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 MARCH 31, 2003
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) |
1600 Adams Drive
Menlo Park, California 94025
(Address of Principal Executive Offices including Zip Code)
(650) 688-5990
(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 May 15, 2003 is 28,024,371.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PACIFIC SYSTEMS CONTROL TECHNOLOGY, INC.
FORM 10-QSB
For March 31, 2003
TABLE OF CONTENTS
| Part I. | Financial Information |
|
Item 1. | Financial Statements | |
Balance Sheet as of March 31, 2003 | 3 | |
Statements of Operations for the three-month periods ended March 31, 2003 and 2002 | 4 | |
Statements of Cash Flows for the three-month periods ended March 31, 2003 and 2002 | 5 | |
Notes to Financial Statements | 6 | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 13 |
Item 3. | Controls and Procedures | 15 |
Part II. | Other Information |
|
Item 1. | Legal Proceedings | 16 |
Item 2. | Changes in Securities and Use of Proceeds | 16 |
Item 3. | Defaults Under Senior Securities | 16 |
Item 4. | Submission of Matters to a Vote of Security Holders | 17 |
Item 5. | Other Information | 17 |
Item 6. | Reports on Form 8-K | 17 |
Signatures | 17 | |
Certifications |
| 17 |
PART I
Item 1. Financial Information - (unaudited)
PACIFIC SYSTEMS CONTROL TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEET
March 31
2003
------------
(unaudited)
ASSETS
Current Assets
Cash & cash equivalents $ 13,683
------------
Property and equipment, net 13,548
Deposit 700
------------
Total Assets $ 27,931
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and
accrued expenses $ 758,233
Due to related party 316,741
Advances from related parties 899,500
Notes payable 96,989
Other current liabilities 10,846
------------
Total current liabilities 2,082,309
------------
Stockholders' Deficit
Preferred stock, $0.0001 par value;
10,000,000 shares authorized $ -
Common stock, $0.0001 par value;
100,000,000 shares authorized,
28,024,371 shares of common stock
issued and outstanding at
March 31, 2003 2,803
Additional paid-in capital 28,341,948
Note receivable - related party (192,000)
Accumulated deficit (30,207,129)
------------
Total Stockholders' Equity (2,054,378)
------------
$ 27,931
============
The accompanying notes are an integral part of these financial statements.
PACIFIC SYSTEMS CONTROL TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Three-month Periods Ended
---------------------------
March 31 March 31
2003 2002
------------ ------------
(unaudited) (unaudited)
REVENUE $ - $ -
------------ ------------
Total revenue - -
------------ ------------
COSTS AND EXPENSES
Salaries and payroll taxes 26,763 24,599
Rent 5,182 14,407
General and administrative 25,459 59,829
------------ ------------
Total costs and expenses 57,404 98,835
------------ ------------
LOSS FROM OPERATIONS (57,404) (98,835)
NON-OPERATING INCOME (EXPENSES)
Other Income - 7,670
Ligitation (100,000) -
Interest expense (6,384) (1,000)
------------ ------------
Total non-operating income (expenses) (106,384) 6,670
------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES (163,788) (92,165)
PROVISION FOR INCOME TAXES 800 0
------------ ------------
NET LOSS FROM CONTINUING OPERATIONS (164,588) (92,165)
LOSS FROM DISCONTINUED OPERATIONS - (10)
------------ ------------
NET LOSS $ (164,588) (92,175)
============ ============
Basic and diluted weighted average
number of shares outstanding 28,024,371 27,574,371
============ ============
Basic and diluted loss per share
from continuing operations $(0.006) $(0.003)
------------ ------------
Basic and diluted loss per share
from discontinued operations $0.000 $(0.000)
------------ ------------
Basic and diluted loss per share $(0.006) $(0.003)
============ ============
The accompanying notes are an integral part of these financial statements.
