U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2001
[ ] 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 0-26705
GOLDSTATE CORPORATION
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(Exact name of small business issuer as specified in its charter)
NEVADA 88-0354425
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(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
3305 Spring Mountain Road, Suite 60
Las Vegas, Nevada 89102
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(Address of Principal Executive Offices)
(888) 228-5526
-------------------------
(Issuer's telephone number)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
----- -----
State the number of shares outstanding of each of the issuers classes of common
equity, as of the latest practicable date:
Class Outstanding as of November 13, 2001
------ ----------------------------------
Common Stock, $.0003 par value 10,847,261*
*Reflects the 10 for 1 reverse stock split effected on February 13, 2001
resulting in a decrease in issued and outstanding shares of Common Stock from
38,119,530 to 3,811,953.
Transitional Small Business Disclosure Format (check one)
Yes No X
----- -----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS 2
INTERIM STATEMENTS OF OPERATIONS 3
INTERIM STATEMENTS OF CASH FLOWS 4
NOTES TO INTERIM FINANCIAL STATEMENTS 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 12
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GOLDSTATE CORPORATION
(An Exploration Stage Company)
BALANCE SHEETS
September 30, December 31,
2001 2000
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS
Accounts receivable $ 10,000 $ --
----------- -----------
TOTAL ASSETS $ 10,000 $ --
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 56,316 $ 47,178
Advances payable 80,011 92,482
Accrued interest payable 1,311 44,274
Notes payable (Note 3) -- 600,000
----------- -----------
137,638 783,934
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Capital Stock (Note 4)
Preferred stock, $.001 par value; 25,000,000 shares authorized;
Nil shares issued and outstanding -- --
Common stock, $.0003 par value, 75,000,000 shares authorized
10,847,261 (2000 - 38,119,500) shares issued and outstanding 13,850 11,740
Additional paid-in capital 2,705,685 2,567,089
Deficit accumulated during the exploration stage (2,847,173) (3,362,763)
----------- -----------
(127,638) (783,934)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,000 $ --
=========== ===========
The accompanying notes are an integral part of these interim financial statements
2
GOLDSTATE CORPORATION
(An Exploration Stage Company)
INTERIM STATEMENTS OF OPERATIONS
(Unaudited)
February
Three Three Nine Nine 28, 1996
months months months months (inception)
ended ended ended ended to
September September September September September
30, 2001 30, 2000 30, 2001 30, 2000 30, 2001
------------ ------------ ------------ ------------ ------------
PROPERTY EXPLORATION EXPENSES
Technology sub-license costs $ -- $ -- $ -- $ -- $ 666,852
Claims maintenance fees, exploration and staking costs -- -- -- -- 187,805
Impairment loss related to profit sharing interest -- -- -- (2,702) 170,000
----------- ----------- ----------- ----------- -----------
-- -- -- (2,702) 1,024,657
GENERAL AND ADMINISTRATIVE EXPENSES 45,309 27,551 131,619 65,314 ,301,513
INTEREST EXPENSE 6,837 6,944 21,123 26,702 189,335
GAIN ON SETTLEMENT OF LAWSUIT (Notes 3 & 6) (668,332) -- (668,332) -- (668,332)
----------- ----------- ----------- ----------- -----------
NET LOSS (INCOME) FOR THE PERIOD $ (616,186) $ 34,495 $ (515,590) $ 89,314 $ 2,847,173
=========== =========== =========== =========== ===========
BASIC NET LOSS (INCOME) PER SHARE $ (0.06) $ 0.01 (0.09) $ 0.03
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 10,847,261 3,775,034 5,483,322 2,720,301
=========== =========== =========== ===========
The accompanying notes are an integral part of these interim financial statements
3
GOLDSTATE CORPORATION
(An Exploration Stage Company)
INTERIM STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months Nine months February 28,
ended ended 1996 (inception)
September 30, September 30, to September 30,
2001 2000 2001
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) for the period $ 515,590 $ (89,314) $(2,847,173)
Adjustments to reconcile net loss to net cash from operating activities:
- Impairment loss on profit sharing interest -- -- 170,000
- Non-cash technology sub-license costs -- -- 690,000
- Net discount recognized on technology notes payable -- -- --
- Gain on settlement of lawsuit (668,332) -- (658,332)
- Changes in assets and liabilities
Accounts receivable (10,000) -- (10,000)
Accounts payable 24,138 1,476 79,826
Advances payable 107,527 -- 107,527
Directors fees payable -- 1,500 --
Accrued interest payable 21,077 26,702 166,142
----------- ----------- -----------
CASH FLOWS USED IN OPERATING ACTIVITIES -- (59,636) (2,302,010)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock -- -- 1,700,207
Advances received -- 59,388 1,973,003
Advances repaid -- -- (1,546,200)
Proceeds from notes payable -- -- 175,000
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES -- 59,388 2,302,010
----------- ----------- -----------
INCREASE (DECREASE) IN CASH -- (248) --
CASH, BEGINNING OF PERIOD -- 248 --
----------- ----------- -----------
CASH, END OF PERIOD $ -- $ -- $ --
=========== =========== ===========
OTHER NON-CASH TRANSACTIONS:
During the nine month period ended September 30, 2001, the Company issued
7,035,308 post-consolidation common shares at a price of $.02 per share in
settlement of debt of $140,706.
