UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
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(Mark one)
XX QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
--------- EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2000
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
--------- OF 1934
For the transition period from ____________ to ___________
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Commission File Number: 000-19708
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Phoenix Resources Technologies, Inc.
(Exact name of small business issuer as specified in its charter)
Nevada 84-1034982
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(State of incorporation) (IRS Employer ID Number)
2 Penn Plaza, Suite 1500, New York City, NY 10121
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(Address of principal executive offices)
(888) 709-3975
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(Issuer's telephone number)
15945 Quality Trail North, Scandia, MN 55073
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(Former name, former address and former fiscal year, if changed since last
report)
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: September 7, 2000: 9,745,100
Transitional Small Business Disclosure Format (check one): YES NO X
--- ---
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Phoenix Resources Technologies, Inc.
Form 10-QSB for the Quarter ended July 31, 2000
Table of Contents
Page
----
Part I - Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 16
Part II - Other Information
Item 1 Legal Proceedings 23
Item 2 Changes in Securities 23
Item 3 Defaults Upon Senior Securities 24
Item 4 Submission of Matters to a Vote of Security Holders 24
Item 5 Other Information 25
Item 6 Exhibits and Reports on Form 8-K 25
Signatures 25
2
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<TABLE>
<CAPTION>
Part 1 - Item 1 - Financial Statements
Phoenix Resources Technologies, Inc.
Balance Sheets
July 31, 2000 and 1999
(Unaudited)
-----------
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
------
Current Assets
Cash on hand and in bank $ 112,298 $ --
------------ ------------
Total current assets 112,298 --
------------ ------------
Property and Equipment - At cost 3,350 --
Less Accumulated Depreciation (56) --
------------ ------------
Net property and equipment 3,294 --
------------ ------------
Other Assets
Option to acquire an unrelated entity 384,561 --
------------ ------------
Total Assets $ 550,153 $ --
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities
Accounts payable
Trade $ 310,710 $ --
Shareholder and related party 10,116 --
Judgment payable -- 313,276
------------ ------------
Total current liabilities 320,826 313,276
------------ ------------
Commitments and Contingencies
Shareholders' Equity
Preferred Stock - $0.001 par value
Series A - 5.0% annual dividend, non-
cumulative. Convertible into 1,000,000
shares of common stock after March 29,
2000. -0- and 200,000 shares issued and
outstanding, respectively -- 200
Common stock - $0.001 par value
9,745,100 and 270,400 shares issued
and outstanding, respectively 9,745 270
Additional paid-in capital 18,445,617 13,338,942
Accumulated deficit (17,542,635) (12,679,288)
------------ ------------
912,727 660,124
Stock subscription receivable -- (240,000)
Treasury stock - at cost (560,000 shares) (733,400) (733,400)
------------ ------------
Total shareholders' equity 179,327 (313,276)
------------ ------------
Total Liabilities and Shareholders' Equity $ 500,153 $ --
============ ============
</TABLE>
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
Phoenix Resources Technologies, Inc.
Statements of Operations and Comprehensive Income
Nine and Three months ended July 31, 2000 and 1999
(Unaudited)
-----------
Nine months Nine months Three months Three months
ended ended ended ended
July 31, July 31, July 31, July 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ --
----------- ----------- ----------- -----------
Expenses
Consulting, legal and professional fees 2,571,656 -- 417,471 --
Management fees to related party 315,000 -- 105,000 --
Other general and administrative fees 315,432 -- 262,401 --
Depreciation expense 56 -- 56 --
Compensation expense for issuances
of common stock at less than "fair
value" 1,659,495 -- (20,580) --
----------- ----------- ----------- -----------
Total expenses 4,861,639 -- 764,348 --
----------- ----------- ----------- -----------
Loss from continuing operations
before income taxes and other
income (expenses) (4,861,639) -- (764,348) --
Other income (expenses)
Interest income and other 16 -- 4 --
Interest on judgment payable -- 19,965 -- 6,655
----------- ----------- ----------- -----------
Loss from continuing operations
before income taxes (4,861,623) (19,965) (764,344) (6,655)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net Loss (4,861,623) (19,965) (764,344) (6,655)
Other comprehensive income -- -- -- --
----------- ----------- ----------- -----------
Comprehensive Loss $(4,861,623) $ (19,965) $ (764,344) $ (6,655)
=========== =========== =========== ===========
Loss per share of common stock
outstanding, computed on net loss
- basic and fully diluted $ (0.51) nil $ (0.08) nil
=========== =========== =========== ===========
Weighted-average number of
shares outstanding 9,476,348 270,400 9,700,160 270,400
=========== =========== =========== ===========
</TABLE>
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
Phoenix Resources Technologies, Inc.
Statements of Cash Flows
Nine months ended July 31, 2000 and 1999
(Unaudited)
-----------
Nine months Nine months
ended ended
July 31, July 31,
2000 1999
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $(4,861,623) $ (19,965)
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation expense 56 --
Compensation expense for issuance of common stock
at less than "fair value" 1,659,495 --
Common stock issued for consulting fees 2,090,175 --
Increase (decrease) in
Accounts payable - trade 310,710 --
Accounts payable to a shareholder and related party 10,116 --
Judgment payable -- 19,965
----------- -----------
Net cash used by operating activities (791,071) --
----------- -----------
Cash Flows from Investing Activities
Cash paid for property and equipment (3,350) --
Cash advanced for option to acquire an unrelated entity (381,336) --
----------- -----------
Net cash used by investing activities (384,686) --
----------- -----------
Cash Flows from Financing Activities
Payment of judgments payable (300,000) --
Cash received on stock subscription receivable 300,000 --
Cash received on sales of common stock and
exercise of stock options 1,307,055 --
Cash paid to facilitate sale of common stock (19,000) --
----------- -----------
Net cash provided by financing activities 1,288,055 --
----------- -----------
Increase in Cash and Cash Equivalents 112,298 --
Cash and cash equivalents at beginning of period -- --
----------- -----------
Cash and cash equivalents at end of period $ 112,298 $ --
=========== ===========
Supplemental Disclosures of Interest and Income Taxes Paid
Interest paid during the period $ -- $ --
=========== ===========
Income taxes paid (refunded) $ -- $ --
=========== ===========
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Common stock issued for option to acquire an unrelated entity $ 3,225 $ --
=========== ===========
</TABLE>
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Phoenix Resources Technologies, Inc.
Notes to Financial Statements
Note 1 - Basis of Presentation
Phoenix Resources Technologies, Inc. (Company) was originally incorporated in
1986 as Firma, Inc. under the laws of the State of Colorado as a corporation
organized to take advantage of unspecified business opportunities.
Pursuant to a plan of merger and reorganization, the Company, as a Colorado
corporation, merged into Hughes Resources, Inc., a Nevada corporation, on June
27, 1995. The purpose of this merger was to redomicile the Company from Colorado
to Nevada. The Nevada corporation had been formed solely for this reorganization
purpose and had no assets, liabilities or operations prior to the merger. The
Articles of Incorporation of the surviving Nevada corporation were amended to
increase the authorized number of common shares to 100,000,000 with a par value
of $0.001 each and to increase the authorized number of preferred shares to
50,000,000 with a par value of $0.001 per share.
The Company has had no operations since the year ended October 31, 1996 and no
operating assets since the year ended October 31, 1997. Accordingly, the Company
became solely dependent upon management and/or significant shareholders to
provide sufficient working capital to preserve the integrity of the corporate
entity at this time. If feasible, it is the intent of management and significant
shareholders to provide sufficient working capital, if needed, necessary to
support the working capital needs of the Company until adequate financing is in
place.
