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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 quarter ended March 31, 1999
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) 292-2300
(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's revenues for the quarter ended March 31, 1999, were approximately
$13,000.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing price on the American Stock Exchange on May 13,
1999, was $53,081,169. As of May 13, 1999, registrant had 32,665,335 shares of
Common Stock outstanding.
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GK INTELLIGENT SYSTEMS, INC.
FORM 10-QSB REPORT INDEX
<TABLE>
<CAPTION>
10-QSB PART AND ITEM NO. PAGE NO.
- ------------------------ --------
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
<S> <C> <C>
Balance sheet as of March 31, 1999............ 3
Statements of loss for the quarter ended
March 31, 1999 and 1998....................... 4
Statements of cash flows for the quarter ended
March 31, 1999 and 1998....................... 5
Notes to financial statements................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 7
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................. 11
ITEM 2. CHANGES IN SECURITIES......................... 12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS........................... 12
ITEM 5. OTHER INFORMATION............................. 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............. 12
</TABLE>
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GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
March 31,
1999
----------
<S> <C>
Assets
------
Current:
Cash ............................................... $ 127,301
Accounts receivable, trade.......................... 288,368
Deposits............................................ 361,925
Prepaid expenses.................................... 220,409
Other............................................... 27,166
----------
Total Current Assets................................. 1,025,169
----------
Computer software costs, net......................... 1,308,520
Property and equipment, net.......................... 1,427,984
----------
Total Assets......................................... $3,761,673
==========
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities........... $ 1,321,716
Deferred revenue, product sales.................... 285,331
Capital lease obligations, current maturities...... 28,153
------------
Total Current Liabilities............................ 1,635,200
------------
Capital lease obligations, less current maturities... 62,925
Other long term liabilities.......................... 155,103
Commitments and Contingencies
Stockholders' Equity:
Common stock....................................... 32,665
Additional paid-in capital......................... 36,621,741
Unearned compensation.............................. (3,843,905)
Deficit accumulated during the development stage... (30,902,056)
------------
Total Stockholders' Equity........................... 1,908,445
------------
Total Liabilities and Stockholders' Equity........... $ 3,761,673
============
</TABLE>
See accompanying notes to unaudited financial statements
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GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF LOSS
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues........................................................ $ 13,478 $ -
----------- -----------
Costs and Expenses:
Cost of revenues............................................ 5,224 -
Professional services....................................... 3,094,833 1,142,300
Employee compensation....................................... 716,015 612,838
Depreciation and amortization............................... 429,109 216,547
Other general and administrative............................ 473,861 114,230
----------- -----------
Total Costs and Expenses................................ 4,719,042 2,085,915
----------- -----------
Net loss........................................................ (4,705,564) (2,085,915)
Dividends on preferred stock.................................... - (79,500)
----------- -----------
Net loss applicable to common shareholders...................... $(4,705,564) $(2,165,415)
----------- -----------
Basic net loss per share of common stock........................ $ (.14) $ (.12)
----------- -----------
Weighted Average Number of Shares of Common Stock Outstanding... 32,531,835 18,051,033
=========== ===========
</TABLE>
See accompanying notes to financial statements.
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GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Quarter Ended
March 31,
-----------------------------
1999 1998
-------------- ------------
<S> <C> <C>
Operating activities:
Net loss..................................................... $(4,705,564) $(2,085,915)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization............................ 429,109 216,547
Issuance of common stock, warrants
and options for various expenses....................... 1,640,626 1,326,683
Changes in assets and liabilities:
Current assets......................................... (308,378) (139,827)
Current liabilities.................................... 702,767 71,780
----------- -----------
Net cash used in operating activities................ (2,241,440) (610,732)
----------- -----------
Investing activities:
Purchased software........................................... - (36,300)
Purchased property and equipment............................. (115,719) (4,495)
----------- -----------
Net cash used in investing activities................ (115,719) (40,795)
----------- -----------
Financing activities:
Proceeds from private placements and other share issuances... 1,049,900 849,969
Repayment of borrowings...................................... (6,262) (5,214)
----------- -----------
Net cash provided by financing activities............ 1,043,638 844,755
----------- -----------
Net increase (decrease) in cash and cash equivalents........... (1,313,521) 193,228
Cash and cash equivalents at beginning of period............... 1,440,822 32,910
----------- -----------
Cash and cash equivalents at end of period..................... $ 127,301 $ 226,138
=========== ===========
</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 seven month transition period ended
December 31, 1998, the years ended May 31, 1998 and 1997 and the period from
inception (October 4, 1993) through December 31, 1998 included in the Company's
Transitional Report on Form 10-KSB.
