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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-13313
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GS TELECOM LIMITED
(Exact name of small business issuer as specified in its charter)
COLORADO 36-3296861
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
(000)14-16 REGENT STREET, LONDON, SWIY 4PH, UNITED KINGDOM
(Address of principal executive offices)
+44-(0) 870-710-6390
(Issuer's telephone number)
------------------------
(Former name, former address and former fiscal year, if changed since last
report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court.
Yes / / No /X/
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of June 15, 2001:
38,606,036 shares of Common Stock, no par value.
Transitional Small Business Disclosure Format (check one):
Yes / / No /X/
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The financial statements for the Company's fiscal quarter ended
December 31, 2000 are attached to this Report, commencing at page F-1.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATIONS
Except for historical information, the material contained in this
Management's Discussion and Analysis or Plan of Operation is forward-looking.
For the purposes of the safe harbor protection for forward-looking statements
provided by the Private Securities Litigation Reform Act of 1995, readers are
urged to review the list of certain important factors set forth in "Cautionary
Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995" contained in the Company's Annual Report on
Form 10-KSB for the fiscal year ended June 30, 2000 ("Fiscal 2000"), which may
cause actual results to differ materially from those described. These risks and
uncertainties include the limited revenues and significant operating losses
generated to date and the possibility of significant ongoing capital
requirements. For the purposes of the safe harbor protection for forward-looking
statements provided by the Private Securities Litigation Reform Act of 1995,
readers are urged to review the list of certain important factors set forth in
"Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995".
For purposes of the discussion contained herein, all information is reported
on a consolidated basis for the Company and its wholly-owned subsidiaries.
The report of the Company's independent accountants, BDO Stoy Hayward, on
the Company's financial statements for the fiscal year ended June 30, 2000,
includes a statement that the Company has incurred significant recurring losses
and has a substantial accumulated deficit as of the end of its fiscal year. The
auditors have stated that there is a substantial doubt about the ability of the
Company to continue as a going concern. There can be no assurances that the
Company will be able to generate any revenues or will be able to continue as a
going concern.
GS Telecom Limited (the "Company") was incorporated in Colorado on
December 19, 1983 as Teleconferencing Systems International, Inc. Activities of
the Company from June 30, 1995 until November 15, 1997 were primarily
liquidation of operating assets and settlement of obligations owed creditors and
employees as previously reported. Between 1998 and 1999, the Company engaged in
a series of transactions to acquire certain intellectual property rights and
E-commerce businesses. These strategic relationships and acquisitions have
provided the Company with a technology in secure Internet payment systems. While
the Company will seek to acquire additional businesses in E-commerce, there can
be no assurance that the Company will be successful in locating such
opportunities, or having sufficient financing to complete such acquisitions, and
even if the Company completes any such acquisition of an additional E-commerce
business, there can be no assurance that such business will be profitable.
Since February 1999, the operations of the Company have been focused on
acquiring and developing businesses and technologies in E-commerce. These
businesses and technologies are inherently risky, and there can be no assurance
that any of these businesses will be commercialized successfully, or if so
commercialized, will be profitable.
1
RESULTS OF OPERATIONS
QUARTER ENDED DECEMBER 31, 2000
REVENUES. In the fiscal quarter ended December 31, 2000 (the "Current
Quarter"), the Company had no revenues from operations. The Company had no
revenues from operations in the fiscal quarter ended December 31, 1999 (the
"Comparable Quarter").
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the Current Quarter, the
Company incurred an aggregate of $1,369,384 in selling, general and
administrative expenses, versus $165,374 for the Comparable Quarter, as the
Company incurred salaries, professional fees and other expenses in effecting an
internal restructuring and in seeking acquisitions in the E-commerce field.
NET LOSS AND LOSS PER SHARE. Net loss was $1,707,118 for the Current
Quarter, versus $711,028 for the Comparable Quarter. Loss per share for the
Current Quarter was $0.04 based on weighted average shares outstanding of
38,606,036, as compared to a loss per share of $0.01 based on weighted average
shares outstanding of 48,170,457 for the Comparable Quarter.