On November 3, 1999, the Company acquired an option to purchase up to 100% of
HHPN Development Corporation (HHPN), an unrelated company located in San Diego,
California. HHPN developed a software program that is used to develop database
applications on the Internet. On February 10, 2000, the Company exercised its
option to purchase 50.0% of HHPN and has options to purchase the remaining 50.0%
through February 10, 2002.
During interim periods, the Company follows the accounting policies set forth in
its Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act
of 1934 on Form 10-KSB filed with the U. S. Securities and Exchange Commission.
The information presented herein may not include all disclosures required by
generally accepted accounting principles and the users of financial information
provided for interim periods should refer to the annual financial information
and footnotes contained in its Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934 on Form 10-KSB when reviewing the interim
financial results presented herein.
In the opinion of management, the accompanying interim financial statements,
prepared in accordance with the instructions for Form 10-QSB, are unaudited and
contain all material adjustments, consisting only of normal recurring
adjustments necessary to present fairly the financial condition, results of
operations and cash flows of the Company for the respective interim periods
presented. The current period results of operations are not necessarily
indicative of results which ultimately will be reported for the full fiscal year
ending October 31, 2000.
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 period.
Actual results could differ from those estimates.
6
<PAGE>
Phoenix Resources Technologies, Inc.
Notes to Financial Statements - Continued
Note 2 - Summary of Significant Accounting Policies
1. Cash and cash equivalents
-------------------------
The Company considers all cash on hand and in banks, including accounts in
book overdraft positions, certificates of deposit and other highly-liquid
investments with maturities of three months or less, when purchased, to be
cash and cash equivalents.
Cash overdraft positions may occur from time to time due to the timing of
making bank deposits and releasing checks, in accordance with the Company's
cash management policies.
2. Income taxes
------------
The Company utilizes the asset and liability method of accounting for income
taxes. At July 31, 2000 and 1999, the deferred tax asset and deferred tax
liability accounts, as recorded when material, are entirely the result of
temporary differences. Temporary differences represent differences in the
recognition of assets and liabilities for tax and financial reporting
purposes, primarily the allowance for doubtful accounts, accumulated
depreciation and certain liability items. A 100% valuation allowance was
provided against deferred tax assets, where applicable.
3. Earnings (loss) per share
-------------------------
Basic earnings (loss) per share is computed by dividing the net income (loss)
by the weighted average number of shares of common stock and common stock
equivalents (primarily outstanding options and warrants). Common stock
equivalents represent the dilutive effect of the assumed exercise of the
outstanding stock options and warrants, using the treasury stock method. The
calculation of fully diluted earnings (loss) per share assumes the dilutive
effect of the exercise of outstanding options and warrants at either the
beginning of the respective period presented or the date of issuance,
whichever is later. As of July 31, 2000 and 1999, the Company's outstanding
warrants and/or options are deemed to be anti-dilutive due to the Company's
net operating loss position.
Note 3 - Option to Acquire an Unrelated Entity
On November 3, 1999, Cyclone Financing Group, Inc. (Cyclone) transferred all of
its rights in the HHPN Option Agreement to purchase up to 100% of HHPN
Development Corporation (HHPN) to the Company by way of an Assignment Agreement.
Pursuant to the terms of the assigned HHPN Option Agreement, the Company may
exercise its option in up to three stages, described as Options 1, 2, and 3
respectively. On February 10, 2000, the Company exercised Option 1 of the HHPN
Option Agreement, which provides for a total of $2,500,000.00 as consideration
for the acquisition of a 50% interest in HHPN by the Company. Under the terms of
this Option 1, the $2,500,000.00 price is required to be paid in monthly
installment payments of between $17,000.00 and $200,000.00, pursuant to a budget
acceptable to HHPN and the Company. As of July 31, 2000, the Company has paid a
total of approximately $384,600 towards these installment obligations under the
exercised Option 1 of the HHPN Option Agreement, in payments either directly to
HHPN or on behalf of HHPN as provided for therein.
In addition, the Company also retains, under Options 2 and 3 respectively,
rights to purchase an additional 25% interest in HHPN for $50,000,000.00 and the
final remaining 25% interest in HHPN for $125,000,000.00. These Options 2 and 3
shall expire on February 10, 2002. Notwithstanding these terms, the Company has
the right, at any time, and at its sole discretion, to increase any of its
monthly installments or other payments and/or pay HHPN in full.
7
<PAGE>
Phoenix Resources Technologies, Inc.
Notes to Financial Statements - Continued
Note 4 - Loan payable
In November 1999, the Company executed a $150,000 US$ revolving demand note
payable to it's President and Chief Executive Officer. The note bears interest
at 6.5%. At April 30, 2000, there is no outstanding balance on this note
payable.
In July 2000, the Company executed a $100,000 US$ revolving demand note payable
to it's Board Chairman (former President and Chief Executive Officer). The note
bears interest at 6.5%; and was retired by way of Company granting 10,000 stock
options on July 31, 2000 and the optionee exercising the 10,000 options at
$10.00 on July 31, 2000.
Note 5 - Preferred Stock Transactions
On October 4, 1999, a former officer of the Company and controlling party of an
entity owning approximately 200,000 shares of Class A Preferred Stock tendered
100% of the issued and outstanding shares of Class A Preferred Stock to the
Company for cancellation with no further consideration being due to the
tendering party. The par value of these issued and outstanding shares was
credited to additional paid-in capital upon their cancellation.
Note 6 - Common Stock Transactions
On October 15, 1999, at a Special Meeting of the Shareholders, a 100 for 1
reverse split of the issued and outstanding common stock was approved. The
effects of this action are reflected in the accompanying financial statements as
of the first day of the first period presented.
In September 1997, the Company, in an effort to seek and obtain a suitable
merger or acquisition agreement with an on-going privately owned business,
issued 15,000,000 pre-split shares (150,000 post reverse split shares) of
unregistered, restricted common stock into the escrow account of the Company's
then corporate attorney under a subscription agreement. The attorney was
responsible for reviewing the Company's books and records, reviewing and
updating the Company's corporate status, procuring the services of a qualified
independent certified accounting firm to audit the Company's financial
statements, facilitating the filing of all delinquent reports with the U.S.
Securities and Exchange Commission and evaluating potential private companies
for either merger or acquisition. The Company's common stock had an estimated
market trading price of approximately $0.04 per share on the date of the
issuance of these shares. Due to the restricted nature of the shares issued into
escrow, the Stock Subscription Agreement was valued at approximately $0.016 per
share, or approximately $240,000 in total, as the "fair value" of this
transaction. The Stock Subscription Agreement was settled upon the successful
merger with or acquisition of a suitable private company.
In September 1999, in anticipation of a transaction involving a change in
control of the Company, the Company's Board of Directors and the Company's
former corporate attorney agreed to reprice this stock subscription agreement to
$0.001 per share, which equals the stated par value of the common stock, as
there had been a deterioration in the quoted price of the Company's common stock
and approximately two (2) years of no operations in the Company. The final
settlement of the stock subscription agreement was a charge of approximately
$15,000 to operations for the various services performed by the Company's former
corporate attorney.
8
<PAGE>
Phoenix Resources Technologies, Inc.
Notes to Financial Statements - Continued
Note 6 - Common Stock Transactions - continued
On October 27, 1999, the Company entered into a Stock Acquisition Agreement with
Ben Traub, a related third party for the purchase of 9,000,000 post-reverse
split shares of restricted, unregistered common stock for total proceeds of
$300,000. The proceeds, when received, were allocated to settle the outstanding
judgment against the Company for $200,000 and to pay $100,000 to retire the
Forbearance Agreement with the Agricultural Production Credit Association
(AgPCA), which was triggered by the execution of the Stock Acquisition
Agreement. As of April 30, 2000, all amounts due under this Agreement have been
received by the Company and the related obligations have been satisfied.
