SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly period Ended: March 31, 2003; or
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period _________ to __________
Commission File Number: 0-22057
-----------------------
GK INTELLIGENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0513297
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2602 Yorktown Place, Houston, Texas 77056
(Address of principal executive offices) (Zip Code)
(713) 626-1504
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that a
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock, $0.001
par value, as of March 31, 2003, was 21,658,274.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
1
GK INTELLIGENT SYSTEMS, INC.
Report on Form 10-QSB
For the Quarter Ended March 31, 2003
INDEX
Page
Part I. Financial Information
Item 1. Consolidated Financial Statements ................................................ 3
Consolidated Balance Sheet (Unaudited) ........................................... 3
Consolidated Statements of Operations (Unaudited) ................................ 4
Consolidated Statements of Cash Flows (Unaudited)................................. 5
Notes to the Consolidated Financial Statements (Unaudited) ....................... 7
Item 2. Management's Discussion and Analysis or Plan of Operation ........................ 12
Item 3. Controls and Procedures .......................................................... 14
Part II. Other Information
Item 1. Legal Proceedings ................................................................ 15
Item 2. Changes in Securities ............................................................ 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 ................................................. 17
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
GK INTELLIGENT SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheet
ASSETS
March 31,
2003
Unaudited)
----------------
CURRENT ASSETS
Cash $ 11,953
----------------
Total Current Assets 11,953
----------------
COMPUTER SOFTWARE, NET -
----------------
TOTAL ASSETS $ 11,953
================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 1,420,041
Accrued liabilities 2,323,234
Accrued liabilities - related parties 118,750
Stock subscription payable 107,500
Notes payable 382,500
Notes payable - related parties 216,296
----------------
Total Current Liabilities 4,568,321
----------------
TOTAL LIABILITIES 4,568,321
----------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock authorized: 10,000,000 preferred
shares at $0.001 par value; -0- issued and outstanding -
Common stock authorized: 275,000,000 common shares at
$0.001 par value; 21,658,274 shares issued and outstanding 21,658
Additional paid-in capital 39,408,618
Accumulated deficit (43,986,644)
----------------
Total Stockholders' Equity (Deficit) (4,556,368)
----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 11,953
================
The accompanying notes are an integral part of these consolidated financial statements.
3
GK INTELLIGENT SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)
From
Inception
For the Three on October 4,
Months Ended 1993 through
March 31, March 31,
----------------------------------
2003 2002 2003
--------------- ----------------- --------------
REVENUES $ - $ - $ 100,156
Cost of sales - - 29,961
--------------- ----------------- --------------
Gross margin - - 70,195
--------------- ----------------- --------------
EXPENSES
Loss on disposal of fixed assets - - 3,458,369
Depreciation and amortization - - 1,385,199
Impairment loss on software - - 1,308,520
General and administrative 308,435 77,091 36,323,098
--------------- ----------------- --------------
Total Costs and Expenses 308,435 77,091 42,475,186
--------------- ----------------- --------------
LOSS BEFORE OTHER INCOME (EXPENSE) (308,435) (77,091) (42,404,991)
--------------- ----------------- --------------
OTHER INCOME (EXPENSE)
Interest income - - 7,663
Gain on release of debt - - 75,253
Interest expense (83,304) (89,958) (1,477,254)
--------------- ----------------- --------------
Total Other Income (Expense) (83,304) (89,958) (1,394,338)
--------------- ----------------- --------------
LOSS BEFORE INCOME TAXES (391,739) (167,049) (43,799,329)
INCOME TAXES - - -
--------------- ----------------- --------------
NET LOSS (391,739) (167,049) (43,799,329)
DIVIDENDS ON PREFERRED STOCK - - (187,315)
--------------- ----------------- --------------
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS $ (391,739) $ (167,049) $ (43,986,644)
=============== ================= ==============
BASIC LOSS PER SHARE $ (0.02) $ (0.02)
=============== =================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 21,216,215 8,420,005
=============== =================
The accompanying notes are an integral part of these consolidated financial statements.
