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, 2002
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 000-22833
PACIFIC SYSTEMS CONTROL TECHNOLOGY, INC.
(Name of small business issuer in its charter)
Delaware | 90-0013185 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) |
100 Marine Parkway, Suite 325
Redwood Shores, California 94065
(Address of Principal Executive Offices including Zip Code)
(650) 688-5878
(Registrant's Telephone Number, Including Area Code)
(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 14, 2002 is 27,885,571.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PACIFIC SYSTEMS CONTROL TECHNOLOGY, INC.
FORM 10-QSB
For September 30, 2002
TABLE OF CONTENTS
| Part I. | Financial Information |
|
Item 1. | Financial Statements | |
Balance Sheets as of September 30, 2002 and December 31, 2001 | 3 | |
Statements of Operations for the three and nine month periods ended September 30, 2002 and 2001 | 4 | |
Statements of Cash Flows for the three and nine month periods ended September 30, 2002, and for the nine month period ended September 30, 2001 | 5 | |
Notes to Financial Statements | 6 | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 11 |
Part II. | Other Information |
|
Item 1. | Legal Proceedings | 13 |
Item 2. | Changes in Securities and Use of Proceeds | 14 |
Item 3. | Defaults Under Senior Securities | 14 |
Item 4. | Submission of Matters to a Vote of Security Holders | 14 |
Item 5. | Other Information | 14 |
Item 6. | Reports on Form 8-K | 14 |
Signatures |
|
PART I
Item 1. Financial Information - (unaudited)
PACIFIC SYSTEMS CONTROL TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEET
September 30 December 31
2002 2001
------------ ------------
(unaudited)
ASSETS
Current Assets
Cash $ 1,906 $ 504,554
Other receivable 26,858 172,736
Prepaid expenses 2,448 2,448
Other assets - 300,000
------------ ------------
Total current assets 31,212 979,738
Property and equipment, net 15,588 121,796
Investments 9,053 471,082
Other asset 300,000 -
------------ ------------
Total Assets $ 355,853 $ 1,572,616
============ ============
LIABILITIES
Current liabilities
Accounts payable and
accrued expenses $ 549,264 $ 634,783
Advances from related parties 891,500 810,745
Other - 74,168
Related party payable 317,042 -
Notes payable 102,335 185,852
------------ ------------
Total current liabilities 1,860,141 1,705,548
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.0001 par value;
10,000,000 shares authorized $ - $ -
Common stock, $0.0001 par value;
100,000,000 shares authorized,
27,834,571 and 27,574,371 shares of
common stock issued and outstanding
respectively 2,783 2,758
Additional paid-in capital 28,325,868 28,960,103
Note receivable (322,000) -
Deferred compensation charges (8,602) -
Accumulated deficit (29,502,337) (29,095,793)
------------ ------------
Total Stockholders' Equity (1,504,288) (132,932)
------------ ------------
$ 355,853 $ 1,572,616
============ ============
The accompanying notes are an integral part of these financial statements.PACIFIC SYSTEMS CONTROL TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Three-month Periods Ended Nine-month Periods Ended
--------------------------- ---------------------------
September 30 September 30 September 30 September 30
2002 2001 2002 2001
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUE $ - $ - $ - $ 132
------------ ------------ ------------ ------------
Total revenue - - - 132
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Salaries and payroll taxes 18,371 - 59,118 -
Rent 30,472 26,341 220,620 81,551
General and administrative 103,642 210,757 263,513 383,003
------------ ------------ ------------ ------------
Total costs and expenses 152,485 237,098 543,251 464,554
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Inter-company interest - 30,000 - 90,000
Interest expense (581) (5,409) (2,364) (7,420)
Other income 245 - 20,654 -
Write off investments - - (462,029) -
Disposal of fixed assets (18,954) - (18,954) -
------------ ------------ ------------ ------------
Total other income (expenses) (19,290) 24,591 (462,693) 82,580
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS BEFORE
PROVISION FOR INCOME TAXES (171,775) (212,507) (1,005,944) (381,842)
PROVISION FOR INCOME TAXES - 11,532 800 11,532
------------ ------------ ------------ ------------
NET LOSS FROM CONTINUING OPERATIONS (171,775) (224,039) (1,006,744) (393,374)
LOSS FROM DISCONTINUED OPERATIONS - (1,086,465) (10) (1,375,516)
------------ ------------ ------------ ------------
NET LOSS $ (171,775) (1,310,504) (1,006,754) (1,768,890)
============ ============ ============ ============