On February 10, 2000, the Company sold 80,000 shares at a price of $2.50 per
share for total gross proceeds of $200,000. As of the date of this transaction,
"fair value" of the common stock issued was approximately $560,000.00 based on
the discounted closing price of the company's common stock. The difference of
approximately $360,000.00 was charged to operations as compensation expense for
issuances of common stock at less than "fair value". As part of this placement,
6,000 warrants were also issued and fees of $16,500 were paid. The holder of the
warrant is entitled to purchase the common stock of the Company at a price of
$3.00 subject to adjustment, through February 10, 2001.
On May 5, 2000, the Company sold 30,000 shares at a price of $5.00 per share for
total gross proceeds of $150,000. As part of the placement, 15,000 warrants were
issued and no commissions or fees paid. As of the date of this transaction,
"fair value" of the common stock issued was approximately $195,000.00 based on
the discounted closing price of the company's common stock. The difference of
approximately $45,000.00 was charged to operations as compensation expense for
issuances of common stock at less than "fair value". As a part of this
placement, 15,000 warrants were also issued and no commissions or fees paid. The
holder of the warrant is entitled to purchase the common stock of the Company at
a price of $10.00, subject to adjustment, through May 2, 2002.
On June 2, 2000, the Company sold 4,000 shares at a price of $6.25 per share for
total gross proceeds of $25,000. As part of the placement, 4,000 fee warrants
were issued and $2,500 fees paid. As of the date of this transaction, "fair
value" of the common stock issued was approximately $19,876 based on the
discounted closing price of the company's common stock. The difference of
approximately $5,124 was credited to operations as compensation expense for
issuances of common stock at less than "fair value". The fee warrants have a 2
year term with an exercise price of $7.50.
On July 31, 2000, the Company sold 10,000 shares at a price of $5.00 per share
for total gross proceeds of $50,000. As of the date of this transaction, "fair
value" of the common stock issued was approximately $50,000 based on the
discounted closing price of the company's common stock. Therefore no charge to
compensation expense was required.
Note 7 - Stock Options
On December 17, 1999, the Company filed a Form S-8 Registration Statement under
The Securities Act of 1933 with the U. S. Securities and Exchange Commission to
register 900,000 post-reverse split shares of common stock pursuant to the
Company's 1999 Nonqualifying Stock Option Plan (1999 Plan). As stated in the
1999 Plan document, "This [1999 Plan is] for persons employed or associated with
the Company, including without limitation any employee, director, general
partner, officer, attorney, accountant, consultant or advisor, is intended to
advance the best interest of the Company by providing additional incentive to
those persons who have a substantial responsibility for its management, affairs,
and growth by increasing their proprietary interest in the success of the
Company, thereby encouraging them to maintain their relationships with the
Company."
9
<PAGE>
Phoenix Resources Technologies, Inc.
Notes to Financial Statements - Continued
Note 7 - Stock Options - Continued
In addition, on August 10, 2000, the Company filed a Form S-8 Registration
Statement under The Securities Act of 1933 with the U. S. Securities and
Exchange Commission to register an additional 600,000 post-reverse split shares
of common stock pursuant to the Company's Amended 1999 Stock Option Plan (1999
Amended Plan). The Amendment to the 1999 Plan was approved by the shareholders
of the Company at the Company's Annual Meeting held on July 21, 2000.
On December 17, 1999, the Company granted options to purchase 200,000 shares of
the Company's common stock at an exercise price of $3.00 per share under the
1999 Nonqualifying Stock Option Plan to its President. The options were granted
in consideration of the value the President and his Board brought to the Company
since their takeover on October 30, 1999. Additionally, the Company granted
options to purchase 100,000 shares each to board members, Judee Fayle and Robert
Seitz, at an exercise price of $3.00 per share. The decision of where to set the
exercise price was based on the pre-determined plan (prior to takeover) to grant
options to the Board as close as possible to the going rate for the Company's
stock prior to takeover. The average closing price of the Company's stock for
the ten month period prior to takeover was $2.27, after taking the reverse stock
split into consideration. On April 28, 2000, Ben Traub, Robert Seitz, and Judee
Fayle, all officers and directors of the Company, rescinded an aggregate total
of 298,000 of these unexercised options. On January 5, 2000, options to purchase
2,000 common shares were exercised by Ben Traub, an officer and a director of
the Company, and the shares issued for total proceeds of $6,000 to the Company.
The quoted market price of the Company's stock at the date of exercise was
approximately $8.625. The difference between the exercise price and the market
price of the Company's stock was charged to operations on the exercise date for
the above exercise of stock options.
On January 24, 2000, options to purchase 5,000 common shares were exercised by
Rob Seitz, an officer and a director of the Company, and the shares were issued
for total proceeds of $15,000 to the Company. The quoted market price of the
Company's stock at the date of exercise was approximately $11.00. The difference
between the exercise price and the market price of the Company's stock was
charged to operations on the exercise date for the above exercise of stock
options. On January 24, 2000, options to purchase 5,000 common shares were
exercised by Judee Fayle, a former officer and a director of the Company. The
shares were issued for total proceeds of $15,000 to the Company. The quoted
market price of the Company's stock at the date of exercise was approximately
$11.00. The difference between the exercise price and the market price of the
Company's stock was charged to operations on the exercise date for the above
exercise of stock options.
On January 28, 2000, options to purchase 5,000 common shares were exercised by
Rob Seitz, an officer and a director of the Company, and the shares were issued
for total proceeds of $15,000 to the Company. The quoted market price of the
Company's stock at the date of exercise was approximately $11.75. The difference
between the exercise price and the market price of the Company's stock was
charged to operations on the exercise date for the above exercise of stock
options. On January 28, 2000, options to purchase 5,000 common shares were
exercised by Judee Fayle, a former officer and a director of the Company. The
shares were issued for total proceeds of $15,000 to the Company. The quoted
market price of the Company's stock at the date of exercise was approximately
$11.75. The difference between the exercise price and the market price of the
Company's stock was charged to operations on the exercise date for the above
exercise of stock options.
On February 2, 2000, options to purchase 40,000 common shares were exercised by
Ben Traub, an officer and a director of the Company; and the shares issued for
total proceeds of $120,000 to the Company. The quoted market price of the
Company's stock at the date of exercise was approximately $13.125. The
difference between the exercise price and the market price of the Company's
stock was charged to operations on the exercise date for the above exercise of
stock options.
10
<PAGE>
Phoenix Resources Technologies, Inc.
Notes to Financial Statements - Continued
Note 7 - Stock Options - Continued
On February 3, 2000, the Company granted options to purchase 25,000 shares of
the Company's common stock at an exercise price of $7.00 per share under the
1999 Nonqualifying Stock Option Plan to employee, Peter Somogyi.
On February 7, 2000, options to purchase 10,000 common shares were exercised by
Ben Traub, an officer and a director of the Company; and the shares issued for
total proceeds of $30,000 to the Company. The quoted market price of the
Company's stock at the date of exercise was approximately $12.00. The difference
between the exercise price and the market price of the Company's stock was
charged to operations on the exercise date for the above exercise of stock
options.
On February 11, 2000, options to purchase 30,000 common shares were exercised by
Ben Traub, an officer and a director of the Company; and the shares issued for
total proceeds of $90,000 to the Company. The quoted market price of the
Company's stock at the date of exercise was approximately $15.00. The difference
between the exercise price and the market price of the Company's stock was
charged to operations on the exercise date for the above exercise of stock
options.
On March 6, 2000, options to purchase 1,500 common shares were exercised by
Peter Somogyi; and the shares issued for total proceeds of $ 10,500 to the
Company. The quoted market price of the Company's stock at the date of exercise
was approximately $19.75. The difference between the exercise price and the
market price of the Company's stock was charged to operations on the exercise
date for the above exercise of stock options.