4
GK INTELLIGENT SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)
From
Inception
For the Three on October 4,
Months Ended 1993 through
March 31, March 31,
----------------------------------
2003 2002 2003
--------------- ----------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (391,739) $ (167,049) $ (43,799,329)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization - - 3,458,369
Loss on disposal of fixed assets - - 1,385,199
Impairment loss on software - - 1,308,520
Gain on release of debt - - (75,253)
Beneficial conversion on issuance of debt - - 103,068
Amortization of unearned compensation 46,900 10,138 5,929,531
Issuance of common stock, options, and warrants
for services 60,626 - 13,268,045
Changes in operating assets and liabilities:
Increase (decrease) in accounts payable and accrued
expenses 182,423 83,702 4,217,122
Increase in accrued liabilities - related party 44,423 73,209 1,142,227
--------------- ----------------- --------------
Net Cash Used by Operating Activities (57,367) - (13,062,501)
--------------- ----------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of software - - (915,742)
Other capital expenditures - - (1,651,988)
Organization costs - - (78,745)
--------------- ----------------- --------------
Net Cash Used by Investing Activities - - (2,646,475)
--------------- ----------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in stock subscription payable 107,500 - 107,500
Proceeds from issuance of note payable - - 1,098,769
Common stock issued for cash - - 13,799,829
Payments on notes payable - - (306,637)
Proceeds from issuance of notes payable - related party - - 250,000
Payments on notes payable - related party (53,746) - (53,746)
Receipt of subscription receivable - - 779,900
Capital contributed by the Company's president - - 45,314
--------------- ----------------- --------------
Net Cash Provided by Financing Activities 53,754 - 15,720,929
--------------- ----------------- --------------
NET DECREASE IN CASH (3,613) - 11,953
CASH AT BEGINNING OF PERIOD 15,566 - -
--------------- ----------------- --------------
CASH AT END OF PERIOD $ 11,953 $ - $ 11,953
================ ================= ===============
The accompanying notes are an integral part of these consolidated financial statements.
5
GK INTELLIGENT SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
From
Inception
For the Three on October 4,
Months Ended 1993 through
March 31, March 31,
----------------------------------
2003 2002 2003
--------------- ----------------- --------------
SUPPLEMENTAL SCHEDULE OF CASH FLOW
ACTIVITIES:
Cash Paid For:
Income taxes $ - $ - $ -
Interest $ 2,255 $ - $ 39,255
Schedule of Non-Cash Financing Activities:
Common stock issued for debt $ - $ - $ 698,685
Common stock issued for debt-related parties $ 102,125 $ - $ 891,187
Options and warrants issued for debt - related party $ 110,000 $ - $ 110,000
Common stock issued for services - related party $ 10,626 $ - $ 4,619,748
Options and warrants issued for services $ 20,000 $ - $ 2,461,986
Common stock issued for services $ 30,000 $ 137,500 $ 6,186,311
Fixed assets distributed for debt $ - $ - $ 42,783
The accompanying notes are an integral part of these consolidated financial statements.
6
GK INTELLIGENT SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Note to Consolidated Financial Statements
March 31, 2003 and 2002
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted in accordance with such
rules and regulations. The information furnished in the interim condensed
financial statements include normal recurring adjustments and reflects all
adjustments, which, in the opinion of management, are necessary for a fair
presentation of such financial statements. Operating results for the three
months ended March 31, 2003 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2003.
NOTE 2 - GOING CONCERN
The Company's consolidated financial statements are prepared using
accounting principles generally accepted in the United States of America
applicable to a going concern which contemplates the realization of assets
and liquidation of liabilities in the normal course of business. However,
the Company does not have cash or other material assets, nor does it have
an established source of revenue to cover its operating costs and to allow
it to continue as a going concern. These consolidated financial statements
do not reflect any adjustments that might result from the outcome of this
uncertainty. It is the intent of the Company to obtain additional financing
through equity offerings or other feasible financing alternatives to fund
its ongoing operations. The Company also continues to pursue the
development and marketing of its software to generate sales to cover the
Company's working capital needs and software development expenditures.
There is no assurance that the Company will be successful in raising the
needed capital or that there will be sales of its software.
NOTE 3 - SIGNIFICANT AND SUBSEQUENT EVENTS
Due to the increase in costs and the lack of financial funding, the Company
suspended operations in June 1999.
In June 2002, the Company, which had been dormant for 3 years, commenced
the process of reestablishing business operations. The Company is pursuing
the further development of its software technology and adapting the
software to current market needs.
Property and Equipment
----------------------
In June 1999, the Company's assets were seized by landlords and sold to off
set amounts owing for rent. The Company realized a loss on disposal of the
fixed assets of $1,385,199.
Subsidiaries
------------
On February 1, 2003, the Company authorized the formation of four
subsidiaries to be utilized in the licensing, marketing, and exploitation
of the Company's software. As of March 31, 2003, the Company had formed (a)
The Baseball Club, Inc., a Nevada corporation, and (b) Smart One Learning
Systems, Inc., a Nevada corporation. There has not been any operating
activity in these subsidiary companies.
