UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly Period ended December 31, 2003
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition Period from _____________ to _____________
Commission file number 000-19949
SCARAB SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
Colorado 84-1153522
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
406-280 Nelson Street, Vancouver, British Columbia V6B 2E2
(Address of principal executive offices)
(604) 688-1075
(Issuer's telephone number)
_______________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the registrant filed all documents and reports required to be
filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [X] No [ ]
As of February 10, 2004, 10,013,319 shares of Common Stock of the Issuer were
outstanding. EXCEPT WHERE AND AS OTHERWISE STATED TO THE CONTRARY IN THIS
QUARTERLY REPORT, ALL SHARE, PRICES PER SHARE AND EXERCISE PRICES HAVE BEEN
ADJUSTED TO GIVE RETROACTIVE EFFECT TO THE CHANGE IN THE PRICE PER SHARE OF THE
COMMON STOCK RESULTING FROM THE ONE-FOR-TEN SHARE CONSOLIDATION OF THE COMMON
STOCK THAT TOOK EFFECT ON JANUARY 20, 2004.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
Part I -- Financial Information
Item 1. Financial Statements
The consolidated financial statements included herein have been prepared by
Scarab Systems, Inc. (the "Company") without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such SEC rules and regulations. In the opinion of the
Company the accompanying statements contain all adjustments necessary to
present fairly the financial position of the Company as of December 31, 2003,
and its results of operations for the nine-month periods ended December 31,
2003 and 2002 and its cash flows for the nine-month periods ended December 31,
2003 and 2002. The results for these interim periods are not necessarily
indicative of the results for the entire year. The accompanying financial
statements should be read in conjunction with the financial statements and the
notes thereto filed as a part of the Company's annual report on Form 10-KSB.
--------------------------------------------------------------------------------
SCARAB SYSTEMS, INC.
(A development stage enterprise)
Consolidated Balance Sheets
(Unaudited and Prepared by Management)
================================================================================
December 31, March 31,
2003 2003
(unaudited)
--------------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents $ - $ -
--------------------------------------------------------------------------------
Total current assets - -
Fixed assets, net of accumulated amortization 1,012 1,305
--------------------------------------------------------------------------------
Total assets $ 1,012 $ 1,305
================================================================================
LIABILITIES
Current
Accounts payable and accrued liabilities $ 209,699 $ 124,306
Promissory notes (Note 6) 92,121 85,921
--------------------------------------------------------------------------------
Total current liabilities 301,820 210,227
Promissory notes - non current (Note 6) 7,500 5,000
--------------------------------------------------------------------------------
Total liabilities 309,320 215,227
================================================================================
STOCKHOLDERS' DEFICIT
Share capital Authorized:
100,000,000 common shares with a par value
of $0.001 per share
Issued and outstanding: 9,166,299 Common shares
(March 31, 2003 - 9,166,299) 9,166 9,166
Additional paid in capital 245,123 245,123
Share subscriptions received 40,500 40,500
Deficit accumulated during the development stage (603,097) (508,711)
--------------------------------------------------------------------------------
Total stockholders' deficit (308,308) (213,922)
--------------------------------------------------------------------------------
Total liabilities and deficiency $ 1,012 $ 1,305
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
SCARAB SYSTEMS, INC.
(A development stage enterprise)
Consolidated Statements of Operations
(Unaudited and Prepared by Management)
================================================================================
Nine months ended December 31,
2003 2002
(unaudited) (unaudited)
--------------------------------------------------------------------------------
General and administrative expenses
Amortization $ 294 $ 419
Consulting fees 7,146 154,314
Foreign exchange losses 1,708 -
Interest expense 8,614 6,555
Management fees 59,413 60,085
Office expenses 351 28,213
Professional fees 13,261 20,181
Rent - 26,945
Telephone - 13,948
Transfer agent and filing fees 3,599 2,000
Travel expenses - 4,340
--------------------------------------------------------------------------------
Operating loss (94,386) (317,000)
Net income from discontinued operations
(Note 4) - 159,000
--------------------------------------------------------------------------------
Net loss for the period $ (94,386) $ (158,000)
================================================================================
Net loss per share - basic and diluted $ (0.010) $ (0.018)
================================================================================
Weighted average number of common shares
outstanding 9,166,299 8,802,948
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
SCARAB SYSTEMS, INC.