In connection with the settlement described in Note 6, during the nine month
period ended September 30, 2001, the Company wrote off its notes payable and
accrued interest resulting in a gain of $658,332.
The accompanying notes are an integral part of these interim financial statements
4
GOLDSTATE CORPORATION
(An Exploration Stage Company)
NOTES TO INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
- --------------------------------------------------------------------------------
(Unaudited)
NOTE 1: NATURE OF CONTINUED OPERATIONS
The Company is an exploration stage company. To date, the Company has not
generated revenues from operations and as of September 30, 2001 had a working
capital deficit and stockholders' deficit of $137,638 raising substantial doubt
as to the Company's ability to continue as a going concern. The Company's
continued operations are dependent on its ability to obtain additional financing
and ultimately to attain profitable operations.
The Company ceased exploration of the joint venture lode mining claims located
in the State of Idaho, pending the outcome of ongoing litigation with regard to
the transfer of technology pursuant to the Sub-license Agreement between the
Company and Geneva Resources, Inc. As a settlement to the litigation has been
reached, the technology will no longer be transferred. Refer to Note 6.
Unaudited Interim Financial Statements
The accompanying unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB of Regulation S-B. They do
not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. However, except as
disclosed herein, there has been no material changes in the information
disclosed in the notes to the financial statements for the year ended December
31, 2000 included in the Company's Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission. The interim unaudited financial statements
should be read in conjunction with those financial statements included in the
Form 10-KSB. In the opinion of Management, all adjustments considered necessary
for a fair presentation, consisting solely of normal recurring adjustments, have
been made. Operating results for the nine months ended September 30, 2001 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2001.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mineral property costs
Mineral property acquisition, exploration and development costs are expensed as
incurred until such time as economic reserves are quantified.
Use of Estimates
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 period. Actual results
could differ from those estimates.
Financial Instruments
The fair value of the Company's financial assets and financial liabilities
approximate their carrying values due to the immediate or short-term maturity of
these financial instruments.
Stock-Based Compensation
The Company accounts for stock-based compensation in respect to stock options
granted to employees and officers using the intrinsic value based method in
accordance with APB 25. Stock options granted to non-employees are accounted for
using the fair value method in accordance with SFAS No. 123. In addition, with
respect to stock options granted to employees, the Company provides pro-forma
information as required by SFAS No. 123 showing the results of applying the fair
value method using the Black-Scholes option pricing model.
The Company accounts for equity instruments issued in exchange for the receipt
of goods or services from other than employees in accordance with SFAS No. 123
and the conclusions reached by the Emerging Issues Task Force in Issue No.
96-18. Costs are measured at the estimated fair market value of the
consideration received or the estimated fair value of the equity instruments
issued, whichever is more reliably measurable. The value of equity instruments
issued for consideration other than employee services is determined on the
earliest of a performance commitment or completion of performance by the
provider of goods or services as defined by EITF 96-18.
5
GOLDSTATE CORPORATION
(An Exploration Stage Company)
NOTES TO INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
- --------------------------------------------------------------------------------
(Unaudited)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (con't)
Income taxes
The Company follows the liability method of accounting for income taxes. Under
this method, future tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
balances. Future tax assets and liabilities are measured using enacted or
substantially enacted tax rates expected to apply to the taxable income in the
years in which those differences are expected to be recovered or settled. The
effect on future tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the date of enactment or
substantive enactment. As at September 30, 2001 the Company had net operating
loss carryforwards; however, due to the uncertainty of realization the Company
has provided a full valuation allowance for the deferred tax assets resulting
from these loss carryforwards.
On March 31, 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No.44, Accounting for Certain Transactions Involving Stock
Compensation - An Interpretation of APB Opinion No. 25 ("FIN 44"), which
provides guidance as to certain applications of APB 25. FIN 44 is generally
effective July 1, 2000 with the exception of certain events occurring after
December 15, 1998. The Company has determined that the implementation of this
standard does not have a material impact on its financial statements.
Net Loss per Common Share
Basic earnings per share includes no dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Dilutive earnings per share reflects the potential
dilution of securities that could share in the earnings of the Company. Because
the Company does not have any potentially dilutive securities, the accompanying
presentation is only of basic loss per share.
NOTE 3: NOTES PAYABLE
Pursuant to the Technology Sub-license agreement with Geneva Resources, Inc.,
the Company issued promissory notes to both Geneva and AuRIC in the amount of
$250,000 to each company. These were 3% interest bearing notes and were payable
upon the transfer of the technology. Pursuant to an amendment to the Technology
Sub-license agreement, the company had issued a convertible promissory note to
Geneva Resources, Inc. ("Geneva") in the amount of $100,000 that is convertible
to 500,000 restricted common shares upon demand, and bears interest at the rate
of 8% per annum. These promissory notes were to become due and payable upon the
transfer of the technology. Such transfer never occurred and upon settlement of
the lawsuit as described in Note 6 all notes were cancelled along with accrued
interest, which along with $10,000 cash (received subsequently) resulted in a
gain of $668,332.
