SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended March 31, 2000.
[_] Transition Report pursuant to Section 13 or 15(d) of The Exchange Act
of 1934
Commission File No. 0-21079
PHLO CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 11-3314168
(State of or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
475 Park Avenue South
7th Floor
New York, New York 10016
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (212) 447-1322
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
----------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Sections
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes _X_ No ___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year were $1,125,650.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the closing price of such stock as of July
31, 2000, was approximately $14,207,790.
The number of shares outstanding of the issuer's common stock as of July 31,
2000 was 24,755,503.
<PAGE>
TABLE OF CONTENTS
Item Number Page
PART I
1. Business
2. Properties
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
PART II
5. Market for the Registrant's Common Equity and Related
Shareholder Matters
6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
7. Financial Statements and Footnotes
PART III
8. Directors and Executive Officers
9. Executive Compensation
10. Security Ownership of Certain Beneficial Owners and Management
11. Certain Relationships and Related Transactions
PART IV
12. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures
<PAGE>
PART I
Item 1. BUSINESS
General
Phlo Corporation, a Delaware corporation incorporated in December, 1995, and its
subsidiaries (hereinafter collectively referred to as the "Company") is engaged
in the creation, distribution and sale of a complete line of new-age beverages.
The Company sells its beverages to distributors, who offer the beverages for
sale in high volume chain stores, such as supermarkets, and in small retail
outlets, such as delicatessens and convenience stores. Additionally, the Company
has been actively developing a proprietary product base the result of which
could dramatically increase the intrinsic value of the Company and its valuation
within the financial community and financial markets. Central to the Company's
strategic development plan is the development, acquisition and/or exclusive
licensing of proprietary (patented or patent-pending) technology of a
nutraceutical, biotechnological, and/or pharmaceutical nature, which the Company
initially plans to convey to consumers through beverages.
The Company is positioned as a biotechnology company which is using the
high-volume chain store segment of the beverage industry to commercialize a
portion of the technology. The Company is focusing its technology acquisition
and development efforts of those technologies related to reducing the effects of
aging, preventing or ameliorating cancer, assisting in weight loss, and
enhancing sexual performance.
The Company's current beverage line is sold under the brand name "McCoy's" and
includes ice teas, green teas, lemonade and fruit drinks. In August 2000, the
Company announced the introduction of its newest line of beverages, "ZO - Vital
Cell Defense", featuring its proprietary (patent-pending) composition with
controlled-release capability which is designed to protect cells from the
oxidative stress of aging and to stimulate cell repair. The launch of the Vital
Cell Defense line marks the successful commercialization of one of the Company's
biotechnologies.
Stock Exchange Transaction
On October 22, 1998, the Company agreed to acquire the capital stock of a
beverage company, X-Treem Products Corporation ("X-Treem"), through an exchange
of stock with the shareholders of X-Treem (the "Stock Exchange Transaction"). On
April 2, 1999, the agreement was amended so that Phlo's stock would not be
reverse-split, as initially intended. As a result, the additional shares that
would be issuable under the amended agreement could not be issued because Phlo
did not have enough authorized shares to do so. Based on the amendment, Phlo
would be required to issue a total of 156,877,611 shares of common stock
(assuming the conversion of any convertible securities and the exercise of any
warrants in connection with such exchange transaction) to acquire 100% of the
outstanding shares of X-Treem capital stock and outstanding warrants to purchase
X-Treem common stock from the holders thereof.
As of March 31, 2000, 28,838 shares of X-Treem capital stock, representing
96.47% of the total outstanding shares, have been exchanged for shares of Phlo
stock which have been issued out of authorized shares or are yet to be issued.
In order to complete the Stock Exchange Transaction with respect to those
shareholders of X-Treem who have elected to participate in the exchange
transaction, the Company is required to issue 911,160 additional shares of
common stock and 1,112,010 shares of Series C Preferred Stock. Additionally, in
connection with the Stock Exchange Transaction, the Company has issued to an
officer and director of the Company a warrant to purchase 5,420,426 shares of
common stock at an exercise price of $0.12 per share.
Immediately subsequent to the filing of this Form 10-KSB, the Company is filing
an information statement with the SEC. Following a brief comment period, a
mailing of the information statement to shareholders, and a waiting period of 20
days, the Company will file an amended certificate of incorporation with the
Secretary of State of Delaware increasing the number of authorized shares of
common stock to accommodate the shares currently due to be issued under the
terms of the Stock Exchange Transaction.
<PAGE>
Financing Activities
During the fiscal year ended March 31, 2000, the Company raised approximately
$1,918,899 in the private placement of equity and convertible debt. In
connection therewith, additional shares of stock are being authorized, as more
fully described above, to enable the Company to issue the shares of stock
issuable pursuant to such transactions.
Recent Developments
During the year, the Company exclusively licensed for all uses, worldwide, a
proprietary (patent pending) composition consisting of an ester (derivative) of
Vitamin E combined with a delivery system (with sustained-release capability).
This technology has been shown through in vitro and in vivo tests to be
effective in protecting cells from oxidative stress associated with aging and
exposure to toxic agents and to be effective in stimulating cell membrane
repair. The uses for which the Company has exclusively licensed the technology
include, among other things, pharmaceuticals, biotechnologicals, nutraceuticals,
dietary supplements, food and beverage products and topical preparations (for
therapeutic or cosmetic use).
The Company is currently in the process of introducing "ZO", its new Vital Cell
Defense line of beverages which features this patent-pending technology. As of
the date of filing, the new beverage line has been authorized for sale in
approximately 2,600 chain supermarkets.
Product Overview
The Company's McCoy's beverage line features fruit drinks, lemonades, iced teas
and green teas and is offered in 20 ounce proprietary glass bottles. The McCoy's
line of all natural beverages contains no preservatives, artificial colors or
flavors and is made from the highest quality natural ingredients.
The Company's McCoy's Green Tea line is the first and only new age beverage that
delivers a truly functional level (250 mg) of powerful green tea catechins,
including the super anti-oxidant, EGCg. Studies show that a high daily intake of
EGCg aids in the protection against cancer and cardiovascular disease. McCoy's
Green Teas also feature Vitamin C and Siberian ginseng for sustained energy and
concentration.
The Company's newest beverage line, "ZO - Vital Cell Defense" with its patent-
pending Vitamin E composition and sustained release technology will initially be
offered in seven flavors: Cranberry Berry, Orange Carrot, Pink Lemonade,
Tropical Punch, Kiwi Strawberry, Raspberry Vanilla and Blackberry Cherry. The
beverage line will later be expanded to include at least four flavors of iced
tea.
Marketing and Distribution
The Company's beverage products are offered through the high volume
chain-stores, such as supermarkets. The Company is in the process of expanding
its distribution to include more distributors with traditional "up and down the
street" accounts (e.g. neighborhood grocery stores, delicatessens, and
convenience stores). The Company prices its McCoy's beverages to compete with
other cold drinks offered for sale at the same supermarket accounts and retail
outlets.
<PAGE>
Industry Overview/Competition
The Company's McCoy's line of beverages competes in the "New Age" beverage
category. The Company's line of ready to drink beverages competes directly with
such brands as Arizona, SoBe, Snapple and others. This category is the fastest
growing category in the beverage industry today.
The Company operates in a highly competitive segment of the beverage industry.
The segment is dominated by competitors with greater resources than the
Company's. In addition the Company competes for limited retail shelf space for
its products. The Company cannot be certain that it can successfully compete for
sales to distributors or stores that purchase from larger, more established
companies that have greater financial, sales and technical resources. However,
the Company believes that its proprietary technology and its ability to
incorporate such technology in good-tasting beverages allows the Company to
offer to its distributors unique products.
Manufacturing
The Company's products are manufactured at independent co-packers. The Company
believes that alternative sources of manufacturing exist in the event that the
production capabilities of the facility currently used by the Company become
insufficient or unavailable. However, there can be no assurances that
alternative sources would be able to meet the requirements of the Company, and
if the Company was unable to arrange for alternative co-packing in a timely
manner, such failure could have a material adverse effect on the Company's
business, operating results and financial condition.
The Company purchases juices, concentrates, flavors, nutrients, labels, caps,
glass bottles, boxes and other ingredients for its product line from independent
manufacturers. The products are delivered to an independent co-packer where the
Company's products are manufactured. Management believes that there are
alternatives to all of its suppliers in the event the Company is compelled to
purchase raw materials from other sources.
Trademarks
The Company has filed an application for registration in the United States for
the trademarks and brand name related to its product line. The Company believes
that its trademarks and trade names are significant to the marketing and sale of
its products and that the inability to utilize the same could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Management and Employees
As of March 31, 2000, the Company employed eight (8) employees, all on a full
time basis.
The Company has experienced no work stoppages and considers its employee
relations to be satisfactory. The Company's employees are not represented by a
labor union.
Product Liability Insurance
The Company, like other manufacturers of products that are ingested, faces an
inherent risk of exposure to product liability claims if, among other things,
the use of its products results in injury. The Company currently has product
liability insurance. There can be no assurances that the amount and scope of any
coverage will be adequate to protect the Company in the event that a product
liability claim is successfully asserted against the Company.
