UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended January 31, 2001.
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________ to ________
COMMISSION FILE NUMBER: 0-31229
GSI TECHNOLOGIES USA INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 65-0902449
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2001 McGill College Avenue, Suite 1310, Montreal, Quebec H3A 1G1 Canada
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(Address of principal executive offices)
(514) 940-5262
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(Issuer's Telephone Number, including Area Code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
As of January 31, 2001, there were 20,656,636 shares of the issuer's $.001 par
value common stock issued and outstanding.
Transitional Business Disclosure Format (Check one): Yes [ ] No[X]
1
INDEX TO FORM 10-QSB
--------------------
For the Quarter Ended January 31, 2001
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheet as of January 31, 2001 3
Statement of Operations for the Three Months
ended January 31, 2001 and 2000 4
Statements of Cash Flows for the Three Months
and Since Inception To January 31, 2001 and 2000 5
Notes to Financial Statements for the 6 - 7
Three Months Ended January 31, 2001 and 2000
Item 2. Management's Discussion and Analysis 8 - 16
PART II. OTHER INFORMATION
16
Item 1. Legal Proceedings
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
2
PART I - FINANCIAL INFORMATION
Item 1. Financial statements
-----------------------------
GSI TECHNOLOGIES USA, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
BALANCE SHEET
JANUARY 31, 2001
(UNAUDITED)
Assets
Current Assets
Cash and cash equivalents $ 5,519
Receivables, net (principally related party) 3,562,389
Other current assets 918
------------------
Total current assets 3,568,826
Property and equipment, net 39,198
Investment in affiliates 201,858
Intangible assets, net 354,784
Other assets 61,105
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Total assets 4,225,770
==================
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable 531,319
Notes Payable (principally related party) 3,526,217
Other current liabilities 96,921
------------------
Total current liabilities 4,154,457
Stockholder's Equity
Common Stock, class A, $1.00 par value; authorized -
5,000,000 shares; issued and outstanding none
Common Stock, class B, $.001 par value; authorized 20,657
55,000,000 shares; issued and outstanding - 20,656,636
Paid in Capital 1,859,818
Deficit accumulated during the development stage (1,809,549)
Accumulated other comprehensive income 388
------------------
Total Shareholder's Equity 71,313
Total liabilities and shareholder's equity $ 4,225,770
==================
Read the accompanying summary of significant accounting notes to
financial statements, which are an integral part of this financial statement
3
GSI TECHNOLOGIES USA, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 31, 2001 AND 2000
FROM INCEPTION (JULY 08, 1998 THROUGH JANUARY 31, 2001
(UNAUDITED)
Three months
ended January 31, Period of inception
-------------------------------------- July 06, 1998 to
2001 2000 January 31, 2001
--------------- --------------- ---------------------
Revenues $ 6,250 $ - $ 602,659
Cost of Sales 3,750 - 473,166
--------------- --------------- ---------------------
Gross Profit 2,500 - 129,493
Operating Expenses:
Marketing 28,695 15,949 238,434
Management and administrative fees 232,490 62,564 739,212
Salaries and related costs 46,812 - 146,637
Rent 14,783 12,430 129,096
Financing expense - 159,132
Professional fees 11,496 8,273 131,857
Consulting - - 304,647
Depreciation 1,300 - 1,693
Amortization 23,809 23,739 120,172
Travel 8,760 5,923 18,289
Other selling, general and administrative 38,581 20,945 160,294
--------------- --------------- ---------------------
Total operating expenses 406,725 149,824 2,149,462
Loss before other income (expense) (404,225) (149,824) (2,019,969)
Other income (expense):
Interest income (principally related party) 88,706 4,480 165,466
Interest expense (principally related party) (86,783) - (131,904)
Equity in net earnings (loss) of affiliates 176,858 - 176,858
--------------- --------------- ---------------------
Total other income (expense) 178,781 4,480 210,420
--------------- --------------- ---------------------
Net Loss (225,444) (145,344) (1,809,549)
=============== =============== =====================
Basic weighted average common shares outstanding 20,595,223 19,958,157 12,281,887
=============== =============== =====================
Basic Loss per common share $ (0.0109) $ (0.0073) $ (0.1473)
=============== =============== =====================
Read the accompanying summary of significant accounting notes to
financial statements, which are an integral part of this financial statement
4
GSI TECHNOLOGIES USA, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31, 2001 AND 2000
FROM INCEPTION (JULY 08, 1998 THROUGH JANUARY 31, 2001
(UNAUDITED)
For the three months Inception
ended January 31, (July 08, 1998)
------------------------------------ through
2001 2000 January 31, 2001
------------- ------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (225,444) $ (145,344) $ (1,809,549)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 25,109 23,739 121,865
Issuance of stock for contract settlement - 500
Accrued Interest Expense 86,783 - 131,904
Accrued Interest Income (88,706) (4,480) (165,458)
Equity in net earnings (loss) of affiliates (176,858) - (176,858)
Changes in Operating assets and liabilities:
Receivables and other current assets (6,570) 89,141 (25,174)
Other assets - (61,104)
Accounts Payable and Accrued Liabilities 4,837 (142,157) 597,541
------------- ------------- -----------------
Net cash provided by/(used in) operating activities (380,849) (179,101) (1,386,333)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash provided by/(used in) investing activities
Loan Receivable, principally related parties (370,449) (413,631) (3,372,675)