Weighted average number of
shares outstanding 27,749,897 26,836,113 27,749,897 26,836,113
============ ============ ============ ============
Basic and diluted loss per share $(0.006) $(0.049) $(0.036) $(0.066)
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
PACIFIC SYSTEMS CONTROL TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Nine Months
Ended Ended
------------ ------------
Sep 30, 2002 Sep 30, 2001
------------ ------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,006,754) $(1,768,890)
Adjustments to reconcile net loss to net cash
used for operating activities
Common stock issued for services 14,880 115,725
Amortization of film costs - 1,395,000
Depreciation and amortization 3,692 57,581
Bad debts 4,801 66,667
Common stock options issued for services 7,169 -
Loss on investments 462,029 -
Loss on disposal of fixed assets 18,955 -
(Increase) decrease in
Accounts receivable 8,077 (421,557)
Prepaid expenses and other - 13,219
Deposits - (300,000)
Inventory - (15,411)
Increase (decrease) in
Accounts payable and accrued expenses 223,452 (33,296)
Other (1,540) -
Related party payable (15,912) -
------------ ------------
Net cash used for operating activities (281,151) (890,962)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment - (3,125)
Payment in 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 14,020 300,000
Proceeds from issuance of common stock - 22,000
Proceeds from investment - 300,000
Proceeds on loans from related parties 120,000 285,500
Proceeds on notes payable - 50,000
Payments on notes payable (30,517) (10,154)
Change in note receivable (325,000) -
------------ ------------
Net cash provided by financing activities (221,497) 947,346
------------ ------------
NET CHANGE IN CASH (502,648) 21,974
CASH, beginning of period 504,554 5,309
------------ ------------
CASH, end of period $ 1,906 $ 27,283
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 2,364 $ 7,894
============ ============
Foreign and state income taxes $ 800 $ 11,532
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Long-term debt converted to equity $ - $ 2,000,000
============ ============
Common stock issued for services $ 14,880 $ 115,725
============ ============
Common stock and warrants issued related to
redemption of debentures $ - $ 2,078,391
============ ============
Options granted related to services $ 15,771 $ -
============ ============
Distribution of investment in subsidiary to
shareholders $12,199,785 $ -
============ ============
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS
For the three-month period ended September 30, 2002
Note 1 - Nature of Operations and Spin-off of Subsidiary
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 PeopleNet International Corporation (formerly known as American Champion Media, Inc. or "AC Media") until February 8, 2002 when AC Media was effectively spun-off from the Company and became an independent entity, and American Champion Marketing ("AC Marketing"), which is a wholly owned subsidiary of AC Media. There was no activity in AC Marketing during 2001 and the three and nine-month periods ended September 30, 2002. All significant intercompany accounts and transactions have been eliminated in consolidation.
In August 2001, the Company changed its name from American Champion Entertainment, Inc. to Pacific Systems Control Technology, Inc. AC Media also changed its name to PeopleNet International Corporation ("PeopleNet").
Spin-off - On June 22, 2001, the Company approved a plan to spin-off PeopleNet to the shareholders as a tax-free distribution. Under the plan, each stockholder of the Company receives one share of PeopleNet stock for every 17 shares of common stock held as of the record date of January 16, 2002. Subsequent to and as part of the spin-off, PeopleNet issues 374,587 shares of common stock, with registration rights, to ECapital, an unrelated party, in exchange for the worldwide exclusive rights to market and distribute ChiBrow, a safe web browser software for children for three years. A related party note payable to PeopleNet was also converted to common stock. The spin-off became effective in January 2002 and all shares were distributed to the above parties on February 8, 2002. As part of this plan, the advances PeopleNet made to ABK were offset against the amounts due to the Company and the net amount was converted to additional paid-in-capital of PeopleNet.
Nature of Operations - The Company is engaged in the development and sale of utilities meter products and technology. This is a new line of business for the Company. The Company expects to generate revenues from these operations beginning in 2003.