SIX MONTHS ENDED DECEMBER 31, 2000
REVENUES. In the six months ended December 31, 2000 (the "Current Period"),
the Company had no revenues from operations, nor did it have any revenues in the
six months ended December 31, 1999 (the "Comparable Period").
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the Current Period, the
Company incurred an aggregate of $2,661,627 in selling, general and
administrative expenses, versus $364,409 for the Comparable Period, as the
Company incurred professional expenses in seeking acquisitions in the E-commerce
field.
NET EARNINGS (LOSS) AND EARNINGS (LOSS) PER SHARE. Net loss was $3,349,502
for the Current Period, versus earnings of $488,214 for the Comparable Period
(including income from discontinued operations). Loss per share for the Current
Period was $0.09 based on weighted average shares outstanding of 38,606,036, as
compared to an earnings per share of $0.01 based on weighted average shares
outstanding of 54,382,104 for the Comparable Period.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. At December 31, 2000, the Company had $1,257,939 in
current assets versus $3,023,856 in current assets at June 30, 2000. The
decrease in current assets was attributable to the expenses incurred by the
Company for salaries, professional fees and other expenses in effecting an
internal restructuring and in seeking acquisitions in the E-commerce field. At
December 31, 2000, cash and cash equivalents amounted to $400,000 held in
escrow; at June 30, 2000, the Company had cash and cash equivalents of $444,700,
with $400,000 held in escrow. The balance of current assets primarily consists
of prepaid expenses in both periods.
STOCKHOLDERS' EQUITY. The Company's stockholders' equity at December 31,
2000 was $2,142,574, including an accumulated deficit of ($10,636,006). At
June 30, 2000, the Company's stockholders' equity was $5,490,057, including an
accumulated deficit of ($7,286,504).
The Company will require additional working capital in the next twelve
months and thereafter to implement its business strategies, including cash for
(i) payment of increased operating expenses such as salaries for additional
employees; and (ii) further implementation of those business strategies. Such
additional capital may be raised through additional public or private financing,
as well as borrowings and other resources. To the extent that additional capital
is raised through the sale of equity or equity-related securities, the issuance
of such securities could result in dilution to the Company's stockholders. No
assurance can be given, however, that the Company will have access to the
capital markets in the
2
future, or that financing will be available on acceptable terms to satisfy the
Company's cash requirements to implement its business strategies. If the Company
is unable to access the capital markets or obtain acceptable financing, its
results of operations and financial conditions could be materially and adversely
affected. The Company may be required to raise substantial additional funds
through other means. If adequate funds are not available to the Company, it may
be required to curtail operations significantly or to obtain funds through
entering into arrangements with collaborative partners or others that may
require us to relinquish rights to certain of its technologies or product
candidates that the Company would not otherwise relinquish.
SUBSEQUENT EVENTS
In June 2001, the Company made the decision to cease providing funds to its
wholly owned subsidiary, Snowstorm Developments Ltd. Snowstorm has been unable
to generate sufficient revenue to warrant continued operations, since its two
major distribution contracts have been non-performing. A meeting of the
creditors of Snowstorm will be held on July 6, 2001.
3
PART II
ITEM 1. LEGAL PROCEEDINGS
(a) The Company is a defendant in a lawsuit entitled GST
TELECOMMUNICATIONS, INC. AND GST TELECOM, INC. VS. GS TELECOM, LTD. The
plaintiffs filed suit in the United States District Court, Northern District of
California seeking injunctive relief and damages for trademark infringement. The
Company consented to judgment and agreed to use a disclaimer: "GS Telecom LTD is
not affiliated in any way with GST Telecommunications, Inc. or GST
Telecom, Inc." in press releases, advertising or promotional materials. The
Company agreed to change its name within four months after judgment. The court
entered judgment April 22, 1999. While the Company has identified an alternative
name, the Company has not yet taken any corporate action to effect the name
change.
(b) On April 19, 1999, the United States Securities and Exchange Commission
commenced a formal investigation as to whether the Company issued securities in
violation of registration requirements and issued press releases containing
materially false information. While the Company believes that it has meritorious
defenses to any such claims, it is cooperating fully with the investigation.