Purchase of property and equipment - - (41,066)
------------- ------------- ----------------
Net cash provided by/(used in) investing activities (370,449) (413,631) (3,413,741)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from:
Notes payable, principally related parties 50,000 (279,667) 2,622,599
Short term borrowings 577,413 - 577,413
Sales of common stock 125,000 577,088 1,605,195
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Net cash provided by/(used in) financing activities 752,413 297,421 4,805,207
------------- ------------- ----------------
Effect of exchange rate changes on cash and cash eqivalents - - 386
------------- ------------- -----------------
Net increase (decrease) in cash and cash equivalents 1,115 (295,311) 5,519
Cash and cash equivalents, beginning of period 4,404 350,019 -
------------- ------------- -----------------
Cash and cash equivalents, end of period $ 5,519 $ 54,708 $ 5,519
============= ============== ================
Supplemental Schedule of noncash investing and financing activities:
Issuance of note for payment of license rights 200,000
Issuance of shares for license rights 274,779
Issuance of shares for dividend to affiliate 325,221
Read the accompanying summary of significant accounting notes to
financial statements, which are an integral part of this financial statement
5
GSI TECHNOLOGIES USA, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
JANUARY 31, 2001
NOTE 1 -BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of GSI
Technologies USA, Inc. have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and Article 10 of Regulation S-X. The financial
statements reflect all adjustments consisting of normal recurring adjustments
which, in the opinion of management, are necessary for a fair presentation of
the results for the periods shown. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
These financial statements should be read in conjunction with the audited
financial statements and footnotes thereto included in GSI Technologies USA,
Inc.'s 10K-SB as filed with the Securities and Exchange Commission.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and that effect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
NOTE 2 - REVENUE RECOGNITION
Revenue from sales of display units are recorded at the time the units are
delivered. Revenues from sub- licensing the master licensing agreement are
recognized over the term of the sub-licensing agreement.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provide guidance for disclosures
related to revenue recognition policies. Management believes that GSI
Technologies USA, Inc.'s revenue recognition practices are in conformity with
the guidelines of SAB 101.
NOTE 3 - NET LOSS PER SHARE
Basic earnings (loss) per share is computed using the weighted-average
number of common shares outstanding during the period. Options and warrants are
not considered since considering such items would have an antidilutive effect.
6
GSI TECHNOLOGIES USA, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
JANUARY 31, 2001
NOTE 4 - GOING CONCERN
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company reported a net loss of
$225,444 and $145,344 for the three months ended January 31, 2001 and 2000
respectively as well as reporting net losses of $1,809,549 from inception (July
08, 1998) to January 31, 2001. As reported on the statement of cash flows, the
Company incurred negative cash flows from operating activities of $380,849 and
$179,101 for three months ended January 31, 2001 and 2000 respectively and has
reported deficient cash flows from operating activities of $1,386,333 from
inception (July 08, 1998). To date, these losses and cash flow deficiencies have
been financed principally through the sale of common stock ($1,605,195) and
short term borrowings (577,413). Continuation of the Company as a going concern
is dependent upon obtaining sufficient working capital for its planned activity
and the management of the Company has developed a strategy, which it believes
will accomplish this objective through additional equity funding, and long term
financing, which will enable the Company to operate for coming year.
NOTE 5 - Investment in Affiliates
The Company's investments in affiliates consists of a 25% interest of
Groupe Solcom, headquartered in France, which participates in the electronic
advertising and interactive information display. The Company accounts for its
25% interest in Group Solcom using the equity method. Condensed financial
information for investments in affiliiates accounted for under the equity method
of accounting are summarized below.
January 31, 2001 January 31, 2000
Current assets 1,337,718 0
Other assets 273,963 0
-------------- --------------
1,611,681 0
Current liabilities 874,037 0
Shareholder's Equity 737,644 0
-------------- --------------
1,611,681 0
Net Sales 1,512,452 0
Gross profit 984,456 0
Net income 707,433 0
7
GSI TECHNOLOGIES USA, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
JANUARY 31, 2001
NOTE 6 - Line of Credit
The Company maintains a line of credit with a foreign financial institution
to meet short term working capital needs which allows the Company to borrow up
to $1,000,000 on an unsecured basis at the prime rate of interest (8.50 percent
at January 31, 2001) plus 2.50 percent. At January 31, 2001, the Company had
borrowed $577,413. This line of credit expires December 01, 2001.
NOTE 7 - STOCKHOLDER'S EQUITY
During the three months ended January 31, 2001, the Company sold, through a
private placement, 125,000 shares of Class B common stock at a price of $1.00
per share.
The Company also canceled 12,000 shares during the three months ended
January 31, 2001 which were previously issued at $1.10 through the exercise of
warrants of which the entire $13,200 was not collected and previously reflected
as a share subscription receivable.
8
Item 2. Management's discussion and analysis
---------------------------------------------
Forward looking statements.