7
GK INTELLIGENT SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Note to Consolidated Financial Statements
March 31, 2003 and 2002
NOTE 3 - SIGNIFICANT AND SUBSEQUENT EVENTS (Continued)
Computer Software
-----------------
Because of minimal sales in 1999 and no sales through January 2003 the
Company determined that the software value has been fully impaired. The
impairment loss recognized was $1,308,520.
Commitments and Contingencies
-----------------------------
On February 10, 2000, the Texas Workforce Commission placed an
administrative lien on the Company in the amount of $109,024. As of the
date of this filing the Company has no evidence to show that this lien has
been released.
In May 2001, the Company entered into a Consulting and Finder's Fee
Agreement with The Herman Group pursuant to which the Herman Group was to
provide services to the Company in connection with the clean-up, strategic
planning, location and procurement of investors and financing for the
Company and identification of potential buyer's and/or merger candidates
for the Company. Despite not having rendered any substantive services to
the Company, nor procuring any investment or identification of any buyer or
strategic alliances, on May 14, 2002 the Company received a letter
threatening a lawsuit for the Company's breach of contract and demanding
payment of $180,000 as fees due under the contract for services performed
by the Herman Group. The Company believes The Herman Group's claim is
without merit as no substantive services were provided and has responded to
the demand letter. The Company has not accrued any amounts as it cannot
estimate the amount of potential loss, if any, relating to this agreement.
On February 1, 2002, a default judgment was entered on behalf of Imperial
Business Credit, Inc. for $23,200. Subsequent to the judgment, the two
parties agreed to settle for $10,000. The liability was paid-in-full as of
March 31, 2003.
On March 3, 2002, a judgment was filed in the matter of Fidelity Leasing,
Inc. v. GK Intelligent Systems, Inc. The judgment was in favor of Fidelity
Leasing in the amount of $29,854 in damages, fees and costs and subject to
interest at various rates. The Company has accrued the judgment and
applicable costs in accrued expenses.
On June 14, 2002, an agreed judgment was entered on behalf of Lyon
Financial Services d.b.a. The Manifest Group. It was ordered that GK
Intelligent Systems, Inc. and Gary Kimmons, individually as guarantor, pay
to Lyon Financial Services d.b.a. The Manifest Group the sum of $20,000
with interest at eight percent per annum from September 20, 2001 to the
above date of judgment, as well as $1,500 in attorney's fees. Subsequent to
the judgment for $21,500, the two parties agreed to settle for $12,750. The
Company has paid $3,250 as of March 31, 2003. The Company has accrued the
judgment and applicable costs in accrued expenses.
8
GK INTELLIGENT SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Note to Consolidated Financial Statements
March 31, 2003 and 2002
NOTE 3 - SIGNIFICANT AND SUBSEQUENT EVENTS (Continued)
Commitments and Contingencies (Continued)
-----------------------------------------
On October 10, 2002, the Company and its President, Gary F. Kimmons entered
in a Settlement Agreement with an unrelated individual. In this action, the
individual alleged violations of the securities laws, common law fraud,
conspiracy, negligence, and negligent misrepresentation and was seeking
unspecified damages. The individual also alleged that certain officers
and/or directors may have engaged in insider trading. The parties to this
matter have released each other from any and all claims or actions they may
have against each other.
Stock Split
-----------
On March 19, 2002, the Company reverse split its common stock on a 1 for 10
basis. All references to common stock have been retroactively restated to
show the effect of the reverse split. On the same date the Company approved
the filing of Amended Articles of Incorporation to increase the number of
authorized shares of common stock from 250,000,000 shares to 275,000,000
shares with a par value of $0.001 per share.
Common Stock
------------
During 2002, the Company issued 121,980 common shares to various vendors
valued at $0.18 to $2.00 per share for the conversion of debt.
During 2002, the Company issued 4,055,000 common shares to various
consultants valued at $0.10 per share for services performed.
During 2002, the Company issued 775,000 common shares to the Company's
President/CEO and director valued at $0.10 per share for services
performed.
During 2002, the Company issued 7,100,000 common shares to the Company's
President/CEO and director valued at $0.10 per share for the conversion of
related party debt.
During the three months ended March 31, 2003, the Company had issued
200,000 common shares to various consultants valued at $0.17 per share for
services performed.
During the three months ended March 31, 2003, the Company had issued
600,735 common shares to the Company's President/CEO and to a Director
valued at $0.17 per share for the conversion of related party debt.