(A development stage enterprise)
Consolidated Statements of Cash Flows
(Unaudited and Prepared by Management)
================================================================================
Nine months ended December 31,
2003 2002
(unaudited) (unaudited)
--------------------------------------------------------------------------------
Cash flows used in operating activities
Net loss for the period $ (94,386) $ (158,000)
Adjustment to reconcile net loss to
net cash used in operating activities:
- Amortization 294 419
- Foreign exchange loss 1,200 -
Changes in non-cash working capital items:
- accounts payable and accrued liabilities 85,392 58,581
--------------------------------------------------------------------------------
Net Cash used in operating activities (7,500) (99,000)
--------------------------------------------------------------------------------
Cash flows provided by financing activities
Proceeds from issuance of promissory notes 7,500 85,000
Proceeds from issuance of common stock - 14,000
--------------------------------------------------------------------------------
Net Cash provided by financing activities 7,500 99,000
--------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents - -
Cash and cash equivalents, beginning of period - -
--------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ - $ -
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
Notes to Consolidated Financial Statements
(Unaudited and Prepared by Management)
--------------------------------------------------------------------------------
1. Incorporation and Continuance of Operations
The consolidated financial statements presented are those of Scarab
Systems, Inc. and its wholly-owned subsidiary Catalyst Technologies Inc.
("Catalyst"). Collectively, they are referred to herein as "the Company".
Scarab Systems Inc. ("Scarab") was incorporated on October 8, 2001 under
the laws of the State of Nevada. The Company, a development stage
enterprise, was in the business of providing a comprehensive range of
services to the e-commerce sector.
On March 25, 2002, iRV, Inc. ("iRV"), a company incorporated in Colorado
on August 1, 1999, entered into an Agreement and Plan of Reorganization
with Scarab, whereby iRV issued 8,260,000 share of its common stock in
exchange for all of the outstanding common stock of Scarab. As part of
the definitive agreement and plan of reorganization, iRV transferred all
its assets and liabilities to its subsidiaries and then spun off the
subsidiaries and iRV became a non-operating shell company without any
assets or liabilities. Immediately prior to the Agreement and Plan of
Reorganization, iRV had 1,446,290 shares of common stock issued and
outstanding. The acquisition was accounted for as a recapitalization of
Scarab because the shareholders of Scarab controlled iRV after the
acquisition. Scarab was treated as the acquiring entity for accounting
purposes and iRV was the surviving entity for legal purposes. The issued
and outstanding common stock of Scarab prior to the completion of
acquisition was restated to reflect the 8,260,000 common stock issued by
iRV.
Subsequent to the completion of Reorganization, Scarab transferred all its
assets and liabilities to iRV and ceased to exist, and on March 24, 2003,
iRV's name changed to Scarab Systems Inc. Accordingly, the consolidated
financial statements are the continuation of Scarab.
On January 20, 2004, as approved by the requisite number of shares at the
Special Meeting of Shareholders of the Company on September 24, 2002, a
one-for-ten share consolidation of the Company's Stock took effect for
shareholders of record. All per share information for all prior periods
have been adjusted accordingly.
The consolidated financial statements for the nine months ended December
31, 2003 and 2002 have been prepared in accordance with generally accepted
accounting principles applicable to a going concern, which contemplates
the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business. Management believes the
statements include all adjustments of a normal recurring nature necessary
to present fairly the results of operations for the interim periods.
The Company has not generated any revenue and requires additional funds to
maintain its operations. Management's plans in this regard are to raise
equity financing as required. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. These
consolidated financial statements do not include any adjustments that
might result from this uncertainty.
