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, 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
--------------------------------------------------
(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 May 11, 2001
------ ----------------------------------
Common Stock, $.0003 par value 3,811,953
Transitional Small Business Disclosure Format (check one)
Yes No X
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GOLDSTATE CORPORATION
(A Developmental Stage Company)
INTERIM FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 2001
Page
----
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 10
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
ITEM 5. OTHER INFORMATION 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
(a) No exhibits required.
(b) No reports required.
SIGNATURES 13
GOLDSTATE CORPORATION
(An Exploration Stage Company)
INTERIM FINANCIAL STATEMENTS
MARCH 31, 2001
(Unaudited)
BALANCE SHEETS
INTERIM STATEMENTS OF OPERATIONS
INTERIM STATEMENTS OF CASH FLOWS
NOTES TO INTERIM FINANCIAL STATEMENTS
1
GOLDSTATE CORPORATION
(An Exploration Stage Company)
BALANCE SHEETS
March 31, December 31,
2001 2000
===================================================================================================
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ - $ -
- ---------------------------------------------------------------------------------------------------
TOTAL ASSETS $ - $ -
===================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 60,787 $ 47,178
Advances payable 119,998 92,482
Accrued interest payable 52,540 44,274
Notes payable (Note 3) 600,000 600,000
- ---------------------------------------------------------------------------------------------------
833,325 783,934
- ---------------------------------------------------------------------------------------------------
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
3,811,953 (2000 - 38,119,500) shares issued and outstanding 11,740 11,740
Additional paid-in capital 2,567,089 2,567,089
Deficit accumulated during the exploration stage (3,412,154) (3,362,763)
- ---------------------------------------------------------------------------------------------------
(833,325) (783,934)
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ - $ -
===================================================================================================
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, 2001 31, 2000 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 - - 170,000
- --------------------------------------------------------------------------------------------------------------
- - 1,024,657
GENERAL AND ADMINISTRATIVE EXPENSES 41,125 17,368 2,211,019
INTEREST EXPENSE 8,266 18,352 176,478
- --------------------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD $ (49,391) $ (35,720) $(3,412,154)
==============================================================================================================
BASIC NET LOSS PER SHARE $ (0.0130) $ (0.0214)
==============================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 3,811,953 1,665,548
==============================================================================================================
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, 2001 31, 2000 2001
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period $ (49,391) $(35,720) $ (3,412,154)
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 - 3,495 -
- Changes in assets and liabilities
Accounts payable 13,609 1,400 69,297
Advances payable 27,516 - 27,516
Directors fees payable - 1,500 -
Accrued interest payable 8,266 21,152 153,331
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS USED IN OPERATING ACTIVITIES - (8,173) (2,302,010)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock - - 1,700,207
Advances received - 8,300 1,973,003
Advances repaid - - (1,546,200)
Proceeds from notes payable - - 175,000
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES - 8,300 2,302,010
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH - 127 -
CASH, BEGINNING OF PERIOD - 248 -
- ------------------------------------------------------------------------------------------------------------------------------
CASH, END OF PERIOD $ - $ 375 $ -
==============================================================================================================================
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, 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 March 31, 2001 had working capital
and stockholders' deficits of $833,325 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. There is a chance that the technology to be
transferred under the Sub-license Agreement may be delayed indefinitely, or
cancelled all together, depending on the outcome of the litigation. 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 three months ended March 31, 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. To date the
Company has not established any proven reserves on its 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.
5
GOLDSTATE CORPORATION
(An Exploration Stage Company)
NOTES TO INTERIM FINANCIAL STATEMENTS
MARCH 31, 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 December 31, 2000 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.
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 are 3% interest bearing notes and are payable
upon the transfer of the technology. Pursuant to an amendment to the Technology
Sub-license agreement, the company has 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 become due and payable upon the transfer
of the technology. Transfer of the technology or any settlement thereto will be
contingent on the outcome of the lawsuit described in Note 6.
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 to 3,811,953. The
loss per share figure for March 31, 2000 has been restated on a consolidated
basis.
NOTE 5: RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2001 $7,500 was incurred to a
significant shareholder for administrative expenses. At March 31, 2001 $15,000
is owing to this shareholder and is included in accounts payable.
NOTE 6: CONTINGENCIES
On May 8, 2000, the Company executed an assignment agreement to Geneva that
transferred and conveyed the potential claims and causes of action that the
Company may have in connections with the Sub-license Agreement with Geneva. If
amounts are 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 are to be determined in court.
The damages incurred stem 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 allege that there were breaches of
contract by AuRIC and Dames and Moore, as well as other causes of action. The
outcome of this lawsuit is presently not determinable.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
Goldstate 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. This
research by current management may result in the Company entering into business
operations that are not in the minerals exploration field.
Blackhawk II Property
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.