This report contains forward-looking statements that are based on the Company's
beliefs as well as assumptions made by and information currently available to
the Company. When used in this report, the words "believe," "expect,"
"anticipate," "estimate," and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks,
uncertainties and assumptions, including without limitation, the overall
strength of the national securities markets, the Company's present financial
condition and the risks and uncertainties concerning the availability of
additional capital as and when required, technological changes, increased
competition, and general economic conditions. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, or
projected. The Company cautions potential investors not to place undue reliance
on any such forward-looking statements, all of which speak only as of the date
made.
Overview
GSI specializes in broadcasting solutions principally for advertisers and
others seeking to extend their reaching power for their commercial and public
service messages. Holder of a world-wide license, GSI's proprietary software,
hardware, and advanced broadcasting systems respond to their needs. In providing
access to its remote control broadcasting capability, we enable users to
transmit and receive full-motion video, graphics, and audio on an array of
attractive, durable and interactive indoor and outdoor display products.
Results from operations
3 months ending January 31, 2001 and 2000
We are still in the development phase after starting up in 1999. During
GSI's first quarter from November 1, 2000 to January 31, 2001, we incurred a
loss of $225,444 or $0.0109 per share versus $145,344 or $0.0073 per share in
the same period in 2000. The accumulated deficit to date during the development
phase increased to $1,809,549 or $0.1473 per share.
Revenues
$6,250 in revenues were recognized during the quarter versus nil in the
same period in the prior year. This related to the sub-license sold to GSI
Canada in May, 2000 and giving it commercialization rights for the territory of
Canada. Since inception, revenue totals $602,659, primarily from product sales.
Cost of revenues and direct operating costs
According to the master license agreement with GSI Canada, we owe 60% of
the price of any sub-license we sell to a new licensee and this amount is
payable to GSI Canada by the end of the calendar quarter in which the
sub-license is granted. $3,750 in direct operating cost for the quarter, versus
nil for the same quarter in the prior year, relates to the sub-license sold to
GSI Canada in its particular role as sub-licensee for the entire territory of
Canada. Since inception, cost of sales is $473,166, including $11,250 in
royalties and $461,916 in product costs.
Operating expenses
During the three months ended January 31,2001, we incurred $406,725 in
operating expenses versus $149,824 in the same period in 2000, The increase is
attributable primarily to an increase in management fees and salary expense.
Since exception, operating expenses total $2,149,462 and these costs are
primarily associated with the development of the company.
9
Other income
During the three months ending January 31, 2001, $88,706 in interest was
earned mainly on the outstanding loan to GSI Canada, while $86,783 in interest
expense was incurred, of which $81,084 was for loans from shareholders and
affiliated parties, $5,293 was accrued interest due on the short term credit
facility with our principal bank, and $406 was interest due to another third
party.
$4,480 in interest was earned in the same period in 2000; no interest
expense was incurred in the same period in 2000. Since inception a total of
$165,466 in interest has been earned while $ 131,904 in expense has been
incurred.
Equity in the net earnings of our European affiliate was $176,858 for the
period versus nil in the same period of 2000. This is discussed further below.
Liquidity and capital resources
At January 31, 2001 we had $5,519 in cash. Cash used in operating
activities during the three months ending January 31, 2001 was $380,849, which
was mainly attributable to the net cash loss from operations plus changes in net
operating assets and liabilities.
Cash used in investing activities during the period reflects additional
short term loans to GSI Canada in the amount of $370,449.
Cash provided from financing activities reflects a private placement in
December in the amount of $125,000; as well as advances through January 31 of
$577,413 in short-term bank credit provided by the Societe Generale, a leading
bank in France, and an advance of $50,000 from a shareholder.
In September, 2000, we entered into formal loan arrangements with a group
of existing investors. At January 31, 2001, the total amount of these
obligations, including interest, is $2,948,804. The promissory notes have a
maturity date of September 7, 2001, bear interest at the rate of prime plus two
per cent and are convertible at any time at the sole discretion of the Company
into a certain number of shares for each holder. If converted, interest on the
notes is waived. In the event of conversion, the total number of Class B common
shares to be issued from treasury would be 2,581,584.
The result of all activities during the three months ending January 31,
2001 was a net increase of $1,115 in our cash position.
From inception, net cash used in operations has been $1,386,333. A total of
$3,413,741 has been used in investing activities, while $4,805,207 has been
provided by financing activities, including $1,605,195 from sales of common
stock.
With the additional funds received we continued to build up our New Media
Division and by the end of January had also lent a total of $3,542,361 to GSI
Canada, mainly in the form of special supplier financing. We also lent $20,028
to Groupe Solcom International France. This financial assistance enabled GSI
Canada and its subsidiaries to complete initial installations on schedule and
activate broadcasting on the Ivanhoe network. Considered a direct benefit to
GSI's global marketing program for our GSITV.COM, The Total Vision Network
concept, it is anticipated that GSI Canada will eventually sell the network
either in whole or in part to an established media operator. The funding will
also enable GSI Canada to maintain its R & D plan and to continue developing the
business and distribution of our products and services in Europe via Groupe
Solcom International France S,A.S., currently 75% owned by GSI Canada and 25%
owned by GSI, and whose results of operations are discussed below.
