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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
________________________________________________________________________________
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from June 1, 1998 through September 30, 1998
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 (IRS Employer
incorporation or organization) Identification No.)
5555 San Felipe, Suite 625
Houston, TX 77056
(Address of principal offices)
(713) 840-7722
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act: Common
Stock
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock
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 past 90 days.
Yes X No
------ -------
Issuer had no revenues for the quarter and four months ended September 30, 1998.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 30,642,238 shares of common stock,
$.001 par value, issued and outstanding at November 20, 1998.
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GK INTELLIGENT SYSTEMS, INC.
FORM 10-QSB REPORT INDEX
10-QSB Part and Item No. Page No.
- ------------------------ --------
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Balance sheet as of September 30, 1998................. 3
Statements of loss for the three and four months ended
September 30, 1998 and 1997........................... 4
Statements of cash flows for the four months ended
September 30, 1998 and 1997........................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......... 8
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................... 10
ITEM 2. CHANGES IN SECURITIES.................................. 11
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
2
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GK INTELLIGENT SYSTEMS, INC.
(A Development Stage Enterprise)
BALANCE SHEET
(Unaudited)
September 30,
1998
-------------
Assets
------
Current:
Cash ................................................... $ 1,679,434
Other................................................... 232,460
------------
Total Current Assets..................................... 1,911,894
------------
Computer software costs, net............................. 1,888,982
Property and equipment, net.............................. 1,235,260
------------
Total Assets............................................. $ 5,036,136
============
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities............... $ 521,720
Capital lease obligations, current maturities.......... 25,667
------------
Total Current Liabilities................................ 547,387
------------
Capital lease obligations, less current maturities....... 77,654
Other long term liabilities.............................. 249,497
Commitments and Contingencies
Stockholders' Equity:
Series A preferred stock; redeemable and convertible
with liquidation preference of $6.00 per share....... 187,315
Common stock........................................... 30,246
Additional paid-in capital............................. 27,582,851
Deficit accumulated during the development stage....... (23,638,814)
------------
Total Stockholders' Equity............................... 4,161,598
------------
Total Liabilities and Stockholders' Equity............... $ 5,036,136
============
See accompanying notes to unaudited financial statements.
3
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GK INTELLIGENT SYSTEMS, INC.
(A Development Stage Enterprise)
STATEMENTS OF LOSS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Four Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues..................................... $ -- $ -- $ -- $ --
Costs and Expenses:
Professional services..................... 2,890,539 373,985 3,106,836 420,014
Compensation expense...................... 1,211,891 368,531 1,391,344 550,436
Depreciation and amortization............. 282,694 215,299 367,396 286,812
Other general and administrative.......... 422,535 133,812 502,746 168,386
----------- ----------- ----------- -----------
Net loss..................................... (4,807,659) (1,091,627) (5,368,322) (1,425,648)
Dividends on preferred stock................. (28,315) -- (54,815) --
----------- ----------- ----------- -----------
Net loss applicable to common shareholders... $(4,835,974) $(1,091,627) $(5,423,137) $(1,425,648)
=========== =========== =========== ===========
Basic net loss per share of common stock..... $ (.16) $ (.08) $ (.19) $ (.11)
=========== =========== =========== ===========
Weighted Average Number of Shares of
Common Stock Outstanding.................. 29,367,324 13,893,702 29,082,381 13,567,040
=========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited financial statements.
4
<PAGE>
GK INTELLIGENT SYSTEMS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Four Months Ended
September 30,
---------------------------
1998 1997
---------------------------
<S> <C> <C>
Operating activities:
Net loss..................................................... $(5,368,322) $(1,425,648)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization............................ 367,396 286,812
Issuance of common stock and warrants
for various expenses................................... 1,820,608 525,707
Changes in assets and liabilities:
Other current assets................................... (134,380) (147)
Accounts payable and accrued liabilities............... 538,441 (50,841)
----------- -----------
Net cash used in operating activities................ (2,776,257) (664,117)
----------- -----------
Investing activities:
Purchased software........................................... -- (103,057)
Purchased property and equipment............................. (1,010,610) (14,202)
----------- -----------
Net cash used in investing activities................ (1,010,610) (117,259)
----------- -----------
Financing activities:
Proceeds from private placements and other share issuances... 232,411 529,464
Repayment of borrowings...................................... (7,559) (10,880)
----------- -----------
Net cash provided by financing activities............ 224,852 518,584
----------- -----------
Net decrease in cash and cash equivalents...................... (3,562,015) (262,792)
Cash and cash equivalents at beginning of period............... 5,241,449 348,465
----------- -----------
Cash and cash equivalents at end of period..................... $ 1,679,434 $ 85,673
=========== ===========
</TABLE>
See accompanying notes to unaudited financial statements.
