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 March 31, 2002
[ ] 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
---------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
NEVADA 88-0354425
------------------------------ ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
3305 Spring Mountain Road, Suite 60
Las Vegas, Nevada 89102
--------------------------------------
(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 issuer's classes of common
equity, as of the latest practicable date:
Class Outstanding as of May 13, 2002
------ ------------------------------
Common Stock, $.0003 par value 10,747,261
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 7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 11
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 5. OTHER INFORMATION 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 15
1
GOLDSTATE CORPORATION
(An Exploration Stage Company)
BALANCE SHEETS
March 31, December 31,
2002 2001
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 13 $ --
----------- -----------
TOTAL ASSETS $ 13 $ --
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ -- $ 319
Accounts payable and accrued liabilities 37,137 33,844
Due to related parties 153,917 129,967
Accrued interest payable 6,806 4,234
----------- -----------
197,860 168,364
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Capital Stock
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
10,747,261 shares issued and outstanding 13,550 13,550
Additional paid-in capital 2,695,985 2,695,985
Deficit accumulated during the exploration stage (2,907,382) (2,877,899)
----------- -----------
(197,847) (168,364)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13 $ --
=========== ===========
CONTINGENCIES (Note 1)
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 28,
Three months Three months 1996 (inception)
ended March ended March to March 31,
31, 2002 31, 2001 2002
------------ ------------ ------------
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 -- -- 170,000
------------ ------------ ------------
-- -- 1,024,657
GENERAL AND ADMINISTRATIVE EXPENSES 26,911 41,125 2,366,227
INTEREST EXPENSE 2,572 8,266 194,830
GAIN ON SETTLEMENT OF LAWSUIT -- -- (678,332)
------------ ------------ ------------
NET LOSS FOR THE PERIOD $ (29,483) $ (49,391) $ (2,907,382)
============ ============ ============
BASIC NET LOSS PER SHARE $ (0.00) $ (0.01)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 10,747,261 3,811,953
============ ============
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)
February 28,
Three months Three months 1996 (inception)
ended March ended March to March 31,
31, 2002 31, 2001 2002
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period $ (29,483) $ (49,391) $(2,907,382)
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
- Gain on settlement of lawsuit -- -- (668,332)
- Changes in assets and liabilities
Accounts payable 3,293 13,609 95,230
Advances payable 23,950 27,516 239,332
Accrued interest payable 2,572 8,266 171,637
----------- ----------- -----------
CASH FLOWS USED IN OPERATING ACTIVITIES 332 -- (2,209,515)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft (319) -- --
Sale of common stock -- -- 1,700,207
Advances received -- -- 1,880,521
Advances repaid -- -- (1,546,200)
Proceeds from notes payable -- -- 175,000
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES (319) -- 2,209,528
----------- ----------- -----------
INCREASE IN CASH 13 -- 13
CASH, BEGINNING OF PERIOD -- -- --
----------- ----------- -----------
CASH, END OF PERIOD $ 13 $ -- $ 13
=========== =========== ===========
The accompanying notes are an integral part
of these interim financial statements
4
GOLDSTATE CORPORATION
(An Exploration Stage Company)
NOTES TO INTERIM FINANCIAL STATEMENTS
MARCH 31, 2002
================================================================================
(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 March 31, 2002 had no material
assets and a working capital deficiency and stockholders' deficiency of $197,847
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 to repay its debts and acquire a new business
venture and ultimately to attain profitable operations.
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, 2001 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 three months ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002.
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. To date the
Company has not established any proven reserves and currently does not own any
mineral properties.
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.
The Company has also adopted the provisions of the Financial Accounting
Standards Board 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.
5
GOLDSTATE CORPORATION
(An Exploration Stage Company)
NOTES TO INTERIM FINANCIAL STATEMENTS
MARCH 31, 2002
================================================================================
(Unaudited)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (con't)
Net Loss per Common Share
Basic loss 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 ay potentially dilutive securities, the accompanying
presentation is only of basic loss per share.
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.
NOTE 3: RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2002 $15,000 (2001 - $7,500) was
incurred to a significant shareholder for administrative expenses. At March 31,
2002 $110,884 is owing to this shareholder as well as accrued interest of
$6,806.
During the three months ended March 31, 2002 $7,500 in consulting fees was
accrued to a significant shareholder. At March 31, 2002 $42,083 is owing to this
shareholder.
During the three months ended March 31, 2002 advances of $950 were received from
a shareholder and a relative of a significant shareholder. These amounts are
unsecured, bear no interest and have no specified terms of repayment.
6
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.
7
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, 2001, 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
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.
8
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.
Three-Month Period Ended March 31, 2002 Compared to Three-Month Period
Ended March 31, 2001
The Company's net loss for the three-month period ended March 31, 2002 was
approximately $29,483 compared to a net loss of approximately $49,391 for the
three-month period ended March 31, 2001. During both three-month periods ended
March 31, 2002 and 2001, respectively, the Company recorded no revenue.
During the three-month period ended March 31, 2002, the Company incurred
operating expenses of $29,483 compared to operating expenses of $49,391 incurred
during the three-month period ended March 31, 2001 (a decrease of $19,908).
During the three-month periods ended March 31, 2002 and 2001, respectively,
the Company did not incur any claims maintenance fees, exploration or staking
costs resulting primarily from suspension of any further exploration of the
Blackhawk II Property during 2000. During the three-month period ended March 31,
2002, the Company incurred general and administrative expenses of $26,911
compared to general and administrative expenses of $41,125 incurred during the
three-month period ended March 31, 2001. The decrease in general and
administrative expenses during the three-month period ended March 31, 2002 was
due primarily to a decrease in expenses related to the Company's 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.