<PAGE>
Government Regulation
The production, distribution and sale of the Company's products in the United
States are subject to the Federal Food, Drug and Cosmetic Act, the Occupational
Safety and Health Act, the Lanham Act, various environmental statutes, and
various other federal, state and local statutes regulating the production,
transportation, sale, safety, advertising, labeling and ingredients of such
products. Certain states and localities prohibit, or may in the future enact
legislation to prohibit, the sale of certain beverages unless a deposit or tax
is charged for containers.
Note Regarding Forward Looking Information
Certain statements contained in this Annual Report constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Sections
21E of the Exchange Act. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, levels of activity, performance or achievements of the Company, or
industry results, to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions; the ability of the Company to
implement its business strategy; the ability of the Company to obtain financing
for general corporate purposes; competition; availability of key personnel; and
changes in, or the failure to comply with, governmental regulations. As a result
of the foregoing and other factors, no assurance can be given as to the future
results, levels of activity and achievements, and neither the Company nor any
person assumes responsibility for the accuracy and completeness of these
statements.
Item 2. PROPERTIES.
The Company operates its executive offices at 475 Park Avenue South, 7th Floor,
New York, New York 10016 pursuant to a five (5) year lease dated as of March 15,
1999, providing for a monthly rent of $10,150.
Item 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are involved in a number of lawsuits related to
claims arising through the normal course of business. There are several claims
which have been reduced to judgments, including a judgment entered on February
12, 1999 against X-Treem in the amount of $1,064,616. This judgment and others
have been provided for and are reflected within the accompanying financial
statements as accrued expenses at March 31, 2000.
In addition to the claims, there are other lawsuits in which the Company is
involved, but is unable to predict the outcome. In the opinion of management,
based on currently available facts, and the aggregate liability currently
provided for within the accompanying financial statements, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's consolidated results of operations or financial position.
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the holders of the Company's common stock
during the last quarter of its fiscal year ended March 31, 2000.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company was first traded on the OTC Bulletin Board on
the effectiveness of the Company's Initial Public Offering on July 31, 1996,
under the symbol "PYMB". On April 20, 1999, the Company changed its trading
symbol to "PHLC" to reflect the change in the Company's name to Phlo
Corporation. The common stock of the Company is quoted and traded on the OTC
Bulletin Board.
The following table indicates the high and low bid prices for the common stock
of the Company for the period April 1, 1998 to March 31, 2000, based upon
information supplied by the NASDAQ system. Prices represent quotations between
dealers without adjustments for retail markups, markdowns or commissions, and
may not represent actual transactions.
There were no cash dividends declared on the common stock for the fiscal years
ended March 31, 1999 and 2000.
--------------------------------------------------------------------------------
Common Stock
--------------------------------------------------------------------------------
Year Ended 3/31/99 Year Ended 3/31/00
--------------------------------------------------------------------------------
Quarter High Low High Low
--------------------------------------------------------------------------------
First Quarter $0.25 $0.12 $1.00 $0.42
--------------------------------------------------------------------------------
Second Quarter $0.16 $0.01 $2.00 $0.37
--------------------------------------------------------------------------------
Third Quarter $0.29 $0.01 $1.37 $0.51
--------------------------------------------------------------------------------
Fourth Quarter $0.85 $0.11 $4.00 $0.51
--------------------------------------------------------------------------------
On March 31, 2000, the closing price of the Common Stock as reported on the
OTC Bulletin Board was $2.62. As of March 31, 2000, the Company had
approximately 1,933 beneficial holders of record of its shares of Common Stock.
During the fiscal year ended March 31, 2000, the Company raised $1,051,400 in
convertible debt and $867,500 in equity, and issued or agreed to issue 1,005,243
shares of common stock or warrants to purchase common stock in exchange for
services, each in reliance on various exemptions available under Regulation D.
For more detail on the individual transactions, see Notes 8 and 9 of the
Financial Statements set forth in item 7 hereof.
<PAGE>
Item 6.
PHLO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
SAFE HARBOR STATEMENT
The Company has made, and may continue to make, various forward-looking
statements with respect to its financial position, business strategy, and plans
and objectives of management. Such forward-looking statements are identified by
the use of forward-looking phrases such as "anticipates", "intends", "expects",
"plans", "believe", "estimates", or words or phrases of similar import. These
forward-looking statements are subject to numerous assumptions, risks, and
uncertainties, and the statements looking forward beyond 2000 are subject to
greater uncertainty because of the increased likelihood of changes in underlying
factors and assumptions. Actual results could differ materially from those
anticipated by the forward-looking statements.
The Company's forward-looking statements represent its judgment only on the
dates such statements are made. By making any forward-looking statements, the
Company assumes no duty to update them to reflect new, changed, or unanticipated
events or circumstances.
OVERVIEW
The following discussion of the Company's financial condition as of March 31,
2000, and results of operations for the twelve month periods ended March 31,
2000 and 1999.
Sales for the fiscal years ended March 31, 2000 and March 31, 1999 were
$1,125,650 and $1,153,675, respectively. Year 1999 sales included approximately
$177,000 of applesauce revenues. This product line was discontinued prior to
Year 2000, accordingly, on a comparative basis, Year 2000 sales exceeded Year
1999 sales by approximately $149,000. Projecting forward to Year 2001, the
Company announced the introduction of its newest beverage line, "ZO - Vital Cell
Defense" which it expects will contribute to a significant increase in sales.
Cost of sales for the fiscal years ended March 31, 2000 and March 31, 1999 were
$840,502 and $866,782, respectively. Each represents approximately 75% of sales,
thus resulting in a 25% gross profit. Projecting forward, the Company
anticipates that future gross profits will increase as overall sales volume
increases, allowing the Company to benefit from certain economies of scale.
Additionally, the introduction of the ZO - Vital Cell Defense beverage line and
other proprietary (patented or patent-pending) products will support higher
sales prices for these products, resulting in greater gross profits.
Selling, general and administrative expenses for the fiscal years ended March
31, 2000 and March 31, 1999 were $2,790,801 and $2,345,564, respectively. Year
2000 selling, general and administrative included approximately $333,000 of
slotting fees paid to chain supermarket accounts. Slotting fees are paid to
obtain initial shelf space for new products. These fees do not guarantee that a
company's product will be carried on a shelf for any definite period of time,
however it generally is true that if the product is selling, then the
supermarket will continue offering the product for sale without necessitating an
additional slotting fee be paid.
Income taxes for the fiscal years ended March 31, 2000 and March 31, 1999 were
not reflected as a result of the current operating loss and net operating loss
("NOL") carryforwards.
Liquidity and Capital Resources
As of March 31, 2000 the Company had a working capital deficit of approximately
$5,409,000. Additionally, for the fiscal year ended March 31, 2000, the Company
incurred a loss from operations of $2,505,653.
<PAGE>
With respect to the working capital deficit of approximately $5,409,000,
approximately $4,100,000 is attributable to a non-operating subsidiary.
Management believes that approximately $4,000,000 portion of the current deficit
of the Company will ultimately be eliminated. Other steps and actions are also
expected to reduce or, possibly, eliminate the current deficit, including plans
to raise additional capital involving private placement of securities and plans
for reducing losses from operations and ultimately realizing profitability by
increasing sales.
Although the Company believes it will raise additional funding and make strides
towards achieving profitable operations by the latter part of the fiscal year
ending March 31, 2001, there can be no assurance that such additional funding
will be successfully completed or that profitable operations will be achieved or
achieved within the necessary time period. These conditions raise doubt about
the Company's ability to continue as a going concern.
Impact of Inflation
The Company does not believe that inflation has had a material adverse effect on
sales or income during the past periods. Future increases in supplies or other
operating costs could adversely affect the Company's operations; however, the
Company believes it could increase prices to offset increases in costs of goods
sold or other operating costs.
