UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission File No. 0-30786
NIGHTHAWK SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Nevada 87-0627349
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
8200 E. Pacific Place, Ste. 204
Denver, CO 80231
(303) 337-4811
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(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.001 par value
Check whether the issuer (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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Registrant's revenues for its most recent fiscal year were $870,360.
As of May 20, 2003 there were 21,833,780 shares of common stock, par value
$.001 per share, of the registrant issued and outstanding.
Transitional Small Business Disclosure Format Used (Check one): Yes [ ] No [X]
1
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
NightHawk Systems, Inc. ("NightHawk" or "the Company") designs and manufactures
easy to use, ready to use, wireless products that can remotely control
virtually any electrical device from any location. Our products are designed to
be easily installed and operated by anyone regardless of technical capability.
NightHawk has taken a complex technology, historically relegated to engineers,
and made it simple for everyone. Our products offer a reliable and economical
alternative to mechanical processes that have historically utilized telephone
line-based systems or human intervention. Most people experience "remote
control" through the use of garage door openers and TV channel changers; we
supply the technology, off the shelf, to allow this same simple functionality
to reach literally around the world to operate almost anything.
Effective February 1, 2002, the Company acquired 100% of the issued and
outstanding shares of Peregrine Control Technologies, Inc. ("PCT") in exchange
for 14,731,200 post reverse split shares of the Company's common stock. In
conjunction with the acquisition and the change in focus of the Company's
business, the Company changed its name to Peregrine, Inc. on January 10, 2002
and later to NightHawk Systems, Inc. on April 29, 2002. Prior to the
acquisition of PCT, the Company had conducted a reverse split of its shares on
a 1:100 basis, and had 4,600,256 shares outstanding. The acquisition was
recorded as a reverse acquisition, with PCT being the accounting survivor.
PCT was originally incorporated as a Colorado company in 1992, and originally
operated as a family-owned business specializing in paging repair. Through
knowledge gained in the operation of the business, the Company began developing
a specialized circuit board which could receive paging signals and switch
electrical power. In its simplest form, the technology gave the user the
ability to turn devices "on" or "off" from or to remote sites. Through limited
marketing, the Company was able to solve specific control problems for both
large and small companies through customization of the original circuit board.
During the approximate eighteen-month period ending June 30, 2002, the Company
identified two large markets and successfully developed standardized products
to meet specific needs for each market: 1) Within the electrical utility
industry, utilities need to be able to control, from a centralized location,
the power going into and out of specific locations throughout that utility's
power grid; and 2) IT professionals, primarily network administrators, need the
ability to re-boot unmanned server or computer locations from a centralized
location. NightHawk developed the CEO-700 and the NightHawk NH2 to meet those
respective industry needs. Countless applications exist for the Company's
technology, and the Company will continue to meet varying industry needs, but
the Company believes that it can provide large-scale solutions and generate
significant revenues in the specific targeted markets identified above.
The Company has nine employees, each of which is full time.
MISSION STATEMENT
To become the premier provider of inexpensive, easy to use remote control
technology to consumers and industry alike.
2
THE MARKETPLACE
The controls industry is characterized by companies that sell remote asset
management and tracking systems and related products, and is estimated by Frost
& Sullivan to be a $3.5 billion industry in 2003, growing at a compound annual
rate of 25%. It is the Company's belief that there is no limit to the size of
the remote control market; the application of remote control is limited only by
one's imagination. On a consumer basis, most people think of remote control in
a recreational sense. However, many companies both large and small are seeking
ways to save money and lower the risk of liability by replacing processes that
require human intervention with processes that can be controlled remotely
without on-site human intervention. Today, the remote control of physical
assets and processes is performed mainly through the use of telephone-line
based systems. However, separate markets exist for those companies that
require wireless solutions, as telephone lines are expensive and limited in
availability and function. NightHawk's products are wireless, and can be
designed to work with a variety of wireless media. Almost any device that runs
off an electrical current, whether battery, solar or line generated, can be
controlled by a NightHawk device. The Company has identified primary markets
(Utility and Computer) as well as secondary markets (Traffic, Irrigation and
Wide Area Notification) for its products.
TECHNOLOGY AND PRODUCTS
NightHawk products have been in service for over five years, primarily to fit
custom applications. Customers using NightHawk products today include
Raytheon, Boeing, GE, AT&T, Lockheed Martin, the U.S. Forestry Service and the
U.S. Army. The Company distinguishes itself from competitors in the market
through its proprietary firmware and software, the design of its products, the
ease with which they are installed and operated, and the paging-based medium
typically used to operate its products, which allows for low cost access,
security and flexibility.
The Company's products are shipped ready for use and are pre-programmed before
shipment to the customer. Its utility products come in their own enclosures,
which fit underneath electric meters. Its computer products come as "plug and
play" devices; a user simply plugs his computer into the NightHawk device,
which is then plugged into the electrical outlet. NightHawk is the only
company currently providing a "plug and play" ready-to-use wireless remote
control device.
Through innovative engineering, NightHawk's products typically utilize a common
paging signal found virtually worldwide. Paging is often used because it is
very secure, yet inexpensive, and easy to use. Customers can choose to operate
their own paging accounts, or arrange for the service directly through
NightHawk. The Company has also developed Windows-based software packages that
enable customers to activate the remote control units from a PC. Paging, when
combined with NightHawk's proprietary firmware and software, allows for a
"group call" feature whereby a user can access multiple sites at the same time
using a single paging number. This exponentially increases the functionality
of the product. It is important to note that the Company's products can be
adapted to function with any wireless, or wireline-based, communications
medium.
The Company assembles its finished products at its Denver, Colorado facility.
The Company sub-contracts for assembly of various components, and utilizes
several vendors for parts that do not require assembly. Parts and sub-assembly
services are widely available. During the final assembly process, individual
units are programmed depending on their destination or customer requirements,
tested, and then shipped to the customer for installation.
In September 2001, the Company purchased certain assets and assumed certain
liabilities of Vacation Communication, Inc. (dba Gotta Go Wireless), a Colorado
corporation engaged in wireless paging airtime and product sales. The assets
purchased consisted primarily of a retail paging customer base, as well as
contracts for wholesale paging services with paging carriers for nationwide and
international coverage. The Company utilizes these paging carrier contracts to
offer paging services to buyers of its products.
3
PATENTS PENDING
The Company has two patent applications pending at the U.S. Patent Office: one
is titled "Remote Disconnect for Utility Meters" and is for whole house
disconnect systems, and the second is titled "Paging Remote Disconnect
Systems" and is for the remote wireless control for turning on and off
electrical and telephonic lines.
Under the first patent application, the user dials a pager number that is
already pre-programmed into the unit. The paging service then transmits a
signal to a radio frequency ("RF") receiver in the module. The signal is then
decoded and sent to a processor. The processor then causes a relay to open or
close in accordance with the decoded signal to connect or disconnect the
electrical power.
Under the second application, a user simply plugs the power cord or
telecommunication line of their device, such as a computer or appliance, into
the outlet of the module. The user is then able to dial a pager number that
is already pre-programmed. The paging service then transmits a signal to a
radio frequency ("RF") receiver in the module. The signal is then decoded and
sent to a processor. The processor then causes a relay to open or close in
accordance with the decoded signal to activate the power supply or to turn the
power off to the electronic device or to connect or disconnect the
telecommunications line.
COMPETITION
Wireless remote control through the use of radio signals is widespread. Most
products available today use private system data radios, cellular telephones,
or satellite-based systems. While NightHawk's technology can be modified to
utilize any of these wireless media, our core expertise has been in the use of
paging. This medium, combined with our proprietary technology, allows for a
high level of security, the lowest overall cost and greatest control
flexibility. Only a handful of small, undercapitalized companies utilize
paging for this purpose. To our knowledge, NightHawk is the only company
emphasizing paging technology that manufactures a product that is ready-to-use
upon receipt.
SALES AND DISTRIBUTION
The Company believes that it has the opportunity to meet current demand for
applications of its technology within specific markets, and to create
opportunities in many other markets as well. Despite having little or no
marketing resources to target these markets, both the IT professional and
electrical utility markets have found that the Company's technology
successfully meets their needs. As such, NightHawk will focus significant
direct, and supplier-based, sales efforts in these industries.
NightHawk products attach to existing customer hardware and act as a "brain",
receiving wireless instructions sent from a remote location, allowing the
hardware to perform as instructed. As mentioned above, NightHawk's products
are typically set up to receive these instructions via a paging protocol, which
allows for secure, reliable and low cost operation. NightHawk products
literally serve as the "brain" between the wireless service medium and the
hardware which must perform the desired action. As such, we believe
substantial opportunities exist to partner with wireless service providers as
well as hardware manufacturers and dealers, each of which stand to gain from
the use of NightHawk's products. The Company will also attempt to establish
itself as a supplier of products to paging and other wireless service
providers, and establish dealer networks in a number of markets, including, but
not limited to, computer controls, utilities, irrigation, traffic control, and
wide area notification.
4
PREDECESSOR OPERATIONS
The Company was incorporated as TPI, Inc., under the laws of the State of Utah
on April 26, 1983. In 1985, the Corporation changed its situs from Utah to
Nevada and its name to Connections Marketing Corp. In July 1992, the
shareholders of the Corporation voted to change the name to LSI Communications,
Inc. (LSI).
On June 21, 1999, the Company entered into a Plan of Acquisition with Coaching
Institute, Inc., a Utah corporation, wherein the Company issued 2,500,000
shares of common stock for 85,000 shares, 85% of the outstanding common stock
of Coaching Institute, Inc. The agreement provided for the Company to receive
options to acquire the remaining 15% of the issued and outstanding stock of
Coaching Institute, Inc. in exchange for 2,045,455 shares of the Company's
common stock. In February 1, 2001, the Company exercised its option by issuing
to Coaching Institute, Inc. 2,045,455 shares of its common stock valued at
$2,045. After the acquisition, both companies were surviving with Coaching
Institute, Inc. being a wholly owned subsidiary of LSI Communications, Inc.
The acquisition of Coaching Institute, Inc. was recorded using the purchase
method of a business combination. Operating activities have been included from
Coaching Institute in the consolidated financials since June 21, 1999. Due to
the common ownership of Coaching and LSI, the Company valued the acquisition of
Coaching Institute at its historical cost, which was $34,728.
In November 2001, the Company sold the assets and liabilities of Coaching
Institute, Inc. to a major shareholder. The Company recognized a loss on the
sale of $574,236. At the time of the reverse acquisition of PCT, the Company
had no assets or liabilities, or ongoing operations.
NASD OTC Bulletin Board Quotations
Our common stock has historically been quoted on the OTC Bulletin Board of the
NASD under the symbol "NIHK". As of May 27, 2003, our stock began trading on
the pink sheets because this filing on Form 10-KSB was considered delinquent.
For information concerning these stock quotations during the past two years,
see the section entitled "Market for Common Equity And Related Stockholder
Matters." The quotations presented do not represent actual transactions or
broker/dealer markups, markdowns or commissions.
ITEM 2. DESCRIPTION OF PROPERTY
The Company sales and operations departments are in leased facilities located
at 8200 East Pacific Place, Suite 204, Denver, Colorado. The lease for its
facilities expired on March 2002, but it has maintained use of the facilities
on a month-to-month basis since that time. The leased property consists of
approximately 2400 square feet, for which the Company pays $1,650 per month.