Currently, it is uncertain whether any action will be filed, or if such action
is filed, what the basis for such action will be. In the event of a successfully
prosecuted SEC action, the Company could suffer civil and criminal sanctions and
substantial fines as well as other remedies including injunction against further
violation of securities laws and rules. Such consequence would have a material
adverse effect on the business and financial condition of the Company.
(c) The Company learned in May 1999 that certificates allegedly representing
shares of its common stock were issued improperly, having not been authorized by
the Company's transfer agent nor approved properly by the Company's Board of
Directors. The Company has determined that all such certificates are invalid and
has so notified the Securities and Exchange Commission, Depository Trust
Corporation, and the Company's current transfer agent, Colonial Stock Transfer
Co, Inc. From the current information available, it appears that invalid
certificates, totaling approximately 800,000 shares have been submitted for
transfer. The Company has placed a stop transfer on such shares and is pursuing
its remedies against the perpetrators of this scheme. The Company is actively
pursuing appropriate legal action against such perpetrators in relation to
misrepresentations and the unauthorized distribution of stock.
(d) In April 2001, the Company and one of the Company's directors, John
Mitchell, were named as parties to a lawsuit brought by Payment Resources
International ("PRI"). PRI is seeking to recover payments made by Global Payment
Systems, Ltd., to the Company on the basis of PRI's claims against Global
Payment Systems, Ltd. The Company and Mr. Mitchell believe such claims are
without merit and are pursuing such defenses vigorously.
ITEM 2. CHANGES IN SECURITIES
(a) None.
(b) None.
(c) None.
(d) None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATIONS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K
None.
3
GS TELECOM LIMITED AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AS OF AND FOR THE QUARTER ENDED DECEMBER 31, 2000
Consolidated Balance Sheets as of December 31, 2000
(Unaudited) and June 30, 2000 (Audited) F-2
Consolidated Statements of Operations for the three months
ended December 31, 2000 and 1999 (Unaudited) and for the six
months ended December 31, 2000 and 1999 (Unaudited)......... F-3
Consolidated Statements of Comprehensive Income for the six
months ended December 31, 2000 and 1999 (Unaudited)......... F-4
Consolidated Statements of Cash Flows for the six months
ended December 31, 2000 and 1999 (Unaudited)................ F-5
Notes to Consolidated Financial Statements.................. F-6
F-1
GS TELECOM LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 JUNE 30, 2000
----------------- --------------
(UNAUDITED) (AUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ -- $ 44,700
Cash held in escrow....................................... 400,000 400,000
Accounts receivable, net of allowance for doubtful
accounts of $4,878 and nil, respectively................ 11,344 5,005
Prepaid expenses.......................................... 846,595 2,574,151
------------ -----------
TOTAL CURRENT ASSETS.................................... $ 1,257,939 $ 3,023,856
NON CURRENT ASSETS:
Acquired technology, net of accumulated amortization of
$835,785 and 297,647, respectively...................... $ 2,393,030 $ 2,931,168
License rights, net of accumulated amortization of
$236,959 and $138,911, respectively..................... 743,541 841,589
Property and equipment, net of accumulated depreciation of
$9,429 and $3,604, respectively......................... 38,695 24,680
------------ -----------
TOTAL NON CURRENT ASSETS................................ $ 3,175,266 $ 3,797,437
------------ -----------
TOTAL ASSETS................................................ $ 4,433,205 $ 6,821,293
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdrafts........................................... $ 4,109 $ --
Convertible notes payable................................. 208,500 208,500
Demand notes payable...................................... 212,400 212,400
Loan from shareholders.................................... 216,030 227,266
Accounts payable.......................................... 458,188 155,554
Amounts due to shareholder................................ 694,066 --
Accrued expenses.......................................... 155,315 228,219
Accrued salaries and wages................................ 173,589 171,460
Accrued interest payable.................................. 168,434 127,837
------------ -----------
TOTAL CURRENT LIABILITIES............................... $ 2,290,631 $ 1,331,236
============ ===========
STOCKHOLDERS' EQUITY:
Common stock (no par value; 38,606,036 shares issued and
outstanding)............................................ $ -- $ --
Additional paid-in capital................................ 12,771,053 12,771,053
Cumulative foreign currency translation adjustment........ 7,527 5,508
Accumulated deficit....................................... (10,636,006) (7,286,504)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY.................................. $ 2,142,574 $ 5,490,057
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 4,433,205 $ 6,821,293
============ ===========
See accompanying notes to consolidated financial statements.