<PAGE>
Item 7. FINANCIAL STATEMENTS AND FOOTNOTES
PHLO CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 31, 2000 and 1999
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
CONTENTS
--------------------------------------------------------------------------------
Page
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INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet F-2-3
Statements of Operations F-4
Statements of Changes in Stockholders' Deficiency F-5
Statements of Cash Flows F-6-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Phlo Corporation and subsidiaries
We have audited the accompanying consolidated balance sheet of Phlo Corporation
("Phlo") and subsidiaries as of March 31, 2000, and the related consolidated
statements of operations, changes in stockholders' deficiency and cash flows for
the years ended March 31, 2000 and 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Phlo Corporation and
subsidiaries as of March 31, 2000 and the results of their operations and their
cash flows for the years ended March 31, 2000 and 1999 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company incurred a net loss of $2,831,579 during the
year ended March 31, 2000, and, as of that date, the Company's current
liabilities exceeded its current assets by $5,409,246 and its total liabilities
exceeded its total assets by $5,410,045 and there are uncertain conditions that
the Company faces. These conditions raise substantial doubt about its ability to
continue as a going concern. Management's plans regarding those matters also are
described in Note 3. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Marcum & Kliegman LLP
New York, New York
August 18, 2000
F-1
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2000
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 45,139
Accounts receivable 69,390
Inventory 334,626
--------
Total Current Assets $449,155
PROPERTY AND EQUIPMENT, Net 21,138
OTHER ASSETS
Goodwill - net of accumulated amortization
of $112,000 348,000
Security deposits 30,063
--------
Total Other Assets 378,063
--------
TOTAL ASSETS $848,356
========
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable $ 1,793,557
Accrued expenses and taxes 2,652,344
Current portion of long-term debt 1,412,500
-----------
Total Current Liabilities 5,858,401
OTHER LIABILITIES
Long-term debt, less current portion 400,000
-----------
TOTAL LIABILITIES 6,258,401
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Preferred stock, 15,000,000 authorized:
Series A convertible stock, $0.0001 par value, 500,000 Shares
authorized, issued and outstanding (liquidation preference $100,000) 50
Series B non-convertible stock, none issued and outstanding --
Series C convertible stock, $0.0001 par value, 3,000,000 shares
authorized, 1,592,909 shares subscribed (liquidation preference $15,929) 159
Common stock, $0.0001 par value, 25,000,000 shares authorized,
24,328,255 shares issued and outstanding 2,433
Common stock, $0.0001 par value, 3,244,888 shares subscribed 324
Additional paid-in capital 3,802,662
Accumulated deficit (9,215,673)
-----------
TOTAL STOCKHOLDERS' DEFICIENCY (5,410,045)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY $ 848,356
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended March 31, 2000, and 1999
--------------------------------------------------------------------------------
2000 1999
------------ ------------
SALES $ 1,125,650 $ 1,153,675
COST OF SALES 840,502 866,782
------------ ------------
GROSS PROFIT 285,148 286,893
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 2,790,801 2,345,564
------------ ------------
OPERATING LOSS (2,505,653) (2,058,671)
------------ ------------
OTHER EXPENSES
Interest expense (325,926) (391,216)
Bad debt expense -- (169,843)
Loss on abandoned assets -- (80,500)
------------ ------------
TOTAL OTHER EXPENSE (325,926) (641,559)
------------ ------------
NET LOSS $ (2,831,579) $ (2,700,230)
============ ============
Weighted Average Common Shares Outstanding 20,884,262 11,633,335
============ ============
Net Loss Per Share (Basic and Diluted) $ (0.14) $ (0.24)
============ ============
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Series C
Preferred Stock Series A Preferred Stock
of Subsidiary Preferred Stock Subscribed
---------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance - April 1, 1998 2,247 $700,000 0 $ 0 0 $ 0
Recapitalization (2,247) ($700,000) 500,000 $50
Issuance of Common Stock for
services at Fair Value
Proceeds from private placement
offering 212,623 21
Exchange by shareholder of debt
for warrant
Net loss
---------------------------------------------------------------------------------
Balance - March 31, 1999 0 0 500,000 50 212,623 21
Shares Issued and subscribed- Recapitalization 1,112,010 111
Proceeds from private placement
offering 256,835 26
Issuance of Shares of Stock for
services rendered 11,441 1
Stock Subscriptions issued for
Services rendered
Common stock subscriptions
Exchange by shareholder of debt
for warrant
Net loss
---------------------------------------------------------------------------------
Balance - March 31, 2000 -0- -0- 500,000 $50 1,592,909 $159
=================================================================================
<CAPTION>
Common Stock
Subscribed Common Stock Additional
------------------------------------------------ Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - April 1, 1998 0 0 764 5,000 0 (3,683,864) (2,978,864)
Recapitalization - 11,305,688 (30,750) 931,530 200,830
Issuance of common stock for service 26,883 26,883 (4,083) 22,800
Proceeds from private placement
offering 1,968,728 197 452,813 453,031
Exchange by shareholder of debt
for warrant 1,477,524 1,477,524
Net loss (2,700,230) (2,700,230)
-----------------------------------------------------------------------------------------
Balance - March 31, 1999 1,968,728 197 11,333,335 1,133 2,857,784 (6,384,094) (3,524,909)
Shares Issued and Subscribed-
Recapitalization 911,160 91 9,379,151 938 (1,140) 0
Proceeds from private placement
offering and other sales 2,760,535 276 682,198 682,500
Issuance of Shares of Stock for
services rendered 855,234 86 28,464 28,551
Stock Subscriptions issued for
Services rendered 150,000 15 17,985 18,000
Common stock subscriptions 215,000 21 184,979 185,000
Exchange by shareholder of debt
for warrant 32,392 32,392
Net loss (2,831,579) (2,831,579)
------------------------------------------------------------------------------------------
Balance - March 31, 2000 3,244,888 $ 324 24,328,255 $ 2,433 $3,802,662 $(9,215,673) $(5,410,045)
==========================================================================================
</TABLE>
F-5
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended March 31, 2000 and 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,831,579) $(2,700,230)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock-based compensation 78,944 22,800
Recapitalization -- 200,830
Depreciation and amortization 99,808 24,286
Loss on disposal of equipment -- 80,500
(Increase)decrease in accounts receivable (69,390) 186,028
(Increase)decrease in inventory (334,626) 271,031
Decrease in other current assets 22,137 105,000
Increase in security deposits -- (29,688)
Increase in accounts payable 626,388 817,997
Increase in accrued expenses and taxes 645,568 494,150
----------- -----------
TOTAL ADJUSTMENTS 1,068,829 2,172,934
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,762,750) (527,296)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash received notes receivable 58,332 --
Purchase of furniture and equipment (3,232) --
Acquisition of goodwill -- (60,000)
Issuance of notes receivable -- (58,332)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ 55,100 $ (118,332)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 1,051,400 227,524
Proceeds from issuance of equity securities 867,499 430,894
Repayment of debt (178,900) --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 1,739,999 $ 658,418
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
For the Years Ended March 31, 2000 and 1999
--------------------------------------------------------------------------------
2000 1999
----------- -----------
NET INCREASE IN CASH $ 32,349 $ 12,790
CASH - Beginning 12,790 --
----------- -----------
CASH - Ending $ 45,139 $ 12,790
=========== ===========
The accompanying notes are an integral part of these financial statements.
Supplemental Dislosures of Cash Flow Information:
2000 1999
----------- -----------
Interest -0- --
----------- -----------
Income Taxes $ -- $ --
=========== ===========
F-7
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - Company Activities
Phlo Corporation, a Delaware Corporation formed in December 1995 and located in
New York, New York, and its subsidiaries (hereinafter collectively referred to
as the "Company") are engaged in the distribution and sale of beverages. The
Company sells its beverages to distributors, who offer the beverages for sale in
high volume chain stores, such as supermarkets, and in small retail outlets,
such as delicatessens and convenience stores.
The Company's current beverage line is sold under the McCoy's name and includes
ice teas, green teas, lemonade and fruit drinks.
On December 7, 1998, Phlo acquired approximately 68% interest in X-Treem's
common stock in exchange for 8,000,000 shares of Phlo's common stock (the
"Acquisition"). This stock exchange transaction was treated as a
recapitalization for accounting purposes since Phlo was deemed a public shell.
The historical financial statements prior to December 7, 1998 were those of
X-Treem. On June 10, 1999, Perry's Majestic Beer, Inc. changed its name to Phlo
Corporation (the "Company").
In July, 1999, the Company incorporated Phlo Beverage Products Company to
conduct the business of producing and selling McCoy's beverages. In August,
1999, the Company incorporated Phlo System, Inc. to conduct the Company's
biotechnology-related activities. The Company also has two subsidiaries which
were not operating entities during the fiscal year, X-Treem Products Corporation
("X-Treem") and Quigley's Orchard, Inc.
On October 22, 1998, the Company agreed to acquire the capital stock of a
beverage company, X-Treem, through an exchange of stock with the shareholders of
X-Treem (the "Stock Exchange Transaction"). On April 2, 1999, the agreement was
amended so as not to require Phlo's stock to be reverse-split, as initially
intended. As a result, the additional shares that would be issuable under the
amended agreement could not be issued because Phlo did not have enough
authorized shares to do so. Based on the amendment, Phlo would be required to
issue a total of 156,877,611 shares of common stock (assuming the conversion of
any convertible securities and the exercise of any warrants in connection with
such exchange transaction) to acquire 100% of the outstanding X-Treem capital
stock and outstanding warrants to purchase X-Treem common stock from the holders
thereof.
As of March 31, 2000, 28,838 shares of X-Treem capital stock representing 96.47%
of the total outstanding shares have been exchanged for Phlo shares which have
been issued out of authorized shares or are yet to be issued. In order to
complete the Stock Exchange Transaction with respect to those shareholders of
X-Treem who have elected to participate in the exchange transaction, the Company
is required to issue 911,160 additional shares of common stock and 1,112,010
shares of Series C Preferred Stock.