2. Significant Accounting Policies
The Consolidated Financial Statements for the nine months ended December
31, 2003 and 2002 have been prepared in accordance with the accounting
policies described in the Company's annual report on Form 10-KSB. The
preparation of financial statements requires the Company's management to
make estimates and assumptions that affect the reported amounts of 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. Management believes the
statements include all adjustments of a normal recurring nature necessary
to present fairly the results of operations for the interim periods.
Notes to Consolidated Financial Statements
(Unaudited and Prepared by Management)
3. Going Concern
These financial statements have been prepared in conformity with generally
accepted accounting principles in the United States of America applicable
to a going concern which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of
business. The general business strategy of the Company is to review and
possibly acquire a technology or resource business or property. The
Company has incurred operating losses and requires additional funds to
meet its obligations and maintain its operations. Management's plan in
this regard is to raise equity financing as required. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. These financial statements do not include any adjustments that
might result from this uncertainty.
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December 31, 2003 March 31, 2003
--------------------------------------------------------------------------------
Deficit accumulated during the
development stage $603,097 $508,711
Working capital deficit $301,820 $210,227
--------------------------------------------------------------------------------
4. Reclassification
The Company has reclassified amounts presented in prior period financial
statements to properly disclose the operating results of the Company's
discontinued operations.
5. Common Stock
No shares of common stock were issued by the Company during the nine
months ended December 31, 2003.
6. Promissory Notes
--------------------------------------------------------------------------------
December 31, 2003 March 31, 2003
--------------------------------------------------------------------------------
Promissory notes due to related party $41,523 $41,361
Promissory notes due to unrelated party and
convertible at $0.05 to $0.075 per share 17,312 16,531
Promissory notes; unrelated party 40,786 33,029
------------ ------------
Total 99,621 90,921
Less: non-current portion (7,500) (5,000)
------------ ------------
Total current portion $92,121 $85,921
============ ============
Notes to Consolidated Financial Statements
(Unaudited and Prepared by Management)
--------------------------------------------------------------------------------
6. Promissory Notes (continued)
The above table includes the principal amounts of promissory notes
outstanding. Interest payable on the notes is included in accounts payable
and accrued liabilities.
On June 10, 2003, the Company issued an unsecured promissory note to an
investor for $7,500 in connection with a debt financing. The note bears
interest at the rate of 3% per year and is repayable on June 10, 2005.
Proceeds from the financing were used by the Company for working capital.
As at December 31, 2003, approximately $17,312 of the promissory notes
were due and payable immediately. The Company is discussing an extension
of the notes with the noteholders but there are no certainties that an
extension will be granted.
In addition, $25,309 of the promissory notes are payable on demand. The
Company has not received a demand notice for repayment from any of the
noteholders.
7. Related Party Transactions
During the nine month period ended December 31, 2003, the Company paid or
accrued consulting fees of $59,413 to the directors and senior officers of
the Company. At December 31, 2003, there was approximately $108,200 in
accrued liabilities that are owing to related parties.
8. Subsequent event
Subsequent to the nine months ended December 31, 2003, accrued debt of
$55,130, including $34,281 owing to a related party, was forgiven.
On February 2, 2004, the Company announced it was undertaking a private
placement of 1,200,000 common shares at $0.10 per share for gross proceeds
of $120,000. There are no assurances that this financing will be
completed.
In addition, on February 2, 2004, a related party promissory note in the
amount of $40,000, along with accrued interest of $11,000, was converted
into 510,000 common shares with an effective exercise price of $0.10 per
share.
Subsequent to the nine months ended December 31, 2003, the Company issued
96,000 common shares for share subscriptions received in the fiscal year
ended March 31, 2003. The Company has also issued 241,020 common shares
for services rendered in the fiscal year ended March 31, 2003.