PACIFIC SYSTEMS CONTROL TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Three Months
Ended Ended
------------ ------------
Mar 31, 2003 Mar 31, 2002
------------ ------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (164,588) $ (92,175)
Adjustments to reconcile net loss to net cash
used for operating activities
Depreciation and amortization 1,020 1,676
(Increase) decrease in current assets
Accounts receivable - (14,986)
Deposits (700) -
Increase (decrease) in current liabilities
Accrued expenses 55,204 (22,564)
Other (3,752) (1,540)
------------ ------------
Net cash used for operating activities (112,816) (129,589)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease of notes receivable 130,000 (393,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments of) loans
from related parties (800) 50,000
Payments on notes payable (2,701) (18,667)
------------ ------------
Net cash provided by (used in) financing
activities (3,501) 31,333
------------ ------------
NET INCREASE (DECREASE) IN CASH &
CASH EQUIVALENTS 13,683 (491,256)
CASH & CASH EQUIVALENTS, Beginning Balance - 504,554
------------ ------------
CASH & CASH EQUIVALENTS, Ending Balance $ 13,683 $ 13,298
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 616 $ 1,000
============ ============
Foreign and state income taxes $ 1,600 $ -
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
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 March 31, 2003
Note 1 - Basis of consolidation, nature of operations and spin-off of subsidiary
Basis of consolidation
The consolidated financial statements include the accounts of Pacific Systems Control Technology, Inc., a Delaware corporation (the "Company") and its wholly owned subsidiary, America's Best Karate ("ABK"). ABK used to own 100% of PeopleNet International Corporation (formerly known as American Champion Media, Inc. or "AC Media") and American Champion Marketing ("AC Marketing"), which is a wholly owned subsidiary of AC Media, until February 8, 2002 when AC Media was effectively spun-off from the Company and became an independent entity,. There was no activity in ABK during the periods ended March 31, 2003 and 2002. All significant intercompany accounts and transactions have been eliminated in consolidation.
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. The Company operates in one segment. All assets are located in the United States of America.
Spin-off
On June 22, 2001, the Company approved a plan to spin-off PeopleNet to the shareholders as a tax-free distribution. 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, the net amount was converted to additional paid-in-capital of PeopleNet.
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").
Note 2 - Basis of presentation
The accompanying unaudited consolidated financial statements of Pacific Systems Control Technology, Inc. and subsidiary (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim periods are not necessarily indicative of the results for any future period. These statements should be read in conjunction with the Company's audited financial statements and notes thereto for the year ended December 31, 2002.
Note 3 - Recent pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations". SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," was issued in August 2001. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business.
In May 2002, the Board issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). SFAS 145 rescinds the automatic treatment of gains or losses from extinguishments of debt as extraordinary unless they meet the criteria for extraordinary items as outlined in APB Opinion No. 30, Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS 145 also requires sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions and makes various technical corrections to existing pronouncements. The provisions of SFAS 145 related to the rescission of FASB Statement 4 are effective for fiscal years beginning after May 15, 2002, with early adoption encouraged. All other provisions of SFAS 145 are effective for transactions occurri ng after May 15, 2002, with early adoption encouraged.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue 94-3, a liability for an exit cost, as defined, was recognized at the date of an entity's commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002 with earlier application encouraged.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions." SFAS No. 147 removes the requirement in SFAS No. 72 and Interpretation 9 thereto, to recognize and amortize any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset. This statement requires that those transactions be accounted for in accordance with SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." In addition, this statement amends SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," to include certain financial institution-related intangible assets.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based Compensation-Transition and Disclosure". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used, on reported results. The Statement is effective for the Companies' interim reporting period ending January 31, 2003.
The adoption of above pronouncements, did not materially impact the Company's financial position or results of operations.
On April 30, the FASB issued FASB Statement No. 149 (FAS 149), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". FAS 149 amends and clarifies the accounting guidance on (1) derivative instruments (including certain derivative instruments embedded in other contracts) and (2) hedging activities that fall within the scope of FASB Statement No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging Activities". FAS 149 also amends certain other existing pronouncements, which will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. FAS 149 is effective (1) for contracts entered into or modified after June 30, 2003, with certain exceptions, and (2) for hedging relationships designated after June 30, 2003. The guidance is to be applied prospectively. The Company does not expect the adoption of SFAS No. 149 to have a material impact on its financial position or results of operations or cash flows.
Note 4 - Reclassifications
Certain prior period amounts have been reclassified to conform to the period ended March 31, 2003 presentation.
Note 5 - Loss per share
Earnings per share for the three month periods ended March 31, 2003 and 2002 were determined by dividing net income for the periods by the weighted average number of both basic and diluted shares of common stock and common stock equivalents outstanding. Weighted average number of shares used to compute basic and diluted loss per share is the same since the effect of dilutive securities is anti-dilutive.
Note 6 - Discontinued operations
During 2002 the Company ceased its studio and film operations. Accordingly, the operations related to the Company's studio and film operations have been presented as discontinued operations in the accompanying financial statements.
Note 7 - Note receivable - related party
The Company has a note to a company owned by the Company's largest shareholder. The loan is unsecured, non-interest bearing and is due on demand. At March 31, 2003, the balance of the note was $192,000 and has been reflected as a part of the shareholders' deficit.
