UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO _____________
Commission file number 333-18967
PACIFIC SYSTEMS CONTROL TECHNOLOGY, INC.
(Name of small business issuer in its charter)
Delaware | 94-3261987 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) |
100 Marine World Parkway, Suite 325
Redwood Shores, California 94065
(Address of Principal Executive Offices including Zip Code)
(650) 802-8299
(Registrant's Telephone Number, Including Area Code)
American Champion Entertainment, Inc.
22320 Foothill Boulevard, Suite 260
Hayward, California 94541
(Former Name, Former Address and Former Fiscal Year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Applicable only to issuers involved in bankruptcy proceedings during the past five years:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ]
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
Number of shares of common stock, par value $0.0001, outstanding as of November 12, 2001 is 27,462,871.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PACIFIC SYSTEMS CONTROL TECHNOLOGY, INC.
FORM 10-QSB
For September 30, 2001
TABLE OF CONTENTS
| Part I. | Financial Information |
|
Item 1. | Financial Statements | |
Consolidated Balance Sheet as of September 30, 2001 and December 31, 2000 | ||
Consolidated Statements of Operations for the three and nine month periods ended September 30, 2001 and 2000 | ||
Consolidated Statements of Cash Flows for the three and nine month periods ended September 30, 2001 | ||
Notes to Consolidated Financial Statements | ||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Part II. | Other Information |
|
Item 1. | Legal Proceedings | |
Item 4. | Submission of Matters to a Vote of Security Holders | |
Item 6. | Reports on Form 8-K | |
Signatures |
|
PART I
Item 1. Financial Information - (unaudited)
PACIFIC SYSTEMS CONTROL TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
Sep 30, 2001 Dec 31, 2000
------------ ------------
(unaudited) (audited)
ASSETS
Cash....................................... $ 27,283 $ 5,309
Accounts receivable........................ 542,616 187,726
Loans receivable, related parties.......... 91,179 91,179
Prepaid expenses........................... 2,448 15,667
Deposits................................... 300,000 -
Property and equipment, net................ 172,091 226,547
Investments................................ 524,414 487,647
Film costs, net............................ 2,549,518 3,950,000
Note receivable............................ 81,244 81,244
Inventory.................................. 15,413 -
------------- ------------
Total Assets............................. $ 4,306,206 $ 5,045,319
============= ============
LIABILITIES
Accounts payable and accrued expenses...... $ 523,763 $ 630,790
Notes payable, related parties............. 321,500 36,000
Other...................................... - 3,746
Securities to be issued.................... - 2,228,391
Notes payable.............................. 174,925 1,606,043
------------- ------------
Total Liabilities........................ 1,020,188 4,504,970
------------- ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.0001 per share,
6,000,000 shares authorized,
none issued or outstanding.............. -
Common stock, $.0001 par value;
40,000,000 shares authorized............ 2,760 941
Additional paid-in capital................. 28,977,246 24,464,507
Accumulated deficit........................ (25,693,988) (23,925,099)
------------- ------------
Total Stockholders' Equity............... 3,286,018 540,349
------------- ------------
$ 4,306,206 $ 5,045,319
============= ============The accompanying notes are an integral part of these financial statements.