Item 2. Management's Discussion and Analysis or Plan of Operations
FORWARD LOOKING STATEMENTS
The information in this discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These forward-
looking statements involve risks and uncertainties, including statements
regarding the Company's capital needs, business strategy and expectations. Any
statements contained herein that are not statements of historical facts may be
deemed to be forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as "may", "will", "should",
"expect", "plan", "intend", "anticipate", "believe", "estimate", "predict",
"potential" or "continue", the negative of such terms or other comparable
terminology. Actual events or results may differ materially. In evaluating
these statements, you should consider various factors, including the risks
discussed below, and, from time to time, in other reports the Company files
with the SEC, including the Company's Annual Report on Form 10-KSB for the year
ended March 31, 2003. These factors may cause the Company's actual results to
differ materially from any forward-looking statement. The Company disclaims any
obligation to publicly update these statements, or disclose any difference
between its actual results and those reflected in these statements. The
information constitutes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995.
Overview
Our business was to provide services to the e-commerce industry. Historically,
these services have been comprised of marketing, e-commerce development and the
sale and distribution of transaction processing and payment services, including
rechargeable stored value payment and money transfer systems that can be used
for both electronic commerce and point of sale purchases. In fiscal year 2003,
the Company ceased all operations.
The Company has been in the development stage since its inception. It has had
no significant operating revenue to date, has accumulated losses of $603,097
and will require additional working capital to sustain its minimal operations.
These circumstances raise substantial doubt as to the Company's ability to
continue as a going concern.
The Company intends to continue to identify and review opportunities in the
technology and resources sectors. The Company is currently reviewing various
financing alternatives, including the possibility of an additional private
equity offering. There can be no assurance, however, that such opportunities or
financings will be available to the Company or, if it is, that it will be
available on terms acceptable to the Company. If the Company is unable to
obtain the financing necessary to support its operations, its may be unable to
continue as a going concern.
The Company currently has no facilities and no employees.
Results of Operations
The results of operations include the results of the Company and its wholly
owned subsidiary, Catalyst. During the year ended March 31, 2003, Catalyst
became inactive due to the curtailing of substantially all of its operations
and, thereafter, all administration operations of the Company were performed in
the parent company.
For the Nine Months Ended December 31, 2003 Compared to the Nine Months Ended
December 31, 2002
Operating Expenses From Continued Operations. Operating expenses consisted of
consulting fees, management fees, professional fees and other general corporate
expenses. Operating expenses were $94,386 for the nine months ended December
31, 2003, compared with $317,000 for the nine months ended December 31, 2002.
This decrease in operating expenses reflects the curtailing of substantially
all of the Company's operating activities during the current fiscal period.
Consulting fees were $7,146 for the nine months ended December 31, 2003,
compared with $154,314 for the nine months ended December 31, 2002 when the
Company was actively engaging financial consultants to raise equity for the
Company's operations. Professional fees were $13,261 for the nine months ended
December 31, 2003, compared with $20,181 for the nine months ended December 31,
2002. The professional fees related to the costs associated with the Company's
last audited statements and periodic reporting obligations. General office
expenses, including rent, telephone were nil for the nine months ended December
31, 2003, compared with $26,945 and $13,948, respectively, for the nine months
ended December 31, 2002 when the Company was operating. Management fees were
$59,413 for the nine months ended December 31, 2003, compared with $60,085 for
such fees for the nine months ended December 31, 2002. The Company recorded
amortization expenses of $294 for the nine months ended December 31, 2003,
compared with $419 for the nine months ended December 31, 2002. Interest costs
were $8,614 for the nine months ended December 31, 2003 compared with $6,555
for the nine months ended December 31, 2002.
Net Income From Discontinued Operations. The Company ceased all of its
business during the fiscal year ended March 31, 2003 and, as a result, combined
all operating revenues and expenses related to the previous business under
discontinued operations. The Company recorded no net income from discontinued
operations for the nine months ended December 31, 2003, compared with a net
income of $159,000 for the nine months ended December 31, 2002.
Net Loss for the Period. The Company recorded a net loss of $94,386 for the
nine months ended December 31, 2003, compared with a net loss of $158,000 for
the nine months ended December 31, 2002.