5
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GK INTELLIGENT SYSTEMS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to interim financial reporting as prescribed by the
Securities and Exchange Commission. All adjustments, which, in the opinion of
management, are necessary for a fair presentation of the results for the interim
periods have been reflected in the accompanying unaudited financial statements.
For further information regarding accounting policies, refer to the Company's
audited financial statements for the years ended May 31, 1998 and 1997 and for
the period from inception (October 4, 1993) through May 31, 1998 included in the
Company's 1998 Annual Report on Form 10-KSB.
Effective August 1998, the Company elected to change its year end to December
31. Accordingly, these interim financial statements present the (i)results of
operations for the quarter ended September 30, 1998 and the period from June 1
through September 30, 1998 (the "Transition Period") and (ii)cash flows for the
Transition Period. The results of operations and cash flows for the month of
June 1998, not previously reported, have been presented in Note 4.
2. GOING CONCERN UNCERTAINTY AND MANAGEMENT PLANS
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered recurring
operating losses since its inception that raise substantial doubt about its
ability to meet future expected expenditures necessary to fully develop its
software products and applications and to continue as a going concern. The
financial statements do not reflect any adjustments that might result from the
outcome of this uncertainty. In this regard, the Company is currently seeking
short and long term debt or equity financing sufficient to fund projected
working capital and software product development needs during the remainder of
calendar 1998 and thereafter. However, there can be no assurance that the
amount and terms of such debt or equity financing, or that the profits from the
sale of software products will be sufficient to fund the Company's future
software development and working capital expenditure requirements. Accordingly,
the Company will continue to seek additional sources of financing as may be
necessary.
3. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the four months ended September 30, 1998, the Company recorded non-cash
compensation expense as a result of the issuance of 1,000,000 shares of common
stock to a board member at $.05 per share valued at $1,575,000 and recognition
of $245,607 of compensation to key professionals associated with common stock
options granted. Non-cash compensation expense recorded during the four months
ended September 30, 1998 and 1997 was determined using the estimated fair market
value of the Company's common stock or common stock options on the date such
instruments were granted.
On August 3, 1998, Microelectronics and Computer Technology Corporation ("MCC"),
holder of 883,333 shares of the Company's Series A convertible, redeemable
preferred stock, converted the preferred stock, exclusive of accrued dividends,
into 883,333 shares of the Company's common stock.
Subsequent to September 30, 1998, the Company issued 31,219 shares of common
stock in full payment of $187,315 of accrued dividends on the Series A preferred
stock.
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4. TRANSITION PERIOD
In August 1998, the Company adopted a calendar year end that will become
effective December 31, 1998. Accordingly, results of operations and cash flows
for the month of June 1998, not previously reported, are presented below and are
included in the Transition Period figures in the accompanying financial
statements.
<TABLE>
<CAPTION>
Month Ended June 30,
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
STATEMENT OF LOSS:
Revenues............................................... $ -- $ --
Costs and Expenses:
Professional services............................... 216,297 46,029
Compensation expense................................ 179,453 181,905
Depreciation and amortization....................... 84,702 71,513
Other general and administrative.................... 80,211 34,574
----------- -----------
Net loss............................................... (560,663) (334,021)
Dividends on preferred stock........................... (26,500) --
----------- -----------
Net loss applicable to common shareholders............. $ (587,163) $ (334,021)
=========== ===========
Basic net loss per share of common stock............... $ (.02) $ (.03)
============ ===========
Weighted Average Number of Shares of
Common Stock Outstanding.............................. 28,208,554 12,565,275
=========== ===========
STATEMENT OF CASH FLOWS:
Operating activities:
Net loss............................................. $ (560,663) $ (334,021)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization...................... 84,702 71,697
Issuance of common stock and warrants
for various expenses........................... 44,933 153,489
Changes in assets and liabilities:
Other current assets........................... (127,695) (166,500)
Accounts payable and accrued liabilities....... 205,583 (50,107)
----------- -----------
Net cash used in operating activities.............. (353,140) (325,442)
----------- -----------
Investing activities:
Purchased software................................... -- (20,163)
Purchased property and equipment..................... (440,847) (3,570)
----------- -----------
Net cash used in investing activities....... (440,847) (23,733)
----------- -----------
Financing activities:
Proceeds from private placements and
other share issuances............................ 156,005 397,100
Repayment of borrowings.............................. (1,847) (3,524)
----------- -----------
Net cash provided by financing activities... 154,158 393,576
----------- -----------
Net increase (decrease) in cash and cash equivalents... (639,829) 44,401
Cash and cash equivalents at beginning of period....... 5,241,449 348,465
----------- -----------
Cash and cash equivalents at end of period............. $ 4,601,620 $ 392,866
=========== ===========
</TABLE>
7
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5. SUBSEQUENT EVENTS
On November 10, 1998, Marcus Wray agreed to join the Company's board of
directors. In connection therewith, the Company issued Mr. Wray an option to
purchase 1,000,000 shares of its common stock at an exercise price of $.05 per
share. The option vests ratably over a one-year period and expires in ten
years. Non-cash compensation expense of approximately $4.9 million associated
with this transaction will be recognized by the Company over the vesting period.