PACIFIC SYSTEMS CONTROL TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended Nine Months Ended
------------------------ ------------------------
Sep 30, Sep 30, Sep 30, Sep 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUE
Film income and sponsorship fees..................$ - $ 1,323 $ - $ 18,591
Licensing income.................................. 150,000 22,386 450,000 487,436
Tuition and related fees (discontinued operation). - - - 50,601
Interest income................................... - 1,706 - 11,384
Other............................................. - 103 2,682 248
----------- ----------- ----------- -----------
Total revenue................................... 150,000 25,518 452,682 568,261
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of sales-Film income......................... - 388 325 2,005
Film cost amortization and reserve................ 1,095,000 1,000,000 1,395,000 1,031,057
Salaries and payroll taxes........................ 9,419 241,746 140,180 803,657
Rent.............................................. 26,341 45,255 81,551 108,062
Selling........................................... 3,000 307,872 19,595 2,096,690
General and administrative........................ 309,329 704,875 565,495 3,524,093
----------- ----------- ----------- -----------
Total costs and expenses........................ 1,443,089 2,300,136 2,202,146 7,565,564
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (1,293,089) (2,274,618) (1,749,464) (6,997,303)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSES)
Interest expense.................................. (5,883) (22,167) (7,894) (53,463)
Interest - Beneficial conversation feature
of debentures - (340,603) - (712,996)
Interest - Debenture conversion expense........... - (60,223) - (146,040)
----------- ----------- ----------- -----------
Total other expenses............................ (5,883) (422,993) (7,894) (912,499)
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS BEFORE
PROVISION FOR INCOME TAXES........................ (1,298,972) (2,697,611) (1,757,358) (7,909,802)
PROVISION FOR INCOME TAXES.......................... 11,532 - 11,532 -
----------- ----------- ----------- -----------
NET LOSS............................................ (1,310,504) (2,697,611) (1,768,890) (7,909,802)
=========== =========== =========== ===========
ACCUMULATED DEFICIT.................................(25,693,988)(17,816,242) (25,693,988)(17,816,242)
WEIGHTED AVERAGE NUMBER OF SHARES................... 27,462,871 7,894,850 27,462,871 7,894,850
NET LOSS PER SHARE.................................. ($0.05) ($0.34) ($0.06) ($1.00)
The accompanying notes are an integral part of these financial statements.
PACIFIC SYSTEMS CONTROL TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Nine Months
Ended Ended
------------ ------------
Sep 30, 2001 Sep 30, 2001
------------ ------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................ $ (1,310,504) $ (1,768,890)
Adjustments to reconcile net loss to net cash
used for operating activities
Securities issued for services.................. 95,745 115,725
Depreciation and amortization................... 18,686 57,581
Amortization of film costs...................... 1,095,000 1,395,000
Bad debts written off 66,667 66,667
(Increase) decrease in
Accounts receivable............................. (192,943) (421,557)
Prepaid expenses and other..................... (2,000) 13,219
Deposits....................................... (300,000) (300,000)
Inventory....................................... - (15,411)
Increase (decrease) in
Accounts payable and accrued expenses............. 48,460 (33,296)
------------ -------------
Net cash used for operating activities.......... (480,889) (890,962)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.................. - (3,125)
Payments for film costs............................. - 5,482
Increase in other investments....................... - (36,767)
------------ -------------
Net cash used for investing activities....... - (34,410)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of common stock options...... - 300,000
Proceeds from issuance of common stock.............. - 22,000
Proceeds from investment............................ 300,000 300,000
Proceeds on loans from related parties.............. 191,393 285,500
Proceeds on notes payable........................... 20,000 50,000
Payments on notes payable........................... (7,022) (10,154)
------------ -------------
Net cash provided by financing activities....... 504,371 947,346
------------ -------------
NET INCREASE IN CASH.................................. 23,482 21,974
CASH, beginning of period............................. 3,801 5,309
------------ -------------
CASH, end of period................................... $ 27,283 $ 27,283
============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for
Interest.......................................... $ 5,883 $ 7,894
============ =============
Foreign and state income taxes.................... $ 11,532 $ 11,532
============ =============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Long-term debt converted to equity................ $ - $ 2,000,000
============ =============
Common stock issued related to services........... $ 95,745 $ 115,725
============ =============
Common stock and warrants issued related
to redemption of debentures..................... $ - $ 2,078,391
============ =============
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS - September 30, 2001
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
Basis of Presentation and Consolidation - The consolidated financial statements include the accounts of Pacific Systems Control Technology, Inc. (the "Company") and its wholly owned subsidiary, America's Best Karate ("ABK"), which owns 100% of American Champion Media, Inc. ("AC Media"), and American Champion Marketing ("AC Marketing"), which is a wholly owned subsidiary of AC Media. There was no activity in AC Marketing during 2001. All significant intercompany accounts and transactions have been eliminated in consolidation.
Nature of Operations - AC Media focuses on operating and managing all media-related programs for the Company. These programs consist of production of educational television programs for children, which emphasize martial arts values and fun. ABK was involved in the operations of the Company's karate studios, which have been discontinued.