Liquidity and Capital Resources
The Company's cash on hand was nil as at December 31, 2003 and March 31, 2003.
The Company's working capital deficit was $301,820 as at December 31, 2003,
compared to a working capital deficit of $210,227 as at March 31, 2003.
The Company has funded its business to date from sales of its common stock and
promissory notes from shareholders and related parties. The Company will
require additional financing in order to complete our stated plan of operations
for the next twelve months.
Our cash used in operating activities for the nine months ended December 31,
2003 in the amount of $7,500 was funded from the issuance of a promissory note.
During the comparative period, the cash used in operating activities of $99,000
and was funded by the issuance of common stock for gross proceeds of $14,000
and funded by the issuance of $85,000 in promissory notes.
Other than the foregoing, Management knows of no trends, demands or
uncertainties that are reasonably likely to have an impact on the Company's
liquidity or capital resources other than the matured promissory notes and
demand promissory notes.
Plan of Operations
We believe that it is in the best interests of the Company and its shareholders
that we actively seek acquisition candidates. We believe the Company can offer
owners of potential merger or acquisition candidates the opportunity to acquire
a controlling ownership interest in a public company at substantially less cost
than is required to conduct an initial public offering. The target company
will, however, incur significant post-merger or acquisition registration costs
in the event target company shareholders wish to offer a portion of their
shares for subsequent sale. Further, while target company shareholders will
receive "restricted securities" in any merger or acquisition transaction, those
restricted securities will represent, if a trading market develops for our
common stock, ownership in a "publicly-traded" as opposed to a "privately-held"
company. We also believe target company shareholders may benefit in obtaining a
greater ownership percentage in the Company remaining after a merger or
acquisition than may be the case in the event a target company offered its
shares directly for sale to the public. Nevertheless, our officers and
directors have not conducted market research and are not aware of statistical
data which would support the perceived benefits of a merger or acquisition
transaction for target company shareholders.
We expect to concentrate primarily on the identification and evaluation of
prospective merger or acquisition "target" entities including private
companies, partnerships or sole proprietorships. We do not intend to act as a
general or limited partner in connection with partnerships we may merge with or
acquire. We have not identified any particular area of interest within which it
will concentrate its efforts.
We plan to seek to merge with or acquire a target company with either assets or
earnings, or both, and that preliminary evaluations undertaken by us will
assist in identifying possible target companies. We have not established a
specific level of earnings or assets below which it would not consider a merger
or acquisition with a target company. Moreover, we may identify a target
company, which is generating losses, which it will seek to acquire or merge
with it. The merger with or acquisition of a target company which is generating
losses or which has negative shareholders' equity may have a material adverse
affect on the price of our common stock.
It should be noted, however, that our independent accountants audit report for
the fiscal year ended March 31, 2003 contains a qualification and explanatory
language that due to our recurring losses from operations and net capital
deficiency, substantial doubts exist about our ability to continue as a going
concern.
Plan of Acquisition
We plan to follow a systematic approach to identify our most suitable
acquisition candidates. In the past, our officers and directors have not used
consultants in an effort to identify potential target companies, although it is
possible that such consultants may be used in the future. To date, there have
been no discussions with and there exists no agreements or understandings with
any particular consultant to provide such services for us. If a finder or
consultant is engaged, of which there can be no assurance, we will make an
effort to limit the scope and duration of the services to be performed by such
consultant so as to minimize any costs associated with such services
As a reporting Company under Section 13 of the Exchange Act, we will be
required to prepare and file an annual report on Form 10-KSB containing audited
financial statements certified by an independent public accountant. In
addition, we will be required to file Quarterly Reports on 10-QSB for the
first, second and third interim periods which include unaudited financial
statements for the quarter and year to date. In addition to the Quarterly and
Annual Reports, extraordinary events outside of the ordinary course of business
must be reported on Form 8-K, such as a change of control, a material
acquisition or disposition of assets, changes in accountants and the like.