Cash requirements of about $400,000 are anticipated during our next fiscal
quarter to April 30, 2001, as spending to sustain operations is currently
running at about $125,000 a month. Our funding of GSI Canada is capped at $3.5
million.
GSI Canada requires funding for its next project, which is to install 50
Citycolumns on certain properties managed by SITQ, a large Quebec-based real
estate company. This must be obtained independently. With the forbearance of
SITQ, the project has been delayed pending funding.
10
We also continue to seek additional sources of funding to sustain
operations on a longer term basis. On October 16, 2000, we engaged CIBC
Investment Banking, a division of one of Canada's largest banks to assist us in
the raising of the capital required to continue with our business plan. We are
now also being assisted by another large international bank, which is providing
short term funding. Pending closing a longer term financing transaction, bridge
financing has been obtained in the form of an interim line of credit of
$1,000,000 from the Paris Branch of the Societe Generale in France. $577,413 has
been drawn through January 31, 2001. The line is available to December 1, 2001.
Interest accrues at prime plus 2.5%. An offering of $2,000,000 in convertible
debentures to the Societe Generale is under negotiation. We anticipate
completing this transaction within the next 30 days. To sustain operations in
the medium term, we also continue to seek out new investors and anticipate
completing a number of private placements.
Investment in affiliates
Our 25% interest in Groupe Solcom International France S.A.S is reflected
as an investment in affiliates on the balance sheet. The value of this
investment was $200,858 at January 31, 2001 versus nil in the same period of
2000. Total revenue generated by this affiliate during the period was
$1,512,452, resulting in a net income of $707,433 versus nil in the same period
of 2000.
Product sales and distribution and provision of services
Under the master license acquired in October, 1999 from our Canadian
affiliate, GSI Technologies (3529363 Canada Inc.), we have access to some of the
most advanced technology currently available in the field of electronic
advertising and interactive information display. The term of the master license
is 5 years to October 26, 2004 and is automatically renewable for another 5
years at the sole discretion of GSI. The cost was $800,000, $200,000 paid in
cash in November 1999; the balance in 600,000 of GSI's common shares.
In addition to production capacity, through this continuing association
with GSI Canada we also benefit from their ongoing research and development and
the opportunity to broaden and enhance our product lines. All research and
development continues to be conducted at GSI Canada and we have made no direct
expenditures to date for the ongoing software enhancements. Currently sharing
facilities with us at Place Mercantile in Montreal, we now anticipate that GSI
Canada's R & D Group will be located in the new Cite Multimedia in Old Montreal
along with our own New Media Group by May, 2001.
Through this association with GSI Canada, we are able to offer a range of
products designed around the concept of providing useful information and
services in an attractive, convenient format to people in their everyday
out-of-home environments. Products actually in production or in the prototype
phase include the interior or Citycolumn display units, the exterior or
Novacolumn display units often referred to as "urban furniture" or "street
furniture" in the language of the major North American and European media
operators and advertisers; and the transit shelter or Servicolumn units. We also
recently launched a new indoor product called Digicolumn specially for interior
wall space applications and designed around plasma screen technology.
In addition to revenue from product sales, revenue will be generated from
our core services. Creative services, principally in the form of message
content, commenced in October, 2000. With a view to market development we are
currently offering these services free of charge. We anticipate generating
revenue from broadcasting, network management and maintenance, and technical
support starting in April, 2001. We also anticipate revenue generation from
special consulting contracts; as well as from the further sale of sub-licenses.
We expect that, in certain cases, elements of the technology covered by the
master license will be sold separately.
As we ramp up our commercial operations, the business model we continue to
favor is marketing and selling our products to the existing media companies. We
believe this provides the best route to rapid deployment of our products and
services globally over the longer term. In the context of our market development
program in Europe, however, we have identified other avenues for exploiting our
technology. We believe our technology is ideally suited to a range of
applications in a broad, growing, global market; is adaptable to various forms
of media operations; and is capable of serving the needs of both national and
local advertisers. Most importantly, it provides an ideal multimedia-based
application for new forms of display equipment coming on the market via major
name brand suppliers.
11
Our strategy, therefore, is to achieve substantial market penetration by
going down two parallel paths: the distribution of our products and continuing
core services via well-established channels, as well as through direct
approaches to end users. Our targeted customers include the established media
operators as well a variety of end users with common characteristics: major
retailers and service providers seeking concentrated, intensive messaging to a
number of sites. The latter market is still largely unexploited, represents the
major growth opportunity, and presents the biggest challenge in the area of
market development.
The established media operators serve the large national brand name
advertisers seeking the broadest possible reach for their advertising campaigns
in high-traffic locations. They provide the most effective route to a large
number of established municipal and private commercial sites.
Exploiting its pinpoint advertising capability, the Company is currently
pursuing additional opportunities to directly serve:
o Hospitals and Health Clinics
o Pharmacies
o Dealerships
o Chain distributors such as grocery, office supply, home renovations
chains, restaurants, etc.
o Banks
o Post Offices
o Theme Parks and Amusement Centers
o Airport, Train, and Subway authorities
Typically, these end users focus their messages on their specific clientele
and a simpler type of display product is appropriate on their largely indoor
sites. In this context, the Company's technology provides the means for an ideal
application for the manufacturers of plasma screens, LED screens, and projection
equipment; specifically, in the "display product" segment of their markets.