Going Concern - Management's plans and the ongoing operations of the Company are expected to require working capital during 2002. The Company has experienced continuing losses from operations. The Company is also changing its principle lines of business with respect to the manufacture and distribution of utility metering devices. In addition, PeopleNet was spun-off in February 2002. 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 2002. In December 2000, Holley Holding USA, Ltd. signed stock purchase agreements with the Company to purchase additional shares from the Company. In 2001, 135,000 shares were purchased under these agreements. Although Holley has not purchased substantial shares from the Company during 2001 or 2002, it has advanced approximately $800,000 as well as additional capital contributions of $300,000 to the Company for its daily operations. For the nine month period ended September 30, 2002, total advances from Holley to the Company amounted to approximately $869,000.
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 - Summary of Significant Accounting Policies
Revenue Recognition - There was no revenue generated from the development and sale of utilities meter products and technology for the year ended December 31, 2001 and for the three and nine-month periods ended September 30, 2002.
Concentrations of Risk - Financial instruments which potentially subject the Company to concentrations of credit risk are cash and accounts receivable. 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.
Fair Values of Financial Instruments - The carrying values 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. Accounting principles generally accepted in the United State of America 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.
Reclassifications - Certain reclassifications have been made to the 2001 amounts to conform to the current presentation.
Use of Estimates, Risks and Uncertainties - 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Note 3 - 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 accounting principles generally accepted in the United States of America 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, 2002 and the results of its operations and its cash flows for the nine-month periods ended September 30, 2002 and 2001. The accompanying unaudited financial statements should be read in conjunction with the financial statements and notes for the year ended December 31, 2001 included in the Company's Form 10-KSB as filed with the SEC on April 15, 2002.
Note 4 - Other Asset
Other asset represents a deposit paid to an outside vendor as part of the commitment for the purchase of metering devices as disclosed in Note 8. The deposit will be accounted for as part of the purchase price of the completed meters.
Note 5 - Note Receivable
The Company has a note to a company owned by the Company's largest shareholder. The loan is unsecured, non-interest bearing and expected to be re-paid in 2002. At September 30, 2002, the balance of the note was $322,000. $95,000 was repaid in the quarter ended September 30, 2002.
Note 6 - Advances from Related Parties
The advances from related parties are non-interest bearing and are unsecured.
Note 7 - Lease Commitments
In October 2001, the Company relocated its headquarters to Redwood Shores, California, and entered into a 40-month non-cancelable lease with monthly rent of approximately $12,000, subject to increases at each anniversary. The Company shared the office with a company owned by the largest shareholder and is liable for 1/3 of the monthly rent. In October 2002, the Company subleased the Redwood Shores office to a sub-leasee who will be paying approximately 62% of the monthly rent directly to the landlord. The Company's address remains unchanged. The Company's old office in Hayward, California, is still under the 4-year non-cancelable lease, with monthly rent of approximately $6,000, which the Company signed in July 2000. The Hayward office lease expires in August 2004. The amounts paid under these leases during the three month period ended September 30, 2002 was $30,472.
The Company subleased the Hayward office under a non-cancelable operating lease, expiring in August 4, 2004. The tenant defaulted on the sub-lease in June 2002 and there is no rental income earned for the quarter ended September 30, 2002. An accrual of $133,755 has been recorded for future minimum lease payments for as of September 30, 2002.
Note 8 - Commitments and Contingencies
In February 2001, the Company signed a 5-year contract with a company in China to deliver electronic, multi function meters over a 5-year period. The Company will purchase the meters in U.S. and resell to the buyer. In August 2001, the Company signed an agreement with International Utility Information Systems Corporation of Scotts Valley, California ("IUISC") to develop meters based on agreed specifications. The Company agreed to purchase a minimum of 50,000 units of such developed products in 2002 upon successful compliance with the specifications. $300,000 was paid to IUISC when the agreement was signed and the amount are to be deducted from the purchase of meters in the above-mentioned contract.
On November 1, 2002, the Company signed a definitive agreement with Holley Import and Export Company Ltd. of Hangzhou, China ("Holley ImpExp") and IUISC for the supply of $20 million of metering products over the next two years. The products are to be designed and manufactured by IUISC and sold to Holley ImpExp. Pursuant to the terms of the agreement, delivery of products begins in April 2003. This definitive agreement replaces the two contracts mentioned in the above paragraph.