In November 1998, the Company commenced a best-efforts private placement to
issue approximately 2.7 million shares of its common stock for approximately $8
million solely to accredited investors. As of November 20, 1998, the Company had
received commitments for 701,000 shares totaling approximately $2.1 million
(which includes approximately $1 million of notes receivable due January 11,
1999) from the placement.
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the attached
condensed financial statements and notes thereto. Discussions relating to the
Company's operations, liquidity and capital resources contain certain statements
that are "Forward Looking Statements" within the meaning of Section 27A of the
Securities Act of 1933 ("Act") and Section 21E of the Securities Exchange Act of
1934 ("Exchange Act"). Although the Company believes that the expectations
reflected in Forward Looking Statements are reasonable, there can be no
assurances that such expectations will prove to be accurate. Generally, these
statements relate to business plans, strategies, anticipated strategies, levels
of capital expenditures in current and future operations, liquidity and
anticipated capital financing needed to effect the business plan. All phases of
the Company's operations are subject to a number of uncertainties, risks and
other influences, many of which are outside the control of the Company and
cannot be predicted with any degree of accuracy. In light of the significant
uncertainties inherent in the Forward Looking Statements made in the following
discussion, the inclusion of such statements should not be regarded as a
representation by the Company of any other person that the objectives and plans
of the Company will be achieved.
OVERVIEW
The Company is a development stage enterprise engaged in the development of
sophisticated intelligent software products. From inception (October 4, 1993)
through September 30, 1998, the Company has utilized funds obtained primarily
through private placements to purchase and begin commercial development of
intelligent software technologies. As of November 13, 1998, the Company is in
the final stages of releasing its first product, an internet training course.
Accordingly, the Company has recorded no revenues and has incurred net losses
totaling approximately $24 million, including non-cash stock-based compensation
of approximately $12.8 million, during the period from inception through
September 30, 1998. The operating losses incurred by the Company since its
inception raise substantial doubt about its ability to meet future expected
expenditures necessary to fully develop its software products and to continue as
a going concern. The Company's independent accountants have issued an
explanatory paragraph in their opinion with respect to the Company's financial
statements for the year ended May 31, 1998 regarding the uncertainty concerning
the Company's ability to continue as a going concern. As of November 20, 1998,
the Company had received commitments from a private placement for 701,000 shares
totaling approximately $2.1 million (which includes approximately $1 million of
notes receivable due January 11, 1999) in order to fund near-term operations.
Costs of purchased software having alternative future uses in developing other
software products are (i)capitalized when acquired, (ii)amortized on a straight
line basis over their expected useful life of five years and (iii)reported at
the lower of unamortized cost or net realizable value. Costs of internally
created computer software products are charged to expense when incurred as
research and development until technological feasibility has been established
for the product. Technological feasibility is considered established upon
completion of a detailed program design or, in its absence, completion of a
working model. Thereafter, all software production costs are capitalized and
subsequently reported at the lower of unamortized cost or net realizable value.
Capitalized costs are amortized based on the ratio of current revenue to current
and future revenue for each product with an annual minimum equal to the
straight-line amortization over the remaining estimated economic life of the
product.
8
<PAGE>
RESULTS OF OPERATIONS
Revenues. There were no revenues for the four months ended September 30, 1998
and 1997. The Company anticipates the initial release of its first product, an
internet training course, during November 1998.
Expenses. Expenses for the four months ended September 30, 1998 increased by
$3,943,000, or 277% from 1997 levels due to significant increases in
professional fees, compensation expense, depreciation and amortization and other
general and administrative expenses as described below. Such increases are
primarily due to the (i)continued development of the Company's first product, an
internet training course, (ii)development of the Company's infrastructure and
operating systems and (iii)securing of key individuals for board of director and
other positions whose talents are consistent with the long-term goals of the
Company.