These include Sony, Pioneer, NEC, Fujitsu, Barco, and Epson.
In this context, the Company is positioning itself to possibly assume the
role of a distributor or Value Added Reseller (VAR). It is also exploring
opportunities with other service providers with similar characteristics,
existing access to a large number of high-traffic sites. We have also identified
potential partners such as Canada Payphone Corporation, whose primary
shareholder is AT&T Canada. Concentrating on the hospitality market such as
hotels and corporate and commercial centers, our collaboration, possibly in the
form of a joint venture, could lead to the integration of our respective
products and services. Interactivity and the further integration of phones,
ATMs, Internet access, SmartCard access, and media are foreseen in this context.
The Company is in various stages of development in targeted geographic
locations where financial and human resources, industry contacts and fruitful
associations are available. In line with our marketing plan for our first year
of operations, we concentrated on the North American market, focusing on
significant opportunities identified in Canada. Accordingly, the first
sub-license was granted to GSI Canada on May 4, 2000 to distribute GSI's
products nationwide in Canada. The price for the sub-license was $250,000,
payable in ten annual installments of $25,000 each. At this stage in our
development, Europe is presenting the best opportunities for rapid deployment of
our technology. We are currently focussing on this market and a sub-licensing
structure is under negotiation in the context of our dual path marketing
strategy for Europe. Pending completion, and in recognition of a planned
acquisition which is discussed blow, we have authorized the use of our
technology in France and Italy by our European affiliate.
Our principal market in the area of out-of-home advertising is mature and
dominated by a relatively small number of large, well-developed media companies
such as Pattison, JC Decaux, Outdoor Systems and Clear Channel, through its
Adshel, Eller Media, and More groups. We believe that the opportunity exists to
both supplant old, static forms of advertising signage and to increase exposure
in terms of "viewers per day" in the out-of-home environment, both indoors and
outdoors. Pending a formal contract with at least one of the major media
operators, our short term plan is to deploy our products via our affiliates and
subsidiaries in prime territories and to sell advertising spots directly to end
users.
12
Canada
Primarily in Quebec, GSI Canada has assumed the role of media operator and
acquired the right to install its products on sites managed by 3 major property
managers and a large entertainment complex in Montreal operated by Canderel, a
leading Canadian property developer.
Barco has proposed that GSI Canada collaborate as a Value Added Reseller
(VAR). An agreement was signed in February, 2001. Reflecting Barco's confidence
in our technology and deployment concept, it calls for GSI to sell the
equivalent of $8 million worth of Barco display products annually.
Our initial focus continues to be on the interior market. Broadcasting
operations have begun and content is gradually added to the showcase network of
32 CityColumns installed on Ivanhoe properties in Quebec and Ontario. Although
no revenues have been generated to date we are confident local advertisers will
be attracted.
50 units remain to be installed on properties managed by SITQ, one of the
largest property managers in the province of Quebec and wholly owned by the
Caisse de Depots et Placements, the provincial pension fund. Originally to
commence in October, 2000 with a planned completion date of December 31, 2000,
with the concurrence of the property manager, installations have been delayed
pending funding. This sale of one of our products to GSI Canada would generate
an additional $850,000 in revenue to be followed by revenues from our ongoing
services. GSI Canada is actively seeking an advertising media operator to
participate in this transaction and to continue developing the Canadian indoor
market for our products and services.
Pending an agreement with a media operator, GSI Canada will continue to
seek opportunities to make installations in Canada and to seek separate funding
wherever possible. In addition to the Ivanhoe and SITQ contracts, a contract has
been signed with Tulon Development Corporation, a major property manager in
Eastern Canada, giving GSI Canada the right to install 14 Citycolumns on their
properties, principally in the Maritimes. This also requires funding. Other
major shopping center owners and property managers such as Cadillac Fairview,
and Oxford are being approached by GSI Canada.
On January 31, 2001, GSI Canada concluded a 10-year agreement with the
Forum Entertainment Center, securing a mandate to conceive its WEB site and
develop its consumer loyalty program using smart card technology as well as the
right to install out-of-home advertising products in and around the Forum. The
Montreal Forum is scheduled to open officially in April 2001.
Each of these operations is an integral part of a turnkey project developed
by GSI Canada for Canderel, a Montreal-based real estate developer and manager
of the Forum. We will benefit directly from the sale of products and ongoing
services. The following products will be displayed at the Forum: backlit
posters, static display units in the restrooms, Digicolumn plasma screens,
outdoor columns, giant outdoor LED screen, interior projection screen and a
banner display system raised on the outside of the Forum. The services provided
by GSI include the operation, maintenance, promotion and sales of the network
advertising. Upon its opening in the spring of 2001, the Montreal Forum
Entertainment Center will be the greatest cinema and amusement complex of its
kind in Canada. Drawing upon its remarkable 70 years of history as the city's
premier entertainment destination, the Forum combines sophisticated movie
theaters, a giant screen theater, boutiques, theme restaurants, and high-tech
games within a single unique and exceptional complex.