Under certain circumstances, an acquisition of significant assets or a
significant subsidiary will require the preparation of additional audited
financial statements for the acquired business as well as pro forma financial
information. Our officers, directors and ten-percent shareholders will also be
subject to the beneficial ownership reporting requirements and short swing
trading restrictions contained in Section 16 of the Exchange Act. All of the
foregoing reporting requirements, and the associated costs of complying with
such requirements, could limit the pool of potential acquisition or merger
candidates.
While we will make every effort to fully comply with its reporting obligations
under the Exchange Act, should such obligations be suspended for any reason in
the future, we intend to continue to voluntarily file periodic reports.
First, we intend to concentrate on identifying any number of preliminary
prospects which may be brought to the attention of management through present
associations, personal contacts of our affiliates, or by virtue of very limited
advertising campaigns we may conduct. As is customary in the industry, we may
pay a fee to a non-affiliate for locating a merger or acquisition candidate. If
any such fee is paid, it will be approved by our Board of Directors and will be
in accordance with industry standards. After preliminary candidates are
identified, we will then apply certain broad criteria to the prospects.
Essentially, this will entail a determination by us as to whether or not the
prospects are in an industry which appears promising and whether or not the
prospects themselves have potential within their own industries. During this
initial screening process, we will ask and receive answers to questions framed
to provide appropriate threshold information, depending upon the nature of the
prospects' businesses. Such evaluation is not expected to be an in-depth
analysis of the target company's operations although it will encompass a look
at most, if not all, of the same areas to be examined once one or more target
companies are selected for an in-depth review. For example, at this stage, we
may look at a prospect's unaudited balance sheet. Once a prospect is selected
for an in-depth review, we will review the prospect's audited financial
statements. Nevertheless, this evaluation is anticipated to provide a broad
overview of the business of the target company and should allow a large
percentage of preliminary prospects to be eliminated from further
consideration.
Assuming we are able to complete the preliminary evaluation process and select
a limited number of companies for further study, of which there can be no
assurance, it may enter into preliminary negotiations with target company
management in order to obtain detailed financial and operational information.
Following our receipt of such information, we will conduct an in-depth analysis
of five major areas of concern with respect to the target company as follows:
1. Managerial and Financial Stability. We will review audited financial
statements of the target company, to the extent available, and will also
research the background of each director and member of management of the target
company in order to discern whether the stability of the company is such that
further negotiations are warranted.
2. Industry Status. We will research the potential of the target company's
industry. The concern here is whether the industry is in a growth, stagnant or
declining stage.
3. Production of Product. If the target company is a manufacturer, we will
review whether it has the necessary resources or access to the necessary
resources and supplies to produce a quality product in a timely manner.
4. Acceptance and Potential of Product. We will review the acceptance of
the target company's product in the market place and assess the competition. We
will also review whether or not the product is realistic: is there potential
for the product to be workable and to fulfill its intended purpose.
5. Development of Target Company. We will review the target company's stage
of development (examples: start-up stage, established company, etc.).
The foregoing is an outline of the areas of concern which most often arise and
merit careful scrutiny by management. Because of the possible varieties of
target companies, which may come to our attention, additional factors will most
likely be considered in any given analysis. Also, the procedures used in such a
review are expected to vary depending upon the target company being analyzed.
We may select a target company for further negotiations even though the target
may not receive a favorable evaluation as to some of the five areas of concern.
We expect to enter into further negotiations with target company management
following successful conclusion of financial and evaluation studies.
Negotiations with target company management will be expected to focus on the
percentage of the Company that target company shareholders would acquire in
exchange for their shares in the target company. Depending upon, among other
things, the target company's assets and liabilities, our shareholders will in
all likelihood hold a lesser percentage ownership interest in the Company
following any merger or acquisition. Assets of a merger or acquisition
candidate would be valued at historical cost for transactional purposes. The
percentage ownership may be subject to significant reduction in the event we
acquire a target company with substantial assets. Any merger or acquisition we
effect can be expected to have a significant dilutive effect on the percentage
of shares held by our then shareholders.