It consists of office space and a manufacturing floor. The Company's financial
and accounting offices are located in 679 square feet of leased office space at
10715 Gulfdale, Suite 200, San Antonio, Texas. The lease expires on January 31,
2004, and calls for monthly payments of $808. The Company's Chief Executive
Officer currently works out of both the Denver and San Antonio locations.
ITEM 3. LEGAL PROCEEDINGS
On May 6, 2003, the Company received notice that a former Board member intended
to prosecute his rights against the Company, seeking recovery for the value of
350,000 shares, or $209,500, and $120,000 due his firm under a retainer
agreement between the Company and his firm. The former Board member had
previously signed a settlement agreement with the Company in which he agreed to
cancel all potential claims against the Company and its directors in return for
150,000 unregistered shares trading at a value of $0.60 or higher. The Company
does not believe it owes the former Board member anything beyond the settlement
agreement and will actively defend its position if necessary. No assurance can
be given, however, as to the ultimate outcome should the former Board member
decide to prosecute his rights.
5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders during the last
quarter of the fiscal year ended December 31, 2002.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market for Common Equity
From July 8, 2002 through May 23, 2002, our common stock traded on the Over the
Counter Bulletin Board ("OTCBB") under the symbol "NIHK". Beginning May 27,
2003, our stock is traded on the pink sheets under the same symbol. The CUSIP
number is 65410X-10-4. Knight Securities, L.P., Schwab Capital Markets, L.P.
and ACAP Financial, Inc. are among the most active market makers for the stock.
From February 1, 2002 through July 8, 2002, our common stock traded on the
OTCBB under the symbol "PGRN." Prior to February 1, 2002, the stock traded on
the OTCBB under the symbol "LSIM".
The following is a table of the high and low bid prices of our stock for each
of the four quarters of the fiscal years ended December 31, 2002 and 2001, and
the first quarter of fiscal 2003:
Quarter Ended High Low Quarter Ended High Low
------------- ---- --- ------------- ---- ---
March 31, 2003 $0.730 $0.200
December 31, 2002 0.320 0.110 December 31, 2001 $ 5.000 $2.200
September 30, 2002 0.600 0.120 September 30,2001 31.000 3.000
June 30, 2002 1.950 0.550 June 30, 2001 57.000 2.000
March 31, 2002 5.000 0.162 March 31, 2001 10.000 2.500
These quotations reflect interdealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions. These prices also
reflect the 1:100 reverse split that occurred in January 2002.
(b) Security Holders
The number of record holders of our common stock as year end was 155 according
to our transfer agent. This figure excludes an indeterminate number of
shareholders whose shares are held in "street" or "nominee" name.
(c) Dividends
There have been no cash dividends declared or paid since the inception of the
company, and no cash dividends are contemplated in the foreseeable future. The
company may consider a potential dividend in the future in either common stock
or the stock of future operating subsidiaries.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following table sets forth for the fiscal periods indicated the percentage
of total revenues, unless otherwise indicated, represented by certain items
included in the Company's consolidated statements of operations:
Fiscal Year Ended December 31,
2002 2001
Product sales, net 76% 59%
Airtime sales, net 24% 41%
Cost of goods sold 40% 75%
Cost of airtime sold 14% 22%
Gross profit 45% 4%
Selling, general & administrative expenses 152% 272%
Amortization of deferred compensation 179% 217%
Reversal of 2001 deferred compensation (42%) -
Reversal of 2002 deferred compensation (127%) -
Impairment of customer base 13% -
Interest expense 5% 69%
Net loss (134%) (553%)
6
Forward Looking Statements
Discussions and information in this document, which are not historical facts,
should be considered forward-looking statements. With regard to forward-
looking statements, including those regarding the potential revenues from
increased sales, and the business prospects or any other aspect of NightHawk
Systems, Inc. ("the Company"), actual results and business performance may
differ materially from that projected or estimated in such forward-looking
statements. The Company has attempted to identify in this document certain of
the factors that it currently believes may cause actual future experience and
results to differ from its current expectations. Differences may be caused by
a variety of factors, including but not limited to, adverse economic
conditions, entry of new and stronger competitors, inadequate capital and the
inability to obtain funding from third parties.
The following information should be read in conjunction with the Company's
audited financial statements for the years ended December 31, 2002 and 2001.
General
The Company's financial results include the accounts of NightHawk Systems, Inc.
(formerly Peregrine, Inc.) and its subsidiary, Peregrine Control Technologies,
Inc. ("PCT"). Effective February 1, 2002, the two companies were brought
together under common management through an acquisition in which Peregrine,
Inc. acquired all of the outstanding shares of PCT. Because Peregrine, Inc.
issued more shares to acquire PCT than it had outstanding just prior to the
acquisition, the transaction was accounted for as a reverse acquisition of
Peregrine, Inc. by PCT. Peregine, Inc. subsequently changed its name to
NightHawk Systems, Inc. Because Peregrine, Inc. was a shell company with no
assets, obligations or operations at the time of the reverse merger, the
operating results of NightHawk Systems, Inc. for 2001 and 2002 discussed below
were generated by PCT.
Prior to the merger on February 1, 2002, PCT had been a privately owned, family
operated company since its founding in 1992. During 2001 and 2002 PCT
developed products it felt could be sold to targeted markets on a large-scale
basis. Prior to 2001, the Company's revenues were generated primarily through
sales of a circuit board that could be utilized by various companies to perform
a variety of functions. During 2001 and 2002, the Company developed "off the
shelf" whole-house disconnect and load control units which could be easily
installed and used by electrical utilities, and the NightHawk, another ready to
use product which can be used to reboot computers. In an effort to strengthen
its operations and results, in September of 2001 PCT acquired certain assets of
Vacation Communication, Inc. ("Vacation"), a retail paging business. The
Company felt that it could leverage off of the existing cash flows of Vacation
to fund growth of its own remote control equipment segment, and utilize
Vacation's contracts with paging carriers to provide profitable paging services
to buyers of its remote control equipment. Also, in an effort to bring outside
funds and additional exposure to the Company, in November 2001 it entered into
discussions that culminated in the reverse acquisition of Peregrine, Inc. in
February 2002. Still, during 2001 and 2002, the Company had minimal funds
available for sales and marketing efforts. During those years, it spent less
than $5,000 per year in advertising related to sales efforts and employed one
equipment sales person. The Company also spent an additional $9,000 on general
advertising efforts.
Comparison of Years Ended December 31, 2002 and 2001
Revenue
Revenue increased from $239,268 during the year ended December 31, 2001 to
$870,360 during the year ended December 31, 2002, or 264%.
7
Equipment sales revenues increased 368% from $141,333 to $661,199 between
years, due mainly to two large orders received by the Company during September
2002 that were completed by December 31, 2002. Through the first nine months
of 2002, the Company's equipment sales had already more doubled from the same
period in the prior year, increasing from $102,378 to $292,533. During the
fourth quarter of 2002, the Company recognized revenues of approximately
$270,000 from a single sale of NightHawk rebooting devices, and approximately
$84,000 from a single sale of load controllers to an electric utility.
Airtime sales increased from $97,935 in 2001 to $209,161 in 2002. However,
revenues from 2001 were generated during a three-month period in 2001 after the
purchase of Vacation, while airtime revenues were generated for a full twelve-
month period in 2002. Monthly airtime sales revenues declined quarterly
throughout 2002, from an average of $32,465 during the last quarter of 2001 to
a monthly average of $21,140 during the last quarter of 2002. This was due to
the closing of retail paging locations operated by Vacation during 2002. Until
the paging services provided to remote control equipment customers of the
Company increases substantially, this trend of decreasing airtime revenues can
be expected to continue.
Cost of sales/Gross margin
Total cost of sales increased from $230,005 in 2001 to $474,623 in 2002, due to
increased volumes of equipment and airtime sales between periods as mentioned
above, but decreased as a percentage of total sales from 96% to 54%. Overall
gross margins increased from 4% in 2001 to 45% in 2002. The Company produced a
negative gross margin in 2001 on equipment sales, but produced a margin of 53%
on equipment sales made during 2002. The increase was due mainly to purchasing
benefits and operating efficiencies realized from greater volume production
between years. Gross margins on airtime sales decreased from 47% to 40% as
retail airtime sales volumes decreased with the closing of retail sales
locations.
Selling, general and administrative expenses
Selling, general and administrative expenses increased 104% from $650,019 in
2001 to $1,325,837 in 2002, due primarily related to increases in employee
costs, professional fees, stock compensation expense and amortization of
intangibles. From 2001 to 2002, the Company added several employees, including
two with the acquisition of Vacation in September 2001. As a result, salaries,
wages and other personnel-related expenses increased from $224,197 in 2001 to
$478,818 in 2002. Professional fees increased from $83,679 in 2001 to
$162,268, due mainly to legal and accounting fees associated with the reverse
acquisition of Peregrine, Inc. effective February 1, 2002. During 2002, the
Company recorded approximately $290,000 in expenses related to stock issuances
to consultants. Amortization expense increased from $44,510 in 2001 to
$156,288 in 2002 as a result of the amortization of intangible assets
associated with the purchase of Vacation over a 12-month period in 2002, as
opposed to a 3-month period in 2001.
Other operating expenses
The Company recognized a charge of $112,394 in 2002 for the impairment of the
customer base acquired from Vacation.
During 2001, the Company recognized consulting expense of $306,250 because it
issued 1,225,000 shares of its common stock to consultants for future services.
At the date of commitment, the total consulting cost was calculated to be
$1,225,000 ($1.00 per share), which was to be recognized over the one-year term
of the agreement. Therefore, an additional $918,750 of expense was
recognized during the year ended December 31, 2002. During the fourth quarter
of 2002, the Company recorded a reduction in stock compensation expense of
$1,225,000 related to the cancellation of the agreements, as management
determined that no services had been performed.
8
Also during 2001, the Company recognized consulting expense of $212,500 because
it issued an aggregate of 850,000 shares of its common stock to its then
outside directors for services. At the date of commitment, total compensation
cost was calculated to be $850,000, which was to be recognized over the one-
year term of the agreement. An additional $637,500 of consulting expense was
recognized during the year ended December 31, 2002. During the fourth quarter
of 2002, the Company canceled the issuance of 200,000 of these shares that were
returned by two of the directors to the Company, and reversed $200,000 of
associated consulting expenses as the associated services were never performed.
Interest expense
Although amounts outstanding under notes payable decreased only slightly
between December 31, 2001 and 2002, interest expense decreased from $164,470 in
2001 to $39,172 in 2002. During 2001, the Company recognized approximately
$135,000 in interest expense as a result of stock awards to both related party
and other creditors of the Company. Only $14,640 of interest expense
resulting from stock transfers was recorded in 2002.
Net loss/Net loss per share
The net loss for 2002 was $1,162,916, or $0.06 per share, compared to a net
loss for 2001 of $1,323,976, or $0.12 per share. As explained in the preceding
paragraphs, the reason for the reduction of the net loss between years was an
increase in sales, which produced additional gross profit, and the decrease in
interest expense recorded by the Company. These positive factors more than
offset increases in selling, general and administrative expenses between years.
Liquidity and Capital Resources
The Company's financial statements for year ended December 31, 2002 have been
prepared on a going concern basis, which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business. For 2002, the Company reported a net loss of $1,162,916 and as of
December 31, 2002 has a stockholders' deficit of $708,091. In addition, the
Company had a working capital deficiency of approximately $747,830 as of
December 31, 2002. The Independent Auditors' Report on the Company's financial
statements as of and for the year ended December 31, 2001 included a "going
concern" explanatory paragraph which means that the auditors expressed
substantial doubt about the Company's ability to continue as a going concern.