During the three months ended March 31, 2003, the Company had issued 62,500
common shares to a Director of the Company valued at $0.17 per share for
services performed.
Warrants
--------
As of March 31, 2003, the Company had issued 200,000 warrants to the
Company's President/CEO for the conversion of debt to equity of $110,000
and services of $20,000. The warrants are exercisable at $0.35 per share,
vest immediately, and are exercisable for five years.
9
GK INTELLIGENT SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Note to Consolidated Financial Statements
March 31, 2003 and 2002
NOTE 3 - SIGNIFICANT AND SUBSEQUENT EVENTS (Continued)
Private Placement Memorandum
----------------------------
On October 18, 2002, the Company issued a Private Placement Memorandum
(PPM) to accredited investors as defined in Rule 501 of Regulation 1 of the
Securities Act of 1933. This PPM was for 40 units with each unit consisting
of 100,000 shares of common stock and a warrant to purchase up to 200,000
shares of common stock. Each warrant vests immediately and will be
exercisable for a period of two years from the date of issuance. Each unit
is being offered for $25,000 or $0.25 per share. Each warrant is
exercisable at $0.35 per share.
As of December 31, 2002 the Company had sold 7 units or 700,000 shares of
common stock and 1,400,000 warrants for $175,000. During the three months
ended March 31, 2003, the Company had received $107,500 as a prepayment on
an additional 4.5 units. These proceeds are reflected as a stock
subscription payable as the shares were not issued by March 31, 2003.
Subsequent to March 31, 2003, the Company had received $36,500 as a
prepayment towards one additional unit.
Notes Payable - Related Party
-----------------------------
On October 1, 2001, the Company entered into a promissory note for $50,000
with a director of the Company. The note bears an interest rate of 8% per
annum. This note was converted into 100,000 post-reverse shares of common
stock on April 1, 2002.
On September 26, 2002, the Company entered into a promissory note for
$170,041 with the Company's president and CEO. The note bears an interest
rate of 6% per annum. This note is unsecured. This note payable formalized
the repayment of expenses paid by the Company president and CEO on behalf
of the Company. On February 17, 2003, the Company issued 588,235 shares to
Gary Kimmons to convert $100,000 of this promissory note to equity.
Consulting Agreements
---------------------
On April 24, 2001, GK Intelligent Systems and Berkshire Capital Management
Co., Inc. ("Berkshire Capital") entered into a Consulting Agreement. Under
the terms of the Agreement, Berkshire Capital was to provide assistance in
the development of the corporate strategy and recommend an effective growth
strategy. This includes mentoring and assistance in forming the structure
of the functional components of the Company as well as providing technical
guidance in the establishing of business alliances and relationships.
Further, Berkshire Capital would aid in the acquisition of administrative
personnel for the Company. In consideration for their efforts the Company
issued 1,000,000 unregistered and restricted shares of its common stock on
the effective date of the agreement. These shares were fully earned and
non-cancelable at time of issuance. Under the terms of the Agreement,
Berkshire Capital will be entitled to receive additional shares, pro rata,
in the event of a reverse stock split within 3 years from the effective
date. The amount of pro rata shares to be issued will be proportional to
the shares exchanged in the reverse stock split.
10
GK INTELLIGENT SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Note to Consolidated Financial Statements
March 31, 2003 and 2002
NOTE 3 - SIGNIFICANT AND SUBSEQUENT EVENTS (Continued)
On March 6, 2002, GK Intelligent Systems and Petty International
Development, Corp. signed an Engagement Letter memorializing an Agreement
under which Petty International will act as the Company's non-exclusive
U.S. consulting, marketing, public offering, mergers and acquisition agent,
for the purpose of rendering financial advice and other such services. The
engagement is effective as of April 5, 2001. In consideration for the
services provided by Petty International the Company issued 1,200,000 post
reverse split shares of its unregistered and restricted stock. The term of
this Agreement is for two years from the effective date. In the event that
the Company determines not to proceed with any transactions after such has
been accepted in writing, then there is a $50,000 dollar "break-up" fee,
which is also payable in Company common stock.
On June 1, 2002, GK Intelligent Systems entered into a Marketing Agreement
with BTH2, Inc. The terms of the Agreement state that BTH2 is to provide
its services as a marketing agency for the Company's products for a period
of 12 months commencing June 1, 2002. In consideration for BTH2's efforts,
the Company shall compensate BTH2 in the form of a non-refundable monthly
retainer of $25,000 per month, with the first payment starting 60 days from
the execution of the Agreement. Additionally as compensation, the Company
issued 500,000 post-reverse split adjusted shares of its unregistered and
restricted common stock.