Note 8 - Loans from related parties
The advances and amount due to from related parties are non-interest bearing, due on demand and unsecured.
Note 9 - 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 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 in the accompanying financial statements.
Note 10 - Commitments and contingencies
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, deliveries of products are to begin in April 2003. The Company has not received the meters through April 30, 2003.
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 involved in the 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 March 31, 2003, the Company's counsel is negotiating with the plaintiff regarding a settlement. The Company accrued $100,000 in respect to the potential liability at December 31, 2002. This amount is included in accounts payable at March 31, 2003.
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 against the Company and its subsidiaries. On April 15, 2002, judgment was entered against the Company and its subsidiaries in the amount of $70,527. On February 11, 2003, the Company and its subsidiaries entered into a global settlement and mutual release of all claims with the former employee. Under the agreement, the defendants, including the Company, will pay to the former employee a total sum of $100,000 plus interest at the rate of 10% per year, payable in installments through August 15, 2003. The statements of operations for the period ended March 31, 2003 includes an accrual of $100,000 in respect to the potential liability.
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 is included in accounts payable at March 31, 2003.
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. The Company recorded expense of $40,000 as a result of this complaint in the year ended December 31, 2002. This amount is included in accounts payable at March 31, 2003.
The Company may be contingently obligated under the following commitments through PeopleNet (PN), which was spun-off as disclosed in Note 1.
In September 1999 PN signed a licensing agreement with Brighter Child of Westerville, Ohio, for the licensing of the Kanga Roddy story and all related characters for use in interactive CD-Rom games. In October 1999, PN signed a licensing agreement with Prestige Toys of New York, New York, for the licensing of the Kanga Roddy character and all related characters for use and manufacturing of plush toy items in all sizes. The agreement with Brighter Child expired on December 31, 2002.
On December 27, 2000, PN 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. Because collection activity through December 31, 2001 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 PN 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 PN from the Company, PN 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). PN 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, PN 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 PN common stock issued to ECapital has not yet been filed as of March 31, 2003.
Note 11 - Sales contract
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 transaction 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. Through April 30, 2003, no delivery of electricity meters has taken place.
Note 12 - Stock option plans
The Employee Stock Option Plan and the Non-Employee Directors Stock Option Plan were adopted by the Board of Directors and stockholders of the Company during 1997. Total numbers of shares issuable under both plans are 10,000,000 and 500,000 shares, respectively. The Employee Stock Option Plan provides for the grant of stock options, stock appreciation rights ("SARs") and other stock awards to employees of the Company or any consultant or advisor engaged by the Company who renders bona fide services to the Company; provided, that such services are not in connection with the offer or sale of securities in a capital raising transaction. The Plans are administered by the Compensation Committee of the Board of Directors (the "Committee"). Stock options may be granted by the Committee on such terms, including vesting and payment forms, as it deems appropriate in its discretion; provided, that no option may be exercised later than ten years after its grant, and the purchase price for incentive st ock options and non-qualified stock options shall not be less than 100% and 85% of the fair market value of the Common Stock at the time of grant, respectively.
Unless terminated by the Board of Directors, the Plans continue until December 2007. The Plan provides for the automatic grant to each of the Company's non-employee directors of (i) an option to purchase 1,250 shares of Common Stock on the date of such director's initial election or appointment to the Board of Directors (the "Initial Grant") and (ii) an option to purchase 500 shares of Common Stock on each anniversary thereof on which the director remains on the Board of Directors (the "Annual Grant"). The options will have an exercise price of 100% of the fair market value of the Common Stock on the date of grant and have a 10-year term. No options were issued to non-employees directors through March 31, 2003.
Note 13 - 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. In 2002, 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. The related party note payable to PeopleNet is also converted to common stock.
On February 8, 2002, the Company completed the spin-off of PeopleNet. The shareholders of the Company received one share of PeopleNet common stock for every 17 shares of Pacific Systems Control Technology common stock held as of the record date of January 16, 2002.
As a part of the spin off transaction of PeopleNet, the investment in PeopleNet amounting $678,881 was adjusted to Additional paid in capital in 2002. The Company wrote off the inter-company balance from PeopleNet amounting $12, 199,786 in the year 2002 and adjusted retained earnings of PeopleNet at the time of spin-off amounting $12,799,995 to accumulated deficit in the year 2002.