F-8
<PAGE>
On June 1, 1999, 281,866 shares of the Series C Convertible Preferred Stock (the
"Series C Preferred") were issued to X-Treem shareholders, along with 2,608,316
of Phlo common stock, in exchange for such X-Treem shareholders' tendering their
shares of X-Treem stock. In addition, 731,683 shares of Series C Preferred and
6,770,835 shares of common stock were also issued to three shareholders who had
previously tendered their X-Treem shares at the outset of the Stock Exchange
Transaction. These share issuances were intended as a partial issuance until
there were sufficient authorized shares to complete the Stock Exchange
Tranaction. When sufficient shares are authorized and the Stock Exchange
Transaction is completed, all former X-Treem shareholders who participated in
the Stock Exchange Transaction will have received Phlo shares on a pro rata
basis based on their ownership of X-Treem stock.
In addition, as disclosed above and in Note 8, the Company has issued additional
shares of convertible preferred and common stock which, after taking into
consideration the total outstanding stock warrants and options, would, if such
warrants and options were fully exercised, cause the overall outstanding shares
to exceed the 25,000,000 shares the Company presently has authorized. As of
March 31, 2000, there are currently 24,328,255 common shares issued and
outstanding. In addition, options and warrants to purchase 2,438,333 and
8,743,762 shares of common stock are also outstanding, respectively.
On December 22, 1999, the Company notified its transfer agent that its legal
counsel believed that no outstanding shares of preferred stock, including both
the Series A and C, had been validly issued, although the Company's prior
outside counsel had issued an opinion that all capital stock had been validly
issued and that the board of directors had authority to approve the issuance of
the classes and series of securities so issued. The Company is in the process of
amending its Certificate of Incorporation to confer on the Board of Directors
blank check authority to create different classes and series of preferred stock
without further shareholder vote. Once this has been accomplished, the Company
intends to replace the old Series A and C preferred stock certificates with
shares of preferred stock which are validly issued.
Subsequent to with the filing of this Form 10-KSB, the Company intends to file
an information statement with the Securities and Exchange Commission. Following
a brief comment period, a mailing of the information statement to shareholders,
and a waiting period of 20 days, the Company will file an amended certificate of
incorporation with the State of Delaware increasing the number of authorized
shares of common stock to accommodate the shares currently due under the terms
of the Stock Exchange Transaction.
F-9
<PAGE>
NOTE 2 - Summary of Significant Account Policies
Basis of Reporting
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, collectively referred to as the "Company and
subsidiaries". All significant inter-company transactions and balances have
been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Goodwill
Goodwill is being amortized on a straight-line basis over a five-year
period. Amortization of goodwill charged to operations for the years ended
March 31, 2000 and March 31, 1999 amounted to $92,000 and $20,000
respectively.
Inventories
Inventories are stated at the lower of cost or market. Costs, which include
purchases, freight and packaging, raw materials, packing fees and finished
products, are determined on the first-in, first-out basis.
Advertising Expense
Advertising costs of $296,761 and $146,633 are expensed as incurred during
the years ended March 31, 2000 and 1999, respectively.
Slotting Fees
Slotting fees are paid to individual supermarkets and supermarket chains to
obtain initial shelf space for new products. Fees vary from store to store,
however, their payment does not guarantee that a company's product will be
carried for any definite period of time. The Company pays for such fees by
issuing a check, providing free goods or issuing credits for previously
sold goods. The cost of the slotting fees is valued at the amount of cash
paid, or the cost to the Company of the goods provided in exchange. The
Company expenses slotting fees when the obligation is incurred.
Furniture and Equipment
Furniture and equipment is stated at cost. Maintenance and repair costs are
charged to expense as incurred, costs of major additions and betterments
are capitalized. When furniture and equipment is sold or otherwise disposed
of, the cost and related accumulated depreciation are eliminated from the
accounts and any resulting gain or loss is reflected in income.
Depreciation and Amortization
The cost of furniture and equipment is depreciated using the straight-line
method over five years.
Revenue Recognition
Revenue is recognized at the time products are shipped and title passes.
F-10
<PAGE>
Research and Development
Research and development costs of $0 and $0 are expensed as incurred during
the years ended March 31, 2000 and 1999, respectively.
Income Taxes
Deferred income tax assets and liabilities are computed annually for
differences between the consolidated financial statements and tax basis of
assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted laws and rates applicable to the periods in
which the differences are expected to affect taxable income. A valuation
allowance is established when necessary to reduce deferred tax assets to
the amount expected to be realized.
Fair Value of Financial Instruments
The financial instruments of the Company are reported in the consolidated
balance sheet at market or fair values, or at carrying amounts that
approximate fair values because of the short maturity of the instruments.
Impairment of Long-Lived Assets
Certain long-term assets of the Company are reviewed at least annually as
to whether their carrying value has become impaired, pursuant to guidance
established in Statement of Financial Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." Management considers assets to be impaired if
the carrying value exceeds the future projected cash flows from related
operations (undiscounted and without interest charges). If impairment is
deemed to exist, the assets will be written down to fair value or projected
discounted cash flows from related operations. Management also re-evaluates
the periods of amortization to determine whether subsequent events and
circumstances warrant revised estimates of useful lives.
Stock Issued to Employees
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation"
on April 1, 1996 for financial note disclosure purposes and will continue
to apply the intrinsic value method of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" for financial
reporting purposes.
Net (Loss) Per Share
The Company adopted the provision of SFAS No. 128, "Earnings Per Share".
Basic EPS is computed by dividing income (losses) available to common
stockholders by the weighted-average number of common shares outstanding
for the period adjusted retroactively to April 1, 1997 for the shares
issued in the recapitalization. Diluted EPS is based on the
weighted-average number of shares of common stock and potential common
shares outstanding during the year. The exercise of option and warrants and
the conversion of convertible securities are antidilutive and have been
excluded from the calculation of diluted EPS for 2000 and 1999.
F-11
<PAGE>
Reporting of Segments
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," effective for fiscal years
beginning after December 15, 1997, with reclassification of earlier periods
required for comparative purposes. The Company has determined that under
SFAS No. 131, it operates in one segment of business and its customers and
operations are within the United States.
Recent Accounting Developments
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which as amended is effective for the
Company beginning April 1, 2001 by the issuance of SFAS No. 137. SFAS No.
133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging
activities. This Statement requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative instrument depends on its
intended use and the resulting designation. The Company does not expect
that this standard will have a material impact on its financial statements.
NOTE 3 - Going Concern
As shown in the accompanying financial statements, the Company incurred a
net loss of $2,831,579 during the year ended March 31, 2000. As of March
31, 2000, the Company's current liabilities exceeded its current assets by
$5,409,246 and its total liabilities exceeded its total assets by
$5,410,045. The Company is delinquent in connection with various
obligations including, but not limited to, trade payables, accrued payroll
taxes, and notes payable. These factors, as well as the uncertain
conditions that the Company faces in its day-to-day operations, create an
uncertainty as to the Company's ability to continue as a going concern. The
financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern. The continuation
of the Company as a going concern is dependent upon the success of future
financing and generating sufficient revenue through the expansion of its
beverage product lines.
F-12
<PAGE>
Management has taken action and is formulating additional plans to
strengthen the Company's working capital position and generate sufficient
cash to meet its operating needs through March 31, 2001 and beyond. Among
the actions taken, the Company anticipates generating more revenue through
the expansion of its beverage lines, and the raising of additional funds
through private placement offerings of its securities. No assurance can be
made that the management will be successful in achieving its plan.
NOTE 4 - Property and Equipment
Property and equipment consists of the following at March 31, 2000:
Furniture and fixtures $33,232
Less: Accumulated depreciation 12,094
-------
Net $21,138
=======
Depreciation expense for the years ended March 31, 2000 and 1999 was $7,808
and $4,286, respectively.
NOTE 5 - Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market value and consist of the following at March 31, 2000:
Raw material $ 93,565
Finished goods 241,061
--------
Total $334,626
========
NOTE 6 - Income Taxes
No provision has been made in the accompanying consolidated financial
statements for income tax expense as a result of the current operating loss
and net operating loss ("NOL") carryforwards.
Differences between income tax benefits computed at the Federal statutory
rate (34%) and reported income taxes for 2000 and 1999 are primarily
attributable to the valuation allowance for the NOL and other permanent
differences.
As of March 31, 2000, the Company estimated the available NOL carryforwards
to be approximately $10,616,000 and the Company's total deferred tax assets
relating to the carryforwards amounted to approximately $3,609,000 which
expire though March 31, 2020. The Company has a valuation allowance for the
full assessment of the deferred tax assets at March 31, 2000 as management
does not believe it is more likely than not that the valuation of the asset
is recoverable, and there are certain limitations on the amount of NOL
carryforwards available another under the Internal Revenue Code due to
changes in Phlo's ownership.
Further, the Company has not filed any federal, state or local income or
franchise tax returns. Such failure may have a material adverse effect on
the amount of any net operating loss carryforwards and may subject the
Company to fines.