On March 20, 2000, options to purchase 10,000 common shares were exercised by
Peter Somogyi; and the shares issued for total proceeds of $ 70,000 to the
Company. The quoted market price of the Company's stock at the date of exercise
was approximately $17.125. The difference between the exercise price and the
market price of the Company's stock was charged to operations on the exercise
date for the above exercise of stock options
On March 29, 2000, options to purchase 3,500 common shares were exercised by
Peter Somogyi; and the shares issued for total proceeds of $ 24,500 to the
Company. The quoted market price of the Company's stock at the date of exercise
was approximately $15.50. The difference between the exercise price and the
market price of the Company's stock was charged to operations on the exercise
date for the above exercise of stock options.
On April 18, 2000, the Company granted options to employee, Peter Somogyi, to
purchase an additional 50,000 shares of the Company's common stock at an
exercise price of $7.00 per share under the 1999 Nonqualifying Stock Option
Plan.
On April 18, 2000, the Company granted options to purchase 100,000 shares of the
Company's common stock at an exercise price of $7.00 per share under the 1999
Nonqualifying Stock Option Plan to employee, Jason Lee.
On April 26, 2000, options to purchase 10,000 common shares were exercised by
Peter Somogyi; and the shares issued for total proceeds of $ 70,000 to the
Company. The quoted market price of the Company's stock at the date of exercise
was approximately $12.50. The difference between the exercise price and the
market price of the Company's stock was charged to operations on the exercise
date for the above exercise of stock options.
11
<PAGE>
Phoenix Resources Technologies, Inc.
Notes to Financial Statements - Continued
Note 7 - Stock Options - Continued
On February 16, 2000 and April 28, 2000, respectively, the Company granted
options to purchase an aggregate of 10,000 shares of the Company's common stock
at an exercise price of $0.01 per share under the 1999 Nonqualifying Stock
Option Plan to its legal counsel, Duane Morris & Heckscher of Chicago, Illinois,
for legal services. These options were exercised on February 17, 2000 and June
21, 2000, respectively, for gross aggregate proceeds of $100. Subsequently,
these transactions were mutually voided and the issued securities were returned
to the Company. The effect of the rescission is reflected in the accompanying
financial statements as of July 31, 2000.
On April 28, 2000, options to purchase 160,000 common shares were granted to and
exercised by Ben Traub under the 1999 Nonqualifying Stock Option Plan. These
options were exercised for cash proceeds of $550 and the reimbursement to Mr.
Traub for the payment of consulting fees to M. D. Price, Jr., the Company's
former corporate legal counsel, paid on behalf of the Company by Mr. Traub the
amount of $1,959,450. The quoted market price of the Company's stock at the date
of exercise was approximately $12.25. There was no difference between the
exercise price and the market price of the Company's stock on the exercise date
of the stock options; therefore no charge was made to operations.
On May 2, 2000, the Company granted options to purchase 500 shares of the
Company's common stock at an exercise price of $0.01 per share under the 1999
Nonqualifying Stock Option Plan to consultant, Patrick McEvoy.
On May 4, 2000, options to purchase 500 common shares were exercised by Patrick
McEvoy; and the shares issued for total proceeds of $5.00 to the Company. The
quoted market price of the Company's stock at the date of exercise was
approximately $13.25. The difference between the exercise price and the market
price of the Company's stock was charged to operations on the exercise date for
the above exercise of stock options.
On May 23, 2000, options to purchase 1,500 common shares were exercised by Peter
Somogyi; and the shares issued for total proceeds of $ 10,500 to the Company.
The quoted market price of the Company's stock at the date of exercise was
approximately $13.00. The difference between the exercise price and the market
price of the Company's stock was charged to operations on the exercise date for
the above exercise of stock options. On May 31, 2000, Jason Lee and Peter
Somogyi rescinded an aggregate total of 75,000 options.
On June 26, 2000, the Company granted qualified options to purchase 200,000
shares of the Company's common stock at an exercise price of $8.50 per share
under the amended 1999 Option Plan to Ronald J. Wilkins, the Company's new
President and Chief Executive Officer.
On July 17, 2000, the Company granted qualified options to purchase 100,000
shares of the Company's common stock at an exercise price of $9.125 per share
under the amended 1999 Option Plan to Michael Bahlo, the Company's new Executive
Vice-President, Sales & Marketing.
On July 17, 2000, the Company granted qualified options to purchase 100,000
shares of the Company's common stock at an exercise price of $10.125 per share
under the amended 1999 Option Plan to Michael Lamb, the Company's new Chief
Operating Officer.
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Phoenix Resources Technologies, Inc.
Notes to Financial Statements - Continued
Note 7 - Stock Options - Continued
On July 31, 2000, non-qualified options to purchase 100,000 common shares were
granted to Ben Traub, Chairman of the Board in consideration of the value of
ongoing services and assistance provided to the Company and to reimburse him for
expenses thereby incurred. On July 31, 2000, 39,000 of these options were
exercised by Mr. Traub under the Amended 1999 Stock Option Plan. These options
were exercised specifically for retiring the $100,000 CFGi loan to the Company
on July 25, 2000, for private share transfers for PRTI expenses totaling
$179,754.38, CFGi's out of pocket PRTI expenses totaling $95,245.62, and Mr.
Traub's out of pocket expenses of $15,000.00. The closing market price of the
Company's stock at the date of exercise was $10.00. There was no difference
between the exercise price and the market price of the Company's stock on the
exercise date of the stock options; therefore no charge was made to operations.
The following table summarizes all options granted from December 31, 1999
through July 31, 2000:
Options Options Options Options Exercise price
granted exercised terminated outstanding per share
--------- --------- ---------- ----------- --------------
1,184,500 338,000 373,000 473,500 $0.01 - $12.25
========= ========= ========== ===========
The weighted average exercise price of all issued and outstanding options at
July 31, 2000 was approximately $9.22.
Note 8 - Litigation
Agricultural Protection Credit Association
------------------------------------------
The Company was a co-maker on a loan payable to Agricultural Production Credit
Association (AgPCA) along with its former subsidiaries, Hughes Wood Products,
Inc. and Houston Woodtech, Inc. On March 17, 1997, AgPCA foreclosed on the
underlying assets collateralizing the loan and was subsequently granted an
approximate $3,236,048 judgment collectively against the Company, Hughes Wood
Products, Inc. and Houston Woodtech, Inc.
On August 21, 1998, AgPCA filed litigation titled "Petition to Enforce Final
Judgment" for collection of an unsatisfied balance of approximately $1,092,100,
as of May 6, 1998, in Texas District Court against 17 named co- defendants,
including the Company and its former officers. The litigation alleged various
actions on behalf of the Company, its former officers, including Racketeering,
Influence and Corrupt Organization (RICO) statute violations.
On July 27, 1999, the Company entered into a Forbearance Agreement with AgPCA
whereby the Company will pay AgPCA the total sum of $100,000 cash prior to the
effective date of its merger or combination with a Private investor in full
settlement of the Company's participation in the litigation discussed above. In
the event that a merger or combination with a Private investor does not occur
within one (1) year of the execution of the Agreement, the Agreement shall
immediately and automatically terminate. The October 27, 1999 execution of the
Stock Acquisition Agreement triggered the liability to pay the $100,000 in
settlement of this Forbearance Agreement and the amount was accrued at the date
of the Forbearance Agreement. The liability under this Agreement is was paid
from the proceeds collected from the Stock Acquisition Agreement related to the
sale of 9,000,000 shares of the Company's common stock.
On March 15, 2000, AgPCA executed a "Receipt and Acknowledgment of Payment in
Full" for the $100,000 obligation. The Company has no further obligation under
this obligation.