NOTE 4: CAPITAL STOCK
The Company completed a ten for one share consolidation on February 13, 2001,
resulting in a decrease in issued and outstanding common stock from 38,119,500
shares to 3,811,953 shares. The loss per share figure for September 30, 2000 has
been restated on a consolidated basis.
During the period the Company issued 7,035,308 post-consolidation restricted
common shares at a price of $.02 per share in settlement of debt of $140,706.
During the period 100,000 post-consolidation common shares originally issued
pursuant to the Technology Sub-license agreement were returned to the Company
and are to be returned to treasury and cancelled. See Note 6.
The weighted average number of shares outstanding for the periods ended in 2000
have been restated to reflect the 10:1 share consolidation on February 13, 2001.
NOTE 5: RELATED PARTY TRANSACTIONS
During the nine months ended September 30, 2001 $22,500 was incurred to a
significant shareholder for consulting and administrative expenses. Also in this
period $15,000 owing to this shareholder was settled by the issuance of 750,000
post-consolidation restricted common shares at $.02 per share. At September 30,
2001 $15,000 is owing to this shareholder and is included in accounts payable.
During the nine months ended September 30, 2001 $45,000 was incurred to Tarmac
Management Ltd. ("Tarmac"), a significant shareholder, for administrative and
management fees, $62,527 was paid by Tarmac for expenses of the Company and
$6,388 of interest was accrued to Tarmac. Also in this period $125,706 owing to
Tarmac was settled by the issuance of 6,285,308 post-consolidation restricted
common shares at $.02 per share representing approximately 58% of the issued and
outstanding shares resulting in a change in control. The majority of these
shares were issued to creditors of Tarmac pursuant to debt assignments. At
September 30, 2001 $80,011 is owing to Tarmac for fees and expenses paid on
behalf of the Company, and is included in advances payable, and $1,311 of
accrued interest is owing, included in accrued interest payable.
6
GOLDSTATE CORPORATION
(An Exploration Stage Company)
NOTES TO INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
- --------------------------------------------------------------------------------
(Unaudited)
NOTE 6: SETTLEMENT OF LAWSUIT
On May 8, 2000, the Company executed an assignment agreement to Geneva that
transferred and conveyed the potential claims and causes of an action that the
Company had in connection with the Sub-license Agreement with Geneva. If amounts
were recovered by the lawsuit initiated by International Gold Corporation, a
subsidiary of Intergold Corporation, a public corporation, and Geneva during
1999, the Company will receive the equivalent pro rata share of the Claims in
relation to all other claims and causes of action for which any damages of
settlement amounts are recovered. On October 8, 2000, the Company's joint
venture partners, Intergold Corporation, International Gold Corporation, and
Geneva initiated a legal complaint against AuRIC Metallurgical Laboratories, LLC
("AuRIC"), Dames & Moore, Ahmet Altinay, General Manager of AuRIC, and Richard
Daniele, Chief Metallurgist for Dames & Moore. The damages sought by
IGCO/IGC/Geneva were to be determined in court.
The damages incurred stemmed from reliance on assays and representations made by
AuRIC and upon actions and engineering reports produced by Dames & Moore related
to the Blackhawk claims. The plaintiffs also alleged that there were breaches of
contract by AuRIC and Dames and Moore, as well as other causes of action. During
September 2001, a settlement was reached and all parties agreed to have the
lawsuit dismissed. As part of the settlement, the Company received $10,000
(received subsequently), the promissory notes totalling $600,000 to AuRIC and
Geneva were cancelled, and 100,000 post-consolidation shares issued to AuRIC
were returned to treasury and subsequently cancelled, resulting in a total gain
of $668,332. See Notes 3 and 4.
NOTE 7: INCOME TAXES
The Company has recorded no tax provision for the period ended September 30,
2001 as it has sufficient loss carryforwards available to offset the income in
the period. Also, due to the uncertainty of realization the Company has provided
a full valuation allowance against the deferred tax assets resulting from its
additional unutilised loss carryforwards.
7
Statements made in this Form 10-QSB that are not historical or current
facts are "forward-looking statements" made pursuant to the safe harbor
provisions of Section 27A of the Securities Act of 1933 (the "Act") and Section
21E of the Securities Exchange Act of 1934. These statements often can be
identified by the use of terms such as "may," "will," "expect," "believe,"
"anticipate," "estimate," "approximate" or "continue," or the negative thereof.
The Company intends that such forward-looking statements be subject to the safe
harbors for such statements. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. Any forward-looking statements represent management's best
judgment as to what may occur in the future. However, forward-looking statements
are subject to risks, uncertainties and important factors beyond the control of
the Company that could cause actual results and events to differ materially from
historical results of operations and events and those presently anticipated or
projected. The Company disclaims any obligation subsequently to revise any
forward-looking statements to reflect events or circumstances after the date of
such statement or to reflect the occurrence of anticipated or unanticipated
events.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
Goldstate Corporation, a Nevada corporation (the "Company") was primarily
engaged in the business of exploration of gold and precious metals in the United
States. During fiscal year ended December 31, 2000, management subsequently
changed and the primary business focus of the Company has been redirected
towards undertaking research relating to prospective new business endeavors and
acquisitions. As of the date of this Quarterly Report, there has been no income
realized from the business operations of the Company and the Company has ceased
any and all gold exploration activities. The research by current management of
prospective new business endeavors may result in the Company entering into
business operations that are not in the minerals exploration field.