The Joint Venture Agreement was entered into primarily to utilize,
maximize and enhance the complementary exploratory technologies of the Company
and IGCO. Under the terms of the Joint Venture Agreement, the Company paid
$100,000 for reimbursement of previously incurred expenses and issued 1,000,000
shares of its restricted Common Stock to IGCO in exchange for the purchase of
the future profit sharing interest in profits. Pursuant to the terms of the
Joint Venture Agreement, the Company was to conduct work programs involving
exploration of the mining claims on the Blackhawk II Property in the minimum
annual amount of $250,000 for each calendar year, which commenced January 1,
1998 and continued through the year 2000. The Company was also to be the
operating partner, contribute all future capital requirements, and be
responsible solely for all project funding. In consideration, the Company was to
receive eighty percent (80%) of all net profits realized from the joint venture
until its invested capital was repaid, and IGCO and INGC were to receive twenty
percent (20%) of the net profits realized from the joint venture. After the
invested capital of the Company had been repatriated, the Company was then to
receive fifty-one percent (51%) of the net profits realized from the joint
venture, and IGCO and INGC were to retain forty-nine percent (49%) of the net
profits realized from the joint venture.
During fiscal year 1999, management of the Company intended to begin
geological survey of the Blackhawk II Property by an initial mapping of the area
for exploration. Management further intended to make preliminary investigations
for property exploration on the Blackhawk II Property in the following areas:
(i) claims maintenance, (ii) preliminary consulting reports and metallurgical
study, (iii) regional exploratory drilling and surface sample assay testing.
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.
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 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.
7
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. Therefore, 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 have not been successful in transferring the proprietary fire assay
technology to Geneva or to any independent third party assay laboratory.
Therefore, 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.
Subsequent to initiation of legal proceedings against AuRIC and Dames &
Moore, during November 1999, IGCO engaged the services of Strathcona Mineral
Services Limited ("Strathcona") to review the available data from AuRIC and
Dames & Moore and provide independent assay and metallurgical recovery testing
relating to IGCO's properties. Strathcona engaged the laboratories of Lakefield
Research and Activation Laboratories for testing and analysis. Strathcona
reported that both laboratories could not find gold above the minimum detection
limits in the samples, and concluded that based on the samples provided, gold
and silver were not present in economic quantities on IGCO's properties.
During November 1999, IGCO also engaged Mineral Science Limited of
London, England ("Mineral Science"), which obtained the services of the
internationally recognized facilities of OMAC Laboratories Ltd to provide fire
assay and geochemical analysis and CSMA Consultants Ltd. to perform leach
testing on the properties of IGCO. The results obtained from Mineral Science
confirmed and reiterated the negative findings of Strathcona, that gold values
were below the detection limits on the properties of IGCO.
As of the date of this Quarterly Report, the Company has suspended
further exploration of the Blackhawk II Property indefinitely due to (i) the
independent assessment information from Strathcona and Mineral Science which
does 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; (iii) the litigation against AuRIC and Dames
& Moore; (iv) the rock type of the Company's Blackhawk II claims is thought to
be similar to that of INGC's and IGCO's Blackhawk claims and without the alleged
assay and metallurgical recovery technology allegedly developed by Auric and
confirmed by Dames & Moore, the Company deems the probability of commercial
grade gold or silver located in the Blackhawk II claims to be nil at the current
date; and (v) the transfer of the alleged assay and metallurgical recovery
technology allegedly developed by Auric and confirmed by Dames & Moore and to be
obtained by the Company under the Sub-License Agreement with Geneva may not ever
be transferred.
Furthermore, the Company and IGCO agreed to the suspension of the
Company's obligations and duties under the Joint Venture Agreement until
resolution of the litigation against AuRIC and Dames & Moore.
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
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 fiscal years 1999
and 2000, the Company's primary source of financing has been from advances made
to the Company.
Three-Month Period Ended March 31, 2001 Compared to Three-Month Period Ended
March 31, 2000
The Company's net losses for the three-month period ended March 31,
2001 were approximately $49,391 compared to a net loss of approximately $35,720
for the three-month period ended March 31, 2000.
During the three-month period ended March 31, 2001, the Company
recorded operating expenses of $49,391 compared to $35,720 of operating expenses
recorded in the same period for 2000. During the three-month periods ended March
31, 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.
General and administrative expenses increased by approximately $23,757
during the three-month period ended March 31, 2001 from $17,368 incurred during
the three-month period ended March 31, 2000 compared to $41,125 incurred during
the three-month period ended March 31, 2001. This increase in general and
administrative expenses 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.
The increase in net loss during the three-month period ended March 31,
2001 as compared to the three-month period ended March 31, 2000 is attributable
primarily to the increase in general and administrative expenses. The Company's
net earnings (losses) during the three-month period ended March 31, 2001 were
approximately ($49,391) or ($0.0130) per share compared to a net loss of
approximately ($35,720) or ($0.0214) per share during the three-month period
ended March 31, 2000. The weighted average number of shares outstanding was
3,811,953 for the three-month period ended March 31, 2001 compared to 1,665,548
for the three-month period ended March 31, 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 March 31, 2001, the Company's total assets were $-0-. As of March
31, 2001, the Company's total liabilities were $833,325 compared to total
liabilities of $783,934 as at December 31, 2000. This increase in liabilities
from December 31, 2000 was due primarily to an increase in advances due and
owing by the Company in the amount of $27,516 and in accounts payable and
accrued liabilities in the amount of $13,609.