Professional services for the four months ended September 30, 1998 increased by
$2,687,000, or 640% from 1997 levels due primarily to (i)an increase in the
number of marketing, legal and other professionals used to develop and staff the
Company's infrastructure efforts in anticipation of the release of its first
product and (ii)the issuance of 1,000,000 shares of common stock to a board
member at $.05 per share valued at $1,575,000.
Compensation expense for the four months ended September 30, 1998 increased by
$841,000, or 153% from 1997 levels due primarily to the hiring of product
management, research and development, and administrative employees during 1998
to carry out the continued development and marketing of the Company's planned
software products. In addition, $376,000 of compensation expense was accrued in
September 1998 as a result of the termination of an employment contract with a
former officer of the Company.
Depreciation and amortization for the four months ended September 30, 1998
increased by $81,000, or 28% from 1997 levels primarily due to increased
depreciation on furniture and equipment purchases made in conjunction with the
development of the Company's infrastructure and operating systems during the
four months ended September 30, 1998.
Other general and administrative expenses for the four months ended September
30, 1998 increased by $334,000, or 199% from 1997 levels due primarily to
increases in the number of employees, professionals and office space needed to
support the general increase in the Company's business activities described
above.
LIQUIDITY AND CAPITAL RESOURCES
Cash Used in Operating Activities. The Company's net cash flow from operating
activities resulted in deficits of $2,776,000 and $664,000 for the four month
periods ended September 30, 1998 and 1997, respectively. The $2,112,000
increase is due primarily to the increase in business activity undertaken by the
Company as described above.
Cash Used in Investing Activities. The Company's net cash used in investing
activities during the four months ended September 30, 1998 increased by $894,000
to $1,011,000 from $117,000 in the same period in 1997 due primarily to
purchases of furniture, equipment and leasehold improvements associated with
development of the infrastructure and operating systems.
Cash Flow from Financing Activities. The Company's net cash flows from financing
activities during the four months ended September 30, 1998 decreased by $294,000
to $225,000 from $519,000 in the same period in 1997 due primarily to a
reduction in private placement proceeds received during the four months ended
September 30, 1998.
Future Capital Requirements. The Company requires substantial capital to pursue
its operating strategy and at September 30, 1998 had a cash balance of
$1,679,434. Until the Company can obtain sales levels sufficient to fund
working capital needs, the Company will be dependent upon external sources of
financing. To date the Company has no significant internal sources of liquidity
and it should be assumed that there will be no significant internal sources
9
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of liquidity for the foreseeable future. The current cash forecast indicates
that there will be negative cash flow from operations for at least the first
three quarters of the 1999 calendar year. In connection therewith, the Company
is currently engaged in a best-efforts private placement to issue approximately
2.7 million shares of its common stock for approximately $8 million solely to
accredited investors. As of November 20, 1998, the Company had received
commitments for 701,000 shares totaling approximately $2.1 million (which
includes approximately $1 million of notes receivable due January 11, 1999) from
the placement. Based on the Company's current plan of operations, it is
anticipated that its current cash balance, plus between $3 and $6 million
(depending upon the rate of expansion and other corporate expenditures) from the
private placement, will provide sufficient working capital through December
1998, and possibly thereafter. However, even if the above private placement
financing is obtained in full, the timing of the Company's immediate cash flow
needs may be extended or reduced depending upon actual revenues received from
sales of the Company's initial product, market interest in the Company's current
and future products, expenses incurred in the development, marketing and
advertising of its products and other working capital expenditures. In order to
fund operations for the balance of calendar year 1999 and thereafter, the
Company will require additional debt or equity financing. The Company has no
commitments for any additional financing and there can be no assurance that the
Company will be successful in raising funds, that the amount and terms of any
financing will be acceptable to the Company, or that the profits, if any, from
the sale of the Company's software product or products will be sufficient to
fund the Company's working capital, software development and marketing
expenditure requirements. Failure to obtain sufficient funding, either from the
current best-efforts private placement or from additional financing, will
adversely impact the Company's financial position, and could cause the Company
to curtail operations, sell assets, or take other actions as necessary in order
to meet cash flow requirements.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS -
In October 1998, the Company, its president and a former officer were
named as defendants in a class-action lawsuit; Griffin v. GK
Intelligent Systems, Inc., et al.; filed in the Texas District Court
of Harris County, Texas, Houston Division, Cause H-98-3847. The
plaintiff has alleged violations of the securities laws, common law
fraud, conspiracy, negligence, and negligent misrepresentation and is
seeking unspecified damages. In November 1998, the Company filed a
Notice of Removal in the United States District Court for the Southern
District of Texas. The Company's answer is due to be filed on December
4, 1998. To date, no discovery has been conducted. The Company is in
the process of evaluating the plaintiff's claims and intends to
vigorously defend the lawsuit.
