial condition. In particular, in connection with our telecommunications and data communications businesses we are materially dependent on satellite companies to provide long distance connections. Our principal managed services customer is under agreement with IBM Global Services Australia, which has subcontracted with us to provide a turn-key service. In connection with our business solutions, we depend upon IBM, Hewlett Packard and Canon.

 

We may be subject to claims of infringement regarding telecommunications technologies that are protected by patents and other intellectual property rights.

 

Telecommunications technologies are protected by a wide array of patents and other intellectual property rights. As a result, third parties may assert infringement claims against us from time to time based

 

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on our general business operations or the specific operation of our wireless networks. We generally have indemnification agreements with the manufacturers and suppliers who provide us with the equipment and technology that we use in our business to protect us against possible infringement claims, but we cannot guarantee that we will be fully protected against all losses associated with an infringement claim. Whether or not an infringement claim was valid or successful, it could adversely affect our business by diverting management attention, involving us in costly and time-consuming litigation, requiring us to enter into royalty or licensing agreements (which may not be available on acceptable terms, or at all), or requiring us to redesign our business operations or systems to avoid claims of infringement.

 

Regulation by government agencies may increase our costs of providing service or require us to change our services.

 

Our operations are subject to varying degrees of regulation by the FCC and local regulatory agencies and legislative bodies. Adverse decisions or regulations of these regulatory bodies could negatively impact our operations and costs of doing business. Governmental regulations and orders can significantly increase our costs and affect our competitive position compared to other telecommunications providers. We are unable to predict the scope, pace, or financial impact of regulations and other policy changes that could be adopted by the various governmental entities that oversee portions of our business.

 

A change in the tax law could ultimately impair our operations in American Samoa.

 

The economic stability of American Samoa’s private sector is heavily dependent upon canneries that operate locally. Net earnings of these cannery operations are subject to judgments and estimates and taxed in part under Internal Revenue Service Section 936, which exempts qualified American Samoa earnings from federal income tax. Section 936 limits the amount of qualified earnings for these canneries and expires at the end of fiscal year 2006. A change in the law may affect the tax rate of these canneries and place extreme pressure on American Samoa’s economic stability. A material deterioration in the general economic stability of American Samoa could affect our American Samoa operations.

 

Future declines in the fair value of our wireless licenses could result in future impairment charges.

 

The market values of wireless licenses granted by the FCC have varied dramatically over the last several years, and may vary significantly in the future. In particular, valuation swings could occur if:

 

    consolidation in the wireless industry allowed or required carriers to sell significant portions of their wireless spectrum holdings;

 

    a sudden large sale of spectrum by one or more wireless providers occurs; or

 

    market prices decline as a result of the bidding activity in recently concluded or upcoming FCC auctions.

 

In addition, the price of wireless licenses could decline as a result of the FCC’s pursuit of policies designed to increase the number of wireless licenses available in our markets. If the market value of our wireless licenses were to decline significantly in the future, the value of our wireless licenses could be subject to non-cash impairment charges. A significant impairment loss could have a material adverse effect on our operating income and on the carrying value of our wireless licenses on our balance sheet.

 

Declines in our operating performance could ultimately result in an impairment of our indefinite-lived assets, including goodwill, or our long-lived assets, including property and equipment.

 

We assess potential impairments to our long-lived assets, including property and equipment and certain intangible assets, when there is evidence that events or changes in circumstances indicate that the carrying value may not be recoverable. We assess potential impairments to indefinite-lived intangible assets, including goodwill and wireless licenses, annually and when there is evidence that events or changes in circumstances indicate that an impairment condition may exist. If we do not achieve our planned operating results, this may ultimately result in a non-cash impairment charge related to our long-lived assets and/or our indefinite-lived intangible assets. A significant impairment loss could have a material adverse effect on our operating results and on the carrying value of our goodwill or wireless licenses and/or our long-lived assets on our balance sheet.

 

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Because our consolidated financial statements reflect fresh-start accounting adjustments made upon our emergence from bankruptcy, financial information in our current and future financial statements will not be comparable to our financial information from periods prior to our emergence from bankruptcy.

 

As a result of adopting fresh-start accounting on September 15, 2004, the carrying values of our wireless licenses and our property and equipment, and the related depreciation and amortization expense, among other things, changed considerably from that reflected in our historical consolidated financial statements. Thus, our current and future balance sheets and results of operations will not be comparable in many respects to our balance sheets and consolidated statements of operations data for periods prior to our adoption of fresh-start accounting. You are not able to compare information reflecting our post-emergence financial statements to information for periods prior to our emergence from bankruptcy, without making adjustments for fresh-start accounting.

 

We expect our operating results to fluctuate.

 

We anticipate that our results of operations will fluctuate on a quarterly and annual basis. The fluctuations in our operating results may cause the market price of our common stock to decline. We expect to experience significant fluctuations in our operating results in the foreseeable future due to a variety of factors including:

 

    financing or other expenses related to the acquisition, purchase or construction of additional facilities and businesses;

 

    mandatory expensing of employee stock-based compensation, including restricted shares;

 

    demand for space and services at our data centers and changes in our subscriber base for our wireless and internet services networks due to competitive and other factors described above;

 

    changes in general economic conditions and specific market conditions in the telecommunications and internet industries;

 

    costs associated with the write-off of unimproved or underutilized property;

 

    the provision of customer discounts and credits;

 

    the mix of current and proposed products and services and the gross margins associated with our products and services;

 

    the timing required for new and future operations to be accepted by consumers;

 

    competition in the markets in which we operate;

 

    conditions related to international operations;

 

    the timing and magnitude of operating expenses, including taxes, capital expenditures and expenses related to the expansion of sales, marketing, operations and acquisitions, if any, of complementary businesses and assets; and

 

    the cost and availability of adequate public utilities, including power.

 

Any of the foregoing factors, or other factors discussed elsewhere in this registration statement could have a material adverse effect on our business, results of operations and financial condition. In addition, a relatively large portion of our expenses are fixed in the short-term, particularly with respect to lease and personnel expenses, depreciation and amortization, and interest expenses. Therefore, our results of operations are particularly sensitive to fluctuations in revenues. As such, comparisons to prior reporting periods should not be relied upon as indications of our future performance. In addition, our operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors. If this occurs, we could experience an immediate and significant decline in the trading price of our common stock.

 

Risks Related to Ownership of Our Common Stock

 

Our stock price may be volatile, and you may lose some or all of your investment.

 

The trading prices of the securities of telecommunications companies have been highly volatile. Accordingly, the trading price of our common stock is likely to be subject to wide fluctuations. Factors affecting the trading price of our common stock may include, among other things:

 

    variations in our operating results;

 

    announcements of technological innovations, new services or service enhancements, strategic alliances or significant agreements by us or by our competitors;

 

    recruitment or departure of key personnel;

 

    changes in the estimates of our operating results or changes in recommendations by any securities analysts that elect to follow our common stock; and

 

    market conditions in our industry and the economy as a whole.

 

The public sale of our common stock by existing stockholders or the exercise of options we have outstanding may result in significant dilution, which could depress the market price of our common stock.

 

All 6,705,000 shares of our common stock issued as a result of our emergence from bankruptcy under chapter 11 are eligible for public sale without registration.

 

In connection with our acquisition of AST, certain of our shareholders have entered into a lock-up agreement, pursuant to which they will not transfer their shares of Elandia for a period of two years. Under this lock-up agreement and subject to the volume limitations set forth in Rule 144, these shareholders were granted the right to transfer an aggregate of up to 100,000 shares of the Elandia stock per calendar quarter during the final six months of the two year period, provided that the Company has filed its Annual Report on Form 10-KSB for the year ended December 31, 2006 at such time. A total of 2,477,863 such shares will be eligible for sale under Rule 144 commencing on February 1, 2008.

 

In connection with the Datec merger, certain of our shareholders have entered into a lock-up agreement pursuant to which they will not transfer their shares of Elandia for a period of two years. Under this lock-up agreement and subject to the volume limitations set forth in Rule 144, certain shareholders of Datec South Pacific Holdings, Ltd. were granted the right to transfer any or all of their shares of Elandia stock through privately negotiated sales prior to February 1, 2006 if the person or entity receiving shares of the Company stock agreed to be bound by the terms of this lock-up agreement.

 

The market price of our common stock could decline as a result of market sales by our existing stockholders or the perception that these sales will occur. These sales also might make it difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. In addition, holders of our outstanding options and warrants may exercise their options or warrants to purchase our common stock, which would increase the number of outstanding shares of common stock in the future. A total of 6,808,542 shares of our common stock will be eligible for sale without registration

 

  (i) at the rate of twenty five percent (25%) thirty days following the listing of shares of our common stock on the NASDAQ Small Cap or National Market system, the AMEX or the OTC Bulletin Board, and (ii) twenty five percent (25%) per quarter for the next three quarters thereafter; or

 

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If no listing of shares of our common stock has been made prior to February 1, 2007, then all of such shares shall be released on such date or at any time at the sole discretion of our board of directors.

 

In addition, shares of our common stock held by management, and parties to mergers we have consummated, may generally sell such shares within two years following the date of the issuance of such shares in accordance with the volume limitations and other requirements of SEC Rule 144. A total of 2,477,863 of such shares will be eligible for sale under rule 144 commencing on January 31, 2008, subject to certain lock-up agreements described elsewhere in this registration statement.

 

Our shares of common stock have not yet begun trading and you may find it difficult to dispose of your shares of our stock, which could cause you to lose all or a portion of your investment in our company.

 

No trading in shares of our common stock has begun and we expect to have only a limited trading market in the foreseeable future. As a result, you may find it difficult to dispose of shares of our common stock and you may suffer a loss of all or a substantial portion of your investment in our common stock.

 

Our common stock will be covered by SEC “penny stock” rules which may make it more difficult for you to sell or dispose of our common stock, which could cause you to lose all or a portion of your investment in our company.

 

Our common stock is covered by an SEC rule that imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors, which are generally institutions with assets in excess of $5,000,000, or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchaser and transaction prior to the sale. Consequently, the rule may affect the ability of broker-dealers to sell our securities, and also may affect the ability of purchasers of our stock to sell their shares in the secondary market. It may also diminish the number of broker-dealers that may be willing to make a market in our common stock, and it may affect the level of news coverage we receive.

 

The interests of our controlling stockholders could conflict with those of our other stockholders resulting in the approval of corporate actions that are not in your interests.

 

Our principal stockholder, Stanford, owns or controls approximately 43.8% of our common stock. This stockholder is able to influence the outcome of stockholder votes, including votes concerning amendments to our charter and by-laws, and the approval of significant corporate transactions like a merger or sale of our assets. Although none of our directors or officers are affiliated with Stanford or have any business relationships with Stanford, Stanford is able, with another substantial stockholder with whom it has a voting agreement to control the election of the board of directors. In accordance with the Arrangement Agreement, Stanford International Bank, Ltd. and Kelton Investments Limited, owning approximately 53.7% of our common stock, entered into a voting agreement for the purpose of selecting our board of directors. Pursuant to the voting agreement, and Stanford International Bank Ltd. Kelton Investments Limited have agreed that for so long as each shall hold no less than three percent of the outstanding common stock of the Company, each shall vote and support jointly a nominee from each side for the Company’s Board of Directors. This controlling influence could have the effect of delaying or preventing a change in control, even if our other stockholders believe it is in their best interest.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This registration statement includes forward-looking statements. All statements other than statements of historical facts contained in this registration statement, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short term and long term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors.” In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this registration statement may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

 

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Item 2. Financial Information.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion of our financial condition and results of operations in conjunction with the annual audited financial statements and unaudited condensed consolidated financial statements and the notes to those statements included elsewhere in this registration statement. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under the section entitled “Risk Factors” and elsewhere in this registration statement, our actual results may differ materially from those anticipated in these forward-looking statements. The more detailed financial information and statistical data contained in this discussion are unaudited, except as indicated.

 

Overview

 

We conduct business operations through operating subsidiaries in four geographic segments: (1) Samoas, which includes American Samoa and Samoa; (2) Papua New Guinea; (3) Fiji and Other Pacific Island Nations, which includes Fiji, Tonga, the Solomon Islands, Vanuatu and Cook Islands and (4) North America, including The Caribbean.

 

The Samoas business segment consists of the operations of our wholly-owned subsidiaries, AST and Blue Sky Samoa Limited. Through our Samoas operations, we provide wireless service, international service, internet access service and network operations service.

 

The Papua New Guinea business segment consists of the operations of our subsidiaries Datec PNG Pty Limited and Datec Queensland Limited, which we acquired through an arrangement that was consummated on February 1, 2006. Through our Papua New Guinea operations, we provide technology products, internet access service, and professional services.

 

The Fiji and Other Pacific Island Nations business segment consists of the operations of our wholly-owned subsidiaries, Datec Fiji Limited, Generic Technology Limited, Network Services Limited, Datec Vanuatu Limited, Datec Solomon Island, Datec Tonga Limited, Datec Samoa Ltd., Datec Investments Limited, Mobile Technology Solutions, Brocker Technology Group NZ Limited, and Datec Australia Pty Limited. Through our Fiji and Other Pacific Island Nations operations, we provide technology products, support services and professional services.

 

The North America business segment consists of our wholly-owned subsidiary, Elandia Technologies, Inc. and Elandia, Inc., our holding company operation. In September 2004, Elandia Technologies, Inc. acquired two wireless telecommunications licenses, issued by the FCC. While we may elect to launch commercial operations and commence build-out activities in the U.S. Virgin Islands, our licenses are currently for sale. We have also entered into an agreement with a cellular service provider to pay a fee to this cellular service provider upon a sale of our U.S. Virgin Island license.

 

Summary Selected Pro Forma Financial Data

 

The following table presents selected summary pro forma financial information of our company to give effect to the following two acquisition transactions. On January 31, 2006, we consummated a merger with AST Telecom, LLC (“AST”). On February 1, 2006 we consummated a plan of arrangement under the laws of New Brunswick, Canada whereby we acquired the South Pacific operations of Datec Group Ltd. (“Datec”). The acquisition of Datec will be accounted for as a purchase business combination and the acquisition of AST will be accounted for as a common control merger for the portion owned by Stanford Venture Capital Holdings. This information should be read in conjunction with, and is qualified in its entirely by reference to, the financial statements of Elandia, AST and Datec and the unaudited pro forma condensed combined statements for the combined entities, and the notes thereto, included elsewhere in this registration statement.

 

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The unaudited pro forma condensed consolidated statements of operations combine the results of operations of Elandia, Datec and AST for the year ended December 31, 2004 and condensed consolidated for the nine months ended September 30, 2005 as if the acquisition of Datec and AST was consummated on January 1, 2004.

 

The selected unaudited pro forma financial information is presented on a combined basis and is not necessarily indicative of the combined financial position had the acquisition occurred on December 31, 2004, or the combined results of operations which might have existed for the periods indicated or the results of operations as they may be in the future.

 

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Elandia, Inc.

Pro Forma Condensed Consolidated Statement of Operations

For the Year Ended December 31, 2004

(unaudited)

 

    Elandia
From
January 1, 2004 to
September 14, 2004
(Predecessor Company)


    Elandia
From
September 15, 2004 to
December 31, 2004
(Successor Company)


    AST

    Datec

    Pro Forma
Adjustments


    Pro Forma
Consolidated


 
    (thousands of dollars)  

Revenue

  $ —       $ —       $ 6,809     $ 37,954     $       $ 44,763  
   


 


 


 


         


Expenses:

                                               

Cost of goods sold

    —         —         2,244       20,047               22,291  

Sales & Marketing

                    506       6,675               7,181  

Customer Service

    —         —         225                       225  

General and administrative

    —         1,125       1,172       8,698               10,995  

Depreciation & Amortization

    —         —         200       1,474       1,277       2,951  
   


 


 


 


 


 


Total operating expenses

    —         1,125       4,347       36,894       1,277       43,643  
   


 


 


 


 


 


Operating (loss) Income

    —         (1,125 )     2,462       1,060       (1,277 )     1,120  

Other (Expenses) Income

                                               

Gain on extinguishment of debt and subsidiaries

    2,968               —         —         (2,968 )     —    

Fresh-start accounting adjustments

    4,631               —         —         (4,631 )     —    

Gain on debt forgiveness

    —                 —         —         (10,390 )     (10,390 )

Loss on abandonment of equipment

    (887 )                             887       —    

Interest expense

    (342 )     (145 )     (12 )     (503 )             (1,002 )

Reorganization items and other costs

    (596 )             14       126       596       140  

Foreign exchange loss

    —                 —         (6 )             (6 )
   


 


 


 


 


 


Total other (expenses) Income

    5,774       (145 )     2       (383 )     (16,506 )     (11,258 )

Income Taxes

    —                 —         (771 )             (771 )

Minority Interest in net income

    —                 —         (273 )             (273 )
   


 


 


 


 


 


(Loss) Income from continuing operations

    5,774       (1,270 )     2,464       (367 )     (17,783 )     (11,182 )

Loss from discontinued operations

    (3,951 )     (2,103 )     —         —                 (6,054 )
   


 


 


 


 


 


Net (loss) Income

  $ 1,823     $ (3,373 )   $ 2,464     $ (367 )   $ (17,783 )   $ (17,236 )
   


 


 


 


 


 


Net (loss) Income per share

                                          $ (0.77 )
                                           


Weighted average number of shares outstanding—basic and diluted

                                            22,323  
                                           


 

31


Elandia, Inc.

Pro Forma Condensed Consolidated Statement of Operations

For the Nine Months Ended September 30, 2005

(unaudited)

 

     Elandia

    AST

    Datec

    Pro Forma
Adjustments


    Pro Forma
Consolidated


 
     (thousands of dollars)  

Revenue

   $ —       $ 5,829     $ 29,496     $       $ 35,325  
    


 


 


 


 


       —         5,829       29,496       —         35,325  

Cost and Expenses:

                                        

Cost of goods sold

     —         2,345       15,014               17,359  

Sales & Marketing

             369       5,919               6,288  

Customer Service

             412       —                 412  

General and administrative

     1,590       1,114       7,017               9,721  

Non cash stock compensation

     1,066                               1,066  

Depreciation & Amortization

     —         311       1,080       958       2,349  
    


 


 


 


 


Total operating expenses

     2,656       4,551       29,030       958       37,195  
    


 


 


 


 


Operating (loss) Income

     (2,656 )     1,278       466       (958 )     (1,870 )

Other (Expenses) Income

                                        

Gain on disposal of property and subsidiaries

     —         —         1,641       463       2,104  

Gain on debt forgiveness

     —         —         —         12,842       12,842  

Interest expense

     (1,301 )     (20 )     (193 )             (1,514 )

Foreign exchange gain (loss)

                     24               24  
    


 


 


 


 


Total other (expenses) income

     (1,301 )     (20 )     1,472       13,305       13,456  
    


 


 


 


 


(Loss) Income from continuing operations

     (3,957 )     1,258       1,938       12,347       11,586  

Income Taxes

     —         —         (1,012 )             (1,012 )

Minority interest in net income

     —         —         (1,232 )             (1,232 )
    


 


 


 


 


(Loss) Income from continuing operations

     (3,957 )     1,258       (306 )     12,347       9,342  

Loss from discontinued operations

     (7,520 )     —         —                 (7,520 )
    


 


 


 


 


Net (Loss) Income

   $ (11,477 )   $ 1,258     $ (306 )   $ 12,347     $ 1,822  
    


 


 


 


 


Net (Loss) Income per share

                                   $ 0.08  
    


 


 


 


 


Weighted average number of shares outstanding basic and diluted

                                     22,323  
    


 


 


 


 


 

- 32 -


Please refer to the proforma consolidated statement of operations and the accompanying notes contained elsewhere in this registration filing.

 

Results of Operations, Samoas

 

AST first commenced business operations in February 2003. As we have no financial results for the year 2002 to compare to our AST operations for the year 2003, comparative figures for the year ending December 31, 2002 cannot be provided. What follows are the financial results of our operating subsidiaries, AST and Blue Sky Samoa Limited.

 

Financial Performance

 

The following table sets forth certain financial data for the periods indicated.

 

     Nine Months Ended
September 30,


   

Year Ended

December 31,


 
     2005

    2004

    2004

    2003

 

Revenue:

                                

Pre-paid PCS

   $ 3,623,371     $ 3,653,346     $ 4,784,181     $ 3,245,473  

Post-Paid PCS

     702,037       836,816       1,087,181       1,152,659  

ISP Revenues

     249,987       68,740       97,792       —    

Equipment Sales

     743,624       630,857       839,665       731,123  

Reverse Toll Fees

     509,692       432,182       585,017       311,790  
    


 


 


 


Total Revenue

     5,828,711       5,621,941       7,393,836       5,441,045  

Expenses:

                                

Cost of services

     1,853,003       1,565,574       2,160,228       1,692,644  

Cost of Equipment

     492,132       427,617       669,189       503,933  

Sales & Marketing

     368,813       226,971       308,023       282,682  

Customer Service

     411,541       209,755       423,645       253,810  

General & Administrative

     1,114,282       808,287       1,172,058       859,991  

Depreciation & Amortization

     310,785       75,432       199,527       76,281  
    


 


 


 


Total operating expenses

     4,550,556       3,313,636       4,932,671       3,669,341  
    


 


 


 


Net Profit (Loss) From Operations

     1,278,155       2,308,305       2,461,165       1,771,704  
    


 


 


 


Other Income (Expenses)

                                

Interest income

     2,684       9,268       12,092       3,413  

Interest expense

     (22,904 )     —                 —    

Other Income

     —         2,700       (14,488 )     22,119  
    


 


 


 


Total Other Income (Expense)

     (20,220 )     11,968       (2,396 )     25,532  
    


 


 


 


Net Income (Loss)

     1,257,935       2,320,273       2,458,769       1,797,236  

Members' Equity—Beginning

     3,800,380       1,574,378       1,752,198       —    

Prior year adjustments

                                

Contributions

                             1,000,000  

Distributions/Redemptions

     (1,739,367 )     (677,239 )     (232,767 )     (1,045,038 )
    


 


 


 


Members' Equity—Ending

   $ 3,318,948     $ 3,395,232     $ 3,800,380     $ 1,752,198  
    


 


 


 


 

 

- 33 -


Nine Months Ended September 30, 2005 Compared to the Nine Months Ended September 30, 2004.

 

Revenues. At September 30, 2005, we had approximately 14,377 customers for our wireless telecommunications services compared to approximately 11,872 customers at September 30, 2004. Customer additions during the nine months ended September 30, 2005 and 2004 were approximately 2,023 and 2,937, respectively. For the nine months ended September 30, 2005 and September 30, 2004, aggregate revenues from our pre-paid and post-paid wireless services accounted for 74% and 80%, respectively, of total revenues for these periods. At February 1, 2006, the total potential customer base covered by our networks in our operating markets was approximately 24,000 subscribers.

 

During the nine months ended September 30, 2005, wireless pre-paid revenues decreased by $29,975, or 0.8% compared to the nine months ended September 30, 2004.

 

During the nine months ended September 30, 2005, wireless post-paid revenues decreased by $134,779, or 16.1% compared to the nine months ended September 30, 2004. This decline was attributable to reductions in our customer base that we made to implement changes instituted in our credit and collection policy and processes in order to reduce our exposure to bad debt.

 

During the nine months ended September 30, 2005, ISP revenues increased $181,000, or 264%, compared to the nine months ended September 30, 2004. The increase was driven by the launch of our high speed data internet services in March, 2005 and the August 2005 E-Rate contract. In March 2005, we entered into a three year contract with The American Samoan Department of Education (“ASDOE”) to provide discounted, or “E-Rate”, fiber connectivity and internet services to 29 public schools and a public library on the Island of Tutuila. E-Rate, is administered by the Universal Service Administrative Company (USAC) under the direction of the Federal Communications Commission (FCC) and provides discounts to assist most schools and libraries with obtaining affordable access to advanced telecommunications. According to the terms of our agreement, our E-Rate services will generate approximately $21,000 monthly. The total stated revenue of the E-Rate contract is over $1 million. In February 2005, ASDOE requested additional network capacity to establish a T-1 connection at the University of Hawaii for video teleconferencing and internet access purposes. In response to this request, we constructed a satellite dish and established the satellite link to Hawaii. Service from this new T-1 connection was initiated on August 18, 2005.

 

During the nine months ended September 30, 2005, equipment sales revenues increased $112,767, or 17.9%, compared to the nine months ended September 30, 2004. This increase is attributed primarily to the growth in the number of customers for our wireless services between the two periods.

 

Cost of Services. During the nine months ended September 30, 2005, cost of services increased $287,429, or 18.4%, compared to the nine months ended September 30, 2004. The increase in cost of service was primarily attributable to:

 

    an increase of $177,971 for cell site and switching circuits, due to increased capacity on our existing network and the additional satellite circuit required for the E- RATE contract; and

 

- 34 -


    an increase of $84,824 in payments made to our long distance carriers, due to an increase in the volume of long distance phone calls made by our customers to locations outside of American Samoa.

 

    

Nine Months Ended

September 30,


     2005

   2004

Cost of Services:

             

Switch/Cell Site Circuits

   $ 655,537    $ 477,566

Switch/Cell Site Utilities

     133,900      97,092

Cost of Long Distance

     487,522      402,698

Salary Expense

     274,648      269,091

License and Maintenance Fees

     41,418      50,692

Other

     259,978      268,437
    

  

Total

   $ 1,853,003    $ 1,565,576
    

  

 

Cost of Equipment Sales. During the nine months ended September 30, 2005, cost of equipment increased $64,517, or 15.1%, compared to the nine months ended September 30, 2004. We attribute this to the increase in the number of customers subscribing to our wireless services and the increase in equipment sales.

 

     Nine Months Ended
September 30,


     2005

   2004

Cost of Equipment Sales:

             

Cost of Phone Sales

   $ 395,683    $ 339,266

Cost of SIM Cards

     32,287      31,381

Cost of Prepaid Cards

     41,448      32,913

Other

     22,715      24,056
    

  

Total

   $ 492,133    $ 427,616
    

  

 

Sales and Marketing. During the nine months ended September 30, 2005, selling and marketing expenses increased $141,842, or 62.5%, compared to the nine months ended September 30, 2004. The increase consisted of increases of $76,385 in advertising costs, $7,470 in recruiting costs and $56,400 in increased salary expenses, due to the hiring of additional personnel.

 

     Nine Months Ended
September 30,


     2005

   2004

Sales and Marketing:

             

Advertising

   $ 119,581    $ 43,196

Recruiting

     7,470      0

Salary Expense

     185,502      129,102

Other

     56,260      54,673
    

  

Total

   $ 368,813    $ 226,971
    

  

 

- 35 -


Customer Service. During the nine months ended September 30, 2005, customer service costs increased $201,787, or 96.2%, compared to the nine months ended September 30, 2004. This increase was primarily attributed to increases of $61,317 in salary expenses due to the hiring of additional personnel, $64,657 for our bad debt reserve due to an increase in uncollectible accounts and $36,492 in rent expenses for our new office space at Laufou Plaza.

 

     Nine Months Ended
September 30,


     2005

   2004

Customer Service:

             

Bad Debts

   $ 117,948    $ 53,291

Building Rents

     36,492      0

Salary Expense

     176,134      114,817

Payroll Taxes

     14,715      9,693

Other

     66,253      31,954
    

  

Total

   $ 411,542    $ 209,755
    

  

 

General and Administrative. During the nine months ended September 30, 2005, general and administrative costs increased $305,995, or 37.9%, compared to the nine months ended September 30, 2004. This increase was primarily due to increases of $87,196 in professional fee expenses paid to outside consultants, $40,738 in legal fees, $23,625 in salary expenses partially due to the hiring of new personnel, $23,802 in computer support expenses, $26,740 in utility expenses for our new office space at Laufou Plaza, $12,802 in building rent payments for our new office space at Laufou Plaza, $31,184 in audit fees associated with our quarterly financials, $22,131 in employee activities expenses, $25,448 in management fee expenses and $10,889 in travel-related expenses.

 

     Nine Months Ended
September 30,


     2005

   2004

General and Administrative:

             

Professional Fees, other than legal

   $ 146,012    $ 58,816

Legal Fees

     99,640      58,902

Salary Expense

     171,497      147,872

Computer Support Agreements

     23,802      0

Utilities

     43,143      16,403

Audit Fees

     36,048      4,864

Employee Activities

     25,781      3,650

Management Fees

     317,819      292,371

Building Rents

     63,747      50,945

Travel and Accommodations

     22,746      11,857

General Insurance

     95,212      88,087

Other

     68,835      74,520
    

  

Total

   $ 1,114,282    $ 808,287
    

  

 

Depreciation and Amortization. During the nine months ended September 30, 2005, depreciation and amortization expenses increased $235,354, or 315%, compared to the nine months ended September 30, 2004. We attribute this increase to the construction of a new operations building, leasehold improvements at Laufou Plaza and upgrades to our existing wireless network.

 

Interest Expense. During the nine months ended September 30, 2005, interest expense increased $22,904, compared to the nine months ended September 30, 2004. We attribute this increase to the Bank of Hawaii mortgage on our operations building.

 

- 36 -


Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003

 

Revenues. At December 31, 2004, we had 12,354 customers for our services compared to approximately 8,935 customers at December 31, 2003. Customer additions for the years ended December 31, 2004 and 2003 were 3,419 and 5,791 respectively. At December 31, 2004, the total potential customer base covered by our networks was approximately 20,000.

 

During the year ended December 31, 2004, pre-paid revenues increased $1,538,708, or 47.4% compared to the year ended December 31, 2003. We attribute this increase to our improved network quality and marketing programs.

 

During the year ended December 31, 2004, post-paid revenues decreased $65,478, or 5.7% compared the year ended December 31, 2003. We attribute this increase to changes in our credit and collection procedures to reduce the Company’s exposure to bad debt.

 

During the year ended December 31, 2004, we launched our ISP services and generated services of $97,792. We had no ISP revenues during 2003.

 

During the year ended December 31, 2004, equipment sales revenues increased $108,542 or 14.8%, compared to the year ended December 31, 2003. We attribute this increase to the growth in the number of customers for our PCS services between the two periods.

 

During the year ended December 31, 2004, revenues from reverse toll fees increased $273,227 or 87.6%, compared to the year ended December 31, 2003. We attribute this increase to the increase in traffic from foreign destinations to American Samoa that utilizes our network.

 

Cost of Services. During the year ended December 31, 2004, cost of service increased $467,584, or 27.6%, compared to the year ended December 31, 2003. The increase in cost of service consisted of increases of $32,317 in utility payments for cell site and switching circuits, $89,772 in salary expenses, $98,137 in professional fee expenses and $171,599 in payments made to our long distance carriers.

 

     Year Ended December 31,

     2004

   2003

Cost of Services:

             

Switch/Cell Site Circuits

   $ 699,180    $ 624,240

Switch/Cell Site Utilities

     131,707      99,390

Building Rents

     51,600      47,209

Salary Expense

     365,698      275,926

Overtime

     24,363      8,377

Bonus

     22,821      22,337

Payroll Taxes

     31,909      23,592

Professional Fees, other than legal

     139,293      41,156

Cost of Long Distance

     522,845      351,246

Other

     170,812      199,171
    

  

Total

   $ 2,160,228    $ 1,692,644
    

  

 

- 37 -


Cost of Equipment. During the year ended December 31, 2004, cost of equipment increased $165,256, or 32.8%, compared to the year ended December 31, 2003. We attribute this increase in equipment sales to the growth in the number of customers subscribing to our wireless services.

 

     Year Ended December 31,

     2004

   2003

Cost of Equipment Sales:

             

Cost of Phone Sales

   $ 554,374    $ 349,533

Cost of SIM Cards

     41,861      60,470

Cost of Prepaid Cards

     43,530      54,996

Other

     29,424      38,934
    

  

Total

   $ 669,189    $ 503,933
    

  

 

Sales and marketing. During the year ended December 31, 2004, sales and marketing costs increased $25,341, or 9.0%, compared to the year ended December 31, 2003, primarily due to an increase in marketing employees.

 

     Year Ended December 31,

     2004

   2003

Sales and Marketing:

             

Salary Expense

   $ 172,132    $ 133,393

Commissions

     0      23,013

Advertising

     62,629      66,336

Other

     73,262      59,940
    

  

Total

   $ 308,023    $ 282,682
    

  

 

Customer Service. During the year ended December 31, 2004, customer service costs increased $169,835, or 66.9%, compared to the year ended December 31, 2003. This increase was primarily attributable to increases of $96,936 in our bad debt reserve due to an increase in the number of uncollectible accounts, $6,776 in miscellaneous expenses from inventory write-downs and $35,828 in salary expense due to our hiring of additional customer service representatives.

 

     Year Ended December 31,

     2004

   2003

Customer Service:

             

Bad Debts

   $ 198,315    $ 101,379

Salary Expense

     157,923      122,095

Bonus

     11,784      13,647

Payroll Taxes

     13,379      11,019

Other Miscellaneous

     42,244      5,670
    

  

Total

   $ 423,645    $ 253,810
    

  

 

- 38 -


General and Administrative. During the year ended December 31, 2004, general and administrative costs increased $312,067, or 36.3%, compared to the year ended December 31, 2003. This increase was primarily attributable to increases of $57,384 in salary expense for additional personnel, $41,016 in professional fee expenses for outside consultants, $19,370 in building rents for the lease of new office space at Laufou Plaza, $25,643 in insurance expenses due to rate increases, $23,302 in legal fees, $116,416 in management fee expenses and $33,456 in miscellaneous expenses for balance sheet write-downs.

 

     Year Ended December 31,

     2004

   2003

General and Administrative:

             

Management Fees

   $ 410,166    $ 293,750

Salary Expense

     194,871      137,487

Professional Fees, other than legal

     95,877      54,861

General Insurance

     116,589      90,946

Legal Fees

     91,165      67,863

Building Rents

     70,142      50,772

Travel

     19,543      15,364

Utilities

     27,938      17,815

Other Miscellaneous Expense

     145,767      131,133
    

  

Total

   $ 1,172,058    $ 859,991
    

  

 

Depreciation and Amortization. During the year ended December 31, 2004, depreciation and amortization expenses increased $123,246 or 162%, compared to the year ended December 31, 2003. This increase was primarily attributable to leasehold improvements for our new office space at Laufou Plaza and the expansion of our telecommunications network.

 

Performance Measures, The Samoas

 

In managing our operations and assessing our financial performance in The Samoas, management supplements the information provided by financial statement measures with several customer–focused performance metrics that are widely used in the telecommunications industry. These metrics include average revenue per user per month (ARPU), which measures service revenue per customer; minutes of use (MOU), which measures total minutes of use within a given period; and churn, which measures turnover in our customer base. MOU is a non-GAAP financial measure. A non-GAAP financial measure, within the meaning of Item 10 of Regulation S-K promulgated by the Securities and Exchange Commission, is a numerical measure of a company’s financial performance or cash flows that (a) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles in the consolidated balance sheet, consolidated statement of operations, or consolidated statement of cash flows, or (b) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented.

 

ARPU is an industry metric that measures service revenue divided by the weighted average number of customers, divided by the number of months during the period being measured. Management uses ARPU to identify average revenue per customer, to track changes in average customer revenues over time, to help evaluate how changes in our business, including changes in our service offerings and fees, affect average revenue per customer, and to forecast future service revenue. In addition, ARPU provides management with a useful measure to compare our subscriber revenue to that of other wireless communications providers. We believe investors use ARPU primarily as a tool to track changes in average revenue per customer and to compare per customer service revenues to those of other wireless communications providers.

 

 

- 39 -


Churn, an industry metric that measures customer turnover, is calculated as the number of customers that disconnect from our services divided by the weighted average number of customers divided by the number of months during the period being measured. Management uses churn to measure our retention of customers, to measure changes in customer retention over time, and to help evaluate how changes in our business affect customer retention. In addition, churn provides management with a useful measure to compare our customer turnover activity to that of other wireless communications providers. We believe investors use churn primarily as a tool to track changes in our customer retention over time and to compare our customer retention to that of other wireless communications providers.

 

Management also measures the performance of operations by analyzing our customer numbers and the number of customers added in The Samoas.

 

Management also reviews the measure of revenue per employee to evaluate the efficiency of our operations. Revenue per employee is calculated by dividing total revenue, less revenue from reverse toll fees, for each quarter by the weighted average headcount.

 

The following table shows metric information for the periods indicated.

 

     Nine Months Ended September 30,

    Year Ended December 31,

 
     2005

    2004

    2004

    2003

 

ARPU

   $ 36.43     $ 41.11     $ 45.93     $ 47.84  

MOU

     22,470,451       23,421,068       30,278,229       22,180,218  

Churn

     6.29 %     3.91 %     3.91 %     1.43 %

Number of Customers at end of period

     14,377       11,872       12,354       8,935  

Revenue per Employee

     91,707       110,420       138,955       134,980  

 

Reconciliation of Non-GAAP Financial Measures

 

We utilize certain financial measures, as described above, that are calculated based on industry conventions and are not calculated based on GAAP. Certain of these financial measures are considered “non-GAAP” financial measures within the meaning of Item 10 of Regulation S-K promulgated by the SEC.

 

Liquidity and Capital Resources, The Samoas

 

Our principal sources of liquidity are cash generated from operations and cash available from borrowings under our existing financial arrangements. We believe that our existing capital resources, including the cash obtained from existing financial arrangements, will be sufficient to meet our operating and capital requirements through at least the next 12 months. However, we expect to seek additional debt or equity financing to fund future development activities and to ensure liquidity.

 

Operating Activities

 

Cash provided by operating activities was $1.69 million for the nine months ended September 30, 2005 compared to cash provided by operating activities of $1.97 million during the nine months ended September 30, 2004. The decrease was primarily attributable to a decrease in the net income, due to increased operating expenses in 2005, offset by a decrease in cash used for working capital.

 

- 40 -


Cash provided by operating activities was $2.71 million during the year ended December 31, 2004 compared to cash provided by operating activities of $2.01 million during the year ended December 31, 2003. This increase was primarily driven by an increase in net income and increased collections of accounts receivable.

 

Investing Activities

 

Cash used in investing activities was $2.42 million during the nine months ended September 30, 2005 and attributed primarily to capital expenditures made to expand our network presence in America Samoa.

 

Cash used in investing activities was $2.25 million during the year ended December 31, 2004 and associated with the expanding of our network and product offerings.

 

Financing Activities

 

Cash used in financing activities during the nine months ended September 30, 2005 was $1.7 million due to our repurchase of ownership interests from members. We financed this repurchase through bank loans consisting of a long-term mortgage of $850,000, secured by our new switch building, and $891,000 from our revolving loan facility.

 

Cash used in financing activities during the year ended December 31, 2004 was $677,000, consisting of distributions to partners. We had no other financing activity during 2004.

 

Cash used in financing activities during year ended December 31, 2003 was $333,000, consisting of distributions to partners. In February 2003, AST received capital contributions from its members in the amount of $1 million.

 

- 41 -


Results of Operations, Papua New Guinea

 

Financial Performance

 

What follows are the financial results for our operating subsidiaries, Datec PNG Pty Limited and Datec Queensland Limited for the periods indicated. Datec PNG Pty Limited holds a 50% joint venture interest in Amalgamated Telikon Holdings PNG Pty Limited. Pursuant to certain securities regulations, all results of these operating subsidiaries in Papua New Guinea, including a provision for the minority interest in the joint venture have been consolidated.

 

    

Nine Months Ended

September 30,


    Year Ended December 31,

 
     2005

    2004

    2004

    2003

    2002

 

Revenue:

                                        

Product Sales

   $ 12,149,029     $ 9,163,302     $ 11,842,372     $ 11,105,048     $ 10,305,991  

Professional Services

     4,202,533       4,114,455       4,902,798       4,169,488       4,011,838  

Data Delivery

     3,790,261       2,179,844       3,897,767       2,061,527       1,915,286  
    


 


 


 


 


Total Revenue

     20,141,823       15,457,601       20,642,937       17,336,063       16,233,115  

Expenses:

                                        

Cost of sales

     9,655,989       6,967,920       10,224,679       8,211,145       8,368,683  

Network Operations

     874,607       609,094       895,731       729,255       624,594  

Sales & Marketing

     1,112,565       1,001,576       1,167,112       833,216       755,681  

Maintenance & Support

     1,637,511       1,422,455       1,916,565       1,697,404       1,549,918  

General & Administrative

     4,311,794       3,726,770       4,075,041       5,011,707       4,315,871  

Depreciation & Amortization

     702,264       651,899       881,485       462,705       464,971  
    


 


 


 


 


Total operating expenses

     18,294,730       14,379,714       19,160,613       16,945,432       16,079,718  
    


 


 


 


 


Net Profit (Loss) From Operations

     1,847,093       1,077,887       1,482,324       390,631       153,397  
    


 


 


 


 


Other Income (Expenses)

                                        

Interest income

                             —         41,970  

Interest expense

     (2,599 )     (55,462 )     (162,582 )     (98,244 )     (88,134 )

Other Income

     1,370,148                               143,591  

Foreign Exchange Gain (Loss) - Unrealized

             11,973                          
    


 


 


 


 


Foreign Exchange Gain (Loss) - Realized

                                        

Total Other Income (Expense)

     1,367,549       (43,489 )     (162,582 )     (98,244 )     97,427  
    


 


 


 


 


Income/(Loss) Before Income Taxes

     3,214,642       1,034,398       1,319,742       292,387       250,824  

Income Tax Expense

     (749,724 )     (258,600 )     (529,487 )     (24,324 )     (953 )

Minority Interest in Net Profit after Taxation

     (1,232,459 )     (387,900 )     (395,128 )     (134,026 )     (124,935 )
    


 


 


 


 


Net Income (Loss)

   $ 1,232,459     $ 387,898     $ 395,127     $ 134,037     $ 124,936  
    


 


 


 


 


 

Nine Months Ended September 30, 2005 Compared to the Nine months ended September 30, 2004.

 

Revenues. For the nine months ended September 30, 2005, revenues increased $4,684,221 million, or 30.3%, compared to the nine months ended September 30, 2004. The table below sets forth the percentage of revenue derived from each of our product and service offerings for the periods indicated.

 

     Nine Months
Ended
September 30,
2005


   Nine Months
Ended
September 30,
2004


Revenues:

             

Product Sales

   $ 12,149,029    $ 9,163,302

Professional Services

     4,202,533      4,114,455

Data Delivery

     3,790,261      2,179,844
    

  

Total Revenues

   $ 20,141,824    $ 15,457,602
    

  

 

Product sales revenue increased $2,985,727, or 32.6% for the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. We attribute this increase to an increased number of customers and purchases at our retail stores in Port Moresby and Lae. Product sales consists of all computer and communications hardware, consumables and packaged software sold either through our retail stores or by direct sales.

 

Professional services revenue increased $88,078, or 2.1%, for the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. We attribute this increase to an increase in the support and technical services sold as a result of increased product sales at our retail store locations in Port Moresby and Lae. Professional services refers to support provided to our clients by our hardware engineers, software analysts, architects, developers and staff for new or existing software, hardware, systems, or applications.

 

Data delivery revenue increased $1,610,417, or 73.9%, for the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. We attribute this increase to an increase in infrastructure services provided during 2005, an increase in the number of subscribers for our ISP services and an increase in the number of bits used per customer. Data delivery refers to the revenue from our ISP services and other data network infrastructure services.

 

- 42 -


Operating expenses. Operating expenses increased $3,915,026, or 27.2%, for the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. Our operating expenses include cost of sales network operations, sales and marketing, maintenance and support, general and administrative and depreciation and amortization. The amounts for the periods indicated are set forth in the following table.

 

     Nine Months
Ended
September 30,
2005


   Nine Months
Ended
September 30,
2004


Operating expenses:

             

Cost of Sales

   $ 9,655,989    $ 6,967,920

Network Operations

     874,607      609,094

Sales & Marketing

     1,112,565      1,001,576

Maintenance & Support

     1,637,511      1,422,455

General & Administrative

     4,311,794      3,726,770

Depreciation & Amortization

     702,264      651,899
    

  

Total

   $ 18,294,730    $ 14,379,714
    

  

 

Cost of Sales. Cost of sales expense increased $2,688,069, or 38.6%, for the nine months ending September 30, 2005, as compared to the nine months ended September 30, 2004. Our cost of sales expenses include the cost of product sales and the cost of data delivery. The amounts for the periods indicated are set forth in the following table.

 

     Nine Months
Ended
September 30,
2005


   Nine Months
Ended
September 30,
2004


Cost of Sales:

             

Cost of Product Sales

   $ 8,772,844    $ 6,305,726

Cost of Data Delivery

     883,145      662,194
    

  

Total

   $ 9,655,989    $ 6,967,920
    

  

 

Cost of product sales increased $2,467,118, or 39.1%, for the nine months ending September 30, 2005 as compared to the nine months ended September 30, 2004. We attribute this increase to the increase in the amount of products sold during the nine months ending September 30, 2005. This cost represents the actual landed costs of all products sold through Datec’s retail stores or through direct sales.

 

Cost of data delivery increased $220,951, or 38.6%, for nine months ending September 30, 2005, as compared to the nine months ended September 30, 2004. We attribute this increase to the increased amount of data services purchased from the local telecommunications provider. These costs are primarily for the costs of telecommunications charges levied by the local telecommunications providers for data traffic.

 

- 43 -


Network Operations. Cost of network operations increased $265,543, or 43.6%, for the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. Network operations expense consists of the allocated cost of employees used in servicing customers under our IBM Global Services Contract. The amounts for the periods indicated are set forth in the following table.

 

     Nine Months
Ended
September 30,
2005


   Nine Months
Ended
September 30,
2004


Network Operations:

             

Salaries

   $ 484,449    $ 363,802

Staff Allowances

     343,459      240,332

Miscellaneous

     46,699      4,930
    

  

Total

   $ 874,607    $ 609,094
    

  

 

Salaries increased 120,647, or 33.2%, for the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. This increase was attributed to increases in staff salaries and the cost of additional staff hired to meet the increased demand for these services.

 

Staff allowances increased $103,127, or 42.9%, for the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. Staff allowance expense includes the cost of benefits and other costs required to compensate employees for moving or commuting to Papua New Guinea. This increase was attributed to additional staff allowances paid to existing staff and the cost of staff allowances paid to in additional staff hired to meet the additional demand for these services.

 

Miscellaneous expense increased $41,769, or 847.2%, for the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. This increase was attributed to the increased costs of miscellaneous and incidental expenses of new employees.

 

Sales and Marketing. Sales and marketing expenses increased $110,989, or 11.1%, for the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. Sales and marketing includes salaries, staff allowances, advertising and miscellaneous expenses. The amounts for the periods indicated are set forth in the following table.

 

     Nine Months
Ended
September 30,
2005


   Nine Months
Ended
September 30,
2004


Sales and Marketing:

             

Salaries

   $ 561,183    $ 555,999

Staff Allowances

     397,861      367,300

Advertising

     99,427      70,697

Miscellaneous

     54,094      7,580
    

  

Total

   $ 1,112,565    $ 1,001,576
    

  

 

- 44 -


Salaries increased $5,184, or 0.9%, in the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. This increase was attributed to the increased costs of existing sales representatives.

 

Staff allowances increased $30,561, or 8.3%, in the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. Staff allowance expense includes the cost of benefits and other costs required to compensate employees for moving or commuting to Papua New Guinea. This increase was attributed to the increased costs of staff allowances paid to existing sales representatives.

 

Advertising expense increased $28,730, or 40.6%, in the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. We attribute this increase to an overall increase in our promotional activities, including newspaper advertising, magazine advertising and promotional seminars and demonstrations.

 

Miscellaneous expense increased $46,514, or 613.6%, in the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. We attribute this increase to an overall increase in our promotional activities.

 

Maintenance and Support. Maintenance and support expense increased $1,637,511 for the nine months ended September 30, 2005 from $1,422,455 in the same period in 2004, an increase of $215,056, or 15.1%. Maintenance and support expense consists of the allocated cost of employees used in the warranty, support and repair activities of our professional services. The component costs of maintenance and support expense include Salaries, Staff allowances, and Miscellaneous expenses and the amounts for the periods indicated are set forth in the following table:

 

    

Nine Months

Ended

September 30,
2005


  

Nine Months

Ended

September 30,

2004


Maintenance and Support:

             

Salaries

   $ 907,025    $ 849,609

Staff Allowances

     643,053      561,262

Miscellaneous

     87,433      11,584
    

  

Total

   $ 1,637,511    $ 1,422,455
    

  

 

Salaries increased to $57,416, or 6.8%, in the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. This increase was attributed to the increased costs of existing service and support representatives.

 

- 45 -


Staff allowances increased to $81,791, or 14.6% in the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. Staff allowance expenses include the cost of benefits and other costs required to compensate employees for moving or commuting to Papua New Guinea. This increase was attributed to the increased costs of staff allowances paid to existing support representatives.

 

Miscellaneous expenses increased to $75,849, or 654.8%, in the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. We attribute this increase to an overall increase in our maintenance and support activities.

 

General & Administrative. Our general and administrative expenses increased to $585,024, or 15.7%, for the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. General and administration expenses include travel, legal fees, salary expense, insurance, utilities, audit fees, telephone and tolls, networking costs, building rents, and other general and administrative expenses. The amounts for the periods indicated are set forth in the following table.

 

    

Nine Months
Ended

September 30,

2005


  

Nine Months
Ended

September 30,

2004


General and Administration:

             

Travel and Accommodations

   $ 182,350    $ 131,581

Legal Fees

     83,954      78,728

Salary Expense

     1,353,362      753,514

Insurance

     177,967      212,822

Utilities

     160,367      96,040

Audit Fees

     14,592      11,407

Telephone/Tolls

     117,672      123,676

Networking costs

     1,042,840      772,797

Building Rents

     297,580      0

Other G&A

     881,110      1,546,205
    

  

Total

   $ 4,311,794    $ 3,726,770
    

  

 

Travel expense increased $50,769, or 38.6%, in the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. This increase was attributed to the increased costs of traveling within Papua New Guinea and from Papua New Guinea to other Pacific islands.

 

Legal fees increased $5,226, or 6.6%, in the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. This increase was indicative of an inflationary increase in the costs of the general legal fees in Papua New Guinea.

 

- 46 -


Salary expense increased $599,848, or 79.6%, for the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. We attribute this increase to increases in costs of employing current staff as well as an increase in the overall number of employees.

 

Insurance expense decreased $34,855, or 16.4%, in the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. This decrease was attributed to the decreased costs of general insurance premiums.

 

Utilities expense increased $64,327, or 67.0%, in the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. This increase was attributed to the increased costs of electricity in PNG.

 

Audit fee expense increased $3,185, or 27.9%, in the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. This increase was indicative of an inflationary increase in the costs of audit fees during the period.

 

Telephone and Toll expense decreased $6,004, or 4.8%, in the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. We attribute this decrease to greater use of alternative and cost efficent forms of communication such as voice over the internet.

 

Networking costs increased $270,043, or 34.9%, in the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. This was due to the increased costs of general and administration expenses of our networking business.

 

Building rents increased $297,580 in the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. There were no building rent expenses for the nine months period ended September 30, 2004. This increase is attributable to the sale and subsequent lease of our retail locations in PNG.

 

Other General and Administration expenses decreased $665,095, or 43.0%, in the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. We attribute this decrease primarily to a decrease of $524,000 in management fees.

 

- 47 -


Depreciation & Amortization. Depreciation and amortization increased $50,365, or 7.7%, for the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. We attribute this increase to equipment placed in service for our data delivery customers during the nine months ending September 30, 2005.

 

Interest Expense. For the nine months ended September 30, 2005 the interest expense decreased $852,863, as compared to the nine months ending September 30, 2004. The decrease was due to the repayment of loans in January 2005.

 

Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003

 

Revenues. During the year ended December 31, 2004, total revenues increased $3,306,874 or 19.1% as compared to the year ended December 31, 2003. The table below sets forth the percentage of revenue derived from each of our product and service offerings for the period indicated:

 

     Year Ended
December 31,
2004


   Year Ended
December 31,
2003


Revenues:

             

Product Sales

   $ 11,842,372    $ 11,105,048

Professional Services

     4,902,798      4,169,488

Data Delivery

     3,897,767      2,061,527
    

  

Total Revenues

   $ 20,642,937    $ 17,336,062
    

  

 

During the year ended December 31, 2004, product sales revenue increased $737,324, or 6.6%, compared to the year ended December 31, 2003. Product sales revenue refers to all computer hardware, communications hardware, consumables and commercial off-the-shelf software sold through our retail locations or by our direct sales force. We attribute this increase in product sales revenue to the growth in the number of customers and increased purchases at our retail locations in Port Moresby and Lae.

 

During the year ended December 31, 2004, professional services revenue increased $733,310, or 17.6%, compared to the year ended December 31, 2003. Professional services refers to support provided to our clients by our hardware engineers, software analysts, architects, developers and staff for new or existing software, hardware, systems or applications. We attribute this increase in professional services revenue to increased product sales and increased revenue generated from our agreement with IBM Global Services.

 

During the year ended December 31, 2004, data delivery revenue increased $1,836,240, or 89.1%, compared to the year ended December 31, 2003. Data delivery refers our ISP and data network infrastructure services to customers in Papua New Guinea. We attribute this increase to an increase in the number of customers utilizing our data delivery services.

 

Operating Expenses. During the year ended December 31, 2004, operating expenses increased $2,215,180 or 13.1%, as compared to the year ended December 31, 2003. Our operating expenses, including amounts for cost of sales, network operations, sales and marketing, maintenance and support, general and administrative and depreciation and amortization, are set forth in the following table for the periods indicated:

 

- 48 -


     Year Ended
December 31,
2004


   Year Ended
December 31,
2003


Operating Expenses:

             

Cost of Sales

   $ 10,224,679    $ 8,211,145

Network Operations

     895,731      729,255

Sales & Marketing

     1,167,112      833,216

Maintenance & Support

     1,916,565      1,697,405

General & Administrative

     4,075,041      5,011,707

Depreciation & Amortization

     881,485      462,705
    

  

Total

   $ 19,160,613    $ 16,945,433
    

  

 

During the year ended December 31, 2004, cost of sales expense, including cost of product sales and cost of data delivery, increased $2,013,534 million, or 24.5%, compared to the year ended December 31, 2003.

 

     Year Ended
December 31,
2004


   Year Ended
December 31,
2003


Cost of Sales:

             

Cost of Product Sales

   $ 9,305,387    $ 7,597,803

Cost of Data Delivery

     919,292      613,342
    

  

Total

   $ 10,224,679    $ 8,211,145
    

  

 

During the year ended December 31, 2004, cost of product sales increased $1,707,584, or 22.5%, compared to the year ended December 31, 2003. Cost of product sales refers to the cost of all products sold through our retail stores or direct sales force. We attribute this increase to an increase in the number of products sold at our Port Moresby and Lae retail locations.

 

During the year ended December 31, 2004, cost of data delivery increased $305,950 or 49.9%, compared to the year ended December 31, 2003. Data delivery refers to our ISP and data network infrastructure services to customers in Papua New Guinea. We attribute this increase to an increase in the amount of data services purchased from our local telecommunications provider.

 

Network Operations. During the year ended December 31, 2004, network operations expense increased $166,476 or 22.8%, as compared to the year ended December 31, 2003. Cost of network operations refers to the cost of services provided by our employees to customers under our IBM Global Services Contract, including amounts for employee salaries, staff allowances and miscellaneous expenses as set forth in the following table:

 

     Year Ended
December 31,
2004


   Year Ended
December 31,
2003


Network Operations:

             

Salaries

   $ 530,309    $ 421,798

Staff Allowances

     298,679      258,536

Miscellaneous

     66,744      48,921
    

  

Total

   $ 895,731    $ 729,255
    

  

 

- 49 -


During the year ended December 31, 2004, cost of employee salaries increased $108,511, or 25.7%, compared to the year ended December 31, 2003. We attribute this increase to an increase in existing salaries and the cost of additional employees, resulting from the additional demand for our network operations services.

 

During the year ended December 31, 2004, staff allowances expense increased $40,143, or 15.5%, compared to the year ended December 31, 2003. Staff allowances refers to the benefits and other expenses used as incentives and additional compensation for those employees relocating to or commuting to Papua New Guinea. This increase was attributed to increased staff allowances paid to existing and new employees.

 

During the year ended December 31, 2004, miscellaneous expenses increased $17,823, or 36.4%, compared to the year ended December 31, 2003. This increase was attributed to the increased costs of miscellaneous and incidental expenses, resulting from the hire of new employees.

 

Sales and marketing. During the year ended December 31, 2004, sales and marketing expenses increased $334,000 or 40%, as compared to the year ended December 31, 2003. Our sales and marketing expense including salaries, staff allowances, advertising and miscellaneous expenses are set forth in the following table for the periods indicated:

 

     Year Ended
December 31,
2004


   Year Ended
December 31,
2003


Sales and Marketing:

             

Salaries

   $ 628,075    $ 433,919

Staff Allowances

     353,742      265,965

Advertising

     106,245      83,006

Miscellaneous

     79,050      50,326
    

  

Total

   $ 1,167,112    $ 833,216
    

  

 

During the year ended December 31, 2004, salary expense increased $194,156, or 44.7%, compared to the year ended December 31, 2003. This increase was attributed to the increased costs of existing sales representatives and cost of additional sales representatives.

 

During the year ended December 31, 2004, staff allowances expense increased $87,777, or 33%, compared to the year ended December 31, 2003. Staff allowances refers to the benefits and other expenses used as incentives and additional compensation for those employees relocating to or commuting to Papua New Guinea. This increase was attributed to increased staff allowances paid to existing sales representatives.

 

During the year ended December 31, 2004, advertising expense increased $23,339, or 28%, compared to the year ended December 31, 2003. We attribute this increase to an overall increase in our promotional activities, including newspaper advertising, magazines advertising and promotional seminars and demonstrations.

 

During the year ended December 31, 2004, miscellaneous expenses increased $28,724, or 57.1% compared to the year ended December 31, 2003. We attribute this increase to an overall increase in our promotional activities.

 

- 50 -


Maintenance and support. During the year ended December 31, 2004, maintenance and support expense increased $219,760, or 12.9% as compared to the year ended December 31, 2003. Our maintenance and support expenses refer to the cost of employees allocated for the warranty, support and repair activities of our professional services. Maintenance and support expenses consisting of amounts for salaries, staff allowances, and miscellaneous expenses are set forth in the following table for the periods indicated.

 

     Year Ended
December 31,
2004


   Year Ended
December 31,
2003


Maintenance and Support:

             

Salaries

   $ 1,134,682    $ 981,771

Staff Allowances

     639,072      601,764

Misc

     142,810      113,869
    

  

Total

   $ 1,916,565    $ 1,697,405
    

  

 

During the year ended December 31, 2004, salary expense increased $152,911, or 15.6%, compared to the year ended December 31, 2003. This increase was attributed to the increased costs of existing service and support representatives and the cost of additional service and support representatives.

 

During the year ended December 31, 2004, staff allowances expense increased $37,308, or 6.2%, compared to the year ended December 31, 2003. Staff allowances refers to the benefits and other expenses used as incentives and additional compensation for those employees relocating or commuting to Papua New Guinea. This increase was attributed to increased staff allowances paid to existing support representatives.

 

During the year ended December 31, 2004, miscellaneous expense increased $28,941, or 25.4%, compared to the year ended December 31, 2003. We attribute this increase to an overall increase in our maintenance and support activities.

 

General and Administrative. During the year ended December 31, 2004, general and administrative expense decreased $936,666 or 18.7%, as compared to the year ended December 31, 2003. Our general and administrative expenses consist of amounts for travel, legal fees, salary expenses, insurance, utilities, audit fees telephone and tolls, networking costs, building rents, and other expenses and are set forth in the following table for the periods indicated.