Acquisition - In September 2000, the Company entered into an agreement to acquire an 80% interest of Beijing Wisdom Net Technology, Co., Ltd. ("BA Networks"), located in Beijing, People's Republic of China. BA Network is in the business of computer and communication network deployment, apartment and office building security automation deployment and related consulting services. The total purchase price paid to BA Networks, including 800,000 shares of the Company's common stock was $450,000. As of September 30, 2001, BA Networks had not commenced the necessary procedures to change the legal status of BA Networks to a foreign invested enterprise or applied for the necessary PRC governmental approvals for the transfer of ownership. On October 28, 2000, BA Networks signed a letter of intent with the Company to set up a Co-operative Joint Venture ("CJV") in China into which all BA Network's assets will be transferred. The CJV will be owned 80% by the Company and 20% by BA Networks. The establishment the CJV was approved by the Beijing Municipal Government on December 1, 2000 and the business license was granted on December 20, 2000. Since the Company does not have control of BA Networks until the transfer of assets occurs, the investment in BA Networks is being accounted for as a deposit under the cost method of accounting as of June 30, 2001 at the original purchase price of $450,000. Upon completion of the transfer of assets the acquisition will be accounted for under the purchase method of accounting. The operations of BA Networks are conducted exclusively in the People's Republic of China ("PRC"). It is at least reasonably possible that the activities of BA Networks, which are conducted in the People's Republic of China, may be disrupted in the near term from factors outside the control of the Company such as from negative effects of economic and political forces.
Revenue Recognition - Revenue from films is recognized on delivery of each master. Film costs are amortized using the individual-film-forecast-computation method, which amortizes costs in the ratio that current gross revenues bear to anticipated total gross revenues from all sources. The management of AC Media periodically reviews its estimates of future revenues for each master and if necessary a revision is made to amortization rates and a write down to net realizable value may occur. During the year ended December 31, 2000, management determined that based on the current licensing agreements in place with respect to films released, a reserve of $3,697,224 should be established.
Concentrations of Risk - Financial instruments which potentially subject the Company to concentrations of credit risk are cash and accounts receivable arising from its normal business activities. The Company places its cash with financial institutions deemed by management to be of high credit quality. The amount on deposit in any one institution that exceeds federally insured limits is subject to credit risk.
Cash and Cash Equivalents - The Company considers certain highly liquid instruments purchased with original maturities of three months or less to be cash equivalents.
Property and Equipment - Property and equipment is stated at cost. Depreciation for furniture and fixtures and certain equipment is computed using the straight-line method over an estimated useful life of five years. Leasehold improvements are amortized using the straight-line method over the term of the respective leases.
Film Costs - Film costs consist of the capitalized costs related to the production of original film masters for videos and television programs. The net film costs are presented on the balance sheet at the net realizable value for each master. During 2000 the Company established a reserve against the capitalized film costs to reduce the carrying amount to the estimated net realizable value.
Other Assets - Other assets for 1999 consists of a deposit for the acquisition of Great Wall. The acquisition did not go through and the deposit was reclassified to note receivable. At December 31, 2000, the total amount of $203,110 was written down to $81,244.
Fair Values of Financial Instruments - The carrying value of cash, receivables, accounts payable and short-term borrowings approximate fair value due to the short maturity of these instruments. The carrying values of long-term obligations approximate fair value since the interest rates either fluctuate with the lending banks' prime rates or approximate market rate. None of the financial instruments are held for trading purposes.
Basic Loss Per Share - Basic loss per share is based on the weighted average outstanding shares issued. Because the Company has a net loss, the common stock equivalents would have an anti-dilutive effect on earnings per share. Accordingly, basic earnings per share and diluted earnings per share are the same.
Income Taxes - Income taxes are accounted for using an asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between financial statement and tax basis of assets and liabilities at the applicable enacted tax rates. Generally accepted accounting principles require a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company and its Subsidiaries file a consolidated tax return.
Securities to be Issued - The balance sheet account at December 31, 2000, also includes shares of common stock to be issued in connection with the acquisition of BA Networks. The shares are issued during the second quarter of 2001.
Beneficial Conversion Feature of Debentures - The beneficial conversion feature of debentures relates to the accounting under Emerging Issues Task Force Consensus 98-5. Under this standard the Company is required to record a charge as interest expense when the conversion terms of convertible debentures provide for a discount from the fair market value of the stock when computing shares to be received by the debenture holders when the debentures are converted to common stock.
Reclassifications - Certain reclassifications have been made to the 1999 amounts to conform to the current presentation.