The project with Canada Payphone Corporation (CPC), Canada's leading
competitive payphone service provider has been deferred indefinitely due to
funding issues and other business priorities. Although we still believe the
project has great potential, it is uncertain it will be reactivated in the near
term. On September 29, 2000, we had jointly announced our intention to form a
joint-venture to market a new range of AT&T branded products. Under the
agreement and joint business plan for the development of the market in Canada
and internationally, GSI would integrate Canada Payphone Corporation's
interactive payphones and Internet kiosks with its own range of display products
being deployed on GSITV.COM, The Total Vision Network. Canada Payphone
Corporation has developed an interactive full video payphone system, named
Grapevine as well as an Internet kiosk with smart card reader called PIK . GSI
Technologies would broadcast information and provide 24 hour management of the
network content from its new facilities in the Cite Multimedia on Grapevine
interactive phones and PIK Internet kiosks, in addition to its exiting
electronic display products. Through its New Media Division, GSI would also
produce all advertising and Internet content, marketing and e-commerce
solutions.
13
USA
Through our office in Orlando, Florida, theme parks and tourist centers are
our primary target. All levels of government have been contacted and strong
links established with Florida's "Enterprise Florida" program which was
instrumental in developing the Milan, Italy territory under the US Department of
Commerce umbrella. In May, 2001 the same agencies will be sponsoring GSI at the
COMDEX Trade Fair in Mexico City. The Orlando Development Commission and the
city of Orlando have made overtures about the availability of funds for training
for our prospective employees. Meanwhile, with the support of these agencies we
were able to submit offers of services to two local airports and the convention
center, as well continuing to make headway with the local tourism industry. Our
progress will improve with the availability of additional financial and human
resources.
Europe
Significant opportunities are being identified in Europe. The appetite in
Europe for new technologies favors the development and installation of GSI's
hi-tech products and services. Through them and the progress of our European
affiliate, Groupe Solcom International France S.A.S., we are responding to
increasing customer demand from, amongst others, the major participants in the
out-of-home advertising industry and retail stores. Considered the most
hospitable environments in Europe at this stage of our development, our focus is
on France and Italy.
We have also been collaborating in a pilot project with major participants
in the out-of-home industry: Adshel and Barco. Concurrently, we are approaching
end users directly and have received 2 orders from purchasers in Milan.
In August, 2000, Clear Channel International formally requested GSI to
participate in a pilot project network of large Barco supplied LED screens and
the relatively new variety of plasma screens using our broadcasting technology,
the initial sites being in France and Switzerland with the broadcasting and
provision of creative services from our studio in Paris. Using the GSI
Multimedia Pack, Clear Channel's Adshel division was able to announce on
December 4, 2000 that it had won a major street furniture contract in Nantes,
the sixth largest city in France.
On November 21, 2000, we announced several strategic moves that open the
doors to the large European market; first that we had entered into a major
agreement with Adshel, a division of Clear Channel International and a world
leader in urban advertising; secondly, that we had also lined up the
participation of ITV, a French company specializing in the production of
television programs and a member of CANAL+. And in order to offer financing to
its customers, we had enlisted the support of Siemans Finance, a leading
international financial institution.
According to the strategic agreement with Adshel, GSI will provide Adshel
with access to the GSI Multimedia Pack and related hardware on a global basis.
GSI's unique broadcasting technology and integrated advertising solution will
enable Adshel to: continuously broadcast targeted content such as information
capsules, animated advertising spots and entertainment; frequently update the
content by remote control; offer digital quality, interactivity and the
possibility of integrating interactive services into its advertising display
products. We expect to complete negotiations regarding the specific terms of the
sale of the license for the GSI Multimedia Pack by the end of this month.
GSI's technology is the inevitable solution, in our view the missing link
in the modern out-of-home advertising chain. As information technology and
related business models are evolving rapidly in line with computer technology,
networking, telecommunications and the Web, GSI now offers a unique, integrated
out-of-home advertising solution.
Our technology has met all of Adshel's test requirements. This agreement
provides GSI with a first-class stepping stone in Europe, paving the way for
attractive contracts with multiple applications in major urban centres. This
Master Software Access Agreement will open new markets and promising revenue
potential for GSI in the years to come.
14
Subsequent contracts to install networks in various public locations will
be according to the size and type of screens deployed in the networks. We
recently made a first public bid for a major service network in France, with the
backing of prestigious partners such as Sony, France Telecom and ITV. The
association with ITV, a member of Canal+, will provide GSI with quality
French-language television content and information capsules of public interest
that are frequently updated and targeted to the different regions across the
country. GSI will provide the broadcasting medium, effectively integrating the
information with the advertising loops transmitted to the interactive multimedia
terminals from its broadcasting station in Paris.
The partnership protocol with Siemens Finance makes available an
advantageous leasing program for GSI's customers in the European Community. A
flexible financial program, it features various facilities that will enable
GSI's partners to update their equipment and remain at the leading-edge of
technology.
These three agreements are complementary, assuring us of reliable
partnerships with major companies in the field of media and urban furniture,
information content, and customer financing. They will greatly enhance the
expansion of our technological platform in the European market and the
efficiency of our operations both in Montreal and Paris.