The Company is a defendant in Cause No. H-98-004; U.S. Quest, Ltd. and
Jacody Financial, Inc. v. Gary Kimmons and GK Intelligent Systems,
Inc.; in the Southern District Court of Texas, Houston Division. The
lawsuit was filed in January 1998 and alleges, among other things,
that the Company is liable to the plaintiffs for violation of state
and federal securities laws, breach of contract and quantum meruit.
The case arises out of services allegedly furnished by the plaintiffs
to the Company, for which plaintiffs claim they did not receive
compensation. The case was mediated without settlement in June 1998.
Although the parties have engaged in informal discovery pursuant to
the Court's order and an officer of the plaintiffs has given his
deposition, the amount of the plaintiffs' demand is currently unknown
except for its initial claim to 590,000 shares of the Company's Common
Stock or $590,000. Plaintiffs have filed a motion for leave to amend
their complaint that is still pending. If the motion is granted, the
plaintiffs intend to add a defamation claim to their suit and add
Rodney L. Norville as a party defendant. The Company denies any
liability to the plaintiffs, and intends to vigorously defend the
lawsuit.
The Company is a defendant in Cause No. 98-35985; David Michael Sims
v. GK Intelligent Systems, Inc. in the 189th Judicial District Court
of Harris County, Texas. The lawsuit was filed in July 1998, and
alleges the Company is liable to the plaintiff for breach of contract
and fraudulent misrepresentation. The case arises out services
allegedly performed by the plaintiff for which he did not receive
compensation. Although preliminary discovery has commenced, the
precise amount of plaintiff's demand is currently unknown other than
its initial claim for a commission of
10
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approximately $500,000. The Company denies any liability to the
plaintiff, and intends to vigorously defend the lawsuit.
In September 1997, the Company entered into a consulting agreement
with Union Atlantic, LC ("Union Atlantic") for performance of
services. The Company issued Union Atlantic a five year warrant to
purchase 200,000 shares of Company Common Stock at an exercise price
of $.9375 per share, and a five year warrant to purchase 112,500
shares of Company Common Stock at an exercise price of $1.25 per share
as compensation for services to be rendered. Each of the warrants
contained demand registration rights. Union Atlantic resigned as a
consultant to the Company in November 1997. As no capital was raised
by Union Atlantic, the Company sent a notice to Union Atlantic in July
1998 canceling the warrants. In August 1998, the Company received
notice from Union Atlantic demanding registration of the warrants. The
Company has contacted Union Atlantic and is in the process of
determining Union Atlantic's legal rights, if any.
The Company and Capella Computers, Ltd. ("Capella") are in the process
of discussing their dispute about the termination of the Memorandum of
Understanding As To A Joint Venture between the parties, which is
discussed in the Company's Form 10-KSB for the fiscal year ending May
31, 1998. At the present time, there has been no resolution.
In May 1997, the Company entered into a sales purchase/asset recovery
agreement with SGD International Corp. ("SGD") pursuant to which the
Company was to sell SGD certain of the Company's products for
marketing purposes. In exchange for the products, SGD agreed to
furnish the Company with merchandise, service and media credits. The
period of exclusivity of the Agreement expired in May 1998. As the
Company had not released any products, none were forwarded to SGD and
the Company did not utilize any of the SGD credits. In July 1998, the
Company sent SGD a notice of termination canceling the agreement. In
August 1998, SGD sent a letter threatening a lawsuit for the Company's
alleged breach of contract. The Company contacted SGD and is in the
process of determining SGD's legal rights, if any.
In August 1998, the Company received a letter from J. David Cabello,
the former general counsel and secretary of the Company, in connection
with Mr. Cabello's separation from employment with the Company. The
Company's contractual obligations to Mr. Cabello turns on whether he
resigned from his employment or whether he was terminated. Mr. Cabello
has demanded $190,000 in total compensation and immediate vesting of
600,000 shares of Company Common Stock. The Company contends Mr.
Cabello resigned from his positions with the Company, and as such, Mr.
Cabello is entitled to earned but unpaid salary and vested options to
purchase 25,000 shares of Company Common Stock. In the event the
parties are unable to settle this matter, it is likely Mr. Cabello
will file suit for wrongful termination.
ITEM 2. CHANGES IN SECURITIES
The following securities issuances occurred between June 1 and
November 20, 1998. Each transaction was exempt from registration
pursuant to Section 4(2) and/or Regulation D promulgated under the Act
as a transaction by an issuer not involving any public offering. No
underwriter was utilized in such issuances and no commissions were
paid.
