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 JUNE 30, 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 August 14, 2003 is 28,024,371.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PACIFIC SYSTEMS CONTROL TECHNOLOGY, INC.
FORM 10-QSB
For June 30, 2003
TABLE OF CONTENTS
| Part I. | Financial Information |
|
Item 1. | Financial Statements | |
Balance Sheet as of June 30, 2003 | 4 | |
Statements of Operations for the three-month and six-month periods ended June 30, 2003 and 2002 | 5 | |
Statements of Cash Flows for the six-month periods ended June 30, 2003 and 2002 | 6 | |
Notes to Financial Statements | 7 | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 15 |
Item 3. | Controls and Procedures | 18 |
Part II. | Other Information |
|
Item 1. | Legal Proceedings | 18 |
Item 2. | Changes in Securities and Use of Proceeds | 19 |
Item 3. | Defaults Under Senior Securities | 19 |
Item 4. | Submission of Matters to a Vote of Security Holders | 19 |
Item 5. | Other Information | 19 |
Item 6. | Reports on Form 8-K | 19 |
Signatures | 19 | |
Certifications |
| 20 |
PART I
Item 1. Financial Information - (unaudited)
PACIFIC SYSTEMS CONTROL TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEET
June 30
2003
------------
(unaudited)
ASSETS
Current Assets
Cash & cash equivalents $ 872
------------
Property and equipment, net 12,528
Deposit 700
------------
Total Assets $ 14,100
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued expenses $ 761,361
Due to related party 259,069
Advances from related parties 899,500
Notes payable 94,236
Other current liabilities 7,513
------------
Total current liabilities 2,021,679
------------
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
June 30, 2003 2,803
Additional paid-in capital 28,341,948
Note receivable - related party (70,000)
Accumulated deficit (30,282,330)
------------
Total Stockholders' Equity (2,007,579)
------------
$ 14,100
============
The accompanying notes are an integral part of these financial statements.
PACIFIC SYSTEMS CONTROL TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Three-month Periods Ended Six-month Periods Ended
------------------------- -------------------------
June 30 June 30 June 30 June 30
2003 2002 2003 2003
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUE $ - $ - $ - $ -
----------- ----------- ----------- -----------
Total revenue - - - -
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Salaries and payroll taxes 29,259 16,148 56,022 40,747
Rent 7,411 175,741 12,593 190,148
General and administrative 31,153 100,042 56,612 159,872
----------- ----------- ----------- -----------
Total costs and expenses 67,823 291,931 125,227 390,767
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (67,823) (291,931) (125,227) (390,767)
NON-OPERATING INCOME (EXPENSES)
Other Income - 12,739 - 20,409
Ligitation - - (100,000) -
Write off investments - (462,029) - (462,029)
Interest expense (7,378) (783) (13,762) (1,782)
----------- ----------- ----------- -----------
Total non-operating income (expenses) (7,378) (450,073) (113,762) (443,402)
----------- ----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES (75,201) (742,004) (238,989) (834,169)
PROVISION FOR INCOME TAXES - 800 800 800
----------- ----------- ----------- -----------
NET LOSS FROM CONTINUING OPERATIONS (75,201) (742,804) (239,789) (834,969)
LOSS FROM DISCONTINUED OPERATIONS - - - (10)
----------- ----------- ----------- -----------
NET LOSS $ (75,201) $ (742,804) $ (239,789) $ (834,979)
=========== =========== =========== ===========
Basic and diluted weighted average
number of common stock outstanding 28,024,371 27,574,371 28,024,371 27,574,371
=========== =========== =========== ===========
Basic and diluted loss per share
from continuing operations $(0.003) $(0.027) $(0.009) $(0.030)
----------- ----------- ----------- -----------
Basic and diluted loss per share
from discontinued operations $0.000 $0.000 $0.000 $(0.000)
----------- ----------- ----------- -----------
Basic and diluted loss per share $(0.003) $(0.027) $(0.009) $(0.030)
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
PACIFIC SYSTEMS CONTROL TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Six Months
Ended Ended
------------- -------------
June 30, 2003 June 30, 2002
------------- -------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (239,789) $ (834,979)
Adjustments to reconcile net loss to net cash
used for operating activities
Depreciation and amortization 2,040 2,672
Loss on investments - 462,029
(Increase) decrease in current assets
Accounts receivable - 8,077
Deposits (700) -
Increase (decrease) in current liabilities
Accrued expenses 58,332 184,235
Other (7,085) (1,540)
------------- -------------
Net cash used for operating activities (187,202) (179,506)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease of notes receivable 252,000 (420,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments of) loans
from related parties (58,472) 122,001
Payments on notes payable (5,454) (27,049)
------------- -------------
Net cash provided by (used in) financing
activities (63,926) 94,952
------------- -------------
NET INCREASE (DECREASE) IN CASH &
CASH EQUIVALENTS 872 (504,554)