 

     Year Ended
December 31,
2004


   Year Ended
December 31,
2003


General and Administrative:

             

Travel

   $ 195,623    $ 116,293

Legal Fees

     77,463      109,403

Salary Expense

     1,130,923      1,014,251

Insurance

     317,527      257,160

Utilities

     127,691      84,675

Audit Fees

     14,410      10,925

Telephone/Tolls

     151,092      99,295

Networking costs

     386,012      225,465

Building Rents

     42,138      79,518

Other G&A

     1,632,162      3,014,722
    

  

Total

   $ 4,075,041    $ 5,011,707
    

  

 

- 51 -


During the year ended December 31, 2004, travel expense increased $79,330 or 68.2%, as compared to the year ended December 31, 2003. This increase was attributed to the increased costs of traveling within Papua New Guinea and internationally.

 

During the year ended December 31, 2004, legal fees decreased $31,940 or 29.2%, as compared to the year ended December 31, 2003. This decrease was attributed to decreased legal expenses in connection with litigation in Papua New Guinea [described in the section “Legal Matters”].

 

During the year ended December 31, 2004, salary expense increased $116,672 or 11.5%, as compared to the year ended December 31, 2003. We attribute this increase to increases in costs of employing current staff and adding additional staff.

 

During the year ended December 31, 2004, insurance expense increased $60,367 or 23.5%, as compared to the year ended December 31, 2003. This increase is attributed to increased general insurance premiums.

 

During the year ended December 31, 2004, utility expense increased $43,016 or 50.8%, as compared to the year ended December 31, 2003. This increase is attributed to the increased costs of electricity in Papua New Guinea.

 

During the year ended December 31, 2004, audit fee expense increased $3,485 or 31.9%, as compared to the year ended December 31, 2003. We attribute this increase to an increase in our audit fees.

 

During the year ended December 31, 2004, telephone and toll expense increased $51,797 or 52.2%, as compared to the year ended December 31, 2003. We attribute this increase to our increased usage of wireless communications throughout Papua New Guinea.

 

During the year ended December 31, 2004, networking costs increased $160,547 or 71.2%, as compared to the year ended December 31, 2003. This increase is attributed to an increase in the general and administrative expenses of our networking operations.

 

During the year ended December 31, 2004, building rents decreased $37,380 or 47.0%, as compared to the year ended December 31, 2003. We attribute this decrease to the reduction of rental space needed for our corporate operations.

 

During the year ended December 31, 2004, other general and administration expense decreased $1,382,560 or 45.9%, as compared to the year ended December 31, 2003. We attribute this decrease to the absence of a one-time provision for bad debt expense, made for a major customer in 2003.

 

Depreciation and Amortization. During the year ended December 31, 2004, depreciation and amortization expense increased $418,780 or 90.6%, as compared to the year ended December 31, 2003. This increase was due to the accelerated depreciation of an acquired network, deployed and leased to one of our primary data services customers for a term of five years.

 

Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002

 

Revenues. During the year ended December 31, 2003, total revenues increased $1,102,948 or 6.8%, as compared to the year ended December 31, 2002.

 

The table below details the revenue derived from each of our product and service offerings for the year ended December 31, 2003 as compared to the same period ended December 31, 2002.

 

- 52 -


     Year Ended
December 31, 2003


   Year Ended
December 31, 2002


Revenues:

             

Product Sales

   $ 11,105,048    $ 10,305,991

Professional Services

     4,169,488      4,011,838

Data Delivery

     2,061,527      1,915,286
    

  

Total

   $ 17,336,062    $ 16,233,116
    

  

 

During the year ended December 31, 2003, cost of product sales increased $799,057, or 7.8%, compared to the year ended December 31, 2002. Cost of product sales refers to the actual landed costs of all products sold through our retail stores or direct sales force. We attribute this increase to an increase in the number of products sold at our Port Moresby and Lae retail locations.

 

During the year ended December 31, 2003, professional services revenues increased $157,650, or 3.9%, compared to the year ended December 31, 2002. Professional services are support services provided to our clients by our hardware engineers, software analysts, architects, developers and staff for new or existing software, hardware, systems or applications. We attribute this increase to an increase in the number of products sold at our Port Moresby and Lae retail locations.

 

During the year ended December 31, 2003, data delivery revenue increased $146,211 or 7.64%, compared to the year ended December 31, 2002. Data delivery refers to the revenue generated from our ISP and data network infrastructure services. We attribute this increase to an increase in the total amount of customers for data delivery services.

 

Operating Expenses. During the year ended December 31, 2003, operating expenses increased $865,715 or 5.4%, as compared to the year ended December 31, 2002. Our operating expenses including amounts for cost of sales, network operations, selling and marketing, maintenance and support, general and administrative and depreciation and amortization are set forth in the following table for the periods indicated.

 

     Year Ended
December 31, 2003


   Year Ended
December 31, 2002


Operating Expenses:

             

Cost of Sales

   $ 8,211,145    $ 8,368,683

Network Operations

     729,255      624,594

Sales & Marketing

     833,216      755,681

Maintenance & Support

     1,697,405      1,549,918

General & Administrative

     5,011,707      4,315,871

Depreciation & Amortization

     462,705      464,971
    

  

Total

   $ 16,945,433    $ 16,079,718
    

  

 

During the year ended December 31, 2003, cost of sales expense, including cost of product sales and cost of data delivery, decreased $157,538 or 1.9%, compared to the year ended December 31, 2002.

 

- 53 -


     Year Ended
December 31, 2003


   Year Ended
December 31, 2002


Revenues:

             

Cost of Product Sales

   $ 7,597,803    $ 7,988,957

Cost of Data Delivery

     613,342      379,826
    

  

Total

   $ 8,211,145    $ 8,368,683
    

  

 

During the year ended December 31, 2003, cost of product sales decreased $391,154 or 4.9% compared to the year ended December 31, 2002. Cost of product sales refers to the actual landed costs of all products sold through our retail stores or direct sales force. We attribute this decrease to the sale of products with higher profit margins.

 

During the year ended December 31, 2003, cost of data delivery increased $233,616 or 61.5% compared to the year ended December 31, 2002. Data delivery refers to our ISP and data network infrastructure services to customers in Papua New Guinea. We attribute this increase to an increase in the amount of data services purchased from our local telecommunications provider and to start-up expenses incurred with a major customer.

 

Network Operations. During the year ended December 31, 2003, the network operations expenses increased $104,661 or 16.8% as compared to the year ended December 31, 2002. Cost of network operations refers to the cost allocated to services provided by our employees to customers under our IBM Global Services Contract, including amounts for cost employee salaries, staff allowances and miscellaneous expenses as set forth in the following table:

 

     Year Ended
December 31, 2003


   Year Ended
December 31, 2002


Network Operations:

             

Salaries

   $ 421,798    $ 362,265

Staff Allowances

     258,536      231,100

Miscellaneous

     48,921      31,229
    

  

Total

   $ 729,255    $ 624,594
    

  

 

During the year ended December 31, 2003, cost of employee salaries increased $59,533, or 16.4% compared to the year ended December 31, 2002. We attribute this increase to an increase in existing salaries and the cost of hiring additional personnel, resulting from the additional demand for our network operations services.

 

During the year ended December 31, 2003, staff allowances expenses increased $27,436, or 11.9% compared to the year ended December 31, 2002. Staff allowances refers to the benefits and other expenses used as incentives and additional compensation for those employees relocating or commuting to Papua New Guinea. This increase was attributed to increased staff allowances paid to existing and new employees.

 

During the year ended December 31, 2003, miscellaneous expenses increased $17,692, or 56.6% compared to the year ended December 31, 2002. This increase was attributed to the increased costs of miscellaneous and incidental expenses, resulting from the hire of new employees.

 

- 54 -


Sales and marketing. During the year ended December 31, 2003, sales and marketing expenses increased $77,535 or 10.3% as compared to the year ended December 31, 2002. Our sales and marketing expenses, including salaries, staff allowances, advertising and miscellaneous expenses are set forth in the following table for the periods indicated.

 

     Year Ended
December 31, 2003


   Year Ended
December 31, 2002


Sales and Marketing:

             

Salaries

   $ 433,919    $ 438,295

Staff Allowances

     265,965      279,602

Advertising

     83,006      26,650

Miscellaneous

     50,326      11,134
    

  

Total

   $ 833,216    $ 755,681
    

  

 

During the year ended December 31, 2003, salary expense decreased $4,376, or 1% compared to the year ended December 31, 2002. This decrease was attributed to lower salary costs of existing sales representatives.

 

During the year ended December 31, 2003, staff allowance expense decreased $13,637, or 4.9% compared to the year ended December 31, 2002. Staff allowances refers to the benefits and other expenses used as incentives and additional compensation for those employees relocating to or commuting to Papua New Guinea. This decrease was attributed to fewer staff allowance costs of existing sales representatives.

 

During the year ended December 31, 2003, advertising expense increased $56,356, or 211.5% compared to the year ended December 31, 2002. We attribute this increase to an overall increase in our promotional activities, including newspaper advertising, magazines advertising and promotional seminars and demonstrations.

 

During the year ended December 31, 2003, miscellaneous expense increased $39,192, or 352.0% compared to the year ended December 31, 2002. We attribute this increase to an overall increase in our promotional activities.

 

Maintenance and support. During the year ended December 31, 2003, maintenance and support expenses increased $147,185 or 9.5% as compared to the year ended December 31, 2002. Our maintenance and support expenses refer to the cost of employees allocated for the warranty, support and repair activities of our professional services. Maintenance and support expenses, consisting of amounts for salaries, staff allowances, and miscellaneous expenses are set forth in the following table for the periods indicated.

 

     Year Ended
December 31, 2003


   Year Ended
December 31, 2002


Maintenance and Support:

             

Salaries

   $ 981,771    $ 898,952

Staff Allowances

     601,763      573,470

Miscellaneous

     113,869      77,496
    

  

Total

   $ 1,697,405    $ 1,549,918
    

  

 

- 55 -


During the year ended December 31, 2003, salary expense increased $82,219, or 9.2% compared to the year ended December 31, 2002. This increase was attributed to the increased costs of existing service and support representatives.

 

During the year ended December 31, 2003, staff allowances expense increased $28,293, or 4.9% compared to the year ended December 31, 2002. Staff allowances refers to the benefits and other expenses used as incentives and additional compensation for those employees relocating to or commuting to Papua New Guinea. This increase was attributed to increased staff allowances paid to existing support representatives.

 

During the year ended December 31, 2003, miscellaneous expense increased $35,773, or 46.4% compared to the year ended December 31, 2002. We attribute this increase to an overall increase in our maintenance and support activities.

 

General and Administrative. During the year ended December 31, 2003, general and administrative expense increased $695,836 or 16.1% as compared to the year ended December 31, 2003. Our general and administrative expense consist of amounts for travel, legal fees, salary expense, insurance, utilities, audit fees, telephone and tolls, networking costs, building rents, and other expenses and are set forth in the following table for the periods indicated.

 

     Year Ended
December 31, 2003


   Year Ended
December 31, 2002


General and Administrative:

             

Travel and Accommodations

   $ 116,293    $ 112,438

Legal Fees

     109,403      1,653

Salary Expense

     1,014,251      912,825

Insurance

     257,160      164,523

Utilities

     84,675      60,224

Audit Fees

     10,925      6,874

Telephone/Tolls

     99,295      160,788

Networking costs

     225,465      389,560

Building Rents

     79,518      45,218

Other G&A

     3,014,722      2,461,768
    

  

Total

   $ 5,011,707    $ 4,315,871
    

  

 

During the year ended December 31, 2003 travel and accommodation expense increased $3,855 or 3.4% as compared to the year ended December 31, 2002. This increase was attributed to higher cost of travel within Papua New Guinea.

 

During the year ended December 31, 2003 legal fees increased $107,750 as compared to the year ended December 31, 2002. This increase was attributed to increased legal expenses in connection with the initiation of litigation in Papua New Guinea as described in the section “Legal Matters”.

 

During the year ended December 31, 2003 salary expense increased $101,426 or 11.1% as compared to the year ended December 31, 2002. We attribute this increase to increases in the number of employees and merit increases.

 

During the year ended December 31, 2003 insurance expense increased $92,637 or 56.3% as compared to the year ended December 31, 2002. This increase is attributed to higher insurance costs for our retail locations and an increase in our insurance premiums.

 

During the year ended December 31, 2003 utility expense increased to increased $24,451 or 40.6%, as compared to the year ended December 31, 2002. This increase is attributed to an increase in the unit cost of electricity in Papua New Guinea.

 

- 56 -


During the year ended December 31, 2003 audit fee expense increased $4,051 or 58.9% as compared to the year ended December 31, 2002. We attribute this increase to an inflation-based increase in our audit fees.

 

During the year ended December 31, 2003 telephone and toll expense decreased $61,493 or 38.2% as compared to the year ended December 31, 2002. We attribute this decrease to internal efforts of management to reduce telephony expenses throughout our operations in Papua New Guinea.

 

During the year ended December 31, 2003 networking costs decreased $164,095 or 42.1%, as compared to the year ended December 31, 2002. This decrease is attributed to the absence of costs associated with the filing for a wireless telecommunications license in 2002.

 

During the year ended December 31, 2003 building rents increased $34,300 or 75.9% as compared to the year ended December 31, 2002. We attribute this increase to the increase of rental rates in Papua New Guinea and the leasing of additional space in Papua New Guinea.

 

During the year ended December 31, 2003 other general and administration expense increased $552,954 million or 22.5% as compared to the year ended December 31, 2002. We attribute this increase to a one-time reserve for bad debt expense from a major customer during 2003. This increase reflects an increase in management fees of approximately $120,000 for the year ending December 31, 2003 as compared to the year ending December 31, 2002.

 

Depreciation and Amortization. During the year ended December 31, 2003 depreciation and amortization expenses decreased $2,266 or 1% as compared to the year ended December 31, 2002.

 

Interest Expense. During the year ended December 31, 2003, interest expense increased $10,110 or 11.5% as compared to the year ended December 31, 2002. This increase was attributed to a currency rate fluctuations during the period.

 

Liquidity and Capital Resources, Papua New Guinea

 

Our principal sources of liquidity are cash generated from operations and cash from external financing arrangements. We believe that our existing capital resources will be sufficient to meet our operating and capital requirements through at least the next 12 months. However, we may seek additional debt or equity financing to fund future development activities and to insure liquidity.

 

Liquidity and Capital Resources

 

     Nine Months Ended
September 30,


    Years Ended December 31,

 
     2005

    2004

    2004

    2003

    2002

 

Cash Flows Provided By (Used In) (dollars in ‘000s)

     (unaudited)                          

Operating activities

   $ 2,791     $ 1,493     $ 3,388     $ 2,107     $ 2,533  

Investing activities

     (1,949 )     (3,699 )     (2,626 )     (86 )     2  

Financing activities

     (981 )     1,580       (1,519 )     (2,091 )     (2,117 )
    


 


 


 


 


Increase (Decrease) In Cash and Cash Equivalents

   $ (139 )   $ (625 )   $ (757 )   $ (70 )   $ 418  
    


 


 


 


 


 

- 57 -


Operating Activities

 

Cash provided from operations increased $1.298 million for the nine months ended September 30, 2005 compared to cash provided from operations during the nine months ended September 30, 2004. This increase was primarily attributable to an increase in net income.

 

Cash provided by operating activities increased $1.281 million during the year ended December 31, 2004 compared to cash provided by operating activities during the year ended December 31, 2003. This increase was primarily driven by reduced payments to suppliers and receipt collections from customers.

 

Cash provided by operating activities decreased $426,000 during the year ended December 31, 2003 compared to cash provided by operating activities during the year ended December 31, 2002. This decrease was attributed to a 15% reduction in the average collection of accounts receivable.

 

Investing Activities

 

During the nine months ended September 30, 2005, cash used in investing activities decreased $1.75 million when compared to the nine months ended September 30, 2004. This decrease is attributed to a reduction in the purchase of capital equipment for a major data services customer in 2005.

 

During the year ended December 31, 2004, cash used in investing activities increased $2.54 million as compared to the year ended December 31, 2003. This increase is attributed to the purchase of ATM equipment leased to a major data services customer.

 

During the year ended December 31, 2003, cash used in investing activities increased $88,000 as compared to the year ended December 31, 2002. This increase is attributed to purchases of ATM equipment for a major data services customer and offset with proceeds from the sale of a subsidiary.

 

Financing Activities

 

During the nine months ended September 30, 2005 we used cash from operating activities to repay all bank loans. During the nine months ended September 30, 2004, we repaid $981,000 in debt financing used to fund the purchase of additional ATM equipment in 2004.

 

During the year ended December 31, 2004 we financed our purchase of ATM equipment, for a major data services customer bank loans totaling $961,000. We made debt payments on these loans during the year ended December 31, 2004 in the amount of $1.102 million. Management fees of $1.377 million were distributed during the year ended December 31, 2004. We had no other financing activity during the year ended December 31, 2004.

 

During the year ended December 31, 2003, we made distributed management fees in the amount of $3.026 million. We borrowed $1.153 million and made $218,000 in debt repayments on these loans. The $1.153 million in borrowed funds funded an expansion of our data delivery services and management fee distributions.

 

- 58 -


Results of Operations, Fiji and Other Pacific Island Nations

 

What follows are the financial results for our operating subsidiaries, Datec Fiji Limited, Generic Technology Limited, Network Services Limited, Datec Vanuatu Limited, Datec Solomon Island, Datec Tonga Limited, Datec Samoa Ltd., Datec Investments Limited, Mobile Technology Solutions, Brocker Technology Group NZ Limited, and Datec Australia Pty Limited for the periods indicated.

 

Financial Performance

 

The following table sets forth certain financial data for the periods indicated.

 

    

Nine Months
Ended

September 30,

2005


   

Nine Months
Ended
September 30,

2004


   

Year Ended
December 31,

2004


   

Year Ended
December 31,

2003


   

Year Ended
December 31,

2002


 
            

Revenue:

                                        

Product Sales

   $ 6,037,553     $ 7,016,890     $ 11,083,677     $ 12,641,495     $ 7,996,607  

Professional Services

     3,316,422       5,483,156       6,227,178       4,856,540       2,616,524  
    


 


 


 


 


Total Revenue

     9,353,957       12,500,046       17,310,855       17,498,035       10,613,131  

Expenses:

                                        

Cost of sales

     5,357,515       5,754,692       9,822,006       9,562,975       5,717,730  

Network Operations

     272,434       264,941       316,246       279,016       209,877  

Sales & Marketing

     672,951       1,147,336       1,284,120       1,204,120       877,808  

Maintenance & Support

     1,349,325       1,631,812       1,669,812       1,522,646       733,122  

General & Administrative

     2,705,637       2,857,259       4,044,712       3,104,418       1,670,769  

Depreciation & Amortization

     377,754       474,607       596,081       551,012       331,633  
    


 


 


 


 


                                          

Total operating expenses

     10,735,616       12,130,647       17,732,977       16,224,187       9,540,939  
    


 


 


 


 


Net Profit (Loss) From Operations

     (1,381,659 )     369,399       (422,122 )     1,273,848       1,072,192  
    


 


 


 


 


Other Income (Expenses)

                                        

Interest income

     494       395       562       98       —    

Interest expense

     (190,846 )     (251,986 )     (342,133 )     (443,270 )     (593,141 )

Other Income

     277,604               (24,659 )     767       (14,755 )

Foreign Exchange Gain (Loss)—Unrealized

                     (23,651 )     53,703       102,906  

Foreign Exchange Gain (Loss)—Realized

     24,493       27,648       18,587               —    
    


 


 


 


 


Total Other Income (Expense)

     111,745       (223,943 )     (371,294 )     (388,702 )     (504,990 )
    


 


 


 


 


Income/(Loss) Before Income Taxes

     (1,269,916 )     145,456       (793,416 )     885,146       567,202  
    


 


 


 


 


Income Tax Expense

     (262,938 )     141,546       (243,168 )     105,623       85,731  

Minority Interest in Net Profit after Taxation

     528       83,539       120,175       (7,675 )     11,978  
    


 


 


 


 


Net Income (Loss)

   $ (1,532,324 )   $ 370,541     $ (916,409 )   $ 983,094     $ 664,911  
    


 


 


 


 


 

Nine Months Ended September 30, 2005 Compared to the Nine Months Ended September 30, 2004.

 

Revenues. During the nine months ended September 30, 2005, revenues decreased by $3,146,091, or 25.2% compared to the nine months ended September 30, 2004. This decline was attributed to our sale of Certus Consulting Ltd., an IT technology and consulting company in September, which eliminated a source of revenue from these operations.

 

Our revenues consist of amounts for product sales and professional services and other revenue as set forth in the following table for the periods indicated.

 

     Nine Months
Ended
September 30,
2005


   Nine Months
Ended
September 30,
2004


Revenues:

             

Product Sales

   $ 6,037,553    $ 7,016,890

Professional Services

     3,316,422      5,483,156
    

  

Total

   $ 9,353,975    $ 12,500,046
    

  

 

During the nine months ended September 30, 2005, product sales revenues decreased by $979,357 or 14.0% compared to the nine months ended September 30, 2004. This decline was attributed to the sale of Certus Consulting, Ltd. in September 2004.

 

During the nine months ended September 30, 2005, professional services revenues decreased by $2,166,734 or 39.5% compared to the nine months ended September 30, 2004. This decline was attributed to the sale of Certus Consulting, Ltd. in September 2004.

 

- 59 -


Operating Expenses. During the nine months ended September 30, 2005, operating expenses decreased $1,395,032, or 11.5%, compared to the nine months ended September 30, 2004. Our operating expenses including amounts for network operations, sales and marketing, maintenance and support, general and administrative expenses and depreciation and amortization are set forth in the following table for the periods indicated.

 

     Nine Months
Ended
September 30,
2005


   Nine Months
Ended
September 30,
2004


Operating Expenses:

             

Cost of Sales

   $ 5,357,515    $ 5,754,692

Network Operations

     272,433      264,941

Sales & Marketing

     672,951      1,147,366

Maintenance & Support

     1,349,325      1,631,812

General & Administrative

     2,705,637      2,857,259

Depreciation & Amortization

     377,754      474,607
    

  

Total

   $ 10,735,618    $ 12,130,647
    

  

 

Cost of Product Sales. During the nine months ended September 30, 2005, cost of product sales decreased $397,177, or 6.9%, compared to the nine months ended September 30, 2004. Our cost of product sales including amounts for cost of product sales and miscellaneous costs are set forth in the following table for the periods indicated.

 

Cost of Product Sales

   $ 5,332,278    $ 5,742,317

Misc

     25,237      12,375
    

  

Total

   $ 5,357,515    $ 5,754,692
    

  

 

 

- 60 -


Network Operations. During the nine months ended September 30, 2005, network operations expense increased $7,493, or 2.8%, compared to the nine months ended September 30, 2004. Our network operations costs including amounts for salary expenses and miscellaneous expenses are set forth in the following table for the periods indicated.

 

     Nine Months
Ended
September 30,
2005


   Nine Months
Ended
September 30,
2004


Network Operations:

             

Salaries

   $ 262,930    $ 251,596

Miscellaneous

     9,504      13,345
    

  

Total

   $ 272,434    $ 264,941
    

  

 

During the nine months ended September 30, 2005, salary expense increased $11,334, or 4.5%, compared to the nine months ended September 30, 2004. The increase was attributed to increases in the salaries of existing employees and the hiring of new employees, due to increased demand for network operations services.

 

Sales and Marketing. During the nine months ended September 30, 2005, sales and marketing expense decreased $474,385, or 41.3%, compared to the nine months ended September 30, 2004. Our sales and marketing costs, including amounts for salary expenses, advertising and marketing, and miscellaneous expenses are set forth in the following table for the periods indicated.

 

- 61 -


     Nine Months
Ended
September 30,
2005


   Nine Months
Ended
September 30,
2004


Sales and Marketing:

             

Salaries

   $ 598,909    $ 948,721

Advertising

     46,006      149,149

Miscellaneous Expenses

     28,036      49,466
    

  

Total

   $ 672,951    $ 1,147,336
    

  

 

During the nine months ended September 30, 2005, salary expense decreased $349,812, or 36.9%, compared to the nine months ended September 30, 2004. The decrease is the result of the restructuring of our sales operations in Fiji and the elimination of certain personnel expenses due to the sale of Certus.

 

During the nine months ended September 30, 2005, advertising expense decreased $103,143, or 69.2%, compared to the nine months ended September 30, 2004. The decrease is attributed to the elimination of certain expenses due to the sale of Certus.

 

During the nine months ended September 30, 2005, miscellaneous expense decreased $21,430, or 43.3%, compared to the nine months ended September 30, 2004. The decrease is attributed to the elimination of certain expenses due to the sale of Certus.

 

Maintenance and Support. During the nine months ended September 30, 2005, maintenance and support expense decreased $282,487, or 17.3%, compared to the nine months ended September 30, 2004. Our maintenance and support expense, including amounts for salary expense and miscellaneous expense, are set forth in the following table for the periods indicated.

 

     Nine Months
Ended
September 30,
2005


   Nine Months
Ended
September 30,
2004


Maintenance and Support:

             

Salaries

   $ 1,338,276    $ 1,631,812

Miscellaneous

     11,049      —  
    

  

Total

   $ 1,349,325    $ 1,631,812
    

  

 

During the nine months ended September 30, 2005, salary expense decreased $293,536, or 18.0%, compared to the nine months ended September 30, 2004. The decrease is the result of the the elimination of certain expense, due to the sale of Certus.

 

During the nine months ended September 30, 2005, miscellaneous expense increased $11,049, compared to the nine months ended September 30, 2004. The increase is attributed to minor expenses incurred as part of our internal maintenance and support reorganization.

 

General and Administrative. During the nine months ended September 30, 2005, general and administrative expenses decreased $151,621, or 5.3%, compared to the nine months ended September 30, 2004. Our general and administrative expenses, including amounts for travel and accommodations, legal fees, salary expenses, insurance, utilities, audit fees, telephone and tolls, motor vehicle expenses, building rents and other general and administrative costs are set forth in the following table for the periods indicated.

 

- 62 -


     Nine Months
Ended
September 30,
2005


   Nine Months
Ended
September 30,
2004


General and Administrative:

             

Travel

   $ 131,310    $ 235,350

Legal Fees

     15,897      18,516

Salary Expense

     908,090      1,077,201

Insurance

     71,318      61,868

Utilities

     45,856      61,112

Audit Fees

     73,575      70,778

Telephone/Tolls

     143,275      179,682

Motor Vehicle

     107,008      133,638

Building Rents

     334,189      378,674

Other G&A

     875,119      640,439
    

  

Total

   $ 2,705,637    $ 2,857,258
    

  

 

During the nine months ended September 30, 2005, travel expense decreased $104,040, or 44.2%, compared to the nine months ended September 30, 2004. The decrease is the result of the discontinuing of certain operations due to the sale of Certus.

 

During the nine months ended September 30, 2005, legal fee expense decreased $2,619, or 14.1%, compared to the nine months ended September 30, 2004. The decrease is the result of the discontinuing of certain operations due to the sale of Certus.

 

During the nine months ended September 30, 2005, salary expense decreased $169,111, or 15.7%, compared to the nine months ended September 30, 2004. $48,669 of the decrease is the result of the discontinuing of certain operations due to the sale of Certus. $94,421 of the reduction was attributed to restructuring of our internal management in Fiji and salary reductions for our New Zealand operations.

 

During the nine months ended September 30, 2005, insurance costs increased $9,450, or 15.3%, compared to the nine months ended September 30, 2004. This increase is attributed to insurance on the purchase of new equipment for our operations in the Solomon Islands and New Zealand.

 

During the nine months ended September 30, 2005, utility costs decreased $15,256, or 25.0%, compared to the nine months ended September 30, 2004. This decreased is attributed to cost reduction efforts implemented during 2005.

 

During the nine months ended September 30, 2005, telephone and toll expense decreased $36,407, or 20.3%, compared to the nine months ended September 30, 2004. The decrease is the result of the discontinuing of certain expenses due to the sale of Certus.

 

During the nine months ended September 30, 2005, motor vehicle expense decreased $26,630, or 19.9%, compared to the nine months ended September 30, 2004. The decrease is the result of the discontinuing of certain operations due to the sale of Certus.

 

During the nine months ended September 30, 2005, other general and administrative expense increased $234,680, or 36.6%, compared to the nine months ended September 30, 2004. This increase is attributed to a $234,000 increase in management fees paid.

 

Depreciation and Amortization. During the nine months ended September 30, 2005, depreciation and amortization decreased to $377,754 from $474,607 in the same period in 2004, a decrease of $96,853, or 20.4%. $120,498 of this decrease is the result of the discontinuing of certain operations due to the sale of Certus. This decrease was partially offset by an increase in depreciation and amortization in The Solomon Islands and New Zealand.

 

- 63 -


Interest Expense. During the nine months ended September 30, 2005, interest expense decreased $61,140, or 24.3%, compared to the nine months ended September 30, 2004. This decrease was attributed to reduced amounts payable under our credit line.

 

Year ended December 31, 2004 Compared to the Year ended December 31, 2003.

 

Revenues. During the year ended December 31, 2004, revenues decreased $187,180, or 1.1% compared to the year ended December 31, 2003. Our revenues consist of amounts for product sales, professional services and other revenues as set forth in the following table for the periods indicated.

 

     Year Ended
December 31,
2004


   Year Ended
December 31,
2003


Revenues:

             

Product Sales

   $ 11,083,677    $ 12,641,495

Professional Services

     6,227,178      4,856,540
    

  

Total

   $ 17,310,855    $ 17,498,035
    

  

 

During the year ended December 31, 2004, product sales revenues decreased by $1,557,818 or 12.3% compared to the year ended December 31, 2003. This decline was attributed to a decrease in sales from Certus Consulting Limited.

 

During the year ended December 31, 2004, professional services revenues increased $1,370,630 million or 28.2% compared to the year ended December 31, 2003. This increase was attributed to a decrease in sales from Certus Consulting Limited.

 

- 64 -


Operating Expenses. During the year ended December 31, 2004, operating expenses increased $1,508,790, or 9.3%, compared to the year ended December 31, 2003. Our operating expenses, including amounts for cost of sales, network operations, sales and marketing, maintenance and support, general and administrative and depreciation and amortization are set forth in the following table for the periods indicated.

 

     Year Ended
December 31,
2004


   Year Ended
December 31,
2003


Operating Expenses:

             

Cost of Sales

   $ 9,822,006    $ 9,562,975

Network Operations

     316,246      279,016

Sales & Marketing

     1,284,120      1,204,120

Maintenance & Support

     1,669,812      1,522,646

General & Administrative

     4,044,712      3,104,418

Depreciation & Amortization

     596,081      551,012
    

  

Total

   $ 17,732,977    $ 16,224,187
    

  

 

Cost of Sales. During the year ended December 31, 2004, cost of sales increased $259,031, or 2.7%, compared to the year ended December 31, 2003. Our cost of equipment sales including amounts for cost of product sales and miscellaneous costs are set forth in the following table for the periods indicated.

 

     Year Ended
December 31,
2004


   Year Ended
December 31,
2003


Cost of Sales:

             

Cost of Product Sales

   $ 9,822,006    $ 9,562,975
    

  

Total

   $ 9,822,006    $ 9,562,975
    

  

 

During the year ended December 31, 2004, cost of product sales increased $259,031, or 2.7%, compared to the year ended December 31, 2003. This increase is attributed to a reduction in the discounts received from some of our vendors.

 

Network Operations. During the year ended December 31, 2004, network operations costs increased $37,230, or 13.3%, compared to the year ended December 31, 2003. Our network operations costs, including amounts for salary expense and miscellaneous expense are set forth in the following table for the periods indicated.

 

     Year Ended
December 31,
2004


   Year Ended
December 31,
2003


Network Operations:

             

Salaries

   $ 303,204    $ 265,366

Miscellaneous

     13,042      13,650
    

  

Total

   $ 316,246    $ 279,016
    

  

 

- 65 -


During the year ended December 31, 2004, salary expense increased $37,838, or 14.3%, compared to the year ended December 31, 2003. The increase was attributed to merit-based increases in the salaries of existing employees.

 

Sales and Marketing. During the year ended December 31, 2004, sales and marketing expense increased $80,000, or 6.6%, compared to the year ended December 31, 2003. Our sales and marketing costs, including amounts for salary expense, advertising and miscellaneous expense are set forth in the following table for the periods indicated.

 

     Year Ended
December 31,
2004


   Year Ended
December 31,
2003


Sales and Marketing:

             

Salaries

   $ 1,032,519    $ 908,146

Advertising

     174,579      236,356

Miscellaneous

     77,022      59,618
    

  

Total

   $ 1,284,120    $ 1,204,120
    

  

 

During the year ended December 31, 2004, salary expense increased $124,373, or 13.7%, compared to the year ended December 31, 2003. The increase is the result of additional hiring and merit-based salary increases.

 

During the year ended December 31, 2004, advertising expense decreased $61,777, or 26.1%%, compared to the year ended December 31, 2003. The decrease is the result of management’s review of marketing costs and implementation of a more targeted approach to marketing activities.

 

During the year ended December 31, 2004, miscellaneous expense increased $17,404, or 29.2%, compared to the year ended December 31, 2003. The increase is attributed to the expenses due to the sale of Certus.

 

Maintenance and Support. During the year ended December 31, 2004, maintenance and support expense increased $147,166, or 9.7%, compared to the year ended December 31, 2003. Our maintenance and support expense, including amounts for salary expense and miscellaneous expense, are set forth in the following table for the periods indicated.

 

     Year Ended
December 31,
2004


   Year Ended
December 31,
2003


Maintenance and Support:

             

Salaries

   $ 1,546,289    $ 1,444,112

Miscellaneous

     123,523      78,534
    

  

Total

   $ 1,669,812    $ 1,522,646
    

  

 

During the year ended December 31, 2004, salary expense increased $102,177, or 7.1%, compared to the year ended December 31, 2003. This increase is attributed to increased

 

- 66 -


personnel in our operations in New Zealand, Australia and Fiji.

 

During the year ended December 31, 2004, miscellaneous expense increased $44,989, or 57.2%, compared to the year ended December 31, 2003. The increased is attributed to our expansion into other Pacific Island countries during the period.

 

General and Administrative. During the year ended December 31, 2004, general and administrative expense increased $940,295, or 30.3%, compared to the year ended December 31, 2003. Our general and administrative expense, including amounts for travel, legal fees, salary expense, insurance, utilities, audit fees, telephone and tolls, motor vehicle expenses, building rents and other general and administrative costs, are set forth in the following table for the periods indicated.

 

     Year Ended
December 31,
2004


   Year Ended
December 31,
2003


General and Administrative:

             

Travel

   $ 417,295    $ 308,557

Legal Fees

     21,041      68,102

Salary Expense

     1,145,509      1,097,491

Insurance

     89,976      114,508

Utilities

     77,198      22,061

Audit Fees

     86,072      145,507

Telephone/Tolls

     248,142      272,036

Motor Vehicle

     169,170      143,624

Building Rents

     516,653      448,569

Other G&A

     1,273,657      483,963
    

  

Total

   $ 4,044,713    $ 3,104,418
    

  

 

During the year ended December 31, 2004, travel expense increased $108,738 or 35.2%, compared to the year ended December 31, 2003. The increase was attributed to expanded operations in New Zealand and Fiji, including the formation of a new subsidiary in New Zealand.

 

During the year ended December 31, 2004, legal fees decreased $47,061, or 69.1%, compared to the year ended December 31, 2003. The decrease is the result of a expense resulting from the ceased operations of a subsidiary.

 

During the year ended December 31, 2004, salary expense increased $48,018, or 4.4%, compared to the year ended December 31, 2003. This increase is the result of increased personnel and merit-based salary increases.

 

During the year ended December 31, 2004, insurance costs decreased $24,532, or 21.4%, compared to the year ended December 31, 2003. This decrease is attributed to a reduction in the value of our assets in Fiji and reduced insurance premiums.

 

During the year ended December 31, 2004, utility costs increased $55,137, or 249.9%, compared to the year ended December 31, 2003. This increase was attributed to the increased cost of electricity from our expansion into other Pacific markets.

 

During the year ended December 31, 2004, audit fees decreased $59,435, or 40.8%, compared to the year ended December 31, 2003. This decrease was attributed to increased efficiency in our internal accounting procedures and the selection of a new auditor.

 

- 67 -


During the year ended December 31, 2004, telephone and toll expense decreased $23,894, or 8.8%, compared to the year ended December 31, 2003. The increase is attributed to expanded activity in PINS and new operations in New Zealand and Fiji, including the formation of a new subsidiary in New Zealand.

 

During the year ended December 31, 2004, motor vehicle expense increased $25,546, or 17.8%, compared to the year ended December 31, 2003. The increase is the result of increased cost of maintenance incurred during the period.

 

During the year ended December 31, 2004, other building rents increased $68,084, or 15.2%, compared to the year ended December 31, 2003. This increase was the result of the need for additional office space, resulting from our new operations in New Zealand.

 

During the year ended December 31, 2004, other general and administrative expense increased $789,694, or 163.2%, compared to the year ended December 31, 2003. This increase is attributed to an increase in management fees paid.

 

Depreciation and Amortization. During the year ended December 31, 2004, depreciation and amortization expense increased $35,055, or 6.5%, compared to the year ended December 31, 2003. This increase was attributed to expanded operations in New Zealand and our acquisition of an entity in New Zealand.

 

Interest Expense. During the year ended December 31, 2004, interest expense decreased to $342,133 from $443,270 in the same period in 2003, a decrease of $101,137, or 22.8%. This decrease is the result of reduced borrowings during the period.

 

Year ended December 31, 2003 Compared to the Year ended December 31, 2002.

 

Revenues. During the year ended December 31, 2003, revenues increased $6,517,117, or 57.2% compared to the year ended December 31, 2002. Our revenues consist of amounts for product sales, professional services and other revenue, as set forth in the following table for the periods indicated.

 

     Year Ended
December 31,
2003


   Year Ended
December 31,
2002


Revenues:

             

Product Sales

   $ 12,641,495    $ 7,966,607

Professional Services

     4,856,540      2,616,524
    

  

Total

   $ 17,498,035    $ 10,613,131
    

  

 

During the year ended December 31, 2003, product sales revenues increased $4,674,888 or 58.7% compared to the year ended December 31, 2002. This increase was attributed to increased product sales from new retail locations.

 

During the year ended December 31, 2003, professional services revenues increased $2,240,016 or 85.6% compared to the year ended December 31, 2002. This increase was attributed to sales from Certus Consulting Limited.

 

- 68 -


Operating Expenses. During the year ended December 31, 2003, operating expenses increased $6,683,248, or 70.0%, compared to the year ended December 31, 2002. Our operating expense including amounts for network operations, sales and marketing, maintenance and support, general and administrative expense and depreciation cost of sales amortization, are set forth in the following table for the periods indicated.

 

     Year Ended
December 31,
2003


   Year Ended
December 31,
2002


Operating Expenses:

             

Cost of Sales

   $ 9,562,975    $ 5,717,730

Network Operations

     279,016      209,877

Sales & Marketing

     1,204,120      877,808

Maintenance & Support

     1,522,646      733,122

General & Administrative

     3,104,418      1,670,769

Depreciation & Amortization

     551,012      331,633
    

  

Total

   $ 16,224,187    $ 9,540,939
    

  

 

Cost of Sales. During the year ended December 31, 2003, cost of sales increased $3,845,245 or 67.3%, compared to the year ended December 31, 2002. Our cost of equipment sales including amounts for cost of product sales and miscellaneous costs are set forth in the following table for the periods indicated.

 

     Year Ended
December 31,
2003


   Year Ended
December 31,
2002


Cost of Sales:

             

Cost of Product Sales

   $ 9,562,975    $ 5,717,730
    

  

Total

   $ 9,562,975    $ 5,717,730
    

  

 

During the year ended December 31, 2003, cost of product sales increased $3,845,245 million, or 67.3%, compared to the year ended December 31, 2002. This increase is attributed to sales from Certus Consulting Limited and the expansion of our operations into Tonga, Vanuatu, and the Cook Islands in December 2002.

 

 

- 69 -


Network Operations. During the year ended December 31, 2003, network operations costs increased $69,139, or 32.9%, compared to the year ended December 31, 2002. Our network operations costs include amounts for salary expense and miscellaneous expense are set forth in the following table for the periods indicated.

 

     Year Ended
December 31,
2003


   Year Ended
December 31,
2002


Network Operations:

             

Salaries

   $ 265,366    $ 209,011

Miscellaneous

     13,650      866
    

  

Total

   $ 279,016    $ 209,877
    

  

 

During the year ended December 31, 2003, salary expense increased $56,355, or 27.0%, compared to the year ended December 31, 2002. The increase was attributed to merit-based increases in the salaries of existing employees.

 

Sales and Marketing. During the year ended December 31, 2003, sales and marketing expense increased $326,312, or 37.2%, compared to the year ended December 31, 2002. Our sales and marketing costs, including amounts for salary expense, advertising and miscellaneous expense are set forth in the following table for the periods indicated.

 

     Year Ended
December 31,
2003


   Year Ended
December 31,
2002


Sales and Marketing:

             

Salaries

   $ 908,146    $ 703,067

Advertising

     236,356      131,056

Misc Expenses

     59,618      43,685
    

  

Total

   $ 1,204,120    $ 877,808
    

  

 

During the year ended December 31, 2003, salary expense increased $205,079, or 29.2%, compared to the year ended December 31, 2002. The increase is the result of additional hiring due to expansion into other markets in the Pacific region.

 

During the year ended December 31, 2003, advertising expense increased $105,300, or 80.3%, compared to the year ended December 31, 2002. The increase was attributed to the overall increase in promotional activities for the opening of new locations.

 

 

- 70 -


Maintenance and Support. During the year ended December 31, 2003, maintenance and support expense increased $789,524, or 107.7%, compared to the year ended December 31, 2002. Our maintenance and support expense, including amounts for salary expense and miscellaneous expense are set forth in the following table for the periods indicated.

 

     Year Ended
December 31,
2003


   Year Ended
December 31,
2002


Maintenance and Support:

             

Salaries

   $ 1,444,112    $ 696,512

Miscellaneous

     78,534      36,610
    

  

Total

   $ 1,522,646    $ 733,122
    

  

 

During the year ended December 31, 2003, salary expense increased $747,600, or 107.3%, compared to the year ended December 31, 2002. $864,000 of this increase was almost entirely related to increased personnel for our operations in New Zealand, Australia and Fiji.

 

During the year ended December 31, 2003, miscellaneous expense increased $41,924, or 114.5%, compared to the year ended December 31, 2002. This increase is attributed to costs incurred as a result of increased personnel hired during the period.

 

General and Administrative. During the year ended December 31, 2003, general and administrative expense increased $1,433,649, or 85.8%, compared to the year ended December 31, 2002. Our general and administrative expense, including amounts for travel, legal fees, salary expense, insurance, utilities, audit fees, telephone and tolls, motor vehicle expense, building rents and other general and administrative costs are set forth in the following table for the periods indicated.

 

    Year Ended
December 31,
2003


   Year Ended
December 31,
2002


General and Administrative:

            

Travel

  $ 308,557    $ 200,843

Legal Fees

    68,102      48,992

Salary Expense

    1,097,491      694,523

Insurance

    114,508      70,105

Utilities

    22,061      17,565

Audit Fees

    145,507      97,984

Telephone/Tolls

    272,036      163,472

Motor Vehicle

    143,624      97,984

Building Rents

    448,569      279,301

Other G&A

    483,963      —  
   

  

Total

  $ 3,104,418    $ 1,670,769
   

  

 

During the year ended December 31, 2003, travel expense increased $107,714 or 53.6%, compared to the year ended December 31, 2002. The increase was attributed to expanded operations in New Zealand and Fiji, including the formation of a new subsidiary in New Zealand.

 

During the year ended December 31, 2003, legal fees increased $19,110, or 39.0%, compared to the year ended December 31, 2002. The increase was attributed to costs associated with the Certus acquisition.

 

- 71 -


During the year ended December 31, 2003, salary expense increased $402,968, or 58.0%, compared to the year ended December 31, 2002. This increase is the result of increased personnel and merit-based salary increases.

 

During the year ended December 31, 2003, insurance costs increased $44,403, or 63.3%, compared to the year ended December 31, 2002. This decrease is attributed to an increase in asset values and coverage requirements related to the Certus acquisition.

 

During the year ended December 31, 2003, utility costs increased $4,496, or 25.6%, compared to the year ended December 31, 2002. This increase was attributed to the Certus acquisition.

 

During the year ended December 31, 2003, audit fees increased $47,523, or 48.5%, compared to the year ended December 31, 2002. This increase was attributed to Certus acquisition and increased operations in the Pacific.

 

During the year ended December 31, 2003, telephone and toll expense increased $108,564, or 66.4%, compared to the year ended December 31, 2002. The increase is attributed to expanded activity in PINS and the formation of a new subsidiary in New Zealand.

 

During the year ended December 31, 2003, motor vehicle expense increased $45,640, or 46.6%, compared to the year ended December 31, 2002. The increase is the result of the Certus acquisition.

 

During the year ended December 31, 2003, other building rents increased $169,268, or 60.6%, compared to the year ended December 31, 2002. This increase was the result of the need for additional office space, as a result of the Certus acquisition.

 

During the year ended December 31, 2003, other general and administrative expense increased $483,963, compared to the year ended December 31, 2002. This increase is attributed to the Certus acquisition and the expansion operations in PINS.

 

Depreciation and Amortization. During the year ended December 31, 2003, depreciation and amortization expense increased $209,373, or 63.2%, compared to the year ended December 31, 2002. This increase was attributed to expanded operations in New Zealand and the Certus acquisition.

 

Interest Expense. During the year ended December 31, 2003, interest expense decreased to $443,270 from $593,141 for the same period in 2002, an increase of $149,871 or 25.3%. This decrease is the result of decreased borrowings during the period.

 

Liquidity and Capital Resources, Fiji and Other Pacific Island Nations

 

Our principal sources of liquidity are cash generated from operations and cash available from available external financing arrangements. We believe that cash generated from operations will be sufficient to meet our operating and capital requirements through at least the next 12 months. However, we may seek additional debt or equity financing to fund future development activities or to ensure liquidity.

 

- 72 -


Liquidity and Capital Resources

 

     Nine Months Ended
September 30,


    Year Ended December 31,

 
     2005

    2004

    2004

    2003

    2002

 

Cash Flows Provided By (Used In) (dollars in ‘000s)

                                        

Operating activities

   $ (5,370 )   $ 978     $ (1,721 )   $ (2,165 )   $ 488  

Investing activities

     5,685       113       (508 )     (1,358 )     (278 )

Financing activities

     181       (1,419 )     1,934       3,155       (1,093 )
    


 


 


 


 


Increase (Decrease) In Cash and Cash Equivalents

   $ 496     $ (329 )   $ (295 )   $ (368 )   $ (883 )
    


 


 


 


 


 

Operating Activities

 

Cash provided by operating activities decreased $4.3 million for the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004. The decrease was primarily attributable to poor operating performance and a stock write down in Fiji.

 

Cash provided by operating activities increased $0.4 million during the year ended December 31, 2004 compared to the year ended December 31, 2003. This increase was attributed to the Certus acquisition.

 

Cash provided by operating activities decreased $2.6 million during the year ended December 31, 2003 compared to the year ended December 31, 2002. This decrease was the result of poorer operating performance and decreased collection of accounts receivable.

 

Investing Activities

 

During the nine months ended September 30, 2005, cash provided by investing activities increased $5.572 million compared to the nine months ended September 30, 2005. This increase was attributed primarily to the sale of a building during 2005.

 

During the year ended December 31, 2004, cash used in investing activities decreased $850,000 compared to the year ended December 31, 2003. This increase was attributed primarily to our expansion into other Pacific markets.

 

During the year ended December 31, 2003, cash used in investing activities increased by $1.08 million compared to the year ended December 31, 2002. This increase was attributed primarily to our expansion into other Pacific markets.

 

Financing Activities

 

During the nine months ended September 30, 2005, cash provided by financing activities increased $1.6 million compared to the nine months ended September 30, 2005. This decrease was attributed primarily to the repayment of debt during 2004.

 

During the year ended December 31, 2004, cash provided by financing activities decreased $1.22 million compared to the year ended December 31, 2003. This decrease was attributed primarily to the reduction of credit facilities used to meet working capital requirements in Fiji.

 

During the year ended December 31, 2003, cash provided by financing activities decreased $4.2 million compared to the year ended December 31, 2002. This decrease was attributed primarily to an increase in our credit facility in Fiji.

 

Results of Operations, North America, including The Caribbean

 

On August 1, 2003, our underground boring and construction business became insolvent and we filed a voluntary petition for reorganization under Chapter 11 of Title 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Western District of Arkansas. On September 14, 2004, the Court confirmed our Plan of Reorganization. By virtue of the confirmation order, we emerged from bankruptcy and obtained a discharge pursuant to Section 1141 of the Bankruptcy Code. Our Plan of Reorganization implemented a comprehensive financial reorganization that significantly reduced our outstanding indebtedness. On January 30, 2006, as a result of the AST Acquisition and Datec Acquisition, Stanford our majority shareholder, contributed all of our outstanding indebtedness into equity. Due to our emergence from bankruptcy we have implemented the “fresh start” accounting provisions of AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code,” (“SOP 90-7”) to our financial statements.

 

- 73 -


Since all of our operations prior to 2006 were discontinued (and all of our related assets sold to unrelated third parties) the results of operations of these construction activities are described as follows:

 

Discontinued Operations. During the first quarter of 2005, the Company implemented a plan to discontinue substantially all of its current operations. The Company plans to generate future revenue by utilizing its remaining assets, consisting primarily of personal communication services licenses, and acquiring various telecom and technology company. Prior to January 2005, the Company was involved in other activities including: (i) setting up wireless internet capabilities in major hotel and apartment complexes, (ii) providing end-to-end infrastructure solutions for the wireless communication and cable television industries, which was comprised primarily of maintaining and constructing cell towers and (iii) providing underground horizontal directional boring technology and related underground construction services to telecommunication and cable television providers, water and sewer systems, and natural gas pipelines. As of September 30, 2005, the Company’s primary assets are personal communication services licenses.

 

Pursuant to a Merger Agreement dated May 20, 2004, on December 31, 2004, we merged with eLandia Technologies, Inc. (“Technologies”) by issuing 744,188 shares of our common stock to the stockholders of Technologies in exchange for their 744,188 shares of Technologies. As a result of this merger, Technologies became a wholly-owned subsidiary of the Company. Stanford Venture Capital Holdings (“SVCH”) was the majority stockholder of Technologies and the Company. To account for this common control, we have consolidated the operations of Technologies retroactively to September 14, 2004 in a format similar to a pooling of interests.

 

As a result of our emergence from bankruptcy and the application of fresh-start accounting, our consolidated financial statements for the periods commencing on September 15, 2004 are referred to as the “Successor Company” and will not be comparable with any periods prior to September 15, 2004, which are referred to as the “Predecessor Company” in this registration statement. All references to the periods ended September 30, 2005 and the period from September 15, 2004 to September 30, 2004 are to the Successor Company. All references to the period ended September 14, 2004, are to the Predecessor Company.

 

The following table sets forth our financial performance for the nine months ended September 30, 2005, from September 15, 2004 to September 30, 2004, from January 1, 2004 to September 14, 2004, from September 15, 2004 to December 31, 2004 and from January 1, 2004 to September 14, 2004. The data has been derived from our historical consolidated financial statements. The information contained in the following table should also be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations for our North American operating segment,” and our historical consolidated financial statements and related notes included elsewhere in this report.

 

Elandia, Inc. & Subsidiaries

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

UNAUDITED


  

For the Nine

Months Ended

September 30,
2005

(Successor
Company)


    From
September 15,
2004
to
September 30,
2004

(Successor
Company)


   

From
January 1,
2004
to

September 14,
2004

(Predecessor
Company)


    From
September 15,
2004
to
December 31,
2004

(Successor
Company)


    From
January 1,
2004
to
September 14,
2004

(Predecessor
Company)


 

REVENUE

   $     $     $     $     $  
    


 


 


 


 


COST AND EXPENSES

                                        

General, selling and administrative expenses

     2,656,285       151,161             1,125,072        
    


 


 


         


                                          

OPERATING LOSS

     (2,656,285 )     (151,161 )           (1,125,072 )      
    


 


 


 


 


OTHER (EXPENSE) INCOME

                                        

Interest expense

     (1,300,790 )     (49,618 )     (341,668 )     (145,101 )     (341,668 )

Reorganization items (including legal and trustee fees)

                     (596,250 )           (596,250 )

Gain on extinguishment of debt and other bankruptcy items

                     2,968,675             2,968,675  

Loss on abandonment of equipment

                     (887,395 )           (887,395 )

Fresh-start accounting adjustments

                     4,631,022             4,631,022  
    


 


 


 


 


LOSS INCOME FROM CONTINUING OPERATIONS

     (3,957,075 )     (200,779 )     5,774,384       (1,270,173 )     5,774,384  
                                          

DISCONTINUED OPERATIONS

                                        
    


 


 


 


 


Discontinued operations

     (1,088,963 )     (470,160 )     (3,950,931 )     (2,103,501 )     (3,950,931 )

Goodwill impairment

     (4,631,022 )                                

Loss on sale of machinery and equipment

     (1,799,915 )                                
    


                               

LOSS FROM DISCONTINUED OPERATIONS

     (7,519,900 )     (470,160 )     (3,950,931 )     (2,103,501 )     (3,950,931 )
    


 


 


 


 


NET LOSS

   $ (11,476,975 )   $ (670,939 )   $ 1,823,453     $ (3,373,674 )   $ 1,823,453  
    


 


 


 


 


Successor Company Nine Months Ended September 30, 2005 Compared to the Successor Company from September 15, 2004 to September 30, 2004 and Predecessor Company from January 1, 2004 to September 14, 2004.

 

General, Selling and Administrative Expenses. General, selling and administrative expenses for the nine months ended September 30, 2005 were $2.66 million, an increase of $2.51 million from the $0.15 million of general, selling and administrative expenses incurred in the period from September 15, 2004 to September 30, 2004 (Successor company) and from January 1, 2004 to September 14, 2004 (Predecessor Company). Included in general, selling and administrative expenses for nine months ended September 30, 2005 was $1.07 million of non-cash stock compensation. Included in general, selling and administrative expenses were salaries and wages received by management as well as legal, accounting and other professional services.

 

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Interest Expense. Interest expense for the nine months ended September 30, 2005 increased to $1.3 million from $0.39 million for the period from September 15, 2004 to September 30, 2004 (Successor company) and from January 1, 2004 to September 14, 2004 (Predecessor Company). This increase was due to the increased amount of debt incurred by the Company to fund its operations in 2005.

 

Other Income. Other income for the period from September 15, 2004 to September 30, 2004 (Successor company) and from January 1, 2004 to September 14, 2004 (Predecessor Company) was $5.43 million. Other income consisted of expenses and income adjustments of the Predecessor Company relating to the bankruptcy. Included in other income was a gain on extinguishment of debt in the amount of $2.97 million, a gain from fresh start accounting adjustments of $4.63 million, a loss on abandonment of machinery and equipment of $0.89 million and $0.6 million of expenses incurred as part of the reorganization.

 

Loss from Discontinued Operations. The loss from discontinued operations decreased to $1.09 million for the nine months ended September 30, 2005 from $4.42 million for the period from September 15, 2004 to September 30, 2004 (Successor company) and from January 1, 2004 to September 14, 2004 (Predecessor Company). This decrease was due to the efforts of management to reduce overhead expenses as part of plan to discontinue certain of its operations. The Company’s future plans are to generate income from its recently completed mergers with Datec Group Ltd. and AST Telecom LLC and by utilizing its remaining PCS assets.

 

Impairment Charge for Reorganization Value. An impairment charge for reorganization value of $4.63 million was recorded during the nine month period ending September 30, 2005. As part of its decision to discontinue certain of its operations and sell all equipment associated with its discontinued operations, the Company determined that the value of the machinery and equipment listed on its financial statements had been permanently impaired.

 

Loss on sale of machinery and equipment. During the nine month period ending September 30, 2005, the Company entered into an agreement to sell all of its machinery and equipment previously used in its discontinued operations. In conjunction with this sale, the Company recorded a loss of $1.8 million.

 

Successor Company from September 15, 2004 to December 31, 2004 and Predecessor Company from January 1, 2004 to September 14, 2004

 

General, Selling and Administrative Expenses. General, selling and administrative expenses from September 15, 2004 to December 31, 2004 (Successor Company) was $1.13 million. There was no general, selling and administrative expenses for the period from January 1, 2004 to September 14, 2004 (Predecessor Company) due to the classification of all general, selling and administrative expenses which occurred prior to September 14, 2004 as part of the loss from discontinued operations. Included in general, selling and administrative expenses were salaries and wages received by management as well as legal, accounting and other professional services.

 

Interest Expense. Interest expense from September 15, 2004, to December 31, 2004 was $145,101. Interest expense from January 1, 2004 to September 14, 2004 was $341,668. Interest expense was incurred on borrowings made by the Company as part of its Joint Plan of Reorganization.

 

Other Income. Other Income for the period from September 15, 2004 to September 30, 2004 (Successor company) and from January 1, 2004 to September 14, 2004 (Predecessor Company) was $5.43 million. Other income consisted of expenses and income adjustments of the Predecessor Company relating to the bankruptcy. Included in other income was a gain on extinguishment of debt in the amount of $2.97 million, a gain from fresh start accounting adjustments of $4.63 million, a loss on abandonment of machinery and equipment of $0.89 million and $0.6 million of expenses incurred as part of the reorganization.

 

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Loss from Discontinued Operations. The loss from discontinued operations for the period from September 14, 2004 to December 31, 2004 (Successor Company) was $2.10 million while the loss from discontinued operations for the period from January 1, 2004 to September 14, 2004 (Predecessor Company) was $3.95 million. The Company’s future plans are to generate income from its recently completed mergers with Datec Group Ltd. and AST Telecom LLC and by utilizing its remaining PCS assets.

 

Liquidity and Capital Resources

 

Operating Activities

 

Cash used in operating activities for the nine months ended September 30, 2005 was $957,268. This was a decrease of $1,722,178 from the combined net cash used in operating activities from the period from September 15, 2004 to September 30, 2004 (Successor Company) and the period from January 1, 2004 to September 14, 2004 (Predecessor Company). Cash used in operating activities for the period from September 15, 2004 to September 30, 2004 (Successor Company) was $623,750 and cash used in operating activities for the period from January 1, 2004 to September 14, 2004 (Predecessor Company) was $2,055,696. The use of cash from operating activities was primarily related to the Company’s discontinued operations.

 

Cash used in operating activities for the period from September 15, 2004 to December 31, 2004 was $4,388,150. The use of cash from operating activities was primarily related to the Company’s discontinued operations.

 

Investing Activities

 

Cash provided by investing activities for the nine months ended September 30, 2005 was $367,098. This consisted of proceeds form the sale of equipment in the amount of $1,032,840 offset by costs incurred as a result of the acquisition of Datec Group Ltd. and AST Telecom LLC in the amount of $646,600 and $19,142 of costs incurred for the Company’s intangible assets. Cash used in investing activities for the period from September 15, 2004 to September 30, 2004 (Successor Company) was $210,636 consisting of acquisition costs relating to the Company’s merger with Technologies.

 

Cash used in investing activities for the period from September 15, 2004 to December 31, 2004 (Successor Company) was $376,453. Of this amount, $311,917 related to the purchase of intangible assets and $64,536 related to the purchase of furniture and equipment. There was no investing activity for the period from January 1, 2004 to September 14, 2004 (Predecessor Company).