For the year ended December 31, 2002, the Company used $103,025 in net cash for
operating activities. This amount included the receipt of $432,600 from a
single customer that the Company has recorded as deferred revenue at year end.
During 2002, aside from using cash generated from normal operations, the
Company was able to meet its financial obligations principally through private
placements of its common stock in which it generated $521,650 in cash proceeds
in return for the issuance of 2,479,000 shares of common stock and 2,304,000
warrants. The Company also received approximately $65,000 in short term loan
proceeds from related parties during 2002 to assist it in meeting short term
cash needs in an effort to maintain production schedules for customers. Only
approximately $21,000 of these borrowings remained outstanding at December 31,
2002. To diminish the need for these short-term advances, during the fourth
quarter of 2002 the Company established purchase order and accounts receivable
financing to assist it in meeting the production costs of orders received. As
of December 31, 2002, the Company had $82,502 outstanding under its factoring
agreement. Approximately half of the Company's debt outstanding at December
31, 2002 is held by related parties, and was outstanding throughout 2002. The
Company was able to arrange for minimal payments to be made on the outstanding
amounts during fiscal 2002. However, no assurance may be given that it will be
able to continue to do so without receiving demands for payment.
9
The Company continues to be cash flow negative from operations, but has enjoyed
increasing cash flows from operations since the end of the third quarter of
2002 due to increasing sales volumes. However, until the Company generates
sufficient cash flows from operations to cover its recurring expenses and any
debt requirements, it will need to continue to raise funds through private or
public placements of its equity securities, or debt instruments. No assurance
can be given that it will be able to do so in an amount to sufficiently cover
its cash flow deficits. However, during April and May 2003, the Company did
receive $300,000 in exchange for stock, warrants and a 90-day convertible note.
The Company anticipates using some portion of these funds to increase its sales
and marketing efforts in an effort to increase revenues and cash flows. In
addition, as of December 31, 2002, the Company had 2,695,200 warrants
outstanding with exercise prices ranging from $0.20 to $1.50 per share that
expire from January 2003 through November 2004. These warrants, to the extent
they have exercise prices below current market prices, may represent a source
of cash funds for the Company in the future. However, no assurance can be
given that the Company will receive proceeds from the exercise of these
warrants, or from any other source, without which, the Company will have
insufficient funds to execute its business plan for the next twelve months.
As a result of funds raised and expected to be raised subsequent to December
31, 2002, the Company believes that it will be able to initiate a sales and
marketing plan designed to utilize direct sales efforts, as well as indirect
sales efforts through dealer networks and through improvements to its own web
site. To date, the majority of revenues have been generated from customers who
have found the Company via its web site, or through referrals from vendors or
existing customers.
The Company also believes that it can eventually generate additional revenues
by making improvements to existing products and designing new products. The
Company's current products utilize a paging medium, but the Company is now
working to develop a product that will utilize an alternative wireless medium,
such as satellite.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
We believe that the following are some of the more critical accounting policies
that currently affect our financial condition and results of operations:
- intangible assets
- stock based compensation
Intangible assets
Intangible assets include patent costs, a non-compete agreement and a customer
base, and are stated at cost. Amortization is provided by use of the straight-
line method over the estimated lives as follows:
Patents Ten years
Customer base Twenty six months
Non-compete agreement One year
The Company reviews these and any other long-lived assets for impairment
whenever events or changes in circumstances indicate their carrying amounts may
not be recoverable. Recoverability of an asset to be held and used is measured
by a comparison of the carrying amount of the asset to future undiscounted cash
flows expected to be generated by the asset. If the asset is considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the asset exceeds the fair value of the asset. Based on
management's review at December 31, 2002, the Company recorded a charge of
$112,394 in 2002 related to an impairment of the customer base.
10
Stock based compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation defines a fair-value based method of accounting for
stock-based employee compensation plans and transactions in which an entity
issues its equity instruments to acquire goods or services from non-employees,
and encourages but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has chosen
to continue to account for employee stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB No. 25") and related
interpretations.
ITEM 7. FINANCIAL STATEMENTS
The audited consolidated balance sheet of the Company as of December 31, 2002
and related consolidated statements of operations, stockholders' deficit and
cash flows for the years ended December 31, 2002 and 2001 are included,
following Item 14, in sequentially numbered pages numbered F-1 through F-19.
The page numbers for the financial statement categories are as follows:
Index Page
-----
Report of Independent Auditors............................................ F-1
Consolidated Balance Sheet as of December 31, 2002........................ F-2
Consolidated Statements of Operations for the Years Ended December
31, 2002 and 2001 ........................................................ F-3
Consolidated Statements of Stockholders' Deficit for the Years Ended
December 31, 2002 and 2001................................................ F-4
Consolidated Statements of Cash Flows for the Years Ended December 31,
2002 and 2001............................................................. F-5
Notes to Consolidated Financial Statements ............................... F-6
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 13, 2002, the client-auditor relationship between the Company and
Chisholm & Associates ("C&A") ceased as C&A was not reappointed as the
Company's auditor after a change in Company management, which occurred as a
result of the February 1, 2002 reverse merger with Peregrine, Inc. On April
29, 2002, the Company engaged Gelfond Hochstadt Pangburn, P.C. to serve as its
new independent accountants.
C&A's auditor's report on the financial statements of the Registrant for the
years ended December 31, 2001 and December 31, 2000, did not contain any
adverse opinion or disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope or accounting principles during the fiscal years
ended December 31, 2001 and December 31, 2000 except as follows: C&A's report
on the financial statement of the Company as of and for the years ended
December 31, 2001 and 2000, contained a separate paragraph stating "the
Company's recurring operating losses and lack of working capital raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to those matters are also described in Note 2.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty."
During the audits of the Company's financial statements for the years ended
December 31, 2001 and December 31, 2000 and any subsequent interim period
through the date of dismissal, there were no disagreements with C&A on any
matter of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure, which disagreements if not resolved to their
satisfaction would have caused them to make reference in connection with their
opinion to the subject matter of the disagreement.
11
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT OF 1934, AS AMENDED
The following persons are executive officers and directors of the Company:
H. Douglas Saathoff, 41 - Chief Executive Officer, Chief Financial Officer
H. Douglas "Doug" Saathoff joined the Company as its full time Chief Financial
Officer on January 1, 2003 after serving in that capacity on a part-time
consulting basis beginning in October 2002. On March 26, 2003, he was promoted
to the position of Chief Executive Officer. Prior to joining the Company, he
served as Chief Financial Officer for ATSI Communications, Inc. (AMEX: AI),
from June 1994 through July 2002 and as a Board Member of ATSI's publicly
traded subsidiary, GlobalSCAPE, Inc. (GSCP.OB) from April 1997 through June
2002. During his tenure at ATSI, he was directly responsible for establishing
and monitoring all accounting, financial, internal reporting and external
reporting functions, and had primary responsibility for fundraising efforts.
ATSI raised over $60 million in debt and equity financing from both individuals
and institutions during Doug's tenure, and moved from the Canadian OTC market
to the U.S. OTC market and eventually to a listing on the American Stock
Exchange in February 2000. ATSI grew from San Antonio-based start-up with 11
employees to an international operation with in excess of 500 employees and
operations in the U.S., Mexico, Costa Rica, Guatemala and El Salvador with
annual revenues in excess of $60 million. He was instrumental in the
acquisition of subsidiaries and customer bases, as well as the divestiture of
GlobalSCAPE in June 2002. Prior to joining ATSI, Doug served as the Accounting
Manager, Controller and Financial Reporting Manager for U.S. Long Distance
Corp. from 1990 to 1993. While at USLD he was responsible for supervising all
daily accounting functions, developing internal and external financial
reporting of budgeted and actual information, and for preparing financial
statements for shareholders, lending institutions and the Securities and
Exchange Commission. Doug also served as Senior Staff Accountant for Arthur
Andersen & Co. where he planned, supervised and implemented audits for clients
in a variety of industries, including telecommunications, oil &gas and
financial services. Doug graduated from Texas A&M University with a Bachelor of
Business Administration degree in Accounting, and has passed the CPA exam.
Arlen Felsen, 43 - Chief Information Officer, Board Member
Mr. Felsen has been a member of the Board since February 2002, and was re-
elected in April 2002. He has an extensive background in the paging industry
including in depth knowledge of paging technology. In 1991 he co-founded
(along with Amy Felsen) Vacation Communication, Inc. d.b.a. Gotta Go Wireless,
retail and wholesale paging and wireless provider. He built the company into a
leading paging provider to the Denver metropolitan area and expanded the
operation throughout Colorado, Utah and Idaho. Within a few years Gotta Go
Wireless had significant market share in this region of the U.S. When the
Company purchased Gotta Go in 2001, Mr. Felsen joined the Company to oversee
product development.
Myron Anduri, 47 - Vice President of Sales
Mr. Anduri joined the Company in January 2000. From 1999 to 2000 he was Vice
President-New Business Development for Kyocera Solar Inc. of Scottsdale,
Arizona. While with Kyocera, he worked to develop new market areas for the
company's solar power products. From 1997 to 1999 he served as Vice President-
Telecommunications Division, a $21 million international unit, where he managed
all sales and engineering efforts. From 1993-1997 Mr. Anduri was Senior Vice
President-Marketing and Sales for Photocomm Inc. a Nasdaq-traded company based
in Scottsdale Arizona, which was ultimately acquired by Kyocera in 1997. He
also served as Vice President-Industrial Division of Photocomm from 1989-1993
and was the Rocky Mountain Regional Manager from 1987-89. Mr. Anduri holds a
BA in Economics from Colorado State University.
12
Max Polinsky, 45 - Chairman of the Board
Mr. Polinsky was elected a member the Board in April 2002 and is a member of
our audit committee. He is a director and principal of Venbanc, Inc., an
investment and merchant bank located in Winnipeg, Manitoba Canada that he
founded with a partner in 1994. Venbanc specializes in the structuring and
financing of start-up companies and provides follow-up financial and management
advisory assistance. It has successfully funded and taken public several
companies in Canada and the United States in the past seven years. Prior to
this Mr. Polinsky was the general manager of City Machinery Ltd., a nationwide
power transmission parts distributor with offices across Canada. He began his
career as a stockbroker at Canarim Investment Corp. (now Canaccord Capital)
in 1982. Mr. Polinsky graduated with honors from the University of Manitoba
with a degree in Business Administration, Finance Major.
Steven Goodbarn, 45 - Board Member
Mr. Goodbarn was elected a member of the Board in April 2002 and is the Chair
of the Audit Committee. He was chief financial officer of Janus Capital
Corporation from 1992 until late 2000. During that time, he was a member of the
executive committee and served on the board of directors of many Janus
corporate and investment entities. Mr. Goodbarn is a CPA and spent 12 years at
Price Waterhouse prior to joining Janus. Steve is also a member of the Board
of Directors of EchoStar Communications Corp.