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Phoenix Resources Technologies, Inc.
Notes to Financial Statements - Continued
Note 8 - Litigation - continued
Garnishment payable
-------------------
On March 20, 1997, the Company was named as the Garnishee in the settlement of a
judgment rendered against Mr. James R. Ray, the Company's former president and
chief executive officer. The garnishment placed against the Company by the
Superior Court of the State of Arizona, Maricopa County, was in the amount of
$266,205.91, plus interest at 10.0% per annum until paid in full. The Company
accrued this garnishment as a current liability and accrued the requisite
interest on the unpaid balance through October 27, 1999. On October 27, 1999,
the garnishment was settled for by agreement with the Company to pay the
claimant $200,000 cash. The difference between the accrued amount and the
$200,000 was credited to operations as forgiveness of debt. As of April 30,
2000, the Company has paid this obligation in full and has no further liability
to the claimant.
Note 9 - Related Party Commitments
The Company has executed a management agreement with Cyclone Financing Group,
Inc. of 2nd Floor, 827 West Pender Street, Vancouver, British Columbia, Canada
V6C 3G8, an entity related through common management personnel who are also
shareholders of the Company, at the amount of $35,000 (US Dollars) per month,
effective November 1, 1999. This amount represents a management fee payable for
the provision of certain services to the Company including: compliance,
accounting, marketing, communications and administration (i.e. bookkeeping,
photocopying, faxing, office space, telephone charges, supplies, news
dissemination). Cyclone has billed the Company a total of $315,000 for the
period from November 1, 1999 through July 31, 2000 and the Company has an
outstanding balance due Cyclone of approximately $10,000 as of July 31, 2000.
In October 1999, in connection with a Stock Acquisition Agreement, the Company
agreed to issue 300,000 post- reverse split shares of restricted, unregistered
common stock in April 2000 to the Company's Company's former corporate attorney
for services rendered in connection with the Stock Acquisition Agreement. This
obligation was satisfied on behalf of the Company by the Company's President and
Chief Executive Officer with the transfer of 300,000 restricted, unregistered
shares of the Company's common stock owned by the Company's President and Chief
Executive Officer. The Company recognized a charge to operations of
approximately $1,959,450 for the fair value of these shares, as calculated on
the discounted (50.0%) value of the quoted closing price of the Company's common
stock on the date of settlement and the Company's President and Chief Executive
Officer was given credit for this payment against the amount due from the
President on the exercise of options to purchase 160,000 shares of stock.
Note 10 - Financing Agreements
On April 12, 2000, the Company entered into a $10 million equity investment line
agreement with Eurofund Derivatives Ltd. This agreement replaces one dated
January 25, 2000 for a $4 million equity investment line. The Company issued to
Eurofund Derivatives a Class A Warrant with an aggregate warrant exercise price
of $10,000,000. The proposed maximum amount which can be exercised at any one
time is $1,000,000. Eurofund may not exercise the warrant until the Company
notifies Eurofund Derivatives to do so by issuing notice in writing. Eurofund
may then exercise the warrant but such exercise is dependent on market
conditions and therefore there is no guarantee that the warrant will ever be
exercised.
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Phoenix Resources Technologies, Inc.
Notes to Financial Statements - Continued
Note 12 - Subsequent Events
Office Lease Agreement
----------------------
On August 21, 2000, the Company executed a lease payable for office facilities.
The lease requires minimum monthly lease payments of approximately $900 per
month. The Company and the landlord remain in negotiation, as of the date of
this filing, as to the ultimate initial term of this agreement.
Issuances of common stock
-------------------------
On August 8, 2000, options to purchase 2,000 common shares were exercised by
Peter Somogyi; and the shares issued for total proceeds of $ 14,000 to the
Company. The quoted market price of the Company's stock at the date of exercise
was approximately $10.00. The difference between the exercise price and the
market price of the Company's stock was charged to operations on the exercise
date for the above exercise of stock options
Loan payable to a related party
-------------------------------
On August 30, 2000 a Company director loaned $100,000 to the Company in the form
of a demand loan bearing 6.5% interest.
Acquisition
-----------
On September 6, 2000, the Company executed a Letter of Intent for the purposes
of acquiring Valley Professionals, Inc., a San Jose, California, software
consulting firm specializing in database applications. The ultimate consummation
of this transaction is subject to the satisfactory completion of due diligence
procedures on the part of both the Company and Valley Professionals, Inc.
(Remainder of this page left blank intentionally)
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Part I - Item 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(1) Caution Regarding Forward-Looking Information
This quarterly report contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of the Company
or management as well as assumptions made by and information currently available
to the Company or management. When used in this document, the words
"anticipate," "believe," "estimate," "expect" and "intend" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current view of
the Company regarding future events and are subject to certain risks,
uncertainties and assumptions, including the risks and uncertainties noted.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. In each instance, forward-looking information should be considered in
light of the accompanying meaningful cautionary statements herein.
(2) General
On November 3, 1999, Cyclone Financing Group, Inc. ("Cyclone") transferred all
of its rights in the HHPN Option Agreement to purchase up to 100% of HHPN
Development Corporation ("HHPN") to the Company by way of an Assignment
Agreement. Pursuant to the terms of the assigned HHPN Option Agreement, the
Company may exercise its option in up to three stages, described as Options 1,
2, and 3 respectively. On February 10, 2000, the Company exercised Option 1 of
the HHPN Option Agreement, which provides for a total of $2,500,000.00 as
consideration for the acquisition of a 50% interest in HHPN by the Company.
Under the terms of this Option 1, the $2,500,000.00 price is required to be paid
in monthly installment payments of between $17,000.00 and $200,000.00, pursuant
to a budget acceptable to HHPN and the Company. As of July 31, 2000, the Company
has paid a total of approximately $384,600.00 towards these installment
obligations under the exercised Option 1 of the HHPN Option Agreement, in
payments either directly to HHPN or on behalf of HHPN as provided for therein.
Further, as of the date of this filing, the Company remains in negotiation to
complete this acquisition.
In addition, the Company also retains, under Options 2 and 3 respectively,
rights to purchase an additional 25% interest in HHPN for $50,000,000.00 and the
final remaining 25% interest in HHPN for $125,000,000.00. These Options 2 and 3
shall expire on February 10, 2002. Notwithstanding these terms, the Company has
the right, at any time, and at its sole discretion, to increase any of its
monthly installments or other payments and/or pay HHPN in full.
Mr. Ben Traub is an officer of both Cyclone Financing Group Inc. and the
Company. Cyclone agreed in the Assignment Agreement to irrevocably transfer the
HHPN Option Agreement to the Company for consideration of $10.00.
HHPN Development Corp. has created a suite of Web development tools, also known
as a web application server, originally code named DBPanacea, and since
re-branded XLiRAD (names used interchangeably herein), which is designed to
increase the flexibility while lowering the cost of developing Web sites that
require database functionality, e.g. Internet based business applications and
Web sites used for e-commerce transactions. The Company's goals are to develop
HHPN or DBPanacea, retain a senior management team for the Company and
ultimately acquire 100% of HHPN.
In February and March 2000, the Company received favorable independent
evaluations of HHPN's principal product called XLiRAD, and believes that
positive market acceptance of HHPN's internet web application software product
could generate revenues for the Company.
The Company believes that websites developed with the HHPN software product will
be able to operate on WindowsNT, UNIX, LINUX or MAC without recoding, using SQL,
Sybase, Oracle and most other database engines. Further, the software is
anticipated to run on any webserver including Apache, Netscape Server or any
other server that supports servlets. The software is in its first product form
and under refinement. Although early testing has provided positive feedback, the
Company acknowledges that it will have to invest heavily in ongoing development
to continue maintain and create ongoing technological advances and there is no
guarantee that it will be able to do so. Most of the Company's existing
competitors have greater resources, which will make it difficult for the Company
to compete.