Effective August 1998, the Company elected to change its year end to December
31.
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
1999 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 quarter ended March 31, 1999, the Company recorded non-cash
compensation expense totaling $1,640,626 associated with the amortization of
common stock and stock options granted to professionals and directors during
1998. Non-cash compensation expense recorded during the periods presented 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.
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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
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
HighAltitude 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.
In late March 1999, the Company began its first shipments of approximately
9,100 copies of Around the Web in 80 Minutes to its distributors for
redistribution to retailers in April 1999. However, since the distribution
agreements give distributors the right to return unsold products, the Company
has deferred approximately $285,000 in revenue associated with these shipments
until the products are ultimately purchased by retail customers. Further,
during the period from April 1 through May 13, 1999, the Company shipped
approximately 11,200 additional copies of Around the Web in 80 Minutes to its
distributors.
Through March 31, 1999, the Company has recorded minimal revenues and has
incurred net losses totaling approximately $30.9 million since inception,
including non-cash stock-based compensation of approximately $14.3 million. 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 and market 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 seven
month transition period ended December 31, 1998 regarding the uncertainty
concerning the Company's ability to continue as a going concern.
To fund its operations, the Company has continued to pursue the private
placement of its securities with accredited investors. The Company commenced a
private placement in November 1998 which was closed in early May 1999 after
raising $3,373,000 for 1,686,500 shares. In May 1999, a new private placement
was commenced which allows for the sale of up to 2.4 million 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. The
7
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warrants expire in five years and may be exercised on a cash-less basis. As of
May 13, 1999, no funding had occurred under the new private placement.
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.
RESULTS OF OPERATIONS
Revenues. The Company's first product, Around the Web in 80 Minutes, a
CD-ROM based Internet training course, was made available to consumers through
direct sales beginning in late November 1998. Revenues from direct retail sales
of the product amounted to approximately $13,000 during the quarter ended March
31, 1999 versus no sales of product during the quarter ended March 31, 1998.
Costs and Expenses. Costs and expenses for the quarter ended March 31,
1999 increased by approximately $2,633,000, or 126%, from the quarter ended
March 31, 1998 primarily due to increases in cost of revenues, professional
services, employee compensation, depreciation and amortization, and other
general and administrative expenses as more fully described below.
Cost of revenues associated with the product sales during the quarter ended
March 31, 1999 amounted to approximately $5,000 versus no such costs during the
quarter ended March 31, 1998. Cost of revenues include the cost of CD-ROM
diskettes, jewel cases, product boxes, shipping costs and labor required to
assemble product kits.
Professional services during the quarter ended March 31, 1999 increased by
approximately $1,953,000, or 171%, from the quarter ended March 31, 1998 due
primarily to a significant increase in the number of professionals hired in mid
and late 1998 to (i) develop and refine the Company's first product, (ii)
develop the Company's internal systems and infrastructure, (iii) provide
marketing and advertising support, (iv) strengthen the Company's Board of
Directors and (v) represent the Company in various legal matters.
Employee compensation during the quarter ended March 31, 1999 increased by
approximately $103,000, or 17%, from the quarter ended March 31, 1998 due to an
increase in the number of full-time employees on staff from ten at March 31,
1998 to 31 at March 31, 1999 partially offset by the absence of non-cash stock-
based compensation to employees during the quarter ended March 31, 1999 as
compared to approximately $211,000 recorded during the quarter ended March 31,
1998.
Depreciation and amortization during the quarter ended March 31, 1999
increased by approximately $213,000, or 98%, from the quarter ended March 31,
1998 due in large part to the acquisition of additional furniture and equipment
to accommodate the increase in employees, as well as an increase in the
amortization of software development costs associated with the release of the
Company's first product in November 1998.
Other general and administrative expenses during the quarter ended March
31, 1999 increased by approximately $360,000, or 315%, from the quarter ended
March 31, 1998 due to the significant increase in the Company's business
activities, the increased number of employees, and the infrastructure needed to
support such activities.
8
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LIQUIDITY AND CAPITAL RESOURCES
Cash Used in Operating Activities. The Company's net cash flow from
operating activities resulted in deficits of $2,241,000 and $611,000 for the
quarters ended March 31, 1999 and 1998, respectively. The $1,630,000 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 quarter ended March 31, 1999 increased by
$75,000 to $116,000 from $41,000 during the quarter ended March 31, 1998 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 quarter ended March 31, 1999 increased by
$199,000 to $1,044,000 from $845,000 during the quarter ended March 31, 1998 due
primarily to an increase in private placement proceeds received during the
quarter ended March 31, 1999.