Presentation -Management believes utilizing a classified balance sheet presentation is not appropriate, as the operating cycle of the media-related segment of the Company is expected to exceed 12 months. Accordingly, an unclassified presentation is utilized for the accompanying balance sheet, which is an acceptable method under SFAS No. 53, "Financial Reporting by Producers and Distributors of Motion Picture Films."
Use of Estimates, Risks and Uncertainties - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates used in these financial statements include the recovery of film costs, which has a direct relationship to the net realizable value of the related asset. It is at least reasonably possible that management's estimate of revenue from films could change in the near term, which could have a material adverse effect on the Company's financial condition and results of operations.
Going Concern - Management's plans and the ongoing operations of the Company are expected to require working capital during 2001. In addition the Company has experienced continuing losses from operations. These factors cause substantial doubt about the ability of the Company to continue as a going concern. Management will be required to obtain additional capital to fund the ongoing operations during the remainder of 2001. Management expects to raise additional capital through the stock purchase agreements with Holley.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of operations. The continuation of the Company as a going concern is dependent upon the success of obtaining additional capital and, thereafter, on attaining profitability. There can be no assurance that management will be successful in the implementation of its plan. The financial statements do not include any adjustments in the event the Company is unable to continue as a going concern.
Note 2 - Basis of Reporting
The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for completed financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the financial position of the Company on September 30, 2001 and the results of its operations and its cash flows for the nine months periods ended September 30, 2001 and 2000. The accompanying unaudited financial statements should be read in conjunction with the financial statements and notes for the year ended December 31, 2000 included in the Company's Form 10-KSB/A as filled with the SEC on April 26, 2001.
Note 3 - Uses of Estimates, Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted accounting principles 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 used in these financial statements include the recovery of film costs which has a direct relationship to the net realizable value of the related asset. It is at least reasonably possible that management's estimate of revenue from films could change in the near term which could have a material adverse effect on the Company's financial condition and results of operations.
Note 4 - Film Costs
Film costs consist of the capitalized costs related to the production of videos and programs for television as follows:
September 30 December 31
2001 2000
------------ -----------
Television program
The Adventures With Kanga Roddy, net of
reserve of $3,537,259 at September 30, 2001
and December 31, 2000....................... $ 4,660,075 $ 4,665,557
Videos
Montana Exercise Video, net of reserve of
$148,253 at September 30, 2001 and
December 31, 2000........................... - -
Strong Mind Fit Body, net of reserve of
$18,042 at September 30, 2001 and
December 31, 2000........................... - -
------------ -----------
4,660,075 4,665,557
Less accumulated amortization 2,110,557 715,557
------------ -----------
$ 2,549,518 $ 3,950,000
============ ===========
A reserve was established to reduce the capitalized film costs of The Adventures With Kanga Roddy to its net realizable value at December 31, 2000. Other investments in both Montana Exercise Video and the videos of theStrong Mind Fit Body were fully reserved as management believes these videos would not generate future revenues for the Company. An amortization charge of $1,395,000 was taken as of September 30, 2001.
Note 5 - Debenture Conversion
On December 27, 2000, the Company entered into an agreement with Holley Holding (U.S.A.) Ltd. (Holley), in which Holley agreed to acquire all outstanding debentures of the Company from the debenture holders. They also agreed that they would convert the debentures to common stock upon acquisition from the debenture holders. The debentures were purchased from the debenture holders and the debentures were converted to common stock on January 4, 2001. As part of the agreement, the conversion terms of the debentures were changed and the debentures were then converted to 13,717,045 shares of common stock. In connection with the agreement, the Company is obligated to issue 2,404,960 shares of stock to the prior debentures holders and certain other individuals. The Company has also agreed to issue 2,325,000 warrants to purchase common stock of the Company at a price of $0.16 per share. The Company also issued warrants and options to various parties related to the conversion. The value of the additional shares issued as a result of the change in conversion terms and securities issued in connection with the transaction was $2,078,391. This amount has been accrued and charged to expense as of December 31, 2000, the period in which the parties agreed to all terms of the transaction.
Note 6 - Delisting
The Company was notified by Nasdaq in April 2001 that the Company failed to meet eligibility requirements for continued listing on the Nasdaq SmallCap Market. Effective April 3, 2001, the Company's common stock began trading on the Over The Counter Bulletin Board ("OTC:BB").