On February 8, 2001 GSI and Barco Daylight Display Systems, a world leader
in large screen video and graphic display technology, announced that we had
signed a Value Added Re-marketing agreement for Barco's Dlite LED display
products. BARCO Group has headquarters in Kuurne, Belgium. Barco Prjoection
Systems, of which Barco Display Systems is a business unit, is one of five major
activities. Barco has a network of subsidiaries, distributors and agents in 97
countries throughout the world. Barco has been quoted on the Brussels Bourse
since 1986.
We are cooperating with Barco for the design and implementation of digital
signage solutions world wide. Integrating two complementary products, GSI and
Barco offer a complete turnkey solution for digital signage with street level
advertising units. As our first step, this month we intend to install a
prototype Servicolumn equipped with digital signage. ServiColumn is a
customized, outdoor, self-contained unit that is designed to be incorporated in
the display portion of transit shelters. A double-faced type of urban furniture,
one face has a 7 sqm high-resolution daylight display (size: 5.87 ft x 4.40 ft);
the other face has an Internet interactive kiosk.
In addition to building relationships with media operators like Adshel and
major suppliers like Barco, our European affiliate, Groupe Solcom International
France, continues to identify end users for our products and services. Initial
orders have been received from MCR Multimedia in Milan, Italy for the
installation of a network of 97 projectors and screens in the city's metro
system. Multimedia Hospital has also placed an order for us to set up a network
of 70 plasma screens in their network of hospitals and surgical facilities.
TreDWeB, a local networking and graphic arts firm was acquired by our European
affiliate in January in order to manage installations and provide content via
the GSI Multimedia Pack.
On February 26, 2001, the Boards of Directors of both companies having
approved the transaction in principle, we announced that we will be presenting
an offer to the shareholders of 3529363 Canada Inc. ("GSI Canada") to acquire
its interest in Groupe Solcom International France S.A.S.,("GSI Europe")by way
of cash and a share exchange. The acquisition is subject to an independent
evaluation and fairness opinion, final approval by the shareholders of each
Company, and appropriate filings with regulatory authorities. We expect this
transaction to be completed by June, 2001.
This announcement superseded an earlier announcement of November 28, 2000.
After careful consideration, the Board of Directors of GSI has concluded that
this revised transaction will be more conducive to maintaining the focus on the
commercialization of core products and services. Upon reaching a definitive
agreement, we will file a registration statement with the Securities and
Exchange Commission to register the Class B Common Stock required to effectively
complete the transaction. The required filings will also be made with the
"Commission des Valeurs Mobilieres du Quebec," or "CVMQ".
As an important strategic step at this stage in the evolution of GSI, we
believe it is in the interest of all of our stakeholders to fully integrate our
rapidly growing operations in Europe. By strengthening our organization
structure and focussing on our core business, we will improve our ability to
raise the needed capital, more efficiently deploy the required financial and
human resources, and thereby enhance shareholder value.
15
Groupe Solcom International France S.A.S. ("GSI Europe") is a subsidiary of
GSI Canada, which owns 75% of the company. Headquartered in Paris, it is
deploying GSI's technology under a provisional license for the territory of
Europe. GSI Europe's current operations are based in Paris, France and Milan,
Italy, considered the most hospitable environments at this stage of its
expansion. GSI Europe has been collaborating in pilot projects with major
participants in the out-of-home advertising industry, principally Adshel and
Barco. Concurrently, it is approaching potential end users directly.
GSI Europe operates a graphic studio for 2D and 3D animation in Paris.
Projects have been undertaken in France, Italy and Morocco. Initial orders have
been received from MCR Multimedia in Milan, Italy for the installation of an
interactive network in the city's subway. The value of the contract is US$1.7
million. GSI Europe has already received a letter of intent for the second phase
of Milan's subway project for a potential sale value of US$5.4 millions. GSI
Europe recently acquired TreDweb, a Milan-based networking and graphic arts
firm, with 20 employees and annual revenues of US$ 1 million.
On March 5, 2001 we announced the planned opening of a new office in the
United Kingdom. To facilitate important contracts currently under negotiation in
the UK, GSI USA will proceed with the installation of a fully operational
broadcast studio and sales center in London. Complementing activities in Paris
and Milan, we expect our new facilities in London will be operational by May
1st, 2001.
Product manufacturing and services
Building on the extensive network of affiliations and strategic alliances
of our affiliated company in Canada, we are able to completely outsource the
integration and production of our products. The prime contractor is HiTech Neon,
currently the largest and longest operating subsidiary of GSI Canada with a
forty year history in the sign business. This affiliated supplier is responsible
for the production of the encasement modules either directly or via
sub-contracting. Subject to a competitive ordering process, computer hardware
components as well as networking and cabling services are ordered from ITS
Service Inter-teck, also a subsidiary of GSI Canada. While all key suppliers
have the required capacity to complete the planned production schedule, the
continuing challenge is for HiTech Neon to meet accelerating demand. Additional
manpower and space will be required to gear up to the planned production
schedule. Sub-contracting arrangements are in place. Labor relations at the
HiTech Neon plant located in a suburb of Montreal are considered excellent.
Although we will eventually outsource the advertising services, our New
Media Division will provide the content for GSITV.COM, The Total Vision Network.