Blackhawk II Property and Settlement of Litigation
The Company previously held possessory title to 439 contiguous unpatented
lode mining claims located in Lincoln and Gooding Counties, in south-central
Idaho (the "Blackhawk II Property"). Pursuant to a joint venture agreement with
Intergold Corporation, a Nevada corporation ("IGCO") and its wholly-owned
subsidiary International Gold Corporation, a Nevada corporation ("INGC") dated
March 17, 1999 (the "Joint Venture Agreement"), the Company owned a fifty-one
percent (51%) of a future profit sharing interest in profits to be realized from
the exploration of the 439 unpatented lode mining claims on the Blackhawk II
Property. As of the date of this Quarterly Report, neither the Company nor INGC
hold title to such mining claims.
INGC, on behalf of IGCO, and AuRIC Metallurgical Laboratories, LLC, of Salt
Lake City, Utah ("AuRIC") had entered into an Agreement for Services dated March
18, 1999 (the "Agreement for Services") whereby AuRIC agreed to perform certain
services, including the development of proprietary technology and know-how
relating to fire and chemical assay analysis techniques and metallurgical ore
extraction procedures developed specifically for the exploration of properties
of IGCO.
8
INGC, on behalf of IGCO, had also retained the services of Dames & Moore,
an internationally recognized engineering and consulting firm ("Dames & Moore")
to provide validation audits of each major step of the assay and metallurgical
recovery procedures conducted by AuRIC. In November of 1998, according to
independent testing conducted by Dames & Moore, Dames & Moore validated AuRIC's
fire assay and parallel chemical leach procedures as a method to verify the
existence of mineralization. The positive outcome of the testing program
conducted by Dames & Moore formed the subject of a November 30, 1998 and
subsequently dated reports regarding IGCO's properties. Dames & Moore verified
the fire and chemical assay techniques and procedures developed by AuRIC and
their repeatability, as well as metallurgical recovery techniques.
AuRIC and Geneva Resources, Inc., a Nevada corporation ("Geneva") entered
into a Technology License Agreement dated March 17, 1999 (the "License
Agreement") whereby AuRIC agreed to supply the proprietary technology to Geneva
and grant to Geneva the right to sub-license the proprietary technology to the
Company for use on the Blackhawk II Property. The Company and Geneva entered
into a Technology Sub-License Agreement dated March 18, 1999 (the "Sub-License
Agreement") whereby the Company acquired from Geneva a sub-license to utilize
AuRIC's proprietary information and related precious metals recovery processes
to carry out assay testing and chemical leach analysis of core samples derived
from any subsequent drilling on the Blackhawk II Property.
Pursuant to certain contractual terms and provisions, AuRIC and Dames &
Moore had not been successful in transferring the proprietary fire assay
technology to Geneva or to any independent third party assay laboratory. On
September 27, 1999, Geneva and INGC, on behalf of IGCO, initiated legal
proceedings against AuRIC for multiple breaches of contract stemming from the
Agreement for Services and the License Agreement and against Dames & Moore in a
declaratory relief cause of action (the "Lawsuit").
The Company thus suspended further exploration of the Blackhawk II Property
indefinitely due to (i) the independent assessment information which did not
support the claims of AuRIC and Dames & Moore; (ii) the existence of multiple
breaches of contract by AuRIC and Dames & Moore under the Agreement for Services
and the License Agreement; and (iii) the pending Lawsuit. Moreover, the Company
deemed the probability of commercial grade gold or silver located in the
Blackhawk II claims to be nil.
On approximately September 25, 2001, Geneva, IGCO, INGC, and others entered
into settlement agreements and releases with Dames & Moore, et. al., and AuRIC
in which the parties agreed to settle in order to diminish the continuous
burden, cost and expense of protracted ongoing litigation. See "Part II. Other
Information Item 1. Legal Proceedings" for further disclosure.
New Business Endeavors
During fiscal year ended December 31, 2000, management of the Company
entered into two separate letters of intent to (i) acquire 100% of the issued
and outstanding shares of common stock of FP Telecom Ltd, a company engaged in
the leasing of cellular telephone equipment and services; and (ii) acquire 100%
of the issued and outstanding shares of common stock of National Care Card,
Inc., a company engaged in offering significantly discounted rates on health
9
services. However, based on the results of the Company's due diligence,
management did not consider the acquisition of either FP Telecom Ltd nor
National Care Card, Inc. probable events and terminated negotiations.
As of the date of this Quarterly Report, management of the Company is
undertaking research relating to prospective new business endeavors and possible
new acquisitions. This research may result in the Company entering into business
operations that are not in the minerals exploration field.