The Company issued 183,504 shares of common stock to 15
accredited investors upon the exercise of outstanding warrants in
exchange for proceeds of $182,411.
The Company issued 1,000,000 shares of common stock to a director
at $.05 per share and recorded associated non-cash compensation
expense of $1,575,000.
The Company issued 883,333 shares of common stock to
Microelectronics and Computer Technology Corporation ("MCC") upon the
conversion by MCC of its 883,333 shares of the Company's Series A
convertible, redeemable preferred stock.
11
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The Company issued 31,219 shares of common stock to MCC in
payment of $187,315 of accrued dividends on the Series A preferred
stock.
The Company issued 191,863 shares of common stock to a former
director upon the cash-less exercise of outstanding warrants.
The Company issued 100,000 shares of common stock to a
professional pursuant to a settlement agreement.
The Company issued 73,000 shares of common stock to an employee
upon the exercise of outstanding options in exchange for proceeds of
$22,630.
The Company issued an option to purchase 1,000,000 shares of
common stock to a director at an exercise price of $.05 per share
which vests ratably over a one-year period. Non-cash compensation
expense of approximately $4.9 million will be recognized over the
vesting period.
The Company issued options to purchase 226,000 shares of common
stock to 3 professionals with exercise prices ranging from $2.50 to
$4.00 per share and expiration dates ranging from September 2003
through September 2008.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS -
Exhibit No. Identification of Exhibit
----------- -------------------------
10.1 Marcus Wray Consulting Agreement
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K -
Form 8-K/A filed September 15, 1998
Form 8-K/A filed September 3, 1998
Form 8-K filed August 31, 1998
Form 8-K/A filed August 19, 1998
Form 8-K filed on August 18, 1998
12
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GK Intelligent Systems, Inc.
Date: November 20, 1998 By /S/ Gary F. Kimmons
------------------------------------
Gary F. Kimmons, President, Chief
Executive Officer, Chief Financial
Officer and Director
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EXHIBIT 10.1
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CONSULTING AGREEMENT
--------------------
THIS AGREEMENT is entered into effective the 10th day of November, 1998, at
Houston, Texas, between GK INTELLIGENT SYSTEMS, INC., a Delaware corporation
("Corporation" or "GKIS") and MARCUS F. WRAY ("Wray").
WHEREAS, GKIS is in the business of providing artificial intelligence based
education, training and performance support and is based in Houston, Texas; and
WHEREAS, GKIS desires that Wray consult with GKIS on the establishment of
retail distribution for the Company's products in the global marketplace and/or
introduce GKIS to parties who may be interested in GKIS's products and make
himself reasonably available to mentor and advise the directors, officers and
management of GKIS; and
WHEREAS, GKIS desires that Wray become an advisor and mentor to the
directors, officers and management of GKIS in all phases of retail product
distribution as well as global marketing developments which could effect GKIS's
business; and
WHEREAS, Wray desires to acquire an equity interest in the Corporation's
common stock; and
WHEREAS, GKIS considers it to be in its best interest that Wray assume a
position as a member of the GKIS Board of Directors;
NOW, THEREFORE, in consideration of the premises, the parties agree as
follows:
1. AGREEMENT TO PROVIDE CONSULTING SERVICES. Wray agrees to provide
consulting services as requested from time to time by GKIS and to help
GKIS establish market opportunities and retail distribution for its
products/services in the domestic and international marketplace, making
himself reasonably available to mentor and advise GKIS directors,
officers and management periodically during the term of this Agreement.
2. POSITION ON GKIS BOARD OF DIRECTORS. The Corporation, acting through
its existing Board of Directors, will appoint Wray as a member of the
Board of Directors. Upon election by the Board of Directors, Wray
agrees to assume a position on the GKIS Board and to serve diligently
as a member thereof, faithfully performing all fiduciary duties as a
director of the Corporation.
3. COMPENSATION. As compensation for the services to be rendered
hereunder, GKIS will pay Wray up to Fifty Thousand Dollars ($50,000) as
follows: on any date on which Wray elects to exercise the Option (as
defined herein) the Company will pay Wray an amount equal to the number
of shares for which such election is made multiplied by five cents
($0.05).
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4. OPTION GRANT.
(a) Option Grant. Effective as of the effective date of this Agreement,
Wray shall be granted an option ("Option") to purchase the one
million (1,000,000) shares of GKIS common stock (the "Option
Shares") with an exercise price of $0.05 per Option Share. Subject
to its earlier termination as provided below, the Option shall
expire on the 10th anniversary of the effective date of this
Agreement.