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(3) Plan of Operations
Since October 31, 1999, the Company has been reorganized and its operations to
date have been in the areas of setting up its organization and financing. As a
result, the Company's personnel and related costs are anticipated to increase in
future periods.
The Company needs to raise capital to continue its operations. HHPN is also
dependent on the Company for its working capital requirements. In the nine
months of fiscal year to date, the Company has continued substantial operating
losses which utilize most of its available cash reserves. The Company
anticipates that it will continue to incur net losses for the foreseeable
future. The Company continues to have no operating revenue. The Company has
incurred aggregate general and administrative expenses of approximately
$4,861,623, including non- cash charges to operations totaling approximately
$3,749,670 for difference between the "fair value" of its common stock at the
date of the exercise of granted stock options and the actual cash proceeds
received. Total loss per share for the nine months ended July 31, 2000 was
$(0.51).
Further, on September 6, 2000, the Company executed a Letter of Intent for the
purposes of acquiring Valley Professionals, Inc., a San Jose, California,
software consulting firm specializing in database applications. The ultimate
consummation of this transaction is subject to the completion of due diligence
procedures on the part of both the Company and Valley Professionals, Inc.
There are certain risk factors associated with the Company, its negotiations
involving HHPN and future products including XLiRAD which are described as
follows. In such description, the Company is referred to as "We", with "Our"
denoting the possessive.
(1) WE HAVE SUBSTANTIAL NET LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE.
Since we began operations, we have incurred substantial net losses in every
fiscal period. We cannot be certain when we will become profitable, if at
all. Failure to achieve profitability within the time frame expected by
investors may adversely affect the market price of our common stock. At our
year ended October 31, 1999, we had generated no revenue and a net loss of
approximately $22,000. For the nine months ended July 31, 2000, we had
generated no revenue and a net loss of $4,882,000, including non-cash
charges aggregating approximately $3,880,000. We expect to increase
expenditures in several areas of our business, particularly in sales and
marketing in order to execute our Business Plan.
(2) NEED FOR ADDITIONAL FINANCING
The Company is expected to require additional working capital or other
funds at a later date for its funding obligations under the HHPN Agreement
and the maintenance and expansion of the Company's operations. HHPN is also
dependent on the Company for working capital. The XLiRAD product is
currently in the near- market stage, but at the direction of current
management is continuing rigorous testing and exposure to focus group
demonstration and assessment for final improvement and to reduce the chance
of unforeseen "bugs" or "glitches". There is no assurance that we will be
successful in obtaining additional financing or that such financing will be
available, nor if such financing becomes available that it would be upon
acceptable terms to the Company.
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<PAGE>
(3) SUBSTANTIAL DILUTION TO NEW INVESTORS
At July 31, 2000, we had a net tangible book value of approximately
$179,000 or approximately $0.02 per share of common stock issued and
outstanding. Net tangible book value per share represents the amount of our
total tangible assets less our total liabilities, divided by the number of
shares of common stock outstanding. Any offerings generally result in an
immediate increase in the net tangible book value per share of common stock
to existing shareholders and an immediate dilution per share to new
investors purchasing our units in the offering. The effects are
significant. Dilution is determined by subtracting net tangible book value
per share after the offering from the offering price to investors.
(4) OUR LIMITED OPERATING HISTORY MAKES THE EVALUATION OF OUR BUSINESS AND
PROSPECTS DIFFICULT.
The Company has no revenues. Accordingly, we have no operating history on
which you can base your evaluation of our business and prospects. This also
requires the Company to be dependent on outside sources, including current
controlling shareholders, for significant amounts of investment. In
addition, the Company's prospects must be considered in light of the risks
and uncertainties encountered by companies in an early stage of development
in new and rapidly evolving markets, particularly those markets which
depend on the Internet.
(5) THE DEVELOPMENT OF A MARKET FOR OUR PRODUCTS IS UNCERTAIN.
If the market for web application servers and related database software
applications does not grow at a significant rate, the Company's business,
operating results and financial condition will be materially adversely
affected. Web technology has been used widely for only a short time, and
the market for web application servers and packaged e-business applications
is new and rapidly evolving. As is typical for new and rapidly evolving
industries, demand for recently introduced products is highly uncertain.
(6) SYSTEM FAILURES
The Company's success depends on the efficient and uninterrupted operation
of HHPN's Internet connectivity systems. HHPN obtains its high speed
Internet access through third party internet service providers. ISPs
maintain physical and electronic systems that are vulnerable to failure,
damage, or interruption resulting from any number of possibilities, ranging
from earthquakes, floods, fire, loss of power, telecommunication failures,
break-ins, sabotage, vandalism and similar events.
(7) REGULATIONS OR CONSUMER CONCERNS REGARDING PRIVACY ON THE INTERNET COULD
LIMIT MARKET ACCEPTANCE OF FUTURE PRODUCTS
Any personalization features of the Company's future products could allow
our customers to develop and maintain web user profiles to tailor content
to specific users. Profile development involves both data supplied by the
user and data derived from the user's web site behavior. Privacy concerns
may cause users to resist providing personal data or to avoid web sites
that track user behavior. In addition, legislative or regulatory
requirements may heighten consumer concerns if businesses must notify web
site users that user profile data may be used to direct product promotion
and advertising to users. If privacy legislation is enacted or consumer
privacy concerns limit the market acceptance of personalization software,
our business, financial condition and operating results could be harmed.
Our future products could use cookies to track demographic information and
user preferences. A cookie is information keyed to a specific user that is
stored on a computer's hard drive, typically without the user's knowledge.
Cookies are generally removable by the user, although removal could affect
the content available on a particular site. We are aware that certain
parties have urged passage of laws limiting or abolishing the use of
cookies. If such laws are passed or if users begin to delete or refuse
cookies as a common practice, market demand for our products could be
reduced.
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(8) WE COULD COMPETE WITH ALLAIRE, BEA, IBM, ORACLE, MICROSOFT AND VIGNETTE
Our future products could compete primarily with Allaire, BEA, IBM, Oracle,
Microsoft and Vignette in the market for web application servers and
related software products. These companies have a longer operating history,
a larger installed base of customers and substantially greater financial,
distribution, marketing and technical resources than our company. As a
result, we may not be able to compete effectively with these companies, or
others, now or in the future, and our business, operating results and
financial condition may be materially adversely affected.
We expect that these companies' commitment to and presence in the web
application server and related software products market will substantially
increase competitive pressure in the market. In addition, we believe that
Microsoft will continue to incorporate web application server technology
into its operating system software and certain of its server software
offerings, possibly at no additional cost to its users.
(9) WE OPERATE IN HIGHLY COMPETITIVE MARKETS AND MAY NOT BE ABLE TO COMPETE
EFFECTIVELY.
The web application server and related database software market is
intensely competitive and rapidly changing. Many of our current and
potential competitors have longer operating histories and substantially
greater financial, technical, marketing, distribution and other resources
than we do and therefore may be able to respond more quickly than we can to
new or changing opportunities, technologies, standards or customer
requirements. We will compete with a number of medium-sized and start-up
companies that have introduced or that are developing web application
servers and related database software applications. We expect that
additional competitors will enter the market with competing products as the
size and visibility of the market opportunity increases. Increased
competition could result in pricing pressures, reduced margins or the
failure of our products to achieve or maintain market acceptance.
(10) OUR FAILURE TO EFFECTIVELY DEVELOP AND MARKET MAY ADVERSELY AFFECT OUR
BUSINESS.
New technologies will likely increase the competitive pressures that we
face. The development of competing technologies by market participants or
the emergence of new industry standards may adversely affect our
competitive position. As a result of these and other factors, we may not be
able to compete effectively with current or future competitors, which would
have a material adverse effect on our business, operating results and
financial condition.