Note 7 - Capital Stock
During the three month period ended June 30, 2001, the Company issued 135,000 shares of common stock to a consultant for investor relations services. In the same period, the Company also sold 137,500 shares of common stock at the price of $0.16 per share to Mr. Yuanhao Li as part of a Stock Purchase Agreement made between the Company and Mr. Li in December 2000.
Subsequent to the three month period ended June 30, 2001, the Company issued 685,529 stock options to Dr. Robert E. Larson and other individuals of the Larson Group for Dr. Larson's involvement with the Company as a member of the Board of Directors and also for the appointment of management personnel from the Larson Group to key positions of the Company.
Note 8 - Significant Events
The company has effectively changed its corporate name to Pacific Systems Control Technology, Inc. on August 8, 2001 and its trading symbol will be changing to PFSY on or about August 14, 2001. This name change is made to more appropriately reflect the businesses of utility metering and power automation that the company is engaging under management by the Larson Group of California and the Holley Group of China. The Holley Group became the company's largest shareholder in January 2001 when they purchased all of the company's convertible debt and converted the outstanding principal into common stock.
The company filed a Form 10-SB on August 2, 2001 with the intent to spin off its wholly own subsidiary, American Champion Media, Inc., ("ACM") as a tax-free distribution to its shareholders. Upon effectiveness of the spin off, the Company's shareholders will receive one share of ACM stock for approximately every 17 shares of PFSY stock held. ACM has changed its corporate name to PeopleNet International Corporation and will be engaging in the marketing of its TV property "Adventures With Kanga Roddy" as well as a truly safe Internet browser for children called "ChiBrow".
As part of the spin off transaction, the advances to ABK will be offset against the amounts due to the Company and the net amount due adjusted down to $1,500,000 with the balance converted to additional paid-in-capital. This $1,500,000 will be converted to a note payable and will be due in annual installments of $300,000 plus interest at 8 percent. The television program, "The Adventures With Kanga Roddy", and all licensing and distribution rights associated with the program will also secure the note.
In July 2001, ACM adopted the 2001 Stock Option Plan. The plan provides for the issuances of up to 1,500,000 options to purchase common stock of ACM. No options have been issued under the plan.
In July 2001, ACM adopted the Non-Employee Directors Stock Option Plan. The plan provides for the issuances of up to 500,000 options to purchase common stock of ACM. No options have been issued under the plan.
In July 2001, ACM adopted the 2001 Stock Incentive Plan. The plan provides for the issuances of up to 500,000 shares of common stock of ACM. No shares have been issued under the plan.
In June 2001, ACM signed an agreement with ECapital Group, Inc. ("ECapital") to purchase the exclusive licensing and marketing rights to ChiBrow, a safe web browser software for children. Under the terms of the agreement, upon the effectiveness of the spin-off of ACM from its parent company, ACM will issue 375,000 shares of common stock, with registration rights, to ECapital in exchange for the worldwide exclusive rights to market and distribute ChiBrow for three years. ACM intends to file a registration statement for such shares immediately after the effectiveness of the spin-off transaction. Pursuant to the terms of the agreement, ACM shall retain 35% of all revenues generated from such marketing efforts and the balance shall be paid to ECapital.
The company has signed a Development and Purchase Contract with International Utility Information Systems Corporation ("Utility Systems) on August 17, 2001, under which terms the Company shall pay Utility Systems a total of $2,000,000 for the development of an electronic utility meter specially designed for the Chinese market. Funding for this development will be provided by Holley, the Company's largest shareholder.
Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations
Forward Looking Information
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" from liability for forward-looking statements. Certain information included in this Form 10-QSB and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by or on behalf of the Company) are forward-looking, such as statements relating to operational and financing plans, capital uses and resources, competition, and demands for the Company's products and services. Such forward-looking statements involve important risks and uncertainties, many of which will be beyond the control of the Company. These risks and uncertainties could significantly affect anticipated results in the future, both short-term and long-term, and accordingly, such results may differ from those expressed in forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, changes in external competitive market factors or in the Company's internal budgeting process which might impact trends in the Company's results of operations, unanticipated working capital or other cash requirements, changes in the Company's business strategy or an inability to execute its strategy due to unanticipated change in the industries in which it operates; and various competitive factors that may prevent the Company from competing successfully in the marketplace.
The following section discusses the significant operating changes, business trends, financial condition, earnings and liquidity that have occurred in the three-month period ended September 30, 2001. This discussion should be read in conjunction with the Company's consolidated financial statements and notes appearing elsewhere in this report.