(b) Option Vesting. Commencing on November 30, 1998, and continuing on
the last day of each calendar month during the term of this
Agreement, one-twelfth of the Option Shares shall become
exercisable; provided, however, that if this Agreement is
terminated prior to the end of a calendar month, no Option Shares
shall vest for that month. Notwithstanding the foregoing, in the
event Wray dies during the term of this Agreement or the
Corporation terminates this Agreement for any reason other than
pursuant to Section 12.b. or Section 12.d., the Option shall become
immediately exercisable in full.
(c) Payment of Exercise Price. To the extent the Option is exercisable,
Wray may exercise the Option from time to time by a notice in
writing of such exercise delivered to the Corporation, attention
Secretary, at its principal corporate offices. The date of exercise
shall be the date the notice is hand delivered or mailed to the
Corporation, whichever is applicable. An election to exercise the
Option shall be accompanied by the tender of the full exercise
price of the shares for which the election is made. Payment may be
made, in Wray's discretion, (i) in cash or check, (ii) shares of
GKIS stock already-owned by Wray, (iii) a "cashless-broker"
exercise in accordance with a Corporation-established policy or
program for the same, (iv) notice from Wray for the Corporation to
withhold a number of shares from the Option excise having an
aggregate fair market value on such date not exceeding the
aggregate exercise price, or (v) any combination of the foregoing.
(d) Registration Rights. Shares acquired by Wray upon any exercise of
the Option shall be subject to registration rights no less
favorable to Wray than the registration rights provided by the
Corporation to any other stockholder with a comparable or greater
number of shares.
(e) Transferability of Option. Wray may transfer all or any part of the
Option by gift to one or more of his immediate family members or
related family trusts or similar entities, in his discretion. If
transferred, the Option (and any shares acquired upon exercise)
shall be subject to the same provisions of this Agreement as if
held or owned, as the case may be, by Wray.
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5. RIGHTS PRIOR TO ISSUE. Wray shall have no rights as a stockholder with
respect to the Option Shares until GKIS has received full payment of
the purchase price and the Option Shares have been issued.
6. PRIOR AGREEMENTS. This Agreement supersedes and is in lieu of any and
all prior or contemporaneous agreements, communications or
understandings, whether written or unwritten, verbal or tacit, or
implied by prior dealings, between and among any of the parties, their
predecessors or affiliates with respect to the matters set out herein
and therein, respectively.
7. AMENDMENT IN WRITING. No amendment, modification or change to this
Agreement shall be binding unless in writing, signed by all the parties
hereto.
8. ASSIGNMENT. This Agreement is for personal services by Wray and shall
not be assignable by Wray. This Agreement may be assigned by GKIS and
shall inure to the benefit of the successors and assigns of GKIS.
9. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF WRAY. Wray represents,
warrants and agrees as follows:
a. No Registration. Wray is aware that the Shares have not been
registered nor is registration contemplated under the Securities
Act of 1933, and accordingly, that the Initial Shares must be held
indefinitely unless they are subsequently registered under said Act
or unless, in the opinion of counsel for the Corporation, a sale or
transfer may be made without registration thereunder. Wray agrees
that any certificates evidencing the Initial Shares may bear a
legend restricting the transfer thereof consistent with the
foregoing and that a notation may be made in the records of the
Corporation restricting the transfer of the Initial Shares in a
manner consistent with the foregoing.
b. No Preemptive Rights. Wray acknowledges and agrees that he has no
preemptive rights with respect to the Shares to be purchased
hereunder.
c. Exchange Act Filings. Wray acknowledges and agrees that he has read
and understands the Corporation's Annual Report on Form 10K-SB for
the fiscal year ended May 31, 1998.
10. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF GKIS. GKIS represents,
warrants and agrees as follows:
a. Authority. GKIS is a corporation duly organized, validly existing,
and in good standing under the laws of Delaware, with full
corporate power and authority to carry on its business as it is now
being conducted, to own or hold under lease the properties and
assets it now owns or holds under lease, and to enter into
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and perform its obligations under this Agreement. The execution and
delivery of this Agreement and the consummation of all the
transactions contemplated thereby have been duly authorized by all
necessary corporate action on behalf of GKIS. The persons signing
on behalf of GKIS are duly authorized to do so and this Agreement
will be binding upon GKIS.
b. Acknowledgment of Wray's Fiduciary Obligations to Third Parties.