In February 2001, a complaint was filed by Chuck Nelson in 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 plaintiff is claiming for incidental damages in excess of $2,500 and consequential damages in excess of $100,000. The Company denies all of the rights claimed by Chuck Nelson and will vigorously defend against all of Mr. Nelson's claims. In May 2002 the Company submitted answers to interrogatories from the plaintiff and such answers demonstrate contradictions to the plaintiff's claims. As of November 2002, the Company's counsel is negotiating with the plaintiff regarding a settlement.
In 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. A counter claim from the employee was filed in April 2002 naming the Company including all of its subsidiaries as the defendants in the cross-complaint. The Labor Commission of California in December 2001 issued a judgment against the Company including all of its subsidiaries in the amount of $69,170.58 in favor of the employee. This amount has been accrued as of September 30, 2002. As of September 30, 2002 the Company has paid approximately $14,000 towards the judgment from the Labor Commission, and is negotiating with the former employee regarding a settlement.
As the parent company, Pacific Systems has agreed to indemnify all of its subsidiaries including PeopleNet from the liabilities of the above two cases including expenses, fees or judgment.
In August 2002, the Company's former publicity agent, filed a complaint against the Company for previously incurred unpaid fees in the amount of approximately $27,000. The Company is not contesting the complaint and a judgment against the Company for the said amount has been issued by the Superior Court of California in Los Angeles County in September 2002. This amount was included in accounts payable at September 30, 2002.
In September 2002, two individuals who have made personal loans to the Company filed a complaint against the Company for unpaid principal and interest totaling approximately $103,000. The Company is not contesting the complaint. During the third quarter the Company recorded expense of $40,000 as a result of this complaint which was included in accounts payable and accrued expenses at September 30, 2002.
The Company may be contingently obligated under the following commitments through PeopleNet, which was spun-off as disclosed in Note 1.
On December 27, 2000, PeopleNet entered into a worldwide distribution agreement with respect toThe Adventures with Kanga Roddytelevision program with World Channel, Inc. Under the agreement, World Channel will have the exclusive rights for exhibition, distribution, process and reproduction and all commercial exploitation of the program for a period of five years. The agreement requires World Channel to make five annual installments of $600,000 on or before the end of each of the years 2001 through 2005. For the year ended December 31, 2001, the Company recognized $450,000 film income in relation to this distribution agreement, $193,000 of which was collected before year-end. Management did not recognize film income for the fourth quarter of 2001 based on management's evaluation of collectibility of the amounts due under the agreement. A 100% reserve on the remaining receivable was also established as of June 30, 2002. Because current year collection activity raises substantial doubt with respect to amounts due in future years under this agreement and because there are currently no other agreements in place, the Company has reserved the remaining unamortized film costs for "The Adventures With Kanga Roddy" television program.
In June 2001 the Company 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 and upon the effectiveness of the spin-off of the PeopleNet from the Company, PeopleNet issued 374,587 shares of common stock, with registration rights, to ECapital in exchange for the worldwide exclusive rights to market and distribute ChiBrow for three years (see Note 1). The Company 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, PeopleNet shall retain 35% of all revenues generated from such marketing efforts and the balance shall be paid to ECapital. The registration for the 374,587 shares of PeopleNet common stock issued to ECapital has not yet been filed as of September 30, 2002.
Note 9 - Industry Segment
The Company operates in one segment, utilities metering devices. All assets are located in the United States of America.
Note 10 - Subsequent Event
On November 1, 2002, the Company signed an agreement with Holley Import and Export Company of Hangzhou, China ("Holley ImpExp") for the delivery of $20 million of four types of fully electronic and modularly designed electricity meters to China. The transactions involves Holley ImpExp as the buyer, with products specifically designed and manufactured for the Company and Holley ImpExp by International Utility Information Systems Corporation of Scotts Valley, California ("IUISC"). The total order of $20 million in meters will be divided into five releases to be delivered over a period of approximately two years starting in April 2003. An affiliate of Holley ImpExp, Holley Holding USA Ltd., is the largest shareholder of the Company.
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 discussion may contain forward-looking statements that are subject to risks and uncertainties. For a discussion of factors that could cause actual results to differ, please see the discussion contained herein. Readers should not place undue reliance on the forward-looking statements, which reflect management's view only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequence events or circumstances. Readers are also encouraged to review the Company's publicly available filings with the Securities and Exchange Commission.