On September 13, 2002 GK Intelligent Systems and Alan S. Litvak ("Litvak")
entered into a Consulting Agreement. The terms of the Agreement set forth
that Litvak will assist in the identification and procurement of qualified
investors for the Company. As compensation for the services rendered under
this Agreement the Company will pay a commission amounting to 10% of the
total dollars raised in the private placement. Payment to Litvak shall be
made according to the following formula: 50% of the total amount shall be
in cash and the remaining 50% shall be in the form of unregistered and
restricted Common Stock of the Company.
During 2001 and 2002, the Company entered into a number of additional
consulting agreements with various individuals and companies wherein they
are to provide a variety of current and future services to the Company in
exchange for compensation in the form of cash payments and issuance of
common stock. Under the provisions of these agreements, the Company is
obligated to issue a minimum of 1,200,000 shares of common stock plus
additional cash payments or common stock in lieu of cash as services are
performed in accordance with terms of the various agreements.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
CAUTIONARY FORWARD - LOOKING STATEMENT
======================================
The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes.
Certain matters discussed herein may contain forward-looking statements
that are subject to risks and uncertainties. Such risks and uncertainties
include, but are not limited to, the following:
- the volatile and competitive nature of the software business,
- the uncertainties surrounding the rapidly evolving markets in which
the Company competes,
- the uncertainties surrounding technological change and the Company's
dependence on computer systems, - the Company's dependence on its
intellectual property rights,
- the success of marketing efforts by third parties,
- the changing demands of customers and
- the arrangements with present and future customers and third parties.
Should one or more of these risks or uncertainties materialize or should
any of the underlying assumptions prove incorrect, actual results of current and
future operations may vary materially from those anticipated.
Business Overview
-----------------
From inception (October 4, 1993) through March, 1999, the Company has
utilized funds obtained primarily through private placements of restricted
common stock to acquire and develop core software technologies used in the
creation of computer-based training products. The Company's first product,
Around the Web in 80 Minutes, a CD-ROM based internet training course, was
introduced at the COMDEX Fall '98 trade show in mid November 1998 and
subsequently made available to consumers solely through direct sales beginning
in late November 1998. During the first quarter of 1999, in an effort to align
itself with established product distribution companies capable of serving major
national retailers, the Company shifted emphasis from its direct sales approach
to a distributor-based approach and engaged as its marketing representatives
High Altitude Sales and Marketing, Inc. and Computer Generation. As a result,
the Company in turn signed distribution agreements with Ingram Micro, Inc. and
Tech Data Corporation in February and March 1999, respectively. Ingram Micro,
Inc. distributes products and services to more than 115,000 resellers in 120
countries. Tech Data serves more than 100,000 value-added resellers and retail
dealers in the United States, Canada, the Caribbean, Latin America, Europe, and
the Middle East.
To fund its operations, the Company commenced a private placement in
November 1998, which was closed in early May 1999 after raising $3,373,000 for
the sale of 168,65 (post reverse split adjusted) shares of its common stock. Due
to increased marketing costs associated with product rollout the Company needed
additional capital. Unable to secure necessary capital from institutional
sources, the Company attempted a private placement in May 1999 wherein it
offered 240,000 (post reverse split adjusted) units at $2.00 per unit with each
unit consisting of one share of common stock and one warrant to purchase one
share of common stock at an exercise price of $4.00 per share. As of May 13,
1999, no funding had occurred under the new private placement.
12
Thereafter, the Company continued to pursue the private placement of its
securities with accredited investors but was unsuccessful. In May 1999, Gerald
C. Allen requested that Gary F. Kimmons resign as Chief Executive Officer,
claiming that if Mr. Kimmons resigned the Company would receive financing which
would be provided through previous private placement sources. Before a
resignation agreement could be effectuated, the Company at the direction of
Gerald C. Allen announced the resignation of Mr. Kimmons and purported to
appoint Winston Van Bieutenen as Chief Executive. Despite these actions, no
financing was forthcoming as Mr. Allen represented, and on June 11, 1999, Marcus
F. Wray, Jean Paul Dejoria, and Gerald C. Allen all submitted letters of
resignation as officers and directors of the Company. Mr. Kimmons attempted to
resurrect the Company and was unable to do so, and the Company closed its doors
on June 11, 1999.