 

Financing Activities

 

Cash provided from financing activities for the nine months ended September 30, 2005 (Successor Company) was $594,871 which consisted of borrowings under the Company’s Revolver Facility in the amount of $1,200,000 offset by the repayment of bank loans in the amount of $605,129. Cash provided from financing activities for the period from September 15, 2004 to September 30, 2004 (Successor Company) was $629,120 which consisted of borrowings under the Company’s Revolver Facility in the amount of $650,000 offset by the repayment of bank loans in the amount of $20,880. For the period from January 1, 2004 to September 14, 2004 (Predecessor Company), cash provided from financing activities was $2,039,975 which consisted of borrowings under the Company’s Secured Revolver and Revolver Facility in the amount of $2,860,000 offset by the repayment of bank loans in the amount of $820,025.

 

Cash provided from financing activities for the period from September 15, 2004 to December 31, 2004 (Successor Company) was $4,486,162 which consisted of borrowings under the Company’s Promissory Note and Revolver Facility in the amount of $4,600,000 offset by the repayment of bank loans in the amount of $113,838.

 

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On February 10, 2006, we issued a promissory note to and entered into a note purchasing agreement with Stanford International Bank Limited (SIBL), an affiliate of our principal shareholder, in the principal amount of $2,300,000 for general working capital purposes. On February 10, 2006, we received $500,000 pursuant to the promissory note and draw-downs on the promissory note are available as follows: (i) $300,000 on or prior to March 31, 2006, (ii) $400,000 on or prior to March 31, 2006, (iii) $500,000 on or prior to June 30, 2006, (iv) $300,000 on or prior to September 30, 2006 and (v) $300,000 on or prior to December 31, 2006. The promissory note accrues interest at a rate of 8% per annum and is due on December 31, 2007. Interest payments under this note commence on April 1, 2006 and are payable on a quarterly basis. The principal amount of the note, together with any unpaid interest, is due in a single payment on December 31, 2007 or upon the occurrence of an equity or debt financing in excess of $8,000,000.

 

Future Capital Needs.

 

Our ability to meet our debt and working capital obligations will depend upon the future performance of our operating subsidiaries which will be affected by many factors, some of which are beyond our control. Based on our current level of operations, we anticipate that our operating cash flows and available credit facilities will be sufficient to fund our anticipated operational needs, for at least the next twelve months. We anticipate securing additional credit facilities to fund network and operational expansion in several of the markets in which we operate. If, however, we are unable to service our debt requirements as they become due or are unable to maintain ongoing compliance with restrictive covenants, we may be forced to adopt alternative strategies that may include reducing or delaying capital expenditures, selling assets, restructuring or refinancing indebtedness or seeking additional equity capital. There can be no assurances that any of these strategies could be effected on satisfactory terms, if at all.

 

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Disclosure About Operational Risks, All Geographic Segments

 

Due to the expected expansion of our networks and increased acquisitions, we depend on management to accurately assess the costs of these transactions or projects and to properly evaluate our ability to generate cash from these operations within a defined period of time. We operate primarily in emerging markets, which offer little economic history as a basis for making such assessments.

 

As a result of price-based competition in our relevant markets, management must continue to monitor the prices of our competitors and costs associated with long haul satellite charges. We rely upon IBM Global Services to negotiate on our behalf with our largest single data center tenant. Therefore, the pricing structure for data center services in Papua New Guinea and Fiji is not wholly controlled by management.

 

Recurring indicators and risks that could materially affect the results of our operations in any period, include unpredictable economic and business conditions and industry trends, changes in currency markets and international currency exchanges, changes in consumer disposable income and consumer spending levels, the acceptance by consumers of existing service offerings and new technology, our ability to adjust to advances in technology and to quickly incorporate new technology into our existing products and services, changes in the regulatory environment in which we operate, increased competition in our operating markets, our ability to develop programs to support new technologies in television and telecommunications, the ability of our suppliers and vendors to deliver products, equipment, software and services, the outcome of any pending or threatened litigation, the availability of qualified personnel, our ability to comply with existing or new laws and regulations, changes in our strategic partner relationships and relationships with our investment partners and increased terrorism and political unrest in certain regions of the world.

 

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Recent Accounting Pronouncements

 

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No . 3”. This Statement replaces APB Opinion No. 20, “Accounting Changes”, and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements”, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, this Statement requires that the new accounting principle be applied to the balance of the assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this Statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable. This Statement shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections made after the date this Statement is issued. We are in the process of assessing the effect of SFAS 154 and does not expect its adoption will have a material effect on our financial position or results of operations.

 

In March 2005, the FASB issued Financial Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143”. This Interpretation clarifies that the term “conditional asset retirement obligation” as used in FASB Statement No. 143 refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. An entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability should be recognized when incurred. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. This Interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. We do not expect to be impacted by the adoption of FIN 47, which will be effective for fiscal years ending after December 15, 2005.

 

Management does not believe that any recently issued, but not yet effective, accounting pronouncements if currently adopted would have a material effect on the accompanying consolidated financial statements.

 

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Item 3. Properties.

 

PROPERTY AND FACILITIES

 

We believe that our facilities are suitable and adequate, that they are being appropriately utilized in line with past experience and that they have sufficient capacity for their present intended purposes. We continuously review our anticipated requirements for facilities and, on the basis of that review, may from time to time acquire or lease additional facilities and/or dispose of existing facilities. A listing and description of our properties is set forth below:

 

Main Office

 

We lease approximately 2,302 square feet for our main office located at 1500 Cordova Road, Suite 300 in Fort Lauderdale, Florida. We pay rent of $58,000 per year under the lease. The lease expires on January 30, 2007. At our discretion, we may exercise an option to extend the lease for one additional term of three years.

 

Fiji

 

We lease approximately 9,634 square feet for our Fiji operations located at 18 Ackland Street in Vatuwaqa, Suva. We pay rent of approximately $48,427 per year under the lease. The lease commenced on April 1, 2005 and has a three year term. We may exercise three additional term renewal options at our discretion. The term for each such renewal is three years.

 

We lease approximately 10,706 square feet for our Fiji operations located at 68 Gordon Street in Suva. We pay rent of approximately $95,124 per year under the lease. The lease commenced on April 1, 2005 for a term of three years. At our discretion, we may exercise three additional term renewal options. The term for each such renewal is three years.

 

New Zealand

 

We lease approximately 2,582 square feet for our New Zealand operations located at 63 Albert Street in Auckland, New Zealand. We pay rent of approximately $35,953 per year under the lease. The lease commenced on January 1, 2005 for a term of three years. We have the right to renew for one additional three year term.

 

Papua New Guinea

 

We lease approximately 40,350 square feet for our Papua New Guinea operations located at Allotment 32 Section 38 in Hohola, N.C.D. We pay rent of approximately $510,000 per year under the lease. The lease terminates on March 31, 2010. We may exercise the option to renew for an additional term of five years at our discretion.

 

Solomon Islands

 

We lease approximately 1,011 square feet for our Solomon Islands operations located at 611 Mendana Avenue in Honiara. We pay rent of approximately $8,405 per year under the lease. The lease commenced on December 1, 2004 for a term two years. We have an option to extend our occupancy at the discretion of the landlord under the existing terms of the agreement.

 

- 80 -


Vanuatu

 

We lease approximately 514 square feet for our Vanuatu operations located at Shop 6 Ocean Walk, Father Lini Highway Port in Vila. We pay rent of approximately $21,831 per year under the lease.

 

Samoa

 

We lease approximately 679 square feet for our Samoa operations located in the Parker Building in Apia. We pay rent of $39,805 per year under the lease. The lease terminates on March 22, 2009. We may exercise the option to renew the lease at our discretion with the consent of the landlord.

 

Tonga

 

We lease approximately 3,327 square feet for our Tonga operations located at Shop 1, Fifita and Sons Shopping Centre in Nukualofa. We pay rent of approximately $16,414 per year under the lease. In connection with the Datec Merger, we assumed a lease agreement for this property for a term of five years. The lease terminates on April 26, 2007. We may exercise the option to renew the lease at our discretion with the consent of the landlord.

 

American Samoa

 

We lease approximately 6,752 square feet for our main offices in Nu’uuli Village. We pay rent of approximately $88,399 per year under the lease. The lease expires on January 31, 2016.

 

We lease approximately 700 square feet for our retail location in Pago Pago Village. We pay rent of approximately $9,324 per year under the lease. The lease expires on February 1, 2007.

 

 

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Item 4.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table contains information about the beneficial ownership of our common stock as of February 1, 2006 for:

 

    each stockholder known to us to beneficially own more than 5% of our common stock;

 

    each named executive officer;

 

    each named director; and

 

    all of such directors and officers as a group.

 

As of February 1, 2006 there were 22,323,089 outstanding shares of common stock.

 

Beneficial ownership is determined in accordance with the rules of the SEC and includes voting and investment power with respect to securities. Except as indicated by footnote, and subject to applicable community property laws, the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.

 

Name of Beneficial Owner        


   Beneficial Ownership

 
   Number of
Shares


   Percent of
Total


 

Stanford International Bank Ltd.

   9,777,513    43.8 %

W&R South Pacific, L.P. 1

   2,477,862    11.1 %

Barry Rose1

   2,477,862    11.1 %

Michael Ah Koy2

   2,217,022    9.9 %

Krishna Sami3

   1,380,174    6.2 %

Sydney D. Camper III

   978,200    4.3 %

Harley L. Rollins4

   180,002    *  

James Ah Koy5

   2,086,185    9.3 %

Richard Gozia

        *  

Osmo Hautanen

        *  

Winston Thompson

        *  

All current executive officers and directors as a group (8 persons)

           

1 Includes 2,477,862 shares held by W&R South Pacific, L.P., a limited partnership organized under the laws of Washington State, owned and controlled by W&R, Inc., an American Samoa corporation, which is wholly owned by Mr. Rose and his wife. Mr. Rose and his wife are the managing partners of W&R South Pacific. They exercise shared voting and investment power over the shares held by W&R South Pacific L.P.

 

2 Includes 141,377 shares held by Michael Ah Koy and 2,075,685 shares held by Kelton Investments Limited, a corporation existing under the laws of Fiji, of which the JMA Family Trust holds a 62% ownership interest. James Ah Koy is the trustee of the JMA Family Trust and Michael Ah Koy holds a 9.5% beneficiary interest in the JMA Family Trust. James Ah Koy is the managing member of Kelton Investments Limited and exercises voting and investment power over the shares held by Kelton Investments Limited.

 

3 Includes 1,357,178 shares held by Sami Holdings Ltd, a private company controlled by Krishna Sami.

 

4 Includes 90,001 shares held by Mr. Rollins, subject to certain repurchase rights set forth in the Stock Purchase Agreement, dated November 14, 2005.

 

5 Includes 10,500 shares held by James Ah Koy and 2,075,685 shares held by Kelton Investments Limited, a corporation existing under the laws of Fiji, of which the JMA Family Trust holds a 62% ownership interest. James Ah Koy is the trustee of the JMA Family Trust and Michael Ah Koy holds a 9.5% beneficiary interest in the JMA Family Trust. James Ah Koy is the managing member of Kelton Investments Limited and exercises voting and investment power over the shares held by Kelton Investments Limited.

 

* Indicates beneficial ownership of less than one percent of the total outstanding common stock.

 

- 82 -


Item 5. Directors and Executive Officers.

 

MANAGEMENT

 

Directors and Officers

 

Our executive officers and directors and their ages as of the date of this registration statement are as follows.

 

Name


   Age

    

Position


Michael Ah Koy

   43      Acting Chief Executive Officer and Chief Operating Officer

Harley L. Rollins

   34      Chief Financial Officer

Barry Rose

   53      President of Operations, American Samoa and Samoa

James Ah Koy

   69      Director

Sydney D. Camper III

   52      Director

Richard M. Gozia1

   61      Chairman of the Board of Directors

Osmo A. Hautanen2

   51      Director

Winston Thompson

   65      Director

 

1 Chairperson of the audit committee of our board of directors.

 

2 Chairperson of the governance, compensation and nominating compensation committee of our board of directors.

 

Michael Ah Koy serves as our acting Chief Executive Officer and our Chief Operating Officer. Prior to joining us, from January 2002 to February 2006, Mr. Ah Koy was chief executive officer of Datec Group Ltd. Mr. Ah Koy was a founding Director of Datec Fiji Ltd., formed in 1985. From 1985 to 1996, Mr. Ah Koy served in various capacities within Datec Group Ltd., including Marketing Director of Datec Fiji and General Manager of Datec Papua New Guinea (PNG) Pty Ltd. He currently serves as Chairman of Amalgamated Telikem Holdings PNG Pty Ltd., a joint venture between the Datec Group Ltd. and Steamships Trading Company Pty Ltd., a subsidiary of the Swire Group. Mr. Ah Koy has extensive commercial experience in Fiji and the South Pacific region and has served as director of a number of leading companies in the South Pacific. Mr. Ah Koy holds a Bachelor of Commerce from Auckland University. Mr. Ah Koy is the son of James Ah Koy, a member of our Board of Directors.

 

Harley L. Rollins has served as our Chief Financial Officer since September 2004. From January 2002 until September 2004, Mr. Rollins was President, Chief Executive Officer and Chairman of the Board of Directors of TVC Telecom, Inc., an international long distance carrier serving primarily the Caribbean and Latin America. From May 1997 to March 2001, Mr. Rollins served as chief financial officer of Technology Control Services, Inc. (TCS), a telecommunications software provider. During his tenure at TCS, Mr. Rollins also served as Managing Director of Interglobe Telecommunications, Ltd., a London-based telecommunications provider. From August 1996 to May 1997, Mr. Rollins was the Director of Finance, Treasury and External Reporting for US One Communications Corporation, a competitive local exchange carrier. From 1995 to 1996, Mr. Rollins served as Director of Finance and SEC Reporting at TresCom International, Inc., a publicly traded international telecommunications company. From 1993 to 1995 Mr. Rollins was an auditor and tax associate for Deloitte and Touche LLP. Mr. Rollins holds a Bachelor of Arts in Business Administration and a Masters in Accountancy from the University of Georgia.

 

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Barry Rose. Mr. Rose has served as President of Operations, American Samoa and Samoa since February 2006. Mr. Rose has served as President of the Board of Managers of AST Telecom since February 2004 and is responsible for our operations and development in both American Samoa and Samoa. Mr. Rose was Founder and Managing Partner of Rose Joneson Vargas, the leading commercial law firm in American Samoa and a member of the Pacific Legal Network, an association of the leading commercial law firms in the South Pacific. Mr. Rose holds a Juris Doctorate from Howard University Law School in Washington D.C. He is licensed to practice law in Virginia, Hawaii and American Samoa.

 

James M. Ah Koy. James M. Ah Koy has served as a member of our Board of Directors since December 2005. Mr. Ah Koy is the founder and still the Executive Chairman of Kelton Investment Ltd. and the Kelton Group of companies now comprising 10 active companies and 12 Datec companies that have been transferred to Elandia, Inc. Mr. Ah Koy presently serves as Senator for Kadavu Province in Fiji in the Upper House of Parliament: The Senate of Fiji. He has been in the House of Representatives and was first elected to the House of Representatives in 1982-1987; re-elected in May 1987 for five years; re-elected in February 1994 for five years and re-elected again in May 1999 for five years. In 1987 and 2000 two coups intervened his stint in the House of Representatives. During the period from 1994-1999 of the Rabuka Fiji Government, Mr. Ah Koy served in three cabinet positions: Minister for Commerce Industries and Public Enterprises; Minister for Youth Employment Opportunities and Sports; and Minister for Finance. As Minister for Finance of the Fiji Government, he was Governor and Representative for Fiji on the IMF/World Bank and the Asian Development Bank. In 1978, on December 30, Mr. Ah Koy was awarded an OBE (Order of the British Empire) by her Majesty Queen Elizabeth II of England and United Kingdom and received the Honours personally by her majesty the Queen at Buckingham Palace. The award was for services to Industry and Commerce in Fiji. In May 1985, Mr. Ah Koy was appointed Honorary Consul of Israel and resigned his appointment upon taking up a cabinet position in the Rabuka Government of Fiji. He has been Chairman and member of more than 20 Government and Statutory Boards of various successive Fiji Governments. Mr. Ah Koy is presently a Fellow of the Institute of Directors (UK) and a Fellow of the Chartered Institute of Marketing (UK).

 

Sydney D. Camper III has served as a Director since September 2003. He served as our President and Chief Executive Officer from September 2003 until February 8, 2006. Prior to joining us, from November 1999 to August 2003, Mr. Camper was a founder and Managing Member of Morgan-Dos Tower Development Company, a company he helped to build from inception, which later was sold to a Fortune 500 New York Stock Exchange company. From 1997 to 1999 Mr. Camper was a partner in TowerCom, a communication tower development and ownership company. From 1995 to 1997 Mr. Camper served as President of CCI Global Telecommunications, Inc., a Southeast-based wireless tower build-to-suit company. From 1994 to 1999, Mr. Camper was President and chief executive officer of The BELT Group, Inc., a company involved in capital acquisitions, mergers, management consulting, and franchise consulting.

 

Richard M. Gozia. Mr. Gozia has served as Chairman of our Board of Directors since December 2005. From June 2001 to January 2004, Mr. Gozia served as chief executive officer of Fenix LLC, a holding company with investments in technology companies. From May 1996 to November 1999, Mr. Gozia served as President and chief operating officer of CellStar Corporation, a global distributor of wireless telephone products. From 1994 to 1996, Mr. Gozia served as Executive Vice President and chief financial officer of SpectraVision, Inc., the largest in-room hotel movie provider. From 1978 to 1994 Mr. Gozia served in senior management positions with a variety of publicly held companies in the media, wholesale baking and restaurant industries. From 1970 to 1978, Mr. Gozia served as an Audit Manager with the certified public accounting firm of Arthur Young & Company. Mr. Gozia holds a Bachelor of Science degree in Accounting from the University of Missouri and is a certified public accountant. Mr. Gozia serves on the Board of Directors of Datrek Miller International, Inc., a golf products manufacturer headquartered in Nashville, Tennessee.

 

Osmo A. Hautanen. Mr. Hautanen has been a member of our board of directors since December 2005. Mr. Hautanen is currently the chief executive officer of Magnolia Broadband, Inc., a semiconductor company and innovator of radio frequency solutions for the cellular communications industry. From May 2000 to May 2001, Mr. Hautanen served as the chief executive officer of Fenix LLC, a holding company for Union Pacific Corporation’s technology assets, based in Dallas, TX. From 1998 to 2000, Mr. Hautanen also served as chief executive officer of Formus Communications, Inc., a broadband access provider of voice, video, data communications and information technology services in European markets. From 1996 to 1998, Mr. Hautanen served in various senior management capacities with Philips Electronics. From 1978 to 1996, Mr. Hautanen has held various management positions with Nokia. Mr. Hautanen holds a Master of Business Administration in International Business from Georgia State University and a Bachelor of Science in Control Engineering from Technical College of Varkaus in Finland. Mr. Hautanen serves on the Board of Directors of Datrek Miller International, Inc., a golf products manufacturer headquartered in Nashville, Tennessee.

 

Winston Thompson. Mr. Thompson has been a member of our board of directors since December 2005. From February 1995 to March 2005, Mr. Thompson served as chief executive officer of Telecom Fiji Ltd, Fiji’s sole domestic carrier. From February 1995 to March 1999, Mr. Thompson was Managing Director of Telecom Fiji Ltd’s predecessor company and is credited with its restructuring and modernization. Mr. Thompson has an extensive background with the Government of Fiji and has served as permanent secretary in a number of ministries and as Fiji’s Ambassador to the United Nations. Mr. Thompson serves as a director of Fiji Television Limited, Fiji Directories Limited and many other companies and also serves on various audit, governance, compensation and nominating committees.

 

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Board Structure

 

In connection with our acquisition of the South Pacific operating subsidiaries of Datec Group Ltd., consummated on February 1, 2006, Stanford International Bank, Ltd. and Kelton Investments Limited, owning approximately 53.7% of our common stock, entered into a voting agreement for the purpose of selecting our board of directors. Pursuant to the voting agreement, Stanford International Bank Ltd. and Kelton Investments Limited have agreed that for so long as each shall hold no less than three percent of the outstanding common stock of the Company, each shall vote and support jointly a nominee from each side for the Company’s Board of Directors.

 

Board Committees

 

Our Board of Directors has established standing committees in connection with the discharge of its responsibilities. These committees include an audit committee and a compensation committee. The Board of Directors may also establish such other committees as it deems appropriate, in accordance with applicable law and regulations, our certificate of incorporation and bylaws.

 

Audit Committee. The audit committee reviews our financial statements and accounting practices and makes recommendations to our Board of Directors regarding the selection of independent auditors. In addition, any transaction in which one of our directors has a conflict of interest must be disclosed to our board of directors and reviewed by the audit committee. The members of our audit committee are Mr. Gozia, Mr. Thompson and Mr. Hautanen. Mr. Gozia serves as chairperson and financial expert of the audit committee.

 

Governance, Compensation and Nominating Committee. The primary responsibilities of the governance, compensation and nominating committee are to:

 

    make compensation recommendations to the Board of Directors regarding salaries and incentive compensation for our officers and key employees and administer our employee benefit plans;

 

    recommend corporate governance guidelines to the Board of Directors;

 

    recommend and review director candidates to the Board of Directors;

 

    make compensation decisions regarding the Chief Executive Officer; and

 

    issue reports on executive compensation for Company financial reports and filings.

 

The governance, compensation and nominating committee will consist of at least three independent directors. The members of our governance, compensation and nominating committee are Mr. Gozia, Mr. Thompson and Mr. Hautanen. Mr. Hautanen serves as chairperson of the governance, compensation and nominating committee.

 

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Item 6. Executive Compensation.

 

EXECUTIVE COMPENSATION

 

The following table sets forth information concerning the total compensation that we paid to our acting chief executive officer and chief operating officer, our former chief executive officer, our former chief operating officer and our most highly compensated executive officers for the financial period ended December 31, 2005, except where the aggregate salary and bonus of such executive officer did not exceed $100,000. Aspects of this compensation are dealt with in the following table.

 

Summary Compensation Table

 

Annual Compensation


   Awards

 

Name and Principal Position


   Year

   Salary ($)

   Bonus ($)

  

Other Annual

Compensation ($)(1)


  

Restricted

Stock Awards


  

Securities

Underlying

Options/

SARs (#)


  

All Other

Compensation


 

Michael Ah Koy(2)

   2005    $ 132,280                     
Acting Chief Executive Officer and Chief Operating Officer    2004
2003
    
 
132,280
132,280
  
    
 

  
  
    
 

 
 
                                            

Harley L. Rollins

Chief Financial Officer

   2005
2004
2003
   $
 
 
175,000
58,333
  

   $
 
 
9,600
3,200
  

  

    
 
 


 
 
 
                                            

Michael McCutcheon(3)

General Manager, Datec PNG Pty Ltd.

   2005
2004
2003
   $
 
 
251,522
251,522
240,247
  

    
 
 


  

  

    
 
 


 
 
 
                                            

Sydney D. Camper III

Former Chief Executive Officer

   2005
2004
2003
   $
 
 
250,000
250,000
33,666
  

   $
 
 
9,600
1,600
  

  

    
 
 


 
 
 
                                            

Eddie Crowston(4)

Former Chief Operating Officer

   2005
2004
2003
   $
 
 
250,000
250,000
33,666
  

   $
 
 
4,800
1,600
  

  

   $
 
 
60,000

(5)
 
 

 

(1) Includes car allowance. Except as stated, perquisites and other personal benefits do not exceed the lesser of $75,000 and 25% of the total annual salary and bonus.

 

(2) Mr. Ah Koy was recently hired by the Company in connection with our arrangement with Datec Group Ltd., consummated on February 1, 2006. This salary amount represents compensation paid to Mr. Ah Koy by Datec Group Ltd. during the year ended December 31, 2005.

 

(3) Mr. McCutcheon was recently hired by the Company in connection with our arrangement with Datec Group Ltd., consummated on February 1, 2006. This salary amount represents compensation paid to Mr. McCutcheon by Datec Group Ltd. during the year ended December 31, 2005.

 

(4) As of June 30, 2005, due to the discontinuation of our construction operations, we entered into an agreement with Mr. Crowston to terminate his services. Pursuant to his employment agreement with the Company, Mr. Crowston is entitled to receive severance payments for a period of 12 months.

 

(5) Mr. Crowston was provided with a $60,000 advance for the purpose of relocation expenses. As of December 31, 2005 we had received receipts for relocation expenses in the amount of approximately $44,200. The $15,800 remaining balance was regarded as paid compensation.

 

 

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Harley L. Rollins Employment Agreement

 

On July 1, 2005, we entered into an Employment Agreement with Harley L. Rollins, our chief financial officer. The Employment Agreement has an initial term that expires five years from the effective date but will automatically be extended for successive two-year terms unless either party gives written notice no less than 120 days prior to the end of the term to the other party of the desire not to renew the Employment Agreement.

 

The Employment Agreement provides that Mr. Rollins will receive a base salary of $175,000 and is also eligible to earn an annual performance bonus if he meets the performance criteria set by our board of directors. During the period of employment, Mr. Rollins will also be entitled to additional benefits, including reimbursement of business expenses, paid vacation, an automobile allowance, a telephone allowance and participation in other company benefits, plans or programs that may be available to other executives or employees of our company.

 

In the event of a change in control, Mr. Rollins shall have the right to terminate his employment under the Employment Agreement by giving 30 days written notice at any time within one year of the change in control. In the event of such a termination, Mr. Rollins shall be entitled to severance in an amount equal to one-twelfth of his annual base salary for twelve months and a waiver of any lapse provisions of stock options or restricted stock grants, made by our company, that have vested.

 

If we terminate the Employment Agreement without cause (as defined in the Employment Agreement), Mr. Rollins is entitled to receive twelve months salary at the rate of his annual salary then in effect and a waiver of any lapse provisions of stock options or restricted stock grants made by the Company, that have since vested.

 

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Item 7. Certain Relationships and Related Transactions.

 

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

Since January 2002, we have not been a party to, and we have no plans to be a party to, any transaction or series of similar transactions in which the amount involved exceeded or will exceed $60,000 and in which any current director, executive officer, holder of more than 5% of our capital stock, or entities affiliated with them, had or will have a material interest other than in the transactions described below. The descriptions set forth below are qualified in their entirety by reference to the applicable agreements, copies of which are filed as exhibits to this registration statement.

 

Agreements with Stanford International Bank affiliates.

 

We have entered into certain agreements with Stanford International Bank Ltd., our principal stockholder and its affiliates.

 

Promissory Note with Stanford International Bank Ltd. On February 10, 2006, we issued a promissory note to and entered into a note purchasing agreement with Stanford International Bank Ltd. (SIBL), an affiliate of our principal shareholder, in the principal amount of $2,300,000 for general working capital purposes for the liquidity of our North American operations. On February 10, 2006, we received $500,000 pursuant to the promissory note and draw-downs on the promissory note are available as follows: (i) $300,000 on or prior to March 31, 2006, (ii) $400,000 on or prior to March 31, 2006, (iii) $500,000 on or prior to June 30, 2006, (iv) $300,000 on or prior to September 30, 2006 and (v) $300,000 on or prior to December 31, 2006. The promissory note accrues interest at a rate of 8% per annum and is due on December 31, 2007. Interest payments under this note commence on April 1, 2006 and are payable on a quarterly basis. The principal amount of the note, together with any unpaid interest, is due in a single payment on December 31, 2007 or upon the occurrence of an equity or debt financing in excess of $8,000,000.

 

Loan and Security Agreement with Stanford Venture Capital Holdings. On May 20, 2004, Elandia Technologies, our subsidiary entered into a one year loan and security agreement with Stanford Venture Capital Holdings, an affiliate of our principal stockholder. The loan and security agreement is collateralized by all of the assets of Elandia Technologies. Under the original terms of the loan and security agreement, the maximum principal amount available was $5,000,000 with interest to accrue at a rate of 8% per annum on the outstanding balance. The original maturity date of the loan and security agreement was May 19, 2005, prior to which time amounts could be repaid or borrowed again. On November 24, 2004, the maximum principal amount available under the loan was increased from $5,000,000 to $8,500,000. All other terms and conditions remained the same. Elandia Technologies was unable to repay the amount outstanding on the May 19, 2005 maturity date. In May 2005, Elandia Technologies received a modification and extension letter stipulating that the lender would convert the debt and related accrued interest into equity in connection with the acquisition of AST. In the event the acquisition was not consummated, the lender agreed not to demand repayment until May 2006. As of September 30, 2005, the outstanding borrowings under the loan and security agreement amounted to $8,500,000, whereas accrued interest, which is included in accounts payable and accrued expenses in the accompanying balance sheet amounted to $1,260,196. On September 15, 2005, the loan and security agreement, which had an outstanding balance of $3,000,000 on such date, was assumed by Elandia as part of our common control merger with Elandia Technologies.

 

Promissory Note with Stanford Financial Group. On September 1, 2004, Elandia Technologies, our subsidiary issued a promissory note to Stanford Financial Group, an affiliate of our principal stockholder, in the amount of $300,000 for the acquisition of PCS wireless licenses in the United States Virgin Islands and Bloomington, IL. We assumed this promissory note as part of the common control merger with Elandia Technologies effective September 15, 2005. This promissory note accrues interest at the rate of 8% per annum, requires quarterly interest payments and matures on August 31, 2007. We have not made any of the required quarterly interest payments subsequent to September 30, 2005. We have classified this promissory note as current, as it is deemed to be in default. As of September 30, 2005, we had accrued $26,926 as interest expense which has been included in accounts payable and accrued expenses in the accompanying balance sheet In May 2005, Elandia Technologies received a modification and extension letter stipulating that the lender would convert such debt and accrued interest into equity in connection with the acquisition of AST. In the event the acquisition was not consummated, the lender agreed not to demand repayment prior to the due date.

 

Secured Revolver Note with Stanford Venture Capital Holdings. Pursuant to a Debtor-in-Possession Financing Agreement executed on September 15, 2003, we borrowed $2,000,000 from Stanford Venture Capital Holdings, an affiliate of our principal stockholder, in a form of a secured, super priority line of credit bearing interest at 8% per annum and due on April 16, 2004. On October 25, 2004, we borrowed an additional $2,500,000 from Stanford Venture Capital Holdings under a supplemental super priority line of

 

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credit. On September 14, 2004, $2,000,000 of our obligations relating to the financing along with other secured claims and accrued interest amounting to $576,682 were converted into common stock as part of our plan of reorganization. On October 25, 2004, $2,500,000 of obligations relating to our financing was converted into a secured revolver note with Stanford Venture Capital Holdings. The secured revolver note is due on October 24, 2005 and bears interest at the rate of 8% per annum. Substantially all of our assets and subsidiaries were pledged as collateral under the secured revolver note agreement. In May 2005, we received a modification and extension letter stipulating that the lender would convert the debt and related accrued interest into equity in connection with the acquisition of AST. In the event the acquisition was not consummated, the lender agreed not to demand repayment until May 2006. The secured revolver note contains restrictions and financial covenants relating to, among other things, limitations on the incurrence of additional indebtedness and liens, asset sales, and capital expenditures. As of September 30, 2005, accrued interest amounted to $254,746 which has been included in accounts payable and accrued expenses in the accompanying balance sheet.

 

Contribution of Related Party Debt to Equity

 

On January 30, 2006, in connection with our acquisitions completed on January 31, 2006 and February 1, 2006, Stanford Venture Capital Holdings and Stanford Financial Group, affiliates of our principal stockholder, converted all of our outstanding debt and accrued interest owed to them into equity.

 

AST Acquisition

 

On September 15, 2004, Elandia and AST were combined by virtue of a common control merger. On January 31, 2006, we acquired all of the outstanding share capital of AST Telecom, L.L.C from W&R South Pacific, L.P. and Stanford International Bank Ltd.. Barry Rose, the president of our American Samoa and Samoa operations, is a managing partner of W&R South Pacific L.P. and holds a 50% interest in the partnership. Stanford International Bank is our principal stockholder.

 

Release of Collateral Security

 

On January 30, 2006 Stanford International Bank Ltd, our principal shareholder and owner and holder of various promissory notes and security agreements acknowledged the full release and satisfaction of certain of our outstanding indebtedness as set forth in certain loan instruments or their respective amendments including: (i) Loan and Security Agreement, dated May 20, 2004, (ii) Renewal Revolver Promissory Note, dated November 24, 2004, (iii) Secured Revolver Note, dated October 25, 2004, (iv) Security Agreement, dated as of October 25, 2004 and (v) Promissory Note in the principal amount of $300,000.

 

Real Property Sale and Leaseback

 

In March, 2005 Datec Fiji Ltd. sold to Kelton Investments Ltd. certain real estate property located in Fiji for a purchase price of approximately $2,000,000. James Ah Koy, our director and father of Michael Ah Koy, our chief operating officer, is a director and controlling shareholder of Kelton Investments Ltd. These properties are utilized for our operations in Fiji.

 

Indemnification Agreements

 

We have entered into an indemnification agreement with each of our directors and officers. The indemnification agreements, our certificate of incorporation and bylaws allow us to indemnify our directors and officers to the fullest extent permitted by Delaware law.

 

Equity Sales and Grants

 

In August 2005, our Board of Directors authorized and our stockholders approved a 10-for-9 reverse stock split. Although the documents that have been previously filed by us as exhibits that pertain to the transactions set forth below contain pre-split numbers, in order to accurately reflect what is held by our shareholders currently, the numbers discussed below reflect the post-split number of shares.

 

Datec Merger. In February 2006, pursuant to an arrangement under Section 128 of the New Brunswick Business Corporations Act pursuant to which the shares of Datec Pacific Holdings Ltd. were exchanged for shares of the registrant, we issued 6,808,542 shares of common stock to the shareholders of Datec Pacific Holdings Ltd. These shares were deemed to be exempt from registration under the Securities Act in reliance on Section 3(a)(10) of the Securities Act of 1933.

 

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AST Acquisition. In January 2006, pursuant to the merger between the registrant and American Samoan Telecom LLC, a closely held limited liability company, we issued 7,042,875 shares of common stock in exchange for all of the issued and outstanding membership interests of such company. These shares were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering.

 

Elandia Technologies Merger. In December 2004, pursuant to our merger with Elandia Technologies, Inc., we issued 744,188 shares of our common stock in exchange for all of the issued and outstanding shares of Elandia Technologies, Inc. These shares were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering.

 

Reorganization. On September 14, 2004, pursuant to our plan of reorganization, we issued 6,705,000 shares of our common stock, par value $.0001 per share. Additionally, certain of our creditors received warrants to purchase an aggregate of approximately 3,127,500 shares of common stock at an exercise price of $.00001 per share. These shares were deemed to be exempt from registration under the Securities Act in reliance on the provisions of Section 1145 of the Bankruptcy Code.

 

In July 2005 and in connection with Mr. Rollins’ offer of employment by us, we entered into a Stock Subscription Agreement with Harley L. Rollins, our chief financial officer for the purchase of 90,001 shares of our restricted common stock. On each of October 31, 2005 and November 14, 2005, in accordance with this Stock Subscription Agreement and pursuant to a Stock Purchase Agreement, we issued to Mr. Rollins 90,001 shares of our common stock for an aggregate total of 180,002 shares at an aggregate purchase price of $200.00. The ownership of these shares is subject to certain repurchase rights set forth in the Stock Purchase Agreement.

 

In September 2003 and in connection with Mr. Camper’s offer of employment by us, Sydney D. Camper III, our former chief executive officer, was granted the option to purchase up to 506,250 shares of our common stock at a purchase price of $.001 per share. On May 20, 2004, pursuant to a Stock Purchase Agreement we issued to Mr. Camper 506,250 shares of our common stock for the aggregate purchase price of $562.50. The ownership of these shares is subject to certain repurchase rights set forth in the Stock Purchase Agreement.

 

Lock Up Agreement

 

W&R and W&R Partners Lock-up Agreement. In connection with our acquisition of AST, certain of our shareholders have entered into a lock-up agreement, pursuant to which they will not transfer their shares of Elandia for a period of two years. In accordance with this agreement, any transfers following the two year period shall be subject to resale restrictions prescribed by applicable securities laws, including volume limitations and other requirements of SEC Rule 144. Under this lock-up agreement, these shareholders were granted the right to transfer an aggregate of up to 100,000 shares of the Elandia stock per calendar quarter during the final six months of the two year period, provided that the Company has filed its Annual Report on Form 10-KSB for the year ended December 31, 2006 at such time. Such transfer(s) of the Company must comply with the volume limitations set forth in Rule 144. A total of 2,477,863 such shares will be eligible for sale under Rule 144 commencing on February 1, 2008.

 

Datec Lock-up Agreement. In connection with the Datec merger, certain of our shareholders have entered into a lock-up agreement pursuant to which they will not transfer their shares of Elandia for a period of two years. In accordance with this agreement, any transfers following the two year period shall be subject to resale restrictions prescribed by applicable securities laws, including volume limitations and other requirements of SEC Rule 144. Under this lock-up agreement , certain shareholders of Datec South Pacific Holdings, Ltd. were granted the right to transfer any or all of their shares of Elandia stock through privately negotiated sales prior to February 1, 2006 if the person or entity receiving shares of the Company stock agreed to be bound by the terms of this lock-up agreement. These shareholders of Datec South Pacific Holdings, Ltd. were also given the right to vote all of their shares of the Elandia stock and are entitled to all dividends or distribution rights in connection with their shares of Elandia stock.

 

Voting Agreement

 

In connection with our acquisition of the South Pacific operating subsidiaries of Datec Group Ltd., consummated on February 1, 2006, Stanford International Bank, Ltd. and Kelton Investments Limited, owning approximately 53.7% of our common stock, entered into a voting agreement for the purpose of selecting our board of directors. Pursuant to the voting agreement, Stanford International Bank Ltd. and Kelton Investments Limited have agreed that for so long as each shall hold no less than three percent of the outstanding common stock of the Company, each shall vote and support jointly a nominee from each side for the Company’s Board of Directors.

 

 

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Item 8. Legal Proceedings.

 

LEGAL PROCEEDINGS

 

Amalgamated Telikom Holdings PNG Pty Ltd. Our subsidiary Datec PNG Pty Ltd is party to an action as a 50% partner in Amalgamated Telikom Holdings PNG Pty Ltd. Amalgamated Telikom Holdings PNG Pty Ltd. was created as a joint venture between Amalgamated Telecom Holdings Limited of Fiji and Datec PNG Pty Ltd. Amalgamated Telikom Holdings PNG Pty Ltd has initiated an action for damages against the State of Papua New Guinea and the Independent Public Business Corporation of PNG for their breach of a Share Acquisition Agreement, dated July 31, 2002, in connection with Amalgamated Telikom Holdings PNG Pty Ltd’s successful bid to acquire 51% of the outstanding shares of Telikom PNG Pty Ltd. Telikom PNG Pty Ltd is a wholly-owned limited liability company, with a monopoly in the provision of fixed and mobile telephone services in Papua New Guinea. Amalgamated Telikom Holdings PNG Pty Ltd. is seeking damages in this proceeding for expenditures incurred in the bidding process, lost profits and revenue and efforts and funds expended for the sole benefit of Telikom PNG Pty Ltd. No court appointment to try this case has been determined.

 

Cornerstone Businesses Inc. On February 6, 2006, we were sued in the Sixth Judicial Circuit Court in Pasco County, Florida by Cornerstone Businesses, Inc. in a complaint related to a subcontractor agreement between Cornerstone Businesses, Inc. and Midwest Cable Communications of Arkansas, Inc.  Cornerstone Businesses, Inc. seeks relief based upon claims of breach of contract, tortious interference with a contractual right, tortious interference with a business relationship and fraud and negligent misrepresentation. The complaint seeks unspecified monetary damages, including pre-judgment interest and costs. We believe that the claims alleged in the complaint are without merit and we intend to vigorously defend against this complaint.

 

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Item 9. Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters.

 

There is and has been no established public trading market for our common stock.

 

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RECENT SALES OF UNREGISTERED SECURITIES

 

In August 2005, our Board of Directors authorized and our shareholders approved a 10-for-9 reverse stock split. Although the documents that have been previously filed by us as exhibits that pertain to the transactions set forth below contain pre-split numbers, in order to accurately reflect what is held by our shareholders currently, the numbers discussed below reflect the post-split number of shares.

 

Datec Merger. In February 2006, pursuant to an arrangement under Section 128 of the New Brunswick Business Corporations Act pursuant to which the shares of Datec Pacific Holdings Ltd. were exchanged for shares of the registrant, we issued 6,808,542 shares of common stock to the shareholders of Datec Pacific Holdings Ltd.. These shares were deemed to be exempt from registration under the Securities Act in reliance on Section 3(a)(10) of the Securities Act of 1933.

 

AST Acquisition. In January 2006, pursuant to the merger between the registrant and AST Telecom LLC, a closely held limited liability company, we issued 7,042,875 shares of common stock in exchange for all of the issued and outstanding membership interests of such company. These shares were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering.

 

Elandia Technologies Merger. In December 2004, pursuant to our merger with Elandia Technologies, Inc., we issued [1,822,500] shares of our common stock in exchange for all of the issued and outstanding shares of Elandia Technologies, Inc. These shares were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering.

 

Reorganization. On September 14, 2004, pursuant to our plan of reorganization, we issued [6,525,000] shares of our common stock, par value $.0001 per share. Additionally, certain of our creditors received warrants to purchase an aggregate of approximately 3,127,500 shares of common stock at an exercise price of $0.001 per share. These shares were deemed to be exempt from registration under the Securities Act in reliance on the provisions of Section 1145 of the Bankruptcy Code.

 

Stock Options. Between September 19, 2003 and December 31, 2005, we issued options to two of our executive officers, to purchase up to an aggregate total of 686,250 shares of our common stock under our stock option plan. The exercise price was $.001 per share. No consideration was paid to us by any recipient of any of the foregoing options for the grant of such options. As of February 1, 2006 the option holders had exercised options for an aggregate of 686,250 shares and we received an aggregate total of $762.50 upon the exercise of such options. There were no underwriters employed in connection with any of these transactions. The sales and issuances of securities listed above were deemed to be exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) by virtue of Rule 701 promulgated under Section 3(b) of the Securities Act as transactions pursuant to compensation benefit plans and contracts relating to compensation.

 

In July 2005 and in connection with Mr. Rollins’ offer of employment by us, we entered into a Stock Subscription Agreement with Harley L. Rollins, our chief financial officer for the purchase of 90,001 shares of our restricted common stock. On each of October 31, 2005 and November 14, 2005, in accordance with this Stock Subscription Agreement and pursuant to a Stock Purchase Agreement, we issued to Mr. Rollins 90,001 shares of our common stock for an aggregate total of 180,002 shares at an aggregate purchase price of $200.00. The ownership of these shares is subject to certain repurchase rights set forth in the Stock Purchase Agreement.

 

In September 2003 and in connection with Mr. Camper’s offer of employment by us, Sydney D. Camper III, our former chief executive officer, was granted the option to purchase up to 506,250 shares of our common stock at a purchase price of $.001 per share. On May 20, 2004, pursuant to a Stock Purchase Agreement we issued to Mr. Camper 506,250 shares of our common stock for the aggregate purchase price of $562.50. The ownership of these shares is subject to certain repurchase rights set forth in the Stock Purchase Agreement.

 

- 93 -


Item 11. Description of Registrant’s Securities to be Registered.

 

DESCRIPTION OF REGISTRANT’S SECURITIES TO BE REGISTERED

 

Common Stock

 

Our certificate of incorporation authorizes the issuance of 50,000,000 non-assessable shares of common stock, par value $.0001 per share, of which approximately 22,323,089 shares were outstanding as of February 5, 2006 and held by 366 shareholders of record.

 

Holders of common stock have equal rights to receive dividends when and if declared by our board of directors, out of funds legally available for dividend payments. Holders of common stock have one vote for each share held of record and do not have cumulative voting rights. Holders of common stock do not have the preemptive right to acquire additional shares or other shares of the Corporation. Holders of common stock are entitled, upon liquidation of the registrant, to share ratably in the net assets available for distribution. Shares of common stock are fully paid and non-assessable.

 

No dividends have been paid by the registrant since its inception nor is the payment of dividends contemplated in the foreseeable future. The payment of any future dividends will be directly dependent upon the registrant’s earnings, financial needs and other similar factors. The registrant expects to retain all earnings to finance and develop future business.

 

Transfer Agent

 

The transfer agent and registrar for our common stock is Nevada Agency and Trust Company, located at 50 West Liberty Street, Reno, Nevada, 89501.

 

- 94 -


Item 12. Indemnification of Directors and Officers.

 

INDEMNIFICATION OF DIRECTORS AND OFFICERS

 

Our certificate of incorporation and bylaws contain provisions that limit the liability of our directors, officers and certain persons serving at the request of the Corporation for monetary damages to the fullest extent authorized by Delaware law.

 

Our bylaws also provide that we shall advance expenses incurred by such director, officer, employee or agent in defending a civil or criminal action, suit, or proceeding in advance of the final disposition of any action or proceeding, and permit us to purchase and maintain insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in that capacity, regardless of whether our bylaws would otherwise permit indemnification.

 

We have entered into and expect to continue to enter into agreements to indemnify our directors, officers and other employees as determined by our board of directors. These agreements provide for indemnification for related expenses including attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. We believe that these bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. We have secured and maintain directors’ and officers’ liability insurance.

 

Consequently, our directors and officers will not be personally liable to us or our stockholders for any liability arising out of their actions or breach of fiduciary duties in such capacity, except liability for the following:

 

    Any proceeding (or part thereof) initiated by a director or officer not first authorized by our board of directors.

 

    Any breach of their duty of loyalty to the Corporation or its stockholders.

 

    Any conduct adjudged to have been a failure of such director or officer to act in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the Corporation.

 

    Any transaction from which the director or officer derived an improper personal benefit.

 

    Unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law.

 

    Any conduct adjudged to have been intentional misconduct or a knowing violation of the law.

 

A stockholder’s investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions. At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents, regarding which indemnification is sought, and we are not aware of any threatened litigation that may result in claims for indemnification.

 

- 95 -


Item 13. Financial Statements and Supplementary Data.

 

ELANDIA, INC. AND SUBSIDIARIES

 

CONTENTS

Index to Financial Statements

 

    

Page


Financial Information Elandia, Inc. Unaudited Pro Forma, as of September 30, 2005 and for the Nine Months Ended September 30, 2005 and the Year ended December 31, 2004

    

Introduction to Unaudited Pro Forma Financial Information.

   F-2

Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2005

   F-3

Pro Forma Condensed Consolidated Statement of Operations for the Nine Months Ended September 30, 2005

   F-4

Pro Forma Condensed Consolidated Statement of Operations for the Year Ended December 31, 2004

   F-5

Notes to Pro Forma Condensed Consolidated Financial Statements

   F-6–9

Elandia Technologies Inc. and Subsidiary

    

Report of Independent Registered Public Accounting Firm

   F-11

Consolidated Balance Sheet, September 14, 2004

   F-12–13

Consolidated Statement of Operations, From October 1, 2003 (date of inception) to September 14, 2004

   F-14

Consolidated Statement of Stockholders’ Deficiency-From October 1, 2003 (Date of Inception) to September 14, 2004

   F-15

Consolidated Statement of Cash Flows, From October 1, 2003 (Date of Inception) to September 14, 2004

   F-16–17

Notes to Consolidated Financial Statements

   F-19–28

Elandia Inc. and Subsidiaries

    

Report of Independent Registered Public Accounting Firm

   F-55–56

Consolidated Balance Sheet, December 31, 2004 (Successor Company)

   F-57

Consolidated Statements of Operations, From January 1, 2004 to September 14, 2004 (Predecessor Company) and from September 15, 2004 to December 2004 (Successor Company)

   F-58

Consolidated Statement of Stockholders’ Deficiency From January 1, 2004 to September 14, 2004 (Predecessor Company) and From September 15, 2004 to December 31, 2004 (Successor Company).

   F-59

Consolidated Statement of Cash Flows From January 1, 2004 to September 14, 2004 (Predecessor Company) and From September 15, 2004 to December 31, 2004 (Successor Company).

   F-60–61

Notes to Consolidated Financial Statements

   F-62–69

Condensed Consolidated Balance Sheets, September 30, 2005, Unaudited and December 31, 2004.

   F-55–56

Condensed Consolidated Statements of Operations:

   F-57

For the Nine Months Ended September 30, 2005 and From January 1, 2004 to September 14, 2004 (Predecessor Company) and From September 15, 2004 to September 30, 2004 (Successor Company)-Unaudited

  

F-58

Condensed Consolidated Statement of Stockholders’ Deficiency for the Nine Months Ended September 30, 2005-Unaudited

  

F-59

Condensed Consolidated Statement of Cash Flows, For the Nine Months Ended September 30, 2005 and From January 1, 2004 to September 14, 2004 (Predecessor Company) and From September 15, 2004 to September 30, 2004 (Successor Company)-Unaudited

  


F-60–61

Notes to Unaudited Condensed Consolidated Financial Statements

   F-62–69

AST Telecom L.L.C. For the Years Ended December 31, 2003 and December 31, 2004

    

Independent Auditor’s Report

   F-71

Balance Sheet

   F-72

Statement of Income and Members’ Equity

   F-73

Statement of Cash Flows

   F-74

Notes to Financial Statements

   F-75–79

AST Telecom L.L.C. For the Years Ended December 31, 2002 and December 31, 2003

    

Independent Auditor’s Report

   F-81

Balance Sheet

   F-82

Statement of Income and Members’ Equity

   F-83

Statement of Cash Flows

   F-84

Notes to Financial Statements

   F-85–87

AST Telecom L.L.C. For the Nine Months Ended September 30, 2005

    

Accountant’s Report

   F-89

Balance Sheet

   F-90

Statement of Operations and Members’ Equity

   F-91

Statement of Cash Flows

   F-92

Notes to Financial Statements

   F-93–97

Datec Group Ltd. Consolidated Financial Statements for the Year Ended December 31, 2004 and the Year Ended December 31, 2003.

    

Auditors’ Report

   F-99

Consolidated Balance Sheets

   F-100

consolidated Statements of Earnings (Loss)

   F-101

consolidated Statements of Deficit

   F-102

Consolidated Statements of Cash Flows

   F-103

Notes to Consolidated Financial Statements

   F-104–125

Brocker Technology Group Ltd. Consolidated Financial Statements for the Year Ended December 31, 2002 and the Year Ended December 31, 2001.

    

Auditors’ Report

   F-141

Consolidated Balance Sheets

   F-142

Consolidated Statements of Earnings (Loss)

   F-143

Consolidated Statements of Deficit

   F-144

Consolidated Statements of Cash Flows

   F-145

Notes to Consolidated Financial Statements

   F-146–168

Datec Group Ltd. Interim Consolidated Financial Statements as at September 30, 2005.

    

Auditors’ Report

   F-127

Consolidated Balance Sheets

   F-128

consolidated Statements of Earnings (Loss)

   F-129

consolidated Statements of Deficit

   F-130

Consolidated Statements of Cash Flows

   F-131

Notes to Consolidated Financial Statements

   F-132–139

 

- 96 -


ELANDIA, INC.

 

Unaudited Pro Forma Financial Information

 

As of September 30, 2005

 

And for the

 

Nine months ended September 30, 2005 and for the year ended December 31, 2004

 

F-1


ELANDIA, INC.

 

INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL INFORMATION

 

(Thousands)

 

The accompanying unaudited pro forma condensed consolidated financial statements give effect to the following two acquisition transactions, which form part of a Plan of Arrangement.

 

  i) On January 31, 2006, Elandia, Inc., a non-public Delaware corporation (“Elandia”), consummated the acquisition of 100% of the membership interest of American Samoa Telecom, LLC (“AST”). AST is headquartered in Pago Pago, American Samoa and operates under the brand name of Blue Sky Communications. AST is a provider of wireless telephone services in American Samoa via its wireless network. AST is majority owned (approximately 65%) by Stanford International Bank, Ltd. (“SIBL”). SIBL, a majority stockholder of Elandia, owned approximately 83% of the outstanding common stock Elandia immediately before the consummation of the acquisition.

 

  ii) On February 1, 2006, Elandia consummated the acquisition of certain operating subsidiaries of Datec Group Ltd. (“Datec”), a publicly traded company on the Toronto Stock Exchange. (“TSX Exchange”). Datec is a provider of information technology and services in Australia, Fiji, New Zealand, Papua New Guinea, Samoa, the Solomon Islands, Tonga, and Vanuatu.

 

Prior to the Plan of Arrangement, SIBL contributed approximately $12,842 of debt and related interest into capital of Elandia.

 

The acquisition of Datec will be accounted for under the purchase of accounting method whereas the acquisition of AST will be accounted for as a common control merger (historical basis) for the portion owned by SIBL (approximately 65%), and purchase accounting will be used to account for the acquisition of the minority owned (35%) interest.

 

The unaudited pro forma condensed consolidated balance sheet at September 30, 2005 combines Elandia, Datec and AST as if the two acquisitions were consummated on September 30, 2005. The unaudited pro forma condensed consolidated statements of operations combine the results of operations of Elandia, Datec and AST for the nine months ended September 30, 2005 and for the year ended December 31, 2004 as if the acquisition of Datec and AST were consummated effective January 1, 2004.

 

The unaudited pro forma condensed consolidated financial statements have been prepared from information derived from, and should be read in conjunction with, the audited historical financial statements of Elandia, Datec and AST for the year ended December 31, 2004 and the unaudited historical financial statements of Elandia, Datec and AST for the nine months ended September 30, 2005 included elsewhere in this registration statement. This pro forma financial information is being provided solely for information purposes and is not necessarily indicative of the consolidated financial position, or the consolidated results of operations which might have existed for the periods indicated or the results of operations as they may be in the future. The acquisition of Datec and the minority interest of AST will be accounted for under the purchase method of accounting, accordingly, the assets and liabilities have been restated at their fair value with any excess assigned to identifiable intangible assets with any remaining amount attributed to goodwill.

 

We anticipate incurring increased expenses related to our expected new corporate management, increased costs associated with being a public company, and coordinating the integration of the entities acquired. We also expect to put in place certain cost cutting programs which may offset some of these additional costs. We have not yet quantified these costs and savings since the acquisitions have just recently closed. Accordingly, these savings and associated costs have not been included in the unaudited pro forma financial information.

 

The pro forma financial statements have not been audited or reviewed by any of the Independent Registered Public Accounting firms of companies which are parties to the transaction.

 

F-2


Elandia, Inc.

Pro Forma Condensed Consolidated Balance Sheet

September 30,2005

(unaudited)

 

                Datec

             
     Elandia(a)

    AST(b)

   Consolidated(c)

   

Less Assets

and Liabilities

Not Subject

to Plan of

Arrangement


   

Assets and

Liabilities

Subject to

Plan of

Arrangement


   

Assets and

liabilities

subject to

Plan of

Arrangement


   

Pro Forma

Adjustments


   

Pro Forma

Consolidated


 

(thousands)


   USD $

    USD $

   CDN $

    CDN $

    CDN $

    USD $

    USD $

    USD $

 
     (1)     (2)                      (3)     (4)     (1+2+3+4)  

ASSETS

                                                               

Current Assets

                                                               

Cash

   $ 21     $ 73    $ 313     $ (14 )   $ 299     $ 258     $       $ 352  

Accounts Receivable, net

     —         215      6,080       —         6,080       5,236               5,451  

Inventories

     —         426      4,447       —         4,447       3,830               4,256  

Deferred Tax Asset

     —         —        —         —         —         —                    

Other Current Assets

     —         355      2,315       (87 )     2,228       1,919               2,274  

Assets held for sale

     1,283       —        —         —         —         —                 1,283  
    


 

  


 


 


 


 


 


Total Current Assets

     1,304       1,069      13,155       (101 )     13,054       11,243               13,616  

Property, Plant & Equipment

     140       5,466      5,514       —         5,514       4,749               10,355  

Intangible Assets - Other

     1,471       —        11,121       (10,882 )     239       206               1,677  

Deferred Tax Asset

     —         —        815       —         815       702               702  

Customer Lists

                                                    2,805 (e)     3,900  
                                                      1,095 (f)        

Contract Rights

                            —         —         —         2,805 (e)     3,900  
                                                      1,095 (f)        
                                                                 
                                                                 

Goodwill

     —         —        —         —         —                 5,610 (e)     10,920  
                                                      2,190 (f)        
                                                      3,120 (g)        
    


 

  


 


 


 


 


 


Total Assets

   $ 2,915     $ 6,535    $ 30,605     $ (10,983 )   $ 19,622     $ 16,900     $ 18,720     $ 45,070  
    


 

  


 


 


 


 


 


LIABILITIES AND STOCKHOLDERS’ EQUITY

                                                               

Current Liabilities

                                                               

Short -Term Debt

   $ —       $ 57    $ 2,028     $ —       $ 2,028     $ 1,747     $ —       $ 1,804  

Accounts payable

     726       1,009      5,084               5,084       4,379               6,114  

Accrued Liabilities

     279       254      4,117       (122 )     3,995       3,441               3,974  

Deferred Revenue

     —         —        1,406               1,406       1,211               1,211  

Line of Credit

     —         891                              —                 891  

Liabilities of Discontinued Operations

     2,446       —                                —                 2,446  

Taxes Payable

     —         —        1,215               1,215       1,046               1,046  

Current Portion of Long-Term Debt

     —         —        901       (539 )     362       312               312  
    


 

  


 


 


 


 


 


Total Current Liabilities

     3,451       2,211      14,751       (661 )     14,090       12,136       —         17,798  
    


 

  


 


 


 


 


 


Long-Term Debt

     —         774      58               58       50               824  

Deferred Revenue

             224      —                                         224  

Deferred Tax Liability

     —         —        —         —         —         —         3,120 (g)     3,120  

Long-Term Debt-Related Party

     12,842       —                —         —         —         (12,842 )(d)     —    
    


 

  


 


 


 


 


 


Total Long Term Liabilities

     12,842       998      58       —         58       50       (9,722 )     4,168  
    


 

  


 


 


 


 


 


Total Liabilities

     16,293       3,209      14,809       (661 )     14,148       12,186       (9,722 )     21,966  
    


 

  


 


 


 


 


 


Minority Interest

     —         —        793       —         793       683       —         683  
    


 

  


 


 


 


 


 


Stockholders’ Equity

                                                               

Members Interest

     —         3,326                              —         (3,326 )(g)     —    

Common Stock

     1       —        36,832       (21,100 )     15,732       13,549       (13,549 )(e)     1  

Additional paid-in capital

     5,314       —                                        15,251 (e)     41,113  
                                                      7,706 (f)        
                                                      12,842 (d)        

Accumulated deficit

     (18,693 )     —        (22,464 )     11,169       (11,295 )     (9,728 )     9,728 (e)     (18,693 )

Foreign currency translation adjustment

     —         —        635       (391 )     244       210       (210 )     —    
    


 

  


 


 


 


 


 


Total Stockholders’ equity

     (13,378 )     3,326      15,003       (10,322 )     4,681       4,031       28,442       22,421  
    


 

  


 


 


 


 


 


Total Liabilities and Stockholders’ Equity

   $ 2,915     $ 6,535    $ 30,605     $ (10,983 )   $ 19,622     $ 16,900     $ 18,720     $ 45,070  
    


 

  


 


 


 


 


 


 

F-3


Elandia, Inc.