The final stage of any merger or acquisition to be effected by us will require
us to retain the services of our counsel and a qualified accounting firm in
order to properly effect the merger or acquisition. We may be expected to incur
significant legal fees and accounting costs during the final stages of a merger
or acquisition. Also, if the merger or acquisition is successfully completed,
we anticipate that certain costs will be incurred for public relations, such as
the dissemination of information to the public, to the shareholders and to the
financial community. If we are unable to complete the merger or acquisition for
any reason, our capital may be substantially depleted if legal fees and
accounting costs have been incurred. We intend to retain legal and accounting
services only on an as-needed basis in the latter stages of a proposed merger or
acquisition.
We anticipate that it may be necessary to raise additional funds within the
next 12 months to meet expenditures required for operations. There are no
current plans or commitments in this regard, and there can be no assurance that
we will be able to raise the funds necessary to continue its limited
operations.
It is possible that acquisition targets are seeking a business combination with
us as part of their efforts to raise additional capital. We do not intend to
raise capital, either through the public or private sale of equity or debt
securities to enable us to provide bridge capital to any potential acquisition
candidate. Nor do we intend to borrow any funds or use any proceeds of any
equity or debt offering to make payments to any of our management, promoters,
or their respective affiliates or associates.
Role of Management in Acquisition Process
The consummation of any acquisition will likely result in a change in control
of the Company, pursuant to which the officers, directors and principal
shareholders of the acquired company will be issued sufficient numbers of
shares of our common stock to exercise voting control immediately following the
acquisition. In addition, the transaction may involve the sale by our current
principal shareholders of all or a portion of their beneficial ownership of our
common stock to the control persons of the acquired company. Such sale would be
upon terms privately negotiated between the principals of the acquired company
and our principal shareholders. Our shareholders will, in all likelihood, not
be provided with information, including financial statements, of a business to
be acquired or be afforded an opportunity to approve or consent to any stock
buy-out transaction involving our principal shareholders. Moreover, our other
shareholders will in all likelihood not be offered an opportunity to sell their
shares of our common stock on the same or similar terms and conditions. We have
not adopted and do not plan to adopt in the future any policy that would
restrict, limit or prohibit management or our principal shareholders from
negotiating a buy-out of their stock in connection with an acquisition
transaction.
Competition
We will remain an insignificant participant among the firms, which engage in
mergers with and acquisitions of privately financed entities. There are many
established venture capital and financial concerns that have significantly
greater financial and personnel resources and technical expertise than we do.
In view of our combined limited financial resources and limited management
availability, we will continue to be at a significant competitive disadvantage
compared to our competitors. Also, we will be competing with numerous other
small, blank check, public companies.
Regulation and Taxation
We could be subject to regulation under the Investment Company Act of 1940 in
the event we obtain and continue to hold a minority interest in a number of
entities. Our plan of operation is based upon the us obtaining a controlling
interest in any merger or acquisition target company and, accordingly, we may
be required to discontinue any prospective merger or acquisition of any company
in which a controlling interest will not be obtained.
We could also be required to register under the Investment Company Act of 1940
in the event it comes within the definition of an Investment Company contained
in that Act due to its assets consisting principally of shares held in a number
of other companies. We intend to seek at most one or two mergers or
acquisitions, which transactions we believe will not result in the Company
being deemed an "investment company" since its interests will be in majority or
wholly owned subsidiaries which themselves will not be investment companies.
Any securities that we acquire in exchange for our common stock will be
"restricted securities" within the meaning of the Securities Act of 1933 (the
"1933 Act"). If we elected to resell such securities, such sale could not
proceed unless a registration statement had been declared effective by the
Securities and Exchange Commission or an exemption from registration was
available. Section 4(1) of the 1933 Act, which exempts sales of securities not
involving a distribution, would in all likelihood be available to permit a
private sale if various restrictions pertaining to such a sale are complied
with. Although our plan of operation does not contemplate resale of securities
acquired, in the event such a sale were necessary, we would be required to
comply with the provisions of the 1933 Act.