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, and in future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases and in oral statements made with the approval of an authorized
executive officer which are not historical or current facts are "forward-looking
statements" made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. 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. The following
important factors, among others, in some cases have affected and in the future
could affect the Company's actual results and could cause the Company's actual
financial performance to differ materially from that expressed in any
forward-looking statement: (i) the extremely competitive conditions that
currently exist in the market for "blank check" companies similar to the Company
and (ii) lack or resources to maintain the Company's good standing status and
requisite filings with the Securities and Exchange Commission. The foregoing
list should not be construed as exhaustive and the Company disclaims any
obligation subsequently to revise any forward-looking statements to reflect
events or circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events.
Plan of Operation
-----------------
The Company has not engaged in any material operations or had any revenues
from operations during the last three fiscal years. The Company's plan of
operation for the next 12 months is to continue to seek the acquisition of
assets, property or business that may benefit the Company and its shareholders.
Because the Company has virtually no resources, management anticipates that to
achieve any such acquisition, the Company will be required to issue shares of
its common stock as the sole consideration for such acquisition.
In the event that the Company contacts or is contacted by a private company
or other entity which may be considering a merger with or into the Company, it
is possible that the Company would be required to raise additional funds in
order to accomplish the transaction. Otherwise, and even though the Company only
possesses nominal funds, as the Company does not engage in any ongoing business
which requires the routine expenditure of funds, the Company would not be
required to raise additional funds during the next twelve months. The Company
does not routinely expend any funds for the ownership or lease of property, as
any routine activities are being conducted out of an office made available by
the Company's President.
13
During the next 12 months, the Company's only foreseeable cash requirements
will relate to maintaining the Company in good standing and making the requisite
filings with the Securities and Exchange Commission and the payment of expenses
associated with reviewing or investigating any potential business venture, which
may be advanced by management or principal shareholders, or as loans to the
Company. Because the Company has not identified any such venture as of the date
of this Report, it is impossible to predict the amount of any such loan.
However, any such loan will not exceed $25,000 and will be on terms no less
favorable to the Company than would be available from a commercial lender in an
arm's length transaction. Management may at its discretion raise any required
funds through any private placement of "unregistered" and "restricted"
securities or any public offering of its common stock.
Results of Operations
---------------------
Net revenues for the three months ended March 31, 2003 and 2002 were $-0-
and $-0-, respectively. The Company had a operating expenses of $308,435 for the
three months ending March 31, 2003 compared to $77,091 for the comparative
period of 2002. The Company was inactive in the first quarter of 2002. In the
first quarter of 2003 the Company continued its efforts to reestablish its
business operations. These efforts focused on bringing its securities filings
current, so it incurred legal and accounting expenses of approximately $107,000.
The Company also paid various consultants in cash and stock for directing its
development of music and entertainment products. The expense recorded was
approximately $217,000.
The Company unsuccessfully launched its product sales in the first six
months of 1999. The Company was unable to raise sufficient capital to sustain
its marketing effort and closed its offices and terminated most of the personnel
in June of 1999. The Company's in the first quarter of 2003 are accruals of
officer compensation and interest on its liabilities.
Liquidity
---------
During the three months ended March 31, 2003, the Company used cash of
$57,367 in its operations compared to $-0- in the three months ended March 31,
2002. The Company had cash on hand of $11,953 as of March 31, 2003. The Company
raised $107,500 from the sale of its common shares in the first quarter of 2003.
Management estimates that the Company will need approximately $3,000,000 to
become fully operating. It is seeking these funds through issuance of its common
stock or debt. There is no assurance that such funds will be available or that
if available will be on terms acceptable to the Company.
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Our principal
executive officer and principal financial officer have evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Exchange Act), as of a date within 90 days of
the filing date of this Quarterly Report on Form 10-QSB. Based on such
evaluation, they have concluded that as of such date, our disclosure controls
and procedures are effective and designed to ensure that information required to
be disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in applicable SEC rules and forms.
14
(b) Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of evaluation by our principal executive officer
and principal financial officer.
PART II - OTHER INFORMATION.
Item 1. Legal Proceedings.
Texas Workforce Commission. On February 10, 2000, the Texas Workforce
Commission placed an administrative lien on the Company in the amount of
$109,024.
Claim of The Hermann Group. May 14, 2002 the Company received demanding a
payment pursuant to the May 1, 2001 Consulting Agreement and threatening a
lawsuit for the Company's breach of contract and demanding payment of $180,000
as fees due under the contract for services performed by the Hermann Group. The
Company believes The Hermann Group's claim is without merit as no services were
provided and has responded to the demand letter.