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, 2002. This discussion should be read in conjunction with the Company's financial statements and notes appearing elsewhere in this report.
Critical Accounting Policies
In the ordinary course of business, the company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and results. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Although historically, actual results have not significantly deviated from those determined using the necessary estimates inherent in the preparation of financial statements, future actual results may vary significantly. Estimates and assumptions include, but are not limited to, customer receivables, long-term asset lives, contingencies and litigation. The Company has also chosen certain accounting policies when options were available, including:
- The intrinsic value method, or APB Opinion No. 25, to account for our common stock incentive awards.
- We record an allowance for credit losses based on estimates of customers' ability to pay. If the financial condition of our customers were to deteriorate, additional allowances may be required.
- We adopt SFAS 142, Goodwill and Other Intangible Assets, in fiscal year 2002 to account for intangible assets.
These accounting policies are applied consistently for all years presented. Our operating results would be affected if other alternatives were used. Information about the impact on our operating results is included in the footnotes to our consolidated financial statements.
Results of Operation
The Company was formed in February 1997 and has a wholly owned subsidiary, ABK, which had no activities in the year 2001 nor the three and nine-month periods ended September 30, 2002. ABK wholly owned AC Media until February 8, 2002 when AC Media was effectively spun-off and became an independent entity with its name changed to PeopleNet International Corporation. In March 2000, the Company signed a Stock Exchange Agreement with 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 in BA Networks to the Company. According to commerce regulation of China, such exchange of ownership needs to be incorporated into a co-operative joint venture ("CJV"). On October 28, 2000 BA Network 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 CJV was approved by the Beijing Municipal Government on December 1, 2000 and the business license was granted on December 20, 2000. As of September 30, 2002, the transfer of assets from BA Networks has not yet been made. Since the Company does not have control of BA Networks until the transfer of assets occurs, the investment in BA Networks was being accounted for as a deposit under the cost method of accounting as of December 31, 2001 at the original purchase price of $450,000. However, current regulations regarding establishment of a CJV in Beijing require another cash investment of approximately the same amount and the Company does not foresee making such additional investment in the near future. Therefore a reserve in the amount of $450,000 has been set up to offset the value of the investment on our balance sheet as of June 30, 2002.
In February 2001, the Company signed a 5-year contract with a company in China to deliver up to 1,000,000 units of electronic, multi function meters over a 5-year period. The Company will purchase the meters in U.S. and resell to the buyer. In August 2001, the Company signed an agreement with International Utility Information Systems Corporation of Scotts Valley, California ("IUISC") to develop meters based on agreed specifications. The Company agreed to purchase a minimum of 50,000 units of such developed products in 2002 upon successful compliance with the specifications. $300,000 was paid to IUISC when the agreement was signed and the amount are to be deducted from the purchase of meters in the above-mentioned contract.
On November 1, 2002, the Company signed a definitive agreement with Holley Import and Export Company Ltd. of Hangzhou, China ("Holley ImpExp") and IUISC for the supply of $20 million of metering products over the next two years. The products are to be designed and manufactured by IUISC and sold to Holley ImpExp. Pursuant to the terms of the agreement, delivery of products begins in April 2003. This definitive agreement replaces the two contracts mentioned in the above paragraph.
Revenues
During the three-month period ended September 30, 2002, our focus was on negotiation for the supply of metering products to China. We had insignificant amount of revenues for this three-month period.
Costs and Expenses
During the three-month period ended September 30, 2002, we incurred $18,371 in salaries and payroll expenses, $30,472 for rent and $103,642 in general and administrative expenses which included legal and accounting expenses. Interest expense for the period was $581. Total expenses for the same period in 2001 were only $237,098 due to the fact that the expenses incurred by PeopleNet which was spun-off from the Company on February 8, 2002 were included in "Loss of discontinued operations".
As a result of foregoing factors, our net loss was ($171,775) for the three-month period ended September 30, 2002 as compared to ($1,310,504) for the same period in 2001 which included ($1,086,465) in loss from discontinued operations. Net loss per share decreased to ($0.006) for this period as compared to ($0.049) for the same period in 2001, while weighted average number of shares increased to 27,749,897 from 26,836,113 of the same period last year.