Future Capital Requirements. The Company requires substantial capital to
pursue its operating strategy. 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 of liquidity for the foreseeable future. Because the current
cash balance of the Company is insufficient to provide adequate working capital
through the end of May 1999, the Company is currently engaged in a best-efforts
private placement to issue 2.4 million 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 $4.00 per share. The warrants expire in five years and may be
exercised on a cash-less basis. As of May 13, 1999, the Company had received no
commitments under the private placement. Based on the Company's current plan of
operations, it is anticipated that proceeds of approximately $4.8 million under
the private placement will provide sufficient working capital through October
1999. 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. Moreover, as the American Stock Exchange
has advised the Company that it does not currently meet the continued listing
requirements, and there is no assurance that the Common Stock will continue to
list on the American Stock Exchange, the Company's ability to raise equity
financing may be hampered. 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.
These conditions and the net 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. At December 31, 1998, the Company's independent accountants
issued an explanatory paragraph in their opinion with respect to the uncertainty
concerning the Company's ability to continue as a going concern.
Year 2000 Compliance Issues. The year 2000 poses certain issues for
business and consumer computing, particularly the functionality of software for
two-digit storage of dates and special meanings for certain dates such as
9/9/99. The year 2000 is also a leap year, which may also lead to incorrect
calculations, functions, or system failure. The problem exists for many kinds
of software, including software for mainframes, PCs, and embedded systems.
9
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In assessing the effect of the Year 2000 Problem on the Company, management
has identified, and is currently evaluating, the following four general areas:
. Software products sold to customers;
. Internal infrastructure;
. Supplier/third-party relationships;
. Contingency plans.
A discussion of the four general areas as well as management's ongoing
actions with regard to each is set forth below:
Software Products Sold to Customers. The Company believes its initial
product, Around the Web in 80 Minutes is Year 2000 compliant. However, once
purchased, Around the Web in 80 Minutes operates on computer systems that are
not under the Company's control. If the computer systems that operate Around
the Web in 80 Minutes are not Year 2000 compliant the product may not function
properly. Around the Web in 80 Minutes utilizes the operating computer's date
code to log the user's progress, as well as to create completion certificates.
As such, the variability of definitions of "compliance" with the Year 2000 and
of different combinations of software, firmware, and hardware may lead to
lawsuits against the Company. The outcomes of any such lawsuits and the impact
on the Company are not estimable at this time. The Company has not and will not
assess the existence of these potential problems in its customers' various
environments. The Company does not believe that the development of Year 2000
compliant products has created or will create a significant increase in the
development costs of its software products.
Internal Infrastructure. The Company continues to verify that all of its
personal computers, servers and software are Year 2000 compliant. The Company
intends to determine if the software vendors of all its critical applications
have represented that their products are Year 2000 compliant. Because the
financial and accounting software currently used by the Company is not believed
to be Year 2000 compliant, the Company's is currently installing and will
continue to install a new, integrated order entry, product support and financial
accounting software during the second and third quarters of 1999. The Company
will obtain certification from its vendors that these systems are Year 2000
compliant. The costs related to these efforts have not been nor are they
expected to be material to the Company's business financial condition, or
results of operations.
Suppliers/Third-Party Relationships. As mentioned above, the Company has
been gathering information from vendor Web sites and available compliance
statements to identify and, to the extent possible, resolve issues involving the
Year 2000 Problem. The Company relies on outside vendors for water, electrical,
and telecommunications services as well as climate control, building access, and
other infrastructure services. The Company intends to communicate with the
largest of these vendors informally to determine whether they are assessing the
potential impact of Year 2000 Problems and are taking appropriate actions;
however, the Company does not intend to independently evaluate the Year 2000
compliance of its vendors systems used to supply such services. The Company has
received no assurance of compliance from the providers of these services to date
and there can be no assurance that these vendors will resolve any or all Year
2000 Problems with these systems before the occurrence of a material disruption
to the Company's business. Any failure of these third-parties to resolve Year
2000 problems with their systems in a timely manner could have a material
adverse effect on the Company's business, financial condition or results of
operation.
Contingency Plans. The Company has not currently developed a formal
contingency plan to be implemented as part of its efforts to identify and
correct Year 2000 Problems affecting its internal systems. However, if the
Company deems it necessary, it may take the following actions:
. Accelerated replacement of affected equipment or software;
. Short to medium-term use of backup equipment and software;
. Wholesale backup of existing computerized data prior to January 1, 2000;
. Increased work hours for Company personnel;
. Other similar approaches.
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If the Company is required to implement any of these contingency plans,
such plans could have a material adverse effect on the Company's business,
financial condition, or results of operations.