F-13
<PAGE>
NOTE 7 - Stock Options
1996 Stock Option Plan
In March 1996, the Board of Directors of the Company adopted, and the
stockholders of the Company approved the adoption of, the 1996 Stock Option
Plan. The maximum number of shares of common stock with respect to which
awards may be granted pursuant to the 1996 Plan is initially 2,000,000
shares. No options are outstanding under this plan.
Options Granted Separate from the Stock Option Plan
In connection with an initial public offering, the Company granted to its
underwriter in July 1996 an option to purchase 58,333 shares of common
stock at a purchase price of $7.20 per share exercisable commencing July
1997 and expiring July 2001.
During the year ended March 31, 1998, the Company granted a total of
1,350,000 options to purchase common stock with an exercise price equal to
fair market value at time of issuance to certain officers, directors and
employees. In addition, the Company issued options to two consultants to
purchase 100,000 shares each of its common stock each for services rendered
during the year ended March 31, 1998. Accordingly, the Company recorded
compensation expense of $46,000 for options issued.
In July 1998, in connection with the acquisition of Leroux Creek applesauce
brand, the Company agreed to grant options to purchase of 750,000 shares of
its common stock to Leroux Creek and a former stockholder of Leroux Creek
with an exercise price of $0.10 per share. None of these options were
issued and the Company has been relieved of its obligation to issue any of
these options by agreement of all parties in June 1999 (see note 8).
In December 1998, the Company issued options to purchase an aggregate of
850,000 shares of its common stock to two officers in exchange for the
return of 450,000 shares of common stock from these officers. These options
have an exercise price of $0.05 per share and expire in December 2003.
In December, 1999, a former officer and director of the Company exercised
options to purchase 20,000 shares of common stock at an exercise price of
$0.05 per share.
F-14
<PAGE>
A summary of stock option activity is as follows:
Weighted Average
Number Exercise Price
of Options Common Stock
---------- -----------------
Balance - April 1, 1997 58,333 $7.20
Options granted 1,550,000 0.46
Options exercised --
Options cancelled --
---------
Balance - March 31, 1998 1,608,333 0.48
Option granted 1,600,000 0.075
Option cancelled --
Option exercised --
---------
Balance - March 31, 1999 3,208,333 $0.26
---------
Options granted --
Options exercised 20,000 0.05
Options cancelled 750,000 0.10
---------
Balance - March 31, 2000 2,438,333 0.33
Exercisable at March 31, 2000 2,438,333 0.33
=========
The options issued to officers, directors and employees expire in four (4)
to nine (9) years and may be exercised at anytime. The options issued to
consultants to purchase 200,000 shares of its common stock, at an exercise
price of $0.875, have a weighted average remaining contractual life of 6.25
years.
In December, 1999, the Company issued to a former officer and director of
the Company 20,000 shares of Common Stock as a result of such individual's
exercise of his options to purchase such shares at an exercise price of
$0.05 per share.
In June, 1999, the Company entered into a settlement agreement with Leroux
Creek Food Corporation and its President, which resulted in the Company
being relieved of its prior agreement to issue to Leroux Creek and its
President options to purchase an aggregate of 750,000 shares of Common
Stock at an aggregate purchase price of $75,000.
F-15
<PAGE>
NOTE 8 - Stockholders' Equity
Preferred Stock
The Company has 15,000,000 shares of preferred stock, $0.0001 par value,
authorized.
Series A Convertible Preferred Stock
At March 31, 2000, the Company has 500,000 shares of Series A Convertible
Preferred Stock ("Series A Preferred") issued and outstanding. The Series A
Preferred holders are entitled to one vote per share on all matters
presented to the stockholders with certain exceptions as defined in the
Certificate of Designation. In addition, the Series A Preferred is
convertible into one share of common stock.
Series B Non-Convertible Preferred Stock
At March 31, 2000, none of Series B Non-Convertible Preferred Stock
("Series B Preferred") was issued and outstanding. The Series B Preferred
holders are entitled to one vote per share on all matters presented to the
stockholders with certain exceptions as defined in the Certificate of
Designation. In addition, the Series B Preferred is subject to certain
redemption and liquidation provisions, as defined.
Series C Convertible Preferred Stock
At March 31, 2000, none of Series C preferred was issued and outstanding
and 1,592,909 shares were subscribed in connection with the private
placement offering. The Series C Preferred is subject to certain
conversion, redemption and liquidation provisions, as defined. In addition,
each share of Series C Preferred is convertible into the Company's common
stock based on a defined formula.
Common Stock
Phlo has 25,000,000 authorized shares of common stock par value of $0.0001
per share (the "Common Stock"), of which 24,328,255 shares were issued and
outstanding at March 31, 2000.
1) In October and November, 1999, in consideration of $121,500, the Company
sold an aggregate of 303,750 shares of Common Stock, of which 253,750
shares have been issued as of March 31, 2000.
2) In March 2000, in consideration of $165,000, the Company sold an aggregate
of 165,000 shares of Common Stock, none of which have been issued as of
March 31, 2000.
3) For the year ended March 31, 2000 Company issued 855,243 shares of common
stock and 150,000 common stock subscriptions with a fair value of $28,555
and $18,000, respectively, for services rendered to the Company by third
parties.
F-16
<PAGE>
Warrants
1) In March, 2000, the Company entered into an exclusive license agreement for
all uses, worldwide, of a proprietary composition consisting of an ester
(derivative) of Vitamin E combined with a delivery system. In connection
with the execution of this license agreement, the Company issued the
licensor of the technology, a warrant to purchase 200,000 shares of the
common stock of the Company at an exercise price of $0.05 per share.
2) During the fiscal year, the Company issued warrants to purchase 16,666
shares of Common Stock at an exercise price of $0.10 per share in
consideration for advertising services rendered.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had
accounted for its warrants under the fair value method of SFAS 123. The
weighted-average fair value of warrants granted was $0.12 per share. The
fair market value for these warrants was estimated at the date of grant
using a Black-Scholes warrant-pricing model with the following
weighted-average assumptions for the year ended March 31, 2000:
ASSUMPTIONS
---------------------------------------------------------------------------
Risk-free rate 5.00%
Dividend yield --
Volatility factor of the expected market price 182.70%
Average life 5 Years
The Black-Scholes valuation model was developed for use in estimating the
fair value of traded options and warrants which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options and
warrants have characteristics significantly different from those of traded
options and warrants, and because changes in the subjective input
assumptions can materially affect the fair value estimated, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options and warrants.
For purposes of pro forma disclosures, the estimated fair value of the
warrants is amortized to expense over the vesting period of the warrants.
The Company's pro forma information for the year ended March 31, 2000 is as
follows:
Net Loss - As reported $(2,831,579)
Net Loss - Pro forma $(3,482,030)
Pro forma net loss per share:
- Basic $(0.14)
- Diluted $(0.14)
The warrants issued during the year ended March 31, 2000, have a weighted
average remaining contractual life of 4.5 years. The warrant to purchase
5,420,426 shares of common stock issued to an officer of the Company are
exercisable on June 30, 2000. All other warrants are exercisable as of
March 31, 2000.
F-17
<PAGE>
Unit Offerings
1) On March 30, 1999, the Company completed the sale, as part of a private
placement offering, of 984,364 units of securities for an aggregate
purchase price of $0.46 per unit (the "Unit Offering"). Each unit consists
of two shares of the common stock, par value $0.0001, 0.216 of a share of
the Series C Preferred and the right to purchase one (1) additional share
of the common stock and 0.108 of additional share of Series C Preferred.
Total proceeds from the sale of these units amounted to $453,031. None of
the rights to purchase additional shares of common stock and Series C
Preferred Stock was exercised prior to the expiration of such rights. Of
the total proceeds, $430,894 was received prior to March 31, 1999 and the
remaining balance of $22,137 was received shortly after March 31, 1999.
As of March 31, 2000, such common stock and Series C Preferred Stock have
not been issued. Accordingly, these common stock and Series C Preferred are
presented as shares subscribed but not yet issued on the accompanying
balance sheet.
In connection with the Unit Offering, the Company has agreed to issue a
warrant providing for the purchase of 9,606,682 shares of Common Stock at
an exercise price of $0.01 per share, which warrant has not been issued as
of March 31, 2000, and the Company has issued in September, 1999, a warrant
providing for the purchase of 2,401,670 shares of Common Stock at an
exercise price of $0.01 per share.
2) In June 1999, in consideration for $500,000, the Company sold 2,312,872
shares of Common Stock and 238,051.5 shares of Series C Preferred. All of
the Common Stock and none of shares of the Series C Preferred have been
issued as of March 31, 2000.
3) In April and May, 1999, in consideration for $80,000, the Company sold
units representing an aggregate of 173,913 shares of Common Stock and
18,782 shares of Series C Preferred. All of the shares of Stock and no
shares of the Series C Preferred issuable in connection with this
transaction have been issued as of March 31, 2000.