Pro Forma Condensed Consolidated Statement of Operations

For the Nine Months Ended September 30, 2005

(unaudited)

 

                 Datec

             

(thousands, except per share amounts)


   Elandia

    AST

    Consolidated

   

Less

Operations

Not Subject

to Plan of

Arrangement


   

Operations

Subject to

Plan of

Arrangement


   

Operations

subject to

Plan of

arrangement


   

Pro Forma

Adjustments


   

Pro Forma

Consolidated


 
     USD $
(1)
    USD $
(2)
    CDN $     CDN $     CDN $    

USD $

(3)

   

USD $

(4)

    USD $
(1+2+3+4)
 

Revenue

   —       $ 5,829     $ 36,106     $ —       $ 36,106     $ 29,496           $ 35,325  
    

 


 


 


 


 


 

 


     —         5,829       36,106       —         36,106       29,496     —         35,325  

Cost and Expenses:

                                                            

Cost of goods sold

   —         2,345       18,379       —         18,379       15,014             17,359  

Selling, general and administrative

   2,656       1,895       16,114       (279 )     15,835       12,936             17,487  

Depreciation & Amortization

   —         311       1,322       —         1,322       1,080     958 (e)     2,349  
    

 


 


 


 


 


 

 


Total operating expenses

   2,656       4,551       35,815       (279 )     35,536       29,030     958       37,195  
    

 


 


 


 


 


 

 


Operating (loss) Income

   (2,656 )     1,278       291       279       570       466     (958 )     (1,870 )

Other (Expenses) Income

                                                            

Gain on disposal of property

   —         —         2,009       —         2,009       1,641             1,641  

Due diligence costs

                   (215 )     215       —                          

Interest expense

   (1,301 )     (20 )     (236 )     —         (236 )     (193 )   1,252 (d)     (262 )

Foreign exchange gain (loss)

                   29       —         29       24             24  
    

 


 


 


 


 


 

 


Total other (expenses) income

   (1,301 )     (20 )     1,587       215       1,802       1,472     1,252       1,403  
    

 


 


 


 


 


 

 


(Loss) Income from continuing operations

   (3,957 )     1,258       1,878       494       2,372       1,938     294       (467 )

Income Taxes

   —         —         (1,239 )     —         (1,239 )     (1,012 )           (1,012 )

Minority interest in net income

   —         —         (1,508 )     —         (1,508 )     (1,232 )           (1,232 )
    

 


 


 


 


 


 

 


(Loss) Income from continuing operations

   (3,957 )     1,258       (869 )     494       (375 )     (306 )   294       (2,711 )
    

 


 


 


 


 


 

 


(Loss) Income from continuing operations per share

                                                       $ (0.13 )
    

 


 


 


 


 


 

 


Weighted average number of shares outstanding basic and diluted

   7,553                                             13,852 (f)     21,405  
    

 


 


 


 


 


 

 


 

F-4


Elandia, Inc.

Pro Forma Condensed Consolidated Statement of Operations

For the Year Ended December 31, 2004

(unaudited)

 

                       Datec

             
    

Elandia

From

January 1, 2004 to

September 14, 2004

(Predecessor Company)


   

Elandia

From

September 15, 2004 to

December 31, 2004

(Successor Company)


    AST

    Datec

   

Less

Operations

Not Subject

to Plan of

Arrangement


   

Operations

Subject to Plan

of Arrangement


   

Operations

subject to Plan

of arrangement


   

Pro Forma

Adjustments


   

Pro Forma

Consolidated


 
(thousands, except
per share
amounts)
  

USD $

(1)

   

USD $

(2)

   

USD $

(3)

    CDN $     CDN $     CDN $    

USD $

(4)

   

USD $

(5)

   

USD $

(1+2+3+4+5)

 

Revenue

   —       —       $ 6,809     $ 49,397           $ 49,397     $ 37,954           $ 44,763  
    

 

 


 


 

 


 


 

 


Expenses:

                                                                

Cost of goods sold

   —       —         2,244       26,091             26,091       20,047             22,291  

General and administrative

   —       1,125       1,903       20,499     (490 )     20,009       15,373             18,401  

Depreciation & Amortization

   —       —         200       1,918             1,918       1,474     1,277 (e)     2,951  
    

 

 


 


 

 


 


 

 


Total operating expenses

   —       1,125       4,347       48,508     (490 )     48,018       36,894     1,277       43,643  
    

 

 


 


 

 


 


 

 


Operating (loss) Income

   —       (1,125 )     2,462       889     490       1,379       1,060     (1,277 )     1,120  

Other (Expenses) Income

                                                                

Gain on extinguishment of debt

   2,968             —         —                             (2,968 )(f)     —    

Fresh-start accounting adjustments

   4,631             —         —                             (4,631 )(f)     —    

Loss on abandonment of equipment

   (887 )                                               887 (f)     —    

Interest expense

   (342 )   (145 )     (12 )     (684 )   30       (654 )     (503 )   289 (d)     (713 )

Reorganization items and other costs

   (596 )           14       185     (20 )     165       126     596 (f)     140  

Foreign exchange loss

   —               —         (8 )           (8 )     (5 )           (5 )
    

 

 


 


 

 


 


 

 


Total other (expenses) Income

   5,774     (145 )     2       (507 )   10       (497 )     (382 )   (5,827 )     (578 )

Income Taxes

   —               —         (1,003 )           (1,003 )     (771 )           (771 )

Minority Interest in net income

   —               —         (356 )           (356 )     (274 )           (274 )
    

 

 


 


 

 


 


 

 


(Loss) Income from continuing operations

   5,774     (1,270 )     2,464       (977 )   500       (477 )     (367 )   (7,104 )     (503 )
    

 

 


 


 

 


 


 

 


(Loss) Income from continuing operations per share

                                                           $ (0.02 )
    

 

 


 


 

 


 


 

 


Weighted average number of shares outstanding - basic and diluted

   7,449                                                 13,852 (g)     21,301  
    

 

 


 


 

 


 


 

 


 

F-5


ELANDIA, INC.

 

NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Nine months ended September 30, 2005 and year ended December 31, 2004

(Unaudited)

(Thousands)

 

PRO FORMA ADJUSTMENTS

 

Balance Sheet – September 30, 2005

 

a. Derived from the unaudited condensed consolidated balance sheet of Elandia as of September 30, 2005.

 

b. Derived from the unaudited balance sheet of AST as of September 30, 2005.

 

c. Derived from the unaudited condensed consolidated balance sheet of Datec as of September 30, 2005 (in Canadian dollars).

 

d. In accordance with the Plan of Arrangement, Elandia’s related party debt and accrued interest owed to SVCH and its affiliates were contributed to capital on January 31, 2006. As of September 30, 2005, this debt consisted of accrued interest in the amount of $1,542, a secured revolver note in the amount of $2,500, a revolver facility in the amount of $8,500 and a secured note in the amount of $300. Accordingly, at September 30, 2005, the pro forma adjustment reflects the contribution of principal and accrued interest to capital amounting to $12,842.

 

e. The completion of the Plan of Arrangement resulted in the issuance of 6,809 shares of common stock to the existing stockholders of Datec with a fair value of $15,251, as consideration for the ownership of certain of Datec’s operating subsidiaries. In connection with the issuance of the shares, Elandia expects to allocate the excess value of the shares issued to goodwill in the amount of $5,610, customer list in the amount of $2,805, and contract rights in the amount of $2,805. The amount allocated to these intangibles has been estimated by management based on information available and are subject to change based on an independent outside appraisal.

 

F-6


The total cost of the acquisition is allocated as follows:

 

Current assets

   $ 11,243  

Property, Plant & Equipment

     4,749  

Other Intangible assets

     206  

Deferred tax asset

     702  

Customer list

     2,806  

Contract rights

     2,804  

Goodwill

     5,610  

Current liabilities

     (12,136 )

Long term liabilities

     (50 )

Minority interest

     (683 )
    


Total fair value of acquisition

   $ 15,251  
    


 

f. The completion of the Plan of Arrangement resulted in the issuance of 7,043 shares of common stock to the members of AST as consideration for 100% of their membership interest. The acquisition of AST 15 accounted for as a common control merger (similar to pooling) for the interest owned by SVCH. SVCH is a majority stockholder of Elandia (approximately 83%) and it owns a majority interest in AST (approximately 65%). The acquisition of the minority interest (approximately 35%) is accounted for by the purchase method of accounting, and, accordingly, the assets and liabilities are restated at their fair value with any excess assigned to identifiable intangible assets with any remaining amount attributed to goodwill. The remainder of the consideration for the 65% interest has been recorded at historical basis of the net assets acquired, similar to pooling of interest. As a result, the purchase is calculated as follows:

 

Fair value of 7,043 shares issued

           $ 15,840  

Portion attributable to minority interest

             35 %
            


Fair value of minority interest aquired

             5,544  

Historical cost basis of net assets acquired

   $ 3,326          

Portion attributable to SVCH

     65 %        
    


       

Historical cost basis of majority interest

             2,162  
            


Total cost of acquisition

           $ 7,706  
            


 

F-7


Elandia expects to allocate the excess value of the shares issued to goodwill in the amount of $2,190, customer list in the amount of $1,095, and contract rights in the amount of $1,095. The amount allocated to the intangibles has been estimated by management based on information available and are subject to change based on an independent appraisal.

 

The total cost of the acquisition is allocated as follows:

 

Current assets

   $ 1,069  

Property, Plant & Equipment

     5,466  

Customer list

     1,095  

Contract rights

     1,095  

Goodwill

     2,190  

Current liabilities

     (2,211 )

Long term liabilities

     (998 )
    


Total acquisition allocation

   $ 7,706  
    


 

g) To give effect to a long term deferred tax liability related to the adjustment for goodwill. The tax effect has been calculated utilizing Elandia’s blended statutory rate of 40%.

 

Statement of Operations – Nine Months Ended September 30, 2005

 

a. Derived from the unaudited condensed consolidated statement of operations of Elandia for the nine months ended September 30, 2005.

 

b. Derived from the unaudited statement of operations of AST for the nine months ended September 30, 2005.

 

c. Derived from the unaudited condensed consolidated statement of operations of Datec for the nine months ended September 30, 2005.

 

d. In accordance with the Plan of Arrangement, Elandia’s related party debt was contributed to capital on January 31, 2006. Accordingly, this adjustment gives effect to the elimination of the interest expense associated with the contributed debt.

 

e. To give effect to the amortization of customer lists and contract rights over a seven (7) and five (5) year life respectively.

 

f. To give effect to the issuance of 6,089 shares of common stock for the Datec acquisition and the issuance of 7,043 for the AST acquisition.

 

F-8


Statement of Operations – Year Ended December 31, 2004

 

a. Derived from the audited consolidated statement of operations of Elandia for the period from January 1, 2004 to September 14, 2004 (Predecessor Company).

 

a-1 Derived from the audited consolidated statement of operations of Elandia from September 15, 2004 to December 31, 2004 (Successor Company).

 

b. Derived from the audited statement of operations of AST for the year ended December 31, 2004.

 

c. Derived from the audited consolidated statement of operations of Datec for year ended December 31, 2004.

 

d. In accordance with the Plan of Arrangement, Elandia’s related party debt was contributed to capital on January 31, 2006. Accordingly, this adjustment gives effect to the elimination of the interest expense associated with the contributed debt.

 

e. To give effect to the amortization of customer lists and contract rights over a seven (7) and five (5) year life respectively.

 

f. To eliminate the effects of Elandia’s bankruptcy related items and fresh start accounting adjustments.

 

g. To give effect to the issuance of 6,089 shares of common stock for the Datec acquisition and the issuance of 7,043 for the AST acquisition.

 

F-9


eLANDIA TECHNOLOGIES, INC.

AND SUBSIDIARY

 

CONSOLIDATED FINANCIAL STATEMENTS

 

From October 1, 2003 (Date of Inception) to September 14, 2004

 

F-10


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders of

eLandia Technologies, Inc.

 

We have audited the accompanying consolidated balance sheet of eLandia Technologies, Inc and Subsidiary (the “Company”) as of September 14, 2004, and the related consolidated statements of operations, stockholders’ deficiency, and cash flows from October 1, 2003 (date of inception) to September 14, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of eLandia Technologies, Inc and Subsidiary as of September 14, 2004, and the results of their operations and their cash flows from October 1, 2003 (date of inception) to September 14, 2004, in conformity with accounting principles generally accepted in the United States of America.

 

     LOGO     

 

Melville, NY

May 20, 2005 (Except for Note 12,

as to which the date is July 22, 2005)

 

F-11


eLANDIA TECHNOLOGIES, INC. AND SUBSIDIARY

 

CONSOLIDATED BALANCE SHEET

 

September 14, 2004

 

ASSETS

             

CURRENT ASSETS

             

Cash

   $ 183,416       

Accounts receivable, net of allowance for doubtful accounts of $49,755

     1,330,045       

Prepaid expenses

     36,957       

Employee advances

     38,984       
    

      

Total Current Assets

          $ 1,589,402

FURNITURE AND EQUIPMENT, Net

            177,767

INTANGIBLE ASSETS - WIRELESS LICENSES

            493,034
           

TOTAL ASSETS

          $ 2,260,203
           

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-12


eLANDIA TECHNOLOGIES, INC. AND SUBSIDIARY

 

CONSOLIDATED BALANCE SHEET

 

September 14, 2004

 

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY                 

CURRENT LIABILITIES

                

Accounts payable and accrued expenses

   $ 945,232          

Payroll and payroll taxes payable

     191,439          

Payable to former members of Rough waters

     64,780          

Promissory note - related party

     300,000          

Revolver facility - related party

     3,000,000          
    


       

TOTAL LIABILITIES

           $ 4,501,451  

COMMITMENTS AND CONTINGENCIES

                

STOCKHOLDERS’ DEFICIENCY

                

Preferred stock, $.001 par value; $1,600,000 liquidation preference, 2,250,000 shares authorized, issued and outstanding

     2,250          

Common stock, $.001 par value; 20,000,000 shares authorized, 1,389,375 issued and 826,875 outstanding

     827          

Additional paid-in capital

     1,597,750          

Accumulated deficit

     (3,842,075 )        
    


       

TOTAL STOCKHOLDERS’ DEFICIENCY

             (2,241,248 )
            


TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY

           $ 2,260,203  
            


 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-13


eLANDIA TECHNOLOGIES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENT OF OPERATIONS

 

From October 1, 2003 (Date of Inception) to September 14, 2004

 

REVENUE

          $ 3,332,119  

OPERATING EXPENSES

               

Costs of revenue

   $ 3,079,240         

General, selling and administrative

     3,486,184         

Bad debt expense

     49,755         
    

        

TOTAL OPERATING EXPENSES

            6,615,179  
           


OPERATING LOSS

            (3,283,060 )

OTHER EXPENSES

               

Interest expense

     61,237         

Write-off of advances to affiliate

     497,778         
    

        

TOTAL OTHER EXPENSE

            559,015  
           


NET LOSS

            (3,842,075 )

Less: Preferred stock deemed dividends - beneficial conversion feature

            (787,500 )
           


NET LOSS APPLICABLE TO COMMON STOCKHOLDERS

          $ (4,629,575 )
           


 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-14


eLANDIA TECHNOLOGIES, INC. AND SUBSIDIARY

 

STATEMENT OF STOCKHOLDERS’ DEFICIENCY

 

From October 1, 2003 (Date of Inception) to September 14, 2004

 

     Number of
shares of
Series A
Convertible
Preferred
Stock


   Series A
Convertible
Preferred
Stock at
$.001 Par
Value


   Number of
Shares of
Common
Stock


   Common
Stock at
$.001 Par
Value


   Additional
Paid-In
Capital


   Accumulated
Deficit


    Total

 

Issuance of common stock to founders

   —      $ —      826,875    $ 827    $ —      $ —       $ 827  

Issuance of 2,250,000 shares of Series A Convertible Preferred Stock

   2,250,000      2,250    —        —        797,750      —         800,000  

Granting of 2,250,000 warrants in connection with issuance of Series A Convertible Preferred Stock

   —        —      —        —        800,000      —         800,000  

Net loss from October 1, 2003 (Date of Inception) to September 14, 2004

   —        —      —        —        —        (3,842,075 )     (3,842,075 )
    
  

  
  

  

  


 


Balance at September 14, 2004

   2,250,000    $ 2,250    826,875    $ 827    $ 1,597,750    $ (3,842,075 )   $ (2,241,248 )
    
  

  
  

  

  


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-15


eLANDIA TECHNOLOGIES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENT OF CASH FLOWS

 

From October 1, 2003 (Date of Inception) to September 14, 2004

 

CASH FLOWS FROM OPERATING ACTIVITIES

                

Net loss

           $ (3,842,075 )

Adjustments to reconcile net loss to net cash used in operating activities:

                

Depreciation

   $ 11,198          

Bad debt expense

     49,755          

Write-off of advances to affiliate

     497,778          

Changes in operating assets and liabilities:

                

Accounts receivable

     (1,293,531 )        

Prepaid expenses

     (20,557 )        

Employee advances

     (3,303 )        

Payroll and payroll taxes payable

     191,439          

Accounts payable and accrued expenses

     848,189          
    


       

TOTAL ADJUSTMENTS

             280,968  
            


NET CASH USED IN OPERATING ACTIVITIES

             (3,561,107 )

CASH FLOWS FROM INVESTING ACTIVITIES

                

Purchases of furniture and equipment

     (176,347 )        

Purchases of intangible assets

     (193,034 )        

Advances to affiliate

     (497,778 )        

Net cash received from acquisition

     10,855          
    


       

NET CASH USED IN INVESTING ACTIVITIES

             (856,304 )

CASH FLOWS FROM FINANCING ACTIVITIES

                

Proceeds from sale of convertible preferred stock, issuance of founders stock, and granting of warrants

     1,600,827          

Proceeds from revolver facility - related party

     3,000,000          
    


       

NET CASH PROVIDED BY FINANCING ACTIVITIES

             4,600,827  
            


NET INCREASE IN CASH

             183,416  

CASH - October 1, 2003

             —    
            


CASH - September 14, 2004

           $ 183,416  
            


 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-16


eLANDIA TECHNOLOGIES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENT OF CASH FLOWS, Continued

 

From October 1, 2003 (Date of Inception) to September 14, 2004

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

        

Cash paid October 1, 2003 (date of inception) to September 14, 2004

        

Interest

   $ —    

Taxes

   $ —    

Supplemental schedule of non-cash investing and financing activities:

        

Acquisition of wireless licenses through issuance of related party promissory note.

   $ 300,000  
    


Acquisition of a 100% interest in Roughwaters, L.L.C. through assumption of liabilities to former members of Roughwaters, LLC:

        

Assets

        

Cash

   $ 10,855  

Accounts receivable

     86,269  

Other current assets

     52,081  

Furniture and equipment

     12,618  

Liabilities

        

Accounts payable

     (97,043 )
    


Payable to former members of Roughwaters

   $ 64,780  
    


 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-17


eLANDIA TECHNOLOGIES, INC. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - Organization and Business

 

Company

 

eLandia Technologies, Inc., (“Technologies”) was incorporated in the State of Delaware on September 12, 2003 under the name of eLandia Solutions Incorporated. On January 26, 2005, Technologies changed its name to eLandia Technologies, Inc. Technologies was formed to set up wireless internet capabilities in major hotels and apartment complexes for which it commenced October 1, 2003. On March 1, 2004, Technologies acquired a 100% interest in Roughwaters, L.L.C. (“Roughwaters”) collectively (the “Company”).

 

Effective December 31, 2004, the Company became a wholly-owned subsidiary of Elandia, Inc (“Elandia”) formerly known as Centra Industries, Inc. (see Note 12). Effective September 15, 2004, upon Elandia’s emergence from bankruptcy, Elandia and the Company were commonly controlled by the Stanford Financial Group.

 

Nature of Business

 

The Company, headquartered in Fort Lauderdale, Florida, currently owns Personal Communications Services (“PCS”) licenses in Bloomington, Illinois and in the US Virgin Islands. The Company’s licenses grant access to a 30 MegaHertz C-block, which can supply wireless broadband services for the transmission of voice, data and video entertainment.

 

The Company’s wholly owned subsidiary Roughwaters provides end-to-end infrastructure solutions, which is comprised primarily of constructing and maintaining cell towers. These services are primarily rendered to wireless communications and cable television companies.

 

Commencing during the first quarter of 2005, the Company committed to a plan for disposing of all installation of wireless internet capabilities in major hotels and apartment complexes along with disposing Roughwaters’ business of end-to-end infrastructure solutions. The Company’s future plans are to generate revenue by utilizing its remaining assets primarily comprised of the PCS licenses.

 

NOTE 2 - Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.

 

Fiscal Year

 

The Company has elected to end its fiscal year as of September 14, 2004 in order to coincide with the date that the Company will become included in the consolidated financial statements of Elandia. (see Notes 1 and 12).

 

F-18


eLANDIA TECHNOLOGIES, INC. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - Significant Accounting Policies, continued

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary Roughwaters, effective March 1, 2004. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made by management in preparing the consolidated financial statements include the allowance for doubtful accounts and the recoverable value assigned to the PCS licenses.

 

Fair Values

 

The Company has determined the estimated fair value amounts presented in these consolidated financial statements using available market information and appropriate methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. The estimates presented in these consolidated financial statements are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The Company has based these fair value estimates on pertinent information available to it as of September 14, 2004. As of September 14, 2004, the carrying value of all financial instruments approximates fair value.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

The Company’s accounts receivables are stated at outstanding principal balance, net of allowance for doubtful accounts. Allowances for doubtful accounts are estimated based on the current aging of accounts receivables, prior collection experience and future expectations of conditions that might impact recoverability.

 

Furniture and Equipment

 

Furniture and equipment are stated at historical cost less accumulated depreciation. Major renewals and improvements are capitalized, while maintenance and repair costs that do not significantly improve the related asset or extend its useful life are charged to expense as incurred. For financial reporting purposes, furniture and equipment are depreciated by the straight-line method over the estimated useful lives which generally range between 5 and 7 years. Depreciation expense from October 1, 2003 (date of inception) to September 14, 2004 was $11,198.

 

F-19


eLANDIA TECHNOLOGIES, INC. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - Significant Accounting Policies, continued

 

Intangible Assets

 

Intangible assets consist of the original costs to acquire the PCS wireless licenses along with the long term maintenance costs necessary to maintain the licenses active. The costs to acquire the wireless licenses as well as the legal and other non-equipment related expenses necessary to activate the wireless licenses are capitalized and amortized over the period in which the Company expects to derive benefits, which is principally five or ten years. As of September 14, 2004, the Company has not amortized these licenses since they have not been placed in service.

 

Concentrations of Credit Risk

 

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of trade receivables. As of September 14, 2004, four customers accounted for 13%, 14%, 14% and 22%, of the Company’s accounts receivable as reflected on the consolidated balance sheet. From October 1, 2003 (date of inception) to September 14, 2004, four customers accounted for 13%, 14%, 28% and 13%, respectively, of the Company’s revenue.

 

Income Taxes

 

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes,” which requires the use of the “liability method” of accounting for income taxes. Accordingly, deferred tax liabilities and assets are determined based on the difference between the financial statement and income tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is required if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management concluded that a full valuation allowance was appropriate at September 14, 2004 due to operating losses incurred. Current income taxes are based on the respective periods’ taxable income for federal and state income tax reporting purposes.

 

At September 14, 2004, the Company has net operating loss carryforwards of approximately $3,550,000 which expire through 2024.

 

Significant items and temporary differences between reported financial statements and income tax basis that give rise to deferred tax assets are as follows:

 

Net operating loss carryforwards

   $ 1,325,000  

Accrued expenses

     55,000  
    


       1,380,000  

Less: valuation allowance

     (1,380,000 )
    


Net deferred tax assets

   $ —    
    


 

F-20


eLANDIA TECHNOLOGIES, INC. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - Significant Accounting Policies, continued

 

Revenue Recognition

 

The Company recognizes revenue only when realized or realizable and earned. The Company recognizes revenue when all of the following are present:

 

    Persuasive evidence of an arrangement exists between the Company and its customers;

 

    Delivery has occurred or the services have been rendered;

 

    The price for the service is fixed or determinable; and

 

    Collectibility is reasonably assured.

 

The Company recognizes revenue based upon the work performed, which is specifically identified and pursuant to the terms of contracts. Cost of revenue includes direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation.

 

Stock-Based Compensation Plans

 

The Company adopted the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”, which amends SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation, which was originally provided under SFAS No. 123. The Statement also improves the timeliness of disclosures by requiring the information be included in interim, as well as annual, financial statements. SFAS No. 123 encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company will account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. Accordingly, compensation cost for stock options will be measured as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock. The Company did not grant any stock options as of September 14, 2004.

 

Recent Accounting Pronouncements

 

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), Share Based Payment, which is a revision of SFAS No. 123. SFAS No. l23R also supersedes APB 25 and amends SFAS No. 95, Statement of Cash Flows. SFAS No. l23R differs from SFAS No. 123, by requiring all entities to measure liabilities incurred in stock based payment transactions at fair value rather than measuring the liability at its intrinsic value. SFAS No. 123R requires entities to estimate the number of instruments for which the requisite service period is expected to be rendered rather than accounting for forfeitures as they occur. Under SFAS No. 123R, modifications to the terms or conditions

 

F-21


eLANDIA TECHNOLOGIES, INC. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - Significant Accounting Policies, continued

 

Recent Accounting Pronouncements, continued

 

of an award are measured by comparing the fair value of the modified award with the fair value of the award immediately before the modification, as opposed to measuring the effects of a modification as the difference between the fair value of the modified award at the date it is granted and the awards value immediately before the modification. SFAS No. 123R will also clarify and expand current guidance under SFAS No. 123 including the measurement of fair value, classifying an award as either equity or as a liability and attributing compensation cost to reporting periods. SFAS No. 123R amends SFAS No. 95 requiring that the excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid. The statement is effective in the first annual reporting period beginning after June 15, 2005.

 

SFAS No. 123R provides two alternatives for adoption: (1) a “modified prospective” method in which compensation cost is recognized for all awards granted subsequent to the effective date of this Statement as well as for the unvested portion of awards outstanding as of the effective date and (2) a “modified retrospective” method which follows the approach in the “modified prospective” method, but also permits entities to restate prior periods to reflect compensation cost calculated under SFAS No. 123 for pro forma amounts disclosure. The Company plans to adopt SFAS No. 123R using the modified prospective method. The adoption of SFAS No. 123R is not expected to have a significant impact on the Company’s results of operations or financial position.

 

In January 2003, the FASB issued Financial Interpretation No. (“FIN”) 46 “Consolidation of Variable Interest Entities” which was amended by FIN 46R in December, 2003. A variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights, or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. Historically, entities generally were not consolidated unless the entity was controlled through voting interests. FIN 46R changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. A company that consolidates a variable interest entity is called the “primary beneficiary” of that entity. FIN 46R also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46R have been adopted by the Company. FIN 46R did not have any impact on the consolidated financial statements of the Company since it currently has no variable interest entities.

 

F-22


eLANDIA TECHNOLOGIES, INC. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 3 - Discontinued Operations

 

During January 2005, the Company committed to a plan to discontinue its business related to the installation of wireless internet capabilities in hotels and apartment complexes and the end-to-end infrastructure wireless solutions provided through its wholly-owned subsidiary Roughwaters.

 

The following table reflects the pro forma results of the discontinued operations, along with the assets and liabilities associated with the discontinued operations.

 

The pro forma results of discontinued operations from October 1, 2003 (date of inception) to September 14, 2004 is as follows (unaudited):

 

    

As

Reported


    Discontinued
Operations


    Continuing
Operations


 

Revenue

   $ 3,332,119     $ 3,332,119     $ —    

Cost of revenue

     3,079,240       3,079,240       —    

General, selling and administrative

     3,486,184       2,079,548       1,406,636  

Bad debt expense

     49,755       49,755       —    
    


 


 


Operating Loss

   $ (3,283,060 )   $ (1,876,424 )   $ (1,406,636 )
    


 


 


 

The pro forma assets and liabilities associated with discontinued operations as of September 14, 2004 are as follows (unaudited):

 

    

As

Reported


  

Discontinued

Operations


   Continuing
Operations


Total current assets

   $ 1,589,402    $ 1,367,002    $ 222,400

Furniture and equipment, net

     177,767      32,250      145,517

Intangible assets - wireless licenses

     493,034      —        493,034

Current liabilities

     4,501,451      960,062      3,541,389

 

NOTE 4 - Furniture and Equipment

 

As of September 14, 2004, furniture and equipment consisted of the following:

 

     Useful Life

   Amount

Office equipment and computers

   5 years    $ 4,847

Furniture and fixtures

   5-7 years      12,054

Machinery and equipment

   5 years      172,064
         

            188,965

Accumulated depreciation

          11,198
         

Total Furniture and Equipment

        $ 177,767
         

 

F-23


eLANDIA TECHNOLOGIES, INC. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 5 - Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses consisted of the following at December 31, 2004:

 

Trade payables

   $ 885,947

Interest

     59,285
    

TOTAL

   $ 945,232
    

 

NOTE 6 - Acquisition of Roughwaters, L.L.C.

 

Effective March 1, 2004, pursuant to a Membership Interest Purchase Agreement (“Purchase Agreement”) the Company purchased 100% of the membership interest in Roughwaters by assuming certain payables to its members for an aggregate of $64,780. Roughwaters’ primary business is to provide end-to-end infrastructure solutions for the wireless communication and cable television industry, which is comprised primarily of constructing and maintaining cell towers.

 

The Company’s financial statements include the operations of Roughwaters from March 1, 2004 through September 14, 2004. The following table sets forth the pro-forma condensed statement of operations as if the acquisition was consummated at the beginning of the period, October 1, 2003 (unaudited):

 

Total revenue

   $ 3,576,300  

Total costs and expenses

     7,457,863  
    


Net loss

   $ (3,881,563 )
    


 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:

 

Current assets

   $ 149,205

Furniture and equipment

     12,618
    

Total Assets Acquired

     161,823

Current liabilities

     97,043
    

Net Assets Acquired

   $ 64,780
    

 

F-24


eLANDIA TECHNOLOGIES, INC. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 7 - Promissory Note-Related Party

 

On September 1, 2004, the Company issued a promissory note (“Promissory Note”) to an affiliate of the Stanford Financial Group (“SFG”) (its controlling stockholder) in the amount of $300,000 for PCS licenses in the United States Virgin Islands and Bloomington, IL. The Promissory Note accrues interest at the rate of 8% per annum, requires quarterly interest payments and it matures on August 31, 2007. The Company has not made any of the required quarterly interest payments subsequent to September 14, 2004. As of September 14, 2004, the Company accrued $2,860 of interest which has been included in accounts payable and accrued expenses in the accompanying balance sheet. During May 2005, the Company received a modification and extension letter stipulating that SFG will contribute such debt and accrued interest into equity in connection with the pending acquisitions discussed in Note 12. In the event the pending acquisitions are not consummated, SFG has agreed not to demand repayment prior to the due date.

 

NOTE 8 - Revolver Facility-Related Party

 

On May 20, 2004, the Company entered into a one year Loan and Security Agreement (“L&S Agreement”) with Stanford Venture Capital Holdings, Inc. (“SVCH”) an affiliate of SFG (its controlling stockholder). The L&S Agreement is collateralized by all of the Company’s assets. The maximum amount available is $5,000,000 and bears interest at the rate of 8% per annum on the outstanding balance. Principal and any accrued interest are required to be paid whenever any collateral is sold. Amounts may be repaid and reborrowed anytime before May 19, 2005, the maturity date.

 

The L&S Agreement contains restrictions and other financial covenants relating to, among other things, limitations on the incurrence of additional indebtedness and liens, asset sales, and capital expenditures. At September 14, 2004, the outstanding borrowings under the L&S Agreement amounted to $3,000,000. The Company accrued interest of $56,425, which has been included in the accounts payable and accrued expenses in the accompanying balance sheet.

 

On November 24, 2004, the L&S Agreement was amended by increasing the amount available from $5,000,000 to $8,500,000. All other terms and conditions remained the same.

 

The Company was unable to repay the amount outstanding on the maturity date, May 19, 2005. During May 2005, the Company received a modification and extension letter stipulating that SVCH will contribute the debt and related accrued interest into equity in connection with the pending acquisitions discussed in Note 12. In the event the acquisitions are not consummated, SVCH has agreed not to demand repayment until May 2006.

 

F-25


eLANDIA TECHNOLOGIES, INC. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9 - Stockholders’ Deficiency

 

Common Stock

 

The Company has 20,000,000 shares of authorized common stock, par value $0.001 per share. At inception, the Company issued an aggregate of 826,875 shares of common stock to its founders. The Company also issued 562,500 shares of common stock to its Chief Executive Officer and placed them in escrow (not reflected as outstanding) for future release based on his performance. The shares will be released to its Chief Executive Officer subject to the Company reaching not less than $50 million of consolidated revenue and not less than $5 million of consolidated pre-tax income, for a calendar year ending on or prior to December 31, 2006. The Company will record a charge to its operations based on the fair market value of the shares on the date the performance conditions are attained.

 

The Company had issued 860,625 shares of its common stock pursuant to performance conditions by certain other officers which were not met. Accordingly, such shares were forfeited and were never deemed outstanding.

 

Convertible Preferred Stock

 

The Company has 2,250,000 shares of authorized preferred stock, par value $0.001 per share. During October of 2003, the Company entered into an agreement to sell 2,250,000 shares of its Series A Convertible Preferred Stock (“Preferred Stock”). Under the terms of the agreement SVCH purchased 2,250,000 shares of Preferred Stock for an aggregate $1,600,000. In addition, SVCH received assignable warrants to purchase 2,250,000 shares of the Company’s common stock at an exercise price of $0.001 at any time prior to December 31, 2010. The terms of the Preferred Stock include an optional conversion by the holder at any time into shares of the Company’s common stock at a conversion rate of the stated value of the preferred stock divided by $0.71 subject to certain standard adjustments. In addition, the terms of the Preferred Stock call for an automatic conversion into shares of the Company’s common stock at the earlier of a) a vote of at least two-thirds of the then outstanding shares of the Preferred Stock or b) the closing of a qualified public offering, as defined. The preferred stockholders shall be entitled to vote at any meetings of stockholders. Each share of preferred stock shall be entitled to one vote for each share of common stock such shares of preferred stock would be convertible into and has a $1,600,000 liquidation preference. The preferred stockholders are not entitled to receive dividends.

 

The Company valued the warrant issued to SVCH at $800,000 using the Black-Scholes pricing model, thereby allocating a portion of the proceeds from the Preferred Stock to the warrant using the relative fair value of the Preferred Stock and warrant to the actual proceeds from the Preferred Stock.

 

F-26


eLANDIA TECHNOLOGIES, INC. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9 - Stockholders’ Deficiency, continued

 

Convertible Preferred Stock, continued

 

In connection with the sale and issuance of the Preferred Stock, the Company reported $787,500 as a deemed dividend to the preferred stockholders representing the beneficial conversion value of the underlying common stock. The beneficial conversion value represents the difference between the fair value of the underlying common stock on the date the Preferred Stock was sold and the price at which the Preferred Stock could be converted into common stock. The beneficial conversion value is treated as a deemed dividend and it’s presented on the statement of operations as a reduction of net loss or loss applicable to common stockholders.

 

NOTE 10 - Commitments and Contingencies

 

Operating Leases

 

The Company leases certain plant, office and warehouse space as well as machinery, vehicles, data processing and other equipment. Certain of these operating leases have renewal options at reduced rates and provisions requiring the Company to pay maintenance, property taxes and insurance. Total rental expense under operating leases, excluding maintenance, taxes and insurance amounted to $136,525 from October 1, 2003 (date of inception) to September 14, 2004.

 

At September 14, 2004, the future payments for all operating leases with remaining lease terms in excess of one year, excluding maintenance, taxes and insurance were as follows:

 

For the Year Ending

September 14,


   Amount

2005

   $ 132,527

2006

     133,963

2007

     80,876
    

     $ 347,366
    

 

Employment Agreements

 

The Company is party to two separate executive employment agreements, one with its Chief Executive Officer and the other with its Chief Operating Officer. The agreements are for five years with two successive renewal options of two years each. The agreements cover various performance and other employment matters and include an annual base salary of $250,000 per individual. Subsequent to September 14, 2004, the Company’s Chief Operating Officer was terminated for reasons other than cause thereby canceling the related employment agreement.

 

F-27


eLANDIA TECHNOLOGIES, INC. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 11 - Related Party Transactions

 

As of September 14, 2004, the Company had advanced $38,984 to its Chief Operating Officer as part of a moving expense allowance pursuant to an employment agreement.

 

NOTE 12 - Subsequent Events

 

Effective December 31, 2004, the Company legally merged with Elandia by virtue of SVCH (controlling stockholder) canceling its Preferred Stock and warrants and by allowing the remaining stockholders of the Company to exchange their 826,875 shares of common stock for 826,875 shares of Elandia’s common stock. Accordingly, on December 31, 2004, the Company became a wholly owned subsidiary of Elandia. Additionally, the Company’s Chief Executive Officer received rights to convert 562,500 shares of the Company’s unvested common stock into 562,500 shares of Elandia’s common stock upon meeting certain performance provisions as outlined in Note 9.

 

On July 22, 2005, the Company’s parent, Elandia, entered into an agreement to purchase 100% of the partnership interests of American Samoa Telecom, LLC (AST). AST is headquartered in Pago Pago, American Samoa and operates under the brand name of Blue Sky Communications. AST is a provider of wireless telephone services in American Samoa via its wireless network. AST is majority owned (approximately 70%) by SVCH.

 

On July 22, 2005, the Company’s parent, Elandia, executed a merger agreement with Datec Group Ltd, (“Datec”) a New Brunswick, Canada, corporation, and its subsidiaries. Datec is publicly-traded company on the Toronto Stock Exchange. Datec is a provider of information technology and services in Australia, Fiji, New Zealand, Papua New Guinea, Samoa, the Solomon Islands, Tonga, and Vanuatu.

 

Closing of the above acquisitions are subject to due diligence, and stockholder and various regulatory approvals. There can be no assurances that the acquisitions will be consummated.

 

F-28


eLANDIA SOLUTIONS, INC. AND SUBSIDIARIES

 

CONSOLIDATED FINANCIAL STATEMENTS

 

As of December 31, 2004 and

From January 1, 2004 to September 14, 2004 (Predecessor Basis)

and From September 15, 2004 to December 31, 2004 (Successor Basis)

 

F-29


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders of

eLandia Solutions, Inc.

 

We have audited the accompanying consolidated balance sheet of ELANDIA, INC. (formerly Centra Industries, Inc.) and subsidiaries (the “Company”) as of December 31, 2004 (Successor), and the related consolidated statements of operations, stockholders’ deficiency, and cash flows from January 1, 2004 to September 14, 2004 (Predecessor) and from September 15, 2004 to December 31, 2004 (Successor). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ELANDIA, INC. and subsidiaries as of December 31, 2004 (Successor), and the results of their operations and their cash flows from January 1, 2004 to September 14, 2004 (Predecessor) and from September 15, 2004 to December 31, 2004 (Successor), in conformity with accounting principles generally accepted in the United States of America.

 

F-30


As discussed in Note 1 to the consolidated financial statements, effective September 14, 2004, the Company emerged from bankruptcy and applied fresh-start accounting commencing September 15, 2004. As a result, the consolidated balance sheet as of December 31, 2004 and the related statements of operations and cash flows of the successor company from September 15, 2004 to December 31, 2004 are presented on a different basis of accounting than that of the predecessor company for the periods before fresh-start and, therefore, are not comparable.

 

/s/ Marcum & Kliegman LLP

 

Marcum & Kliegman LLP

Melville, NY

May 20, 2005 (Except for Note 12a,

as to which the date is July 22, 2005, and

Note 12b as to which the date is September 14, 2005)

 

F-31


ELANDIA, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEET

 

December 31, 2004

 

ASSETS              

CURRENT ASSETS

             

Cash

   $ 16,139       

Assets from discontinued operations held for sale

     13,219,885       
    

      

Total Current Assets

          $ 13,236,024

FURNITURE AND EQUIPMENT, Net

            168,988

INTANGIBLE ASSETS - WIRELESS LICENSES

            804,951
           

TOTAL ASSETS

          $ 14,209,963
           

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-32


ELANDIA, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEET

 

December 31, 2004

 

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY                 

CURRENT LIABILITIES

                

Accounts payable and accrued expenses

   $ 980,723          

Secured revolver note - related party

     2,500,000          

Promissory note - related party

     300,000          

Revolver facility - related party

     7,300,000          

Liabilities of discontinued operations

     6,096,399          
    


       

TOTAL LIABILITIES

           $ 17,177,122  

COMMITMENTS AND CONTINGENCIES

                

STOCKHOLDERS’ DEFICIENCY

                

Common stock, $.00001 par value; 50,000,000 shares authorized 7,955,438 issued and 7,449,188 outstanding

     74          

Additional paid-in capital

     4,248,547          

Accumulated deficit

     (7,215,749 )        

Subscription receivable

     (31 )        
    


       

TOTAL STOCKHOLDERS’ DEFICIENCY

             (2,967,159 )
            


TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY

           $ 14,209,963  
            


 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-33


ELANDIA, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     From
September 15,
2004
to
December 31,
2004

(Successor
Company)


    From January 1,
2004
to
September 14,
2004

(Predecessor
Company)


 

REVENUE

   $ —       $ —    

COST AND EXPENSES

                

General, selling and administrative expenses

     1,125,072       —    
    


 


OPERATING LOSS

     (1,125,072 )     —    
    


 


OTHER (EXPENSE) INCOME

                

Interest expense

     (145,101 )     (341,668 )

Reorganization items (including legal and trustee fees)

     —         (596,250 )

Gain on extinguishment of debt and other bankruptcy items

     —         2,968,675  

Loss on abandonment of equipment

             (887,395 )

Fresh-start accounting adjustments

     —         4,631,022  
    


       

TOTAL OTHER (EXPENSE) INCOME

     (145,101 )     5,774,384  
    


       

(LOSS) INCOME FROM CONTINUING OPERATIONS

     (1,270,173 )     5,774,384  

LOSS FROM DISCONTINUED OPERATIONS

     (2,103,501 )     (3,950,931 )
    


       

NET (LOSS) INCOME

   $ (3,373,674 )   $ 1,823,453  
    


 


Basic and diluted loss from continuing operations per common share

   $ (0.17 )        

Basic and diluted loss from discounted operations per common shares

     (0.28 )        
    


       

Basic and diluted net loss per common share

   $ (0.45 )        
    


       

Weighted average number of shares outstanding, basic and diluted

     7,449,188          
    


       

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-34


ELANDIA, INC. AND SUBSIDIARIES

 

STATEMENT OF STOCKHOLDERS’ DEFICIENCY

 

From January 1, 2004 to September 14, 2004 - Predecessor Company

and From September 15, 2004 to December 31, 2004 - Successor Company

 

     Number of
Shares of
Common Stock


    Common Stock
at $.00001
Par Value


    Additional
Paid-in
Paid In Capital


    Accumulated
Deficit


    Subscription
Receivable


   Total

 

BALANCE - January 1, 2004 (Predecessor Company)

   13,629,344     $ 136     $ 15,340     $ (1,767,848 )   $ —      $ (1,752,372 )

Net income from January 1, 2004 to September 14, 2004 (Predecessor Company)

   —         —         —         1,823,453       —        1,823,453  

Fresh-start adjustments

   (13,629,344 )     (136 )     (15,340 )     (55,605 )     —        (71,081 )
    

 


 


 


 

  


BALANCE - September 14, 2004 (Predecessor Company)

   —         —         —         —         —        —    

Issuance of 180,000 shares of common stock to unsecured creditors in connection with reorganization plan

   180,000       2       71,079       —         —        71,081  

DIP Financing exchanged for 3,397,500 shares of common stock and 3,127,500 warrants issued to SVCH

   3,397,500       34       2,576,648       —         —        2,576,682  
    

 


 


 


 

  


BALANCE - September 15, 2004 (Successor Company) (Forward)

   3,577,500     $ 36     $ 2,647,727     $ —       $ —      $ 2,647,763  
    

 


 


 


 

  


 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-35


ELANDIA, INC. AND SUBSIDIARIES

 

STATEMENT OF STOCKHOLDERS’ DEFICIENCY, Continued

 

From January 1, 2004 to September 14, 2004 - Predecessor Company

and From September 15, 2004 to December 31, 2004 - Successor Company

 

     Number of
Shares of
Common Stock


  

Common Stock
at $.00001

Par Value


   Additional
Paid-in
Capital


   Accumulated
Deficit


    Subscription
Receivable


    Total

 

BALANCE - September 15, 2004 (Successor Company) (Forward)

   3,577,500    $ 36    $ 2,647,727    $ —       $ —       $ 2,647,763  

Issuance of 3,127,50 shares of common stock to SVCH and certain of its principals in connection with exercise of warrants

   3,127,500      31      —        —         (31 )     —    

Net loss from September 15, 2004 to December 31, 2004 (Successor Company)

   —        —        —        (3,373,674 )     —         (3,373,674 )

Issuance of common stock in connection with common control merger on 12/31/2004

   744,188      7      1,600,820      (3,842,075 )     —         (2,241,248 )
    
  

  

  


 


 


BALANCE - December 31, 2004 (Successor Company)

   7,449,188    $ 74    $ 4,248,547    $ (7,215,749 )   $ (31 )   $ (2,967,159 )
    
  

  

  


 


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

F -36


ELANDIA, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     From
September 15,
2004
to
December 31,
2004

(Successor
Company)


    From January
1,2004 to
September 14,
2004

(Predecessor
Company)


 

CASH FLOWS FROM OPERATING ACTIVITIES

                

Net (loss) income

   $ (3,373,674 )   $ 1,823,453  
    


 


Adjustments to reconcile net (loss) income to net cash used in operating activities:

                

Depreciation

     283,117       680,565  

Bad debt expense

     756,643       404,000  

Gain on debt discharge

     —         (2,968,675 )

Loss on abandonment of furniture and equipment

     —         887,395  

Fresh start adjustments

     —         (4,631,022 )

Changes in operating assets and liabilities:

                

Accounts receivable

     (3,804,166 )     (138,363 )

Employee advances

     38,984       —    

Prepaid expenses

     (205,516 )     146,117  

Accounts payable and accrued expenses

     1,869,926       1,057,730  

Payroll and payroll taxes payable

     46,536       683,104  
    


 


TOTAL ADJUSTMENTS

     (1,014,476 )     (3,879,149 )
    


 


NET CASH USED IN OPERATING ACTIVITIES

     (4,388,150 )     (2,055,696 )
    


 


CASH FLOWS FROM INVESTING ACTIVITIES

                

Purchase of Intangible Assets - Licenses

     (311,917 )     —    

Purchases of furniture and equipment

     (64,536 )     —    
    


 


NET CASH USED IN INVESTING ACTIVITIES

   $ (376,453 )   $ —    
    


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

F -37


ELANDIA, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CASH FLOWS, Continued

 

     From
September 15,
2004
to
December 31,
2004

(Successor
Company)


    From January
1,2004 to
September 14,
2004

(Predecessor
Company)


 

CASH FLOWS FROM FINANCING ACTIVITIES

                

Proceeds from secured revolver note - related party

   $ 300,000     $ 2,860,000  

Principal payments for promissory notes

     (113,838 )     (820,025 )

Proceeds from revolver facility - related party

     4,300,000       —    
    


 


NET CASH PROVIDED BY FINANCING ACTIVITIES

     4,486,162       2,039,975  
    


 


NET DECREASE IN CASH

     (278,441 )     (15,721 )

CASH – Beginning

     294,580       126,885  
    


 


CASH – Ending

   $ 16,139     $ 111,164  
    


 


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

                

Cash paid during the periods for:

   $ —       $ —    

Interest

   $ —       $ —    

Taxes

                

Supplemental schedule on non-cash investing and financing activities:

                

Dip financing exchanged for 3,397,500 shares of common stock and 3,127,500 warrants issued to SVCH

           $ 2,576,682  

Issuance of 180,000 shares of common stock to unsecured creditors in connection with reorganization plan

           $ 71,081  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F -38


ELANDIA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - Organization and Business

 

Company

 

ELANDIA, INC. (the “Company” or the “Successor Company”) was known as Centra Industries, Inc. prior to its merger with eLandia Technologies, Inc. (“Technologies”) on December 31, 2004. (Note 5)

 

On August 1, 2003, the Company’s main operating subsidiary, eLandia Infrastructure, Inc. (“Infrastructure”), formerly known as Midwest Cable Communications of Arkansas, Inc. filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code (“Bankruptcy Code”) in the United States Bankruptcy Court for the Western District of Arkansas (the “Bankruptcy Court”).

 

On January 8, 2004, the Company also filed a voluntary petition for reorganization under the Bankruptcy Code in the Bankruptcy Court. The Company operated its business and managed its assets in the ordinary course effectively from August 1, 2003 to September 14, 2004 as debtor-in-possession, and obtained Bankruptcy Court approval for transactions outside the ordinary course of business.

 

By order dated September 14, 2004, (the “Confirmation Date”) the Bankruptcy Court confirmed the Joint Plan of Reorganization (the “POR”) of the Company and Infrastructure. Accordingly, on September 14, 2004, the Company emerged from reorganization under Chapter 11 of The United States Bankruptcy Code.

 

Pursuant to the POR, all of the outstanding common stock of the Company was cancelled on September 14, 2004, and new issuances were made to the holders of allowed pre-petition claims against the Company and for the conversion of certain debtor-in-possession financing (“DIP Financing”) provided by Stanford Venture Capital Holdings (“SVCH”).

 

On the Confirmation Date, the Company issued 180,000 shares of newly authorized common stock to the holders of allowed pre-petition claims for the settlement of such claims and the equivalent of 6,525,000 shares of newly authorized common stock to SVCH for the conversion of certain DIP Financing and other secured claims which amounted to $2,576,682. The Company’s POR also provided that the Company pay $110,000 to holders of allowed pre-petition claims.

 

Business

 

The Company, through its wholly owned subsidiaries i) owns Personal Communication Services (“PCS”) licenses, ii) sets up wireless internet capabilities in major hotel and apartment complexes, iii) provides end-to-end infrastructure solutions for the wireless communication and cable television industry, which is comprised primarily of constructing and maintaining cell towers, and iv) provides underground horizontal directional boring technology and related underground construction services to telecommunication and cable television providers, water and sewer systems, and natural gas pipelines.

 

F -39


ELANDIA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - Organization and Business, continued

 

The above operations are conducted through the Company’s wholly owned subsidiaries as follows:

 

Technologies -

   Owns PCS licenses and sets up wireless internet capabilities to hotels and large apartment complexes.

Roughwaters, LLC (“Roughwaters”) -

   A subsidiary of Technologies, provides end-to-end infrastructure solutions which is comprised primarily of constructing and maintaining cell towers to the telecommunication and cable television industry.

Infrastructure -

   Provides construction services primarily composed of underground boring for cable and telephone companies.

 

From January 1, 2004 through December 31, 2004, the Company’s three remaining subsidiaries, Centra Construction, Inc., Centra Wireless Solutions, Inc., and Razorback, Inc., have been inactive.

 

Commencing during the first quarter of 2005, the Company committed to a plan for disposing substantially all of its current operations. The Company’s future plans are to generate revenue by utilizing its remaining assets comprised primarily of the PCS licenses and acquire existing operating providers of wireless telephone services and cable television providers.

 

NOTE 2 - Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.

 

The Company operated its business as a debtor-in-possession subject to the jurisdiction of the Bankruptcy Court during the period from August 1, 2003 until September 14, 2004, the Confirmation Date. Accordingly, the Company’s consolidated financial statements for periods prior to its emergence from Chapter 11 reorganization were prepared in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, 11 “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code 11” (“SOP 90-7”). In addition, the Company adopted fresh-start reporting upon its emergence from Chapter 11 reorganization in accordance with SOP 90-7. For financial reporting purposes, the effects of the consummation of the POR as well as adjustments for fresh-start reporting have been recorded in the accompanying consolidated financial statements as of September 14, 2004 and from January 1, 2004 to September 14, 2004 (Predecessor Company financial statements).

 

F-40


ELANDIA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - Significant Accounting Policies, continued

 

Basis of Presentation, continued

 

Pursuant to fresh-start reporting, a new entity was deemed created for financial reporting purposes and the carrying values of assets and liabilities were adjusted. The carrying values of assets were adjusted to their reorganization values that are equivalent to their estimated fair values. The carrying values of liabilities were adjusted to their present values.

 

The reorganization value was determined using various valuation methods including, (i) reviewing historical financial information, (ii) comparing the Company and its projected performance to the market values of the comparable companies, (iii) performing industry precedent transaction analysis, and (iv) considering certain economic and industry information relevant to the operating business. While the discounted cash flow approach was one of the three approaches used to determine reorganization value, it was not the sole method used in the determination. This use of multiple approaches is consistent with methods used to determine value in most purchase business combinations.

 

The following table describes the periods presented in the consolidated financial statements and related notes thereto:

 

Period


 

Referred to as


Results for the Predecessor Company From January 1, 2004 through September 14, 2004   “Predecessor Company 2004 Nine Months”
Results for the Successor Company From September 15, 2004 through December 31, 2004   “Successor Company 2004 Three Months”

 

F-41


ELANDIA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - Significant Accounting Policies, continued

 

Basis of Presentation, continued

 

The effects of the POR and the application of fresh-start accounting on the Company’s pre-confirmation consolidated balance sheet are as follows:

 

ASSETS

 

     Predecessor
Company
September 14,
2004


   Debt
Discharge


   Fresh-Start
Adjustments


    Exchange
DIP
Financing
for
Common
Stock and
Warrants


   Reclassification
for
Discontinued
Operations


    Successor
Company
September 14,
2004


CURRENT ASSETS

                                           

Cash

   $ 111,164    $ —      $ —       $ —      $ —       $ 111,164

Assets held for sale

     —        —        —         —        8,809,646       8,809,646

Accounts receivable, net

     265,142      —        —         —        (265,142 )     —  

Machinery and equipment

     3,706,121      —        —         —        (3,706,121 )     —  

Prepaid expenses

     207,361      —        —         —        (207,361 )     —  

Reorganization value

     —             $ 4,631,022 (B)     —        (4,631,022 )     —  
    

  

  


 

  


 

TOTAL ASSETS

   $ 4,289,788    $ —      $ 4,631,022     $ —      $ —       $ 8,920,810
    

  

  


 

  


 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY

 

     Predecessor
Company
September 14,
2004


    Debt
Discharge


    Fresh-Start
Adjustments


    Exchange
DIP
Financing for
Common
Stock and
Warrants


    Reclassification
for
Discontinued
Operations


    Successor
Company
September 14.
2004


LIABILITIES

                                              

Payroll tax liabilities

   $ 1,779,427     $ —       $ —       $ —       $ (1,779,427 )   $ —  

Accounts payable

     3,321,949       (2,835,321 )     —         —                 486,628

Liabilities subject to compromise

     72,734       —         —         —         —         72,734

Accrued expenses

     854,202       —         —         —         (854,202 )     —  

Current portion of long term debt

     5,790,092       (133,354 )     —         (2,576,682 )(C)     (880,056 )     2,200,000

Liabilities of discontinued operations

     —         —         —         —         3,513,685       3,513,685
    


 


 


 


 


 

Total Liabilities

     11,818,404       (2,968,675 )     —         (2,576,682 )     —         6,273,047
    


 


 


 


 


 

STOCKHOLDERS’ DEFICIENCY

                                              

Common stock - predecessor

     136       (136 )     —         —         —         —  

Common stock - successor

     —         2       —         34       —         36

Additional paid in capital

     15,340       55,739       —         2,576,648       —         2,647,727

Accumulated deficit

     (7,544,092 )     2,913,070       4,631,022       —         —         —  
    


 


 


 


 


 

TOTAL STOCKHOLDERS’ DEFICIENCY

     (7,528,616 )     2,968,675       4,631,022 (D)     2,576,682       —         2,647,763
    


 


 


 


 


 

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY

   $ 4,289,788     $ —       $ 4,631,022     $ —       $ —       $ 8,920,810
    


 


 


 


 


 

 

F-42


ELANDIA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - Significant Accounting Policies, continued

 

Basis of Presentation, continued

 

Adjustments reflected in the reorganized condensed consolidated balance sheet as of September 14, 2004 are as follows:

 

  a. Liabilities subject to compromise have been adjusted to reflect the settlement of the claims for cash and/or issuance of common shares in the reorganized Company.

 

  b. The Successor Company has recorded excess of reorganization value over the fair value of the Company’s assets and liabilities in accordance with SFAS No. 141.

 

  c. Upon emergence from Chapter 11 Bankruptcy, SVCH converted approximately $2,600,000 of DIP Financing into 3,397,500 shares of common stock and 3,127,500 warrants exercisable at $.00001 per share.

 

  d. Upon emergence from Chapter 11 Bankruptcy, the Company issued 180,000 shares of common stock to holders of allowed pre-petition claims. The $71,081 value assigned to the 180,000 shares represents the stockholders’ deficiency immediately after the fresh-start adjustment.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The consolidated statements of operations and cash flows include the operations of Technologies from September 15, 2004. (Note 5)

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Such estimates and assumptions impact, among others, the following: the amounts of uncollectible accounts receivable, the amount to be realized upon the sale of assets held for sale and the settlement of liabilities of discontinued operations, the amount to be paid for tax liabilities and the amount of costs capitalized in connection with the wireless licenses. Actual results could differ from those estimates.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

The Company’s accounts receivables are stated at outstanding principal balance, net of allowance for doubtful accounts. Allowances for doubtful accounts are estimated based on the current aging of accounts receivables, prior collection experience and future expectations of conditions that might impact recoverability. The allowance for doubtful accounts amounted to $378,793 at December 31, 2004 and was included in “assets from discontinued operations held for sale”.

 

F-43


ELANDIA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - Significant Accounting Policies, continued

 

Furniture and Equipment

 

Furniture and equipment has been recorded at cost. Expenditures for major improvements are capitalized, while maintenance and repair costs that do not significantly improve the related asset or extend its useful life are charged to expense as incurred. For financial reporting purposes, furniture and equipment are depreciated primarily by the straight-line method over the estimated useful lives of the assets which generally range between five to seven years.

 

Intangible Assets

 

Intangible assets consist of the original costs to acquire the PCS wireless licenses along with the long term maintenance costs necessary to maintain the licenses active. The costs to acquire the wireless licenses as well as the legal and other non-equipment related costs necessary to activate the wireless licenses are capitalized and amortized over the period in which the Company expects to derive benefits, which is principally five or ten years. As of December 31, 2004, the Company has not amortized these licenses since they have not been placed in service.

 

Reorganization Value

 

On September 14, 2004, in connection with the application of fresh-start accounting, the Company recorded $4,631,022 of reorganization value representing the excess value of the Successor Company’s enterprise value over the aggregate fair value of the Successor Company’s tangible and identifiable assets and liabilities at the Confirmation Date. Reorganization value is not amortized but will be reviewed annually or more frequently under certain conditions for impairment in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 142, “Goodwill and Other Intangible Assets”. The reorganization value has been allocated entirely to the “assets from discontinued operations held for sale”.

 

Concentrations of Credit Risk- Significant Customers of Discontinued Operations

 

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of trade receivables. As of December 31, 2004, three customers accounted for 24%, 18%, and 14% of the Company’s accounts receivable and from September 15, 2004 to December 31, 2004, the same three customers accounted for 29%, 20%, and 16%, respectively, of the Company’s revenue.

 

Revenue Recognition

 

The Company recognizes revenue based upon the work performed, which is specifically identified and pursuant to the terms of contracts. Cost of revenue includes direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation.