F-2
GS TELECOM LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Sales, net............................. $ -- $ -- $ -- $ --
Cost of sales.......................... -- -- -- --
------------ ------------ ------------ ------------
GROSS PROFIT........................... -- -- -- --
Selling, general and administrative
expenses............................. $ (1,369,384) $ (165,374) $ (2,661,627) $ (364,409)
Depreciation and amortization.......... (322,224) (10,089) (642,122) (10,386)
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES......... (1,691,608) (175,463) (3,303,749) (374,795)
------------ ------------ ------------ ------------
Loss from operations................... (1,691,608) (175,463) (3,303,749) (374,795)
Net interest expense................... (15,510) (21,625) (45,753) (45,107)
Income from discontinued operations.... -- 908,116 -- 908,116
------------ ------------ ------------ ------------
NET (LOSS) INCOME................ $ (1,707,118) $ (711,028) $ (3,349,502) $ 488,214
============ ============ ============ ============
Net loss/earnings per share, basic and
diluted.............................. $ (0.04) $ (0.01) $ (0.09) $ 0.01
============ ============ ============ ============
Weighted average shares outstanding,
basic and diluted.................... 38,606,036 48,170,457* 38,606,036 54,382,104*
============ ============ ============ ============
* 21,500,000 and 16,500,000 shares were rescinded on October 21, 1999 and
April 27, 2000 respectively.
See accompanying notes to financial statements
F-3
GS TELECOM LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SIX MONTHS ENDED
---------------------------
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED) (UNAUDITED)
Net (loss) income........................................... $(3,349,502) $ 488,214
Other comprehensive income (loss), cumulative currency
translation adjustments................................... 2,019 (20,588)
----------- ---------
Comprehensive loss for the period........................... $(3,347,483) $(467,656)
=========== =========
See accompanying notes to financial statements.
F-4
GS TELECOM LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
SIX MONTHS ENDED
---------------------------
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................... $(3,349,502) $ 488,214
Adjustments to reconcile net (loss) income to net cash used
in operating activities:
Depreciation and amortization............................... 642,122 10,386
Common stock issued for services............................ -- 97,750
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Increase in accounts receivable............................. (6,339) 3,833
Decrease in prepaid expenses................................ 1,727,556 9,128
Increase in accounts payable................................ 302,634 (514,167)
Decrease in accrued expenses................................ (72,904) (172,013)
Decrease in accrued salaries................................ (3,026) --
Increase in accrued interest................................ 45,752 --
Increase in Bank overdraft 4,109 (1,387)
----------- ---------
NET CASH USED IN OPERATING ACTIVITIES (709,654) (78,256)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets.................................... (20,593) --
----------- ---------
NET CASH USED IN INVESTING ACTIVITIES (20,593) --
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.................................... -- 137,027
Advance from/(repaid to) shareholders....................... 682,830 (34,086)
----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 682,830 102,941
----------- ---------
Effect of changes in exchange rates on cash................. 2,717 (20,558)
----------- ---------
Increase (decrease) in cash and cash equivalents............ (44,700) 4,127
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 44,700 51
----------- ---------
CASH AND CASH EQUIVALENT, END OF PERIOD $ -- $ 4,178
=========== =========
See accompanying notes to consolidated financial statements.
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
NATURE OF REPORT. The consolidated balance sheet at the end of the
preceding fiscal year has been derived from the audited consolidated balance
sheet contained in the Company's Annual Report on Form 10-KSB, on file with the
Securities and Exchange Commission, and is presented for comparative purposes.