F-18
<PAGE>
NOTE 9 - Debt
Debt as of March 31, 2000 consists of the following:
Term note payable with interest due monthly at a rate
of 12% per annum. The note matured on March 31, 1998
when principal and unpaid interest was due. The note is
currently in default. No action has been taken or
threatened against the Company to enforce the note. The
Company continues to accrue interest on this note. $600,000
Term note payable with interest at a rate of 12% per
annum. Principal and accrued interest are payable at
the note's maturity date on February 12, 2001. 50,000
`
Note payable with principal plus an interest payment of
$10,000 are payable at the note's maturity on June 27,
1997. The holder of the note has initiated an action to
enforce the note. The Company continues to accrue
interest on this note. 100,000
Note payable with interest at a rate of 12% per annum.
Principal and interest are payable at the note's
maturity date on November 24, 2000. The Company
continues to accrue interest on this note. 100,000
Note payable with principal plus an interest payment of
$5,000 were payable at the loan's maturity date on
March 31, 1998. The parties agreed to convert this debt
into equity, however, this conversion has not taken
place to date, and therefore, the note is in default.
The Company continues to accrue interest on this note.
The holder has agreed informally to extend the date of
maturity in order to consummate the conversion. 45,000
Note payable with principal plus an interest payment of
$5,000 was payable on the note's maturity date on March
30, 1998. The parties agreed to revise the terms of the
note to provide for an increase in interest payable
from $5,000 to $10,000 and a maturity date of December
31, 1998. The note is currently in default. No action
has been taken or threatened against the Company to
enforce the note. The Company continues to accrue
interest on this note. 45,000
Note payable with interest at a rate of 14% per annum.
The Note matured on December 31, 1999, when principal
and unpaid interest was due. The holder has obtained a
summary judgment against the Company. The Company
believes that the holder engaged in intentional conduct
which resulted in damage to the Company and has filed
an action against the holder in federal court which is
currently pending. In connection with the note, the
Company issued warrants to the holder and another
individual to purchase an aggregate of 500,000 shares
of common stock at an exercise price of $0.20 per share
upon issuance of the note and warrants to the holder to
purchase an aggregate of 200,000 shares of the common
stock in connection with its option to extend the
maturity date of the note to December 31, 1999. In
addition, to secure repayment of the note, the Company
issued to a trustee of the holder 105,875 shares of
common stock and 11,441 shares of Series C Convertible
Preferred Stock. The Company continues to accrue
interest on this note. 250,000
F-19
<PAGE>
Note payable with interest at a rate of 10%. Principal
and interest are payable at the note's maturity date of
December 31, 2000. In consideration of this loan and
two prior bridge loans, the Company issued warrants to
purchase 200,000 shares of common stock. 104,000
Note payable in the original principal amount of
$25,000 with interest at a rate of 10% per annum. The
Note matured on July 2, 1999, when principal and unpaid
interest was due. The the note is currently in default,
although partial payment has been made subsequent to
the maturity date. No action has been taken against the
Company to enforce the note. The Company continues to
accrue interest on this note. In connection with the
note, the Company issued a warrant to purchase 5,000
shares of common stock at an exercise price of $0.04
per share. 18,500
Convertible notes payable with interest accruing at a
rate of one percentage point (1%) above the prime rate.
Principal and interest are payable at the notes'
maturity dates which fall within May and June, 2001.
After December 31, 1999, the principal under the notes
is convertible, at the option of the holder, into
shares of the Company's common stock at a conversion
price of $0.22 per share. A holder of one convertible
note in the principal amount of $100,000 exercised his
option to convert the note into shares of common stock
subsequent to March 31, 2000. 400,000
Bridge notes with interest at a rate of one percentage
point (1%) above the prime rate. The notes matured on
March 31, 2000, when principal and unpaid interest was
due. The notes are currently in default. No action has
been taken or threatened against the Company to enforce
the notes. The Company continues to accrue interest on
these notes. 100,000
----------
Total Long-Term Debt $1,812,500
Less: Current Portion $1,412,500
----------
Long-Term Debt, net of current portion $400,000
===========
F-20
<PAGE>
NOTE 10 - Commitments and Contingencies
Employment Agreement
The Company has one employment agreement with an executive of the Company
is that expires in the year 2001. The annual commitment for compensation is
approximately $150,000 each year.
Loan Guarantee
The Company is a guarantor of loan obtained by an unrelated party in
connection with a purchase agreement. In addition, payments of the loan are
secured by the Company's assets. Total outstanding balance of the loan at
March 31, 2000 was approximately $65,000.
Litigation
The Company is involved in litigation through the normal course of
business. The Company believes that the resolution of these matters will
not have a material adverse effect on the financial position of the
Company.
On February 12, 1999, a judgment in the amount of $1,064,616 was entered
against X-Treem. Such amount has been accrued and included in accrued
expenses at March 31, 2000.
Payroll Taxes
The Company has not paid payroll taxes since the fourth quarter 1997
totalling $434,137. The Company is in the process of filing all unfiled
returns and has accrued estimated penalties and interest of $220,500.
Lease
The Company occupies its premises subject to a noncancelable lease
agreement expiring in March 2004. The Company will pay a fixed monthly rent
plus real estate taxes.
Future minimum payments under an operating lease are as follows at March
31, 1999.
For the Year Ending
March 31, Amount
-------------------------------------------------------------
2001 121,805
2002 121,805
2003 121,805
2004 30,450
---------
Total minimum lease payments $ 395,865
=========
Rent expense for the years ended March 31, 2000 and 1999 was $94,772 and
$70,410, respectively. In connection with the above lease, a refundable
security deposit in the amount of $30,063 is being held by the landlord.
F-21
<PAGE>
NOTE 11 - Economic Dependency
Major Customers
The Company sells a substantial portion of its products to three customers.
During the year ended March 31, 2000, sales to these customers were
$267,301, $239,710, and $123,753, or 23.75%, 21.30%, and 10.99%,
respectively, for the year ended March 31, 2000. As of March 31, 2000, the
amounts due from these customers included in accounts receivable were
$18,540, $0, and $0, respectively.
Major Suppliers
The Company purchased a substantial portion of its raw materials from one
supplier for the year ended March 31, 2000.
NOTE 12 - Subsequent Events
A) Notes Payable
The following note was issued by the Company subsequent to March 31, 2000,
in conjunction with financing activities:
In June, 2000, a Senior Subordinated Note in the principal amount of
$500,000 was entered into with simple interest accruing at an annual rate
of six percent (6%) and payable of the note's mauturity date of December
22, 2000. Principal and interest are payable in stock at the option of the
Company. The Company agreed to issue to the holders of the notes warrants
to purchase an aggregate of 1,000,000 shares of common stock at an exercise
price of $0.50 per share.
B) Equity
1) In April and May, 2000, in consideration of $147,500, the Company issued
98,333 shares of common stock.
2) The Company issued 22,250 shares of common stock and warrants to purchase
an aggregate of 84,166 shares of common stock in consideration for services
rendered, including legal services, advertising and marketing services, and
financial services. Additionally, the Company is obligated, pursuant to
various existing agreements, to issue 450,000 shares of common stock (or
equivalents) in connection with the provision of services to the Company.
F-22
<PAGE>
PART III
Item 8. DIRECTORS AND EXECUTIVE OFFICERS
Directors and Executive Officers
The names and ages of the directors, executive officers, significant
employees, and promoters of the Company are set forth below.
Name Age Position Held
---- --- -------------
James B. Hovis 50 President & CEO, Director
Robert Sipper 46 Chief Operating Officer,
Director
Anne P. Hovis 40 Executive Vice President, General
Counsel, Secretary & Director
Allen G. Hoube', Jr. 39 Vice President, Production Operations
Background of Executive Officers and Directors
James B. Hovis, President, Chief Executive Officer and a Director. Mr.
Hovis is responsible for the overall management of the Company, including the
product development, sales, marketing, distribution, production and financial
functions. Additionally, Mr. Hovis directs the Company's acquisition and
financing activities. Previously, Mr. Hovis was the partner in charge of the
corporate practice at White, Blackburn & Conte, P.C., a Richmond, Virginia-based
law firm. Mr. Hovis has over 20 years of experience involving a wide range of
corporate activity, both as a principal and as a professional representative or
advisor, including all types of financings and refinancings (including debt and
equity private placements), mergers, acquisitions (including product
acquisitions and leveraged and management buyouts), divestitures, sales of
assets or stock, restructurings and reorganizations. Additionally, his
professional background has included a strong emphasis on developing business
entities in a number of different industries, and he has been published in his
areas of expertise. During the period from 1983 to the present, he has served on
a number of boards of developing companies. Mr. Hovis is a graduate of Davidson
College and received his J.D. degree from the T.C. Williams School of Law at the
University of Richmond. He is a member of the Virginia State Bar.
Robert J. Sipper, Chief Operating Officer and a Director. Mr. Sipper is
responsible for the overall management and operations of the Company under the
direction of Mr. Hovis, including sales, marketing, distribution, production and
administration. Previously, Mr. Sipper founded H&H Day, Inc. a beverage
brokerage company. Prior to that, Mr. Sipper served as the Executive Vice
President and Chief Operating Officer of Mootch & Muck, Inc., a beverage
distributor in New York City, and was the President of Bev-Tyme, Inc., the
corporate parent of Mootch & Muck, Inc. Mr. Sipper also practiced law for ten
years, including as a partner of Leopold, David & Sipper. Mr. Sipper has a B.A.
from Fordham University and his J.D. degree from Vermont Law School. He is a
member of the New York State Bar.