Patricia Thompson, 59 - Board Member
Ms. Thompson was elected a member of the Board in April 2002 and is the Chair
of our Compensation Committee. She has served as Senior Vice President of
Daniels & Associates since 1991. During Ms. Thompson's tenure at Daniels &
Associates, she has completed hundreds of transactions for small, independently
owned cable companies as well as larger multiple systems operators. Over the
years, she has won several annual Daniels awards for completing the most
transactions within a given year. Prior thereto, Ms. Thompson owned and
operated Pat Thompson & Co. for approximately ten years, the nation's first
woman-owned cable television brokerage company. Ms. Thompson currently serves
as a Director on the Small Cable Business Association Board and is an NCTA-
CablePac Committee Member.
Patrick A. Gorman, 38 - Board Member
Mr. Gorman was elected a member of the Board in April 2002, and is a member of
the compensation committee. He is the managing director of Gorman and
Associates, Inc., a strategic consulting firm for corporate and government
affairs. Since its inception, the company has been dedicated to being the
preeminent business development firm for companies seeking to do business with
the Fortune 500 as well as the advisory firm of choice in understanding the
federal government in Washington, D.C. Mr. Gorman's focus at Gorman and
Associates, Inc. includes law and the legislative process, communications,
government relations, and operations. Over the last 10 years, he has advised
corporations, NGOs, non-profits, and individuals on issues pertaining to
criminal law, the environment, telecommunications, international trade, fund
raising, community development, media relations, and alternative dispute
resolution. Mr. Gorman is a member of the Advisory Board of New Media
Strategies, Inc., an Internet service provider focused on public relations,
communications, and viral marketing. Mr. Gorman is also a Board member of the
Echo Hill Campership Fund, a local non-profit whose mission is to send the
neediest, very low-income, inner-city youths to camp on the Chesapeake Bay. Mr.
Gorman is admitted to practice law in Maryland and the District of Columbia and
has successfully appeared at the administrative, district, circuit, and
appellate court levels.
13
Herbert I. Jacobson, 72 - Board Member
Mr. Jacobson has been a member of the Board since February 2002, and was re-
elected in April 2002. He is an entrepreneur who has built several businesses
from the ground up. In 1984 he founded Advanced Communication Services and
Aaron Communication Services, both sales and service companies in paging and
cable. He started PCT in 1992 as a progression into the wireless control
industry. He also was founder of the Children's Metabolic Research Foundation
and a Director of the National Gaucher Foundation. He volunteers at the Denver
Museum of Nature & Science and mentors senior citizens on the use of the
Internet. He served in Army Finance and taught American history, political
science, business and literature at the high school level. Mr. Jacobson is a
graduate of Montclair State University and completed graduate level coursework
at Denver University and the University of Florida.
Steven Jacobson, 39 - Board Member
Mr. Jacobson has been a member of the Board since February 2002, and was re-
elected in April 2002. He is a member of the compensation committee, and was
instrumental in the development of the Company from its inception. In March of
1992 he began as Vice President of Marketing, assumed the roles of Chief
Operating Officer and Chief Financial Officer in 1995, and later became the
Chief Executive Officer of the Company. On March 26, 2003, he resigned as
Chief Executive Officer, but remains at the Company as an employee. From 1987-
1992 he was a legislative aide to US Senator Hank Brown and Congressman James
Schuer where his responsibilities included the oversight and coordination of
joint environmental policy legislation. Mr. Jacobson has a joint MA from
Rutgers and Princeton in Public Policy and Finance, and a BA from Colorado
College. He received a Masters of Business Administration (MBA) through a
joint program from the University of Colorado and Columbia University.
Robert Woodworth, 51 - Board Member
Mr. Woodworth was elected a member of the Board in April 2002. He is a capital
markets financial specialist, with extensive experience in arranging capital
for emerging companies. He is a former managing director of Trust Company of
America, and has served as a director for several mutual funds and investment
advisory firms. Bob has over twenty-five (25) years experience in the
financial services industry.
Each member of the Board of Directors was elected for a one-year term on April
29, 2002. Herbert I. Jacobson is the father of Steven Jacobson.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The following officers and directors did not file the indicated forms for the
indicated transactions or events. These transactions and events were reported
on Form 5 filings made subsequent to December 31, 2002, with respect to the
Company's fiscal year 2002.
H. Douglas Saathoff did not file a Form 4 upon joining the Company as its Chief
Financial Officer, and did not file Form 3's for six transactions in which he
became a beneficial owner of securities.
Arlen Felsen did not file a Form 4 subsequent to the merger of PCT with the
Company on February 1, 2002, and did not file a Form 3 for one transaction in
which he became a beneficial owner of securities.
Max Polinsky did not file a Form 4 subsequent to his election to the Board of
Directors on April 29, 2002.
Steven Goodbarn did not file a Form 4 subsequent to his election to the Board
of Directors on April 29, 2002, and did not file a Form 3 for two transactions
in which he became a beneficial owner of securities.
Patricia Thompson did not file a Form 4 subsequent to her election to the Board
of Directors on April 29, 2002, and did not file a Form 3 for one transaction
in which she became a beneficial owner of securities.
14
Patrick Gorman did not file a Form 4 subsequent to his election to the Board of
Directors on April 29, 2002.
Herbert I. Jacobson did not file a Form 4 subsequent to the merger of PCT with
the Company on February 1, 2002, and did not file a Form 3 for two transactions
in which he became a beneficial owner of securities.
Steven Jacobson did not file a Form 4 subsequent to the merger of PCT with the
Company on February 1, 2002, and did not file a Form 3 for three transactions
in which he became a beneficial owner of securities
Bob Woodworth did not file a Form 4 subsequent to his election to the Board of
Directors on April 29, 2002.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
Annual Compensation Long Term Compensation
Awards Payouts
Name and Year Salary Bonus Other annual Restricted Securities Underlying LTIP All other
principal compensation stock award Options/SARS (#) payouts compensation
position ($) ($) ($) ($)
Steven Jacobson
Chief Executive
Officer (a) 2002 $177,000 (b) $ - $ 4,966 (c) $ - 500,000 $ - $ -
Notes:
(a)Steven Jacobson was Chief Executive Officer of PCT when PCT was acquired
by the Company effective February 1, 2002. He became Chief Executive
Officer of the Company subsequent to this acquisition.
(b)Salary includes the issuance of 1,000,000 shares valued at $0.14 per
share issued in lieu of cash compensation, and $37,000 in cash
compensation.
(c)Amount includes $4,966 in personal expenses.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
Beneficial Owners of More Than 5%
of NightHawk Systems, Inc. Common Stock
Title of class Name and address of beneficial owner Amount and nature of beneficial owner Percent of class
Common stock Steven Jacobson 5,550,100 (a)(b) 25%
7995 E. Mississippi, #E6
Denver, Co. 80247
Common stock Herbert I. Jacobson 3,001,000 (c) 14%
1011 S. Valentia St., #87
Denver, Co. 80247
15
Notes:
(a)Includes 450,000 shares under options, none of which vest within 60 days.
(b)Includes 550,000 shares held in a trust that expires on 6/11/06 for Aaron
Guth and 550,000 shares held in a trust that expires on 3/31/09 for Adam
Guth. Steve Jacobson acts as trustee for both trusts, and has all rights
afforded any shareholder, including voting rights, until the trusts expire.
(c)Includes 1,500,500 shares held in the name of Mr. Jacobson's wife, Sharon
Jacobson.
Security Ownership of Management
Title of class Name and address of beneficial owner Amount and nature of beneficial owner Percent of class
Common stock Steven Jacobson 5,550,100 (a), (b) 25%
7995 E. Mississippi, #E6
Denver, Co. 80247
Common stock Herbert I. Jacobson 3,001,000 14%
1011 S. Valentia St., #87
Denver, Co. 80247
Common stock Max Polinsky 500,000 2%
138 Portage Ave. East, Ste. 406
Winnipeg, Manitoba R2COA1
Common stock Steven Goodbarn 676,000 (c) 3%
93 Falcon Hills Dr
Highlands Ranch, Co 80126
Common stock Patricia Thompson 200,000 (d) 1%
400 E. Third, #606
Denver, Co 80203
Common stock Arlen Felsen 575,000 (e) 3%
PO Box 260980
Highlands Ranch, Co 80163
Common stock Patrick Gorman - 0%
1666 K Street NW, Ste 500
Washington, D.C. 20006
Common stock Bob Woodworth - 0%
7100 E. Belleview, Ste. 203
Greenwood Village, Co 80111
Common stock Directors and officers as a group 12,000,424 54%
Notes:
(a)Includes 450,000 shares under options, none of which vest within 60 days
(b)Includes 550,000 shares held in trust for Aarom Guth which expires on
6/11/06 and 550,000 shares held in trust for Adam Guth which expires on
3/31/09. Steve Jacobson acts as trustee for both, and has all rights
afforded any shareholder, including voting rights, until the trusts
expire.
(c)Includes 335,000 warrants currently exercisable
(d)Includes 100,000 warrants currently exercisable
(e)Includes 250,000 options exercisable in thirds on 1/1/04, 1/1/05 and
1/1/06
16
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 30, 2001, PCT acquired certain assets and assumed certain
liabilities of Vacation Communication, Inc., a Colorado corporation, in
exchange for $50,000 cash, 150,000 shares of the Company's common stock valued
at $150,000, and notes payable of $183,135, which included a non compete
agreement. Vacation Communication was owned by Arlen Felsen and his wife. Mr.
Felsen is a board member and officer of the Company. At December 31, 2002, the
balance owed was $121,422, and in 2002 the Company made payments totaling
$48,718 towards the notes. In connection with the acquisition of Vacation
Communication, Inc. the Company entered into employment agreements with Mr. and
Mrs. Felsen and another employee. The agreement with Mr. Felsen calls for
annual salary of $25,000 through February 2005. The agreements with Mrs. Felsen
and the employee call for annual salaries of $25,000 and $27,000,
respectively. In addition, the agreements provide for covenants-not-to-compete
for a period of one year following separation from the Company.
In October 2001, PCT issued an aggregate of 850,000 shares of its common stock
to its outside directors for services. The directors were Charles McCarthy, Jr,
Thomas Betterton, Lawrence Brady, Allen Gordon, Edwin Meese III, William Odom,
Larry Pressler and Max Polinsky. At the date of commitment, total compensation
cost was calculated to be $850,000, which is to be recognized over the one-year
term of the agreement. During the fourth quarter of 2002, the Company canceled
the issuance of 200,000 of these shares that were returned by Mr. Gordon and
Mr. Odom to the Company, and reversed $200,000 of associated consulting
expenses as these services were never performed. With the exception of Mr.
Polinsky, the other directors of PCT listed above resigned in April 2002.
In December 2001, PCT entered into an employment agreement with Steve Jacobson,
its president/ chief executive officer. The agreement called for an annual
salary of $150,000 and a grant of options to purchase 450,000 shares of PCT's
common stock. These options were never issued. Additionally, under the
agreement, PCT was obligated to make monthly payments on the officer's student
loans in the amount of $460. The agreement also provided for a covenant-not-
to-compete for a period of one year following separation from the Company. At
a meeting held in December 2002, the Board of Directors of the Company voted to
terminate the existing agreement effective January 1, 2003 and to replace it
with a new one-year agreement paying Mr. Jacobson $72,000 per year. This
agreement was not executed. The Board also voted to award Mr. Jacobson options
to purchase 450,000 shares of common stock on January 1, 2003. No option
agreement has been executed. At a meeting of the Board of Directors held on
March 26, 2003, the Board accepted Steve Jacobson's resignation as chief
executive officer.