RESULTS OF OPERATION
As of the date of this Quarterly Report, there has been no income realized
from the business operations of the Company. During the prior fiscal years, the
Company's primary source of financing was from advances made to the Company.
Nine-Month Period Ended September 30, 2001 Compared to Nine-Month Period Ended
September 30, 2000
The Company's net income for the nine-month period ended September 30, 2001
was approximately $515,590 compared to a net loss of approximately $89,314 for
the nine-month period ended September 30, 2000. During both nine-month periods
ended September 30, 2001 and 2000, respectively, the Company recorded no income.
During the nine-month period ended September 30, 2001, the Company recorded
operating expenses of $152,742, which were offset by a recognized gain of
$668,332, resulting in a recognized income from continuing operations of
$515,590. During the nine-month period ended September 30, 2000, the Company
recorded operating expenses of $89,314 (a decrease of $579,018).
During the nine-month periods ended September 30, 2001 and 2000,
respectively, the Company did not incur any property exploration expenses
resulting primarily from suspension of any further exploration of the Blackhawk
II Property during 2000.
During the nine-month period ended September 30, 2001, the Company incurred
operating expenses of $152,742, which primarily consisted of $131,619 in general
and administrative expenses and $21,123 in interest expense. During the
nine-month period ended September 30, 2000, the Company incurred operating
expenses of $92,016, which primarily consisted of $65,314 in general and
administrative expenses and $26,702 in interest expense. The increase in general
and administrative expenses during the nine-month period ended September 30,
2001 was due primarily to an increase in expenses related to research of
possible new business endeavors and the identification of possible new
acquisitions. General and administrative expenses generally include corporate
overhead, administrative salaries, consulting costs and professional fees.
Although the Company actually incurred $152,742 of operating expenses
during the nine-month period ended September 30, 2001, such expenses were offset
by the recognition of a gain in the amount of $668,332 resulting from the
settlement of the Lawsuit. During the nine-month period ended September 30,
2001, this resulted in recognized income from continuing operations of $515,590.
Of the $131,619 incurred as general and administrative expenses during the
nine-month period ended September 30, 2001, approximately $45,000 was incurred
payable to Tarmac Management Ltd. ("Tarmac") for amounts due and owing for
10
managerial, administrative and financial services rendered and/or advances made
by Tarmac. During the nine-month period ended September 30, 2001, the Company
had paid $ -0- to Tarmac towards an aggregate principal of $80,011 plus $1,311
in accrued interest due and owing Tarmac. During the nine-month period ended
September 30, 2001, the Company settled a debt due and owing to Tarmac in the
amount of $125,706 by issuance of 6,285,308 shares of Common Stock. Such
services rendered by Tarmac include, but are not limited to, financial,
administrative and investor relations management.
As discussed above, the recognition of net income during the nine-month
period ended September 30, 2001 as compared to the net loss incurred during the
nine-month period ended September 30, 2000 is attributable primarily to the
realization of a gain on the settlement of the Lawsuit. The Company's net
earnings during the nine-month period ended September 30, 2001 were
approximately $515,590 or $0.09 per share compared to a net loss of
approximately ($89,314) or ($0.03) per share during the nine-month period ended
September 30, 2000. The weighted average number of shares outstanding was
5,483,322 for the nine-month period ended September 30, 2001 compared to
2,720,301 for the nine-month period ended September 30, 2000, after giving
retroactive effect to the ten for one share consolidation completed on February
13, 2001.
Three-Month Period Ended September 30, 2001 Compared to Three-Month Period Ended
September 30, 2000
The Company's net income for the three-month period ended September 30,
2001 was approximately $616,186 compared to a net loss of approximately $34,495
for the three-month period ended September 30, 2000. During both three-month
periods ended September 30, 2001 and 2000, respectively, the Company recorded no
income.
During the three-month period ended September 30, 2001, the Company
recorded operating expenses of $52,146, which were offset by a recognized gain
of $668,332, resulting in a recognized income from continuing operations of
$616,186. During the three-month period ended September 30, 2000, the Company
recorded operating expenses of $34,495 (a decrease of $633,837).
During the three-month periods ended September 30, 2001 and 2000,
respectively, the Company did not incur any property exploration expenses
resulting primarily from suspension of any further exploration of the Blackhawk
II Property during 2000.
During the three-month period ended September 30, 2001, the Company
incurred operating expenses of $52,146, which primarily consisted of $45,309 in
general and administrative expenses and $6,837 in interest expense. During the
three-month period ended September 30, 2000, the Company incurred operating
expenses of $34,495, which primarily consisted of $27,551 in general and
administrative expenses and $6,944 in interest expense. The increase in general
and administrative expenses during the three-month period ended September 30,
2001 was due primarily to an increase in expenses related to research of
possible new business endeavors and the identification of possible new
acquisitions.
Although the Company actually incurred $52,146 of operating expenses during
the three-month period ended September 30, 2001, such expenses were offset by
the recognition of a gain in the amount of $668,332 resulting from the
settlement of the Lawsuit. During the three-month period ended September 30,
2001, this resulted in recognized income from continuing operations of $616,186.