Results of Operations
In March 2000, the Company signed a Stock Exchange Agreement with the Beijing Wisdom Network Technology Company, Ltd. ("BA Networks") for the acquisition of 80% of the common stock of BA Networks. The Company's shareholders approved of the acquisition at the Company's Annual Meeting of Shareholders held on September 27, 2000. The owners of BA Networks have agreed to sell an 80% interest of BA Networks to the Company. According the commerce regulation of China, such exchange of ownership needs to be incoprorated into a co-operative joint venture ("CJV"). On October 28, 2000, BA Networks signed a letter of intent with the Company to set up a CJV in China into which all of BA Networks' assets will be transferred. The CJV will be owned 80% by the Company and 20% by BA Networks. The establishment of the CJV was approved by the Beijing Municipal Government on December 1, 2000 and the business license was granted on December 20, 2000. As of June 30, 2001, the transfer of assets from BA Networks has not yet been made. The Company and BA Networks will complete all appropriate steps to fulfill the Chinese commerce regulations for the necessary transfer of ownership into the CJV as soon as possible. Since the Company does not have control of BA Networks until the transfer of assets occurs, the investment in BA Networks is being accounted for as a deposit under the cost method of accounting as of June 30, 2001 at the original purchase price of $450,000. Upon completion of the transfer of assets the acquisition will be accounted for under the purchase method of accounting. The operations of BA Networks are conducted exclusively in the People's Republic of China ("PRC"). It is at least reasonably possible that the activities of BA Networks, which are conducted in the PRC, may be disrupted in the near term from factors outside the control of the Company such as from negative effects of economic and political forces.
Revenues. For the three months ended September 30, 2001, the Company's total revenue of $150,000 was derived from the licensing agreement with World Channel.
Costs and Expenses. The Company's revenues were offset by amortization of film costs of $1,095,000. Such film costs were capitalized production costs of the Kanga Roddy series, and the amortization is calculated based upon the proportion to the revenue generated by the series in this period compared to total expected revenues from the series. Management intends to evaluate the recoverability of the film costs each year going forward. Based on the ability of the Company to conclude future licensing agreements sufficient to recover the capitalized costs, the estimate of recoverability may change in future periods.
The Company's expenses for salaries and payroll taxes decreased to $9,419 for the three months ended September 30, 2001 from $241,746 for the comparable period in 2000. The decrease is due to a significant effort by management to reduce overhead personnel and also that Messrs Chan, Li and Chung have all agreed to receive no compensation for the quarter ended September 30, 2001. Rent expense decreased to $26,341 for the three month period ended September 30, 2001 from $45,255 for the comparable period in 2000.
Selling expense decreased to $3,000 for the three months ended September 30, 2001 from $307,872 for the comparable period in 2000. General and administrative expenses decreased to $309,329 for the three months ended September 30, 2001 from $704,875 for the comparable period in 2000. These decreases are primarily due to drastic reduction in marketing and promotional events for the television series and corporate public relations activities.
Interest expense decreased to $5,883 for the three months ended September 30, 2001 from $22,167 for the comparable period in 2000. There was no non-cash charge for the beneficial conversion feature of the convertible debentures as there was no such debt issued within the quarter, compared to a $340,603 charge for the comparable period in 2000. The debentures were convertible to common stock of the Company with the shares to be issued upon conversion based on 77.5% of the fair value of the stock at the time of conversion. Since the debt can be converted at any time, the value of the discount as of the issuance date has been charged to interest expense with a corresponding increase to additional paid in capital.
As a result of the foregoing factors, the Company's net loss decreased to ($1,310,504) during the three months ended September 30, 2001 from ($2,697,611) for the comparable period in 2000. Net loss per share decreased to ($0.05) for the three months ended September 30, 2001 from ($0.34) for the comparable period in 2000. Weighted average number of shares outstanding increased to 27,462,871 the three months ended September 30, 2001 from 7,894,850 for the comparable period in 2000 primarily due to purchase of the Company's debentures by Holley Holding U.S.A. ("Holley") in December 2000 and the conversion of debentures into the Company's common stock in January 2001 and other shares that were issued along with the Holley transaction.
Liquidity And Capital Resources
Cash increased for the three months ended September 30, 2001 by $23,482 of which none was used for investing activities. Net operating cash loss was $480,889 and financing activities resulted in an inflow of $504,371.