CASH & CASH EQUIVALENTS, Beginning Balance - 504,554
------------- -------------
CASH & CASH EQUIVALENTS, Ending Balance $ 872 $ -
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 18,945 $ 1,787
============= =============
Foreign and state income taxes $ 1,600 $ 800
============= =============
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 June 30, 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 was 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, and AC Marketing was dissolved and closed as of June 30, 2003. There was no activity in ABK during the periods ended June 30, 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 in coming year. 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 ofPacific 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 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. The adoption of SFAS 145 does not have a material effect on the earnings or financial position of the Company.
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 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 adoption of SFAS 146 did not have a material effect on the earnings or financial position of the Company.
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. The adoption of SFAS 147 did not have a material effect on the earnings or financial position of the Company.
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. The adoption of this pronouncement does not have a material effect on the earnings or financial position of the Company.
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 Company does not expect the adoption of SFAS No. 148 would have a material impact on its financial position or results of operations or cash flows.
On April 30, 2003, the FASB issued FASB Statement No. 149 ("SFAS 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 ("SFAS 133"),Accounting for Derivative Instruments and Hedging Activities. SFAS 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. SFAS 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 SFA S No. 149 to have a material impact on its financial position or results of operations or cash flows.
On May 15, 2003, the FASB issued FASB Statement No. 150 ("SFAS 150"),Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 changes the accounting for certain financial instruments that, under previous guidance, could be classified as equity or "mezzanine" equity, by now requiring those instruments to be classified as liabilities (or assets in some circumstances) in the statement of financial position. Further, SFAS 150 requires disclosure regarding the terms of those instruments and settlement alternatives. SFAS 150 affects an entity's classification of the following freestanding instruments: a) Mandatorily redeemable instruments b) Financial instruments to repurchase an entity's own equity instruments c) Financial instruments embodying obligations that the issuer must or could choose to settle by issuing a variable number of its shares or other equity instruments based solely on (i) a fixed monetary amount known at inc eption or (ii) something other than changes in its own equity instruments d) SFAS 150 does not apply to features embedded in a financial instrument that is not a derivative in its entirety. The guidance in SFAS 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. For private companies, mandatorily redeemable financial instruments are subject to the provisions of SFAS 150 for the fiscal period beginning after December 15, 2003. The Company does not expect the adoption of SFAS No. 150 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 June 30, 2003 presentation.
Note 5 - Loss per share
Earnings per share for the six month periods ended June 30, 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 June 30, 2003, the balance of the note was $70,000 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 period. 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 2003. The Company has not received any meters from IUISC and has not delivered any meters to Holley ImpExp as of June 30, 2003. The Company and Holley ImpExp are considering altering the meter types and may also seek alternative suppliers.
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 June 30, 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 June 30, 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, 2005. The statements of operations for the period ended June 30, 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 June 30, 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 June 30, 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 June 30, 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 2003. An affiliate of Holley ImpExp, Holley Holding USA Ltd., is the largest shareholder of the Company. Through June 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 incentiv e stock 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 June 30, 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 $30,282,330 and the Company's total liabilities exceeded the total assets by $2,007,579 as of June 30, 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 June 30, 2003, the outstanding amount under advance arrangement amounted to $877,000.