All other financial statements are unaudited. In the opinion of management, all
adjustments, which include only normal recurring adjustments necessary to
present fairly the financial position, results of operations and changes in cash
flows, for all periods presented, have been made. The results of operations for
interim periods are not necessarily indicative of the operating results for the
full year.
FOOTNOTES. Certain footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted in accordance with the published rules and regulations of the
Securities and Exchange Commission. These consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-KSB, on file with the
Securities and Exchange Commission.
ESTIMATES AND UNCERTAINTIES. The preparation of financial statements in
conformity with generally accepted accounting principles 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, as determined at a later date,
could differ from those estimates. Estimates relate primarily to recoverability
of the Company's tangible and intangible assets.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
ACQUIRED TECHNOLOGY. Acquired technology is the difference between the
value of the consideration paid and the value of the assets and liabilities
acquired. It is amortized through the statement of operations over a period of
three years, which is management's best estimate of its beneficial economic
life.
2. CONTINGENCIES
On April 19, 1999, the United States Securities and Exchange Commission
issued a formal private investigation as to whether the Company issued
securities in violation of registration requirements and issued press releases
containing materially false information. While the Company believes it has
meritorious defenses to any such claims, it is co-operating fully with the
investigation. Presently, it is uncertain whether any action will be filed, the
grounds for said action, or the potential consequences thereof In the event of a
successfully prosecuted SEC action, the Company could suffer civil and criminal
sanctions and substantial fines as well as other remedies including injunctive
action against further violation of securities laws and rules. Such consequences
would have a material adverse effect on the Company.
During fiscal 1999, the Company and holders of $420,900 in notes payable
became involved in a dispute. The Company has charged the note holders with
non-performance in providing promised funding. The note holders have threatened
legal proceedings for recovery of amounts due, but the parties are continuing
settlement discussions. At present, the outcome of the dispute cannot be
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
predicted, but the Company intends to defend its rights vigorously. These notes
are classified as a current liability because of the outstanding dispute.
During fiscal 1999, prior to the installation of the Company's present
management, certain certificates purporting to represent approximately 800,000
shares of the Company's common stock were invalidly distributed by third
parties. The Company has placed a stop transfer on such shares and is pursuing
remedies against the perpetrators of the scheme.
The Company is a defendant in a lawsuit entitled GST
Telecommunications, Inc. and GST Telecom, Inc. vs. GS Telecom LTD, in which
plaintiffs are seeking an injunction and damages for trademark infringement and
name infringement. On April 22, 1999, the Company consented to a judgement in
Federal District Court in San Francisco and agreed to use a disclaimer: "GS
Telecom LTD is not affiliated in any way with GST Telecommunications, Inc. or
GST Telecom, Inc." in press releases, advertising or promotional materials. The
Company also agreed to change its name within four months after judgement. The
court entered judgement on April 22, 1999. While the Company has identified an
alternative name, it has not yet taken any corporate action to effect such name
change.
In April 2001, the Company and one of the Company's directors, John
Mitchell, were named as parties to a lawsuit brought by Payment Systems
International ("PRI"). PRI is seeking to recover payments made to Global Payment
Systems, Ltd. to the Company on the basis of PRI's claims against Global Payment
Systems, Ltd. The Company and Mr. Mitchell believe such claims are without merit
and are pursuing such defenses vigorously.
3. SUBSEQUENT EVENTS
In June 2001, the Company made the decision to cease providing funds to its
wholly owned subsidiary, Snowstorm Developments Ltd. Snowstorm has been unable
to generate sufficient revenue to warrant continued operations, since its two
major distribution contracts have been non-performing. A meeting of the
creditors of Snowstorm will be held on July 6, 2001.
F-7
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GS TELECOM LIMITED.
By: /s/ JOHN MITCHELL_________________
John Mitchell
CHIEF EXECUTIVE OFFICER
By: /s/ F.G.L. ASKHAM_________________
F.G.L. Askham
CHIEF FINANCIAL OFFICER
Date: June , 2001