11
As discussed above, the recognition of net income during the three-month
period ended September 30, 2001 as compared to the net loss incurred during the
three-month period ended September 30, 2000 is attributable primarily to the
realization of a gain on the settlement of the Lawsuit. The Company's net
earnings during the three-month period ended September 30, 2001 were
approximately $616,186 or $0.06 per share compared to a net loss of
approximately ($34,495) or ($0.01) per share during the three-month period ended
September 30, 2000. The weighted average number of shares outstanding was
10,847,261 for the three-month period ended September 30, 2001 compared to
3,775,034 for the three-month period ended September 30, 2000, after giving
retroactive effect to the ten for one share consolidation completed on February
13, 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial statements have been prepared assuming that it will
continue as a going concern and, accordingly, do not include adjustments
relating to the recoverability and realization of assets and classification of
liabilities that might be necessary should the Company be unable to continue in
operation.
As of September 30, 2001, the Company's total assets were $10,000. As of
September 30, 2001, the Company's total liabilities were $137,638 compared to
total liabilities of $783,934 as of the fiscal year ended December 31, 2000.
This decrease in liabilities from December 31, 2000 was due primarily to a
decrease in notes payable of $600,000 due to settlement of the lawsuit and a
decrease in accrued interest payable of $42,963 from $44,274 at fiscal year
ended December 31, 2000 to $1,911 at nine-month period ended September 30, 2001.
Stockholders' Deficit decreased from ($783,934) for the fiscal year ended
December 31, 2000 to ($127,638) for the nine-month period ended September 30,
2001.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 27, 1999, Geneva and INGC, on behalf of IGCO, initiated legal
proceedings against AuRIC and Dames & Moore by filing a complaint in the
District Court of the Third Judicial District for Salt Lake City, State of Utah,
for: (i) multiple breaches of contract relating to the Agreement for Services
and the License Agreement, respectively, including, but not limited to,
establishment and facilitation of the proprietary technology and fire assay
procedures developed by AuRIC at an independent assay lab and failure to deliver
the proprietary technology and procedures to IGCO, Geneva and Dames & Moore;
(ii) breach of the implied covenant of good faith and fair dealing; (iii)
negligent misrepresentation; (iv) specific performance, (v) non-disclosure
injunction; (vi) failure by AuRIC to repay advances, and (vii) quantum
meruit/unjust enrichment. INGC, on behalf of IGCO, also named Dames & Moore in
the legal proceeding in a declaratory relief cause of action (collectively, the
"Lawsuit").
On October 8, 1999, Geneva and INGC, on behalf of IGCO, amended the
complaint by naming as defendants AuRIC, Dames & Moore, Ahmet Altinay General
Manager of AuRIC, and Richard Daniele, Chief Metallurgist for Dames & Moore and
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specifying damages in excess of $10,000,000. The damages sought by Geneva and
INGC, on behalf of IGCO, are based on the general claims and causes of action
set forth in the amended complaint relating to reliance on the assays and
representations made by AuRIC, the actions and engineering reports produced by
Dames & Moore and, specifically, the negligent misrepresentations and
inaccuracies contained within some or all of those Dames & Moore reports and
breaches of contract by AuRIC and Dames & Moore.
On or about November 17, 1999, AuRIC, Dames & Moore, Richard Daniele and
Ahmet Altinay filed separate answers to the amended complaint, along with
counterclaims and a third party complaint against Geneva, INCG, IGCO and others
for breach of contract against Geneva, INGC and others, defamation against IGCO,
INGC, Geneva and others, injunctions against IGCO, INGC, Geneva and others,
amongst other claims. In their defamation claims against IGCO, the plaintiffs
sought damages and punitive damages in an amount to be determined at trial, as
well as attorney's fees and costs. In connection with the cause of action for
preliminary and permanent injunctions against IGCO, AuRIC and Ahmet Altinay
sought attorney's fees and costs.
On approximately June 14, 2000, Dames & Moore filed an action against IGCO,
INGC and others in the District Court of the Fifth Judicial District of the
State of Idaho, in and for the County of Lincoln (the "Idaho Lawsuit"). In the
Idaho Lawsuit, Dames & Moore sought foreclosure of a lien against IGCO and/or
INGC which purportedly arose in favor of Dames & Moore. INGC has dropped the
bulk of its mining claims, except for a small group related to this litigation
as IGCO and INGC believed that the mining claims contain no commercial
quantities of gold or silver. Dames & Moore sought to have the mining claims
sold to compensate Dames & Moore for its services, materials and equipment.
Dames & Moore also sought its fees and costs incurred in enforcing its claimed
lien. IGCO and INGC filed an answer on or about August 8, 2000.