As of December 31, 2001, PCT had a payable to Steve Jacobson of $92,780 for un-
reimbursed business expenses incurred by him over a period of several years.
Also as of December 31, 2001 PCT had a receivable due from him of $118,629 as a
result of company payments of personal expenses incurred by him over a period
of several years. During 2002, the Company eliminated the amount owed to Mr.
Jacobson by making payments of $97,746 to various entities on his behalf.
Funds paid in excess of the amount owed to Mr. Jacobson were expensed as salary
to Mr. Jacobson.
In December 2001, PCT entered into an employment agreement with Mark Brady, the
son of Lawrence Brady, a director of PCT at the time, to be its chief financial
officer. The agreement called for an annual salary of $120,000 and a grant of
options to purchase 400,000 shares of PCT's common stock. These options were
never issued. In addition, the agreement provided for a covenant-not-to-
compete for a period of one year following separation from PCT. Subsequent to
year end the individual and PCT terminated their agreement. Management of the
Company does not believe there are any amounts owing to Mr. Brady under the
agreement at December 31, 2002.
17
In December 2001, PCT entered into an employment agreement with its vice
president of marketing, Celia Gray. The agreement called for an annual salary
of $75,000 and a grant of options to purchase 150,000 shares of PCT's common
stock. These options were never issued. In addition, the agreement provided
for a covenant-not-to-compete for a period of one year following separation
from PCT. During 2002, Ms. Gray and the Company terminated their agreement.
Management of the Company does not believe there are any amounts owing to Ms.
Gray under the agreement at December 31, 2002.
In December 2001, PCT entered into an employment agreement with its vice
president of sales, Myron Anduri. The agreement called for an annual salary of
$60,000, and the payment of commissions on sales of the Company's products.
At a meeting held in December 2002, the Board of Directors of the Company voted
to terminate the existing agreement effective January 1, 2003 and to replace it
with a new one-year agreement paying Mr. Anduri $75,000 per year. This
agreement has not been executed. As of December 31, 2002, the Company owed Mr.
Anduri $11,100 in salary and $8,365 in commissions under the old contract.
At a meeting held in December 2002, the Board of Directors voted to issue a
one-year contract to the Company's chief financial officer, H. Douglas
Saathoff, effective January 1, 2003 including an annual salary of $120,000.
The Board also voted to award Mr. Saathoff options to purchase 500,000 shares
of common stock effective January 1, 2003. These agreements have not been
executed. At a meeting of the Board of Directors held on March 26, 2003, Mr.
Saathoff was named Chief Executive Officer of the Company.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) 99.1 Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) None
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures:
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in the reports filed under the Exchange
Act is accumulated and communicated to management, including the Chief
Executive Officer and the Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. Within the 90 days prior to the
filing of this report, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and its Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon and as of the date of that evaluation, the Chief
Executive Officer, who is also the Chief Financial Officer, concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports the Company files and
submits under the Exchange Act is recorded, processed, summarized and reported
as and when required.
18
(b) Changes in Internal Controls:
Prior to January 1, 2003, the Company did not maintain adequate internal
controls related to treasury activities. Throughout 2002 and until March 26,
2003, the Company's former Chief Executive Officer was responsible for, among
other duties, opening the mail, making accounting entries, writing checks and
producing financial reports. Disbursements of cash and stock issuances were
made during this time period that have not been substantiated as relating to
Company business, or were made in error. In addition, filings made with the
Internal Revenue Service and other government agencies did not accurately
reflect activities of the Company during this time period. During the course
of the audit of the Company's 2002 fiscal year, unsubstantiated payments were
adjusted first as payments against amounts previously owed to the former Chief
Executive Officer and then to salary expense to the former Chief Executive
Officer in the accompanying audited financial statements for the year ended
December 31, 2002. See related disclosure in Item 12. Amounts owed to the
Internal Revenue Service and other government agencies have been estimated and
included in accrued expenses in the accompanying audited financial statements
for the year ended December 31, 2002. Subsequent to the addition of a Chief
Financial Officer and accounting staff in January 2003, the Board of Directors
and management of the Company implemented control procedures related to
treasury activities at the Company, including, but not limited to, dual
signature requirements on checks of $5,000 and above and board authorization of
all stock issuances. At the meeting of the Board of Directors held on March 26,
2003, the former Chief Executive Officer resigned, and the Chief Financial
Officer was appointed as his replacement by the Board of Directors.
Consequently, the same person currently holds both the position of Chief
Executive Officer and Chief Financial Officer, but a process has been initiated
to segregate responsibilities in order to reduce the opportunities for a single
person to be in a position to both perpetrate and conceal errors or
irregularities in the normal course of business. In addition, the Chief
Executive Officer and the audit committee have initiated a process to establish
and implement a written policy on disclosure controls and procedures to be in
place as soon as possible.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, NightHawk Systems, Inc. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NIGHTHAWK SYSTEMS, INC.
Dated: May 28, 2003 By: /s/ H. Douglas Saathoff
------------------------
H. Douglas Saathoff
Chief Executive Officer
and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of NightHawk
and in the capacities and on the date indicated:
Signature Title Date
--------- ------ --------
/s/ Steven Jacobson Director May 28, 2003
-------------------------
Steven Jacobson
/s/ Arlen Felsen Director May 28, 2003
-------------------------
Arlen Felsen
/s/ Herbert I. Jacobson Director May 28, 2003
-------------------------
Herbert I. Jacobson
/s/ Max Polinsky Director May 28, 2003
--------------------------
Max Polinsky
/s/ Patricia Thompson Director May 28, 2003
--------------------------
Patricia Thompson
/s/ Patrick Gorman Director May 28, 2003
--------------------------
Patrick Gorman
/s/ Steven R. Goodbarn Director May 28, 2003
--------------------------
Steven H. Goodbarn
/s/ Bob Woodworth Director May 28, 2003
--------------------------
Bob Woodworth
20
CERTIFICATION OF PERIODIC REPORT
I, H. Douglas Saathoff, certify that:
1. I have reviewed this annual report on Form 10-KSB of NightHawk
Systems, Inc. (the "Registrant");
2. Based on my knowledge, this annual 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
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. I am 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. 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. I have indicated in this annual report in Item 14 (b) that 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 28, 2003
/s/ H. DOUGLAS SAATHOFF
-----------------------------------
H. Douglas Saathoff
Chief Executive Officer and
Chief Financial Officer
21
INDEPENDENT AUDITORS' REPORT
Board of Directors
Nighthawk Systems, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheet of NightHawk
Systems, Inc. and subsidiary as of December 31, 2002, and the related
consolidated statements of operations, changes in stockholders' deficit and
cash flows for each of the years in the two-year period ended December 31,
2002. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nighthawk Systems,
Inc. and subsidiary as of December 31, 2002, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 1 to
the consolidated financial statements, the Company incurred net losses of
$1,162,916 and $1,323,976 during the years ended December 31, 2002 and 2001,
respectively, and has a stockholders' deficit and working capital deficiency
of $708,091 and $747,830, respectively, at December 31, 2002. These
conditions raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans with regard to these matters are also
described in note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
April 9, 2003
F-1
Nighthawk Systems, Inc.
Consolidated Balance Sheet
December 31, 2002
ASSETS
Current assets :
Cash $ 428,677
Accounts receivable, net of allowance for
doubtful accounts of $6,035 205,290
Inventories 59,708
-----------------
Total current assets 693,675
Furniture, fixtures and equipment, net (Note 4) 17,750
Intangible assets, net (Note 5) 43,115
-----------------
$ 754,540
=================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities :
Accounts payable $ 340,122
Accrued expenses 191,945
Lines of credit (Note 8) 19,842
Notes payable (Note 9)
Related parties 206,369
Factoring arrangement 82,502
Other 119,213
Deferred revenue 432,600
Other related party payable 48,912
-----------------
Total current liabilities 1,441,505
Long term debt, related party (Note 9) 21,126
-----------------
Total liabilities 1,462,631
-----------------
Commitments and contingencies (Notes 3,6,10 and 11)
Stockholders' deficit (Notes 10 and 11):
Preferred stock; $0.001 par value; 5,000,000
shares authorized; none issued and outstanding
Common stock; $0.001 par value; 50,000,000
shares authorized; 21,333,780 issued and outstanding 21,334
Additional paid- in capital 2,517,338
Accumulated deficit (3,128,134)
Receivable from stockholder (118,629)
-----------------
Total stockholders' deficit (708,091)
-----------------
$ 754,540
=================
The accompanying notes are an integral part of these financial statements.
F-2
Nighthawk Systems, Inc.
Consolidated Statements of Operations
Years ended December 31,
------------------------
2002 2001
---- ----
Product sales, net $ 661,199 $ 141,333
Airtimes sales, net 209,161 97,935
----------------- -----------------
870,360 239,268
----------------- -----------------
Cost of goods sold 349,075 178,315
Cost of airtime sold 125,548 51,690
----------------- -----------------
474,623 230,005
----------------- -----------------
Gross profit 395,737 9,263
Selling, general and administrative expenses 1,325,837 650,019
Amortization of deferred compensation (Note 10) 1,556,250 518,750
Reversal of 2001 deferred compensation (Note 10) (368,750) -
Reversal of 2002 deferred compensation (Note 10) (1,106,250) -
Impairment of customer base (Note 2) 112,394 -
----------------- -----------------
Loss from operations (1,123,744) (1,159,506)
----------------- -----------------
Interest expense :
Related parties 17,795 113,344
Other 21,377 51,126
----------------- -----------------
39,172 164,470
----------------- -----------------
Net loss $ (1,162,916) $ (1,323,976)
================= =================
Net loss per basic and diluted common share $ (0.06) $ (0.12)
================= =================
Weighted average shares outstanding 18,128,254 11,494,013
================= =================
The accompanying notes are an integral part of these financial statements.
F-3
Nighthawk Systems, Inc.
Consolidated Statements of Stockholders' Deficit
For the Years Ended December 31, 2002 and 2001
Additional
Preferred Stock Common Stock Paid-in Accumulated Deferred Stockholder
--------------- ------------
Shares Amount Shares Amount Capital Deficit Compensation Receivable Total
------ ------ ------ ------ ------- ------- ----------------------- -----
Balances, 9,250,000 $9,250 $(1,066) $(641,242) $(27,349) $(660,407)
December 31,
2000
Preferred stock 103,000 $432,600 -
issued in
satisfaction of
notes payable
Common stock 800,000 800 7,200 8,000
issued for
services
Common stock 1,500,000 1,500 133,500 135,000
and options
issued for
interest
expense
Common stock 150,000 150 149,850 150,000
issued for
acquisition of
assets of
Vacation
Communication,
Inc.
Private 391,200 391 375,346 375,737
placement of
common stock
(net of
offering costs)
Common stock 2,075,000 2,075 2,072,925 $(2,075,000) -
issued for
services
Amortization of 518,750 518,750
deferred
compensation
costs
Conversion of (103,000) (432,600) 515,000 515 432,085 432,600
preferred stock
to common stock
Advances to (91,280) (91,280)
stockholder
Net loss (1,323,976) (1,323,976)
------- ------- ---------- ------ --------- --------- --------- ------- ---------
December 31, 14,681,200 14,681 3,169,840 (1,965,218) (1,556,250) (118,629) (455,576)
2001
Common stock 2,479,000 2,479 519,171 521,650
issued for cash
Common stock 1,473,324 1,473 285,027 286,500
issued for
services
Transfer of 21,000 21,000
common stock by
stockholder for
obligations of
the Company
Common stock 4,600,256 4,600 (4,600) -
retained by
Peregrine, Inc.