 

F-44


ELANDIA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - Significant Accounting Policies, continued

 

Revenue Recognition, continued

 

The Company recognizes revenue when all of the following are present:

 

    Persuasive evidence of an arrangement exists between the Company and its customers;

 

    Delivery has occurred or the services have been rendered;

 

    The price for the service is fixed or determinable; and

 

    Collectibility is reasonably assured.

 

Fair Values

 

The Company has determined the estimated fair value amounts presented in these consolidated financial statements using available market information and appropriate methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. The estimates presented in these consolidated financial statements are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The Company has based these fair value estimates on pertinent information available to it as of December 31, 2004. As of December 31, 2004, the carrying value of all financial instruments approximates fair value.

 

Income Taxes

 

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes,” which requires the use of the “liability method” of accounting for income taxes. Accordingly, deferred tax liabilities and assets are determined based on the difference between the financial statement and income tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is required if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management concluded a full valuation allowance was appropriate at December 31, 2004 due to operating losses incurred. Current income taxes are based on the respective periods’ taxable income for federal and state income tax reporting purposes.

 

At December 31, 2004, the Company has net operating loss carryforwards of approximately $5,100,000 which expire through 2024. A portion of the losses are subject to the separate return limitation year rules governed by Internal Revenue Code Section 1503.

 

F-45


ELANDIA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - Significant Accounting Policies, continued

 

Income Taxes, continued

 

Net operating loss carryforwards Accrued expenses and other

   $ 1,895,000  
       654,000  
    


       2,549,000  

Less: valuation allowance

     (1,566,000 )
    


Deferred income tax asset

     983,000  

Deferred income tax liabilities: Fixed assets

     (983,000 )
    


Net deferred income tax asset

   $ —    
    


 

Stock-Based Compensation Plans

 

The Company adopted the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”, which amends SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation, which was originally provided under SFAS No. 123. The Statement also improves the timeliness of disclosures by requiring the information be included in interim, as well as annual, financial statements. SFAS No. 123 encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company will account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. Accordingly, compensation cost for stock options will be measured as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock. The Company did not grant any stock options as of December 31, 2004.

 

Loss Per Share

 

The Company presents both basic and diluted loss from continuing and discontinued operations per share and net loss per share on the face of the statements of operations. As provided by SFAS 128, “Earnings per Share,” basic loss from continuing and discontinued operations and net loss per share is calculated as the loss attributable to common stockholders divided by the weighted average number of shares outstanding during the period. The 744,188 shares issued on December 31, 2004 in connection with the common control merger are reflected in the basic loss per share calculation retroactively to

 

F-46


ELANDIA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - Significant Accounting Policies, continued

 

Loss Per Share, continued

 

September 15, 2004, since the operations of Technologies are included in the consolidated results of operations commencing that same date (see Note 5). The 3,127,500 warrants issued to SVCH are reflected in the basic loss per share calculation retroactively to September 15, 2004, since the underlying shares of common stock were immediately exercisable for nominal consideration. Diluted loss per share reflects the potential dilution that could occur from common shares issuable through stock options, warrants and convertible preferred stock. As of December 31, 2004, there were no outstanding stock options, warrants or convertible preferred stock instruments to be included in the diluted loss per share computation. However, there were 506,250 shares of unvested common stock not included in either the common shares outstanding or the basic or diluted loss per share calculations since the result would be antidilutive (see Note 10).

 

Recent Accounting Pronouncements

 

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R (revised 2004), Share Based Payment, which is a revision of SFAS No. 123. SFAS No. 123R also supersedes APB 25 and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123R differs from SFAS No. 123, by requiring all entities to measure liabilities incurred in stock based payment transactions at fair value rather than measuring the liability at its intrinsic value. SFAS No. 123R requires entities to estimate the number of instruments for which the requisite service period is expected to be rendered rather than accounting for forfeitures as they occur. Under SFAS No. 123R, modifications to the terms or conditions of an award are measured by comparing the fair value of the modified award with the fair value of the award immediately before the modification, as opposed to measuring the effects of a modification as the difference between the fair value of the modified award at the date it is granted and the awards value immediately before the modification. SFAS No. 123R will also clarify and expand current guidance under SFAS No. 123 including the measurement of fair value, classifying an award as either equity or as a liability and attributing compensation cost to reporting periods. SFAS No. 123R amends SFAS No. 95 requiring that the excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid. The statement is effective in the first annual reporting period beginning after June 15, 2005.

 

SFAS No. 123R provides two alternatives for adoption: (1) a “modified prospective” method in which compensation cost is recognized for all awards granted subsequent to the effective date of this statement as well as for the unvested portion of awards outstanding as of the effective date and (2) a “modified retrospective” method which follows the approach in the “modified prospective” method, but also permits entities to restate prior periods to reflect compensation cost calculated under SFAS No. 123 for pro forma amounts disclosure. The Company plans to adopt SFAS No. 123R using the modified prospective method. As the Company currently accounts for share based payments to employees in accordance with the fair value method under SFAS No. 123, the adoption of SFAS No. 123R is not expected to have a significant impact on the Company’s results of operations or financial position.

 

F-47


ELANDIA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - Significant Accounting Policies, continued

 

Recent Accounting Pronouncements, continued

 

In January 2003, the FASB issued Financial Interpretation No. (“FIN”) 46 “Consolidation of Variable Interest Entities” which was amended by FIN 46R in December, 2003. A variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights, or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. Historically, entities generally were not consolidated unless the entity was controlled through voting interests. FIN 46R changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. A company that consolidates a variable interest entity is called the “primary beneficiary” of that entity. The consolidation requirements of FIN 46R have been adopted. FIN 46R did not have any impact on the consolidated financial statements of the Company since it currently has no variable interest entities.

 

NOTE 3 - Discontinued Operations

 

During January 2005, the Company committed to a plan to discontinue its business related to the installation of wireless internet capabilities in hotels and apartment complexes, the end-to-end infrastructure wireless solutions provided through its wholly-owned subsidiary Roughwaters and its construction services relating to underground boring for cable and telephone companies. All periods presented were reclassified to reflect discontinued operations to conform with subsequent financial statement presentations.

 

The assets and liabilities from discontinued operations are as follows as of December 31, 2004:

 

Current Assets Held for Sale:

 

Accounts receivables, net

   $ 4,642,710

Prepaid expenses

     449,834

Machinery and equipment

     3,496,319

Reorganization value

     4,631,022
    

Assets of discontinued operations held for sale

   $ 13,219,885
    

 

The current liabilities of discontinued operations are as follows as of December 31, 2004:

 

Payroll taxes payable

   $ 2,017,405

Accounts payable and accrued expenses

     3,312,776

Notes payable – equipment

     766,218
    

Liabilities of discontinued operations

   $ 6,096,399
    

 

F-48


ELANDIA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 3 - Discontinued Operations, continued

 

The results of discontinued operations were composed of the following for the periods presented below:

 

     From
September 15,
2004
to
December 31,
2004


    From
January 1,
2004
to
September 14,
2004


 

Revenue

   $ 4,532,781     $ 4,034,773  

Cost of revenue

     4,804,538       4,242,320  

General, selling and administrative

     1,831,744       3,743,384  
    


 


Loss from discontinued operations

   $ (2,103,501 )   $ (3,950,931 )
    


 


 

NOTE 4 - Furniture and Equipment

 

As of December 31, 2004, furniture and equipment consists of the following:

 

     Cost

   Useful Life

Furniture

   $ 12,054    7 years

Equipment

     160,237    5 years
    

    
       172,291     

Accumulated depreciation

     3,303     
    

    

Total Furniture and Equipment, net

   $ 168,988     
    

    

 

NOTE 5 - Merger with Technologies

 

Pursuant to a Merger Agreement dated May 20, 2004 with Technologies, the Company legally merged on December 31, 2004 by virtue of issuing 744,188 shares of its common stock to the stockholders of Technologies on a one-for-one exchange for their shares in Technologies. Accordingly, on December 31, 2004, Technologies became a wholly-owned subsidiary of the Company.

 

SVCH was the majority stockholder of Technologies and became the majority stockholder of the Company upon emergence from bankruptcy on September 15, 2004. As companies under common control, the Company has consolidated the operations of Technologies retroactively to September 15, 2004 in a manner similar to pooling of interests.

 

F-49


ELANDIA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 6 - Secured Revolver Note - Related Party

 

Pursuant to a Debtor-in-Possession Financing Agreement (“DIP Financing”) executed on September 15, 2003, SVCH loaned the Company $2,000,000 in a form of a secured, super priority line of credit bearing interest at 8% per annum and due on April 16, 2004. On October 25, 2004, SVCH loaned an additional $2,500,000 to the Company under a supplemental super priority line of credit. On September 14, 2004, $2,000,000 of obligations relating to the initial DIP Financing along with other secured claims and accrued interest amounting to $576,682 were converted into common stock as part of the POR. On October 25, 2004, $2,500,000 of obligation relating to the Company’s supplemental DIP Financing was converted to a secured revolver note with SVCH. The secured revolver note is due on October 24, 2005 and bears interest at the rate of 8% per annum. Substantially all of the assets of the Company and its subsidiaries are pledged as collateral under the secured revolver note agreement. During May 2005, the Company received a modification and extension letter stipulating that SVCH will contribute the debt and related accrued interest in connection with the pending acquisitions discussed in Note 12. In the event the acquisitions are not consummated, SVCH has agreed not to demand repayment until May 2006.

 

The secured revolver note contains restrictions and financial covenants relating to, among other things, limitations on the incurrence of additional indebtedness and liens, asset sales, and capital expenditures. As of December 31, 2004, accrued interest amounted to $105,157 which has been included in accounts payable and accrued expenses in the accompanying balance sheet.

 

NOTE 7 - Promissory Note - Related Party

 

On September 1, 2004, Technologies had issued a promissory note (“Promissory Note”) to Stanford Financial Group (“SFG”), an affiliate of SVCH (its majority stockholder) in the amount of $300,000 for the acquisition of PCS wireless licenses in the United States Virgin Islands and Bloomington, IL. The Promissory Note was assumed by the Company as part of the common control merger (see Note 5). The Promissory Note accrues interest at the rate of 8% per annum, requires quarterly interest payments and it matures on August 31, 2007. The Company has not made any of the required quarterly interest payments subsequent to December 31, 2004. As of December 31, 2004, the Company accrued $11,934 as interest expense which has been included in accounts payable and accrued expenses in the accompanying balance sheet. During May 2005, Technologies received a modification and extension letter stipulating that SFG will contribute such debt and accrued interest in connection with the pending acquisitions discussed in Note 12. In the event the pending acquisitions are not consummated, SFG has agreed not to demand repayment prior to the due date.

 

F-50


ELANDIA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 8 - Revolver Facility - Related Party

 

On May 20, 2004, Technologies entered into a one year Loan and Security Agreement (“L&S Agreement”) with SVCH. The L&S Agreement is collateralized by all of Technologies’ assets. The maximum amount available was $5,000,000 and bears interest at the rate of 8% per annum on the outstanding balance. Principal and any accrued interest are required to be paid whenever any collateral is sold. Amounts may be repaid and re-borrowed any time before May 19, 2005, the maturity date.

 

The L&S Agreement contains restrictions and other financial covenants relating to, among other things, limitations on the incurrence of additional indebtedness and liens, asset sales, and capital expenditures.

 

The L&S Agreement, which had a balance of $3,000,000 on September 15, 2005, was assumed by the Company as part of the common control merger (see Note 5). On November 24, 2004 the L&S Agreement was amended by increasing the amount available from $5,000,000 to $8,500,000. All other terms and conditions remained the same. At December 31, 2004, the outstanding borrowings under the L&S Agreement amounted to $7,300,000, whereas accrued interest, which is included in accounts payable and accrued expenses in the accompanying balance sheet amounted to $171,425. The Company was unable to repay the amount outstanding on the May 19, 2005 maturity date.

 

During May 2005, the Company received a modification and extension letter stipulating that SVCH will contribute the debt and related accrued interest into equity in connection with the pending acquisitions discussed in Note 12. In the event the acquisitions are not consummated, SVCH has agreed not to demand repayment until May 2006.

 

NOTE 9 - Commitments and Contingencies

 

Settlement Agreement

 

On August 18, 2004, the Company entered into a settlement agreement and release with various management members who operated the Company prior to its bankruptcy filing. As part of the agreement, the Company agreed to pay a total of $250,000 to prior management in exchange for a full and final settlement of all ownership and other compensation claims that existed as a result of the bankruptcy or subsequent to the bankruptcy. In return, the Company’s former management agreed to be governed by certain terms in the agreement including confidentiality requirements and a non-compete agreement with the Company. The Company ceased making payments under this agreement on October 8, 2004, as it was determined that the terms of the settlement agreement had been breached by prior management. At December 31, 2004, the amount outstanding amounted to $197,607 and has been included in liabilities of discontinued operations.

 

F-51


ELANDIA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9 - Commitments and Contingencies, continued

 

Operating Lease

 

The Company leases certain plant, office and warehouse space as well as machinery, vehicles, data processing and other equipment. Certain of the leases have renewal options at reduced rates and provisions requiring the Company to pay maintenance, property taxes and insurance. Generally, all rental payments are fixed. The Company’s assets and obligations under capital lease arrangements are not significant, and are included in discontinued operations.

 

Total rental expense under operating leases, excluding maintenance, taxes and insurance, was $88,173 and $102,368 for the Successor Company 2004 Three Months and Predecessor Company 2004 Nine Months, respectively, and are included in discontinued operations.

 

At December 31, 2004, the future payments for all operating leases with remaining lease terms in excess of one year, and excluding maintenance, taxes and insurance were as follows:

 

For the Year Ending
December 31,


   Amount

2005

   $ 132,527

2006

     133,963

2007

     80,876
    

Total

   $ 347,366
    

 

NOTE 10 - Stockholders’ Deficiency

 

Common Stock and Warrants

 

On September 14, 2004, in accordance with the POR, all former outstanding shares of the Company’s common stock were cancelled with new shares to be issued in accordance with the POR to SVCH and to some of its former unsecured creditors. Accordingly, on September 15, 2004, the Company issued 3,397,500 shares of its common stock and 3,127,500 warrants to SVCH and 180,000 shares of its common stock to holders of allowed pre-petition claims. All of the warrants were subsequently exercised.

 

On December 31, 2004, the Company issued 744,188 shares of common stock to the stockholders of Technologies in exchange for Technologies’ shares in connection with the common control merger effected on December 31, 2004 (Note 5). Additionally, the Company’s Chief Executive Officer, previously a Technologies stockholder, also received rights to exchange 506,250 shares of Technologies’ unvested common stock into 506,250 shares of the Company’s common stock upon the Company reaching not less than $50 million of consolidated revenue and not less than $5 million of pre-tax income, for a calendar year ending on or prior to December 31, 2006. These shares are recorded as issued but not outstanding. The Company will record a charge to its operations based on the fair market value of the shares on the date the performance conditions are met.

 

F-52


ELANDIA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 11 - Employment Agreements

 

The Company is party to two separate executive employment agreements, one with its Chief Executive Officer and the other with its Chief Operating Officer. The agreements are for five years with two successive renewal options of two years each. The agreements cover various performance and other employment matters and include an annual base salary of $250,000 per individual. Subsequent to December 31, 2004, the Company’s Chief Operating Officer was terminated for reasons other than cause thereby canceling the related employment agreement.

 

NOTE 12 - Subsequent Events

 

  a. On July 22, 2005, the Company entered into an agreement to purchase 100% of the partnership interests of American Samoa Telecom, LLC (AST). AST is headquartered in Pago Pago, American Samoa and operates under the brand name of Blue Sky Communications. AST is a provider of wireless telephone services in American Samoa via its wireless network. AST is majority owned (approximately 70%) by SVCH. The Company expects to issue a total of 7,042,875 shares of its common stock of which 4,565,012 will be issued to SVCH, AST’s majority interest owner and 2,477,863 to AST’s minority interest owners. Additionally, SVCH and SFG have agreed to forgive all of the debt owed to them by the Company.

 

On July 22, 2005, the Company executed a merger with Datec Group Ltd, (“Datec”) a New Brunswick, Canada, corporation, and its subsidiaries. Datec is publicly-traded company on the Toronto Stock Exchange. Datec is a provider of information technology and services in Australia, Fiji, New Zealand, Papua New Guinea, Samoa, the Solomon Islands, Tonga, and Vanuatu. In connection with the acquisition of certain operating assets of Datec, the Company expects to issue 6,808,542 shares of common stock. The merger of Datec is subject to the Company consummating the AST acquisition and having SVCH and SFG forgive all outstanding debt owed to them.

 

Closing of the above-acquisitions is subject to due diligence and stockholder and various regulatory approvals. There can be no assurances that the acquisitions will be consummated.

 

  b. On September 14, 2005, our Board of Directors approved a 9 for 10 reverse stock split of our outstanding shares of common stock. The reverse stock split was effective on September 14, 2005. All share and per share information in these consolidated financial statements have been adjusted to reflect this reverse stock split.

 

F-53


ELANDIA, INC. AND SUBSIDIARIES

 

CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

As of September 30, 2005 and For the Nine Months Then Ended

and From January 1, 2004 to September 14, 2004 (Predecessor Basis)

and From September 15, 2004 to September 30, 2004 (Successor Basis)

 

F-54


ELANDIA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

ASSETS

 

    

September 30,
2005

(Unaudited)


   December 31,
2004


CURRENT ASSETS

             

Cash

   $ 20,840    $ 16,139

Assets from discontinued operations held for sale

     1,282,656      13,219,885
    

  

Total Current Assets

     1,303,496      13,236,024
    

  

FURNITURE AND EQUIPMENT Net

     140,350      168,988
    

  

OTHER ASSETS

             

Acquisition costs - Datec

     646,600      —  

Intangible assets - wireless licenses

     824,093      804,951
    

  

Total Other Assets

     1,470,693      804,951
    

  

TOTAL ASSETS

   $ 2,914,539    $ 14,209,963
    

  

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

F-55


ELANDIA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY

 

     September 30,
2005

(Unaudited)


    December 31,
2004


 

CURRENT LIABILITIES

                

Accounts payable and accrued expenses

   $ 1,004,422     $ 692,207  

Liabilities of discontinued operations

     2,446,796       6,096,399  

Secured revolver note - related party

     —         2,500,000  

Promissory note - related party

     —         300,000  

Revolver facility - related party

     —         7,300,000  

Accrued expenses - related party interest

     —         288,516  
    


 


Total Current Liabilities

     3,451,218       17,177,122  
    


 


COMMITMENTS AND CONTINGENCIES

                

LONG TERM LIABILITIES

                

Secured revolver note - related party

     2,500,000       —    

Promissory note - related party

     300,000       —    

Revolver facility - related party

     8,500,000       —    

Accrued expenses - related party interest

     1,541,868       —    
    


 


Total long term liabilities

     12,841,868       —    
    


 


TOTAL LIABILITIES

     16,293,086       17,177,122  
    


 


STOCKHOLDERS’ DEFICIENCY

                

Common stock, $.00001 par value; 50,000,000 shares authorized, 8,471,672 issued and 7,875,422 outstanding at September 30, 2005 and 7,955,438 issued and 7,449,188 outstanding at December 31, 2004

     78       74  

Additional paid-in capital

     5,314,130       4,248,547  

Accumulated deficit

     (18,692,724 )     (7,215,749 )

Subscription receivable

     (31 )     (31 )
    


 


TOTAL STOCKHOLDERS’ DEFICIENCY

     (13,378,547 )     (2,967,159 )
    


 


TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY

   $ 2,914,539     $ 14,209,963  
    


 


 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

F-56


ELANDIA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

    

For the Nine

Months Ended

September 30,
2005

(Successor
Company)


    From
September 15,
2004
to
September 30,
2004

(Successor
Company)


    From
January 1,2004
to
September 14,
2004

(Predecessor
Company)


 

REVENUE

   $ —       $ —       $ —    
    


 


 


COST AND EXPENSES

                        

General, selling and administrative expenses (includes $1,065,587 of non-cash compensation)

     2,656,285       151,161       —    
    


 


 


OPERATING LOSS

     (2,656,285 )     (151,161 )        
    


 


 


OTHER (EXPENSES) INCOME

                        

Interest expense

     (1,300,790 )     (49,618 )     (341,668 )

Reorganization items (including legal and trustee fees)

     —         —         (596,250 )

Gain on extinguishment of debt and other bankruptcy items

     —         —         2,968,675  

Loss on abandonment of machinery and equipment

     —         —         (887,395 )

Fresh-start accounting adjustments

     —         —         4,631,022  
    


 


 


Total Other (Expenses) Income

     (1,300,790 )     (49,618 )     5,774,384  
    


 


 


(LOSS) INCOME FROM CONTINUING OPERATIONS

     (3,957,075 )     (200,779 )     5,774,384  

DISCONTINUED OPERATIONS

                        

Loss from discontinued operations

     (1,088,963 )     (470,160 )     (3,950,931 )

Impairment charge for reorganization value

     (4,631,022 )     —         —    

Loss on sale of machinery and equipment

     (1,799,915 )     —         —    
    


 


 


TOTAL LOSS FROM DISCONTINUED OPERATIONS

     (7,519,900 )     (470,160 )     (3,950,931 )
    


 


 


NET (LOSS) INCOME

   $ (11,476,975 )   $ (670,939 )   $ 1,823,453  
    


 


 


 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

F-57


ELANDIA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS, Continued

(UNAUDITED)

 

     For the Nine
Months Ended
September 30,
2005

(Successor
Company)


    From
September 15,
2004
to
September 30,
2004

(Successor
Company)


    From
January 1,2004
to
September 14,
2004

(Predecessor
Company)


Basic and diluted loss from continuing operations per common share

   $ (0.52 )   $ (0.03 )   $ —  

Basic and diluted loss from discounted operations per common share

     (1.00 )     (0.06 )     —  
    


 


 

Basic and diluted net loss per common share

   $ (1.52 )   $ (0.09 )   $ —  
    


 


 

Weighted average number of shares outstanding, basic and diluted

     7,552,923       7,449,188       —  
    


 


 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 

F-58


ELANDIA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

 

For the Nine Months Ended September 30, 2005

 

     Number of
Shares of
Common
Stock


  

Common Stock

Par Value


   Additional
Paid-in
Capital


   Accumulated
Deficit


    Subscription
Receivable


    Total

 

BALANCE - January 1, 2005

   7,449,188    $ 74    $ 4,248,547    $ (7,215,749 )   $ (31 )   $ (2,967,159 )

Net loss for the nine months ended September 30, 2005

   —        —        —        (11,476,975 )     —         (11,476,975 )

Issuance of common stock for services

   426,234      4      1,065,583      —         —         1,065,587  
    
  

  

  


 


 


BALANCE - September 30, 2005

   7,875,422    $ 78    $ 5,314,130    $ (18,692,724 )   $ (31 )   $ (13,378,547 )
    
  

  

  


 


 


 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

F-59


ELANDIA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

 

     For the Nine
Months Ended
September 30,
2005

(Successor
Company)


    From
September 15,
2004
to
September 30,
2004

(Successor
Company)


    From
January 1,
2004
to
September 14,
2004

(Predecessor
Company)


 

CASH FLOWS FROM OPERATING ACTIVITIES

                        

Net (loss) income

   $ (11,476,975 )   $ (670,939 )   $ 1,823,453  
    


 


 


Adjustments to reconcile net (loss) income to net cash used in operating activities:

                        

Depreciation

     28,638       82,948       680,565  

Bad debt expense

     60,529       131,171       404,000  

Gain on debt discharge

     —         —         (2,968,675 )

Loss on sale of machinery and equipment

     1,799,915       —         —    

Loss on abandonment of machinery and equipment

     —         —         887,395  

Fresh start adjustment

     —         —         (4,631,022 )

Reorganization value impairment charge

     4,631,022       —         —    

Non-cash stock compensation

     1,065,587       —         —    

Changes in operating assets and liabilities:

                        

Accounts receivable

     4,337,922       (372,504 )     (138,363 )

Insurance receivable

     (374,833 )     —         —    

Prepaid expenses

     449,834       143,034       146,117  

Accounts payable, accrued expenses, and accrued expenses - related party interest

     (957,395 )     146,249       1,057,730  

Payroll taxes payable

     (521,512 )     (83,709 )     683,104  
    


 


 


TOTAL ADJUSTMENTS

     10,519,707       47,189       (3,879,149 )
    


 


 


NET CASH USED IN OPERATING ACTIVITIES

     (957,268 )     (623,750 )     (2,055,696 )
    


 


 


CASH FLOWS FROM INVESTING ACTIVITIES

                        

Acquisition cost incurred - Datec

     (646,600 )     —         —    

Proceeds from sale of machinery and equipment

     1,032,840       —         —    

Purchase of intangible licenses

     (19,142 )     (210,636 )     —    
    


 


 


NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

   $ 367,098     $ (210,636 )   $ —    
    


 


 


 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

F-60


ELANDIA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED CASH FLOWS, Continued

 

     For the Nine
Months Ended
September 30,
2005

(Successor
Company)


    From
September 15,
2004
to
September 30,
2004

(Successor
Company)


    From
January 1,
2004
to
September 14,
2004

(Predecessor
Company)


 

CASH FLOWS FROM FINANCING ACTIVITIES

                        

Proceeds from revolver facility - related party

   $ 1,200,000     $ 650,000     $ 2,860,000  

Repayment of principal on bank loans

     (605,129 )     (20,880 )     (820,025 )
    


 


 


NET CASH PROVIDED BY FINANCING ACTIVITIES

     594,871       629,120       2,039,975  
    


 


 


NET INCREASE (DECREASE) IN CASH

     4,701       (205,266 )     (15,721 )

CASH - Beginning

     16,139       254,531       126,885  
    


 


 


CASH - Ending

   $ 20,840     $ 49,265     $ 111,164  
    


 


 


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

                        

Cash paid during the periods for:

                        

Interest

   $ —       $ —       $ —    

Taxes

   $ —       $ —       $ —    

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

F-61


ELANDIA, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 - Organization and Business

 

Historical Structure of the Company

 

Elandia, Inc. (the “Company” or the “Successor Company”) was known as Centra Industries, Inc. prior to the Company’s merger with eLandia Technologies, Inc. (“Technologies”) on December 31, 2004.

 

On August 1, 2003, the Company’s main operating subsidiary, eLandia Infrastructure, Inc. (“Infrastructure”), formerly known as Midwest Cable Communications of Arkansas, Inc. filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code (“Bankruptcy Code”) in the United States Bankruptcy Court for the Western District of Arkansas (the “Bankruptcy Court”).

 

On January 8, 2004, the Company also filed a voluntary petition for reorganization under the Bankruptcy Code in the Bankruptcy Court. The Company operated its business and managed its assets in the ordinary course effectively from August 1, 2003 to September 14, 2004 as debtor-in-possession, and obtained Bankruptcy Court approval for transactions outside the ordinary course of business.

 

By order dated September 14, 2004, (the “Confirmation Date”) the Bankruptcy Court confirmed the Joint Plan of Reorganization (the “POR”) of the Company and Infrastructure. Accordingly, on September 14, 2004, the Company emerged from reorganization under Chapter 11 of The United States Bankruptcy Code.

 

Business

 

Commencing during the first quarter of 2005, the Company committed to a plan for disposing substantially all of its operations. The Company’s future plans are to generate revenue by utilizing its remaining assets comprised primarily of Personal Communication Services (“PCS”) licenses and acquire existing operating providers of wireless telephone services and cable television providers. (See Note 11)

 

Prior to January 2005, the Company was involved in other activities such as: i) setting up wireless internet capabilities in major hotel and apartment complexes, ii) provided end-to-end infrastructure solutions for the wireless communication and cable television industries, which was comprised primarily of maintaining and constructing cell towers and iii) provided underground horizontal directional boring technology and related underground construction services to telecommunication and cable television providers, water and sewer systems, and natural gas pipelines. As of September 30, 2005, the Company’s main remaining assets (other than assets from discontinued operations held for sale) are the PCS licenses.

 

F-62


ELANDIA, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 - Organization and Business, continued

 

Business, continued

 

The above operations are or were conducted through the Company’s wholly owned subsidiaries as follows:

 

Technologies -    Owns PCS licenses
Roughwaters, LLC (“Roughwaters”) -    A subsidiary of Technologies, which maintained and constructed cell towers.
Infrastructure -    Provided construction services primarily composed of underground boring for cable and telephone companies.

 

From January 1, 2004 through September 30, 2005, the Company’s three remaining subsidiaries, Centra Construction, Inc., Centra Wireless Solutions, Inc., and Razorback, Inc., have been inactive.

 

NOTE 2 - Management Plans

 

As of September 30, 2005, the Company had a working capital deficiency of $2,147,722 and incurred a net loss of $11,476,975 for the nine months then ended. As part of the Company’s merger with the operating subsidiaries of Datec Group Ltd. (“Datec”) and American Samoa Telecom, LLC (“AST”) (Note 11), $12,841,868 (representing principal and accrued interest) comprised of the Company’s Secured Revolver Note, Promissory Note and Revolver Facility were contributed to capital (Notes 6, 7 and 8). Additionally, during February 2006, the Company was able to secure a debt facility in the amount of $2,300,000 for working capital from an affiliate of its majority stockholder (Note 11). The Company has also reduced its administrative overhead expenses where necessary and feasible as part of the sale of discontinued operations. Management believes that with the closing of its mergers and the reduction of expenses, the combined companies will begin to generate positive cash flows from operations. There can be no assurance that the plans and actions taken by management will be successful and the Company may have to secure additional funding sources in the future.

 

NOTE 3 - Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles (United States) for complete financial statements. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly

 

F-63


ELANDIA, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 3 - Basis of Presentation, continued

 

the financial position, results of operations and cash flows for all periods presented have been made. The results of operations for the nine month period ended September 30, 2005 is not necessarily indicative of the operating results that may be expected for the year ending December 31, 2005.

 

The Company emerged from bankruptcy on September 14, 2004. Accordingly, pursuant to SOP 90-7, the Company’s financial statements are not comparable since the Company applied fresh start accounting commencing September 15, 2004. As a result, the statements of operations and cash flows from January 1, 2004 to September 14, 2004 (the “Predecessor Company”) are presented on a different basis of accounting than that of the Successor Company for the periods before fresh start, and therefore are not comparable.

 

These condensed consolidated financial statements should be read in conjunction with the Company’s audited 2004 consolidated financial statements and related notes.

 

Certain reclassification were made to the December 31, 2004 Balance Sheet in order to conform to the September 30, 2005 presentation.

 

NOTE 4 - Merger with Technologies

 

Pursuant to a Merger Agreement dated May 20, 2004 with Technologies, the Company legally merged on December 31, 2004 by virtue of issuing 744,188 shares of its common stock to the stockholders of Technologies on a one-for-one exchange for their shares in Technologies. Accordingly, on December 31, 2004, Technologies became a wholly-owned subsidiary of the Company.

 

Stanford Venture Capital Holdings (“SVCH”) was the majority stockholder of Technologies and became the majority stockholder of the Company upon emergence from bankruptcy on September 15, 2004. As companies under common control, the Company has consolidated the operations of Technologies retroactively to September 15, 2004 in a manner similar to pooling of interests.

 

NOTE 5 - Discontinued Operations

 

During January 2005, the Company committed to a plan to discontinue its business related to the installation of wireless internet capabilities in hotels and apartment complexes, the end-to-end infrastructure wireless solutions provided through its wholly-owned subsidiary Roughwaters and its construction services relating to underground boring for cable and telephone companies. All periods presented were reclassified to reflect discontinued operations.

 

F-64


ELANDIA, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 - Discontinued Operations, continued

 

The assets and liabilities from discontinued operations are as follows as of September 30, 2005:

 

     Amount

Assets From Discontinued Operations Held for Sale:

      

Accounts receivables, net

   $ 304,788

Receivable from sale of machinery and equipment

     603,035

Insurance receivable

     374,833
    

Total Assets From Discontinued Operations Held for Sale

   $ 1,282,656
    

 

The liabilities of discontinued operations are as follows as of September 30, 2005:

 

     Amount

Liabilities of Discontinued Operations

      

Payroll taxes payable

   $ 1,418,600

Accounts payable and accrued expenses

     867,107

Notes payable-equipment

     161,089
    

Total Liabilities of Discontinued Operations

   $ 2,446,796
    

 

The results of discontinued operations were composed of the following for the periods presented below:

 

    

For the Nine

Months

Ended

September 30,

2005

(Successor

Company)


   

From

September 15,

2004 to

September 30,

2004

(Successor

Company)


   

From

January 1,

2004 to

September 14,

2004

(Predecessor

Company)


 

Revenue

   $ 2,718,936     $ 766,446     $ 4,034,773  

Cost of revenue

     3,235,038       540,093       4,242,320  

General, selling and administrative

     572,861       696,5133       3,743,384  
    


 


 


Loss from discontinued operations

   $ (1,088,9631 )   $ (470,1601 )   $ (3,950,9311 )
    


 


 


 

In connection with the plan to sell its machinery and equipment during August of 2005, the Company recorded a $4,631,022 impairment charge for its reorganization value associated with such equipment. The Company determined that the reorganization value recorded on its financial statements had been permanently impaired.

 

F-65


ELANDIA, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

NOTE 6 - Secured Revolver Note-Related Party

 

Pursuant to a Debtor-in-Possession Financing Agreement (“DIP Financing”) executed on September 15, 2003, SVCH loaned the Company $2,000,000 in a form of a secured, super priority line of credit bearing interest at 8% per annum which was due on April 16, 2004. On October 25, 2004, SVCH loaned an additional $2,500,000 to the Company under a supplemental super priority line of credit. On September 14, 2004, $2,000,000 of obligations relating to the initial DIP Financing along with other secured claims and accrued interest amounting to $576,682 were converted into common stock as part of the POR. On October 25, 2004, $2,500,000 of obligation relating to the Company’s supplemental DIP Financing was converted to a secured revolver note with SVCH. The secured revolver note was due on October 24, 2005 and bears interest at the rate of 8% per annum. Substantially all of the assets of the Company and its subsidiaries are pledged as collateral under the secured revolver note agreement. During May 2005, the Company received a modification and extension letter stipulating that SVCH will contribute the debt and related accrued interest to capital in connection with the acquisitions discussed in Note 11.

 

The secured revolver note contains restrictions and financial covenants relating to, among other things, limitations on the incurrence of additional indebtedness and liens, asset sales, and capital expenditures. As of September 30, 2005, the Company was not in compliance with such financial covenants. As of September 30, 2005, accrued interest amounted to $254,746, which has been included in accrued expenses – related party interest in the accompanying balance sheet.

 

NOTE 7 - Promissory Note-Related Party

 

On September 1, 2004, Technologies had issued a promissory note (“Promissory Note”) to Stanford Financial Group (“SFG”), an affiliate of SVCH (its majority stockholder) in the amount of $300,000 for the acquisition of PCS wireless licenses in the United States Virgin Islands and Bloomington, IL. The Promissory Note was assumed by the Company as part of the common control merger effective September 14, 2004. The Promissory Note accrues interest at the rate of 12% per annum, requires quarterly interest payments and it matures on August 31, 2007. The Company had not made any of the required quarterly interest payments as of September 30, 2005 and subsequent thereto. Accordingly, such promissory was deemed to be in default. As of September 30, 2005, the Company accrued $26,926 as interest expense which has been included in accrued expenses – related party interest in the accompanying balance sheet.

 

F-66


ELANDIA, INC. AND SUBSIDIARIES

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 7 - Promissory Note-Related Party, continued

 

During May 2005, Technologies received a modification and extension letter stipulating that SFG will contribute such debt and accrued interest to capital in connection with the acquisitions discussed in Note 11.

 

NOTE 8 - Revolver Facility-Related Party

 

On May 20, 2004, Technologies entered into a one year Loan and Security Agreement (“L&S Agreement”) with SVCH. The L&S Agreement is collateralized by all of Technologies’ assets. The maximum amount available was $5,000,000 and bears interest at the rate of 8% per annum on the outstanding balance. Principal and any accrued interest are required to be paid whenever any collateral is sold. Amounts may have been repaid and re-borrowed any time before May 19, 2005, the maturity date.

 

The L&S Agreement contains restrictions and other financial covenants relating to, among other things, limitations on the incurrence of additional indebtedness and liens, asset sales, and capital expenditures.

 

The L&S Agreement, which had a balance of $3,000,000 on September 15, 2004, was assumed by the Company as part of the common control merger with Technologies. On November 24, 2004 the L&S Agreement was amended by increasing the amount available from $5,000,000 to $8,500,000. All other terms and conditions remained the same. At September 30, 2005, the outstanding borrowings under the L&S Agreement amounted to $8,500,000. As a result of the default, interest has been accrued at the default rate of 15% and it’s included in accrued expenses – related party interest in the accompanying balance sheet. Accrued interest amounted to $1,260,196 at September 30, 2005.

 

During May 2005, the Company received a modification and extension letter stipulating that SVCH will contribute the debt and related accrued interest to capital in connection with the acquisitions discussed in Note 11.

 

NOTE 9 - Commitments and Contingencies

 

Concentrations of Credit Risk- Significant Customers of Discontinued Operations

 

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of trade receivables. As of September 30, 2005, three customers accounted for 42%, 11%, and 11% of the Company’s accounts receivable and for the nine months ended September 30, 2005, two customers accounted for 51% and 44%, respectively, of the Company’s revenue.

 

F-67


ELANDIA, INC. AND SUBSIDIARIES

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 9 - Commitments and Contingencies, continued

 

Settlement Agreement

 

On August 18, 2004, the Company entered into a settlement agreement and release with various management members who operated the Company prior to its bankruptcy filing. As part of the agreement, the Company agreed to pay a total of $250,000 to prior management in exchange for a full and final settlement of all ownership and other compensation claims that existed as a result of the bankruptcy or subsequent to the bankruptcy. In return, the Company’s former management agreed to be governed by certain terms in the agreement including confidentiality requirements and a non-compete agreement with the Company. The Company ceased making payments under this agreement on October 8, 2004, as it was determined that the terms of the settlement agreement had been breached by prior management. At September 30, 2005, the amount outstanding amounted to $197,607 and has been included in liabilities of discontinued operations.

 

Operating Lease

 

The Company leases certain plant, office and warehouse space as well as office equipment. Certain of the leases have renewal options at reduced rates and provisions requiring the Company to pay maintenance, property taxes and insurance. Generally, all rental payments are fixed. The Company’s assets and obligations under capital lease arrangements are not significant, and are included in discontinued operations.

 

Total rental expense under operating leases, excluding maintenance, taxes and insurance, amounted to $71,446 for the nine months ended September 30, 2005.

 

At September 30, 2005, the future payments for all operating leases with remaining lease terms in excess of one year, and excluding maintenance, taxes and insurance were as follows:

 

For the Year Ending September 30,


   Amount

2006

   $ 93,916

2007

     59,040
    

Total

   $ 152,956
    

 

Employment Agreements

 

The Company was a party to 2 separate executive employment agreements, one with its Chief Executive Officer, and one with its Chief Operating Officer. The agreements with an effective date of April 1, 2004, were for five years with two successive renewal options of two years each. The agreements cover various performance and other employment matters and include an annual base salary of $250,000 for the Chief Executive Officer and $250,000 for its Chief Operating Officer. During July 2005, the Company’s Chief Operating Officer was terminated for reasons other than cause thereby canceling the related employment agreement. As of September 30, 2005, the Company has accrued $187,500 in connection with the one year severance provision.

 

On July 1, 2005, The Company entered into an employment agreement with its Chief Financial Officer with an initial term of five years but will automatically be extended for successive two year terms unless either party gives written notice. The agreement covers various performance and other employment matters and includes an annual base salary of $175,000.

 

The above agreements have a change in control clause. If a change in control occurs, the executives have a right to terminate their agreements and receive one year severance.

 

F-68


ELANDIA, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 10 - Issuance of Common Stock

 

During the nine months ended September 30, 2005, the Company issued 426,234 shares of its common stock to its officers and other consultants in exchange for services. The shares were valued at their estimated fair value resulting in a non-cash compensation expense to the Company of $1,065,587.

 

NOTE 11 - Subsequent Events

 

On July 22, 2005 the Company entered into an agreement to purchase 100% of the partnership interest of AST. AST is headquartered in Pago Pago, American Samoa and operates under the brand name of Blue Sky Communications. AST is a provider of wireless telephone services in American Samoa via its GSM wireless network. AST is majority owned (approximately 70%) by SVCH. On January 31, 2006, the Company issued a total of 7,042,875 shares of its common stock in exchange for 100% partnership interest of AST. Of the total shares issued, 4,565,012 were issued to SVCH, AST’s majority interest owner and 2,477,863 to AST’s minority interest owners.

 

On July 22, 2005 the Company executed a merger with the operating subsidiaries of Datec, a New Brunswick, Canada, corporation. Datec is publicly-traded on the Toronto Stock Exchange. Datec is a provider of information technology and services in Australia, Fiji, New Zealand, Papua New Guinea, Samoa, the Solomon Islands, Tonga, and Vanuatu. On February 1, 2006, in connection with the acquisition of certain operating subsidiaries of Datec, the Company issued 6,808,542 shares of common stock to the shareholders of Datec.

 

Simultaneously with the acquisition of AST, both SVCH and SFG have contributed the related party debt and related accrued interest which amounted to $12,841,868 at September 30, 2005.

 

On February 10, 2006, the Company secured a loan from an affiliate of its majority stockholder in the amount of $2,300,000 to fund operating expenses for the next twelve months. The loan bears interest at a rate of 8% and is payable on December 31, 2007.

 

Datec PNG Pty Ltd, a subsidiary, is party to an action as a 50% partner in Amalgamated Telikom Holdings PNG Pty Ltd. Amalgamated Telikom Holdings PNG Pty Ltd. was created as a joint venture between Amalgamated Telecom Holdings Limited of Fiji and Datec PNG Pty Ltd. Amalgamated Telikom Holdings PNG Pty Ltd has initiated an action for damages against the State of Papua New Guinea and the Independent Public Business Corporation of PNG for their breach of a Share Acquisition Agreement, dated July 31, 2002, in connection with Amalgamated Telikom Holdings PNG Pty Ltd’s successful bid to acquire 51% of the outstanding shares of Telikom PNG Pty Ltd. Telikom PNG Pty Ltd is a wholly-owned limited liability company, with a monopoly in the provision of fixed and mobile telephone services in Papua New Guinea. Amalgamated Telikom Holdings PNG Pty Ltd. is seeking damages in this proceeding for expenditures incurred in the bidding process, lost profits and revenue and efforts and funds expended for the sole benefit of Telikom PNG Pty Ltd. No court appointment to try this case has been determined.

 

On February 6, 2006, Elandia was sued in the Sixth Judicial Circuit Court in Pasco County, Florida by Cornerstone Businesses, Inc. in a complaint related to a subcontractor agreement between Cornerstone Businesses, Inc. and Midwest Cable Communications of Arkansas, Inc.  Cornerstone Businesses, Inc. seeks relief based upon claims of breach of contract, tortious interference with a contractual right, tortious interference with a business relationship and fraud and negligent misrepresentation. The complaint seeks unspecified monetary damages, including pre-judgment interest and costs. The Company believes that the claims alleged in the complaint are without merit and it intends to vigorously defend against this complaint.

 

F-69


AST TELECOM, L.L.C.

FINANCIAL STATEMENTS

 

For the Years Ended

December 31, 2003 and 2004

 

F-70


KINGBETHAM & COMPANY

 

Certified Public Accountants

  

P.O. Box 6740

Pago Pago, Am. Samoa 96799

Tel: (684) 699-2401.

Fax: (684) 699-2402

 

April 4, 2005

 

Independent Auditor’s Report

 

Board of Members

AST Telecom, LLC.

Pago Pago, American Samoa

 

We have audited the accompanying balance sheet of AST Telecom, LLC, as of December 31, 2004, and the related statements of income, members’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

The financial statements for AST Telecom, LLC for the year ended December 31, 2003, were audited by King Accountancy Corporation whose report dated September 13, 2004 expressed an unqualified opinion on those statements.

 

We conducted our audit in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AST Telecom, LLC, as of December 31, 2004 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles in the United States.

 

/s/ KingBetham & Company

KingBetham & Company

 

SAMOA OFFICE: P.O. BOX 859, APIA, SAMOA Tel: (685)24337 Fax: (685)24336

 

F-71


AST TELECOM, LLC

BALANCE SHEET

DECEMBER 31, 2004 and 2003

 

         

Year Ended

December 31,


     Note

   2004

   2003

ASSETS

                  

Current Assets

                  

Cash on hand & at banks

   3    $ 815,678    $ 1,296,164

Receivables net of allowance for doubtful accounts

   4      444,128      311,632

Inventories

   5      172,424      121,009

Other receivables and prepayments

   6      178,495      146,823
         

  

Total Current Assets

        $ 1,610,725    $ 1,875,628

Fixed Assets

                  

Property, plant and equipment net of accumulated depreciation

   7      3,361,270      1,307,777
         

  

Total Assets

        $ 4,971,995    $ 3,183,405
         

  

LIABILITIES AND MEMBERS’ EQUITY

                  

Current Liabilities

                  

Trade accounts payable

          672,218      357,573

Accrued expenses

          220,188      127,118
         

  

Total Current Liabilities

          892,406      484,691

Deferred Revenue

   8      279,209      234,811

Member Distributions Payable

   9      —        711,705
         

  

Total Liabilities

        $ 1,171,615    $ 1,431,207
         

  

Members’ Equity

          3,800,380      1,752,198
         

  

Total Liabilities and Members’ Equity

        $ 4,971,995    $ 3,183,405
         

  

 

The accompanying notes are an integral part of these financial statements.

 

F-72


AST TELECOM, LLC

STATEMENT OF INCOME AND MEMBERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2004 and 2003

 

         

Year Ended

December 31,


 
     Note

   2004

    2003

 

Revenue

                     

Prepaid

        $ 4,784,181     $ 3,245,473  

Postpaid

          1,087,181       1,152,659  

Long Distance Reverse Tolls

          585,017       107,339  

Other

          937,457       731,123  
         


 


Total Revenue

        $ 7,393,836     $ 5,236,594  

Cost of Revenue

                     

Cost of Services

        $ 2,160,228     $ 1,488,193  

Other

          669,189       503,933  
         


 


Total Cost of Revenue

        $ 2,829,417     $ 1,992,126  
         


 


Gross Profit

        $ 4,564,419     $ 3,244,468  
         


 


Operating Expense

                     

Sales and Marketing

          704,477       311,937  

Customer Service

          205,012       224,555  

General and Administrative

          1,172,058       859,991  

Depreciation

          199,527       76,281  
         


 


Total Operating Expense

          2,281,074       1,472,764  
         


 


Net Profit (Loss) From Operation

          2,283,345       1,771,704  
         


 


Other Income (Expense)

                     

Interest income

          12,092       3,413  

Other income

          (14,488 )     22,119  
         


 


Total Other Income (Expense)

          (2,396 )     25,532  
         


 


Net Income (Loss)

        $ 2,280,949     $ 1,797,236  

Members’ Equity - Beginning of year

        $ 1,752,198     $ —    

Contributions

          —         1,000,000  

Distributions

          (232,767 )     (1,045,038 )
         


 


Members’ Equity - End of year

        $ 3,800,380     $ 1,752,198  
         


 


 

The accompanying notes are an integral part of these financial statements.

 

F-73


AST TELECOM, LLC

STATEMENT OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2004 and 2003

 

    

Year Ended

December 31,


 
     2004

    2003

 

Cash Flows From Operating Activities

                

Net Income

   $ 2,280,949     $ 1,797,236  

Adjustments to reconcile net income to net cash provided from operating activities:

                

Depreciation

     199,527       76,281  

Changes in:

                

Inventory

     (51,415 )     (121,009 )

Receivables

     (132,496 )     (311,632 )

Other assets

     (31,673 )     (146,823 )

Accounts payable and other liabilities

     452,114       719,502  
    


 


Cash provided from operating activities

   $ 2,717,006     $ 2,013,555  
    


 


Cash Flows From Investing Activities

                

Payments for property, plant and equipment

   $ (2,253,020 )   $ (1,384,058 )
    


 


Net cash flow from investing activities

     (2,253,020 )     (1,384,058 )
    


 


Cash Flows From Financing Activities

                

Contributions by Members

   $ —       $ 1,000,000  

Distributions to Members

     (944,472 )     (333,333 )
    


 


Net cash flow from Financing

   $ (944,472 )   $ 666,667  
    


 


Net Change in Cash and Cash Equivalents

   $ (480,486 )   $ 1,296,164  

Cash and Cash Equivalents, Beginning of Year

   $ 1,296,164     $ —    
    


 


Cash and Cash Equivalents, End of Year

   $ 815,678     $ 1,296,164  
    


 


Cash on hand and at banks

                

Cash on hand

   $ 2,100     $ 2,100  

Bank of Hawaii

     512,361       401,302  

Amerika Samoa Bank

     125,347       621,823  

Stanford International Bank

     123,797       220,734  

Stanford International Bank - CD

     52,072       50,205  
    


 


     $ 815,678     $ 1,296,164  
    


 


 

The accompanying notes are an integral part of these financial statements.

 

F-74


AST TELECOM, LLC

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2003 and 2004

 

Note 1. Organization

 

AST Telecom, LLC is a Delaware limited liability company, organized on July 15, 2002 and registered as a foreign entity with a permit to transact business in the Territory of American Samoa. The Company’s primary business activity is the provision of wireless telephone and internet services and sales of related items. Company headquarters are in Nuu’uli, American Samoa. On February 14, 2003, the Company began operations by purchasing the assets and assuming certain liabilities of AST Telecom, LLC.

 

Note 2. Significant Accounting Policies

 

Method of Accounting

 

The financial statements of the company are prepared using the accrual basis of accounting in accordance with United States generally accepted accounting principles.

 

Inventories

 

Inventories are carried at the lower of cost or net realizable value. Cost is based on the first-in-first-out principle. All expenditures incurred in acquiring the inventories including transportation and custom duties are included in inventory.

 

Revenue Recognition

 

There are three sources of revenue generated by the Company. The primary source being prepaid phone cards sold with revenue recognized when the minutes are used. When the phone cards are initially sold, revenue is recognized as deferred until such time as the minutes become used.

 

Revenue is recognized for ISP (internet) services when performed and from sales of networking equipment and mobile phones including accessories at the time the sale is complete.

 

Foreign Currency

 

Unless otherwise stated, all amounts are expressed in US dollars. Transactions in foreign currencies have been converted to US dollars at rates approximating those at the dates of the transactions. Exchange gains and losses are brought into the account in determining the profit for the year.

 

Recent Accounting Pronouncements

 

There are no recent accounting pronouncements that would have a significant impact on the Company’s results of operations or financial position.

 

Operating Lease

 

Leases where a significant portion of the risks and rewards of ownership are not retained by AST Telecom, LLC are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease.

 

The company has entered into lease agreements for several locations in American Samoa for cell towers, satellite and networking site, and sales and administrative offices with lease terms of one to thirty years. Note 11 shows the future commitments of the lease obligations.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Such estimates and assumptions impact, among others, the following: the amounts of uncollectible accounts receivable. Actual results could differ from those estimates.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

The Company’s accounts receivables are stated at outstanding principal balance, net of allowance for doubtful accounts. Allowances for doubtful accounts are estimated based on the current aging of accounts receivables, prior collection experience and future expectations of conditions that might impact recoverability. The allowance for doubtful accounts amounted to $342,512 and $146,210 at December 31, 2004 and 2003, respectively.

 

Fair Values

 

The Company has determined the estimated fair value amounts presented in these financial statements using available market information and appropriate methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. The estimates presented in these financial statements are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The Company has based these fair value estimates on pertinent information available to it as of December 31, 2004. As of December 31, 2004, the carrying value of all financial instruments approximates fair value.

 

F-75


AST TELECOM, LLC

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2003 and 2004

 

Note 2. Significant Accounting Policies cont’d.

 

Fixed Assets

 

Fixed assets are stated at cost and depreciated using the straight line method over their useful lives as follows:

 

Leasehold Improvements

   7 years

Furniture & Fixtures

   7 years

Cellular Equipment

   7 years

Data Handling Equipment

   7 years

Microwave Equipment

   7 years

Towers & Antennas

   7 years

Office Equipment & Software

   3 to 5 years

Switch Hardware & Software and others

   5 to 7 years

Vehicles

   5 years

 

Provision for Doubtful Debts

 

A specific provision is based on the annual review by management of those accounts that are considered doubtful.

 

Income Tax and Income Tax Exemption

 

As a Limited Liability Company taxed as a partnership, the Company pays no income tax. Taxable income and the resulting tax liability is reported by the members of the Company.

 

In addition, the American Samoa Government, effective January 1, 2004, approved a ten year tax exemption for the members of the Company for all income taxes and, for the Company, all excise taxes incurred within the Territory of American Samoa. The exemption is for the purpose of promoting economic activity and employment within the Territory of American Samoa and the Company must meet certain investment requirements for the exemption to continue.

 

Note 3. Cash on hand and at banks

 

     2004

   2003

Cash on hand

   $ 2,100    $ 2,100

Bank of Hawaii

     512,361      401,302

Amerika Samoa Bank

     125,347      621,823

Stanford International Bank

     123,797      220,734

Stanford International Bank - CD

     52,072      50,205
    

  

     $ 815,678    $ 1,296,164
    

  

 

Note 4. Receivables less Allowance for Doubtful Accounts

 

Trade receivables

   $ 786,640     $ 457,842  

Less: Allowance for doubtful accounts

     (342,512 )     (146,210 )
    


 


     $ 444,128     $ 311,632  
    


 


 

F-76


AST TELECOM, LLC

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2004 and 2003

 

Note 5. Inventories

 

    

Year Ended

December 31,


     2004

   2003

Retail merchandise and prepaid phone cards

   $ 172,424    $ 121,009
    

  

 

Inventories are valued at lower cost or market and consist principally of prepaid phone cards.

 

Note 6. Other Receivables and Prepayments

 

Equipment for Rent

   $ 2,871    $ 7,213

Prepayments

     116,291      96,174

Deposits with suppliers

     54,334      38,436

Legal Retainers

     5,000      5,000
    

  

     $ 178,495    $ 146,823
    

  

 

Note 7. Property, Plant and Equipment

 

2004

 

   Cost

   Accum.
Depn.


   Current
Depreciation


   Net Book
Value


Leasehold Improvements

   $ 317,579    $ 4,070    $ 3,829    $ 313,509

Furniture & Fixtures

     315,398      9,410      3,528      305,988

Cellular Equipment

     472,451      61,771      45,090      410,680

Data Handling Equipment

     525,168      48,404      46,538      476,765

Microwave Equipment

     63,206      4,722      4,184      58,484

Towers & Antennas

     107,688      20,714      12,683      86,974

Office Equipment & Software

     76,518      3,702      3,702      72,816

Switch Hardware & Software

     437,396      100,853      62,050      336,543

Vehicles

     144,467      22,162      17,923      122,306

Construction in Progress

     1,177,206      —        —        1,177,206
    

  

  

  

     $ 3,637,078    $ 275,808    $ 199,527    $ 3,361,270
    

  

  

  

 

2003

 

   Cost

   Accum.
Depn.


   Current
Depreciation


   Net Book
Value


Leasehold Improvements

   $ 10,522    $ 241    $ 241    $ 10,281

Furniture & Fixtures

     24,650      5,882      5,882      18,768

Cellular Equipment

     181,982      16,682      16,682      165,300

Data Handling Equipment

     20,350      1,865      1,865      18,485

Microwave Equipment

     5,874      538      538      5,335

Towers & Antennas

     87,611      8,031      8,031      79,580

Switch Hardware & Software

     204,157      38,803      38,803      165,354

Vehicles

     46,248      4,239      4,239      42,009

Construction in Progress

     802,664      —        —        802,664
    

  

  

  

     $ 1,384,058    $ 76,281    $ 76,281    $ 1,307,777
    

  

  

  

 

F-77


AST TELECOM, LLC

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2004 and 2003

 

Note 8. Deferred Revenue

 

Deferred revenue consists of unused minutes and is recorded when phone cards are sold. (See Note 2.)

 

    

Year Ended

December 31,


     2004

   2003

Access Revenue

   $ 43,895    $ 53,033

Prepaid Services

     228,745      175,255

Customer Deposits

     6,568      6,523
    

  

     $ 279,208    $ 234,811
    

  

 

Note 9. Member Distributions Payable

 

The Company’s operating agreement provides for distributions to members to pay taxes incurred by the members from Company operations. The distribution for taxes is provided for at 39.6% of net income. However, the Company received a tax exemption in 2004 which eliminates the requirement to pay income taxes for tax years 2004 through 2013.

 

Note 10. Credit Facilities

 

The Company obtained a $850,000.00 term loan credit facility on December 17, 2004, with a term of seven years, payments amortized over 15 years and bearing interest at 0.50% over the Bank’s base rate. No loan advances have been made by the Company on the credit facility at the date of this report.

 

Note 11. Operating Leases

 

The future minimum lease payments under operating leases are as follows:

 

     2004

   2003

Not later than 1 year

   $ 198,220    $ 69,556

Later than 1 year and not later than 5 years

     873,280      268,624

Later than 5 years

     964,088      316,520
    

  

Total future lease commitments

   $ 2,035,588    $ 654,700
    

  

 

Note 12. Related Party Transaction

 

The Company maintains bank accounts with Stanford International Bank, an affiliate of one of the members. Additionally, the Company leases premises from and pays management fees and legal fees to affiliates of the members.

 

F-78


AST TELECOM, LLC

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2003 and 2004

 

Note 13. Contingent Liabilities

 

There exists certain legal actions against the Company, none of which is expected by management to have a material adverse effect on the financial position of the Company.

 

Note 14. Subsequent Events

 

Management is not aware of any material subsequent events.

 

Note 15. Capital Commitments

 

At the end of 2004, the company was committed to capital projects that involved the upgrading of its switch building and operation, implementation of new accounting software and other projects. The total expected capital expenditure is $1,560,867 of which $179,720 was paid in 2004. The remaining capital commitment for 2005 is $1,381,147. All the capital projects are expected to be completed by July, 2005.

 

F-79


AST TELECOM, L.L.C.

FINANCIAL STATEMENTS

 

For the Years Ended

December 31, 2002 and 2003

 

F-80


KING ACCOUNTANCY CORPORATION

 

Daniel R. King, JD, CPA    Tel: (684) 699-2401 
     Faxt: (684) 699-2402

 

September 13, 2004

 

Independent Auditor’s Report

 

Board of Members

AST Telecom, LLC.

Pago Pago, American Samoa

 

We have audited the accompanying balance sheet of AST Telecom, LLC, as of December 31,2003, and December 31, 2002, and the related statements of income, members’ equity, and cash flows for the year ending December 31, 2003 and the period from July 15, 2002 (Inception) to December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

ln our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AST Telecom, LLC, as of December 31, 2003 and December 31, 2002, the results of its operations and its cash flows for the periods then ended in conformity with generally accepted accounting principles in the United States of America.