Of the $26,911 incurred as general and administrative expenses during the
three-month period ended March 31, 2002, $15,000 and $7,500 was incurred payable
to Tarmac Management Ltd. ("Tarmac") and No. 50 Corporate Ventures Ltd. ("No.
50"), respectively, for amounts due and owing for managerial, administrative and
financial services rendered. As of March 31, 2002, an aggregate of $110,884 in
principal and $6,806 in accrued interest is due and owing Tarmac. As of March
31, 2002, an aggregate of $42,083 in principal is due and owing No. 50. During
the three-month period ended March 31, 2002, the Company paid $ -0- to Tarmac
and No. 50 towards the aggregate amounts due and owing. Such services rendered
by Tarmac and No. 50 include, but are not limited to, financial, administrative
and investor relations management. Both Tarmac and No. 50 are shareholders of
the Company holding an approximate 7.31% and 6.98% equity interest,
respectively.
As discussed above, the decrease in net loss incurred during the
three-month period ended March 31, 2002 as compared to the net loss incurred
during the three-month period ended March 31, 2001 is attributable primarily to
the decrease in general and administrative expenses. The Company's net loss
during the three-month period ended March 31, 2002 was approximately (29,483) or
$0.00 per share compared to a net loss of approximately ($49,391) or ($0.01) per
share during the three-month period ended March 31, 2001. The weighted average
number of shares outstanding was 10,747,261 for the three-month period ended
March 31, 2002 compared to 3,811,953 for the three-month period ended March 31,
2001, after giving retroactive effect to the ten for one share consolidation
completed on February 13, 2001.
9
LIQUIDITY AND CAPITAL RESOURCES
The Company must raise additional capital. Further, the Company has not
generated sufficient cash flow to fund operations and activities. Historically,
the Company has relied upon internally generated funds, funds from the sale of
shares of stock and loans from its shareholders and private investors to finance
its operations and growth. The Company's future success and viability are
entirely dependent upon the Company's current management to successfully
research and identify new business endeavors, and to raise additional capital
through further private offerings of its stock or loans from private investors.
There can be no assurance, however, that the Company will be able to
successfully research, identify and acquire new business endeavors and to raise
additional capital. The Company's failure to successfully identify and acquire
new business endeavors and to raise additional capital will have a material and
adverse affect upon the Company and its shareholders. 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 March 31, 2002, the Company's current assets were $13 and its current
liabilities were $197,860, which resulted in a working capital deficit of
$197,847. As of the three-month period ended March 31, 2002, the Company's total
assets were $13 compared to total assets of $-0- for fiscal year ended December
31, 2001. This increase in total assets from fiscal year ended 2001 was due
primarily to cash. As of the three-month period ended March 31, 2002, the
Company's total liabilities were $197,860 compared to total liabilities of
$168,364 for fiscal year ended December 31, 2001. This slight increase in
liabilities from fiscal year ended 2001 was due primarily to an increase in
amounts due to related parties and advances payable and accrued liabilities due
and owing by the Company to significant shareholders and debt holders which
totaled $153,917 and $37,137, respectively.
Stockholders' Deficit increased from ($168,364) for fiscal year ended
December 31, 2001 to ($197,847) for the three-month period ended March 31, 2002.
The Company has not generated positive cash flows from operating
activities. For the three-month period ended March 31, 2002, net cash flows used
in operating activities was $332 compared to $-0- of net cash flows used in
operating activities for the three-month period ended March 31, 2001. The net
operating loss of $29,483 decreased during the three-month period ended March
31, 2002 from a net operating loss of $49,391 during the three-month period
ended March 31, 2001. Changes in working capital assets and liabilities
decreased to an aggregate of $29,815 for the three-month period ended March 31,
2002 from an aggregate of $49,391 for the three-month period ended March 31,
2001.
Cash flows from financing activities were ($319) for the three-month period
ended March 31, 2002 relating to bank overdraft compared to $-0- for the
three-month period ended March 31, 2001.
10
FUNDING
Current management of the Company anticipates a possible increase in
operating expenses in order to successfully research and identify new business
endeavors. The Company may finance these expenses with further issuance of
common stock of the Company. The Company believes that any anticipated private
placements of equity capital and debt financing, if successful, may be adequate
to fund the Company's operations over the next six months. Thereafter, the
Company expects it will need to raise additional capital to meet long-term
operating requirements. The Company may encounter business endeavors that
require significant cash commitments or unanticipated problems or expenses that
could result in a requirement for additional cash before that time. If the
Company raises additional funds through the issuance of equity or convertible
debt securities other than to current shareholders, the percentage ownership of
its current shareholders would be reduced, and such securities might have
rights, preferences or privileges senior to its common stock. Additional
financing may not be available upon acceptable terms, or at all. If adequate
funds are not available or are not available on acceptable terms, the Company
may not be able to take advantage of prospective new business endeavors or
opportunities, which could significantly and materially restrict the Company's
business operations.
PART II. OTHER INFORMATION
Blackhawk II Property
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
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.
11
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
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.
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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.
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.
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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 100,000 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 100,000 shares of Common Stock,
which has been 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
$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.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
No report required.
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.
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: May 13, 2002 By: /s/ LAARA SHAFFER
-------------------------------
Laara Shaffer
President
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