Amortization of 81,250 81,250
deferred
compensation
cost
Cancellation of (1,900,000) (1,900) (1,473,100) 1,475,000 -
agreements
under deferred
compensation
Net loss (1,162,916) (1,162,916)
------- ------- ---------- ------ --------- --------- --------- ------- ---------
December 31, 21,333,780 $21,334 $2,517,338 $(3,128,134) $ - $(118,629) $(708,091)
2002
======= ======= ========== ====== ========= ========= ========= ======= =========
The accompanying notes are an integral part of these financial statements.
F-4
Nighthawk Systems, Inc.
Consolidated Statements of Cash Flows
Years ended December 31,
------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net loss $ (1,162,916) $ (1,323,976)
------------ ------------
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 156,288 44,509
Provision for bad debts 6,035 -
Common stock issued for services 286,500 8,000
Common stock issued for interest - 135,000
Amortization of deferred compensation (Note 10) 1,556,250 518,750
Reversal of 2001 deferred compensation (Note 10) (368,750) -
Reversal of 2002 deferred compensation (Note 10) (1,106,250) -
Impairment of customer base (Note 2) 112,394 -
Change in assets and liabilities, net of business acquisition:
Decrease (increase) in accounts receivable (200,468) 2,971
Decrease (increase) in inventories 6,873 (52,481)
Increase in accounts payable 54,830 272,059
Increase in accrued expenses 118,257 59,533
Increase in deferred revenue 432,600 -
Net decrease in other assets and liabilities 5,332 -
------------ ------------
Total adjustments 1,059,891 988,341
------------ ------------
Net cash used in operating activities (103,025) (335,635)
------------ ------------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (6,732) (3,373)
Increase in patent applications - (2,800)
Cash paid in business acquisition (Note 3) - (25,232)
------------ ------------
Net cash used in investing activities (6,732) (31,405)
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable, related parties 64,526 67,000
Payments on notes payable, related parties (141,513) (16,052)
Proceeds from factoring arrangement, net 82,502 -
Proceeds from notes payable, other - 75,000
Payments on notes payable, other (18,529) (52,000)
Net advances (payments) on lines of credit (158) 15,232
Payments on other related party payable (355) -
Advances to stockholder - (91,280)
Net proceeds from issuance of common stock 521,650 375,737
------------ ------------
Net cash provided by financing activities 508,123 373,637
------------ ------------
Net increase in cash 398,366 6,597
Cash, beginning of year 30,311 23,714
------------ ------------
Cash, end of year $ 428,677 $ 30,311
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 13,345 $ 15,495
============ ============
Supplemental disclosure of non-cash investing and financing activities:
Transfer of common stock by stockholder for obligations
of the Company (Note 10) $ 21,000
============
Note payable issued to related party in satisfaction of
account payable $ 25,000
============
Series A, 7% convertible preferred stock issued in
satisfaction of notes payable $ 432,600
============
Purchase of assets of Vacation Communication, Inc.
Customer base $ 252,856
Non-compete agreement 85,337
Accounts receivable 6,121
Furniture, fixtures and equipment 8,720
Deposits 5,333
Fair value of common stock issued (150,000)
Notes issued to seller (183,135)
------------
Net cash paid $ 25,232
============
The accompanying notes are an integral part of these financial statements.
F-5
NIGHTHAWK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
1. Organization, going concern, results of operations and
management's plans:
Organization:
NightHawk Systems, Inc. ("NightHawk" or "the Company"), a Nevada
corporation, designs and manufactures easy to use, ready to use,
wireless products that can remotely control virtually any electrical
device from any location. The Company has developed a specialized
circuit-board which can receive wireless signals and switch electrical
power. In its simplest form, the technology gives the user the
ability to turn devices "on" or "off" from or to remote sites.
In November 2001, the Company sold the assets and liabilities of its
investment in a majority owned subsidiary to a major stockholder. On
February 1, 2002, the Company acquired Peregrine Control Technologies,
Inc. ("PCT"). The transaction represented a reverse acquisition of
the Company by PCT, since PCT owned approximately 76% of the post
acquisition shares of the consolidated entity immediately after the
completion of the transaction. At the date of the transaction, the
Company was a shell company with no net assets. For accounting
purposes, the acquisition was treated as an acquisition of the Company
by PCT and a recapitalization of PCT. The historical stockholders'
deficit of PCT has not been retroactively restated since the shares
exchanged in the transaction were on a one-for-one basis. The
accompanying consolidated financial statements include the accounts of
NightHawk Systems, Inc., and its subsidiary, PCT.
PCT was incorporated as a Colorado corporation in 1992. In September
2001, the Company purchased certain assets and assumed certain
liabilities of Vacation Communication, Inc. (dba Gotta Go Wireless), a
Colorado corporation, engaged in providing wireless paging airtime and
in product sales. Through Vacation Communication, the Company is able
to provide paging services to customers that purchase its remote
control products.
Going concern, results of operations and management's plans:
The Company incurred a net loss of $1,162,916 during the year ended
December 31, 2002 and has a stockholders' deficit and working capital
deficiency of $708,091 and $747,830, respectively, as of December 31,
2002. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Although no assurance can be
given that such plans will be successfully implemented, management's
plans to address these concerns include:
1. Raising working capital through additional borrowings.
2. Raising equity funding through sales of the Company's common
stock
3. Implementation of a sales and marketing plan.
4. Development of new designs and markets for the Company's
products.
F-6
Subsequent to December 31, 2002, the Company believes that it will be
able to raise funds through the private placement of common stock and
warrants, and/or the issuance of convertible notes. In addition, as of
December 31, 2002, the Company had 2,695,200 warrants outstanding with
exercise prices ranging from $0.20 to $1.50 per share that expire from
January 2003 through November 2004. These warrants, to the extent
they have exercise prices below current market prices, may represent a
source of cash funds for the Company in the future. See Note 14.
As a result of funds raised and expected to be raised subsequent to
December 31, 2002, the Company believes that it will be able to
initiate a sales and marketing plan designed to utilize direct sales
efforts, as well as indirect sales efforts through dealer networks and
through improvements to its own web site. To date, the majority of
revenues have been generated from customers who have found the Company
via its web site, or through referrals from vendors or existing
customers.
The Company also believes that it can eventually generate additional
revenues by making improvements to existing products and designing new
products. The Company's current products utilize a paging medium, but
the Company is now working to develop a product that will utilize an
alternative wireless medium, such as satellite.
The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of assets or the
amounts of liabilities that might be necessary should the Company be
unsuccessful in implementing these plans, or otherwise be unable to
continue as a going concern.
2. Summary of significant accounting policies
Cash and cash equivalents
Cash on hand and in banks, together with marketable securities having
original maturities of three months or less, are classified as cash
and cash equivalents by the Company.
Concentration of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. Receivables arising from sales to customers are not
collateralized and, as a result, management continually monitors the
financial condition of its customers to reduce the risk of loss. At
December 31, 2002, the Company had $205,290 in accounts receivable,
net of the allowance for doubtful accounts. Approximately $113,000 of
this balance was from one customer. The entire balance was collected
subsequent to December 31, 2002. This same customer represented 36%
of the Company's revenue during 2002. The Company was not dependent on
any single industry segment for its revenues.
During 2002 and 2001, the Company's largest supplier accounted for
approximately 22% and 30% of purchases of pre-manufactured component
materials. During 2002, two customers accounted for approximately 36%
and 10% of sales, respectively.
Inventories
Inventories consist of parts and pre-manufactured component materials
and finished goods. Inventories are valued at the lower of cost or
market using the first-in, first-out (FIFO) method.
F-7
Property and equipment
Property and equipment are recorded at cost. Depreciation is recorded
using the straight-line method over the estimated useful lives of five
to seven years. Maintenance and repairs are expensed as incurred and
improvements are capitalized. Upon sale or retirement of assets, the
cost and related accumulated depreciation or amortization are
eliminated from the respective accounts and any resulting gains or
losses are reflected in operations.
Intangible assets
Intangible assets include patent costs, a non-compete agreement and a
customer base, and are stated at cost. Amortization is provided by
use of the straight-line method over the estimated lives as follows:
Patents Ten years
Customer base Twenty-six months
Non-compete agreement One year
The Company reviews these and any other long-lived assets for
impairment whenever events or changes in circumstances indicate their
carrying amounts may not be recoverable. Recoverability of an asset to
be held and used is measured by a comparison of the carrying amount of
the asset to future undiscounted cash flows expected to be generated by
the asset. If the asset is considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount
of the asset exceeds the fair value of the asset. Based on
management's review at December 31, 2002, the Company recorded a charge
of $112,394 in 2002 related to an impairment of the customer base.
Revenue recognition
Revenue from product sales is recognized when all significant
obligations of the Company have been satisfied. Revenues from
equipment sales are recognized either on the completion of the
manufacturing process, or upon shipment of the equipment to the
customer, depending on the Company's contractual obligations. The
Company occasionally contracts to manufacture items, bill for those
items and then hold them for later shipment to customer-specified
locations. In these instances, the Company will bill the customer
first for items manufactured, and then later for shipping. Revenue
from paging airtime sales is recognized over the period of use on a
monthly basis.
Provision for doubtful accounts
The Company reviews accounts receivable periodically for
collectibility and establishes an allowance for doubtful accounts and
records bad debt expense when deemed necessary.
Advertising:
Advertising costs are expensed as incurred. For the years ended
December 31, 2002 and 2001, advertising costs were approximately
$14,000 and $34,100, respectively.
F-8
Income taxes
Deferred tax assets and liabilities are recorded for the estimated
future tax effects of temporary differences between the tax basis of
assets and liabilities and amounts reported in the accompanying
balance sheets, and for operating loss and tax credit carry forwards.
The change in deferred tax assets and liabilities for the period
measures the deferred tax provision or benefit for the period.
Effects of changes in enacted tax laws on deferred tax assets and
liabilities are reflected as adjustments to the tax provision or
benefit in the period of enactment. The Company's deferred tax assets
have been completely reduced by a valuation allowance because
management does not believe realization of the deferred tax assets is
sufficiently assured at the balance sheet date.
Financial instruments
The carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable, and notes with floating interest rates
approximate their fair values. The fair values of notes with related
parties are not practicable to estimate based upon the related party
nature of the underlying transactions.
Net loss per share
Basic net loss per share is computed by dividing the net loss
applicable to common stockholders by the weighted-average number of
shares of common stock outstanding for the year. Diluted net loss per
share reflects the potential dilution that could occur if dilutive
securities were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the
Company, unless the effect of such inclusion would reduce a loss or
increase earnings per share. During the year ended December 31, 2001
the Company issued 2,075,000 shares under stock-based compensation
arrangements, which were to be earned in future periods. Until they
were earned, or canceled, during the year ended December 31, 2002,
these shares were considered options for purpose of computing basic and
diluted earnings per share. For the years ended December 31, 2002 and
2001, the effect of the inclusion of dilutive shares would have
resulted in a decrease in loss per share. Accordingly, the weighted
average shares outstanding have not been adjusted for dilutive shares.
Use of estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Shipping and handling fees and costs
The Company records shipping and handling fees billed to customers as
revenue, and shipping and handling costs incurred with the delivery of
its products as cost of sales.