<PAGE>
Anne P. Hovis, Executive Vice President, General Counsel, Secretary and a
Director. Mrs. Hovis is responsible for managing the day-to-day administration
of the Company and assists Messrs. Hovis and Sipper in the overall management of
the Company. She is also responsible for the legal affairs of the Company,
including intellectual property protection, compliance with FDA regulations,
securities filings, compliance with applicable laws, and negotiation of
agreements with distributors and co-packers. Mrs. Hovis also assists Mr. Hovis
in the Company's transactional activities, including financings and
acquisitions. Previously, Mrs. Hovis was an attorney with Anderson, Hibey &
Blair, a Washington, D.C. based firm, where she specialized in corporate legal
and international trade policy matters. Prior to this, Mrs. Hovis was an
attorney with Lane & Mittendorf, where she participated in the firm's corporate
transactional (including stock and asset acquisitions and commercial lending
facilities) and international trade practices. Mrs. Hovis has a B.A. from New
York University and a J.D. degree from the Georgetown University Law Center. She
is a member of the District of Columbia Bar.
Allen G. (Skip) Hoube', Jr., Vice President of Production Operations. Mr.
Hoube is responsible for coordinating the production of the Company's beverage
products, including inventory and quality control, raw material and production
scheduling, and identification of new production facilities to accommodate
nationwide distribution. Previously, Mr. Hoube served as Director of Quality
Assurance for Premium Beverage Packers, Inc. Formerly, he was the Contract
Manufacturing Manager for Royal Crown Company, Inc. and the Director of
Operation for Tribev Corp. (a division of Royal Crown). He also served as
President and General Manger of RC Cola Canada Ltd. Mr. Hoube has a B.S. in
Biochemistry from Auburn University.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent
(10%) of a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of common stock and other equity securities of the Company.
Officers, directors and greater than ten percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
To the Company's knowledge, based solely on its review of the copies of
such reports furnished to the Company during the year ended March 31, 2000, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were satisfied.
<PAGE>
ITEM 9. EXECUTIVE COMPENSATION.
The following table sets forth the compensation paid to the executive
officers for the fiscal year ending March 31, 2000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compenation
---------------------
Annual Compensation Awards Awards Payouts
------------------------------- --------- ---------
(a) (b) (c) (d) (e) (f) (g) (h)
Other Securities
Annual Restricted Under- All Other
Compen- Stock lying L/TIP Compen-
Name and sation Awards Options/ Payouts sation
Principal Position Year Salary Bonus ($) ($) SARa (#) ($) ($)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James B. Hovis
President and CEO 1999 $165,000 -0- -0- -0- -0- -0- -0-
Robert J. Sipper
COO 1999 $150,000 -0- -0- -0- -0- -0- -0-
Anne P. Hovis 1999 $135,000 -0- -0- -0- -0- -0- -0-
Exec. Vice President
General Counsel &
Secretary
Allen Hoube, VP
Production 1999 $125,000 -0- -0- -0- -0- -0- -0-
Operations
</TABLE>
Compensation of Directors
The names of the directors of the Company as of March 31, 2000, are James
B. Hovis, Robert J. Sipper, and Anne P. Hovis. Each director of the Company is
entitled to receive reasonable out-of-pocket expenses incurred in attending
meetings of the Board of Directors of the Company. No payments were made to
directors during the year ended March 31, 2000, for services provided as a
director.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
As of April 4, 1996, the Company entered into a five (5) year employment
agreement with Robert Sipper pursuant to which Mr. Sipper served as the
Company's President and Chief Executive Officer. The agreement, which was
amended in February, 1997, provides for Mr. Sipper to receive a salary of
$150,000 per annum. Pursuant to the Stock Exchange Transaction, which involved a
change in control of the Company, Mr. Sipper relinquished his positions as
President and CEO of the Company in December, 1998, and became the Company's
Chief Operating Officer.
Stock Option Plans and Agreements
In March 1996, the Board of Directors of the Company adopted, and the
stockholders of the Company approved the adoption of, the 1996 Stock Plan
(hereinafter called the "1996 Plan"). The purpose of the 1996 Plan is to provide
an incentive and reward for those executive officers and other key employees in
a position to contribute substantially to the progress and success of the
Company, to closely align the interests of such employees with the interests of
stockholders of the Company by linking benefits to stock performance and to
retain the services of such employees, as well as to attract new key employees.
In furtherance of that purpose, the 1996 Plan authorizes the grant to executives
and other key employees of the Company and its subsidiaries of stock options,
restricted stock, deferred stock, bonus shares, performance awards, dividend
equivalent rights, limited stock appreciation rights and other stock-based
awards, or any combination thereof. The 1996 Plan is expected to provide
flexibility to the Company's compensation methods, after giving due
consideration to competitive conditions and the impact of federal tax laws.
<PAGE>
The maximum number of shares of Common Stock with respect to which awards
may be granted pursuant to the 1996 Plan is initially 2,000,000 shares. To date,
no options have been granted under the 1996 Plan. Shares issuable under the 1996
Plan may be either treasury shares or authorized but unissued shares. The number
of shares available for issuance will be subject to adjustment to prevent
dilution in the event of stock splits, stock dividends or other changes in the
capitalization of the Company.
The 1996 Plan will be administered by a committee consisting of not less
than two (2) members of the Board of Directors who are "disinterested" within
the meaning of Rule 16b-3 promulgated under the Exchange Act and "outside
directors" within the meaning of Section 162(m) of the Internal Revenue Code
(including persons who may be deemed outside directors by virtue of any
transitional rule which may be adopted by the Internal Revenue Service
implementing such Section) (the "Committee"). The Board will determine the
persons to whom awards will be granted, the type of award and, if applicable,
the number of shares to be covered by the award. During any calendar year, no
person may be granted under the 1996 Plan awards aggregating more than 100,000
shares (which number shall be subject to adjustment to prevent dilution in the
event of stock splits, stock dividends or other changes in capitalization of the
Company).
Types of Awards
Stock Options. Options granted under the 1996 Plan may be "incentive stock
options" ("Incentive Options") within the meaning of Section 422 of the Internal
Revenue Code or stock options which are not incentive stock options
("Non-Incentive Options" and, collectively with Incentive Options, hereinafter
referred to as "Options"). The persons to whom Options will be granted, the
number of shares subject to each Option granted, the prices at which Options may
be exercised (which shall not be less than the fair market value of shares of
common stock on the date of grant), whether an Option will be an Incentive
Option or a Non-Incentive Option, the time or times and the extent to which
Options may be exercised and all other terms and conditions of Options will be
determined by the Committee.
Each Incentive Option shall terminate no later than ten (10) years from the
date of grant, except as provided below with respect to Incentive Options
granted to 10% Stockholders (as hereinafter defined). No Incentive Option may be
granted at any time after October 2006. Each Non-Incentive Option shall
terminate not later than fifteen (15) years from the date of grant. The exercise
price at which the shares may be purchased may not be less than the fair market
value of shares of common stock at the time the Option is granted, except as
provided below with respect to Incentive Options granted to 10% stockholders.
Options granted to executive officers may not be exercised at any time prior to
six (6) months after the date of grant.
The exercise price of an Incentive Option granted to a person possessing
more than 10% of the total combined voting power of all shares of stock of the
Company or a parent or subsidiary of the Company (a "10% Stockholder") shall in
no event be less than 110% of the fair market value of the shares of the common
stock at the time the Incentive Option is granted. The term of an incentive
Option granted to a 10% Stockholder shall not exceed five (5) years from the
date of grant.
<PAGE>
The exercise price of the shares to be purchased pursuant to each Option
shall be paid (i) in full in cash, (ii) by delivery (i.e., surrender) of shares
of the Company's common stock owned by the optionee at the time of the exercise
of the Option, (iii) in installments, payable in cash, if permitted by the
Committee or (iv) any combination of the foregoing. The stock-for-stock payment
method permits an optionee to deliver one (1) or more shares of previously-owned
common stock of the Company in satisfaction of the exercise price of subsequent
Options. The optionee may use the shares obtained on each exercise to purchase a
larger number of shares on the next exercise. (The foregoing assumes an
appreciation in value of previously acquired shares). The result of the
stock-for-stock payment method is that the optionee can generally avoid
immediate tax liability with respect to any appreciation in the value of the
stock utilized to exercise the Option.