Based on the actions taken to date as discussed above, the company is
reasonably certain that it has or will identify and resolve all Year 2000
Problems that could materially adversely affect its business and operations.
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. The plaintiff has also alleged that
certain officers and/or directors may have engaged in insider trading.
The Plaintiff seeks to have a class certified for all purchasers of
the Company's stock between February 10, 1998 and September 14, 1998,
inclusive, and seeks an unspecified amount of damages. The case was
removed to Federal Court because the causes of action that were
asserted could only have been brought under federal law. The parties
have exchanged basic discovery. There is no trial setting. The
Company is in the process of evaluating the plaintiff's claims and
intends to vigorously defend the lawsuit.
The Company is an appellee in Cause No. 99-20361; U.S. Quest, Ltd. and
Jacody Financial, Inc. v. Gary Kimmons and GK Intelligent Systems,
Inc.; in the United States Court of Appeals for the Fifth Circuit.
The lawsuit underlying this appeal was filed in January 1998 and
alleged, 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 arose 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. In January 1999, Judge Lynn
N. Hughes of the United States District Court for the Southern
District of Texas granted a summary judgment in the Company's favor.
The plaintiffs appealed the district court's summary judgment to the
United States Court of Appeals for the Fifth Circuit. The amount of
the plaintiffs' demand remains unknown except for their initial claim
to 590,000 shares of the Company's Common Stock or $590,000. The
Company denies any liability to the plaintiffs, and intends to
vigorously defend the appeal.
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 of 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
his initial claim for a commission of 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
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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.
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 depends 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 issuances of securities occurred between January 1 and
May 13, 1999. 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.
In March 1999, the Company issued 135,000 shares of common stock
to 2 accredited investors in exchange for proceeds of $270,000.
In April 1999, the Company issued warrants to purchase 60,250
shares of common stock with an exercise price of $.01 per share to a
corporation in settlement of all claims between the Company and the
corporation. The warrants are exercisable immediately and expire in
April, 2004. In April 1999, the warrants were exercised and the
Company issued 60,250 shares of common stock to the corporation.
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
2.1(1) Certificate of Merger
3.1(1) Certificate of Incorporation of the Company,
and Amendments thereto.
12
<PAGE>
3.2(1) By-laws of the Company
3.3(2) Amendment to Certificate of Incorporation
4.1(1) Common Stock Certificate
4.2(1) Form of Warrant
10.1(1) Agreement with Microelectronics Computer
Corporation
10.2(1) Agreement with AT&T
10.3(a)(2) Gary Kimmons Amended and Restated Employment
Agreement
10.3(b)(2) Gary Kimmons Addendum to the Amended and
Restated Employment Agreement
10.4(1) Employee Stock Option Plan
10.5(1) Data Crystal Agreement
10.6(2) John Paul DeJoria Consulting Agreement
10.7(2) Shelley Duvall Memorandum of Understanding
10.8(2) Rodney L. Norville Severance Agreement and
General Release
10.9(3) Marcus F. Wray Consulting Agreement
10.10(4) Cynthina Heinsohn Employment Agreement
27.1(5) Financial Data Schedule
(1) Filed as an exhibit to the Company's registration statement on Form 10-SB
SEC File No. 000-22057 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 SEC File No. 000-22057 and incorporated by
reference herein.
(3) Filed as an exhibit to the Company's Quarterly Report for transitional
quarter from June 1, 1998 to September 30, 1998 on Form 10-QSB SEC File No.
000-22057 and incorporated by reference herein.
(4) Filed as an exhibit to the Company's registration statement on Form S-8 SEC
File No. 333-65835 and incorporated by reference herein.
(5) Filed herewith.
(b) REPORTS ON FORM 8-K - None
13
<PAGE>
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: May 14, 1999 By //S// Winston van Buitenen
----------------------------
Winston van Buitenen
Chief Executive Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S QUARTERLY REPORT FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 127
<SECURITIES> 0
<RECEIVABLES> 288
<ALLOWANCES> 0
<INVENTORY> 5
<CURRENT-ASSETS> 1,025
<PP&E> 6,183
<DEPRECIATION> (3,446)
<TOTAL-ASSETS> 3,762
<CURRENT-LIABILITIES> 1,635
<BONDS> 0
0
0
<COMMON> 33
<OTHER-SE> 1,876
<TOTAL-LIABILITY-AND-EQUITY> 3,762
<SALES> 13
<TOTAL-REVENUES> 13
<CGS> 5
<TOTAL-COSTS> 5
<OTHER-EXPENSES> 4,710
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> (4,706)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,706)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,706)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