As a condition to any merger or acquisition, it is possible that the target
company management may request registration of our common stock to be received
by target company shareholders. In such event, we could incur registration
costs, and we intend to require the target company to bear most, if not all, of
the cost of any such registration. If we do contribute toward the cost of such
registration, our maximum contribution will be limited to the extent that we
have assets available for such contribution. Alternatively, we may issue
"restricted securities" to any prospective target company, which securities may
be subsequently registered for sale or sold in accordance with Rule 144 of the
Securities Act of 1933.
We intend to structure a merger or acquisition in such a manner as to minimize
federal and state tax consequences to the Company and any target company.
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
Our Chief Executive Officer and Chief Financial Officer have, within 90 days of
the filing date of this report, evaluated our internal controls and procedures
designed to ensure that information required to be disclosed in reports under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within specified time periods. After such review, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that said
information was accumulated and communicated to management as appropriate to
allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls.
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the evaluation
referred to in paragraph (a) above.
Part II. Other Information
Item 1. Legal Proceedings
We are not a party to any material legal proceedings and to our knowledge, no
such proceedings are threatened or contemplated.
Item 2. Changes in Securities and Use of Proceeds
We did not complete any unregistered sales of our common stock during our
fiscal quarter ended December 31, 2003.
Item 3. Default upon Senior Notes
A 6% promissory note in the amount of $10,000, along with accrued interest,
became due and payable on December 31, 2003. The Company and the noteholder are
currently discussing the possibility of extending the terms of the note but
there are no assurances the maturity date of the note will be extended. This
note is convertible into common stock of the Company at an exercise price of
$0.05 per share.
A 20% promissory note in the approximate amount of $7,312, along with accrued
interest, became due and payable on December 31, 2002. The Company and the
noteholder are currently discussing the possibility of extending the terms of
the note but there are no assurances the maturity date of the note will be
extended. This note is convertible into common stock of the Company at an
exercise price of $0.075 per share.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to our security holders for a vote during the fiscal
quarter ending December 31, 2003.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------------------------------------------------------
(a) Exhibit Description
-------- -----------------------------------------------------------------
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.1 Officers' Certification
--------------------------------------------------------------------------------
(b) Date of Current Description
Report
------------------ -------------------------------------------------------
July 8, 2003 Form 8-K reporting withdrawal of Form 15
August 1, 2003 Form 8-K reporting that appointee declined
directorship.
February 2, 2004 Form 8-K reporting proposed financing and conversion
of promissory note
--------------------------------------------------------------------------------
Signatures
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SCARAB SYSTEMS, INC.
(Registrant)
Date: February 10, 2004 /s/ Thomas E. Mills
Thomas E. Mills, President
Date: February 10, 2004 /s/ John Allen
John Allen, Chief Financial Officer
Exhibit 31.1
Certification
I, Thomas E. Mills, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Scarab Systems,
Inc.;
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. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this 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. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether 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.
February 10, 2004
By /s/ Thomas E. Mills
Thomas E. Mills
Chief Executive Officer and President
Exhibit 31.2
Certification
I, John S. Allen, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Scarab Systems,
Inc.;
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. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this 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. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether 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.
February 10, 2004
By /s/ John S. Allen
John S. Allen
Chief Financial Officer
EXHIBIT 32.1
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 quarterly report of Scarab Systems, Inc. on Form 10-QSB
for the quarter ended September 30, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the Report), we, Thomas E. Mills, Chief
Executive Officer and President of the Company, and John S. Allen, Chief
Financial Officer of the Company, 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, as amended; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: February 10, 2004 By /s/ Thomas E. Mills
Thomas E. Mills
Chief Executive Officer and President
Date: February 10, 2004 By /s/ John S. Allen
John S. Allen
Chief Financial Officer