 

/s/ King Accountancy Corporation

King Accountancy Corporation

 

P.O. BOX 6740, Pago Pago, American Samoa, 96799

 

F-81


AST TELECOM, LLC

BALANCE SHEET

DECEMBER 31, 2003 and 2002

 

     NOTES

   2003

   2002

ASSETS

                

Current Assets

                

Cash on hand & at banks

   4    $ 1,296,164    0

Receivables net of allowance for doubtful accounts

   5      311,632    0

Inventories

   6      121,009    0

Other receivables and prepayments

   7      146,823    0
         

  

Total Current Assets

          1,875,628    0

Fixed Assets

                

Property, plant and equipment net of accumulated depreciation

   8      1,307,777    0
         

  

Total Assets

        $ 3,183,405    0
         

  

LIABILITIES AND MEMBERS’ EQUITY

                

Current Liabilities

                

Trade accounts payable

        $ 357,573    0

Accrued expenses

          127,118    0
         

  

Total Current Liabilities

          484,691    0

Deferred Revenue

   9      234,811    0

Member Distributions Payable

   10      711,705    0
         

  

Total Liabilities

          1,431,207    0
         

  

Members’ Equity

          1,752,198    0
         

  

Total Liabilities and Members’ Equity

        $ 3,183,405    0
         

  

 

The accompanying notes are an integral part of these financial statements.

 

F-82


AST TELECOM, LLC

STATEMENT OF INCOME AND MEMBERS’ EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2003

and for the period from

July 15, 2002 (Inception) to December 31, 2002

 

     2003

    2002

Revenue

            

Prepaid

   $ 3,245,473     0

Postpaid

     1,152,659     0

Long Distance Reverse Tolls

     311,790      

Other

     731,123     0
    


 

Total Revenue

   $ 5,441,045     0

Cost of Revenue

            

Cost of Services

     1,672,644     0

Other

     503,933     0
    


 

Total Cost of Revenue

   $ 2,196,577     0
    


 

Gross Profit

   $ 3,244,468     0
    


 

Operating Expense

            

Sales and Marketing

   $ 282,682     0

Customer Service

     253,810     0

General and Administrative

     859,991     0

Depreciation

     76,281     0
    


 

Total Operating Expense

   $ 1,472,764     0
    


 

Net Profit (Loss) From Operation

   $ 1,771,704     0
    


 

Other Income (Expense)

            

Interest income

   $ 3,413     0

Other income

     22,119     0
    


 

Total Other Income (Expense)

   $ 25,532     0
    


 

Net Income (Loss)

   $ 1,797,236     0

Members’ Equity - Beginning

     —        

Contributions

     1,000,000     0

Distributions

     (1,045,038 )   0
    


 

Members’ Equity - Ending

   $ 1,752,198     0
    


 

 

The accompanying notes are an integral part of these financial statements.

 

F-83


AST TELECOM, LLC

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2003

and for the period from

July 15, 2002 (Inception) to December 31, 2002

 

     2003

    2002

Cash Flows From Operating Activities

            

Net Income

   $ 1,797,236     0

Adjustments to reconcile net income to net cash provided from operating activities:

            

Depreciation

     76,281     0

Changes in:

            

Inventory

     (121,009 )   0

Receivables

     (311,632 )   0

Other assets

     (146,823 )   0

Accounts payable and other liabilities

     719,502     0
    


 

Cash provided from operating activities

   $ 2,013,555     0
    


 

Cash Flows From Investing Activities

            

Payments for property, plant and equipment

   $ (1,384,058 )   0
    


 

Net cash flow from investing activities

   $ (1,384,058 )   0
    


 

Cash Flows From Financing Activities

            

Contributions by Members

   $ 1,000,000     0

Distributions to Members

     (333,333 )   0
    


 

Net cash flow from Financing

   $ 666,667     0

Net Change in Cash and Cash Equivalents

   $ 1,296,164     0

Cash and Cash Equivalents, Beginning

     —       0
    


 

Cash and Cash Equivalents, Ending

   $ 1,296,164     0
    


 

 

The accompanying notes are an integral part of these financial statements.

 

F-84


AST TELECOM, LLC

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2003 and 2002

 

Note 1. Organization

 

AST Telecom, LLC. is a Delaware limited liability company, organized on July 15, 2002 and registered as a foreign entity with a permit to transact business in the Territory of American Samoa. The Company’s primary business activity is the provision of wireless telephone and internet services and sales of related items. Company headquarters are in Tafuna, American Samoa. On February 14, 2003, the Company began operations by purchasing the assets and assuming certain liabilities of American Samoa Telecom, LLC.

 

Note 2. 2002 Activity

 

The company had no activity for the period July 15, 2002 to December 31, 2002.

 

Note 3. Significant Accounting Policies

 

Method of Accounting

 

The financial statements of the company are prepared using the accrual basis of accounting in accordance with United States generally accepted principles.

 

Recent Accounting Pronouncement

 

There are no recent accounting pronouncements that would have a significant impact on the Company’s results of operations or financial position.

 

Inventories

 

Inventories are carried at the lower of cost or net realizable value. Cost is based on the first-in-first-out principle. All expenditures incurred in acquiring the inventories including transportation and custom duties are included in inventory.

 

Property and Equipment and Depreciation

 

Property and equipment are recorded at cost and depreciated using the straight line method over the estimated useful life of the individual assets ranging from 5 to 40 years.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Such estimates and assumptions impact, among others, the following: the amounts of uncollectible accounts receivable. Actual results could differ from those estimates.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

The Company’s accounts receivables are stated at outstanding principal balance, net of allowance for doubtful accounts. Allowances for doubtful accounts are estimated based on the current aging of accounts receivables, prior collection experience and future expectations of conditions that might impact recoverability. The allowance for doubtful accounts amounted to $342,512 and $146,210 at December 31, 2004 and 2003, respectively.

 

Fair Values

 

The Company has determined the estimated fair value amounts presented in these financial statements using available market information and appropriate methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. The estimates presented in these financial statements are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The Company has based these fair value estimates on pertinent information available to it as of December 31, 2004. As of December 31, 2004, the carrying value of all financial instruments approximates fair value.

 

Note 4. Cash on hand and at banks

 

     2003

   2002

Cash on hand

   $ 2,100    0

Bank of Hawaii

     401,302    0

Amerika Samoa Bank

     621,823    0

Stanford International Bank

     220,734    0

Stanford International Bank - CD

     50,205    0
    

  
     $ 1,296,164    0
    

  

 

Note 5. Receivables less allowance for doubtful accounts

 

     2003

    2002

Trade receivables

   $ 457,842     0

Less: Allowance for doubtful accounts

     (146,210 )   0
    


 
     $ 311,632     0
    


 

 

F-85


AST TELECOM, LLC

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2003 and 2002

 

Note 6. Inventories

 

     2003

   2002

Retail merchandise and prepaid phone cards

   $ 121,009    0
    

  

 

Note 7. Other Receivables And Prepayments

 

     2003

   2002

Equipment for Rent

   $ 7,213    0

Prepayments

     96,174    0

Deposits with suppliers

     38,436    0

Legal Retainers

     5,000    0
    

  
     $ 146,823    0
    

  

 

Note 8. Property, Plant And Equipment

 

December 31, 2003


   Cost

   Accumulated
Depreciation


   Net Book
Value


Leasehold Improvements

   $ 10,522      241      10,281

Furniture & Fixtures

     24,650      5,882      18,768

Cellular Equipment

     181,982      16,682      165,300

Data Handling Equipment

     20,350      1,865      18,485

Microwave Equipment

     5,874      538      5,335

Towers & Antennas

     87,611      8,031      79,580

Switch Hardware & Software

     204,157      38,803      165,354

Vehicles

     46,248      4,239      42,009

Construction in Progress

     802,664      —        802,664
    

  

  

     $ 1,384,058    $ 76,281    $ 1,307,777
    

  

  

 

Note 9. Deferred Revenue

 

The Company recognizes revenue from prepaid services and access charges as the services are provided. Deferred Revenue at December 31, 2003 consists of the following:

 

     2003

   2002

Access Revenue

   $ 53,033    0

Prepaid Services

     175,255    0

Customer Deposits

     6,523    0
    

  
     $ 234,811    0
    

  

 

F-86


AST TELECOM, LLC

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2003 and 2002

 

Note 10. Member Distributions Payable

 

The Company’s operating agreements provide for distribution to members to pay taxes incurred by the members from Company’s operations.

 

Note 11. Leases

 

The company has entered into lease agreements for several locations in American Samoa for cell towers, satellite and networking site, and sales and administrative offices with lease terms of one to thirty years. Future lease commitments at December 31, 2003 follows:

 

Payments due within 1 year

   $ 69,556

Payments due within 2-5 years

   $ 268,624

Payments due after 5 years

   $ 316,520
    

Total future lease commitments

   $ 654,700
    

 

Note 12. Related Party Transaction

 

The Company maintains bank accounts with Stanford International Bank, an affilate of one of the members. Additionally, the Company leases premises from and pays management fees and legal fees to affiliates of the members. See Note 3 and 10.

 

Note 13. Income Taxes

 

The Company files income tax returns as a partnership with the Territory of American Samoa and the U.S. Internal Revenue Service. As a limited liability, the Company is taxed as a partnership, therefore the Company pays no income tax.

 

Note 14. Contingent Liabilities

 

There exists certain legal actions against the Company, none of which is expected to have a material adverse effect on the financial position of the Company.

 

F-87


AST TELECOM, L.L.C.

FINANCIAL STATEMENTS

 

For the Quarter Ended

September 30, 2005 and September 30, 2004

And the Nine Months Ended

September 30, 2005 and September 30, 2004

UNAUDITED

 

F-88


KINGBETHAM & COMPANY

 

Certified Public Accountants

  

P.O. Box 6740

    

Pago Pago, Am. Samoa 96799

    

Tel: (684) 699-2401

    

Fax: (684) 699-2402

 

ACCOUNTANT’S REPORT

 

To the Board of Members

AST Telecom, LLC

 

We have reviewed the accompanying balance sheet of AST Telecom, LLC at September 30, 2005, and the related statements of income, members’ equity, and cash flows for the nine months then ended September 30, 2005 and 2004, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of AST Telecom, LLC.

 

A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles.

 

The financial statements for the year ended December 31, 2004, were audited by us and we expressed an unqualified opinion on them in our report dated April 4, 2005, but we have not performed any auditing procedures since that date.

 

/s/ KingBetham & Company

KingBetham & Company

Pago Pago, American Samoa

November 2, 2005

 

SAMOA OFFICE: P. O. BOX 859, APIA, SAMOA        Tel: (685)24337        Fax: (685)24336

 

F-89


AST TELECOM, LLC

BALANCE SHEET

SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004

(UNAUDITED)

 

     NOTES

   September 30,
2005


ASSETS

           

Current Assets

           

Cash on hand & at banks

   3    $ 73,221

Receivables net of allowance for doubtful accounts

   4      214,771

Inventories

   5      426,514

Other receivables and prepayments

   6,14      355,043
         

Total Current Assets

        $ 1,069,549

Fixed Assets

           

Property, plant and equipment net of accumulated depreciation

   7      5,503,242
         

Total Assets

        $ 6,572,791
         

LIABILITIES AND MEMBERS’ EQUITY

           

Current Liabilities

           

Current portion of Long-term debt

        $ 56,700

Trade accounts payable

          1,008,955

Accrued expenses

          299,051

Line of Credit

          890,667
         

Total Current Liabilities

        $ 2,255,373

Deferred Revenue

   8      224,175

Member Distribution\Redemption Payable

   9      —  

Loan Payable

   10      774,295
         

Total Liabilities

        $ 3,253,843
         

Members’ Equity

          3,318,948
         

Total Liabilities and Members’ Equity

        $ 6,572,791
         

 

The accompanying notes are an integral part of these financial statements.

 

F-90


AST TELECOM, LLC

STATEMENT OF INCOME AND MEMBERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004

(UNAUDITED)

 

    NOTES

  

9 Months Ended

September 30, 2005


   

9 Months Ended

September 30, 2004


 

Revenue

                    

Prepaid

       $ 3,623,371     $ 3,653,346  

Postpaid

         702,037       836,816  

Long Distance reverse tolls

  2      509,692       432,182  

Other

  2      993,611       699,593  
        


 


Total Revenue

       $ 5,828,711     $ 5,621,941  

Cost of Revenue

                    

Cost of Services

         1,853,003       1,565,57  

Other

         492,132       427,617  
        


 


Total Cost of Revenue

       $ 2,345,135     $ 1,993,191  
        


 


Gross Profit

       $ 3,483,576     $ 3,628,750  
        


 


Operating Expense

                    

Sales and Marketing

       $ 368,813     $ 226,971  

Customer Service

         411,541       209,755  

General and Administrative

         1,114,281       808,281  

Depreciation

         310,786       75,432  
        


 


Total Operating Expense

       $ 2,205,421     $ 1,320,439  
        


 


Net Profit (Loss) From Operation

       $ 1,278,155     $ 2,308,311  
        


 


Other Income (Expense)

                    

Interest income

       $ 2,684     $ 9,268  

Interest expense

       $ (22,904 )   $ —    

Other income

         —         2,700  
        


 


Total Other Income (Expense)

       $ (20,220 )   $ 11,968  
        


 


Net Income (Loss)

       $ 1,257,935     $ 2,320,279  

Members’ Equity - Beginning

       $ 3,800,380     $ 1,752,198  

Contributions

         —         —    

Distributions\Redemptions

  9      (1,739,367 )     (677,239 )
        


 


Members’ Equity - Ending

       $ 3,318,948     $ 3,395,238  
        


 


 

The accompanying notes are an integral part of these financial statements.

 

F-91


AST TELECOM, LLC

STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004

(UNAUDITED)

 

    

9 Months Ended

September 30, 2005


   

9 Months Ended

September 30, 2004


 

Cash Flows From Operating Activities

                

Net Income

   $ 1,257,935     $ 2,320,279  

Adjustments to reconcile net income to net cash provided from operating activities:

                

Depreciation

     310,786       75,432  

Changes in:

                

Inventory

     (254,090 )     (98,683 )

Receivables

     229,357       (340,344 )

Other assets

     (176,548 )     (62,750 )

Accounts payable and other liabilities

     360,566       76,551  
    


 


Cash provided from operating activities

   $ 1,728,006     $ 1,970,485  
    


 


Cash Flows From Investing Activities

                

Payments for property, plant and equipment

   $ (2,452,758 )   $ (1,707,439 )
    


 


Net cash flow from investing activities

     (2,452,758 )     (1,707,439 )
    


 


Cash Flows From Financing Activities

                

Members’ distributions\Redemptions

   $ (1,739,367 )   $ (677,238 )

Bank Loans

     1,721,662          
    


 


Net cash flow from financing activities

     (17,705 )     (677,238 )
    


 


Net Change in Cash and Cash Equivalents

   $ (742,457 )   $ (414,192 )

Cash and Cash Equivalents, Beginning of Year

   $ 815,678     $ 1,296,164  
    


 


Cash and Cash Equivalents, End of Year

   $ 73,221     $ 881,972  
    


 


Cash on hand and at banks

                

Cash on hand

   $ 1,700     $ 2,100  

Bank of Hawaii

     (2,489 )     321,524  

Amerika Samoa Bank

     11,086       283,520  

Stanford International Bank

     9,407       223,231  

Stanford International Bank - CD

     53,517       51,597  
    


 


     $ 73,221     $ 881,972  
    


 


 

The accompanying notes are an integral part of these financial statements.

 

F-92


AST TELECOM, LLC

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1. Organization

 

AST Telecom, LLC is a Delaware limited liability company, organized on July 15, 2002 and registered as a foreign entity with a permit to transact business in the Territory of American Samoa. The Company’s primary business activity is the provision of wireless telephone and internet services and sales of related items. Company headquarters are in Nuu’uli, American Samoa. On February 14, 2003, the Company began operations by purchasing the assets and assuming certain liabilities of American Samoa Telecom, LLC.

 

Note 2. Significant Accounting Policies

 

Method of Accounting

 

The financial statements of the company are prepared using the accrual basis of accounting. In accordance with United States generally accepted accounting principles.

 

Inventories

 

Inventories are carried at the lower of cost or net realizable value. Cost is based on the the first-in-first-out principle. All expenditures incurred in acquiring the inventories including transportation and custom duties are included in inventory.

 

Revenue Recognition

 

There are sources of revenue generated by the company. The primary source being prepaid phone cards sold with revenue recognized when the minutes are used. When the phone cards are initially sold, revenue is recognized as deferred until such time as the minutes become used.

 

Revenue is recognized for ISP (internet) services when performed and from sales of networking equipment and mobile phones including accessories at the time the sale is complete.

 

Foreign Currency

 

Unless otherwise stated, all amounts are expressed in US dollars. Transactions in foreign currencies have been converted to US dollars at rates approximating those at the dates of the transactions. Exchange gains and losses are bought into the account in determining the profit for the year.

 

Operating Lease

 

Leases where a significant portion of the risks and rewards of ownership are not retained by AST Telecom, LLC are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease.

 

F-93


AST TELECOM, LLC

NOTES TO FINANCIAL STATEMENTS

FOR PERIODS ENDING SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004

(UNAUDITED)

 

Note 2. Significant Accounting Policies cont’d.

 

The company has entered into lease agreements for several locations in American Samoa for cell towers, satellite and networking site, and sales and administrative offices with lease terms of one to thirty years. Note 11 shows the future commitments of the lease obligations.

 

Fixed Assets

 

Fixed assets are stated at cost and depreciated using the straight line method over their useful lives as follows:

 

Leasehold Improvements

   7 years

Furniture & Fixtures

  

7 years

Cellular Equipment

  

7 years

Data Handling Equipment

  

7 years

Microwave Equipment

  

7 years

Towers & Antennas

  

7 years

Office Equipment & Software

  

3 to 5 years

Switch Hardware & Software and others

  

5 to 7 years

Vehicles

  

5 years

 

Provision for Doubtful Debts

 

A specific provision is based on the annual review by management of those accounts that are considered doubtful.

 

Income Tax and Income Tax Exemption

 

As a Limited Liability Company taxed as a partnership, the Company pays no income tax. Taxable income and the resulting tax liability is reported by the members of the Company.

 

In addition, the American Samoa Government, effective January 1, 2004, approved a ten year tax exemption for the members of the Company for all income taxes and, for the Company, all excise taxes incurred within the Territory of American Samoa. The exemption is for the purpose of promoting economic activity and employment within the Territory of American Samoa and the Company must meet certain investment requirements for the exemption to continue.

 

Note 3. Cash on hand and at banks

 

     September 30, 2005

    September 30, 2004

Cash on hand

   $ 1,700     $ 2,100

Bank of Hawaii

     (2,489 )     321,524

Amerika Samoa Bank

     11,086       283,520

Stanford International Bank

     9,407       223,231

Stanford International Bank - CD

     53,517       51,597
    


 

     $ 73,221     $ 881,972
    


 

 

Note 4. Receivables less Allowance for Doubtful Accounts

 

Trade receivables

   $ 675,230     $ 851,477  

Less: Allowance for doubtful accounts

     (460,459 )     (199,501 )
    


 


     $ 214,771     $ 651,976  
    


 


 

F-94


AST TELECOM, LLC

NOTES TO FINANCIAL STATEMENTS

FOR PERIODS ENDING SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004

(UNAUDITED)

 

Note 5. Inventories

 

     September 30,
2005


   September 30,
2004


Retail merchandise and prepaid phone cards

   $ 426,514    $ 219,692
    

  

Note 6. Other Receivables and Prepayments

 

             

Equipment for Rent

   $ 2,871    $ 7,213

Prepayments

     69,958      158,624

Due from Affiliate

     149,805      —  

Due from Others

     48,494      —  

Deposits with suppliers

     78,915      38,736

Legal Retainers

     5,000      5,000
    

  

     $ 355,043    $ 209,573
    

  

 

Note 7. Property, Plant and Equipment

 

September 30, 2005    Cost

   Accum.
Depn.


   Current
Depreciation


   Net Book
Value


Leasehold Improvements

   $ 422,066    $ 26,925    $ 22,855    $ 395,141

New Engineering Building

     970,259      5,680      5,680      964,579

Furniture & Fixtures

     327,159      43,443      34,003      283,716

Cellular Equipment

     472,451      118,802      57,030      353,649

Data Handling Equipment

     530,307      102,950      54,547      427,357

Microwave Equipment

     63,206      9,651      4,929      53,555

Towers & Antennas

     107,688      31,607      10,893      76,081

Office Equipment & Software

     76,518      14,620      10,917      61,898

Switch Hardware & Software

     1,412,554      221,117      86,960      1,191,437

Vehicles

     144,467      45,134      22,972      99,333

Construction in Progress

     1,596,495      —        —        1,596,495
    

  

  

  

     $ 6,123,171    $ 619,929    $ 310,786    $ 5,503,242
    

  

  

  

September 30, 2004    Cost

   Accum.
Depn.


   Current
Depreciation


   Net Book
Value


Leasehold Improvements

   $ 11,117    $ 631    $ 631    $ 10,486

Furniture & Fixtures

     1,010      328      153      682

Cellular Equipment

     225,095      39,120      19,669      185,975

Data Handling Equipment

     30,850      7,888      2,536      22,962

Microwave Equipment

     5,982      1,398      420      4,584

Towers & Antennas

     87,611      17,911      5,373      69,700

Switch Hardware & Software

     242,691      66,618      41,618      176,073

Vehicles

     96,368      5,032      5,032      91,336

Construction in Progress

     2,377,986      —        —        2,377,986
    

  

  

  

     $ 3,078,710    $ 138,926    $ 75,432    $ 2,939,784
    

  

  

  

 

F-95


AST TELECOM, LLC

NOTES TO FINANCIAL STATEMENTS

FOR PERIODS ENDING SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004

(UNAUDITED)

 

Note 8. Deferred Revenue

 

Deferred revenue consists of unused minutes and is recorded when phone cards are sold. (See Note 2.)

 

     September 30, 2005

   September 30, 2004

Access Revenue

   $ 109,736    $ 2,312

Prepaid Services

     104,756      211,646

Customer Deposits

     9,683      6,548
    

  

     $ 224,175    $ 220,506
    

  

 

Note 9. Member Distributions Payable

 

The Company’s operating agreement provides for distributions to members to pay taxes incurred by the members from Company operations. The distribution for taxes is provided for at 39.6% of net income. However, the company received a tax exemption in 2004 which eliminates the requirement to pay income taxes for tax years 2004 through 2013. Distributions payable at September 30, 2004 are for tax year 2003.

 

The Company expended $1,739,367 to redeem 235 membership units in May, 2005.

 

Note 10. Credit Facilities

 

  a The Company obtained a $850,000.00 term loan credit facility on December 17, 2004 with a term of seven years, payments amoritzed over 15 years and bearing interest at 0.50% over the Bank’s base rate with interest only payments for the first six months and monthly repayments of $4,725 plus accrued interest thereafter.

 

     September 30, 2005

   September 30, 2004

Current Portion

   $ 56,700      —  

LongTerm Portion

     774,295      —  
    

  

     $ 830,995    $ —  
    

  

 

  b The Company also obtained a $1,000,000 credit facility on May 9, 2005 with a 90 day renewable term through May 2006, with variable interest at 0.50% over the Banks base rate. The Company has the option to pay the whole principal plus accrued interest or roll over for another 90 day term. As of September 30, 2005, $890,667 of the total loan was drawn down.

 

Both loans are secured by the Company’s current and fixed assets.

 

F-96


AST TELECOM, LLC

NOTES TO FINANCIAL STATEMENTS

FOR PERIODS ENDING SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004

(UNAUDITED)

 

Note 11. Operating Leases

 

The future minimum lease payments under operating leases are as follows:

 

     September 30, 2005

   September 30, 2004

Not later than 1 year

   $ 201,889    $ 104,293

Later than 1 year and not later than 5 years

     873,280      284,800

Later than 5 years

     647,240      107,800
    

  

Total future lease commitments

   $ 1,722,409    $ 496,893
    

  

 

Note 12. Related Party Transaction

 

The Company maintains bank accounts with Stanford International Bank, a member of the Company. Additionally, the Company leases premises from and pays management fees and legal fees to affiliates of the members. See Note 3 and 11. For the nine months ended September 30, 2005 and 2004, the Company paid $             and $            , respectively for management fees and legal fees to affiliates of the members.

 

Note 13. Contingent Liabilities

 

There are no contingent liabilities known to management as at September 30, 2005.

 

Note 14. Capital Commitments

 

As of September 30, 2005, the company was committed to capital projects that involved the upgrading of its switch building and operation, implementation of a new microwave link to Apia, implementation of new accounting software and other projects. The total expected capital expenditure is $2,005,949 of which $1,163,602 was paid by September 30, 2005. The remaining capital commitment is $842,347 and is expected to be completed by December 31, 2005.

 

F-97


 

 

 

 

 

DATEC GROUP LTD.

 

 

 

CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

FOR THE YEAR ENDED DECEMBER 31, 2004

 

AND

 

FOR THE YEAR ENDED DECEMBER 31, 2003

 

 

 

 

 

 

 

F-98


                                    DATEC GROUP LTD.

 

 

 

2900 Bell Tower

 

10104 – 103 Avenue

 

Edmonton, Alberta

 

T5J 0H8

 

Phone: 780.424.3000

 

Fax: 780.429.4817

 

www.krpgroup.com

   LOGO   

 

 

LOGO

 

                                       AUDITORS’ REPORT   

March 30, 2005 (except as to Note 20

which is as of January 30, 2006)

Edmonton, Alberta, Canada        

 

 

To the shareholders of Datec Group Ltd.:

 

We have audited the consolidated balance sheets of Datec Group Ltd. as at December 31, 2004 and 2003 and the consolidated statements of earnings (loss), deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

 

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2004 and 2003 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

 

Comments by Auditors for U.S readers on Canadian – U.S. Reporting Differences

 

In the United States, reporting standards for auditors require the addition of an explanatory paragraph when the consolidated financial statements are affected by conditions and events that cast substantial doubt on the Company’s ability to continue as a going concern, such as those described in note 2 to the consolidated financial statements. Our report to the shareholders dated March 30, 2005, except for note 20 which is as of January 30, 2006, is expressed in accordance with Canadian reporting standards, which do not permit a reference to such events and conditions in the auditors’ report when these are adequately disclosed in the financial statements.

 

LOGO

 

Kingston Ross Pasnak LLP

Chartered Accountants

 

F-99


DATEC GROUP LTD.

 

CONSOLIDATED BALANCE SHEETS

 

AS AT DECEMBER 31, 2004 AND DECEMBER 31, 2003

 

     Note

   2004

    2003

 

ASSETS

                     

Current Assets

                     

Cash

        $ 419,114     $ 743,155  

Accounts receivable

          8,645,258       11,205,720  

Other receivables

          919,042       1,135,642  

Taxation receivable

          17,984       125,962  

Inventories

          3,723,091       3,617,369  
         


 


            13,724,489       16,827,848  

Contingencies and commitments

   16      —         —    

Deferred development costs

   10      392,644       215,657  

Property, plant and equipment

   5      9,400,382       7,873,342  

Future tax assets

   9      532,990       1,037,348  

Goodwill

   6      10,939,306       12,745,211  
         


 


          $ 34,989,811     $ 38,699,406  
         


 


LIABILITIES & SHAREHOLDERS EQUITY

                     

Current Liabilities

                     

Bank indebtedness

   7    $ 3,503,030     $ 2,452,401  

Accounts payable

          3,968,117       4,991,937  

Tax payable

          50,173       —    

Accrued liabilities

          3,181,811       5,440,305  

Deferred revenue

          4,489,024       3,865,013  

Current portion of long-term debt

   7      1,272,077       1,152,340  
         


 


            16,464,232       17,901,996  

Contingencies and commitments

   16      —         —    

Long term debt – related parties

   7      525,241       3,838,963  

- external parties

   7      1,017,044       1,113,054  

Future tax liability

   9      —         149,401  
         


 


            18,006,517       23,003,414  

Non-controlling interest

   19      2,254,860       1,898,929  

Shareholders’ equity

                     

Share capital

   8(a)      34,778,692       32,765,393  

Contributed surplus

   18      1,949,501       1,774,501  

Deficit

          (21,594,970 )     (20,618,099 )

Foreign currency translation adjustment

          (404,789 )     (124,732 )
         


 


            14,728,434       13,797,063  
         


 


            16,983,294       15,695,992  
          $ 34,989,811     $ 38,699,406  
         


 


 

Approved by the Board

 


     

 


Director

     

Director

 

See the accompanying notes to the consolidated financial statements.

 

F-100


DATEC GROUP LTD.

 

CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

     Note

   2004

    2003

 

Revenues

        $ 49,396,805     $ 48,631,278  

Cost of sales

          26,090,738       24,814,139  
         


 


Gross profit

          23,306,067       23,817,139  
         


 


Expenses

                     

Amortization

          1,917,881       1,410,519  

Interest expense

          684,364       743,719  

Salaries and commissions

          8,862,629       9,774,133  

Loss on disposal of property, plant and equipment

          —         31,418  

Other operating expenses

          11,635,624       10,277,318  
         


 


Total operating expenses

          23,100,498       22,237,107  
         


 


Earnings from operations before other income (losses)

          205,569       1,580,032  

Foreign exchange (losses)/gains

          (8,060 )     76,819  

Other (losses) income

          (8,964 )     26,131  

Settlement of lawsuit

          193,422       —    
         


 


Earnings from operations before income taxes

          381,967       1,682,982  

Income taxes (recoverable)

   9      1,002,907       (113,106 )
         


 


Net (Loss)/Earnings from operations before non-controlling interests

          (620,940 )     1,796,088  

Non controlling interest

   19      355,931       197,167  
         


 


Net (Loss)/ Earnings for the year

        $ (976,871 )   $ 1,598,921  
         


 


Basic Earnings (Loss) per common share from operations

   8(d)    $ (0.04 )   $ 0.14  

Diluted Earnings (Loss) per common share from operations

   8(d)    $ (0.04 )   $ 0.10  

 

See the accompanying notes to the consolidated financial statements.

 

F-101


DATEC GROUP LTD.

 

CONSOLIDATED STATEMENTS OF DEFICIT

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

     Note

   2004

    2003

 

Deficit, beginning of the year

        $ (20,618,099 )   $ (22,217,020 )

Deficit for the year

          (976,871 )     1,598,921  
         


 


Deficit, end of the year

        $ (21,594,970 )   $ (20,618,099 )
         


 


 

See the accompanying notes to the consolidated financial statements.

 

F-102


DATEC GROUP LTD.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

     Note

   2004

    2003

 

Cash flows from / (used in) operating activities

                     

Receipts from customers

        $ 51,946,804     $ 45,060,837  

Payments to suppliers and employees

          (48,541,847 )     (44,701,938 )

Net interest received / (paid)

          (684,364 )     (673,505 )

Income taxes refunded / (paid)

          (490,124 )     227,826  
         


 


Cash flows from / (used in) operating activities

   13      2,230,469       (86,780 )
         


 


Cash flows from / (used in) investing activities

                     

Purchase of property, plant and equipment

          (4,155,791 )     (2,089,300 )
         


 


Cash flows from / (used in) in investing activities

          (4,155,791 )     (2,089,300 )
         


 


Cash flows from / (used in) financing activities

                     

Increase in bank indebtedness

          1,050,629       628,037  

Proceeds from loans to related party

          —         251,034  

Proceeds from mortgage finance raised

          737,285       1,854,267  

Proceeds from equity raising

          285,000       300,000  

Proceeds from share options

          2,500       25,000  

Repayment of mortgage financing

          (480,882 )     (898,327 )
         


 


Cash flows from financing activities

          1,594,532       2,160,011  
         


 


Net decrease in cash equivalents

          (330,790 )     (16,069 )

Cash at beginning of the year

          743,155       769,548  

Effect of exchange rate changes on cash

          (52,863 )     (10,324 )

Cash overdraft disposed on sale of Certus

          58,303       —    

Cash acquired on acquisition of Sybrel

          1,309       —    
         


 


Cash at end of the year

        $ 419,114     $ 743,155  
         


 


 

See the accompanying notes to the consolidated financial statements.

 

F-103


DATEC GROUP LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

1. BASIS OF PRESENTATION

 

General

 

Datec Group Ltd., (the Company), was incorporated under the Business Corporations Act (Alberta) on November 25, 1993, and obtained its listing on the Alberta Stock Exchange on April 14, 1994. The Company changed its name from Brocker Technology Limited to Datec Group Ltd. during 2003.

 

On February 28, 1998, the Company transferred its listing to the Toronto Stock Exchange (TSX).

 

The Company has operations in the South Pacific focussed on the marketing and distribution of information technology products, software and services. The Company principally operates in four industry segments, being the divisions by which the Company is managed, as follows:

 

    Distribution and sale of computer and telecommunications hardware and software;

 

    The hosting of client hardware and software services including the provision of technical support and services for the Technology Industry;

 

    Software application design and development; and

 

    Provision of professional consulting services.

 

These financial statements are presented in Canadian dollars and have been prepared by management in accordance with Canadian generally accepted accounting principles. Differences between Canadian and United States accounting principles are described in Note 20.

 

2. GOING CONCERN

 

While the financial statements have been prepared on the basis of accounting principles applicable to a going concern, several conditions and events cast substantial doubt upon the validity of this assumption. The Company incurred significant operating losses in the current fiscal year and in 2000 and 2001. Although the company achieved profitable operations in 2002 and 2003, it is still in a significant deficit position. If the going concern assumption were not appropriate for these financial statements, then adjustments would be necessary in the carrying values of assets and liabilities, the reported net earnings and the balance sheet classifications used.

 

F-104


DATEC GROUP LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

3. SIGNIFICANT ACCOUNTING POLICIES

 

  a) Revenue recognition

 

The Company generates revenue principally through the provision of IT Services. The IT Services comprise the following:

 

    Sale of product and services

 

    Outsourcing

 

    Maintenance

 

    Systems integration

 

Revenue from the sale of products is recorded when the products are shipped or services rendered. Product sales are represented by hardware and software.

 

Service revenue relating to outsourcing arrangements is recognized on a monthly basis over the term of the contract unless there is a better measure of delivery. Revenue from time and materials is recognized as the services are provided.

 

Revenue from Maintenance services is recognized on a monthly basis over the term of the contract unless there is a better measure of delivery. Revenue billed in advance is recorded as deferred revenue and recognized on a monthly basis over the term of the contract.

 

Service revenue related to systems integration under time and material contracts is recognized as services are rendered, whereas service revenue under fixed fee contracts is recognised using the percentage of completion method over the implementation period. Management regularly reviews underlying estimates of project profitability. Revisions to estimates are reflected in the Statement of Earnings in the period in which the facts that give rise to the revision become known. Provisions for estimated losses, if any, are recognized in the period in which the loss is determined. Contract losses are measured as the amount by which the estimated costs of the contract exceed the estimated total revenue from the contract.

 

Reimbursements, including those relating to travel and other out-of-pocket expenses, and other similar third party costs are included in revenue and the corresponding expense included in cost of sales.

 

The Company recognises a provision for warranties at the time the underlying products are sold. The provision is based on historical warranty data. Certain products sold are backed by manufacturers warranties in which case no provision is made.

 

In cases where contracts represent multiple elements of the above, the elements are split into the above areas and the revenue recognised accordingly. This applies primarily in cases where the sale of products accompanies the sale of services, or the provision of outsourcing, maintenance or systems integration services.

 

All revenue is recognized net of discounts and allowances.

 

F-105


DATEC GROUP LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

  b) Basis of consolidation

 

The consolidated financial statements include the accounts of the Company and all of its subsidiary companies since the dates of their acquisition. All intercompany balances and transactions have been eliminated upon consolidation. Companies consolidated comprise the following:

 

Name


   Percentage Ownership

   Fiscal Year End

Brocker New Zealand Limited

   100%    31 December

Brocker Financial Limited

   100%    31 December

Brocker Application Developments Limited

   100%    31 December

Datec Investments Limited

   100%    31 December

Datec New Zealand Limited (Note 4(b))

   0% (2003 – 66%)    31 December

Datec Queensland Limited

   100%    31 December

Datec Tuvalu Limited

   100%    31 December

Datec Tonga Limited

   100%    31 December

Datec Samoa Limited

   100%    31 December

Datec Papua New Guinea Limited

   50%    31 December

Datec Fiji Limited

   100%    31 December

Datec Australia Limited

   100%    31 December

Fiji Shop Limited

   51%    31 December

Generic Technology Group Limited

   100%    31 December

Industrial Communication Services Limited

   100%    31 December

Kepra Software Limited

   66%    31 December

Mobile Technology Solutions Limited

   100% (2003 – nil)    31 December

Pacific Software Limited

   100%    31 December

PC Pacific Limited

   100%    31 December

Network Services Limited

   100%    31 December

Pritech Limited

   100%    31 December

Sealcorp Telecommunications Limited

   100%    31 December

Tech Support Limited

   100%    31 December

Technology Design & Development Solutions Limited (Note 4(a))

   66% (2003 – nil)    31 December

Telecom Pacific Limited

   100%    31 December

 

Mobile Technology Solutions Limited was formed by the Company during the year. The 2004 results for Mobile Technology Solutions Limited reflect two months trading only.

 

  c) Inventories

 

Inventories principally comprise finished goods and are carried at the lower of cost and net realizable value. Cost is determined on a weighted average or first in first out basis.

 

  d) Property, plant and equipment

 

Property, Plant and Equipment is recorded at cost. Amortization is calculated on a declining balance basis (except for leasehold improvements where a straight line basis is used) using the following annual rates:

 

Buildings

   2 %

Office equipment

   20 %

Vehicles

   20 and 26 %

Furniture and fixtures

   20 %

Computer hardware

   20 to 30 %

Computer software

   30 to 40 %

Plant and equipment

   20 to 26 %

 

F-106


DATEC GROUP LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

  e) Goodwill

 

Indefinite life assets such as goodwill are initially recognised and carried at cost. Goodwill is not amortized, but is reviewed annually for impairment, or when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. When such review indicates that the estimated future cash flows or benefits associated with these assets would not be sufficient to recover their carrying value, the excess of carrying value over fair value will be recognised as an impairment loss and charged to expense in the period that impairment has been determined.

 

  f) Research and development expenditures

 

Research costs, other than capital expenditures, are expensed as incurred. Development costs are expensed as incurred unless they meet the criteria under generally accepted accounting principles for deferral and amortization. Deferred development costs are amortized over the expected life of the developed product, currently a maximum of three years. Amortization commences upon commercial production of the product or process.

 

  g) Future income taxes

 

Future income taxes are accounted for under the asset and liability method. Under this method, future 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. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that substantive enactment occurs.

 

Withholding taxes payable on repatriation of earnings of foreign operations are not provided, as it is not expected that those earnings will be repatriated in the foreseeable future.

 

  h) Earnings per share

 

Basic earnings per common share are calculated using the weighted average number of common shares outstanding during the year. Interest, carrying costs, and accretion charges associated with convertible debentures are deducted from net earnings for the purpose of calculating earnings per share available to common shareholders.

 

Diluted earnings per share is calculated on the basis of the weighted average number of shares outstanding during the period, plus the additional common shares that would have been outstanding if potentially dilutive common shares issuable under stock options and warrants had been issued using the treasury stock method. The calculation of diluted earnings per share also applies the “if converted” method for convertible debentures, which assumes conversion into common shares outstanding since the beginning of the period.

 

  i) Stock-based compensation

 

Effective January 1, 2004 the Company prospectively adopted the new standard with respect to accounting for stock based compensation arrangements relating to stock options granted to employees and directors. Stock options granted to employees and directors on or after January 1, 2004 are accounted for using the fair value method. Under this method, compensation expense related to these programs is recorded in the statement of loss and deficit with a corresponding increase to contributed surplus. The fair value of options granted are determined at the date of grant using the Black-Scholes valuation model.

 

F-107


DATEC GROUP LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

Options granted to employees and directors after December 31, 2001 and prior to January 1, 2004 are accounted for using the intrinsic value method whereby the excess of the stock price on the date of grant over the exercise price of the option is recorded as compensation expense. For options granted where the stock price does not exceed the exercise price at the date of the grant, the company was required to disclose pro forma net income and earnings per share information as if the fair value method had been used.

 

Options granted to non-employees on or after January 1, 2003 are accounted for using the fair value method.

 

Consideration paid on the exercise of stock options is credited to share capital, along with the fair value of the options originally recorded to contributed surplus. The Company does not incorporate an estimated forfeiture rate for stock options that will not vest, but accounts for forfeitures as they occur.

 

  j) Cash and cash equivalents

 

Cash and cash equivalents consist of cash on hand and balances with banks, short term bank indebtedness and investments in money market instruments. Cash and cash equivalents included in the cash flow statement are comprised solely of balances with banks.

 

  k) Leases

 

Leases are classified as capital or operating leases. A lease that transfers substantially all of the benefits and risks incidental to the ownership of property is classified as a capital lease. All other leases are accounted for as operating leases, wherein rental payments are expensed as incurred.

 

  l) Use of estimates

 

The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Estimates have been used when accounting for items such as revenue recognition, allowances for uncollectible accounts receivable and inventory obsolescence, product warranty provisions, impairment assessments, deferred product development costs, amortization rates, stock-based compensation and contingencies and commitments.

 

  m) Statement of cash flow

 

The Company is using the direct method in its presentation of the statement of cash flow.

 

  n) Foreign currency translation

 

Revenue and expense transactions denominated in foreign currencies are translated into Canadian dollars at the average exchange rates in effect at the time of such transactions. Monetary assets and liabilities are translated at current rates at the balance sheet date. Gains or losses resulting from these translation adjustments are included in other income.

 

The operations of the Company’s foreign subsidiaries are considered to be self-sustaining foreign operations and accordingly, are converted to Canadian dollars using the current method. Under this method, foreign exchange gains and losses arising from the translation of the foreign subsidiaries’ accounts into Canadian dollars are deferred and reported as cumulative foreign currency translation adjustment as a separate component of shareholders’ equity. Upon the disposal of a self-sustaining subsidiary, any unrealized gains or losses relating to this subsidiary are included in income in the period of disposal.

 

F-108


DATEC GROUP LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

The following exchange rates were used in the preparation of the financial statements:

 

New Zealand dollar    Average rate    End of period
December 2004    0.8679    0.8706
December 2003    0.8202    0.8511
Australian dollar    Average rate    End of period
December 2004    0.9556    0.9370
December 2003    0.9120    0.9678
Fiji dollar    Average rate    End of period
December 2004    0.7448    0.7232
December 2003    0.7326    0.7405
Papua New Guinea kina    Average rate    End of period
December 2004    0.4276    0.3973
December 2003    0.4087    0.3800
Vanuatu Vatu    Average rate    End of period
December 2004    0.0117    0.0114
December 2003    0.0140    0.0136
Samoa Tala    Average rate    End of period
December 2004    0.4703    0.4565
December 2003    0.4681    0.4637
Tonga Panga    Average rate    End of period
December 2004    0.6597    0.6288
December 2003    0.6507    0.6369

 

4. ACQUISITIONS AND DIVESTMENTS

 

All business combinations have been accounted for using the purchase method. The results of operations have been included in the Company’s results since their respective dates of acquisition up to the date of any disposal.

 

(a) Acquisition in 2004

 

Technology Design & Development Solutions Limited

 

On January 1, 2004, the Company acquired 66% of the assets and liabilities of CE2002 (trading as Sybrel Ltd), a privately owned, unrelated New Zealand based Company. During the period, the Company was renamed Technology Design & Development Solutions Limited. The Company is a mobile consulting & technology implementation company.

 

This purchase consideration was by way of issuing 377,000 common shares in Datec Group Ltd. at CAN$0.375. These shares have been issued during the year.

 

F-109


DATEC GROUP LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

The fair value of the assets and liabilities acquired was as follows:

 

     NZ$

    CAN$

 

Bank

   $ 1,538     $ 1,309  

Trade debtors

     8,838       7,522  

Plant and equipment

     94,055       80,050  

Trade creditors

     (58,041 )     (49,399 )

Sundry debtors

     21,916       18,652  

Sundry payables

     (815 )     (694 )

Term loan

     (15,978 )     (13,957 )

Goodwill

     114,595       97,532  
    


 


Net assets acquired

     166,108       141,375  
    


 


Consideration for purchase

                

Shares issued

   $ 166,108     $ 141,375  
    


 


 

(b) Divestment in 2004

 

Datec (New Zealand) Limited trading as Certus Consulting

 

The Company divested its 66% interest in the business Datec (New Zealand) Limited for the sum of $1. In addition, shares to be issued as consideration for this acquisition were cancelled. This divestiture resulted in a gain on sale of $30,073. The consolidated income statement reflects the results of Datec (New Zealand) Limited for the period 1 Jan 2004 to 30 September 2004, the date of sale. This business had been acquired on May 1, 2003 (refer to Note 4(c)).

 

During the period, the Company incurred an operating loss of $176,988 (2003 - $142,543), of which $60,173 (2003 - $47,039) is reflected in non-controlling interest.

 

(c) Acquisition in 2003

 

Certus Consulting Limited

 

As at May 1, 2003, the Company acquired 66% of the assets and liabilities of Certus Consulting Limited, a privately owned, unrelated New Zealand based company. Certus is an IT consulting and technology implementation company and an IBM premier software partner.

 

This purchase consideration was by way of issuing 750,000 common shares in Datec Group Ltd. at CAN$0.375, 293,003 ordinary shares in Datec (New Zealand) Limited, issued at NZ$1 (CAN$0.81), and cash consideration by way of vendor loan amounting to NZ$1,427,187 (CAN$1,157,449). This loan accrued interest at 7.83% from May 1, 2003. An initial payment of $43,863 was to be made prior to March 31, 2004 and the remaining balance was to be fully repaid prior to December 31, 2009.

 

F-110


DATEC GROUP LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

The fair value of the assets and liabilities acquired were:

 

     NZ$

    CAN$

 

Bank (overdraft)

   (109,013 )   (95,634 )

Trade debtors

   341,501     299,590  

Sundry debtors

   5,252     4,607  

Plant and equipment

   173,358     152,082  

Trade creditors

   (253,463 )   (222,356 )

Deferred revenue

   (95,976 )   (84,197 )

Sundry payables

   (116,676 )   (102,357 )

Goodwill

   2,123,957     1,863,296  
    

 

Net assets acquired

   2,068,940     1,815,031  
    

 

Cash payments made

   50,000     43,863  

Cash payments accrued

   1,377,187     1,208,174  

Shares to be issued

   641,753     562,994  
    

 

Consideration for purchase

   2,068,940     1,815,031  
    

 

 

Datec New Zealand Limited operated under the trade name of Certus Consulting.

 

5. PROPERTY, PLANT AND EQUIPMENT

 

     2004

     Cost

  

Accumulated

Amortization


   

Net Book

Value


Land

   $ 377,394      —       $ 377,394

Buildings

   $ 4,725,847      (600,861 )     4,124,986

Office equipment

     759,157      (509,178 )     249,979

Vehicles

                     

- leased

     110,388      (34,128 )     76,260

- non-leased

     1,364,193      (727,252 )     636,941

Furniture and fixtures

     681,084      (359,988 )     321,096

Computer hardware

     1,177,429      (787,546 )     389,883

Computer software

     99,064      (59,998 )     39,066

Plant and equipment

                     

- leased

     2,780,188      (603,547 )     2,176,641

- non leased

     2,650,913      (1,642,777 )     1,008,136
    

  


 

     $ 14,725,657    $ (5,325,275 )   $ 9,400,382
    

  


 

 

F-111


DATEC GROUP LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

     2003

     Cost

   Accumulated
Amortization


    Net Book
Value


Land

   $ 166,366      —       $ 166,366

Buildings

   $ 4,656,440      (431,874 )     4,224,566

Office equipment

     585,481      (287,558 )     297,923

Vehicles

                     

- leased

     276,294      (58,084 )     218,210

- non-leased

     555,115      (154,273 )     400,842

Furniture and fixtures

     797,908      (380,605 )     417,303

Computer hardware

     1,659,065      (926,015 )     733,050

Computer software

     327,004      (111,346 )     215,658

Plant and equipment

                     

- leased

     —        —         —  

- non-leased

     2,783,501      (1,584,077 )     1,199,424
    

  


 

     $ 11,807,174    $ 3,933,832     $ 7,873,342
    

  


 

 

Amortization provided for in the current year totalled $1,917,881; (2003 - $1,410,519)

 

6. GOODWILL

 

     Note

   2004

    2003

Goodwill

        $ 10,939,306     $ 12,745,211
         


 

Goodwill movement in the period:

                   

Opening Goodwill

        $ 12,745,211     $ 10,881,915

Goodwill on (divestment) acquisition of Datec New Zealand Limited (t/a Certus Consulting

   4(b),(c)      (1,863,296 )     1,863,296

Goodwill on acquisition of Technology Design & Development Solutions Ltd.

   4(a)      97,532       —  

Impairment losses recognised

          —         —  

Foreign exchange movement

          (40,141 )     —  
         


 

Closing Goodwill

        $ 10,939,306     $ 12,745,211
         


 

 

Based on the impairment tests performed as at December 31, 2004 and 2003, the Company concluded that no goodwill impairment charge was required.

 

F-112


DATEC GROUP LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

7. INDEBTEDNESS

 

          2004

    2003

 

a)

   Mortgage and lease debt                 
     Mortgage finance liability, payable in Fiji Dollars, with current interest rates of 7.29 – 7.66%, collateralised by land and buildings, payable over 10 years, ending May 2012      1,357,063       1,770,343  
     Less: Current portion      (795,085 )     (797,211 )
         


 


            561,978       973,132  
         


 


     Capital lease obligations payable in Fiji Dollars      932,058       451,188  
     Less: Current portion      (476,992 )     (311,266 )
         


 


     Capital lease obligations – Non Current      455,066       139,922  
         


 


     Total long term portion    $ 1,017,044     $ 1,113,054  
         


 


     The monthly principal and interest payments on this mortgage and lease debt amounts to $19,864 and the mortgage and lease debt is secured by property, plant and equipment having a book value of $4,498,125.   
     The lease expiry dates range between April 2005 and October 2006 and incur interest rates ranging from 9% - 14%.  

b)

   Debenture    $ 369,457     $ 2,474,344  
         


 


     A first ranking debenture was issued to the vendors of Generic Technology Group, in connection with the renegotiated terms of the acquisition of the Generic Group by the Company. The balance represents the outstanding principal as at the closing date (October 2000) plus interest from that date, less amounts being settled by cash or shares. In May 2004, the Company settled $2,104,887 of the debenture by the issuance of 2,416,668 common shares at $0.30 per share and the exercise of 1,866,668 warrants at $0.30 and 2,186,364 warrants at $0.375. A total of 6,469,700 common shares have been issued pursuant to these transactions, primarily all of which were issued to directors or officers or companies related to them. In September 2003, the Company settled $2,474,343 of the debenture by the issuance of 3,299,124 common shares at $0.75 per share.         

   This debenture bears an interest rate of 8% and is to be repaid by January 2007. It is secured by the assets and liabilities of Datec Group Ltd.. All of the debenture is payable to directors or officers or companies related to or controlled by directors or officers.    

c)

   Shareholder loan  
    

Total loan

   $ 155,784     $ 1,408,482  
    

Less: Current Portion

     —         (43,863 )
         


 


          $ 155,784     $ 1,464,619  
         


 


     The shareholder loan in 2003 was comprised of two balances, payable to the vendors of Certus Consulting Ltd and a director of the company. The loans accrued interest at a rate of 7.83%.   
     The movement in the shareholder loan balance resulted from the divestiture of Certus Consulting Ltd (refer Note 4(b)) which decreased the loan by $1,208,174. The remaining decrease resulted from repayment of a portion of the loan due to a director of the company.    

 

F-113


DATEC GROUP LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

Total long term debt

   $ 1,542,285    $ 4,952,017
    

  

Disclosed as:

             

Long Term Debt – Related Parties

   $ 525,241    $ 3,838,963

Long Term Debt – External Parties

   $ 1,017,044    $ 1,113,054
The total interest expense for the year in relation to long-term debt was as follows:              

Related Parties

     107,769      370,444

Non Related Parties

     576,595      373,275
    

  

     $ 684,364    $ 743,719
    

  

d)      Repayment dates

             
Capital lease obligations are repayable as follows:              

In less than 1 year

     476,992      311,266

1 to 2 years

     134,064      139,922

2 to 3 years

     321,002      —  
    

  

     $ 932,058    $ 451,188
    

  

Mortgage finance liabilities are repayable as follows:              

In less than 1 year

     795,085      797,211

1 to 2 years

     561,978      702,195

2 to 3 years

     —        101,598

3 to 4 years

     —        99,396

4 years and over

     —        69,943
    

  

     $ 1,357,063    $ 1,770,343
    

  

e)      Bank indebtedness

             

Bank Overdraft

   $ 3,503,030    $ 2,452,401
    

  

The bank overdraft incurs interest at rates of 7.79% (Fiji) and 12.5% (Papua New Guinea). It is a revolving facility with no fixed repayment date and is secured by the following:

-        equitable mortgage debenture over the assets and liabilities of Datec Fiji Limited and Datec Papua New Guinea Limited;

-        unlimited company guarantee by Generic Technology Group Limited;

-        unlimited joint and several debt and interest guarantee by the Directors of Generic Technology Group Limited;

-        registered first mortgage over the land and building assets of Generic Technology Group Limited.

The maximum facility available to the company is $4,500,000.

 

F-114


DATEC GROUP LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

8. SHARE CAPITAL

 

  a) Authorized

 

   

Unlimited number of common shares

                     
   

Unlimited number of Preferred Shares

                     
   

10,000,000 Series A Preferred Shares - 6 1/2% cumulative

                     
              2004

    2003

 
    Issued and outstanding                      
   

Common shares

   8(b)(i)    $ 37,106,874     $ 34,573,112  
   

Shares to be issued

   8(b)(iii)      —         520,463  
   

Less: Share issue costs

          (2,328,182 )     (2,328,182 )
             


 


              $ 34,778,692     $ 32,765,393  
             


 


 

As at December 31, 2004 12,430 shares (2003—12,430 shares) were being held in escrow pursuant to Escrow Agreements, which provide for the release of such shares on a performance basis. On June 30, 2003, 247,640 escrowed shares relating to various previous business acquisitions, were cancelled under expired escrow agreements.

 

  b) Share transactions

 

  (i) Common Shares

 

     2004

    2003

 
     Shares

    Amount

    Shares

    Amount

 

Shares issued - beginning of year

   20,987,258     $ 34,573,164     6,809,466     $ 33,325,084  

Issue of shares for acquisition of Sybrel

   377,000       141,375     —         —    

Exercise of warrants

   550,000       165,000     —         —    

Issue of shares for executive compensation

   —         —       182,679       106,167  

Exercise of stock options

   10,000       2,500     50,000       25,000  

Cancellation of shares held in escrow

   —         —       (247,640 )     (1,657,430 )

Private placement

   200,000       120,000     400,000       300,000  

Issue of shares for debt

   6,469,700       2,104,887     3,299,124       2,474,343  

Adjustment for share split

   —         —       10,493,629       —    
    

 


 

 


Shares issued – end of year

   28,593,958       37,106,926     20,987,258       34,573,164  

Acquisition shares held in escrow

   (12,430 )     (52 )   (12,430 )     (52 )
    

 


 

 


Shares outstanding - at end of year

   28,581,528     $ 37,106,874     20,974,828     $ 34,573,112  
    

 


 

 


 

During the current year the Company completed private placements of 200,000 units at a price of $0.60 per unit for total proceeds of $120,000. Each unit represents one common share and one warrant. Each warrant will entitle the purchase of one additional common share at a price of $1.00 per share for a period of two years, expiring July 22, 2006 (for 120,000 warrants) and August 9, 2006 (for 80,000 warrants). These private placement shares were subject to a four-month hold period, expiring November 2004 and December 2004, respectively.

 

During the current year, the Company issued 6,469,700 common shares for the settlement of debt in the amount of $2,104,887 through the exercise of warrants and convertible debt (refer to Note 7(b)).

 

F-115


DATEC GROUP LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

During the year the Company issued 377,000 shares for the acquisition of Sybrel Ltd. (refer to Note 4(a)).

 

During the year, the Company issued 550,000 shares upon the exercise of 550,000 warrants at $0.30 per warrant, for cash proceeds of $111,081 and settlement of debts of $53,920.

 

  (ii) Warrants

 

       2004(1)

     2003(1)

 

Warrants outstanding at

               

Kaufmann Bros. Warrants

     —   (2)    150,000 (2)

First Montauk Warrants

     —   (3)    800,000 (3)

Hedlin Lauder Warrants

     —   (4)    200,000 (4)

Other Warrants

     864,000 (5)    4,867,032 (5)
      

  

       864,000      6,017,032  
      

  


 

  (1) Share figures and prices and disclosures below for 2003 year have been adjusted to reflect the two-for-one stock split effected in October of 2003.

 

  (2) On April 11, 2001 the Company by special resolution agreed to grant 150,000 warrants to Kaufmann Bros. L.P under an agreement originally entered into in October 2000 to provide capital planning and financial services to the Company. The warrants were issued in 3 parcels of 50,000 shares with exercise prices of USD $4, $6 and $8 per share. These warrants expired during the current year without being exercised.

 

  (3) Pursuant to a consulting agreement entered into in 2003 with First Montauk Securities Corp. the Company has issued to First Montauk warrants to purchase a total of 800,000 shares. 400,000 of the warrants have an exercise price of $0.475 per share and 400,000 warrants have an exercise price of $0.75 per shares. The warrants have a term of 5 years, expiring September 2008, and were conditional upon regulatory and shareholder approval. These approvals were not obtained in 2004 and, accordingly, these warrants have been cancelled.

 

  (4) Pursuant to a consulting agreement entered into in 2003 with Hedlin Lauder Associates Inc. the Company has issued 200,000 warrants to Hedlin Lauder, which have an exercise price of $0.55 per share and a term of 5 years (subject to earlier termination if the agreement is terminated), vesting over a period of 18 months, expiring September 2008. These warrants were conditional upon regulatory and shareholder approval. These approvals were not obtained in 2004 and, accordingly, these warrants have been cancelled.

 

  (5) The Company issued 264,000 warrants in connection with convertible loans in 2002. These warrants have an exercise price of $0.375 per common share and an expiry date of January 21, 2006. The Company issued 400,000 warrants in connection with a private placement in 2003. These warrants have an exercise price of $0.75 per common share and an expiry date of September 8, 2005. During 2004 the Company completed private placements pursuant to which it issued a total of 200,000 warrants having an exercise price of $1.00 per common share and a term of two years; 120,000 expire in July 2006 and 80,000 in August 2006.

 

During 2004, 4,603,032 warrants were exercised for a total of $1,544,887 for cash and debt settlement (refer to Note 8(b)(i)).

 

The fair value of warrants issued in connection with equity offerings, using the Black-Scholes valuation model, has been determined to be not material.

 

F-116


DATEC GROUP LTD.

 

CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

  (iii) Shares to be issued

 

At December 31, 2003, there were 750,000 shares in Datec Group Ltd. and 293,003 shares in Datec New Zealand Limited due to be issued in relation to the purchase of Certus Consulting Note 4(c). These shares were valued at $0.375 and $0.85 respectively. These shares had not been issued at the time that Certus Consulting was sold in 2004 (refer Note 4(b)) and as such were cancelled as part of the sale process.

 

     2004

   2003

     Quantity

   Amount

   Quantity

   Amount

Certus Consulting

   —      $ —      1,043,003    $ 520,463
    
  

  
  

     —      $ —      1,043,003    $ 520,463
    
  

  
  

 

  c) Unexercised stock options

 

     2004

   2003

     Number

   

Per share

Amount


   Number

   

Per share

Amount


Options outstanding at beginning of year

   807,500     $ 3.09    316,250     $ 14.24

Granted

   350,000     $ 0.59    375,000       0.71

Exercised

   (10,000 )   $ 0.25    (100,000 )     0.25

Adjustment for share split

   —         —      316,250       —  
    

 

  

 

Adjusted sub total

   1,147,500            907,500        

Cancelled/Expired

   —         —      (100,000 )     22.50
    

 

  

 

Options outstanding at end of year

   1,147,500     $ 2.35    807,500     $ 3.09
    

 

  

 

 

As at December 31, 2003 all outstanding options were exercisable. As at December 31, 2004 50,000 options were subject to vesting restrictions and the balance of 1,097,500 options are exercisable.