We are not aware of pending claims or assessments, other than as described
above, which may have a material adverse impact on the Company's financial
position or results of operations.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
On January 31, 2003, the Company authorized the issuance of a common stock
purchase warrant to Gary F. Kimmons. This warrant is for the purchase of up to
520,000 shares of common stock at an exercise price of $0.35 per share as full
and complete satisfaction of his accrued and unpaid salary totaling $110,000
($20,000 a month, from July 15, 2002 through December 31, 2002). The warrant is
immediately exercisable for a period of five (5) years and shall expire on
December 31, 2007.
On January 31, 2003, the Company authorized the issuance of a common stock
purchase warrant to Gary F. Kimmons. This warrant is for the purchase of up to
80,000 shares of common stock at an exercise price of $0.35 per share as full
and complete satisfaction of the accrued and unpaid salary totaling $20,000
($20,000 a month, from January 1, 2003 through January 31, 2003). The warrant is
immediately exercisable for a period of five (5) years and shall expire on
December 31, 2007.
On February 1, 2003, the Company authorized the formation of four
subsidiaries to be utilized in the licensing, marketing, and exploitation of the
Company's software. As of March 31, 2003, the Company had formed (a) The
Baseball Club, Inc., a Nevada corporation, and (b) Smart One Learning Systems,
Inc., a Nevada corporation. There has not been any operating activity in these
subsidiary companies.
15
On February 1, 2002, the Board of Directors approved and adopted the GK
Intelligent Systems, Inc., 2003 Stock Option Plan. The plan was established in
order to provide a method whereby chosen key employees and persons providing
services to the Company who are primarily responsible for the management and
growth of the Company and who are expected to continue to make substantial
contributions to the Company's future can be offered incentives. The number of
common shares authorized under the plan are ten million (10,000,000) and said
shares will be granted either as Incentive Stock Options as defined in Section
422 of the Internal Revenue Code or Non-Qualified Stock Options for those
options which do not meet the conditions of Section 422 of the Internal Revenue
Code.
On February 1, 2003, the Company entered into a new employment agreement
with Mr. Kimmons. The agreement provides for a three-year term that
automatically renews at the end of the term for consecutive one-year terms, and
which provides for an annual base compensation of $240,000 and non-qualified
stock options to 3,000,000 shares of Common Stock under the Company's 2003 Stock
Option Plan, at a purchase price of $0.18 per share (110% of the closing market
price on the date of grant). Options to purchase 1,000,000 shares are
exercisable immediately, options to purchase 1,000,000 shares vest and shall be
exercisable at such time as the Company is current and filed its annual and
quarterly reports for the years 2000, 2001 and 2002 and any reports then due for
the fiscal year 2003, and options to purchase 1,000,000 shares vest and shall be
exercisable at such time as the Company has raised a minimum of $500,000 in
investment capital. Upon Mr. Kimmon's death, disability or involuntary
termination (other than for cause), all unvested warrants will become
immediately vested and exercisable. The Company may terminate the agreement for
cause, or upon the extended disability or death of Mr. Kimmons. Mr. Kimmons may
terminate the agreement for good reason, which is defined as (1) diminution of
duties, (2) failure by the Company to comply with the agreement, (3) a
requirement by the Company for Mr. Kimmons to move locations, (4) any purported
termination other than as permitted in the agreement, (5) a change of control,
or (6) failure to have a successor corporation assume the agreement. If the
agreement is terminated in connection with a change of control, (1) the Company
must pay Mr. Kimmons an amount equal to approximately three times the sum of his
annual base salary and the average of the last annual incentive bonuses actually
paid, (2) all outstanding warrants immediately vest, (3) welfare and fringe
benefits are provided for one year, (4) the Company must pay the sum of any
earned salary not yet paid, deferred compensation and an amount equal to 150% of
the value of Mr. Kimmons accrued benefits in any Company long term incentive
plan times a fraction equal to the months worked in the performance period
before termination divided by the total performance period. If the agreement is
terminated for cause or Mr. Kimmons terminates for other than good reason, the
Company shall pay earned but unpaid salary and any vested benefits payable to
him under a plan or policy. In the event of a change of control, Mr. Kimmons
will remain with the Company until the later of: (1) 15 days after the one year
anniversary of the change of control, (2) 15 days after the anniversary date of
any merger, or (3) January 31, 2006. The agreement defines a change of control
as: (1) any person acquiring 30% of the Company or if Mr. Kimmons' voting rights
are reduced to less than 30% of the outstanding shares, (2) if during a two year
period, individuals who were on the board of directors (and any new directors
elected by two-thirds of directors in office at the beginning of the period or
whose election or nomination was so approved) cease to be a majority of the
board of directors, (3) if the shareholders approve a merger or consolidation
(other than a merger in which company shareholders own at least 50% of surviving
entity), or (4) a complete liquidation.