Note 14 - Going Concern
The Company's financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has accumulated deficit of $30,207,129 and the Company's total liabilities exceeded the total assets by $2,054,378 as of March 31, 2003. These factors cause substantial doubt about the ability of the Company to continue as a going concern.
Management's plans and the ongoing operations of the Company are expected to require working capital during next twelve months. 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. 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.
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. As of March 31, 2003, the outstanding amount under advance arrangement amounted to $877,000.
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 March 31, 2003. 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 2002 nor the three-month period ended March 31, 2003. ABK wholly owned 100% of PeopleNet International Corporation (formerly known as American Champion Media or 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.
On November 1, 2002, the Company signed an 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 is scheduled to begin in April 2003. As of the filing of this report, the supplier, IUISC, has not yet made the first batch of delivery and it is currently unknown as to when IUISC will begin delivery of the products.
Revenues
During the three-month period ended March 31, 2003, we focused on working with Holley ImpExp and the supplier, IUISC, in the supply of metering products to China. We had no revenues for this three-month period.
Costs and Expenses
During the three-month period ended March 31, 2003, we incurred $26,763 in salaries and payroll expenses, $5,182 for rent and $25,459 in general and administrative expenses which included legal and accounting expenses. Interest expense for the period was $6,384. We also accrued $100,000 in potential litigation liability for this period.
As a result of foregoing factors, our net loss was ($164,588) for the three-month period ended March 31, 2003 as compared to ($92,175) for the same period in 2002. Net loss per share increased to ($0.006) for this period as compared to ($0.003) for the same period in 2002, while weighted average number of shares increased to 28,024,371 from 27,574,371 of the same period last year.
Liquidity and Capital Resources
Stockholders' equity decreased to a negative ($2,054,378) at March 31, 2003, and cash increased for the three months ended March 31, 2003 by $13,683.
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 delivery of products is originally scheduled to begin in April 2003. However due to delays from the supplier, the first batch of products has not been delivered as of the filing of this report. The supplier, IUISC, cannot indicate to us as to when delivery of the products will begin.
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 Pacific Systems for a percentage of the total purse amounts paid to boxers involved in the 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. Pacific Systems denies all of the rights claimed by Chuck Nelson and will vigorously defend against all of Mr. Nelson's claims. In May 2002 Pacific Systems submitted answers to interrogatories from the plaintiff and such answers demonstrate contradictions to the plaintiff's claims. As of March 31, 2003, Pacific Systems' counsel is negotiating with the plaintiff regarding a settlement. The Company accrued $100,000 in respect to the potential liabilities at December 31, 2002. This amount is included in accounts payable at March 31, 2003.
In October 2001, Pacific Systems 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 against Pacific Systems and its subsidiaries. On April 15, 2002, judgment was entered against Pacific Systems and its subsidiaries in the amount of $70,527. As of December 31, 2002, $56,727 was still outstanding on the judgment. On February 11, 2003, Pacific Systems and its subsidiaries entered into a global settlement and mutual release of all claims with the former employee. Under the agreement, the cross-defendants, including the Company, will pay to the former employee a total sum of $100,000 plus interest at the rate of 10% per year, payable in installments at the rate of $3,000 per month. As of March 31, 2003, the outstanding balance under the settlement agreement was $84,000.
In August 2002, the Company's former publicity agent, filed a complaint against the Company for previously incurred unpaid fees in the amount of $27,380. The Company did not contesting the complaint and a judgment against the Company for the said amount plus interest and costs totaling $31,075 has been issued by the Superior Court of California in Los Angeles County in February 2003.
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 $103,025. The Company did not contest the complaint and a judgment against the Company for the said amount plus interest and costs totaling $128,368 has been issued by the Superior Court of California in Santa Clara in February 2003.
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
The Company filed on Form 8-K, dated March 3, 2003, to report on the change of independent auditors.
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 May 15, 2003 by the undersigned, thereunto duly authorized.
PACIFIC SYSTEMS CONTROL TECHNOLOGY, INC.
(Registrant)
By: /s/ Julin Mao
- ------------------------------
Julin Mao
Chief Executive Officer
CERTIFICATIONS
We, Julin Mao, Chief Executive Officer and Dexter Fong, Chief Financial Officer of Pacific Systems Control Technology, Inc., certify that:
1. We have reviewed this quarterly report an Form 10-QSB of Pacific Systems Control Technology, Inc.;
2. Based on our 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 our 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 we 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 we 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 we 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: May 15, 2003
/s/ Julin Mao
Julin Mao
Chief Executive Officer
and
/s/ Dexter Fong
Dexter Fong
Chief Financial Officer