As of September 30, 2001, total liabilities of the company was $1,020,188 which was significantly reduced from end of the year at December 31, 2000. This reduction is primarily due to Holley's conversion of the convertible debt into common stock of the Company.
Significant Events
The company has effectively changed its corporate name to Pacific Systems Control Technology, Inc. on August 8, 2001 and its trading symbol will be changing to PFSY on or about August 14, 2001. This name change is made to more appropriately reflect the businesses of utility metering and power automation that the company is engaging under management by the Larson Group of California and the Holley Group of China. The Holley Group became the company's largest shareholder in January 2001 when they purchased all of the company's convertible debt and converted the outstanding principal into common stock.
The company filed a Form 10-SB on August 2, 2001 with the intent to spin off its wholly own subsidiary, American Champion Media, Inc., ("ACM") as a tax-free distribution to its shareholders. Upon effectiveness of the spin off, the Company's shareholders will receive one share of ACM stock for approximately every 17 shares of ACEI stock held. ACM has changed its corporate name to PeopleNet International Corporation and will be engaging in the marketing of its TV property "Adventures With Kanga Roddy" as well as a truly safe Internet browser for children called "ChiBrow".
As part of the spin off transaction, the advances to ABK will be offset against the amounts due to the Company and the net amount due adjusted down to $1,500,000 with the balance converted to additional paid-in-capital. This $1,500,000 will be converted to a note payable and will be due in annual installments of $300,000 plus interest at 8 percent. The television program, "The Adventures With Kanga Roddy", and all licensing and distribution rights associated with the program will also secure the note.
In July 2001, ACM adopted the 2001 Stock Option Plan. The plan provides for the issuances of up to 1,500,000 options to purchase common stock of ACM. No options have been issued under the plan.
In July 2001, ACM adopted the Non-Employee Directors Stock Option Plan. The plan provides for the issuances of up to 500,000 options to purchase common stock of ACM. No options have been issued under the plan.
In July 2001, ACM adopted the 2001 Stock Incentive Plan. The plan provides for the issuances of up to 500,000 shares of common stock of ACM. No shares have been issued under the plan.
In June 2001, ACM signed an agreement with ECapital Group, Inc. ("ECapital") to purchase the exclusive licensing and marketing rights to ChiBrow, a safe web browser software for children. Under the terms of the agreement, upon the effectiveness of the spin-off of ACM from its parent company, ACM will issue 375,000 shares of common stock, with registration rights, to ECapital in exchange for the worldwide exclusive rights to market and distribute ChiBrow for three years. ACM intends to file a registration statement for such shares immediately after the effectiveness of the spin-off transaction. Pursuant to the terms of the agreement, ACM shall retain 35% of all revenues generated from such marketing efforts and the balance shall be paid to ECapital.
The company has signed a Development and Purchase Contract with International Utility Information Systems Corporation ("Utility Systems) on August 17, 2001, under which terms the Company shall pay Utility Systems a total of $2,000,000 for the development of an electronic utility meter specially designed for the Chinese market. Funding for this development will be provided by Holley, the Company's largest shareholder.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On February 9, 2001, a complaint was filed by Chuck Nelson in the Court of Common Pleas, Mahoning County in Youngstown, Ohio, against the Company for a percentage of the total purse amounts paid to boxers in the Company produced boxing event in China in April 2000, and for a percentage of the television revenue generated thereof. The Company denies all of the rights claimed by Chuck Nelson and will vigorously defend against all of the plaintiff's claims.
On October ??, 2001, the Company filed a complaint against a former employee in licensing and marketing activities for breach of contract, breach of fiduciary duty and unjust enrichment, among other causes of action, seeking declaratory relief from the court.
With the exception of the foregoing, no lawsuits or proceedings are currently pending against the Company.
Item 4. Submission of Matters to a Vote of Security Holders
There is no submission of matters to a vote of security holders during the three months ended September 30, 2001.
Item 6. Reports on Form 8-K.
There is no report on Form 8-K filed during the three months ended September 30, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf on November 14, 2001 by the undersigned, thereunto duly authorized.
PACIFIC SYSTEMS CONTROL TECHNOLOGY, INC.
(Registrant)
By: /s/ Anthony K. Chan
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Anthony K. Chan,
Chief Executive Officer and Chief Financial Officer