Stockholders' Deficit increased from ($783,934) for fiscal year ended
December 31, 2000 to ($833,325) for the three-month period ended March 31, 2001.
9
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.
INGC and AuRIC had entered into 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
properties of IGCO. Dames & Moore subsequently verified the fire and chemical
assay techniques and procedures developed by AuRIC, their repeatability, and
confirmed preliminary metallurgical recovery testing. Geneva and AuRIC thus
entered into 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 simultaneously entered into the Sub-License Agreement
whereby the Company acquired from Geneva a sub-license to utilize such
proprietary information and related precious metals recovery processes on the
Blackhawk II Property.
On September 27, 1999, Geneva and INGC, on behalf of IGCO, initiated
legal proceedings against AuRIC 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.
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 Brent
Pierce for breach of contract against Geneva, breach of contract against INGC,
breach of contract against Pierce, defamation against IGCO, INGC, Geneva and
Pierce, injunctions against IGCO, INGC, Geneva and Pierce, amongst other claims.
In their defamation claims against IGCO, the plaintiffs seek 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 seek attorney's fees
and costs.
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, 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 forms 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, allege 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.
10
Geneva and INGC subsequently obtained an order from the District Court
granting its Motion to Compel. The Order requires 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, intend
to obtain an expert opinion as to the validity or 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.
As of the date of this Quarterly Report, various depositions have been
taken by various parties to the lawsuit. Discovery and document production have
been conducted by both sides to the dispute. Geneva and INGC, on behalf of IGCO,
continue to pursue all such legal actions and review further legal remedies
against AuRIC and Dames & Moore, and have hired an expert witness in this
regard.
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 seeks 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 believe that the mining claims contain no commercial quantities
of gold or silver. Dames & Moore seeks to have the mining claims sold to
compensate Dames & Moore for its services, materials and equipment. Dames &
Moore also seeks its fees and costs incurred in enforcing its claimed lien. IGCO
and INGC filed an answer on or about August 8, 2000. No discovery has occurred
in the Idaho Lawsuit. IGCO intends to vigorously contest the claims and
allegations of Dames & Moore.
Due to the Company's knowledge that the Blackhawk II Property's
unpatented lode mining claims do not contain commercial quantities of gold or
silver, the Company has ceased to maintain and pay annual fees relating to most
of the Blackhawk II Property claimed areas. Moreover, management deems the
proprietary technology crucial with respect to successful exploration of the
Blackhawk II Property. Management has suspended exploration of the Blackhawk II
Property indefinitely until resolution of the legal proceedings. Management
believes that the legal proceedings will prove that the alleged proprietary
technology is invalid.
If the proprietary technology is proven to be invalid and not
transferable, and INGC/Geneva are not successful in the outcome of the
litigation and damages are not awarded, the Company may not be able to recover
its potential losses and expenses incurred due to the breach of the Sub-License
Agreement by Geneva. However, if the proprietary technology is proven to be
invalid and not transferable, and INGC/Geneva are successful in the outcome of
the litigation, INGC/Geneva may then receive damages from AuRIC and Dames &
Moore. Geneva's damages result primarily from its inability to transfer the
proprietary technology to IGCO in accordance with the provisions of the
Sub-License Agreement. Management believes that the Company will, under these
circumstances, be entitled to receive a pro-rata portion of the awarded damages
for potential losses incurred due to the breach of the Sub-License Agreement by
Geneva.
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. If damages are recovered in the lawsuit
initiated by Geneva and INGC, on behalf of IGCO, the Company will receive a pro
rata share of such damages relating to its claims and causes of action in
relation to all other claims and causes of action for which damages are
recovered. Thus, Geneva will receive any such pro rata share of the damages
recovered pursuant to the terms and provisions of the Assignment Agreement.
Management believes that the Company will, under these circumstances, be
entitled to receive a pro-rata portion of the awarded damages for potential
losses incurred due to the breach of the Sub-License Agreement by Geneva.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 13, 2001, the Company effected a reverse stock split of ten
for one share of common stock, which resulted in a decrease in the issued and
outstanding shares of common stock to 3,811,953.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No report required.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to a Definitive Proxy Statement dated December 19, 2000, the
shareholders of the Company held a special meeting on January 30, 2001 in which
the shareholders of the Company voted and approved the following:
(i) the authorization for the board of directors to effect a reverse
stock split of one-for-ten (the "Reverse Stock Split") of GDSS's
outstanding Common Stock;
(ii) the adoption of an amendment to the Company's Articles of
Incorporation, as amended, which would effect the Reverse
Stock Split, without having any effect upon the authorized and
unissued shares of Common Stock;
(iii) the election of the following two persons to serve as directors of
the Company until their successor shall have been elected and
qualified: Ron F. Horvat and James Bunyan; and
(iv) the ratification of the selection of LaBonte & Co. as the
independent public accountants of the Company for the fiscal year
ending December 31, 2000.
ITEM 5. OTHER INFORMATION
No report required.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits required.
(b) No reports 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: May 14, 2001 By: /s/ CARSON WALKER
-------------------------------
Carson Walker
President
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