GKIS understands, acknowledges and agrees that Wray is an officer
or director of other corporations, and thus may have a fiduciary
relationship towards one or more third parties, including his own
businesses and that, in such capacity, Wray is subject to certain
ethical and business constraints with respect to certain materials
or information of third parties which may be confidential, trade
secret, proprietary or otherwise subject to restrictions on its use
or dissemination by Wray. GKIS acknowledges and agrees that it will
not constitute a breach of this agreement for Wray to comply with
these obligations to their full legal, moral and ethical
limitations.
11. TERM OF AGREEMENT. The term of this Agreement shall be for one (1) year
from the date of this Agreement, unless terminated by either party
pursuant to the provisions contained herein.
12. TERMINATION OF AGREEMENT. This Agreement shall be automatically
terminated upon the death of Wray and may be terminated by the parties
as follows:
a. Illness or Other Disability. If Wray, during the term of this
Agreement, shall fail to perform his duties hereunder as a result
of illness or other disability which shall continue for a period of
more than eight (8) weeks, the Corporation shall have the right to
terminate this Agreement and remove Wray from the Board of
Directors effective as of a date to be specified in written notice
of termination sent to Wray.
b. Conduct. If Wray shall use liquor or drugs to an extent which has a
visible detrimental effect on his services to the Corporation, or
conduct himself publicly or privately in a manner which offends
against decency or causes him to be held in public ridicule or
causes public scandal, the Corporation shall have the right to
terminate this Agreement and remove Wray from the Board of
Directors effective as of a date to be specified in written notice
of termination sent to Wray.
c. Unilateral Termination by Wray. Wray may terminate this Agreement
and his obligations hereunder effective as of a date to
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be specified in written notice of termination sent to the
Corporation, such date not to be more than ten (10) days after
delivery of the notice.
d. Termination for Cause Other than Conduct. The Corporation may
terminate this Agreement and remove Wray from the Board of
Directors at any time if the Board of Directors determines that
Wray has breached his fiduciary duties to the Corporation or failed
to perform his duties hereunder and such failure is not due to
illness or disability. Such termination shall be effective as of a
date to be specified in a written notice of termination, such date
to be not more than ten (10) days after delivery of the notice.
13. NOTICES. All notices required hereunder shall be in writing and shall
be sent via certified mail, postage prepaid, if to GKIS, in care of
President, 5555 San Felipe, Suite 625, Houston, Texas, 77056, and if to
Wray, in care of Marcus F. Wray, 2800 Ferndale Street, Houston, Texas
77098. Notices shall be effective upon deposit in the United States
mail.
14. CHOICE OF LAW. The parties agree that this agreement shall be governed
by and interpreted in accordance with the laws of the State of Texas,
excluding any principle or provision thereof that would require
application of the laws of any other jurisdiction.
15. ARBITRATION. If the parties have any disagreement or dispute arising in
connection with this Agreement that cannot be resolved amicably among
the parties, such dispute shall, on the written request of either
party, be submitted to arbitration. Such arbitration shall be binding
and shall be conducted under the Commercial Arbitration Rules of the
American Arbitration Association in effect at the time of arbitration.
The cost and expenses, including attorney's fees and the fees of the
arbitrators, shall be borne by the losing party or in such
proportions as the arbitrators shall determine. All arbitration
proceedings hereunder shall be held in Houston, Texas.
16. CONFIDENTIAL INFORMATION. Wray shall hold in fiduciary capacity for the
benefit of GKIS all information, knowledge and data of a secret or
confidential nature relating to GKIS or any of its affiliated
companies, and their respective businesses, which shall have been
obtained by Wray during the term of this Agreement and which shall not
be or become public knowledge (other than by acts by Wray or
representatives of Wray in violation of this Agreement). After
termination of this Agreement, Wray shall not, without the prior
written consent of GKIS or as may otherwise be required by law or legal
process, communicate or divulge any such information, knowledge or data
to anyone other than GKIS and those designated by it.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year set forth above.
GK INTELLIGENT SYSTEMS, INC
By: /s/ Gary Kimmons
------------------------------------
GARY KIMMONS, C.E.O.
/s/ Marcus F. Wray
------------------------------------
MARCUS F. WRAY
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S TRANSITIONAL REPORT FOR THE FOUR MONTHS ENDED SEPTEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,679
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,912
<PP&E> 5,783
<DEPRECIATION> (2,659)
<TOTAL-ASSETS> 5,036
<CURRENT-LIABILITIES> 547
<BONDS> 0
0
187
<COMMON> 30
<OTHER-SE> 3,944
<TOTAL-LIABILITY-AND-EQUITY> 5,036
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
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<OTHER-EXPENSES> 5,417
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> (5,423)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,423)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,423)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