On June 21, 2000, Geneva and INGC, on behalf of IGCO, filed a second
amended complaint in the District Court of the Third Judicial District for Salt
Lake City, State of Utah. The second amended complaint increased detail
regarding the alleged breaches of contract and increased causes of action
against other parties involved by adding two new defendants, MBM Consulting,
Inc. and Dr. Michael B. Merhtens, who provided consulting services to INGC. The
amendment also added certain claims of other entities involved through Geneva
against the defendants. The proprietary technology formed the basis of claims
made by Geneva and INGC, on behalf of IGCO, in the complaints as filed with the
District Court. Geneva and INGC, on behalf of IGCO, alleged that the proprietary
technology does not exist and that Geneva and INGC were fraudulently, recklessly
and/or negligently deceived by AuRIC, Dames & Moore, and other parties to the
Lawsuit.
Geneva and INGC subsequently obtained an order from the District Court
granting its Motion to Compel. The Order required that AuRIC and Dames & Moore
produce the proprietary technology for Geneva's and INGC's restricted use by its
legal counsel and industry experts. Geneva and INGC, on behalf of IGCO, obtained
an expert opinion as to the absence of validity and ineffectiveness of the
proprietary technology.
On November 10, 2000, Geneva and INGC filed motions for partial summary
judgment against Dames & Moore and AuRIC. Subsequently, on March 19, 2001, the
motions for partial summary judgment were denied. The court, however, provided a
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ninety-day period during which both parties were required to prepare for trial,
and after such period the court would set a date for trial. At a scheduling
conference held on July 31, 2001, the court set trial for a period of fifteen
days commencing October 16, 2001. The court date was subsequently changed to
October 26, 2001 pursuant to mutual consent of the parties in an attempt to
mediate the dispute. Such mediation was unsuccessful.
Agreements Relating to Litigation
The Company and Geneva entered into an assignment agreement dated May 9,
2000 (the "Assignment Agreement") that transferred and conveyed to Geneva the
potential claims and causes of action that the Company may have under the
Sub-License Agreement with Geneva.
On June 22, 2001, IGCO, INGC, Geneva, Brent Pierce, MBM Consultants, Inc.
and Michael B. Mehrtens entered into a settlement agreement (the "Mehrtens
Settlement Agreement"). Pursuant to the terms of the Mehrtens Settlement
Agreement, the parties agreed to treat the contents of the Mehrtens Settlement
Agreement as strictly confidential and to not disclose such terms and provisions
to anyone.
As IGCO has not generated revenues and has no liquid assets to commit to
fund the significant estimated future expenses associated with ongoing
litigation, on June 28, 2001, Geneva, IGCO, INGC, Tristar Financial Services,
Inc. ("Tristar") and Alexander Cox ("Cox") entered into a funds sharing
agreement (the "Funds Sharing Agreement"). Pursuant to the terms of the Funds
Sharing Agreement, (i) Tristar would fund the direct costs of the litigation on
a best efforts basis relating to the Lawsuit for the period from April 1, 2001
to the date that the Lawsuit was settled; (ii) as consideration therefore,
Tristar would receive thirty percent (30%) of the gross proceeds received by
Geneva, IGCO and INGC from any and all settlements relating to the Lawsuit, plus
the repayment of all payments and advances made by Tristar (the "Tristar
Payment"); and (iii) the Tristar Payment would be shared with Cox in proportion
of (a) the funds advanced and paid by Cox to Tristar for the purpose of funding
the costs of the litigation, (b) divided by the total amount of funds advanced
by and paid by Tristar, (c) times the amount of the Tristar Payment. Cox is a
shareholder of IGCO and as of the date of this Quarterly Report, holds an
approximate 17.12% equity interest in IGCO.
On September 21, 2001, Geneva, IGCO, INGC and others entered into a
settlement agreement with AuRIC and Ahmet Altinay (the "AuRIC Settlement
Agreement"). Pursuant to the terms of the AuRIC Settlement Agreement, the
parties agreed that: (i) significant additional expense and time would be
incurred to proceed with and resolve the Lawsuit and therefore desired to settle
the Lawsuit; (ii) AuRIC would pay an undisclosed sum; (iii) AuRIC would return
three promissory notes in the principal amounts of $250,000 marked cancelled
payable to AuRIC by the Company, IGCO and Vega-Atlantic Corporation,
respectively; (iii) AuRIC would return all stock certificates received from the
Company, IGCO and Vega-Atlantic Corporation, respectively; (iv) the parties
would execute and jointly file a motion to dismiss the parties' respective
claims and counterclaims in the Lawsuit; (v) the parties would release one
another from any and all claims and liabilities, whether known or unknown,
arising from or based upon the Lawsuit; and (vi) the Agreement for Services, the
License Agreement and the related Sub-License Agreement would be deemed null,
void and without further force or effect.
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On September 25, 2001, Geneva, IGCO, INGC, and others entered into a
settlement agreement and release with Dames & Moore, et. al. (the "Dames & Moore
Settlement Agreement"). Pursuant to the terms of the Dames & Moore Settlement
Agreement, the parties agreed that: (i) solely to save the burden, cost and
expense of continued litigation, the Lawsuit and the Idaho Lawsuit would be
settled without any admission of liability by any party; (ii) the parties would
execute and jointly file a motion to dismiss the parties' respective claims and
counterclaims in the Lawsuit and the Idaho Lawsuit with prejudice; (iii) the
parties would release one another from any and all claims and liabilities,
whether known or unknown, arising from or based upon the Lawsuit and the Idaho
Lawsuit, including those arising from or related to the Blackhawk projects,
mining claims and property; (iv) each party would bear its own respective
attorneys' fees and costs incurred in connection with the Lawsuit, the Idaho
Lawsuit and the Dames & Moore Settlement Agreement; and (v) Dames & Moore would
pay $798,000.