Liquidity and Capital Resources
Stockholders' equity decreased to a negative ($1,504,288) at September 30, 2002 included in which was the effect due to the spin-off distribution of PeopleNet from the Company as of February 8, 2002.Cash increased for the three months ended September 30, 2002 by $1,906 while cash utilized for operations for this three-month period was ($103,646). Cash from financing activities was an increase of $105,552.
The Company has historically financed its operating and capital outlays primarily through sales of common stock, loans from stockholders and other third parties and bank financing. The Company's largest shareholder, Holley Holding USA, has provided the funds to the Company in terms of an unsecured loan with no interests, for the Company operational needs. However, there is no assurance that Holley Holding USA will continue to assist the Company in the future. The Company is focusing on the execution of the signed contract for delivery of metering products to China, as described under the heading Results of Operation. The Company may be able to generate enough positive cash flow to sustain its operations if it is successful in delivering such products to China. The Company originally anticipated delivering products in the second half of 2002; however, due to delays in finalizing the terms of the contract, the Company's delivery of products shall not begin until April 2003.
A payable in the amount of $332,954 was set up to account for payables that were included in the financial statements of PeopleNet International Corporation as a result of the spin-off transaction. As part of the spin-off the Company agreed to reimburse PeopleNet for these liabilities. Approximately $19,000 of the liabilities were paid in the quarter ended September 30, 2002.
Item 3. Controls and Procedures
Based on their most recent review, which was completed within 90 days of the filing of this report, the Company's principal executive officer and principal financial officer has concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to ensure that such information is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. There were no significant changes in the Company's internal controls or in other factors that could significantly affect those controls subsequent to the date of their evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In February 2001, a complaint was filed by Chuck Nelson in 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 plaintiff is claiming for incidental damages in excess of $2,500 and consequential damages in excess of $100,000. The Company denies all of the rights claimed by Chuck Nelson and will vigorously defend against all of Mr. Nelson's claims. In May 2002 the Company submitted answers to interrogatories from the plaintiff and such answers demonstrate contradictions to the plaintiff's claims.As of November 2002, the Company's counsel is negotiating with the plaintiff regarding a settlement.
In 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. A counter claim from the employee was filed in April 2002 naming the Company including all of its subsidiaries as the defendants in the cross-complaint. The Labor Commission of California in December 2001 issued a judgment against the Company including all of its subsidiaries in the amount of $69,170.58 in favor of the employee. This amount has been accrued as of September 30, 2002. Pacific Systems Control Technology has agreed to indemnify all of its subsidiaries including PeopleNet from the liabilities of these two cases including expenses, fees or judgment. As of September 30, 2002 the Company has paid approximately $14,000 towards the judgment from the Labor Commission,and is negotiating with the former employee regarding a settlement.
In August 2002, the Company's former publicity agent, filed a complaint against the Company for previously incurred unpaid fees in the amount of approximately $27,000. The Company is not contesting the complaint and a judgment against the Company for the said amount has been issued by the Superior Court of California in Los Angeles County in September 2002. This amount was included in accounts payable at September 30, 2002.
In September 2002, two individuals who have made personal loans to the Company filed a complaint against the Company for unpaid principal and interest totaling approximately $103,000. The Company is not contesting the complaint. During the third quarter the Company recorded expense of $40,000 as a result of this complaint which was included in accounts payable and accrued expenses at September 30, 2002.
With the exception of the foregoing, no lawsuits or proceedings are currently pending against the Company.
Item 2. Changes in Securities and Use of Proceeds. None
Item 3. Defaults Under Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
Exhibit 99.1 Certification pursuant to the Sarbanes-Oxley Act of 2002
There were no reports on Form 8-K filed during the three-month period ended September 30, 2002.
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, 2002 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 & Chief Financial Officer
CERTIFICATIONS
I, Anthony K. Chan, Chief Executive Officer and Chief Financial Officer of Pacific Systems Control Technology, Inc., certify that:
1. I have reviewed this quarterly report an Form 10-QSB of Pacific Systems Control Technology, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying Officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as pf the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function);
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Anthony K. Chan
Anthony K. Chan
Chief Executive Officer and Chief Financial Officer