(11) PRTI/HHPN HAS NO DISTRIBUTION.
PRTI/HHPN had no distribution as of July 5, 2000 and in the future
PRTI/HHPN can be expected to derive a substantial portion of their revenue
from a small number of distributors. A reduction in orders to a significant
distributor could have a material adverse effect on our business, operating
results and financial condition.
(12) PRTI/HHPN MAY BE UNABLE TO HIRE AND RETAIN THE SKILLED PERSONNEL WE NEED TO
SUCCEED.
Qualified personnel are in great demand throughout the software industry.
Our success depends in large part upon our ability to attract, train,
motivate and retain highly skilled employees, particularly software
engineers and other senior personnel. Our failure to attract and retain the
highly trained technical personnel that are integral to our product
development, service and support teams may limit the rate at which we can
generate sales and develop new products or product enhancements. This could
have a material adverse effect on our business, operating results and
financial condition.
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(13) OUR FAILURE TO PROPERLY MANAGE OUR GROWTH COULD STRAIN OUR RESOURCES AND
ADVERSELY AFFECT OUR BUSINESS.
If successful, our failure to manage our rapid growth could have a material
adverse effect on the quality of our products, our ability to retain key
personnel and our business, operating results and financial condition. To
manage future growth effectively we must maintain and enhance our financial
and accounting systems and controls, integrate new personnel and manage
expanded operations.
(14) IF WE LOSE THE SERVICES OF RON WILKINS, MICHAEL BAHLO OR MICHAEL LAMB OUR
BUSINESS WOULD SUFFER.
Our future success depends to a significant degree on the skills,
experience and efforts of our President, Ron Wilkins and other Directors or
Officers such as Michael Bahlo and Michael Lamb. The loss of the services
of these Officers and/or Directors, as well as key employees enhancing
XLiRAD, could have a material adverse effect on our business, operating
results and financial condition. We also depend on the ability of our
executive officers and other members of senior management to work
effectively as a team. The Company is in the process of developing and
executing employment agreements with our executive officers. The Company
does not have any key person life insurance on any Officer or Director.
(15) CONFLICTS OF INTEREST
The Company's Directors and Officers are, or may become, in their
individual capacities, officers, directors, controlling shareholders and/or
partners or other entities engaged in a variety of businesses. Thus, there
exist potential conflicts of interest including, among other things, time,
effort, and corporate opportunity, involved in participation with other
business entities.
(16) CONTROL BY THE MANAGEMENT
The Officers and Directors of the Company currently own approximately 77%
of the outstanding common stock of the Company. Accordingly, the Board of
Directors and the Officers of the Company will exercise control over the
Company, including control over the election of directors and the
appointment of officers of the Company.
(17) OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT ITS PROPRIETARY TECHNOLOGY.
Our success depends to a significant degree upon the protection of any
future software and other proprietary technology. The unauthorized
reproduction or other misappropriation of our technology could enable third
parties to benefit from such technology without paying for it. This could
have a material adverse effect on our business, operating results and
financial condition.
If we resort to legal proceedings to enforce our intellectual property
rights, the proceedings could be burdensome and expensive and could involve
a high degree of risk.
(18) CLAIMS BY OTHER COMPANIES THAT HHPN INFRINGES THEIR COPYRIGHTS OR PATENTS
COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
If any of our future products violate third party proprietary rights, we
may be required to re-engineer its product or seek to obtain licenses from
third parties to continue to offer the product. Any efforts to re- engineer
our future products or obtain licenses on commercially reasonable terms may
not be successful, and, in any case, would substantially increase our costs
and have a material adverse effect on our business, operating results and
financial condition. We have not conducted comprehensive patent searches to
determine whether the technology used in its products infringes patents
held by third parties. In addition, product development is inherently
uncertain in a rapidly evolving technological environment in which there
may be numerous patent applications pending, many of which are confidential
when filed, with regard to similar technologies.
In addition, any claim of infringement could cause us to incur substantial
costs defending against the claim, even if the claim is invalid, and could
distract our management from our business. A party making a claim also
could secure a judgment that requires us to pay substantial damages. A
judgment could also include an injunction or other court order that could
prevent us from selling our products. Any of these events could have a
material adverse effect on our business, operating results and financial
condition.
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(19) NO DIVIDENDS ANTICIPATED TO BE PAID
The Company has never paid any dividends and does not anticipate paying
dividends in the foreseeable future. The future payment of dividends is
directly dependent upon our future earnings, our financial requirements and
other factors to be determined by the Board of Directors.
(20) THE PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
The price of our common stock has been and may continue to be volatile. The
price of our common stock may fluctuate significantly in response to a
number of events and factors relating to our company, our competitors and
the market for our products, such as:
- quarterly variations in our operating results;
- announcements of new technological innovations or new products by our
competitors;
- changes in financial estimates and recommendations by securities
analysts; and - news relating to trends in our markets.
In addition, the stock market in general, and the market prices for
start-up companies, in particular, have experienced extreme volatility that
often has been unrelated to the operating performance of these companies.
These broad market and industry fluctuations may adversely affect the
market price of our common stock, regardless of our operating performance.
Our stock closed at $7.00 on December 31, 1999; at $16.00 on March 31, 2000
and at $10.00 on July 31, 2000.
Recently, when the market price of a stock has been volatile, holders of
that stock have often instituted securities class action litigation against
the company that issued the stock. If any of our stockholders brought such
a lawsuit against us, we could incur substantial costs defending the
lawsuit. The lawsuit could also divert the time and attention of our
management.
(21) WE WILL NEED TO INVEST IN HHPN, OPERATIONS AND ON THE LAUNCH OF XLIRAD.
Pursuant to the agreement with HHPN dated November 3, 1999, the Company
exercised its option on February 10, 2000 to fund HHPN a minimum of $17,000
per month up to a maximum of $200,000 per month until the Company has paid
a total of $2,500,000 for 50% of the issued and outstanding shares of HHPN.
As of August 29, 2000 the Company had paid HHPN the sum of $417,802.
Additional sums must be invested in HHPN to complete payment for the option
exercise and to defray the costs of further development and additional
staffing to support the launch of XLiRAD. PRTI will incur substantial
marketing and sales costs and retain additional staff to launch XLiRAD and
there can be no assurance that any of these efforts will result in revenues
to the Company.
Although we believe that the expectations reflected in any forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements.
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(4) Liquidity and Capital Resources
The reports of our independent certified public accountants on the accompanying
interim financial statements and our annual year end financial statements, as of
October 31, 1999, contain an explanatory paragraph indicating factors which
create substantial doubt about our ability to continue as a going concern. These
factors include recurring net losses for fiscal year 1999 and uncertainty
surrounding future equity financing through anticipated offerings. As of the
date of each respective report, the Company was without viable operations or
significant assets and was dependent upon certain significant shareholders to
provide sufficient working capital.
The Company's ability to implement its business plan is dependent upon obtaining
adequate financial resources. The Company has been engaged in various
exploratory discussions with prospective investors. While no specific terms have
been negotiated, a due diligence process has begun on behalf of some investors
who are considering a equity investment in the company. No assurance can be made
that a private placement or public offering of Company's equity will be
successful. In such an instance the Company intends to rely upon certain
shareholders to meet future financing needs for the remainder of fiscal year
2000 while the Company pursues other financing alternatives.
At July 31, 2000, the Company had cash and cash equivalents of approximately
$112,298 compared to $-0- at July 31, 1999. Working capital, defined as current
assets less current liabilities, was approximately ($198,528) at July 31, 2000
as compared to $-0- at July 31, 1999. The Company had current assets of
approximately $112,298 and cumulative stockholders' equity of $179,327 at July
31, 2000 compared to current assets of $-0- and cumulative stockholders' deficit
of $(306,621) at July 31, 1999.