Comprehensive income
For the years ended December 31, 2002 and 2001, the Company had no
components of comprehensive income to report.
F-9
Stock-based compensation
Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation defines a fair-value
based method of accounting for stock-based employee compensation
plans and transactions in which an entity issues its equity
instruments to acquire goods or services from non-employees, and
encourages but does not require companies to record compensation cost
for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for employee stock-based
compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB No. 25") and related interpretations.
Accordingly, compensation cost for stock options granted to employees
is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee
must pay to acquire the stock.
Recently issued accounting pronouncements
In December 2002, FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure. This statement amends SFAS No.
123 Accounting for Stock-Based Compensation and establishes two
alternative methods of transition from the intrinsic value method to
the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 requires prominent disclosure
about the effects on reported net income and requires disclosure for
these effects in interim financial information. The provisions for the
alternative transition methods are effective for fiscal years ending
after December 15, 2002 and the amended disclosure requirements are
effective for interim periods beginning after December 15, 2002. The
Company plans to continue accounting for stock-based compensation
under APB 25. Therefore, this pronouncement is not expected to impact
the Company's financial position or results of operations.
In November 2002, the FASB issued SFAS Interpretation No. 45 ("FIN
45"), Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees and Indebtedness of Others.
FIN 45 elaborates on the disclosures to be made by the guarantor in
its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also requires that a
guarantor recognize, at the inception of a guarantee, a liability for
the fair value of the obligation undertaken in issuing the guarantee.
The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, while the provisions of
the disclosure requirements are effective for financial statements of
interim or annual reports ending after December 15, 2002. The Company
is currently evaluating the recognition provisions of FIN 45, but does
not expect that the adoption of FIN 45 will have a significant
immediate impact on the financial condition or results of operations
of the Company. In June 2001, the Company guaranteed $50,000 in debt
under a business loan agreement between a bank and a member of the
Company's Board of Directors. See Note 6.
Common stock split
In January 2002, the Company effected a 1:100 reverse common stock
thereby decreasing the number of issued and outstanding shares. All
references in the accompanying financial statements to the number of
common shares have been restated to reflect the common stock split.
F-10
3. Business acquisition
On September 30, 2001, the Company acquired certain assets and assumed
certain liabilities of Vacation Communication, Inc., a Colorado
corporation, in exchange for $50,000 cash, 150,000 shares of the
Company's common stock valued at $150,000, and notes payable of
$183,135, in a transaction accounted for as a purchase. The Company
acquired Vacation Communication, Inc. to enable it to market and sell
both control devices and paging airtime.
4. Furniture, fixtures and equipment
Furniture, fixtures and equipment consist of the following at December
31, 2002:
Equipment $ 16,831
Furniture and fixtures 13,112
----------
29,943
Less accumulated depreciation (12,193)
----------
$ 17,750
==========
5. Intangible assets
Intangible assets consist of the following at December 31, 2002:
Customer base $ 140,462
Non-compete agreement 85,337
Patent costs 7,938
----------
233,737
Less accumulated amortization 190,622
----------
$ 43,115
==========
Customer base consists of core customers that rely on the Company's
airtime paging services. Customer base is being amortized using the
straight-line method over twenty-six months. The customer base
expires in 2003 and the amortization expense, based on the existing
customer base, is expected to be approximately $35,200 in 2003.
In connection with the acquisition of the assets of Vacation
Communication, Inc., one of the selling shareholders entered into a
non-compete agreement with the Company. The non-compete agreement is
being amortized using the straight-line method over the one-year term
of the agreement.
Patent costs consist of the costs for two pending applications.
Patent costs will be amortized using the straight-line method over ten
years.
6. Commitments
Leases
The Company leases office and warehouse space under a month-to-month
operating lease in Denver, Colorado, as well as office space in San
Antonio, Texas. Rent expense incurred for the years ended December
31, 2002 and 2001 was approximately $36,000 and $27,000, respectively.
F-11
Loan guarantee
The Company has guaranteed a $50,000 line of credit that a member of
its Board of Directors has with a bank, which is due in June 2003. The
outstanding balance on this line of credit, at December 31, 2002 was
$48,912, which represents the maximum potential amount of future
payments the Company could be required to make if the Board
member defaults on his obligation. Proceeds from this line of credit
were advanced to the Company by the Board member under an unsecured
arrangement. The Company has historically paid interest owed, which
is incurred at the bank's prime rate, under the line-of-credit to the
bank on behalf of the Board member. The Company has included the
balance owed under the arrangement at December 31, 2002 in current
liabilities as other related party payable in the accompanying
financial statements. At December 31, 2002, the Company has not
recorded any liabilities related to the guarantee and the Company has
no recourse against third parties for any obligations incurred under
the guarantee.
7. Income taxes
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized
in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and
tax bases of assets and liabilities using enacted tax rates in effect
in the years in which the differences are expected to reverse.
The Company did not incur income tax expense for the years ended
December 31, 2002 and 2001. The difference between the expected tax
benefit computed at the federal statutory income tax rate of 34% and
the effective tax rate for the years ended December 31, 2002 and 2001
was due primarily to the tax effect of the change in the valuation
allowance.
At December 31, 2002, the Company has approximately $2,792,000 of net
operating loss carryforwards, which expire from 2014 through 2022. At
December 31, 2002 the components of the Company's deferred tax assets
and liabilities are as follows:
Deferred tax assets:
Net operating loss carryforwards $ 949,000
Customer base (66,900)
Non-compete agreement (26,600)
Valuation allowance (855,500)
---------
Net deferred tax asset $ -
=========
A valuation allowance has been provided to reduce the deferred tax
assets as realization is not assured.
8. Line of credit
The Company has $19,842 outstanding at December 31, 2002 under a
$20,000 unsecured line of credit with a bank. Borrowings under the
line of credit bear interest at the Wall Street Journal's published
prime rate plus 3% (7.25% at December 31, 2002); interest due monthly.
The line of credit is guaranteed by two board members, a stockholder
and an officer of the Company.
F-12
9. Notes payable
At December 31, 2002, notes payable consist of the following:
Short-term, related parties:
Notes payable, officer; unsecured;
non-interest bearing; due on demand $ 36,085
Note payable, officer; imputed interest at 8%;
principal and interest due in monthly installments
of $2,083; due September 2005; currently in default 85,337
Subordinated note payable, affiliate; unsecured;
interest at 8%; due June 2002, currently in default 50,000
Note payable, officer; unsecured; interest at prime
rate plus 5.5% (9.75% at December 31, 2002);
due on demand 11,347
Note payable, officer, unsecured, interest at 17%,
due December 2002, currently in default 23,600
-----------
$ 206,369
===========
Factoring arrangement, 80% advance rate on
certain receivables, purchased with full recourse,
rate of 2.5% of face amount for 30 days, .83%
every ten days thereafter, expires on
October 31, 2003 $ 82,502
===========
Short-term, other:
Subordinated note payable, unrelated party;
unsecured; interest at 8%; due June 2002,
currently in default $ 81,640
Unsecured line of credit with a bank. Borrowings
under the line of credit bear interest at the bank's
prime rate plus 4.75% (14.49% at December 31, 2002);
interest due monthly. 37,573
-----------
$ 119,213
===========
Long-term, related party:
Note payable to a stockholder/business partner;
unsecured; 8% annual interest rate;
due April 1, 2004 $ 21,126
===========
10. Stockholders' deficit
Preferred stock:
The Company has authorized 5,000,000 shares of $0.001 par value,
preferred stock, and has designated 107,000 shares as Series A
preferred stock.
Series A 7% convertible preferred stock:
F-13
During 2001, the Company issued 103,000 shares of Series A 7%
convertible preferred stock (the "Series A Preferred Stock") in
exchange for a reduction of $432,600 in notes payable. The Series A
Preferred Stock had no voting rights, was non-participating and was
entitled to a 7% cumulative annual dividend on the stated value of
$4.20 per share. The Series A Preferred Stock had a liquidation
preference of $432,600, equal to the stated value per share, plus any
declared but unpaid dividends. In December 2001, the Company, with the
approval of its board of directors, elected to convert all of the
issued and outstanding shares of Series A Preferred Stock into shares
of the Company's common stock at a rate of five shares of common stock
for each share of Series A Preferred Stock outstanding equal to $5.00
per share. At December 31, 2002 there were no Series A Preferred shares
issued and outstanding.
Common stock:
In January 2001, PCT issued 425,000 shares of its common stock to
consultants for services. At the date of commitment, the total
consulting cost was calculated to be $4,250 ($0.01 per share), which
was management's estimate of the fair value of the common stock on the
issue date.
In February 2001, PCT issued 375,000 shares of its common stock at
$0.01 per share, which was equal to management's estimate of the fair
value of the common stock on the issue date, to its president and a
director as compensation. Accordingly, the Company recorded
compensation expense of $3,750.
In connection with the renewal of approximately $233,000 of notes
payable in February 2001, PCT issued 1,200,000 shares of its common
stock, valued at $60,000 ($0.05 per share). The issuance of the common
stock has been accounted for as additional interest expense on the
notes.
In September 2001, PCT issued 1,225,000 shares of its common stock to
consultants for future services. At the date of commitment, the total
consulting cost was calculated to be $1,225,000 ($1.00 per share),
which was to be recognized over the one-year term of the agreement.
Through December 31, 2001, the Company had recognized consulting
expense of $306,250. An additional $918,750 of expense was recognized
during the year ended December 31, 2002. During the fourth quarter of
2002, the Company recorded a reduction in stock compensation expense of
$1,225,250 related to the cancellation of the agreements, as management
determined that no services had been performed.
In October 2001, PCT issued an aggregate of 850,000 shares of its
common stock to its outside directors for services. At the date of
commitment, total compensation cost was calculated to be $850,000,
which was to be recognized over the one-year term of the agreement.
Through December 31, 2001, the Company had recognized consulting
expense of $212,500. An additional $637,500 of consulting expense was
recognized during the year ended December 31, 2002. During the fourth
quarter of 2002, the Company canceled the issuance of 200,000 of these
shares that were returned by two of the directors to the Company, and
reversed $200,000 of associated consulting expenses as the associated
services were never performed.
In connection with the issuance of a $50,000 note payable in October
2001, the Company's issued 50,000 shares of its common stock valued at
$50,000 ($1.00 per share, management's estimate of the fair value of
the common stock on the issue date), and issued options to purchase
25,000 shares Company's common stock, valued at $12,500 ($0.50 per
share, management's estimate of the fair value of the options on the
issue date). The issuance of the common stock and options has been
accounted for as additional interest expense on the note.
F-14
In connection with the issuance of two $75,000 notes payable in
December 2000 and January 2001, the Company issued 250,000 shares of
common stock valued at $12,750 ($0.05 per share). The issuance of the
common stock has been accounted for as additional interest expense on
the notes.
Throughout fiscal 2001, the Company issued 391,200 warrants to
purchase 391,200 shares of common stock at $1.50 per share. During
fiscal 2002, the Company issued 2,479,000 shares of its common stock
and 2,304,000 warrants, at prices ranging from $1.00 per share in
January to $0.10 per share in November, in exchange for total cash
proceeds of $531,650. The warrants are exercisable within two years of
the date of grants at prices ranging from $1.50 to $0.20. Stock
warrant transactions during 2002 and 2001 are summarized below:
Weighted Average
Shares Exercise Price
----------- ---------------
Outstanding at December 31, 2000 -- --
Granted 391,200 $1.50
Exercised -- --
Forfeited -- --
----------- ---------------
Outstanding at December 31, 2001 391,200 $1.50
Granted 2,304,000 0.37
Exercised -- --
Forfeited -- --
----------- ---------------
Outstanding at December 31, 2002 2,695,200 $0.53
=========== ===============
The Company issued 40,167 shares of common stock in September 2002 and
58,157 shares of common stock in December 2002 to a consultant in
return for $6,000 and $12,000 of financial and accounting services
performed during the third and fourth quarters, respectively. The
number of shares issued was based on management's estimate of the fair
value of the common stock during the period in which the services were
performed.