Shares received by an optionee upon exercise of a Non-Incentive Option may
not be sold or otherwise disposed of for a period determined by the Board of
Directors of the Company upon grant of the Option, which period shall be not
less than six (6) months nor more than three (3) years from the date of
acquisition of the shares (the "Restricted Period"), except that, during the
Restricted Period (i) the optionee may offer the shares to the Company and the
Company may, in its discretion, purchase up to all the shares offered at the
exercise price and (ii) if the optionee's employment terminates during the
Restricted Period (except in limited instances), the optionee, upon written
request of the Company, must offer to sell the shares to the Company at the
exercise price within seven (7) business days. The Restricted Period shall
terminate in the event of a Change in Control of the Company (as defined in the
1996 Plan), or at the discretion of the Board of Directors of the Company. After
the Restricted Period, an optionee wishing to sell must first offer such shares
to the Company at the fair market value.
Limited Stock Appreciation Rights. The Committee is authorized, in
connection with any Option granted under the 1996 Plan, to grant to the holder
of such Option a limited stock appreciation right ("LSAR"), entitling the holder
to receive, within sixty (60) days following a Change in Control, an amount in
cash equal to the difference between the exercise price of the Option and the
market value of the common stock of the Company on the effective date of the
Change in Control. The LSAR may be granted in tandem with an Option or
subsequent to grant of the Option. The LSAR will only be exercisable to the
extent that the related Option is exercisable and will terminate if and when the
Option is exercised.
Restricted and Deferred Stock. An award of restricted stock or deferred
stock may be granted under the 1996 Plan. Restricted stock is subject to
restrictions on transferability and other restrictions as may be imposed by the
Committee at the time of grant. In the event that the holder of restricted stock
ceases to be employed by the Company during the applicable restrictive period,
restricted stock that is at the time of cessation of employment subject to
restrictions shall be forfeited and reacquired by the Company. Except as
otherwise provided by the Committee at the time of grant, a holder of restricted
stock shall have all of the rights of a stockholder including, without
limitation, the right to vote restricted stock and the right to recover
dividends thereon. An award of deferred stock is an award that provides for the
issuance of stock upon expiration of a deferral period established by the
Committee. Except as otherwise determined by the Committee, upon termination of
employment of the recipient of the award during the applicable deferral period,
all stock that is at the time of the termination of employment subject to
deferral shall be forfeited. Until such time as the stock which is the subject
of the award is issued, the recipient of the award has no rights as a
stockholder.
Dividend Equivalent Awards. A dividend equivalent gives the recipient the
right to receive cash or other property equal in value to the dividends that
would be paid if the recipient held a specified number of shares of common stock
of the Company. A dividend equivalent right may be granted as a component of
another award or as separate award.
<PAGE>
Bonus Shares and other Share Based Awards. The 1996 Plan authorizes the
Committee to grant shares as a bonus, or to grant shares or other awards in lieu
of obligations of the Company to pay cash under other plans or compensatory
arrangements, upon such terms as shall be determined by the Committee. The 1996
Plan also authorizes the Committee to grant other forms of awards based upon,
payable in, or otherwise related, in whole or in part, to, common stock,
including, without limitation, convertible or exchangeable debentures or other
debt securities, other rights convertible or exchangeable into shares, purchase
rights for shares, awards contingent upon performance of the Company, and awards
valued by reference to the book value of shares of common stock or awards
determined by reference to the value of securities of, or the performance of,
specified subsidiaries.
ITEM 10. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 31, 2000, certain information
with respect to the beneficial ownership of common stock and preferred stock by
each person or entity known by the Company to be the beneficial owner of 5% or
more of such shares, each officer and director of the Company, and all officers
and directors of the Company as a group:
--------------------------------------------------------------------------------
Name and Address of
Beneficial Owner (1)
Percentage Percentage(%)
Shares of (%) of Shares of of Total
Common Stock Common Preferred Combined
Owned Stock (2) Stock Vote(2)
--------------------------------------------------------------------------------
James B. Hovis 8,795,260(3) 28.77% 0 28.77%
--------------------------------------------------------------------------------
Anne P. Hovis 8,761,380(4) 28.66% 0 28.66%
--------------------------------------------------------------------------------
Edward J. Mathias 6,083,075(5) 19.90% 0 19.90%
--------------------------------------------------------------------------------
Robert J. Sipper 6,245,426(6) 20.43% 0 20.43%
--------------------------------------------------------------------------------
Allen G. Hoube, Jr. 439,188 1.44% 1.44%
--------------------------------------------------------------------------------
All officers and
directors as a
group (four persons) 15,479,874 50.63% 50.63%
--------------------------------------------------------------------------------
(1) The address of each Stockholder shown above except as otherwise indicated
is c/o Phlo Corporation, 475 Park Avenue South, 7th Floor, New York, New
York 10016.
(2) Based upon 24,328,255 shares of common stock outstanding as of March 31,
2000, and warrants and options to purchase shares of Common Stock
exercisable by the listed individuals which are outstanding as of March 31,
2000.
(3) Includes 5,745,349 shares as to which Mr. Hovis has sole voting power,
3,016,031 shares as to which he shares the power to dispose with his wife,
Anne P. Hovis, and an aggregate of 33,380 shares as to which Mr. Hovis has
indirect beneficial ownership as trustee for his sons under the Uniform
Gift to Minors Act of the Commonwealth of Virginia.
(4) Includes 3,016,031 shares as to which Mrs. Hovis has sole voting power and
5,745,349 shares as to which she shares the power to dispose with her
husband, James B. Hovis.
(5) Mr. Mathias' address is c/o The Carlyle Group, 1001 Pennsylvania Avenue,
N.W., Washington, D.C. 20004-2505
(6) Includes options issued in December 1998 to purchase 425,000 shares of
common stock, exercisable at $.05 per share, options issued in January 1998
to purchase 200,000 shares of common stock, exercisable at $0.16 per share,
options issued in September 1997 to purchase 100,000 shares of common
stock,exercisable at $.05 per share, options issued in June 1997 to
purchase 100,000 shares of common stock, exercisable at $0.875 per share,
and a warrant issued in June 1999 to purchase 5,420,426 shares of common
stock at an exercise price of $0.12 per share.
<PAGE>
Item 11. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
James B. Hovis and Anne P. Hovis are husband and wife.
ITEM 12. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
a)(1) Financial Statements.
The following financial statements are included in Part II, Item 7:
Index to Consolidated Financial Statements
Report of Independent Auditors F-1
Consolidated Balance Sheet as of March 31, 2000 F-2
Consolidated Statements of Operations for the years ended
March 31, 2000 and 1999 F-3
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 2000 and 1999 F- 4 F-5
Consolidated Statements of Cash Flows for the years
ended March 31, 2000 and 1999 F-6 F-7
Notes to Consolidated Financial Statements F-8 - F-18
(a) (2) Exhibits
A list and description of exhibits filed as part of this Form 10-KSB is
provided in the attached Exhibit Index.
Item 27. Exhibits.
3.01* Certificate of Incorporation of the Company.
3.02* Amendment of Certificate of Incorporation.
3.03**** Certificate of Amendment of Certificate of Incorporation.
3.04* By-Laws of the Company.
3.05* Form of Certificate of Designation of Series A Preferred Stock.
3.06* Form of Certificate of Designation of Series B Preferred Stock.
4.01* Specimen Certificate for shares of Common Stock.
4.04* Form of Underwriter's Unit Purchase Option.
10.02* 1996 Stock Plan.
<PAGE>
10.07* Employment Agreement by and between the Company and Robert J. Sipper
dated April 4, 1996.
10.12** Amendment No. 1 to Employment Agreement by and between the Company
and Robert J. Sipper dated February 3, 1997.
10.21*** Asset Purchase Agreement by and between Company and The Brooklyn
Brewery Corporation dated May 18, 1998.
10.22*** Agreement to Purchase and Market Brand Name and Recipes by and
between Leroux Creek Food Corporation and the Company dated June 30,
1998.
10.23**** License Agreement between X-Treem Products Corporation and the
Company dated December 1, 1998.
10.24**** Security Agreement between X-Treem Products Corporation and the
Company dated December 1, 1998.
10.25**** Promissory Note, dated December 1, 1998, made by the Company in the
amount of $100,000.
10.26**** Letter by Company, dated December 23, 1998, exercising Option.
10.27**** Promissory Note, dated December 23, 1999, made by the Company in the
amount of $300,000.
10.28**** Bill of Sale dated December 1, 1998.
* Incorporated by reference to Registrant's Registration Statement on Form
SB-2, and amendments thereto, Registration No. 333-3458 declared effective
on July 30, 1996.
** Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended March 31, 1997 (File No. 0-21079).
*** Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended March 31, 1998 (File No. 0-21079).
**** Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended March 31, 1999 (File No. 0-21079).
(b) Reports on Form 8-K.
None.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
executed on this 18th day of March, 2000.
Phlo Corporation
By: /s/ James B. Hovis
------------------------------------
James B. Hovis
President & Chief Executive Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant in the capacities and on the dates
indicated
Signature Title Date
--------- ----- ----
/s/ James B. Hovis President & CEO August 18, 2000
----------------------
James B. Hovis
/s/ Robert J. Sipper Chief Operating Officer August 18, 2000
----------------------
Robert J. Sipper
/s/ Anne P. Hovis Exec. Vice President, General August 18, 2000
---------------------- Counsel & Secretary
Anne P. Hovis