As part of our strategy to grow and expand in the information technology and
multimedia industries, we intend to pursue an aggressive mergers and
acquisitions program. The program is designed to help us reach a critical mass
of activity, to achieve substantial vertical integration and control over the
production processes; as well as to create a strong financial underpinning for
the continued development of our core business. Additional funding would be
required in order to help finance acquisitions and capitalize on emerging
opportunities.
PART II - OTHER INFORMATION
Item 1. Legal proceedings
--------------------------
On December 15, 2000, we signed an agreement with the Quebec Securities
Commission to conform to filing requirements for any sales of shares to
residents of the Province. Our President also agreed that the sale of any shares
directly by himself or shares owned by companies in which he has an interest
would be in conformity with the filing requirements in the jurisdiction of
Quebec.
We remain party to one proceeding initiated by another party, a Mr. Jacques
Biron, against GSI Canada, GSI, our President, and others in the Superior Court
of the Province of Quebec, District of Montreal. An amount of $98,766 in
Canadian dollars has been claimed for our alleged failure to pay a commission
and consequent damages relating to negotiations with GSI Canada for an
acquisition. We have retained legal counsel in Montreal, Mr. Marc Cote of
Labelle, Boudrault, Cote & Associates, who advises that, in his opinion, Mr.
Biron's case against the company is without merit; that he has no right in law
to sue GSI Technologies USA Inc.
16
Item 2. Changes to authorized shareholders' capital
---------------------------------------------------
On August 1, 2000, the Board of Directors resolved that all 5,000,000 of
the Corporation's Class A authorized and unissued shares be cancelled and the
by-laws of the Corporation be amended and the appropriate filing with the State
of Delaware be made. This will be completed early in 2001.
Item 3. Defaults upon senior securities
----------------------------------------
None.
Item 4. Submission of matters to vote of security holders
----------------------------------------------------------
None.
Item 5. Other information
--------------------------
On February 16, 2001, we announced several management changes and two new
appointments to the Board of Directors:
Mr. James A. Hone, who has served as the Company's Chief Financial Officer
since its founding in 1999, took on a new mandate as Special Advisor to the CEO.
In this consulting capacity, he will focus on several key strategic projects
related to the integration of GSI's affiliated entities and to long-term
financing. He will continue to guide the Company's business planning process and
assist Management and the Board in the area of corporate governance. He
continues to serve as a member of the Board of Directors.
17
Mr. Sylvain Ethier, C.A. was appointed interim Chief Financial Officer. He
is 37. A founding partner in the accounting firm of Pontbriand, Roy, Ethier, and
a member of the Order of Chartered Accounts of Quebec, he qualified as a
chartered accounted in 1987. The firm serves mainly small and medium-sized
businesses. He was an audit team leader with Adam Authier Boyer from 1985 to
1987 and with Ernst & Young from 1987 to 1992. He is a past President of the
Association of Businesspeople of St-Hubert and member of the Board of Directors
of the South Shore Chamber of Commerce. A graduate of the University of Quebec,
he has completed his B.S. in accounting in 1985.
Dr. Jean-Paul Cajolais, Vice President Marketing & Director of Operations
USA, joined the Board of Directors. Based at the Company's headquarters in
Orlando, Florida, Mr. Cajolais' primary responsibility is developing the market
for the Company's products and services in the United States. Prior to joining
GSI in early 2000, he managed and was a consultant to institutions of higher
learning. More recently, Dr. Cajolais has been a consultant for HUD in
Washington, DC, coordinating training and employment services. He is currently
Chairman of the Programs' Committee of the Mid-Florida Tech College, Chairman of
the Orlando International School, Board Member of the Orlando International
Fashion Academy, Board Member of the Disadvantaged Population Advisory
Committee, Director of the Central Florida Drug Information Group and Board
Member of the Center for Drug Free Living. Dr. Cajolais is also Notary Public
for the State of Florida and the Province of Quebec International Court
Appointee, Designated Official of the United-States Department of Justice
(Immigration and Naturalization Services) and Arbitrator for the Better Business
Bureau. Mr. Cajolais is a graduate of the University of Montreal with a Ph.D. in
Education (Instructional Design) and a Masters Degree in Business Education
(Business and Industry training). He is 61.
Mr. Rene Arbic, President of Bridgepoint International Inc., joined the
Board of Directors. He is 47. On retiring in 1997 after a 25-year career in
operations and sales with Bell Canada and Stentor, the former Canadian alliance
of telecommunications carriers, he launched a successful telecommunications
consulting firm. He then co-founded Bridgepoint International, a rapidly growing
innovator in the field of shared networking facilities, voice and date
switching, and local technical support. Bridgepoint centers are currently in
operation in Montreal, Toronto, Calgary, and Vancouver, as well as in New York
and Los Angeles. The Company is now listed on the Toronto Stock Exchange and
plans to expand in internationally.
Item 6. Exhibits and reports on Form 8-K
-----------------------------------------
The following exhibits are contained in this 10-QSB:
Exhibit No: Description
----------- -----------
27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements 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.
Dated: March 19, 2001 GSI TECHNOLOGIES USA INC.
By: /s/ Michel de Montigny
--------------------------------
Michel de Montigny
Chief Executive Officer