In October 2002, the Company issued 300,000 shares of common stock to
a consultant for services rendered, and to be rendered. At the date
of the commitment, the total consulting cost was calculated to be
$40,750, which was based on the fair value of the Company's common
stock on that day.
In October 2002, the Company issued 1,000,000 shares of common stock to
its chief executive officer in lieu of unpaid cash compensation
aggregating $140,000, or $0.14 per share, which was equal to the market
price of the common stock on the date of stock award, and the Company
recorded stock compensation of $140,000. On the same date, the chief
executive officer transferred 150,000 and 300,000 of these shares to a
creditor of the Company and a consultant, respectively. The Company
accounted for the transfer as a capital contribution by the chief
executive officer aggregating $21,000 and $42,000 for the creditor and
consultant, respectively, and the Company recorded a note reduction of
$6,360, interest expense of $14,640 and compensation expense of
$42,000.
Receivable from stockholder
At December 31, 2002 and 2001, the Company had $118,629 outstanding in
unsecured and non-interest bearing advances made by the Company. No
advances or repayments were made during 2002.
F-15
11. Related party transactions
During 2002, the Company borrowed $41,126 from an individual who is a
business partner of a board member, and later repaid $24,150 including
$4,150 in interest during 2002. The balance of this note payable at
December 31, 2002,is $21,126.
At December 31, 2001, the Company had a note payable - Non compete
due an employee, who is also a member of the board of directors, in the
amount of $85,337. The balance due on this note remained unchanged
during 2002. The Company had a second note payable to this employee at
December 31, 2001 in the amount of $84,803 and made payments during
2002 totaling $48,718, reducing the note payable balance to $36,085 at
December 31, 2002.
During 2002, two employees made short-term loans to the Company, in
the amounts of $7,900 and $8,500, for the purpose of paying critical
vendors. Both notes payable were repaid in full prior to December 31,
2002.
In October 2001, PCT issued an aggregate of 850,000 shares of its
common stock to its outside directors who were on PCT's board at that
time in exchange for services to be performed. At the date of
commitment, total compensation cost was calculated to be $850,000,
which was to be recognized over the one-year term of the agreement.
With the exception of one Board member, all of the outside directors
resigned in April 2002. During the fourth quarter of 2002, the
Company canceled 200,000 of these shares that were returned to the
Company, and reversed $200,000 of consulting expenses as the
associated services were never performed.
In September 2001, in connection with the acquisition of Vacation
Communication, Inc. the Company entered into three employment
agreements with the two selling shareholders and another employee.
One of the sellers became the Company's chief information officer and
a director. The agreement with the Company's chief information
officer and a director calls for annual salary of $25,000 through
February 2005. The agreements with the other seller and employee
call for annual salaries of $25,000 and $27,000, respectively.
In addition, the agreements provide for covenants-not-to-compete for a
period of one year following separation from the Company.
Upon the reverse acquisition of Peregrine, Inc. on February 1, 2002,
2000 Performance Stock Option Plan (the "Plan") of PCT was
automatically terminated. As such, no options were outstanding as of
December 31, 2002. This option plan was subsequently adopted by the
Company's Board effective January 1, 2003. The Company may issue a
maximum of 4,000,000 shares of common stock under the Plan. The Plan
provides for awards in the form of options, including incentive stock
options and non-qualified stock options. Under the plan, options
granted vest at a rate set by the board of directors or committee
appointed by the board directors, options are exercisable up to 10
years from the date of grant at not less than 100% of the fair value of
the common stock on the date of grant. If the option holder owns 10%
or more of the Company's common stock, the options are excercisable at
not less than 110% of the fair value of the common stock on the date of
grant.
F-16
Employment contracts
In December 2001, the Company entered into an employment agreement
with its president/ chief executive officer. The agreement called for
an annual salary of $150,000 and a grant of options to purchase
450,000 shares of the Company's common stock. These options were
never issued. Additionally, under the agreement, the Company was
obligated to make monthly payments on the officer's student loans in
the amount of $460. The agreement also provided for a covenant-not-
to-compete for a period of one year following separation from the
Company. In December 2002, the Company reached an agreement with that
officer to pay the officer $72,000 per year beginning January 1, 2003
and to award the officer options to purchase 450,000 shares of common
stock effective January 1, 2003.
In December 2001, the Company entered into an employment agreement
with an individual to be its chief financial officer. The agreement
called for an annual salary of $120,000 and a grant of options to
purchase 400,000 shares of the Company's common stock. These options
were never issued. In addition, the agreement provided for a
covenant-not-to-compete for a period of one year following separation
from the Company. Subsequent to the year ended December 31, 2001 the
individual and the Company terminated their agreement. Management
does not believe there are any amounts owing to the individual under
the agreement at December 31, 2002.
In December 2001, the Company entered into an employment agreement
with its chief technical officer. The agreement called for an annual
salary of $90,000 and a grant of options to purchase 150,000 shares of
the Company's common stock. These options were never issued. In
addition, the agreement provided for a covenant-not-to-compete
for a period of one year following separation from the Company. The
Board also voted to award the officer options to purchase 150,000
shares of common stock effective January 1, 2003.
In December 2001, the Company entered into an employment agreement
with its vice president of marketing. The agreement called for an
annual salary of $75,000 and a grant of options to purchase 150,000
shares of the Company's common stock. These options were never
issued. In addition, the agreement provided for a covenant-not-to-
compete for a period of one year following separation from the
Company. During 2002, the individual and the Company terminated their
agreement. Management does not believe there are any amounts owing to
the individual under the agreement at December 31, 2002.
In December 2001, the Company entered into an employment agreement
with its vice president of sales. The agreement called for an annual
salary of $60,000, and the payment of commissions on sales of the
Company's products. At a board meeting in December 2002, the Board
approved an annual salary for the officer of $75,000 per year
effective January 1, 2003. As of December 31, 2002, the Company owed
the employee $11,100 in salary and $8,365 in commissions under the old
contract.
At a meeting held in December 2002, the Board of Directors approved
the hiring of the Company's Chief Financial Officer effective January
1, 2003 at an annual salary of $120,000. The Board also approved the
issuance of options to him to purchase 500,000 shares of common stock
effective January 1, 2003.
F-17
12. Segment information
The Company operates in two business segments, remote control
equipment and paging services. The remote control equipment segment
is engaged in the design, manufacture and sale of easy to use, ready to
use, wireless products that can remotely control virtually any
electrical device from any location. The paging services segment sells
pagers and paging services, including services to some of the Company's
equipment customers who desire to access their equipment via paging.
The paging services segment was acquired via the purchase of Vacation
Communication, Inc. in September of 2001. See notes 1 and 3. The
Company does not intend to remain in the retail paging business.
Rather, the Company desires to resell paging services to its equipment
customers at a profit.
The accounting policies for these segments are the same as those
described in Note 1 and there are no intersegment transactions. The
Company evaluates the performance of its segments and allocates
resources to them based primarily on employee headcount and estimated
time spent on each segment. All operating revenues and expenses are
directly incurred by one or the other segment; no direct operating
revenues or expenses are allocated to either segment.
The table below summarizes information about reported segments (in thousands):
Equipment Services Corporate Total
Year ended December 31, 2001
Sales $141,333 $ 97,935 - $239,268
Gross Profit (36,982) 46,245 - 9,263
Property and equipment 10,297 8,720 - 19,017
Capital expenditures 3,735 - - 3,375
Stock issued for services - - $ 8,000 8,000
Depreciation and amortization 2,276 42,333 - 44,509
Interest expense - - 164,170 164,170
Year ended December 31, 2002
Sales $661,198 $209,161 - $870,359
Gross Profit 312,124 83,613 - 395,737
Property and equipment, net 8,509 9,241 - 17,750
Capital expenditures 4,241 2,491 - 6,732
Stock issued for services - - $286,500 286,500
Depreciation and amortization 7,999 148,289 - 156,288
Amortization of deferred
compensation - -
Impairment of customer base - 112,394 - 112,394
Interest expense - - 39,172 39,172
13. Deferred Revenue
In December 2002, the Company received $432,600 from a customer in
return for a commitment to build 1,400 remote control units for
specific unmanned computer kiosk sites throughout the United States.
The Company will recognize revenues from this sale as each individual
unit is completed. The Company anticipates that all units will be
built by June 30, 2003; however, the actual timing is controlled by
the customer, who must designate destinations for each piece of
equipment before they can be completed by the Company.
F-18
14. Subsequent events
During a meeting on March 26, 2003, the Company's Board of Directors
accepted the resignation of the Company's chief executive officer.
The former officer remains with the Company as an employee and as a
Board member. The Company's chief financial officer was promoted to
Chief Executive Officer at the same meeting.
During April and May 2003, the Company received $300,000 in cash
proceeds in exchange for:
1) the issuance of 500,000 shares of common stock at $0.20 per
share, and warrants to purchase $200,000 of additional common
stock on or before September 30, 2003 at the lesser of US $0.25
per share or 50% of the consecutive 10-day average closing price
prior to the purchaser's election to exercise the warrant, or on
or before March 31, 2004, at the lesser of US $0.37 per share or
50% of any consecutive 10-day average closing price prior to the
purchaser's election to exercise the warrant; or on or before
September 30, 2004, at the lesser of US $1.00 per share or 50% of
any consecutive 10-day average closing price prior to the
purchaser's election to exercise the warrant; or on or before
March 31, 2005, at the lesser of US $2.00 per share or 50% of any
consecutive 10-day average closing price prior to the purchaser's
election to exercise the warrant; and
2) a 90-day loan for $200,000 which will be convertible into
common shares of the Company at the lender's option on the 91st day
at a price of no more than US$0.20 per share. Should the Company
sell any shares during the period the note is outstanding for less
than US$0.20 per share, the conversion price would be lowered to
match that selling price. The Company will have the right to prepay
the note anytime prior to the 91st day with no penalty. Interest on
the note for the 90-day period will be 25,000 shares of the Company's
common stock. Should the lender choose not to convert the note, and
should the Company fail to repay the note on June 30, 2003, the
Company will incur a penalty of 25,000 common shares per month. The
Company also agreed to register all shares underlying the
agreement on a best-efforts basis.
F-19
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------------ --------------------------------------------
99.1 Certifications Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
EXHIBIT 99.1
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Nighthawk Systems, Inc. (the "Company")
on Form 10-KSB for the year ended December 31, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, H
Douglas Saathoff, Chief Executive Officer and Chief Financial Officer, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial
condition and result of operations of the Company, as of, and for the periods
presented in the
Report.
/s/ H. Douglas Saathoff
- ------------------------------------
H. Douglas Saathoff
Chief Executive Officer and
Chief Financial Officer
May 28, 2003
A signed original of this written statement required by Section 906 has been
provided to Nighthawk Systems, Inc. and will be retained by Nighthawk Systems,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.