On February 11, 2003, the Board of Directors authorized the issuance of
75,000 unregistered common shares of the Company to Dick Meador in consideration
for his director services to the Company through March 31, 2003.
On February 11, 2003, the Board of Directors authorized the issuance of
200,000 unregistered common shares of the Company to various consultants for
services performed.
On February 17, 2003, the Company issued 588,235 unregistered shares of
common stock to Gary F. Kimmons in consideration for a capital contribution of
$100,000 in cash through the conversion of the unpaid principal sum of $100,000
under the promissory note dated September 26, 2002.
16
On March 31, 2003 the Board of Director's authorized the termination of the
consulting agreement with AfterPlay Entertainment, Inc.
On March 31, 2003 the Board of Director's authorized the termination of the
consulting agreement with Suns Associates Group.
On March 31, 2003 the Company entered into a Director's Agreement to retain
the services of Dick Meador as a member of the Board of Directors. Under the
Agreement Mr. Meador will serve as a Director of the Company from April 1, 2003
through March 31, 2004 and will receive compensation of 300,000 restricted
shares of common shares or options to purchase 300,000 restricted shares of
common shares.
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits attached or incorporated by referenced pursuant to
Item 601 of Regulation S-B.
Exhibit Description
------- -----------
3.1(1) Certificate of Incorporation of the Company and Amendments thereto.
3.2(1) By-laws of the Company.
3.3(2) Amendment to Certificate of Incorporation.
3.4(4) Certificate of Amendment to Certificate of Incorporation;
10.11(3) Consulting Agreement with Berkshire Capital Management Co., Inc.
10.12(3) Consulting and Finder's Fee Agreement with The Herman Group, L.P.
10.13(3) Engagement Letter with Petty International Development Corp.
10.14(3) Consulting Agreement with Ron Sparkman.
10.15(3) Consulting Agreement with Rockne J. Horvath.
10.16(3) Consulting Agreement with Stephen K. Carper.
10.17(3) Consulting Agreement with Renee H. Ethridge.
10.18(3) Consulting Agreement with Technical Objective, Inc.
10.19(3) Debt Resolution Agreement with Gary F. Kimmons.
10.20(3) Interim Compensation Agreement with Gary F. Kimmons.
10.21(3) Amended and Restated Consulting Agreement with Dick Meador.
10.22(3) Promissory Note to BDO Seidman LLP.
10.23(3) Consulting Agreement with Alan S. Litvak.
10.24(3) Promissory Note to Gary Kimmons.
10.25(5) Marketing Agreement with BTH2
10.26(6) Consulting Agreement with AfterpPlay Entertainment Inc. dated 12/12/02
10.27(6) Consulting Agreement with Suns Associates Group dated 12/13/02
10.28(6) Non-Employee Director Agreement with Dick Mead dated 3/31/03
10.29(6) Employment Agreement with Gary F. Kimmons dated 2/1/03
21(6) Subsidiaries
99.1** Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
99.2** Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
99.3** 906 Certification
- ------------------------
(1) Filed as an exhibit to the Company's registration statement on
Form 10-SB filed on January 24, 1997, and incorporated by
reference herein.
(2) Filed as an exhibit to the Company's Annual Report for fiscal
year ended May 31, 1998 on Form 10-KSB filed on September 14,
1998, and incorporated by reference herein.
(3) Filed as an exhibit to the Company's Current Report on Form 8-K
filed November 6, 2002 and incorporated by reference herein.
17
(4) Filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for the Quarter Ended March 31, 2002, and incorporated by
reference herein.
(5) Filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for the Quarter Ended June 30, 2002, and incorporated by
reference herein.
(6) Filed as an exhibit to the Company's Annual Report on Form 10-KSB
for the Year Ended December 31, 2003, and incorporated by
reference herein.
** Filed herewith.
(b) Reports on Form 8-K.
There were no other reports on Form 8-K filed during the period covered by
this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the Undersigned, thereunto duly authorized.
GK Intelligent Systems, Inc.
Dated: May 13, 2003 /s/ Gary F. Kimmons
---------------------------------------
By: Gary F. Kimmons
Its: President, Chief Executive Office
and Chief Financial Officer
18