The Company had minimal capital expenditures for the nine months ended July 31,
2000. However, the Company anticipates that it will need to purchase the
appropriate equipment in the near future to implement the launch of its
products.
Net cash flow provided by financing activities increased from $-0- at July 31,
1999 to $1,288,000 for the period ended July 31, 2000. The increase is primarily
due to the proceeds from exercised stock options and a private placement of
restricted stock. Initial working capital during Fiscal 2000 was provided by a
loan from the Company's President and Chief Executive Officer, which was
subsequently repaid during the first six months of Fiscal 2000. The Company has
not paid dividends in prior periods and does not intend to pay cash dividends in
the foreseeable future.
On February 10, 2000, as part of a private placement, the company issued 80,000
shares at a price of $2.50 per share for total gross proceeds of $200,000. As
part of the placement, 6,000 warrants were issued with a strike price of $3 and
a term of one year, and fees of $16,500 were paid.
On May 5, 2000, as part of a private placement, the company issued 30,000 shares
at a price of $5.00 per share for total gross proceeds of $150,000. As part of
the placement, 15,000 warrants were issued with a strike price of $10 and a term
of two years. No fees were paid.
On June 2, 2000, as part of a private placement, the Company issued 4,000 shares
at a price of $6.25 per share for total gross proceeds of $25,000. As part of
the placement, 4,000 fee warrants were issued with a strike price of $7.50 and a
term of 2 years.
On July 31, 2000, as part of a private placement, the Company sold 10,000 shares
at a price of $5.00 per share for total gross proceeds of $50,000. As of the
date of this transaction, "fair value" of the common stock issued was
approximately $50,000 based on the discounted closing price of the company's
common stock. Therefore no charge to compensation expense was required.
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On April 12, 2000, the Company entered into a $10 million equity investment line
agreement with Eurofund Derivatives Ltd., which replaced a January 25, 2000
agreement for a $4 million equity investment line. The Company issued to
Eurofund Derivatives a Class A Warrant with an aggregate warrant exercise price
of $10,000,000. The proposed maximum amount which can be exercised at any one
time is $1,000,000. Eurofund may not exercise the warrant until the Company
notifies Eurofund Derivatives to do so by issuing notice in writing. Eurofund
may then exercise the warrant but such exercise is dependant on market
conditions and therefore there is no guarantee that the warrant will ever be
exercised.
On April 19, 2000, the Company was granted a listing by the Deutsche Boerse AG
to begin trading on the Third Market Segment of the Frankfurt Stock Exchange.
The trading symbol is "PHU" and the German securities code is 898 258. The
Company's trades are facilitated by Berliner Freiverkehr AG, a major German
investment banking and brokerage firm. The Geneva Group Inc. facilitated the
Frankfurt listing and, in conjunction with Teamwork Kommunikations Gmbh., will
act as a consultant to the Company concerning investor relations, introductions
to strategic partners and corporate financing activities in Europe.
(5) Year 2000 Considerations
The Year 2000 (Y2K) date change was believed to affect virtually all computers
and organizations. The Company undertook a comprehensive review of its
information systems, including personal computers, software and peripheral
devices, and its general communications systems during 1999 and made all
necessary modifications, upgrades or replacements that it believed were
necessary to address its potential internal Y2K exposures.
The Company also held discussions with its significant suppliers, shippers,
customers and other external business partners related to their readiness for
the Y2K date change.
The costs associated with the Y2K date change compliance did not have a material
effect on the Company's financial position or its results of operations. The
Company has experienced no negative impact from any potential Y2K issues through
March 31, 2000. However, there can be no continued assurance that all of the
Company's systems and the systems of its suppliers, shippers, customers or other
external business partners will continue function adequately.
Part II - Other Information
Item 1 - Legal Proceedings
See Notes to the Financial Statements
Item 2 - Changes in Securities
On May 2, 2000, the Company granted options to purchase 500 shares of the
Company's common stock at an exercise price of $0.01 per share under the
1999 Nonqualifying Stock Option Plan to consultant, Patrick McEvoy. On May
4, 2000, options to purchase 500 common shares were exercised by Patrick
McEvoy; and the shares issued for total proceeds of $5.00 to the Company.
The quoted market price of the Company's stock at the date of exercise was
approximately $13.25. The difference between the exercise price and the
market price of the Company's stock was charged to operations on the
exercise date for the above exercise of stock options.
On May 23, 2000, options to purchase 1,500 common shares were exercised by
Peter Somogyi; and the shares issued for total proceeds of $ 10,500 to the
Company. The quoted market price of the Company's stock at the date of
exercise was approximately $13.00. The difference between the exercise
price and the market price of the Company's stock was charged to operations
on the exercise date for the above exercise of stock options. On May 31,
2000, Jason Lee and Peter Somogyi rescinded an aggregate total of 75,000
options.
On June 26, 2000, the Company granted qualified options to purchase 200,000
shares of the Company's common stock at an exercise price of $8.50 per
share under the amended 1999 Option Plan to Ronald J. Wilkins, the
Company's new President and Chief Executive Officer.
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On July 17, 2000, the Company granted qualified options to purchase 100,000
shares of the Company's common stock at an exercise price of $9.125 per
share under the amended 1999 Option Plan to Michael Bahlo, the Company's
new Executive Vice-President, Sales & Marketing.
On July 17, 2000, the Company granted qualified options to purchase 100,000
shares of the Company's common stock at an exercise price of $10.125 per
share under the amended 1999 Option Plan to Michael Lamb, the Company's new
Chief Operating Officer.
On July 31, 2000, non-qualified options to purchase 100,000 common shares
were granted to Ben Traub, Chairman of the Board in consideration of the
value of ongoing services and assistance provided to the Company and to
reimburse him for expenses thereby incurred. On July 31, 2000, 39,000 of
these options were exercised by Mr. Traub under the Amended 1999 Stock
Option Plan. These options were exercised specifically for retiring the
$100,000 CFGi loan to the Company on July 25, 2000, for private share
transfers for PRTI expenses totaling $179,754.38, CFGi's out of pocket PRTI
expenses totaling $95,245.62, and Mr. Traub's out of pocket expenses of
$15,000.00. The closing market price of the Company's stock at the date of
exercise was $10.00. There was no difference between the exercise price and
the market price of the Company's stock on the exercise date of the stock
options; therefore no charge was made to operations.
Item 3 - Defaults on Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
On July 21, 2000, the Company held its Annual General Meeting of Shareholders.
There were 6,775,360 shares represented at this meeting out of 9,696,100 shares
issued and outstanding at the date of the Company's proxy statement. This amount
represents approximately 69.88%, which represented a valid quorum. No proxies
were received related to the Company's circulated proxy statement.
The following actions were taken at this meeting
(1) Election of Directors: 6,775,360 votes For; -0- Against
Benjamin Traub - Chairman of the Board
Ellen Luthy - Secretary and Treasurer
Rob Seitz - Director
Dick Monson - Director
Warren Gacsi - Director
(2) Adoption of the Amended 1999 Stock Option Plan: 6,775,360 votes For; -0-
Against
(3) Ratification of the Actions of the Board of Directors during the preceding
year: 6,775,360 votes For; -0- Against
(4) Affirmation of the Company's mandate to pursue possible acquisition of
various entities with technology synergistic to that of the Company and
with established revenues, distribution channels and marketing expertise:
6,775,360 votes For; -0- Against
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Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
--------------------------------------------------------------------------------
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Phoenix Resources Technologies, Inc.
September 13 , 2000 /s/ Ron Wilkins
-------- ------------------------------------
Ron Wilkins
President and CEO
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