 

Options held by the Directors of the Company totalling 795,000 shares (2003-805,000 shares) are as follows:

 

Number of options


   Exercise price

   Expiry date

75,000

   $22.50    February 29, 2005

25,000

   $16.90    August 21, 2005

320,000

   $0.25    January 24, 2007

375,000

   $0.71    November 14, 2008

795,000

   $3.09     

 

Options held by employees and consultants of the Company totalling 352,500 shares (2003-2,500) are as follows:

 

Number of options


   Exercise price

  

Expiry date


2,500

   $14.80    March 31, 2005

100,000

   $0.70    January 1, 2009

200,000

   $0.55    November 10, 2009

50,000

   $0.55    November 10, 2006

352,500

   $0.69     

 

F-117


DATEC GROUP LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

50,000 of these options are subject to vesting restrictions over a period of 18 months from the date of grant (November 10, 2004). For the remaining options there are no criteria that need to be met before the Options can be exercised by the holder. Options are forfeited in the event the holder ceases to be a Director, employee or consultant of the Company or one of its subsidiaries.

 

All option amounts and exercise prices have been adjusted to reflect the two-for-one stock split effected in October 2003.

 

The Company has recorded stock based compensation in the amount of $175,000 (2003 – nil) with respect to the 350,000 (2003 – 375,000) stock options granted during the year as an expense in the statement of loss and deficit and an increase to contributed surplus. Compensation expense has been determined based on the fair value of the options at the grant date and does not include any options issued prior to January 1, 2004. The fair value of $0.50 per stock option is estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

Dividend rate

   0 %

Annualized volatility

   117.42 %

Risk-free rate

   4.67 %

Expected life of options in years

   5.0  

 

With respect to the previous fiscal year, pro forma net earnings and earnings per share reflecting the impact of stock-based compensation using the fair value method arising from options granted to directors and employees during 2003, is not required as the fair value was determined to be not material. For pro forma disclosure purposes, the Company used the Black-Scholes option-pricing model to value the options at each grant date, under the following weighted average assumptions:

 

Dividend rate

   0 %

Annualized volatility

   121.33 %

Risk-free interest rate

   4.82 %

Expected life of options in years

   2.1  

 

The compensation expense recorded in the current year and the pro forma amount disclosed for the previous year, according to the Black-Scholes option pricing model, may not be indicative of the actual values realized upon the exercise of these options by the holders.

 

  d) Earnings (loss) per common share

 

Earnings (loss) per share has been calculated on the basis of the weighted average number of common shares outstanding for the period.

 

     2004

    2003

Weighted average number of shares

     25,598,404       11,539,137

Earnings (loss) attributable to shareholders

   $ (976,871 )   $ 1,598,921

Basic earnings (loss) per share from operations

   $ (0.04 )   $ 0.14
    


 

Diluted earnings (loss) per share from operations

   $ (0.04 )   $ 0.10
    


 

 

F-118


DATEC GROUP LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

9. INCOME TAXES

 

Income tax expense (recovery) attributable to income from profit was $1,002,907 and ($113,106) for the year ended December 31, 2004 and the year ended December 31, 2003, respectively, and differed from the amounts computed by applying the Canadian income tax rate of 36.62% (2003: 36.62 %) to pre-tax loss/profit from continuing operations as a result of the following:

 

     2004

    2003

 

Expected income tax expense calculated at the statutory rate on earnings before taxation

   $ 139,876     $ 616,308  

Income tax expense

                

Adjustment for foreign tax rates

     (93,679 )     (4,985 )

Stock-based compensation

     64,085       —    

Prior years overprovision

     74,641       —    

Recognition of tax losses

     (168,565 )     (733,217 )

Losses not recognized

     658,496       —    

Losses written back

     228,531       —    

Other

     99,522       8,788  
    


 


     $ 1,002,907     $ (113,106 )
    


 


Total income tax expense is made up of:

                

Current income taxes

   $ 647,950     $ 271,194  

Future tax liability

     (149,401 )     26,455  

Future income taxes

     504,358       (419,755 )
    


 


     $ 1,002,907     $ (113,106 )
    


 


 

The tax effects of temporary differences that give rise to significant portions of the future tax assets and future tax liabilities at December 31, 2004 and December 31, 2003 are presented below.

 

     2004

    2003

 

Future tax assets:

                

Accounts receivable principally due to allowance for doubtful accounts

   $ 146,554     $ 282,665  

Inventories, principally due to allowance for obsolescence

     118,746       112,487  

Compensated absences, principally due to accrual for financial reporting purposes

     189,664       214,370  

Other

     78,026       42,167  

Tax losses available for future use

     839,160       548,362  
    


 


Subtotal

     1,372,150       1,200,051  

Less valuation allowance related to tax losses

     (839,160 )     (162,703 )
    


 


Future tax assets

   $ 532,990     $ 1,037,348  
    


 


Future tax liabilities:

                

Property, plant and equipment, principally due to allowance for amortization differences between accounting and tax

   $ —       $ 149,401  
    


 


Future tax liabilities

   $ —       $ 149,401  
    


 


 

F-119


DATEC GROUP LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

In assessing the realizability of future tax assets, management considers whether it is more likely than not that some portion or all of the future tax assets will not be realized. The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

 

Management considers the scheduled reversal of future tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In order to fully realize the future tax asset, the Company will need to generate future taxable income. Based upon the level of historical taxable income and projections for future taxable income over the periods that the future tax assets are deductible, management believes it is more than not likely the Company will realize the benefits of these deductible assets. The amount of the future tax asset considered realizable has been reduced to reflect this change in classification. The majority of these tax losses relate to the Company’s Fiji subsidiaries and are not transferable to other companies within the group.

 

10. DEFERRED DEVELOPMENT COSTS

 

       2004

     2003

Development costs deferred beginning of year

     $ 215,657      $ —  

Development costs deferred during the year

     $ 176,987      $ 215,657
      

    

         392,644        215,657

Amortized during the year

       —          —  
      

    

Development costs deferred end of year

     $ 392,644      $ 215,657
      

    

 

Development costs deferred principally related to the development of software applications.

 

11. RELATED PARTY TRANSACTIONS

 

During the year a legal firm in which a director of the Company is a partner charged legal fees and disbursements of $26,656 (2003 - $35,561).

 

During the year, interest was paid to related parties in the amount of $107,769 (2003 - $370,444) - see Note 7.

 

These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to between the related parties.

 

12. SEGMENTED OPERATIONS

 

The Company operates in the Pacific Islands, New Zealand and Australia. The Canadian operations shown relate to administrative activities only. The reporting of all business segments is consistent with those reported in the prior period.

 

The Company principally operates in four industry segments, being the divisions by which the Company is managed, as follows:

 

    Distribution and sale of computer and telecommunications hardware and software (“Vendor Services”);

 

    The hosting of client hardware and software services including the provision of technical support and services for the Technology Industry (“Application Hosting”);

 

    Software application design and development (“Application Development”); and

 

    Provision of professional consulting services (“Professional Services”).

 

F-120


DATEC GROUP LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

The corporate services operation shown relates to the Company’s administrative functions in the Pacific Islands New Zealand and Canada.

 

The below tables contain the continuing operations only.

 

2004 ($)


   Canada

    Australia

    Pacific

    New Zealand

   Total

 

Sales

   —       3,551,342     37,275,747     8,569,716    49,396,805  

Net income/(loss)

   (481,613 )   (182,148 )   (1,003,208 )   690,098    (976,871 )

Amortization

   —       14,366     1,723,783     179,732    1,917,881  

Net interest expense

   29,242     1,604     461,569     191,949    684,364  

Identifiable assets

   177,341     310,689     34,167,813     333,968    34,989,811  

Goodwill

   —       —       10,925,224     14,082    10,939,306  

Capital expenditures

   —       74,737     3,941,122     782,865    4,798,724  

 

The net loss of $1,003,208 disclosed under “Pacific” includes a loss after tax of $1,797,579 incurred by Datec Fiji Limited. This loss includes the reversal of future tax assets related to tax loss carryforwards of $253,416 (refer to Note 9) and an inventory writedown of $470,803.

 

2003 ($)


   Canada

    Australia

    Pacific

   New Zealand

   Total

Sales

   —       5,845,071     34,624,570    8,161,637    48,631,278

Net income/(loss)

   (241,644 )   (28,676 )   302,329    1,566,912    1,598,921

Amortization

   —       31,043     1,296,066    83,410    1,410,519

Net interest expense

   —       —       401,092    342,627    743,719

Identifiable assets

   151,080     841,970     36,802,950    910,398    38,706,398

Goodwill

   —       —       10,881,915    1,863,296    12,745,211

Capital expenditures

   —       —       1,889,614    199,686    2,089,300

 

2004 ($)


     Vendor
Services


     Application
Hosting


     Application
Development


     Professional
Services


     Corporate
Services


     Total

 

Sales

     38,911,457      4,289,811      1,429,937      4,765,600      —        49,396,805  

Net income/(loss)

     (254,958 )    (88,110 )    (32,040 )    (120,150 )    (481,613 )    (976,871 )

Amortization

     1,457,589      172,609      57,536      230,147      —        1,917,881  

Net interest expense

     497,893      58,961      19,654      78,615      29,241      684,364  

Identifiable assets

     26,592,256      3,149,082      1,049,694      4,021,438      177,341      34,989,811  

Capital expenditures

     3,104,007      1,082,084      122,527      490,106      —        4,798,724  

 

2003 ($)


     Vendor
Services


     Application
Hosting


     Application
Development


     Professional
Services


    

Corporate

Services


     Total

Sales

     36,608,988      4,394,238      1,464,746      5,863,306      —        48,631,278

Net income/(loss)

     1,353,189      184,641      61,547      241,188      (241,644 )    1,598,921

Amortization

     1,071,994      126,946      42,315      169,264      —        1,410,519

Net interest expense

     565,226      66,935      22,311      89,247      —        743,719

Identifiable assets

     29,302,041      3,469,978      1,156,659      4,619,648      151,080      38,699,406

Capital expenditures

     1,587,868      188,037      62,679      250,716      —        2,089,300

 

The accounting policies adopted by each of the individual segments are as disclosed in Note 3.

 

F-121


DATEC GROUP LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

13. NOTES TO THE STATEMENT OF CASH FLOWS

 

Reconciliation of net earnings (loss) and cash flow from operating activities

 

     2004

    2003

 
     $     $  

Net Earnings (loss) for the year

   (976,871 )   1,598,921  

Add/(Less) non-cash items:

            

Amortization

   1,917,881     1,410,519  

Non-controlling interest

   355,931     197,167  

Loss on sale of property, plant and equipment

   (26,020 )   31,418  

Tax losses written off

   246,058     —    

Effect of exchange rate changes on cash

   (2,771 )   (127,356 )

Bad debts

   (197,992 )   463,060  

Stock based compensation

   175,000     —    

Write-down of inventory

   470,033     —    

Working capital/(deficit) acquired – Sybrel

   (22,610 )   —    

Working capital disposed – Certus

   (57,328 )   —    

Other non-cash items

   —       (286,749 )

Impact of changes in working capital items:

            

Decrease / (Increase) in accounts receivable

   2,560,462     (2,329,387 )

Decrease / (Increase) in other receivables

   216,600     (62,819 )

Decrease/ (Increase) in tax payable

   50,173     —    

Decrease / (Increase) in taxation receivable

   107,978     589,406  

Decrease / (Increase) in future tax liability

   (149,401 )   26,456  

Decrease / (Increase) in future tax assets

   504,358     (410,756 )

Decrease / (Increase) in deferred costs

   (176,987 )   (215,657 )

Decrease / (Increase) in inventories

   (105,722 )   (410,464 )

Decrease / (Increase) in deferred revenue

   624,011     34,717  

Decrease / (Increase) in accounts payable

   (1,023,820 )   426,674  

Decrease / (Increase) in accrued liabilities

   (2,258,494 )   (1,021,930 )
    

 

Net cash flow from/(used in) operating activities

   2,230,469     (86,780 )
    

 

 

14. FINANCIAL INSTRUMENTS

 

The nature of activities and management policies with respect to financial instruments are as follows:

 

  a) Foreign currency

 

The Company uses a very limited number of forward exchange contracts and currency options to hedge purchases of inventory in foreign currencies. The Company’s exchange rate commitments are intended to minimise the exposure to exchange rate movement risk on the cost of the Company’s products and on the price it is able to sell those products to its customers. The Company does not use foreign exchange instruments for trading or any other purpose.

 

No forward exchange contracts were entered into during the year ended December 31, 2004 or the year ended December 31, 2003.

 

F-122


DATEC GROUP LTD.

 

CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

  b) Concentration of credit risk

 

In the normal course of business, the Company incurs credit risk from accounts receivable and transactions with financial institutions. The Company has a credit policy, which is used to manage the risk. As part of this policy, limits on exposure with counterparties have been set and are monitored on a regular basis. Anticipated bad debt losses have been provided for in the allowance for doubtful accounts.

 

The Company has no significant concentrations of credit risk. The Company does not consider that it requires any collateral or security to support financial instruments due to the quality of financial institutions and trade debtors.

 

  c) Interest rate risk

 

The Company has adopted a policy of ensuring that its exposure to changes in interest rates is on a fixed rate basis. The Company does not hedge against interest rate fluctuations.

 

  d) Fair values

 

The fair values of the Company’s cash accounts, accounts receivable and other receivables, bank, indebtedness, accounts payable, accrued liabilities and lease obligations approximate the carrying values given their short-term nature. The carrying value of the debenture, capital leases and other long term debts, as disclosed in note 7, also approximate their fair value.

 

15. COMMITMENTS

 

There were no material or unusual commitments at December 31, 2004.

 

16. CONTINGENCIES

 

There were no material or unusual contingent liabilities or guarantees at December 31, 2004.

 

On December 21, 2001 the Company was awarded $101,495 plus interest and costs from Jonathan Hugh Barker relating to Acquisitions of Easy PC Computer Rentals Limited. These funds have not yet been received and therefore no income has been recognised in the period.

 

17. SUBSEQUENT EVENTS

 

  a) In January 2005 the Company closed a private placement financing of 115,000 units at a price of $0.60 per unit for total proceeds of $69,000. Each unit represents one common share and one warrant. Each warrant entitles the holder to purchase one additional common share at a price of $1.00 per share for a period of two years.

 

  b) In March 2005, the Company agreed to dispose of several properties for proceeds of approximately $2,000,000, resulting in a gain on sale of approximately $300,000. The properties are being sold to a company controlled by a director and officer with the sale price supported by appraised values. Certain of these properties are to be leased back from the purchaser.

 

F-123


DATEC GROUP LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

18. CONTRIBUTED SURPLUS

 

During the year December 31, 2004, the Company granted 350,000 stock options with an aggregate fair value of $175,000, which was credited to contributed surplus.

 

At December 31, 2002, the Company had 4,413 shares due to be issued in relation to the earn out of 1World Systems Limited, a former subsidiary of the Group. During the year ended December 31, 2003, the shares held were cancelled and an amount of $211,002 was credited to contributed surplus.

 

At March 31, 2001, the Company had 223,357 shares to be issued in respect of Certus Consulting Limited, a former subsidiary of the Group. Although named the same, this is not the same company as is referred to in Notes 4(b) and 4(c). During the year ended December 31 2001, the shares held were cancelled on the sale of the business and were credited to contributed surplus, amounting to $1,563,499.

 

19. NON CONTROLLING INTEREST

 

A non controlling interest is created reflecting the minority interests of other shareholders for the following partly-owned Companies.

 

     Datec Group
ownership


    Non-controlling
Interest


 

Datec Papua New Guinea Limited

   50 %   50 %

Fiji Shop Limited

   51 %   49 %

Kepra Software Limited

   66 %   34 %

Technology Design & Development Solutions Limited

   66 %   34 %

 

Technology Design & Development Solutions Limited was acquired during the period. Refer to Note 4(a) for further information.

 

20. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

 

These consolidated financial statements of the company have been prepared in accordance with accounting principles generally accepted in Canada, which conform in all material respects with United States generally accepted accounting principles.

 

Under United States securities requirements, the Company is required to provide a reconciliation setting out differences between accounting principles generally accepted in Canada and the United States.

 

Based upon the standards in effect at January 30, 2006, there were no material differences between the Company’s consolidated financial statements as prepared under Canadian and United States generally accepted accounting principles for the years ended December 31, 2004 and December 31, 2003.

 

Comprehensive income or loss

 

Statement of Financial Accounting Standards No. 130 (SFAS 130), “Reporting Comprehensive Income”, establishes standards for reporting and display of comprehensive income or loss and its components in the financial statements. Under U.S. GAAP, there are no other material components of comprehensive income for 2003 and 2004 other than net income or loss as reported.

 

F-124


DATEC GROUP LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE YEAR ENDED DECEMBER 31, 2003

 

Recently issued accounting standards

 

The following standards were recently issued by the Financial Accounting Standards Board:

 

SFAS No. 151 - “Inventory Costs, an Amendment of ARB No. 43, Chapter 4.” SFAS No. 151 retains the general principle of ARB No. 43, Chapter 4, “Inventory Pricing,” that inventories are presumed to be stated at cost; however, it amends ARB No. 43 to clarify that abnormal amounts of idle facilities, freight, handling costs and spoilage should be recognized as current period expenses. Also, SFAS No. 151 requires fixed overhead costs be allocated to inventories based on normal production capacity. The guidance in SAFS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005.

 

SFAS 123 (Revised) - “Share Based Payment,” which will require the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award – the requisite service period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments. SFAS No. 123 (Revised) eliminates the use of APB Opinion No. 25. SFAS No. 123 (Revised) is effective for the first interim or annual reporting period that begins after December 15, 2005. Early adoption for interim or annual periods for which financial statements or interim reports have not been issued is encouraged.

 

SFAS 152 - In December 2004, the FASB issued SFAS No. 152 “Accounting for Real Estate TimeSharing Transactions – an amendment of FASB Statements No. 66 and 67” (“SFAS 152”). This statement amends FASB Statement No. 66 “Accounting for Sales of Real Estate” to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position 04-2 “Accounting for Real Estate Time-Sharing Transactions” (“SOP 04-2”). SFAS 152 also amends FASB Statement No. 67 “Accounting for Costs and Initial Rental Operations of Real Estate Projects” to state that the guidance for incidental operations and costs incurred to sell real estate projects does not apply to real estate time-sharing transactions, with the accounting for those operations and costs being subject to the guidance in SOP 04-2. The provisions of SFAS 152 are effective in fiscal years beginning after June 15, 2005.

 

SFAS 153 - In December 2004, the FASB issued SFAS No. 153 “Exchanges of Non-monetary Assets – an amendment of APB Opinion No. 29” (“SFAS 153”). SFAS 153 replaces the exception from fair value measurement in APB Opinion No. 29 for non-monetary exchanges of similar productive assets with a general exception from fair value measurement for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for all interim periods beginning after June 15, 2005.

 

SFAS 154- In May 2005, the FASB issued SFAS 154 “Accounting Changes and Error Corrections”. The statement replaces APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 requires companies to apply voluntary changes in principles retrospectively whenever practicable. SFAS 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005.

 

The company believes that the above standards would not have a material impact on its financial position, results of operations or cash flows as it relates to the reconciliation of Canadian and United States accounting policy differences.

 

F-125


 

 

 

 

 

DATEC GROUP LTD

 

 

 

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

FOR THE NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 2005

 

F-126


                                    DATEC GROUP LTD

 

 

2900 Bell Tower

 

10104 – 103 Avenue

 

Edmonton, Alberta

 

T5J 0H8

 

Phone: 780.424.3000

 

Fax: 780.429.4817

 

www.krpgroup.com

   LOGO   

 

 

LOGO

 

                                      REVIEW ENGAGEMENT REPORT   

December 9, 2005 (except as to Note 10

which is as of January 30, 2006)

Edmonton, Alberta, Canada

 

 

To the shareholders of Datec Group Ltd:

 

We have reviewed the interim consolidated balance sheet of Datec Group Ltd as at September 30, 2005 and the interim consolidated statements of loss, deficit and cash flows for the nine and three month periods then ended. These interim consolidated financial statements have been prepared in accordance Canadian generally accepted accounting principles. Our review was made in accordance with Canadian generally accepted standards for review engagements and accordingly consisted primarily of enquiry, analytical procedures and discussion related to information supplied to us by the company.

 

A review does not constitute an audit and consequently we do not express an audit opinion on these interim consolidated financial statements.

 

Based on our review, nothing has come to our attention that causes us to believe that these interim consolidated financial statements are not, in all material respects, in accordance with Canadian generally accepted accounting principles.

 

The comparative figures for the nine and three month periods ended September 30, 2004 were not reviewed by the company’s auditors.

 

Comments by Accountants for U.S readers on Canadian – U.S. Reporting Differences

 

In the United States, reporting standards for require the addition of an explanatory paragraph when the financial statements are affected by conditions and events that cast substantial doubt on the Company’s ability to continue as a going concern, such as those described in note 2 to the interim consolidated financial statements. Our report to the shareholders dated December 9, 2005, except for note 10 which is as of January 30, 2006, is expressed in accordance with Canadian reporting standards, which do not permit a reference to such events and conditions in the review engagement report when these are adequately disclosed in the financial statements.

 

LOGO

 

 

Kingston Ross Pasnak LLP

Chartered Accountants

 

F-127


DATEC GROUP LTD

 

INTERIM CONSOLIDATED BALANCE SHEETS

 

AS AT SEPTEMBER 30, 2005

 

     Note

  

September

2005


   

December

2004


 

ASSETS

                     

Current Assets

                     

Cash

          312,585       419,114  

Accounts receivable

          6,080,240       8,645,258  

Other receivables

          2,315,102       919,042  

Taxation receivable

          —         17,984  

Inventories

          4,447,477       3,723,091  
         


 


            13,155,404       13,724,489  

Deferred development costs

          221,372       392,644  

Property, Plant and Equipment

          5,514,089       9,400,382  

Future tax assets

          814,435       532,990  

Goodwill

          10,899,649       10,939,306  
         


 


          $ 30,604,949     $ 34,989,811  
         


 


LIABILITIES & SHAREHOLDERS’ EQUITY

                     

Current Liabilities

                     

Bank indebtedness

   3(d)      2,028,302       3,503,030  

Accounts payable

          5,084,069       3,968,117  

Tax Payable

          1,215,441       50,173  

Accrued liabilities

          4,117,150       3,181,811  

Deferred revenue

          1,406,191       4,489,024  

Current portion of long-term debt

   3(a)      900,793       1,272,077  
         


 


            14,751,946       16,464,232  

Long term debt – related parties

   3(b),3(c)      —         525,241  

                            – external parties

   3(a)      57,685       1,017,044  
         


 


            14,809,631       18,006,517  

Non-controlling interest

   4      792,577       2,254,860  

Shareholders’ equity

                     

Share capital

   5(a)      34,882,192       34,778,692  

Contributed surplus

          1,949,501       1,949,501  

Deficit

          (22,464,335 )     (21,594,970 )

Foreign currency translation adjustment

          635,383       (404,789 )
         


 


            15,002,741       14,728,434  
         


 


            15,795,318       16,983,294  
          $ 30,604,949     $ 34,989,811  
         


 


 

Approved by the Board

    

  

Director

  

Director

 

F-128


DATEC GROUP LTD

 

INTERIM CONSOLIDATED STATEMENTS OF LOSS

 

NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 2005

 

    

Sept 05

9 months


   

Sept 05

3 months


   

Sept 04

9 months


   

Sept 04

3 months


 
     $     $     $     $  

Revenue

   36,106,840     12,195,282     37,591,664     13,014,428  

Cost of Goods Sold

   18,379,090     6,036,985     17,785,077     6,467,840  
    

 

 

 

Gross Profit

   17,727,750     6,158,297     19,806,587     6,546,588  

Expenses

                        

Amortization

   1,322,072     458,256     1,497,163     853,742  

Interest on long term debt

   236,195     60,097     433,726     155,819  

Salaries and commissions

   7,310,298     2,555,541     8,926,204     2,368,938  

Other operating expenses

   8,804,519     3,578,463     7,622,393     2,453,454  
    

 

 

 

Total operating expenses

   17,673,084     6,652,357     18,479,486     5,831,953  
    

 

 

 

Earnings (loss) from operations before the following

   54,666     (494,060 )   1,327,101     714,635  

Foreign exchange gains

   29,983     56,406     52,657     12,691  

Due diligence costs

   (215,218 )   (102,218 )            

Other income

   0     11,976     29,896     —    

(Gain)/Loss on Disposal of property, plant and equipment

   2,008,852     (266 )   0     0  
    

 

 

 

Earnings before income taxes and non-controlling interests

   1,878,283     (528,162 )   1,409,654     727,326  

Income taxes (Note 6)

   1,239,617     295,621     155,568     286,935  
    

 

 

 

Net Earnings (loss) before non-controlling interests

   638,666     (823,783 )   1,254,086     440,391  

Non controlling interest (Note 4)

   (1,508,031 )   (53,661 )   (404,505 )   (221,376 )
    

 

 

 

Net (Loss) Earnings for the period

   (869,365 )   (877,444 )   849,581     219,015  
    

 

 

 

Basic Earnings (Loss) Per Common Share

   (0.03 )   (0.03 )   0.03     0.01  

Diluted Earnings (Loss) Per Common Share

   (0.03 )   (0.03 )   0.02     0.01  
    

 

 

 

 

See the accompanying notes to the interim consolidated financial statements

 

F-129


DATEC GROUP LTD

 

INTERIM CONSOLIDATED STATEMENTS OF DEFICIT

 

NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 2005

 

     9 Months to
30 September 2005


    9 Months to
30 September 2004


 

Deficit, beginning of the period

   $ (21,594,970 )   $ (20,618,099 )

Net Earnings for the six month period ended June 30

     8,079       630,566  

Net (Loss) Earnings for the three month period ended September 30

     (877,444 )     219,015  
    


 


Deficit, end of the period

   $ (22,464,335 )   $ (19,768,518 )
    


 


 

See the accompanying notes to the interim consolidated financial statements.

 

F-130


DATEC GROUP LTD

 

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

 

NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 2005

 

    

Nine Months

Ended Sept

2005


   

Three Months

Ended Sept

2005


   

Nine Months

Ended Sept

2004


   

Three Months

Ended Sept

2004


 
     $     $     $     $  

Cash flows from operating activities

                        

Receipts from customers

   34,464,967     12,676,201     39,586,557     12,077,011  

Payments to suppliers and employees

   (34,026,507 )   (13,318,109 )   (36,288,315 )   (8,955,365 )

Net interest paid

   (236,972 )   (60,874 )   (433,726 )   (155,819 )

Dividends paid

   (2,970,314 )   (1,099,344 )            

Taxation (paid) / refunded

   (584,819 )   615,308     299,222     49,299  
    

 

 

 

Cash flows from operating activities

   (3,353,645 )   (1,186,818 )   3,163,738     3,015,126  

Cash flows from investing activities

                        

Proceeds from the sale of capital assets

   6,436,262     0     16,000     0  

Purchase of capital assets

   (1,863,189 )   (1,180,314 )   (4,782,222 )   (3,219,119 )
    

 

 

 

Cash flows from investing activities

   4,573,073     (1,180,314 )   (4,766,222 )   (3,219,119 )

Cash flows from financing activities

                        

Increase (decrease) in bank indebtedness

   (1,474,728 )   1,234,862     914,593     (1,775,163 )

Proceeds from shares, options and warrants issued and exercised

   103,500     103,500     120,000     120,000  

Proceeds from mortgage finance raised

   0     0     1,487,289     1,487,289  

Repayment of mortgage principal

   (1,082,877 )   295,337     (1,273,397 )   (1,052,341 )
    

 

 

 

Cash flows from financing activities

   (2,454,105 )   1,633,699     1,248,485     (1,220,215 )

Translation of cash equivalents to reporting currency

   1,128,148     873,396     (18,498 )   (31,930 )
    

 

 

 

Net Increase (Decrease) in cash

   (106,529 )   139,963     (372,497 )   (1,456,138 )

Cash, beginning of period

   419,114     172,622     743,155     1,826,796  
    

 

 

 

Cash, end of the period

   312,585     312,585     370,658     370,658  
    

 

 

 

 

See the accompanying notes to the interim consolidated financial statements.

 

F-131


DATEC GROUP LTD

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

NINE MONTHS ENDED SEPTEMBER 31, 2005

 

1. BASIS OF PRESENTATION

 

Datec Group Ltd, (the Company), was incorporated under the Business Corporations Act (Alberta) on November 23, 1993, and was continued under the Business Corporations Act (New Brunswick) on July 21, 2001. It obtained its listing on the Alberta Stock Exchange on April 14, 1994. The Company changed its name from Brocker Technology Limited to Datec Group Limited during 2003.

 

On February 28, 1998, the Company transferred its listing to the Toronto Stock Exchange (TSX).

 

The Company has operations in the South Pacific focussed on the marketing and distribution of information technology products, software and services. The Company principally operates in four industry segments, being the divisions by which the Company is managed, as follows:

 

    Distribution and sale of computer and telecommunications hardware and software;

 

    The hosting of client hardware and software services including the provision of technical support and services for the Technology Industry;

 

    Software application design and development; and

 

    Provision of professional consulting services.

 

The information presented for the nine and three month periods ended September 30, 2005 as well as the comparative figures has been presented in accordance with Canadian generally accepted accounting standards for interim financial reporting. Accordingly, these interim consolidated financial statements focus on transactions, events and circumstances occurring in the third quarter ended September 30, 2005 and do not necessarily duplicate information previously reported in the first and second quarters of the current fiscal year. These interim consolidated financial statements follow the same accounting policies and methods of their application as, and should be read in conjunction with, the most recent annual audited consolidated financial statements for the year ended December 31, 2004.

 

2. GOING CONCERN

 

While the financial statements have been prepared on the basis of accounting principles applicable to a going concern, several historical conditions and events cast substantial doubt upon the validity of this assumption. The Company incurred significant operating losses in 2000 and 2001. Although the company has achieved profitable operations in 2002 and 2003, it is still in a significant deficit position, which increased as a result of a further operating loss in 2004 and the first three quarters of 2005. If the going concern assumption were not appropriate for these financial statements, then adjustments would be necessary in the carrying values of assets and liabilities, the reported net earnings and the balance sheet classifications used.

 

F-132


DATEC GROUP LTD

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

NINE MONTHS ENDED SEPTEMBER 31, 2005

 

3. INDEBTEDNESS

 

    

September

2005


   

December

2004


 

a)       Mortgage and lease debt

                

Mortgage finance liability, payable in Fiji Dollars, with current interest rates of 7.29 – 7.66% Payable over 10 years, ending May 2012

   $ 169,125     $ 1,357,063  

Less: Current portion

     (169,125 )     (795,085 )
    


 


       0       561,978  
    


 


Capital lease obligations payable in Fiji Dollars

     406,852       932,058  

Less: Current portion

     (349,167 )     (476,992 )
    


 


Capital lease obligations – Non Current

     57,685       455,066  
    


 


     $ 57,685     $ 1,017,044  
    


 


b)       Debenture

   $ 369,457     $ 369,457  
    


 


 

A first ranking debenture was issued to the vendors of Generic Technology Group, in connection with the renegotiated terms of the acquisition of the Generic Group by the Company. The balance represents the outstanding principal as at the closing date (October 2000) plus interest from that date, less amounts settled thereafter by cash or shares. No repayment of this debenture has occurred during the first three quarters of 2005.

 

This debenture bears an interest rate of 8%, is secured by the net assets of the Datec Group and is to be repaid by October 2005. (Refer to subsequent events note 6.) All of the debenture is payable to directors or officers or companies related to or controlled by directors or officers of the Company.

 

c)       Shareholder Loan

   $ 13,044     $ 155,784

Less: Current Portion

     (13,044 )     —  
    


 

     $ —       $ 155,784
    


 

The shareholder loan is comprised of a loan from a director of the company.

              

Total long term debt

   $ 57,685     $ 1,542,285
    


 

d)       Bank Indebtedness

              

Bank Line of Credit

   $ 2,028,302     $ 3,503,030
    


 

 

F-133


DATEC GROUP LTD

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

NINE MONTHS ENDED SEPTEMBER 31, 2005

 

  d) Bank Indebtedness (continued)

 

The bank overdraft incurs interest at rates of 7.79% (Fiji) and 12.5% (Papua New Guinea). It is a revolving facility with no fixed repayment date and is secured by the following:

 

- equitable mortgage debenture over the assets and liabilities of Datec Fiji Limited and Datec Papua New Guinea Limited;

 

- unlimited company guarantee by Generic Technology Group Limited;

 

- unlimited joint and several debt and interest guarantee by the directors of Generic Technology Group Limited;

 

4. NON CONTROLLING INTEREST

 

Ownership percentage of the subsidiary companies is disclosed in the annual financial statements for the year ended December 31, 2004. The non-controlling interests reported in these interim consolidated financial statements relate primarily to the externally owned 50% interest in Datec Papua New Guinea Limited.

 

During the nine months ended September 30, 2005, the non controlling interest share of net earnings from this company amounted to $1,508,077 and dividends were paid to the non-controlling interest in the amount of $2,970,314.

 

5. SHARE CAPITAL

 

a)      Authorized

Unlimited number of common shares

Unlimited number of Preferred Shares

10,000,000 Series A Preferred Shares – 6.5% cumulative

 

         Issued and outstanding

                
    

September

2005


   

December

2004


 

Common shares

   $ 37,210,374     $ 37,106,874  

Less: Share issue costs

     (2,328,182 )     (2,328,182 )
    


 


     $ 34,882,192     $ 34,778,692  
    


 


Number of shares

     28,801,101       28,593,958  
    


 


 

As at September 30, 2005 and December 31, 2004, 12,430 shares were being held in escrow pursuant to Escrow Agreements, which provide for the release of such shares on a performance basis.

 

F-134


DATEC GROUP LTD

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

NINE MONTHS ENDED SEPTEMBER 31, 2005

 

5. SHARE CAPITAL (CONTINUED)

 

No shares were issued or redeemed during the three month period ended September 30, 2005, although the cash related to the following share transactions was received during the three month period ended September 30, 2005. During the nine month period ended September 30, 2005, the following share transactions occurred:

 

  (i) Payment of directors’ fees by the issuance of 167,143 common shares at a price of $0.35 per share, for a total value of $58,500;

 

  (ii) Issuance of 115,000 common shares by way of private placement at a price of $0.60 per unit (each unit comprised of one common share and one share purchase warrant), for total cash proceeds of $69,000. The share purchase warrants are exercisable within two years of issuance at a price of $1.00 per share. The fair value of these warrants are immaterial at the date of issuance and, accordingly, no cost of share issuance with respect to the warrants has been recorded in these financial statements.

 

  (iii) Cancellation of 75,000 shares, valued at $0.32 per share, for a total of $24,000, with respect to the settlement of loans in a previous fiscal year.

 

  b) Warrants

 

The Company has 579,000 share purchase warrants outstanding at September 30, 2005 (864,000 outstanding at December 31, 2004). During the nine month period ended September 30, 2005, the Company issued 115,000 share purchase warrants (refer to above). During the current quarter, on September 8, 2005, 400,000 warrants previously issued in 2003 expired without being exercised.

 

A summary of the warrants outstanding as at September 30, 2005 is as follows:

 

-  264,000 warrants, exercisable at $0.375, expire in January 2006

 

-  120,000 warrants, exercisable at $1.00 per share, expire in July 2006

 

-  80,000 warrants, exercisable at $1.00 per share, expire in August 2006

 

-  115,000 warrants, exercisable at $1.00 per share, expire in January 2007

 

  c) Stock Options

 

The Company has 1,045,000 stock options outstanding at September 30, 2005 (1,147,500 outstanding at December 31, 2004). During the nine month period ended September 30, 2005 102,500 of the stock options expired; 77,500 during the first quarter and 25,000 during the third quarter.

 

The exercise price and expiry date of the remaining options is set out in the annual financial statements for the year ended December 31, 2004.

 

  d) Earnings Per Common Share

 

Earnings per share amounts have been calculated on the basis of the weighted average number of common shares outstanding for the period.

 

    

September

2005


   

September

2004


Weighted average number of shares

     28,734,354       23,158,825

Earnings attributable to shareholders

     (869,365 )     630,566

Basic Earnings (loss) per share

   $ (0.03 )   $ 0.03
    


 

Diluted Earnings (loss) per share

   $ (0.03 )   $ 0.01
    


 

 

F-135


DATEC GROUP LTD

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

NINE MONTHS ENDED SEPTEMBER 31, 2005

 

6. INCOME TAXES

 

The provision for income taxes differs from amounts computed by applying the effective income tax rates due primarily to estimated income tax liabilities accrued in full for profitable subsidiary companies and the future income tax benefit of losses in non-profitable subsidiary companies not necessarily being recognized, depending upon management’s assessment of whether it is more likely than not that some portion of the future tax assets will not be realized.

 

The majority of unrecognized future tax assets relates to tax loss carryforwards in the Company’s Fiji subsidiaries, which are not transferable to other companies within the group operating in other countries.

 

7. SEGMENTED OPERATIONS

 

The Company operates in the Pacific Islands, New Zealand and Australia. The Canadian operations shown relate to administrative activities only. The reporting of all business segments is consistent with those reported in the prior period.

 

The Company principally operates in four industry segments, being the divisions by which the Company is managed, as follows:

 

    Distribution and sale of computer and telecommunications hardware and software (“Vendor Services”);

 

    The hosting of client hardware and software services including the provision of technical support and services for the Technology Industry (“Application Hosting”);

 

    Software application design and development (“Application Development”); and

 

    Provision of professional consulting services (“Professional Services”).

 

The corporate services operation shown relates to the Company’s administrative functions in the Pacific Islands New Zealand and Canada.

 

September 2005 ($)


   Canada

    Australia

    Pacific

   New Zealand

    Total

 

Sales

   —       371,429     34,753,415    981,996     36,106,840  

Net income/(loss)

   (494,427 )   (255,437 )   483,317    (602,818 )   (869,365 )

Amortization

   —       24,104     1,244,830    53,138     1,322,072  

Net interest expense

         (604 )   164,508    72,291     236,195  

Identifiable assets

   100,438     558,852     28,655,915    1,289,744     30,604,949  

Goodwill

   —       —       10,886,443    13,206     10,899,649  

Capital expenditures

   —       8,499     1,292,183    43,710     1,344,392  

September 2004 ($)


   Canada

    Australia

    Pacific

   New Zealand

    Total

 

Sales

   16,500     2,465,736     29,186,095    5,923,333     37,591,664  

Net income/(loss)

   (187,916 )   (192,945 )   613,030    617,412     849,581  

Amortization

   —       10,164     1,312,272    174,727     1,497,163  

Net interest expense

   25,117     1,620     256,275    150,714     433,726  

Identifiable assets

   100,232     291,686     33,513,924    3,417,631     37,323,473  

Goodwill

   —       0     10,881,915    1,899,875     12,781,790  

Capital expenditures

   —       74,737     3,941,122    782,865     4,798,724  

 

F-136


DATEC GROUP LTD

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

NINE MONTHS ENDED SEPTEMBER 31, 2005

 

September 2005 ($)


   Vendor
Services


    Application
Hosting


    Application
Development


    Professional
Services


    Corporate
Services


    Total

 

Sales

   27,441,198     3,249,616     1,083,205     4,332,821     —       36,106,840  

Net income/(loss)

   (659,608 )   (78,243 )   (28,300 )   (103,214 )   —       (869,365 )

Amortization

   1,004,775     118,986     39,662     158,649     —       1,322,072  

Net interest expense

   179,508     21,258     7,086     28,343     —       236,195  

Identifiable assets

   22,990,299     2,722,535     907,512     3,630,047     —       30,250,393  

Capital expenditures

   1,021,738     120,995     40,332     161,327     —       1,344,392  

September 2004 ($)


   Vendor
Services


    Application
Hosting


    Application
Development


    Professional
Services


    Corporate
Services


    Total

 

Sales

   28,557,125     3,381,765     1,127,254     4,509,020     16,500     37,591,664  

Net income/(loss)

   788,498     93,375     31,124     124,500     (187,916 )   849,581  

Amortization

   1,137,844     134,745     44,914     179,660     0     1,497,163  

Net interest expense

   310,543     36,775     12,258     49,033     25,117     433,726  

Identifiable assets

   28,318,933     3,339,093     1,113,031     4,452,184     100,232     37,323,473  

Capital expenditures

   3,104,007     1,082,084     122,527     490,106     0     4,798,724  

 

8. SUBSEQUENT EVENTS

 

  a) At the Annual and Special Meeting of Shareholders held on October 28, 2005, the shareholders of Datec Group Limited approved a Plan of Arrangement with eLandia Solutions, Inc. This arrangement was originally announced on April 8, 2005. The closing of the Arrangement transaction is subject to completion of certain regulatory matters and final Court approval. At present it is anticipated that this transaction will be completed by January 31, 2006. The Plan of Arrangement will result in a disposition of all subsidiary companies, which represent all of the Company’s business operations. The transaction will be accounted for under generally accepted accounting principles for “discontinued operations” in the fourth quarter of the 2005 fiscal year.

 

Under the proposed Arrangement, Datec shareholders will receive, on a pro-rata basis, a total of 6,808,542 shares of eLandia Solutions, Inc., which will represent approximately 30% of the total outstanding shares of eLandia Solutions, Inc. at that time. eLandia is currently a United States private corporation, with plans to go public in the United States. Upon completion of the Arrangement, eLandia Solutions, Inc. will include the combined business of Datec and AST Telecom, LLC. Further particulars of this Arrangement, including information respecting eLandia Solutions, Inc. and AST Telecom, LLC are set out in Datec’s Management Information Circular dated September 27, 2005.

 

  b) Upon successful completion of the above-noted transaction, the Company has agreed to pay a fee to an unrelated company for services provided in connection with the identification and negotiation of the Plan of Arrangement. The fee, amounting to $708,678, will be satisfied by the payment of $177,168 in cash and by the issuance of 979,907 common shares.

 

  c) The Company proposes to issue a total of 2,996,073 common shares, at a price of $0.325 per share, for an aggregate amount of $973,724. This share issuance is in satisfaction of the outstanding debenture totaling $907,724 (principal – $369,457; accrued interest – $538,267) owed to the vendors of Generic Technology Group (refer to Note 3(b)) and amounts owing to certain directors and officers in the amount of $66,000.

 

  d) The Company proposes to issue 90,000 common shares at a price of $0.30 per share, for a total of $27,000 in consideration for the transfer to the Company of minority interests in one of its subsidiary companies, Kepra Pty Limited.

 

F-137


DATEC GROUP LTD

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

NINE MONTHS ENDED SEPTEMBER 31, 2005

 

  e) Subsequent to September 30, 2005, certain directors and officers exercised 270,000 stock options at $0.25 per share, for cash proceeds totaling $67,500.

 

  f) Subsequent to September 30, 2005, 264,000 share purchase warrants were exercised at $0.375 per share, resulting in cash proceeds to the Company of $99,000.

 

  g) The Company proposes to amend its Stock Option Plan to increase the number of shares reserved thereunder by 3,000,000 shares, to bring the total number of shares reserved under the plan to 4,400,000.

 

9. RELATED PARTY TRANSACTIONS

 

During the period ended September 30, 2005, the following material related party transaction, not disclosed elsewhere in these financial statements, occurred:

 

In the first quarter of 2005, the Company disposed of a property located in Fiji to a company controlled by a director and officer. Total proceeds at the property’s fair value of approximately $2,000,000 were received, resulting in a gain on sale of approximately $300,000.

 

10. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

 

These interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in Canada, which conform in all material respects with United States generally accepted accounting principles.

 

Under United States securities requirements, the Company is required to provide a reconciliation setting out differences between accounting principles generally accepted in Canada and the United States.

 

Based upon the standards in effect at January 30, 2006, there were no material differences between the Company’s interim consolidated financial statements as prepared under Canadian and United States generally accepted accounting principles for the nine and three month periods ended September 30, 2005.

 

Comprehensive income or loss

 

Statement of Financial Accounting Standards No. 130 (SFAS 130), “Reporting Comprehensive Income”, establishes standards for reporting and display of comprehensive income or loss and its components in the financial statements. Under U.S. GAAP, there are no other material components of comprehensive income for the nine and three month periods ended September 30, 2005 other than net income or loss as reported.

 

Recently issued accounting standards

 

The following standards were recently issued by the Financial Accounting Standards Board:

 

SFAS No. 151 - “Inventory Costs, an Amendment of ARB No. 43, Chapter 4.” SFAS No. 151 retains the general principle of ARB No. 43, Chapter 4, “Inventory Pricing,” that inventories are presumed to be stated at cost; however, it amends ARB No. 43 to clarify that abnormal amounts of idle facilities, freight, handling costs and spoilage should be recognized as current period expenses. Also, SFAS No. 151 requires fixed overhead costs be allocated to inventories based on normal production capacity. The guidance in SAFS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005.

 

F-138


DATEC GROUP LTD

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

NINE MONTHS ENDED SEPTEMBER 31, 2005

 

SFAS 123 (Revised) - “Share Based Payment,” which will require the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments. SFAS No. 123 (Revised) eliminates the use of APB Opinion No. 25. SFAS No. 123 (Revised) is effective for the first interim or annual reporting period that begins after December 15, 2005. Early adoption for interim or annual periods for which financial statements or interim reports have not been issued is encouraged.

 

SFAS 152 - In December 2004, the FASB issued SFAS No. 152 “Accounting for Real Estate TimeSharing Transactions - an amendment of FASB Statements No. 66 and 67” (“SFAS 152”). This statement amends FASB Statement No. 66 “Accounting for Sales of Real Estate” to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position 04-2 “Accounting for Real Estate Time-Sharing Transactions” (“SOP 04-2”). SFAS 152 also amends FASB Statement No. 67 “Accounting for Costs and Initial Rental Operations of Real Estate Projects” to state that the guidance for incidental operations and costs incurred to sell real estate projects does not apply to real estate time-sharing transactions, with the accounting for those operations and costs being subject to the guidance in SOP 04-2. The provisions of SFAS 152 are effective in fiscal years beginning after June 15, 2005.

 

SFAS 153 - In December 2004, the FASB issued SFAS No. 153 “Exchanges of Non-monetary Assets - an amendment of APB Opinion No. 29” (“SFAS 153”). SFAS 153 replaces the exception from fair value measurement in APB Opinion No. 29 for non-monetary exchanges of similar productive assets with a general exception from fair value measurement for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for all interim periods beginning after June 15, 2005.

 

SFAS 154- In May 2005, the FASB issued SFAS 154 “Accounting Changes and Error Corrections”. The statement replaces APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 requires companies to apply voluntary changes in principles retrospectively whenever practicable. SFAS 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005.

 

The company believes that the above standards would not have a material impact on its financial position, results of operations or cash flows as it relates to the reconciliation of Canadian and United States accounting policy differences.

 

F-139


BROCKER TECHNOLOGY GROUP LTD

 

CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2002

 

AND

 

FOR NINE MONTHS ENDED DECEMBER 31, 2001

 

F-140


2900 Bell Tower

 

10104 – 103 Avenue

 

Edmonton, Alberta

 

T5J 0H8

 

Phone: 780.424.3000

 

Fax: 780.429.4817

 

www.krpgroup.com

   LOGO

 

     May 30, 2003 (except as to Note 21
     which is as of January 30, 2006)
AUDITORS’ REPORT    Edmonton, Alberta, Canada

 

To the shareholders of Brocker Technology Group Ltd:

 

We have audited the consolidated balance sheet of Brocker Technology Group Ltd as at December 31, 2002 and the consolidated statements of earnings, deficit, and cash flows for the year ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

 

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2002 and the results of its operations and its cash flows for the year ended December 31, 2002 in accordance with Canadian generally accepted accounting principles.

 

The consolidated financial statements as at December 31, 2001 and for the nine month period then ended were audited by other auditors who expressed an opinion without reservation on those statements in their report dated June 24, 2002.

 

Comments by Auditors for U.S. readers on Canadian – U.S. Reporting Differences

 

In the United States, reporting standards for auditors require the addition of an explanatory paragraph when the consolidated financial statements are affected by conditions and events that cast substantial doubt on the Company’s ability to continue as a going concern, such as those described in note 2 to the consolidated financial statements. Our report to the shareholders dated May 30, 2003, except for note 21 which is as of January 30, 2006, is expressed in accordance with Canadian reporting standards, which do not permit a reference to such events and conditions in the auditors’ report when these are adequately disclosed in the financial statements.

 

LOGO

Kingston Ross Pasnak LLP

Chartered Accountants

 

F-141


BROCKER TECHNOLOGY GROUP LTD

 

CONSOLIDATED BALANCE SHEETS

 

AS AT DECEMBER 31, 2002 AND DECEMBER 31, 2001

 

    

Note


  

December

2002

$


   

December

2001

$


 

ASSETS

                     

Current Assets

                     

Cash and cash equivalents

          769,548       437,176  

Accounts receivable

          8,876,333       13,634,167  

Other receivables

          1,072,823       1,549,655  

Taxation receivable

   10      717,368       —    

Inventories

          3,206,905       4,033,339  

Prepaid expenses and deposits

          —         303,428  

Assets held for resale

          —         2,106,560  

Future tax assets

   10      626,593       567,775  
         


 


            15,269,570       22,632,100  

Deferred development costs

   7      —         146,458  

Capital assets

   6      7,651,814       7,218,773  

Goodwill

          10,881,915       10,881,915  
         


 


          $ 33,803,299     $ 40,879,246  
         


 


LIABILITIES

                     

Current Liabilities

                     

Bank indebtedness

          1,824,364       1,106,636  

Accounts payable

          4,565,263       10,881,625  

Accrued liabilities

          6,464,235       4,909,237  

Deferred revenue

          3,830,296       1,594,700  

Income taxes payable

   10      —         758,872  

Current portion of long-term debt

   8(a)      786,967       1,640,212  
         


 


            17,471,125       20,891,282  

Long term debt - related parties

   8(b)      4,948,687       4,948,687  

                            - external parties

   8(a)      579,800       5,467,077  

Future tax liability

          122,946       58,720  
         


 


            23,122,558       31,365,766  
         


 


Contingencies and commitments

   1,16,17      —         —    

EQUITY

                     

Non-controlling interest

          1,602,120       1,735,119  

Shareholders’ equity

                     

Share capital

   19(a)      29,609,775       29,589,775  

Contributed surplus

   19      1,563,499       1,563,499  

Deficit

          (22,217,020 )     (23,422,721 )

Foreign currency translation adjustment

   20      122,367       47,808  
         


 


            9,078,621       7,778,361  
         


 


            10,680,741       9,513,480  
          $ 33,803,299     $ 40,879,246  
         


 


 

Approved by the Board

 

         
Director       Director
Date:        

 

See the accompanying notes to the consolidated financial statements.

 

F-142


BROCKER TECHNOLOGY GROUP LTD

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

    

Note


   Year ended
December 2002
$


   

Nine months ended
December 2001

$


 

Revenues

          42,128,941       27,730,996  

Cost of sales

          22,105,349       17,710,932  
         


 


Gross profit

          20,023,592       10,020,064  

Expenses

                     

Depreciation and amortization

          1,250,588       2,108,181  

Interest expense

          1,007,427       594,938  

Salaries and commissions

          8,322,486       5,485,061  

Other operating expenses

          8,527,240       2,498,729  
         


 


Total operating expenses

          19,107,741       10,686,909  
         


 


Profit /(Loss) from continuing operations before other income

          915,851       (666,845 )

Other income

          337,008       200,557  
         


 


Profit /(Loss) from continuing operations before income taxes

          1,252,859       (466,288 )

Income taxes (recoverable)/payable

   10      (130,175 )     565,347  
         


 


Net Profit /(loss) from continuing operations, before non-controlling interests

          1,383,034       (1,031,635 )

Non controlling interest

          177,333       85,283  
         


 


Net profit /( loss) from continuing operations

          1,205,701       (1,116,918 )

Net (loss) earnings from discontinued operations

   15(a)      —         (4,121,489 )
         


 


Net Profit /(loss) for the period

          1,205,701     $ (5,238,407 )
         


 


Profit /(Loss) per common share – continuing operations

   9(d)    $ 0.19     $ (0.23 )

(Loss) per common share- discontinued operations

   9(d)    $ —       $ (0.85 )

Diluted Profit per common share – continuing operations

   9(d)    $ 0.18     $ (0.23 )

 

See the accompanying notes to the consolidated financial statements.

 

F-143


BROCKER TECHNOLOGY GROUP LTD

 

CONSOLIDATED STATEMENTS OF DEFICIT

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

     Year ended
December 2002
$


   

Nine months ended
December 2001

$


 

(Deficit), beginning of the period

   $ (23,422,721 )   $ (18,184,314 )

Plus net profit / (loss) for the period

     1,205,701       (5,238,407 )
    


 


(Deficit), end of the period

   $ (22,217,020 )   $ (23,422,721 )
    


 


 

See the accompanying notes to the consolidated financial statements.

 

F-144


BROCKER TECHNOLOGY GROUP LTD

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

     Note

   Year ended
December 2002
$


   

Nine months ended
December 2001

$


 

Cash flows from operating activities

                     

Receipts from customers

          48,776,000       39,367,304  

Payments to suppliers and employees

          (41,663,806 )     (35,766,991 )

Net interest received /(paid)

          (1,003,941 )     (740,598 )

Income taxes refunded /(paid)

          (1,325,809 )     (1,275,948 )
         


 


Cash flows from operating activities

   13      4,782,444       1,583,767  
         


 


Cash flows from /(used in) investing activities

                     

Proceeds from the sale of investments and capital assets

          1,679,103       2,922,718  

Purchase of capital assets

          (2,112,714 )     (1,357,283 )

Cash balance of subsidiaries sold in the period

          —         (332,686 )
         


 


Cash flows from /(used) in investing activities

          (433,611 )     1,232,749  
         


 


Cash flows from /(used in) financing activities

                     

Increase (decrease) in bank indebtedness

          717,728       (2,398,514 )

Proceeds from mortgage financing

          —         2,374,068  

Repayment of mortgage financing

          —         (767,990 )

Repayment of mortgage financing

          (5,023,912 )     (4,190,879 )
         


 


Cash flows used in financing activities

          (4,306,184 )     (4,983,315 )
         


 


Net increase /(decrease) in cash equivalents

          42,649       (2,166,799 )

Cash at beginning of the period

          437,176       2,612,073  

Effect of exchange rate changes on cash

          289,723       (8,098 )
         


 


Cash at end of the period

        $ 769,548     $ 437,176  
         


 


 

See the accompanying notes to the consolidated financial statements.

 

F-145


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

1. BASIS OF PRESENTATION

 

  a) General

 

Brocker Technology Group Ltd, (the Company), was incorporated under the Business Corporation Act (Alberta) on November 25, 1993, and obtained its listing on the Alberta Stock Exchange on April 14, 1994.

 

On February 28, 1998, the Company transferred its listing to the Toronto Stock Exchange.

 

On August 21, 2000, the Company also listed on the NASDAQ National Market. The Company’s shares were delisted from NASDAQ effective November 27, 2001, due to the Company’s failure to meet the continued listing requirements of the NASDAQ National Market.

 

These financial statements are presented in Canadian dollars and have been prepared in accordance with Canadian generally accepted accounting principles. Differences between Canadian and United States accounting principles are described in Note 21.

 

2. GOING CONCERN

 

While the financial statements have been prepared on the basis of accounting principles applicable to a going concern, several adverse conditions and events cast substantial doubt upon the validity of this assumption. The Company has incurred significant operating losses over the past several years and is in a significant deficit position. If the going concern assumption were not appropriate for these financial statements, then adjustments would be necessary in the carrying values of assets and liabilities, the reported net earnings and the balance sheet classifications used.

 

3. CHANGES IN ACCOUNTING POLICY IN THE YEAR

 

  a) Stock-based compensation

 

Effective January 1, 2002, the Company adopted the recommendations of new CICA Handbook section 3870 Stock-Based Compensation and Other Stock-Based Payments with respect to a stock-based compensation plan that is described in Note 10. Under CICA 3870, companies that elect a method other than fair value accounting are required to disclose pro forma net income and earnings per share information as if the fair value method of accounting had been used. This disclosure only applies to options granted after December 31, 2001.

 

As permitted by the new standard, the Company has elected to continue measuring compensation cost based on the excess, if any, of the quoted market value of the stock at the date of the grant over the amount an optionee must pay to acquire the stock. As the exercise prices of the options approximate market value at the grant date, no compensation expense has been recognized to date under the stock option plan.

 

Options granted to non-employees are deemed to be consideration given up in exchange for goods or services and measured using the Black-Scholes option pricing model to determine their fair value, which is charged to the appropriate asset or expense.

 

Any consideration paid by option holders for the purchase of stock is credited to share capital. If share options are repurchased from the holder, the consideration paid is charged to retained earnings. There is no effect on the financial statements of either the current period or prior periods presented as a result of the adoption of CICA 3870.

 

F-146


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

  b) Goodwill and other intangible assets

 

Effective January 1, 2002, the Company adopted on a prospective basis new CICA Handbook section 3062 Goodwill and Other Intangible Assets, whose provisions replace the amortization of goodwill and indefinite life assets with requirements for an annual impairment test. When events or changes in circumstances indicate that the carrying value of an asset may not be recoverable, the excess of carrying value over fair value will be recognized as an impairment loss and charged to expense in the period that impairment has been determined.

 

There is no effect on the financial statements of either the current period or prior periods presented as a result of the adoption of CICA 3062.

 

  c) Foreign currency translation

 

Revenue and expense transactions denominated in foreign currencies are translated into Canadian dollars at the average exchange rates in effect at the time of such transactions. Monetary assets and liabilities are translated at current rates at the balance sheet date, and non-monetary assets and liabilities are translated at the exchange rate in effect when the assets were acquired or the obligations assumed. Gains or losses resulting from these translation adjustments are included in other income.

 

Effective January 1, 2002, the Company adopted the recommendations of revised CICA Handbook section 1650 Foreign Currency Translation, which eliminates the deferral and amortization of unrealized exchange gains on long-term monetary items, requiring instead that they be recognized in income in the period that they occur. There is no material impact on the financial statements resulting from this change either in the current period or the prior periods presented.

 

The following exchange rates were used in the preparation of the financial statements:

 

New Zealand dollar

   Average rate    End of period

December 2002

   0.7043    0.7534

December 2001

   0.6490    0.6583

Australian dollar

   Average rate    End of period

December 2002

   0.8564    0.8439

December 2001

   0.7935    0.8135

Fiji dollar

   Average rate    End of period

December 2002

   0.6877    0.6805

December 2001

   0.6698    0.6898

Papua New Guinea kina

   Average rate    End of period

December 2002

   0.3579    0.3686

December 2001

   0.5379    0.5999

 

F-147


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

4. SIGNIFICANT ACCOUNTING POLICIES

 

  a) Principles of consolidation

 

The consolidated financial statements include the financial statements of the Company and all of its subsidiary companies since the dates of their acquisition.

 

  b) Inventories

 

Inventories principally comprise finished goods and are carried at the lower of cost and net realizable value. Cost is determined on a weighted average or first in first out basis.