Results of Settlement
Pursuant to the Assignment Agreement, the Company transferred and conveyed
to Geneva the potential claims and causes of action that the Company may had
under the Sub-License Agreement with Geneva. The amount of damages to be
recovered by Geneva and INGC pursuant to the Dames & Moore Settlement Agreement
and the AuRIC Settlement Agreement were primarily used for payment of attorneys
fees, expert witness fees, and associated costs of litigation. The Company,
therefore, was not in a position to retain any portion of the cash settlement
damages.
IGCO and INGC had paid an aggregate of $938,805 in cash to AuRIC and Dames
& Moore for services before the litigation commenced. IGCO and INGC also owed
$219,469 to Dames & Moore for disputed but unpaid services. Prior to the
litigation, (i) AuRIC received 1,000,000 shares of Common Stock from the Company
and a promissory note in the principal amount of $250,000, and (ii) Geneva
received a promissory note in the principal amount of $250,000 and a promissory
note in the principal amount of $100,000.
As of the date of this Quarterly Report, the Company has received: (i) the
share certificate issued to AuRIC representing 1,000,000 shares of Common Stock,
which will be cancelled and the shares returned to treasury; (ii) the promissory
note in the principal amount of $250,000 payable by the Company to AuRIC, which
has been cancelled; (iii) the promissory note in the principal amount of
$250,000 payable by the Company to Geneva, which has been cancelled; (iv) the
promissory note in the principal amount of $100,000 payable by the Company to
Geneva, which has been cancelled; and (v) $10,000.
Geneva, IGCO, INGC and other parties also received an aggregate of $808,000
in settlement proceeds. An aggregate in excess of approximately $2,000,000 was
incurred as legal fees and associated direct costs relating to the litigation.
Of the $808,000 in settlement proceeds, $345,000 was paid for outstanding
amounts due and owing to legal counsel relating to the litigation, $10,000 was
paid to the Company, and the remaining $453,000 was paid to Tristar to provide a
partial recovery of approximately $800,000 paid by Tristar pursuant to the
provisions of the Funds Sharing Agreement.
At the time the respective settlement agreements were entered into, after
incurring in excess of $2,000,000 in legal fees and associated direct costs
relating to the litigation, management of IGCO estimated that future litigation
costs to continue through the trial stage could have reached an additional
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$1,000,000, with no guarantee of either outcome or award. Management of IGCO
further believed that if the litigation proceeded to trial, any positive future
monetary award in favor of IGCO and INGC could have been subjected to a lengthy
appeals process and further legal costs. While Dames & Moore, currently a
subsidiary of URS Corporation, has approximately $2 billion in annual revenues
representing a formidable resource for future legal expenses, IGCO has not
generated revenues and has no liquid assets to commit to such significant
estimated future expenses associated with ongoing litigation. Management of IGCO
believes, therefore, that settlement of the litigation and execution of the
respective settlement agreements was in the best interests of IGCO, the Company
and respective shareholders.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In conjunction with the Dames & Moore Settlement Agreement, a stock
certificate evidencing an aggregate of 1,000,000 shares of Common Stock was
returned to the Company and will be cancelled, and thus will reduce the
aggregate issued and outstanding shares of Common Stock by 100,000 (taking into
effect the reverse stock split of 10 for 1 shares on February 13, 2001). As of
the date of this Quarterly Report, there are 10,847,261 shares of Common Stock
issued and outstanding.
The following table sets forth the name and address, as of the date of this
Quarterly Report, and the approximate number of shares of common stock owned of
record or beneficially by each person who owned of record, or was known by the
Company to own beneficially, more than five percent (5%) of the Company's common
stock, and the name and shareholdings of each officer and director and all
officers and directors as a group.
- --------------------------------------------------------------------------------
Title of Class Name and Address of Amount and Nature Percent of
Beneficial Owner of Class Class
- --------------------------------------------------------------------------------
Common Stock No. 50 Corporate 1,491,200 13.7%
Ventures Ltd.
1255 W. Pender St.
Vancouver, B.C.
Canada V6E 2V1
Common Stock Cybergarden 695,000 6.4%
Development, Inc.
1177 W. Hastings St.
Suite 1710
Vancouver, B.C.
Canada V6E 2L3
Common Stock Tarmac Management Ltd. 785,308 7.2%
1250 W. Hastings St.
Vancouver, B.C.
Canada V6E 2M4
Common Stock All officers and 100,000 .09%
directors as a group
(2 persons)
- --------------------------------------------------------------------------------
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No report required.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No report required.
ITEM 5. OTHER INFORMATION
No report required.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No report required.
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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.
GOLDSTATE CORPORATION
Dated: November 13, 2001 By: /s/ LAARA SHAFFER
-------------------------------
Laara Shaffer
President
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