 

  c) Capital assets

 

Capital assets are recorded at cost. Depreciation and amortization is calculated on a declining balance basis (except for leasehold improvements where a straight line basis is used) using the following annual rates:

 

Buildings

   2 %

Office equipment

   20 %

Vehicles

   20 and 26 %

Furniture and fixtures

   20 %

Computer hardware

   20 to 30 %

Computer software

   30 to 40 %

Plant and equipment

   20 to 26 %

 

  f) Revenue recognition

 

The Company earns substantially all of its revenue from the sale and delivery of products and services to its customers. Revenue is recorded when the products are shipped, or services rendered to customers.

 

The Company has deferred certain revenue that has been received in advance of the services being provided, primarily being for network support contracts.

 

  e) Research and development expenditure

 

Research costs, other than capital expenditures, are expensed as incurred. Development costs are expensed as incurred unless they meet the criteria under generally accepted accounting principles for deferral and amortization. Deferred development costs are amortised over the expected life of the developed product, currently a maximum of three years.

 

  f) Future Income taxes

 

Future income taxes are accounted for under the asset and liability method. Under this method, future tax assets and liabilities are recognised for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on future tax assets and liabilities of a change in tax rates is recognised in income in the period that substantive enactment or enactment occurs.

 

Withholding taxes payable on repatriation of earnings of foreign operations are not provided, as it is not expected that those earnings will be repatriated in the foreseeable future.

 

F-148


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

  g) Earnings per share

 

Basic earnings per common share is calculated using the weighted average number of common shares outstanding during the year. Interest, carrying costs, and accretion charges associated with convertible debentures are deducted from net earnings for the purpose of calculating earnings per share available to common shareholders.

 

Diluted earnings per share is calculated on the basis of the weighted average number of shares outstanding during the period, plus the additional common shares that would have been outstanding if potentially dilutive common shares issuable under stock options and warrants had been issued using the treasury stock method. The calculation of diluted earnings per share also applies the “if converted” method for convertible debentures, which assumes conversion into common shares outstanding since the beginning of the period.

 

  h) Stock options

 

The Company has a stock option plan. When stock options are issued, the value of the options is not determined or recorded. Any consideration received on the exercise of stock options is credited to share capital.

 

  i) Cash and cash equivalents

 

Cash and cash equivalents consist of cash on hand and balances with banks, and investments in money market instruments. Cash and cash equivalents included in the cash flow statement are comprised solely of balances with banks.

 

  j) Use of estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

F-149


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

5. ACQUISITIONS AND DIVESTMENTS

 

  (a) Acquisitions in 2001

 

Generic Technology Group

 

As at October 1, 2000, the Company acquired the Generic Technology Group, the private company of the Datec Group of companies (“Datec”). Datec is a developer and marketer of information technology, and a telecommunications and network management- consulting firm.

 

This purchase was to be paid by way of issuing 348,442 common shares (valued at $15.96 each) with an additional $5,973,300 paid by cash over four equal annual instalments. The final two instalments were to be paid on June 30, 2002 and 2003, and were subject to achieving certain earn-out targets. An additional 87,500 shares were to be issued to senior management of Datec, upon completion. The first instalment of $1,493,325 was paid on October 13, 2000, and the Company later entered into an agreement in principal with the vendors to amend the settlement terms.

 

This amendment to the settlement terms calls for the issuance of 1,500,000 common shares and 600,000 warrants in settlement of the amount of $750,000, a cash payment of $265,000 (which was paid subsequent to the year end), and $485,000, plus a late payment penalty of $75,000, to be paid from the proceeds of the sale of the Company’s New Zealand head office property, with the balance to be settled by the issuance of a 5 year debenture and 493,182 warrants. In addition, the Company issued in favour of the vendors a first ranking debenture equal to $4,948,687. This debenture represents the outstanding principal as at the closing date (October 2000) plus interest from that date to November 30, 2001 less amounts settled by cash or shares, and bears an interest rate of 8% and is to be fully repaid within 5 years.

 

The effect on the purchase was as follows:

 

    

December

2001

Revised Position

$


   

March

2001

Original Position

$


 

Current assets

   15,920,872     15,920,872  

Non current assets

   6,865,705     6,865,705  

Current Liabilities

   (17,900,078 )   (17,900,078 )

Non-current liabilities

   (866,604 )   (866,604 )

Less Minority interests

   (1,805,634 )   (1,805,634 )

Goodwill

   12,360,951     6,595,969  
    

 

Consideration paid to date and accrued

   14,575,212     8,812,230  
    

 

Cash payments made

   1,758,325     1,493,325  

Cash payments accrued

   4,844,029     1,493,325  

Shares to be issued

   7,708,420     5,561,142  

Acquisition costs

   264,438     264,438  
    

 

Consideration paid to date and accrued

   14,575,212     8,812,230  
    

 

 

The overall effect of this renegotiation was that the acquisition consideration payments that were formerly to be made under earn out provisions were cancelled and replaced with cash payments and share issues (as noted above). This resulted in the overall goodwill on the acquisition increasing as indicated in the above table.

 

During the year ended 31 December 2002, the former Head Office property of Brocker New Zealand was sold. The proceeds from the sale were originally due to have been transferred to the vendors of the Generic Group. However, Generic agreed instead to re-advance to the Company the principal amounts of funds payable from the proceeds of the sale and, as a result, subsequent to the year end the vendors of the Generic Technology Group exchanged a debt for the amount of $560,000 for $560,000 in convertible loans and 933,334 warrants.

 

F-150


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

  (b) Divestments in the twelve months ended December 31, 2002

 

Datec Vanuatu Limited

 

Generic Technology Limited divested its 66% interest in the business Datec (Vanuatu) Limited for the sum of CDN $268,000. This represented a gain in sale of CDN $223,780. Under the term of sale the purchaser of the business, relinquished the use of the name Datec Vanuatu Limited, and Brocker Technology Limited formed a wholly owned subsidiary company that now operates in Vanuatu under the name Datec Vanuatu Limited.

 

Effective December 24th, 2002 the Company disposed of its New Zealand head office property for a purchase price of $2,034,180, yielding net sales proceeds of $587,776. The net book value of this property at the time of sale was $2,335,540 and, in consequence, the Company realized a net loss of $301,360 on the sale of this property.

 

6. CAPITAL ASSETS

 

     December 2002

     Cost

   Accumulated
Depreciation


    Net Book
Value


Land

   $ 166,366    $ —       $ 166,366

Buildings

     3,966,744      (189,591 )     3,777,153

Office equipment

                     

- leased

     —        —         —  

- non-leased

     550,487      (284,562 )     265,925

Vehicles

                     

- leased

     357,602      (31,745 )     325,857

- non-leased

     269,103      (83,270 )     1,858,332

Furniture and fixtures

                     

- leased

     —        —         —  

- non-leased

     536,638      (356,009 )     180,629

Computer hardware

                     

- leased

     —        —         —  

- non leased

     1,009,046      (508,256 )     500,790

Computer software

                     

- leased

     —        —         —  

- non leased

     190,114      (86,824 )     103,290

Plant and equipment

                     

- leased

     507,506      (148,807 )     358,699

- non leased

     3,225,597      (1,438,325 )     1,787,272
    

  


 

     $ 10,779,203    $ 3,127,389     $ 7,651,814
    

  


 

 

F-151


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

     December 2001

     Cost

   Accumulated
Depreciation


   Net Book
Value


Land

   $ 166,366      —      $ 166,366

Buildings

     4,692,500      194,474      4,498,026

Office equipment

                    

- leased

                    

- non-leased

     517,288      312,766      204,522

Vehicles

                    

- leased

     61,247      4,695      56,522

- non-leased

     487,260      239,456      247,804

Furniture and fixtures

                    

- leased

                    

- non-leased

     491,456      340,918      150,538

Computer hardware

                    

- leased

     —        —        —  

- non leased

     187,247      75,281      111,966

Computer software

                    

- leased

                    

- non leased

     710,541      531,181      179,360

Plant and equipment

                    

- leased

     330,199      111,430      218,769

- non leased

     2,900,954      1,516,084      1,384,870
    

  

  

     $ 10,545,058    $ 3,326,285    $ 7,218,773
    

  

  

 

7. DEFERRED DEVELOPMENT COSTS

 

    

Year ended
December 2002

$


  

Nine months ended
December 2001

$


Development costs deferred beginning of period

   146,458      —  

Development costs deferred during the period

   —        181,374
    
  

     146,458      181,374

Amortised during the period

   146,458      34,916
    
  

Development costs deferred end of period

   —      $ 146,458
    
  

 

Development costs deferred principally related to the development of software applications.

 

F-152


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

8. INDEBTEDNESS

 

    

December
2002

$


   

December
2001

$


 

a)      Mortgage and lease debt

                

Mortgage finance liability, payable in Fiji Dollars, with current interest rates of 7.29 – 7.66%, collateralised by land and buildings Payable over 10 years

     786,326       6,677,070  

Less: Current portion

     (378,565 )     (1,436,331 )
    


 


       407,761       5,240,739  
    


 


Capital lease obligations payable in Fiji Dollars, with interest rates ranging from 6.6% to 14.5% per annum, collateralised by related assets, payable over 1 to 3 years.

     580,441       430,219  

Less: Current portion

     (408,402 )     (203,881 )
    


 


Capital lease obligations payable over 1 year

     172,039       226,338  
    


 


     $ 579,800     $ 5,467,077  
    


 


b)      Debenture

   $ 4,948,687     $ 4,948,687  
    


 


A first ranking debenture was issued to the vendors of Generic Technology Group, in connection with the renegotiated terms of the acquisition of the Generic Group by the Company. This represents the outstanding principal as at the closing date (October 2000) plus interest from that date, less amounts being settled by cash or shares.

                

This debenture bears an interest rate of 8% and is to be fully repaid within 5 years. It is secured over the assets and liabilities of the Datec Group.

                

Total long term debt

   $ 5,528,487     $ 10,415,764  
    


 


 

The total interest expense for the year in relation to long-term debt was $1,007,427 ($481,141 to December 31, 2001).

 

Capital lease obligations are repayable as follows:

             

In less than 1 year

     408,402      203,881

1 to 2 years

     148,558      184,827

2 to 3 years

     23,481      41,511
    

  

     $ 580,441    $ 430,219
    

  

 

F-153


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

Mortgage finance liabilities are repayable as follows:

 

In less than 1 year

     378,565      1,436,331

1 to 2 years

     199,216      849,716

3 to 4 years

     54,671      710,044

4 to 5 year

     54,671      1,084,737

5 years and over

     99,203      2,596,242
    

  

     $ 786,326    $ 6,677,070
    

  

Debenture – payable within 5 years

   $ 4,948,687    $ 4,948,687
    

  

 

The mortgage and lease debt (part (a)) totalling $1,366,767 is repaid on a monthly basis comprising principal and interest amounting to $101,168 per month. Monthly mortgage principal and interest repayment for year 2003 will be $57,582. Monthly lease principal and interest repayment for the year 2003 will be $43,586.

 

F-154


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

9. SHARE CAPITAL

 

  a) Authorised

 

Unlimited number of common shares

Unlimited number of Preferred Shares

10,000,000 Series A Preferred Shares

6 1/2% cumulative

 

Issued and outstanding

 

          

December 31

2002

$


   

December 31

2001

$


 

Common shares

   10 (b)(i)   $ 31,667,602     $ 23,943,718  

Shares to be issued

   10 (b)(iii)     211,161       7,915,045  

Less: Share issue costs

           (2,268,988 )     (2,268,988 )
          


 


           $ 29,609,775     $ 29,589,775  
          


 


 

As at December 31, 2002 and March 31, 2002, 253,855 shares were being held in escrow pursuant to Escrow Agreements, which provide for the release of such shares on a performance basis.

 

  b) Share Transactions

 

  (i) Common Shares

 

    

December 31

2002


   

December 31

2001


 
     Shares

    Amount

    Shares

    Amount

 

Shares issued - at beginning of period

   4,854,524     $ 25,601,200     19,357,045     $ 25,579,850  

Issue of shares for acquisition of Generic Technology Group

   348,442     $ 5,561,134                

Issue of shares to senior management of Generic Technology Group

   87,500     $ 1,396,500                

Issue of shares for acquisition of Generic Technology Group (amended terms)

   1,500,000     $ 750,000                

Issue to shares for executive compensation

   9,000     $ 11,250                

Exercise of stock options

   10,000     $ 5,000                

Adjustment for consolidation of shares

                 (14,517,771 )        

Shares issued pursuant to Microchannel acquisition

                 15,250       21,350  
    

 


 

 


Shares issued - at end of period

   6,809,466       33,325,084     4,854,524       25,601,200  

Acquisition shares held in escrow (Note 9(b)((ii))

   (253,855 )     (1,657,482 )   (253,855 )     (1,657,482 )
    

 


 

 


Shares outstanding - at end of period

   6,555,611     $ 31,667,602     4,600,669     $ 23,943,718  
    

 


 

 


 

F-155


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

  (ii) Warrants

 

Warrants outstanding at

 

    

December

2002


   

December

2001


Half Warrants

   —       225,000

Other Warrants

   1,225,182 (2)   —  

Agents Warrants

   —       121,500

Kaufmann Bros. Warrants

   75,000     75,000
     1,300,182     421,500
    

 

 

The first private placement occurred on December 15, 1999 and consisted of the issuance of 1,800,000 Special Warrants (the “First Special Warrants”) at a price of $2.70 per First Special Warrant. This entitled the holder thereof to acquire one pre-consolidated Common Share and one Half Warrant, at no additional cost, at any time until 4:00 p.m. (Edmonton time) (the “First Expiry Time”) on the earlier of:

 

  (i) Five days after the date the Company receives a receipt from the Alberta Securities Commission for the filing of a prospectus; and

 

  (ii) December 15, 2000.

 

Two Half Warrants entitled the holder thereof to purchase one additional pre-consolidated Common Share at a price of $12.60 per post-consolidated Common Share ($3.15 per pre-consolidated share) on or before June 15, 2001. As at December 31,2001 these half warrants had not been exercised. The Company had extended the expiry dates of these warrants by one year to June 15, 2002, subject to the provision that they would have an accelerated expiry date (30 days) if the 10 day weighted average trading price exceeds $14.82. These warrants have now expired.

 

In addition to the fee paid in connection with the offering of the First Special Warrants, the Company also granted Agents Warrants to acquire 486,000 pre-consolidated Common Shares at a price of $3.15 per share on or before June 15, 2001. The Company extended the expiry date of these warrants by one year and these warrants have now expired. None of these warrants were exercised.

 

In addition to the Agent’s and Sub-Agents’ fee, the Company has also granted to the Agent an option entitling the Agent to acquire a further option exercisable to acquire in the aggregate 200,000 pre-consolidated Common Shares of the Company at a price of $6.25 per Common Share until January 21, 2002, and granted to the Sub-Agents an option to acquire an aggregate of 28,400 pre-consolidated Common Shares at a price of $6.25 per share until January 21, 2002. These warrants have now expired. No Agents Warrants or Options were exercised.

 

On April 11, 2001 the Company by special resolution agreed to grant 300,000 pre-consolidated warrants to Kaufmann Bros. L.P under an agreement originally entered into in October 2000 to provide capital planning and financial services to the Company. The warrants were issued in 3 parcels of pre-consolidated 100,000 shares with exercise prices of USD $2, $3, $4 per pre-consolidated share.

 

Pursuant to the amended terms of the acquisition of Generic Technology Group the Company issued 1,093,182 warrants. Each of these warrants entitles the holder to purchase one common share of the Company at a price of $0.75 per share. 600,000 of these warrants expire April 9, 2006 and 493,182 expire April 9, 2007. In addition, the Company issued 132,000 warrants in connection with convertible loans. These options have an exercise price of $0.75 per common share and an expiry date of April 9, 2006.

 

F-156


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

  (iii) Shares to be issued December 2002 $211,161, (December 2001: $7,915,045))

 

At December 31, 2002 there were 4,413 shares due to be issued in relation to the earn out of 1World Systems Limited. These shares have been valued at $47.00, being the equivalent market value of these shares as at March 31, 2000, the date the conditions for their issue were met (December 31, 2001 there were 4,413 pre-consolidation shares due to be issued, valued at $47.00).

 

Also at December 31, 2001 there were 1,500,000 shares and 1,093,182 warrants to be issued in relation to the settlement of certain obligations in relation to the acquisition of Generic Technology Limited. These shares are to be recorded at $0.50 per share, being the market value at October 8, 2001, being the date the agreement in principal was signed respecting this settlement. The warrants entitle the holder to purchase one common share at a price of $0.75 per share. 600,000 of the warrants are to have a term of 4 years and 493,182 of the warrants are to have a term of 5 years. These shares and warrants were issued subsequent to December 31, 2001.

 

    

December 31

2002


  

December 31

2001


     Quantity

   Amount

   Quantity

   Amount

Generic Technology Ltd

   —      —      1,935,942    7,707,634

Executive Compensation

   3,000    3,750    —      —  

1World Systems Ltd

   4,413    207,411    4,413    207,411
    
  
  
  
     7,413    211,161    1,940,355    7,915,045
    
  
  
  

 

  (c) Unexercised Options

 

    

December 31

2002


  

December 31

2001


     Number

    Amount

   Number

    Amount

Options outstanding at beginning of period

   187,000     $ 32.71    1,998,000     $ 5.33

Granted

   225,000       0.50    —         —  

Exercised

   10,000       0.50    —         —  

Adjustment for share consolidation

   —         —      (1,668,000 )     —  
    

 

  

 

Adjusted sub total

   402,000            330,000     $ 21.32

Cancelled/Expired

   (85,750 )   $ 20.04    (143,000 )   $ 14.51
    

 

  

 

Options outstanding at end Of period

   316,250     $ 14.24    187,000     $ 32.71
    

 

  

 

 

As at December 31, 2002 all outstanding options are able to be exercised.

 

F-157


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

Options held by the Directors of the Company (2001-107,500) are as follows:

 

Number of options


   Exercise price

   Expiry date

   87,500

   $ 45.00    02/29/05

   12,500

   $ 33.80    08/21/05

 215,000

   $ 0.50    01/24/07

315,000

   $ 14.18     

 

Options are held by employees of the Company as follows (2001-79,500):

 

Number of options


   Exercise price

   Expiry date

1,250

   $ 29.60    03/30/05

1,250

   $ 29.60     

 

There are no criteria that need to be met before the Options can be exercised by the holder. Options are forfeited in the event the holder ceases to be a Director or employee of the Company or one of its subsidiaries.

 

As permitted by CICA Handbook section 3870 Stock-Based Compensation and Other Stock-Based Payments, the Company has elected to continue measuring compensation expense as the excess, if any, of the quoted market value of the stock at the date of the grant over the amount an optionee must pay to acquire the stock. Had compensation cost for the Company’s stock option plan been determined at the grant date of the awards using the fair value method, additional compensation expense would have been recorded in the consolidated statements of earnings with pro forma net profit and profit per share, as presented in the table below. Under the transitional provisions of this section, comparative figures are not required.

 

     2002

 

Profit (loss) from continuing operations before income taxes

   $ 1,252,859  

Compensation expense under CICA 3870

     76,950  
    


       1,175,909  

Pro forma income taxes (recovery)

     (130,175 )

Pro forma non-controlling interest

     177,333  
    


Pro forma net profit for the period

   $ 1,128,751  
    


Pro forma basic profit per share

   $ 0.19  

Pro forma diluted profit per share

   $ 0.18  

 

For pro forma disclosure purposes, the Company uses the Black-Scholes option-pricing model to value the options at each grant date, under the following weighted average assumptions:

 

     2002

 

Dividend rate

   0 %

Annualized volatility

   120.83 %

Risk-free interest rate

   4.56 %

Expected life of options in years

   3.0  

 

The pro forma amounts estimated according to the Black-Scholes option pricing model may not be . indicative of the actual values realized upon the exercise of these options by the holders.

 

F-158


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

  d) Profit /(Loss) Per Common Share

 

Loss per share has been calculated on the basis of the weighted average number of common shares outstanding for the period.

 

    

Year ended

December 2002


  

Nine months

December 2001


 

Weighted average number of shares

     6,348,115    4,839,271  

Profit/(Loss) attributable to shareholders

     1,205,701    (5,328,407 )

Basic loss per share – discontinued operations

     —      ($0.85 )

Basic Profit/( loss )per share – continuing operation

   $ 0.19    ($0.23 )
    

  

Basic Profit/(loss )per share

   $ 0.19    ($1.08 )
    

  

Diluted Profit/(loss) per share - continuing operations

   $ 0.18    ($0.23 )
    

  

 

For the previous financial period the effect on earnings per share of the exercise of outstanding options and warrants, for the calculation of diluted loss per share, is anti-dilutive.

 

10. INCOME TAXES

 

Income tax (refund)/expense attributable to income from loss/profit was ($130,175) and $565,347 for the year ended December 31, 2002 and nine months ended December 31, 2001, respectively, and differed from the amounts computed by applying the Canadian income tax rate of 39.12% (2001: 41.6%) to pre-tax loss/profit from continuing operations as a result of the following:

 

    

December
2002

$


   

December

2001

$


 

Expected income tax expense calculated at the statutory rate on earnings before taxation

   471,670     (193,975 )

Income tax expense

            

Amortization of goodwill

   —       622,108  

Adjustment for foreign tax rates

   11,848     137,214  

Prior years overprovision

   (438,831 )   —    

Other

   (174,862 )   —    
    

 

     (130,175 )   565,347  
    

 

Total income tax expense is made up of:

            

Current income taxes

   (135,583 )   565,938  

Future tax liability

   64,226     —    

Future income taxes

   (58,818 )   (591 )
    

 

     (130,175 )   565,347  
    

 

 

F-159


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

The tax effects of temporary differences that give rise to significant portions of the future tax assets and future tax liabilities at December 31, 2002 and nine months to December, 2001 are presented below.

 

    

December

2002

$


  

December

2001

$


Future tax assets:

         

Accounts receivable principally due to allowance for doubtful accounts

   146,528    82,194

Inventories, principally due to allowance for obsolescence

   150,131    185,334

Compensated absences, principally due to accrual for financial reporting purposes

   295,661    280,958

Other

   34,273    9,289
    
  

Total gross future tax assets

   626,593    567,775

Less valuation allowance

   —      —  
    
  

Net future tax assets

   626,593    567,775
    
  

 

In assessing the realizability of future tax assets, management considers whether it is more likely than not that some portion or all of the future tax assets will not be realized. The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

 

Management considers the scheduled reversal of future tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In order to fully realize the future tax asset, the Company will need to generate future taxable income. Based upon the level of historical taxable income and projections for future taxable income over the periods that the future tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible assets. The amount of the future tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced.

 

11. RELATED PARTY TRANSACTIONS

 

During the year ended to December 31, 2002 a legal firm in which a director of the Company is a partner charged legal fees and disbursements of $13,711.

 

F-160


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

12. SEGMENTED OPERATIONS

 

The Company now operates only in the Pacific, as the New Zealand and Australian operations have been discontinued. The Canadian operations shown relate to administrative activities only.

 

The reporting of all business segments is consistent with those reported in the prior period, apart from the discontinued operations in New Zealand being omitted.

 

The below tables contain the continuing operations only.

 

Year ended

December 31, 2002 ($)


   Canada

    Australia

   Pacific

   Total

 

Sales

     —         —        42,128,941      42,128,941  

Net income/(loss)

     (115,918 )     —        1,321,619      1,205,701  

Depreciation and amortization

     —         —        1,250,588      1,250,588  

Net interest expense

     —         —        1,007,427      1,007,427  

Identifiable assets

     76,463       —        33,726,836      33,803,299  

Capital expenditures

     —         —        433,041      433,041  

Nine months ended

December, 2001 ($)


   Canada

    Australia

   Pacific

   Total

 

Sales

   $ —       $ 1,933,346    $ 25,797,650    $ 27,730,996  

Net income/(loss)

     (1,488,893 )     124,694      247,281      (1,116,918 )

Depreciation and amortization

     1,339,873       32,769      735,539      2,108,181  

Net interest expense

     104,657       —        490,281      594,938  

Identifiable assets

     16,223,575       986,003      23,669,668      40,879,246  

Capital expenditures

     —         —        633,420      633,420  

 

The Company principally operates in four industry segments, being the divisions by which the Company is managed, as follows:

 

    Distribution and sale of computer and telecommunications hardware and software (“Vendor Services”);

 

    The hosting of client hardware and software services including the provision of technical support and services for the Technology Industry (“Application Hosting”);

 

    Software application design and development (“Application Development”); and

 

    Provision of professional consulting services (“Professional Services”).

 

F-161


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

The corporate services operation shown relates to the Company’s administrative functions in the Pacific Islands and Canada.

 

Year ended

December 31, 2002 ($)


   Vendor
Services


   Application
Hosting


   Application
Development


   Professional
Services


   Corporate
Services


    Total

 

Sales

   32,439,284    421,289    1,263,868    8,004,500    —         42,128,941  

Net income/(loss)

   836,611    11,007    33,022    440,979    (115,918 )     1,205,701  

Depreciation and amortization

   962,953    12,506    37,518    237,611    —         1,250,588  

Net interest expense

   775,718    10,072    30,222    191,415    —         1,007,427  

Identifiable assets

   25,690,507    338,032    676,064    7,022,233    76,463       33,803,299  

Capital expenditures

   333,441    4,330    12,991    82,279    —         433,041  

Nine months ended

December 31, 2001 ($)


   Vendor
Services


   Application
Hosting


   Application
Development


   Professional
Services


   Corporate
Services


    Total

 

Sales

   21,028,330    273,312    941,272    5,447,713    40,369     $ 27,730,996  

Net income/(loss)

   304,952    2,731    9,412    54,477    (1,488,490 )     (1,116,918 )

Depreciation and amortization

   87,514    7,683    161,345    61,465    1,790,174       2,108,181  

Net interest expense

   372,612    4,902    14,706    98,060    104,658       594,938  

Identifiable assets

   18,595,328    252,514    757,543    5,050,287    16,223,574       40,879,246  

Capital expenditures

   —      —      —      399,055    234,365       633,420  

 

The accounting policies adopted by each of individual segment are as disclosed in Note 4.

 

F-162


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

13. NOTES TO THE STATEMENT OF CASH FLOWS

 

Reconciliation of net profit and cash flow from operating activities

 

     Year ended
December 2002
$


   

Nine months ended
December 2001

$


 

Net Profit/(Loss) for the year

   1,205,701     (5,238,407 )

Add/(Less) non-cash items:

            

Depreciation and amortization

   1,250,588     2,575,828  

Non-controlling interest

   (177,333 )   85,283  

Loss on sale of capital assets

   427,528     (732,691 )

Unrealised foreign exchange gain

   (156,564 )   (328,723 )

Effect of exchange rate changes on cash

   (128,252 )   110,832  

Foreign currency translation adjustment realizedon disposition of discontinued operations

   —       3,806,512  

Bad debts

   192,420     1,149,909  

Gain / loss on subsidiaries

   —       (1,035,979 )

Other non-cash items

   (194,165 )   253,839  

Impact of changes in working capital items:

            

Decrease / (Increase) in accounts receivable and prepayments

   5,538,094     (2,157,170 )

Decrease / (Increase) in taxation receivable

   (1,476,240 )   (773,873 )

Decrease / (Increase) in inventories

   826,434     7,974,164  

(Decrease) / Increase in deferred revenue

   2,235,596     —    

(Decrease) / Increase in accounts payable, and accrued liabilities

   (4,761,364 )   (4,105,757 )
    

 

Net cash flow from operating activities

   4,782,444     1,583,767  
    

 

 

14. FINANCIAL INSTRUMENTS

 

The nature of activities and management policies with respect to financial instruments are as follows:

 

  i) Foreign Currency

 

The Company uses a very limited number of forward exchange contracts and currency options to hedge purchases of inventory in foreign currencies. The Company’s exchange rate commitments are intended to minimise the exposure to exchange rate movement risk on the cost of the Company’s products and on the price it is able to sell those products to its customers. The Company does not use foreign exchange instruments for trading or any other purpose.

 

No forward exchange contracts were entered into during year ended December 31, 2002. (nil: for the nine months ended December 31, 2001).

 

F-163


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

  ii) Concentration of credit risk

 

In the normal course of business, the Company incurs credit risk from accounts receivable and transactions with financial institutions. The Company has a credit policy, which is used to manage the risk. As part of this policy, limits on exposure with counterparties have been set and are monitored on a regular basis. Anticipated bad debt losses have been provided for in the allowance for doubtful accounts.

 

The Company has no significant concentrations of credit risk. The Company does not consider that it requires any collateral or security to support financial instruments due to the quality of financial institutions and trade debtors.

 

  iii) Interest Rate Risk

 

The Company has adopted a policy of ensuring that its exposure to changes in interest rates is on a fixed rate basis. The Company does not hedge against interest rate fluctuations.

 

  iv) Fair Values

 

The fair values of the Company’s cash accounts, accounts receivable and other receivables, bank, indebtedness, accounts payable, accrued liabilities and lease obligations approximate the carrying values given their short-term nature. The carrying value of the debenture and capital leases, as disclosed in note 9, also approximate their fair value.

 

15. DISCONTINUED OPERATIONS

 

  (a) Discontinued Operations for the nine months ended December 31, 2001

 

Subsequent to the Company’s decision to cease operations in the New Zealand, the Company effectively ceased to operate in New Zealand after November 2, 2001 with all staff being made redundant, with their last day of employment being December 12, 2001. The consolidated balance sheets include the following amounts related to the discontinued operations:

 

    

Nine months December
2001

$


ASSETS

    

Cash and cash equivalents

   178,349

Accounts receivable

   3,233,571

Other receivables

   —  

Inventories

   —  

Prepaid expenses and deposits

   49,499

Assets held for resale

   2,106,560

Taxes receivable

   436,001

Future tax assets

   —  

Capital assets

   132,395

LIABILITIES

    

Accounts payable

   3,627,381

Accrued liabilities

   2,910,614

Income taxes payable

   —  

Financing facility

   —  

Current portion of long-term debt

   1,214,877

Inter-group balances

   6,296,201

Long term debt

   —  

 

F-164


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

Revenues and net earnings (loss) of the New Zealand business segment for the periods ended December 31, 2001 were as follows:

 

    

Nine months ended
December 2001

$


 

Revenues

     14,020,636  

Depreciation and amortization

     467,648  

Interest expense

     215,663  

Loss before other income and tax

     (4,208,827 )

Other Income

     87,337  

Income Taxes

     —    
    


Net loss

   $ (4,121,489 )
    


 

Brocker Online Services Limited

 

Subsequent to the Company’s decision to cease operations in New Zealand Brocker Online Services Limited effectively ceased to operate after November 2, 2001 with all staff being made redundant, with their last day of employment being December 12, 2001.

 

Sealcorp Telecommunications Group Limited

 

On June 12, 2001, Sealcorp Telecommunications Group Limited gave one months notice to withdraw from its contract to distribute mobile phones for Telecom New Zealand Limited. This withdrawal was due to Sealcorp Telecommunications Group Limited being unable to make economic returns under the existing contract terms.

 

1 World Systems Limited

 

Subsequent to the restructuring plan announced in February 2001, this company ceased to operate and did not operate during the nine months ending December 31, 2001.

 

Brocker Financial Limited

 

Subsequent to the restructuring plan announced in February 2001, this company ceased to operate and did not operate during the nine months ending December 31, 2001.

 

Tech Support Limited

 

Subsequent to the restructuring plan announced in February 2001, this company ceased to operate and did not operate during the nine months ending December 31, 2001.

 

F-165


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

16. COMMITMENTS

 

  a) The Company has entered into a number of acquisitions where the final acquisition price is dependent on the occurrence of future events. This contingent purchase price is calculated based on cash flow earned for a given period, and is settled by way of shares issued but held in escrow.

 

Shares are released from escrow based on cash flows, as defined with each party, earned by the subsidiary over a varying number of years following acquisition, being the “earn-out” period.

 

As at December 31, 2001 the following earn-outs were in existence.

 

1 World Systems Limited

 

Shares to be held in escrow based on cash flow earned for the year ended March 31, 1999. Earn-out based on defined cash flow earned in financial years ended March 31, 2001 – 2002.

 

17. CONTINGENT LIABILITIES

 

In the general course of business disputes may arise with customers and other third parties. Subsequent to the decision to cease trading in the New Zealand businesses, certain claims against the Company arose. Management considers adequate provision has been made for all such instances.

 

A dispute has also arisen subsequent to the Company seeking to recover $274,000 from the vendors of Industrial Communications Service Ltd pursuant to breaches of the warranty provisions of the acquisition agreement. The vendors have counter claimed for lost share value seeking $1,476,000 in damages. The matter had been set down to be resolved through an arbitration process and to date remain unresolved. No provision has been made in relation to this matter.

 

18. SUBSEQUENT EVENTS

 

In May 2003 the Corporation signed a heads of agreement to purchase the assets and operations of SGB Investments Ltd for a consideration of 375,000 shares in the Corporation. The company is to be named Datec NZ. The Corporation will retain 66% of Datec NZ and SGB will hold the remaining 34%.

 

19. CONTRIBUTED SURPLUS

 

At 31 March 2001, the Group had 223,357 shares to be issued in respect of Certus Consulting Ltd, a former subsidiary of the Group. During the year ended 31 December 2001, the shares held were cancelled on the sale of the business and were credited to contributed surplus.

 

F-166


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

20. FOREIGN CURRENCY TRANSLATION ADJUSTMENT

 

     Year ended
December 2002
$


  

Nine months ended
December 2001

$


 

Beginning of the period

     47,808      (3,729,548 )

Portion of foreign currency translation adjustment realized on disposition of discontinued operations

     —        3,806,512  

Difference arising on the translation of foreign operations

     74,559      (29,156 )
    

  


End of the period

   $ 122,367    $ 47,808  
    

  


 

21. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

 

The consolidated financial statements of the company have been prepared in accordance with accounting principles generally accepted in Canada, which conform in all material respects with United States generally accepted accounting principles.

 

Under United States securities requirements, the Company is required to provide a reconciliation setting out differences between accounting principles generally accepted in Canada and the United States.

 

Based upon the standards in effect at January 30, 2006, there were no material differences between the Company’s consolidated financial statements as prepared under Canadian and United States generally accepted accounting principles for the year ended December 31, 2002.

 

Comprehensive income or loss

 

Statement of Financial Accounting Standards No. 130 (SFAS 130), “Reporting Comprehensive Income”, establishes standards for reporting and display of comprehensive income or loss and its components in the financial statements. Under U.S. GAAP, there are no other material components of comprehensive income for 2002 other than net income or loss as reported.

 

Recently issued accounting standards

 

The following standards were recently issued by the Financial Accounting Standards Board:

 

SFAS No. 143 — Accounting for asset retirement obligations — this standard requires that entities record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. This standard is effective for fiscal years beginning after June 15, 2002.

 

SFAS No. 144 — Accounting for the impairment or disposal of long-lived assets. This standard supercedes SFAS No. 121 — Accounting for the impairment of long-lived assets and for long-lived assets to be disposed of. This standard requires that businesses recognize impairment when the financial statement carrying amount of long-lived asset or asset group exceeds its fair value and is not recoverable.

 

F-167


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

SFAS No. 145 — Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB No. 13, and Technical Corrections. SFAS 145 updates, clarifies and simplifies existing accounting pronouncements. SFAS 145 rescinds Statement No. 4, which required all gains and losses from extinguishments of debt to be aggregated and, if material, classified as an extraordinary items, net of related income tax effect. As a result, the criteria in APB Opinion No. 30 will now be used to classify those gains and losses because Statement No. 4 has been rescinded. Statement No. 44 was issued to establish accounting requirements for the effects of transition to provisions of the Motor Carrier Act of 1980. Because the transition has been completed, Statement No. 44 is no longer necessary.

 

SFAS No. 146 — Accounting for Cost Associated with the Exit of Disposal Activities. SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. Previous accounting guidance was provided by Emerging Issues Task Force (“EITF”) Issue No. 94-3. SFAS 146 replaces EITF94-3. The Statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

 

SFAS No. 147 — Acquisition of certain financial institutions an amendment of SFAS 72 and 144 and SFAS interpretation number 9 issued October 2002 and relates to acquisitions of financial institutions.

 

SFAS No. 148 — Accounting for stock based compensation-transition and disclosure an amendment of SFAS 123 issued December 2002 and permits two additional transition methods for entities that adopt the fair value based method of accounting for stock based employee compensation to avoid the ramp-up effect arising from prospective application. This statement also improves the prominence and clarity of the pro-forma disclosures required by SFAS 123.

 

SFAS No. 149 — Amendment of statement 133 on derivative instruments and hedging activities. This statement amends and clarifies financial accounting and reporting for derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB 133 accounting for derivative instruments and hedging activities.

 

SFAS No. 150 — Accounting for certain financial instruments with characteristics of both liabilities and equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.

 

SFAS No. 151 - “Inventory Costs, an Amendment of ARB No. 43, Chapter 4.” SFAS No. 151 retains the general principle of ARB No. 43, Chapter 4, “Inventory Pricing,” that inventories are presumed to be stated at cost; however, it amends ARB No. 43 to clarify that abnormal amounts of idle facilities, freight, handling costs and spoilage should be recognized as current period expenses. Also, SFAS No. 151 requires fixed overhead costs be allocated to inventories based on normal production capacity. The guidance in SAFS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005.

 

SFAS 123 (Revised) - “Share Based Payment,” which will require the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments. SFAS No. 123 (Revised) eliminates the use of APB Opinion No. 25. SFAS No. 123 (Revised) is effective for the first interim or annual reporting period that begins after December 15, 2005. Early adoption for interim or annual periods for which financial statements or interim reports have not been issued is encouraged.

 

F-168


BROCKER TECHNOLOGY GROUP LTD

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2002

AND NINE MONTHS ENDED DECEMBER 31, 2001

 

SFAS 152 - In December 2004, the FASB issued SFAS No. 152 “Accounting for Real Estate TimeSharing Transactions - an amendment of FASB Statements No. 66 and 67” (“SFAS 152”). This statement amends FASB Statement No. 66 “Accounting for Sales of Real Estate” to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position 04-2 “Accounting for Real Estate Time-Sharing Transactions” (“SOP 04-2”). SFAS 152 also amends FASB Statement No. 67 “Accounting for Costs and Initial Rental Operations of Real Estate Projects” to state that the guidance for incidental operations and costs incurred to sell real estate projects does not apply to real estate time-sharing transactions, with the accounting for those operations and costs being subject to the guidance in SOP 04-2. The provisions of SFAS 152 are effective in fiscal years beginning after June 15, 2005.

 

SFAS 153 - In December 2004, the FASB issued SFAS No. 153 “Exchanges of Non-monetary Assets - an amendment of APB Opinion No. 29” (“SFAS 153”). SFAS 153 replaces the exception from fair value measurement in APB Opinion No. 29 for non-monetary exchanges of similar productive assets with a general exception from fair value measurement for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for all interim periods beginning after June 15, 2005.

 

SFAS 154 - In May 2005, the FASB issued SFAS 154 “Accounting Changes and Error Corrections”. The statement replaces APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 requires companies to apply voluntary changes in principles retrospectively whenever practicable. SFAS 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005.

 

The Company believes that the above standards would not have a material impact on its financial position, results of operations or cash flows as it relates to the reconciliation of Canadian and United States accounting policy differences.

 

F-169


Item 15. Exhibits.

 

Exhibit Index

 

Exhibit No.


  

Document


  2.1      Order Confirming Joint Plan of Reorganization and Granting Debtors’ Motion to Substantively Consolidate Bankruptcy Cases, In the United States Bankruptcy Court for the Western District of Arkansas Fayetteville Division, dated as of September 14, 2004.
  2.2      Amended and Restated Agreement and Plan of Merger among eLandia Solutions, Inc., Elandia AST Acquisition, Inc., W&R South Pacific L.P., Stanford International Bank Ltd., AST Telecom L.L.C., dated as of August 15, 2005.
  2.3      Amended and Restated Arrangement Agreement between eLandia Solutions, Inc., eLandia South Pacific Holdings, Inc., Elandia Datec Acquisition Ltd., Datec Group Ltd., Datec Pacific Holdings, Ltd., Stanford International Bank Ltd., Michael Ah Koy, James Ah Koy, Krishna Sami, Kelton Investments Limited, Sami Holdings Ltd., Sydney Donald (Trip) Camper III, Eddie Crowston and Harley L. Rollins, dated as of August 8, 2005.
  3.1      Certificate of Incorporation of the Company.
  3.2      Bylaws of the Company.
  4.1      Co-Sale and First Refusal Agreement by and between Stanford International Bank and W&R South Pacific, L.P., dated January 31, 2006.
  4.2      Security Agreement by and among the Company (formerly known as Centra Industries Inc.), Midwest Cable Communications of Arkansas, Inc., and Stanford Venture Capital Holdings, Inc., dated as of October 25, 2004.
  4.3      Satisfaction and Release of Promissory Notes and Security Interests by Stanford International Bank, Ltd., dated as of January 30, 2006.
  9.1      Shareholder Voting Agreement between Stanford International Bank Ltd. and Kelton Investments, dated January 31, 2005.
10.1      Agreement between Blue Sky Communications and the Government of Samoa, dated as of February 17, 2005 (E-Rate Contract).
10.2      Customer Solutions Agreement between Datec Fiji Limited and IBM Global Services Australia Limited, dated as of January 3, 2001.
10.3      Employment Agreement between the Company and Sydney D. “Trip” Camper, dated September 19, 2003.
10.4      Executive Employment Agreement, Sydney D. Camper III.
10.5      Form of Stock Purchase Agreement, between the Company and Sydney D. Camper III, dated as of May 20, 2004.
10.6      Renewal Revolver Note between the Company (formerly known as Centra Industries, Inc.), Midwest Cable and Communications of Arkansas and Stanford Venture Capital Holdings Inc., dated as of November 24, 2004.
10.7      First Amendment to Loan and Security Agreement between the Company and Stanford Venture Capital Holdings., dated as November 24, 2004.

 

- 97 -


10.8      Secured Revolver Note between the Company (formerly known as Centra Industries, Inc.), Midwest Cable and Communications of Arkansas and Stanford Venture Capital Holdings Inc., dated as of October 25, 2004.
10.9      Secured Revolver Note between the Company (formerly known as Centra Industries, Inc.) and Stanford Venture Capital Holdings Inc., dated as of September 30, 2004.
10.10    Post Petition Loan and Security Agreement between the Company and Stanford Venture Capital Holdings., dated as of September 15, 2003.
10.11    Security Agreement by and among the Company (formerly known as Centra Industries Inc.), Midwest Cable Communications of Arkansas, Inc., and Stanford Venture Capital Holdings, Inc., dated as of October 25, 2004.
10.12    Form of Indemnification Agreement
10.13    Form of Lock-Up Agreement
10.14    Employment Agreement between the Company and Harley L. Rollins, dated as of July 1, 2005.
10.15    Stock Subscription Agreement between the Company and Sydney D. Camper, dated as of July 29, 2005.
10.16    Stock Purchase Agreement between the Company and Harley L Rollins, dated as of July 29, 2005.
10.17    Stock Subscription Agreement between the Company and Harley L. Rollins, dated as of July 29, 2005.
10.18    IBM Business Partner Agreement between IBM New Zealand Limited and Datec (Fiji) Ltd., dated as of September 12, 2002.
10.19    Distributor Agreement between Canon Australia Pty Limited and Datec (PNG) LTD, dated as of June 26, 2003.
10.20    Contract between Sagric International Pty. Ltd and Datec (PNG) Ltd. in relation to PNG Education Capacity Building Program, dated as of April 22, 2005.
10.21    Network Outsourcing Agreement by Bank of South Pacific Limited and Datec PNG Limited, dated as of May 2004.
10.22    Master Operating Lease between Datec (PNG) Limited and Bank of South Pacific Limited, dated as of November 20, 2004.
10.23    Lease Agreement, dated •, by and between the Company and Southern Centers Association, LLP (relating to property at 1500 Cordova Road in Ft. Lauderdale, FL).
10.24    Lease Agreement, dated April 1, 2005, by and between Kelton Investments Limited and Datec Fiji Ltd. (relating to property at 68 Gordon Street in Suva, Fiji).
10.25    Lease Agreement, dated April 1, 2005, by and between Kelton Investments Limited and Network Services Ltd. (relating to property at 63 Albert Street in Auckland, New Zealand).
10.26    Lease Agreement, dated October 13, 2004, by and between Jewel Properties Limited, Datec Investments Ltd. and Datec Group Ltd. (relating to property at 63 Albert Street in Auckland, New Zealand).
10.27    Lease Agreement, dated September 10, 2003, by and between Monier PNG Limited and the Independent State of Papua New Guinea (relating to property at Allotment 32 Section 38 in Hohola, N.C.D in Papua New Guinea).

 

- 98 -


10.28    Lease Agreement, dated December 1, 2004, by and between Centrepoint Limited and Datec Solomon Islands Limited (relating to property at 611 Mendana Avenue in Honiara, Solomon Islands).
10.29    Lease Agreement, dated March 22, 2004, by and between Datec Samoa Limited and Justin Parker Trading as J Parker Investment (relating to property at in the Parker Building in Apia, Samoa).
10.30    Constitution of Datec (PNG) Limited (relating to the Datec PNG Pty Joint Venture).
10.31    Shareholders’ Agreement for Datec (PNG) Pty Limited between Steamships Pty Limited and Kelton Investments Limited (relating to the Datec PNG Pty Joint Venture).

 

- 99 -


 

SIGNATURES

 

Pursuant to the requirements of the Securities Act, Elandia, Inc. has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Fort Lauderdale, Florida, on February 12, 2006.

 

ELANDIA, INC.

By:   /s/  HARLEY L. ROLLINS
    Harley L. Rollins, Chief Financial Officer

 

- 100 -


APPENDIX A

 

Country Description

American Samoa

 

History and Politics

 

Settled as early as 1000 B.C., and later occupied by European explorers in the 18th century, the territory of American Samoa (“American Samoa”) developed as a result of many international rivalries, finally resolved by a treaty in 1899 between the United States, Great Britain, and Germany, dividing the archipelago, and granting the United States of America control of all Samoan islands east of 171°W. The United States of America began to formally occupy American Samoa in 1900.

 

American Samoa remained under the jurisdiction of the U.S. Navy Department until 1951, when administration was transferred to the Department of the Interior and a governor was appointed. In 1978, the first popularly elected Samoan governor was inaugurated. The government of American Samoa is comprised of a bicameral legislature, consisting of a Senate and a House of Representative, and an independent judicial branch, consisting of a High Court. The Chief Justice and Associate Justices are appointed by the U.S. Secretary of Interior. America Samoa is represented in the United States Congress by one non-voting delegate. Togiola Tulafona is the current governor of American Samoa.

 

The Land

 

American Samoa comprises the eastern half of the Samoan island chain in the South Pacific. The group consists of several major islands: Tutuila, the Manu’a group (Ta’u, Ofu, and Olosega), Rose and Sand Islands, and Swains Island. Pago Pago, the capital, is on the island of Tutuila. Most of the islands are mountainous, heavily wooded, and surrounded by coral reefs. Nearly all of the land of American Samoa is owned by the native inhabitants.

 

The People

 

As of November 2005, American Samoa had 57,881 inhabitants. The Polynesian people account for a large majority of the population. Christian Congregationalism and other Protestant denominations are practiced by over half of the people. 20% of the population identify themselves as Roman Catholic. Most of the inhabitants of American Samoa are bilingual, speaking the native Polynesian tongue and English. American Samoans are considered nationals, rather than citizens of the United States.

 

The Economy

 

American Samoa is a traditional Polynesian economy in which more than 90% of the land is communally owned. Economic activity is closely tied to the United States of

 

A-1


America, the primary foreign trading partner of American Samoa. Tuna fishing and tuna processing plants are the strongest contributors to the private sector, with canned tuna serving as the primary export. Economic transfers from the United States government contribute to the economic stability of the country. However, further attempts by the American Samoan government to develop a broader and more diverse economy are often restrained by the remote location, limited transportation, and devastating hurricanes.

 

As of 2000, the Gross Domestic Product (“GDP”) of American Samoa was approximately $500 million, with an annual per capita income of $8,000.

 

     1996

   1999

   2002

Exports

   313 m    345 m    30 m

Imports

   471 m    452 m    123 m

 

COMMUNICATIONS

 

The telecommunications in American Samoa include telefax, facsimile and cellular telephone services. The country supports a domestic satellite system with one Comcast earth station.

 

The Cellular Market Area (“CMA”) was created from the 1980 Metropolitan Statistical Areas and defined by the Office of Management and Budget to include the Gulf of Mexico (306), and the Rural Service Area (“RSA”). RSAs do not cross state borders and include Puerto Rico (723-729), U.S. Virgin Islands (730-731), Guam (732), Northern Mariana Islands (734) and American Samoa (733). The number of cellular phones in use in American Samoa has increased dramatically since the mid-1990s. As of 1999, there were an estimated 2,377 mobile telephone users in American Samoa.

 

A-2


APPENDIX B

 

Country Description

Papua New Guinea

 

Land, History and Politics

 

The Independent State of Papua New Guinea is located in the southwest region of the Pacific Ocean and includes the eastern half of the island of New Guinea, the Bismarck Archipelago, the Trobriand Islands, Samarai Island, Woodlark Island, D’Entrecasteaux Islands, the Louisiade Archipelago, and the northernmost Solomon Islands of Buka and Bougainville. Papua New Guinea is a wild, rugged region, divided into 20 provinces.

 

The southern section of the country, formerly-named Papua was annexed by Queensland in 1883 and became a British protectorate, British New Guinea, in 1884. It was later declared part of Australia in 1905 as the Territory of Papua.

 

The northern section of the country, New Guinea, was occupied by Germany from 1884 to 1914 and renamed Kaiser-Wilhelmsland during the occupation. While occupied by Australian forces during World War I and under a mandate from the League of Nations, the northern section of the country became the Territory of New Guinea of Australia in 1920. The United Nations confirmed Australian rule of the territory in 1947.

 

In 1949 the territories of Papua and New Guinea were merged administratively, but remained constitutionally distinct. In 1973 both territories were united as the self-governing country of Papua New Guinea with full independence following in 1975. In the late 1980s a violent secessionist movement broke out on the island of Bougainville. A cease-fire was declared in 1998 and a peace accord granted the island broad autonomy three years later.

 

Government

 

The executive branch includes a Chief of State, Head of Government and Cabinet. Members of the Cabinet and National Executive Council are appointed by the governor general at the recommendation of the prime minister. The governor general is appointed by the National Executive Council. A monarch remains in place in the country.

 

The legislative branch includes a unicameral National Parliament, often referred to as the House of Assembly. There are 109 seats, including 89 elected seats from open electorates and 20 elected seats from provincial electorates. Members serve for a term of five years.

 

The judicial branch includes the Supreme Court, with the chief justice appointed by the governor general at the proposal of the National Executive Council. Other judges are appointed by the Judicial and Legal Services Commission.

 

B-1


The People

 

The current population of the region is 5,545,268 inhabitants. The native population is Melanesian. Although some 700 different languages are spoken in the region, Pidgin is the primary language.

 

ECONOMY

 

As of 2004, Papua New Guinea’s GDP was $11.99 billion with a per capita income of $2,200.

 

     2000

   2001

   2002

   2003

   2004

Exports

   2 b    1.8 b    1.8 b    1.9 b    2.4 b

Imports

   1 b    1.024 b    1.1 b    967 m    1.35 b

 

Domestic agricultural production sustains most of the population of Papua New Guinea, with sweet potatoes as the primary food crop. Notable agricultural exports include coconut products, rubber, coffee, cocoa, tea, and refined palm oil products. The agriculture sector sustains most of the population of Papua New Guinea, with sweet potatoes as the primary food crop. Notable agricultural exports include coconut products, rubber, coffee, cocoa, tea, and refined palm oil products. Pearl-shell and tortoise fisheries are commonly found along the coastline of the country. Mineral deposits account for 72% of all export earnings. Silver, copper, and gold are all mined in the country. Oil production began in 1992 and some natural gas reserves remain undeveloped. Timber from rain forests also provide an important source of revenue. Although logging efforts by foreign companies began to raise environmental concerns in the 1990’s, exploitation of Papua New Guinea’s natural resources has been hampered by the rugged terrain and high cost of developing infrastructure within the country.

 

After a prolonged period of instability, economic forecasts for the country are now improving. Efforts by Prime Minister Sir Michael Somore to restore integrity to state institutions, stabilize the local currency, establish a national budget and encourage privatization of public have contributed in this regard. Papua New Guinea receives $240 million in aid from Australia, accounting for 20% of the national budget. The country also seeks to increase investor confidence, bolster efforts to privatize government assets, and balance relations with Australia.

 

COMMUNICATIONS

 

A general telephone system supplies communications within the region, including 62,000 main lines and 15,000 mobile telephone lines.

 

Although the country has a relatively advanced telecom network, as compared to other developing nations, the density of telephone service or mobile and internet services

 

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remains very low. Strong infrastructure for the telecommunications system is limited to the major urban centers of Port Moresby, Lae and Mt Hagen.

 

The Privatization of Telikom, the domestic communications service, was first attempted in 2001 and then again July 2004, when an agreement was reached to sell a majority of the company to Amalgamated Telecom Holdings PNG Pty Ltd. and then to Econet Wireless (a South Africa-based company). In December 2004, however, the government of Papua New Guinea government rejected the bid from Econet Wireless, stating the need to re-examine other options in 2006. In September 2005, Telikom signed an agreement with NewSat to supply satellite communication services through a range of co-branded services including high-speed internet, web browsing, data transfer, video streaming and multicasting services.

 

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APPENDIX C

 

Country Description

Fiji

 

History and Politics

 

Fiji was discovered in 1643 by Dutch explorer, Abel Tasman but was first settled about 3,500 years ago. In 1822, the first European settlement in Fiji was established at Levuka, which in 1871 became the seat of the first national government, the Kingdom of Fiji. Great Britain annexed the islands in 1874 and declared it a British colony. In 1882, the capital was moved from Levuka to Suva.

 

In 1970, Fiji gained independence as a member of the British Commonwealth with Ratu Sir Kamisese Marass prime minister. In 1987, Colonel Sitiveni Rabuka led two coups that took control of the government from the Fiji Labor Party dominated by the Indian population. Fiji was then declared a republic and ceased to be a part of the British Commonwealth.

 

The Government of Fiji is divided into four divisions, which are further subdivided into fourteen provinces. Each division is headed by a Commissioner, appointed by the Fijian government. The President of Fiji is elected by the Great Council of Chiefs and serves for a term of five years. The President also appoints the Prime Minister. Although the role of the President is largely honorary and modelled after that of the British monarchy, the President has reserved constitutional powers that may be used in the event of a national crisis. The president also serves as Commander-in-Chief of the Armed Forces. The Great Council of Chiefs recognizes Queen Elizabeth II as its Paramount Chief.

 

The bicameral Parliament consists of the Senate and the House of Representatives. The House of Representatives has 25 open seats which may be occupied by any citizen satisfying requirements established by law. Each representative serves for a term of five years.

 

Cabinet members, selected from members of Parliament, are appointed by the Prime Minister and responsible to Parliament. The Presidential Council and the Great Council of Chiefs, including of the highest ranking members of the traditional chief system, advises the President on matter of national importance

 

Judicial power is vested in three courts; the High Court, Court of Appeal, and Supreme Court, established by the Constitution, which also makes provision for other courts to be set up by Parliament.

 

The Land

 

The Republic of the Fiji Islands is a Melanesian island group, comprised of 320 islands, 105 of which are inhabited. Viti Levu, the largest island, comprises half of Fiji’s land area.

 

Fiji’s climate is warm and humid. Dense tropical forests are found on the windward sides of the islands; grassy plains and clumps of casuarina and pandanus grow on the leeward sides and mangrove forests and hot springs are abundant in the mountain regions.

 

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The People

 

As of July 2005, Fiji had 893,354 inhabitants, of which 75% resided on the island of Viti Levu. The majority of the indigenous population of the eastern islands is Polynesian. Origins of the Indian population can be traced to a period from 1879 to 1916, when many people came to Fiji from India to serve as indentured workers in the sugar industry established by the British Government through the Colonial Sugar Refining company in Fiji. Much of this Indian population left Fiji after the 1987 coup and today comprise 44% of the total population. Europeans, Pacific Islanders, Chinese and other ethnicities comprise approximately 5% of the population.

 

The native Fijians are predominantly Christian; the Indians are about three quarters Hindu and one quarter Muslim. The official language of Fiji is Fijian, but English and Hindi are also spoken. English is recognized as the official language of Fiji.

 

ECONOMY

 

The seaports often denote the most important cities in Fiji, including Suva and Lautoka and Levuka. With ample forests, minerals, and fishing resources, Fiji’s economy is one of the most developed in the Pacific island region. Fiji’s economy is also largely agrarian, with sugar exports serving as a major source of foreign trade. Sugar processing comprises one-third of all industrial activity, but remains largely inefficient. Long-term economic challenges include low investment, uncertain land ownership rights, and the government’s inability to manage the budget. Short-run economic forecasts are favorable but are subject to the risk of erupting tensions between native Fijians and Indo-Fijians.

 

As of 2005, the GDP, by official exchange rate, of Fiji was approximately $5.4 billion. In 2005, GDP, per capita, by purchasing power parity, was $6,000. Overseas money transfers into Fiji have increased significantly, as the result of many Fijians working in Kuwait and Iraq.

 

     1998

   1999

   2000

   2001

   2002

Export

   393 m    537 m    572 m    442 m    609 m

Import

   612 m    653 m    833 m    642 m    835 m

 

COMMUNICATIONS

 

The telephone service in Fiji include modern local, interisland and international (wire/radio integrated) public and special-purpose telephone, teleprinter facilities and a regional radio communications center. As of 2003, there were 102,000 land lines and 109,900 mobile telephones in use.

 

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Fiji’s telecom system is reliable and efficient with access to the Southern Cross cable that connects New Zealand, Australia and North America. The country’s telecom industry is comprised primarily of three major monopolies, the services of which are all protected through exclusivity licenses. Telecom Fiji Ltd has the exclusive license to provide domestic voice and data services; Vodafone Fiji Ltd is the sole provider of mobile services; and Fiji International Telecommunications Ltd (Fintel) has the monopoly on the supply of international voice and data services. Fiji’s broadband services are among the most expensive in the world, essentially due to little competition in the local market. In October 2005, Unwired Fiji launched the country’s first privately owned broadband wireless network.

 

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Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-12G’ Filing    Date    Other Filings
1/31/16
12/31/1010-K,  10-K/A,  NT 10-K
3/31/1010-Q,  NT 10-Q
12/31/0910-K,  10-K/A,  5,  NT 10-K
11/10/09
3/22/09
1/1/09
11/14/088-K
2/1/08
1/31/08
12/31/0710-K,  10-K/A,  5,  5/A,  NT 10-K
8/31/07
4/26/07
4/9/07
2/1/07
1/30/07
1/24/07
12/31/0610-K,  5,  5/A,  NT 10-K
11/10/06
9/30/0610-Q,  NT 10-Q
8/9/06
7/22/06
6/30/0610-Q
4/9/06
4/1/06
3/31/0610-Q
Filed on:2/13/06
2/12/06
2/10/06
2/8/06
2/6/06
2/5/06
2/1/06
1/31/06
1/30/06
1/21/06
1/1/06
12/31/05
12/15/05
12/9/05
11/14/05
11/2/05
10/31/05
10/28/05
10/24/05
9/30/05
9/27/05
9/15/05
9/14/05
9/8/05
8/21/05
8/18/05
8/15/05
8/8/05
7/29/05
7/22/05
7/1/05
6/30/05
6/15/05
5/20/05
5/19/05
5/9/05
4/22/05
4/8/05
4/4/05
4/1/05
3/31/05
3/30/05
2/17/05
1/31/05
1/26/05
1/1/05
12/31/04
12/17/04
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