PHOENIX RESOURCES TECHNOLOGIES INC
Filing Type: 10QSB / A
Description: Amended Quarterly Report
Filing Date: July 21, 2000
Period End: Apr 30, 2000
Primary Exchange: Over the Counter Includes OTC
and OTCBB
Ticker: PRTI
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB/A
(Mark one)
XX QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
---- OF 1934
For the quarterly period ended April 30, 2000
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
----
For the transition period from ______________ to _____________
Commission File Number: 000-19708
Phoenix Resources Technologies, Inc.
(Exact name of small business issuer as specified in its charter)
Nevada 84-1034982
------------------------ ------------------------
(State of incorporation) (IRS Employer ID Number)
15945 Quality Trail North, Scandia MN 55073
-------------------------------------------
(Address of principal executive offices)
(888) 709-3975
--------------
(Issuer's telephone number)
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: May 26, 2000: 9,665,100
Transitional Small Business Disclosure Format (check one): YES NO X
--- ---
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Phoenix Resources Technologies, Inc.
Form 10-QSB/A for the Quarter ended April 30, 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 27
Item 2 Changes in Securities 27
Item 3 Defaults Upon Senior Securities 29
Item 4 Submission of Matters to a Vote of Security Holders 29
Item 5 Other Information 29
Item 6 Exhibits and Reports on Form 8-K 29
Signatures 30
This filing corrects certain unintentional clerical errors in reporting the cash
received on sales of common stock and exercise of stock options, ambiguities in
describing the terms of Option 1, omission in reporting the difference between
price of common stock sold and its "fair value" as a charge to compensation
expense, and provides discussion of risk factors not previously included in the
original filing.
2
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S. W. HATFIELD, CPA
certified public accountants
Member: American Institute of Certified Public Accountants
SEC Practice Section
Information Technology Section
Texas Society of Certified Public Accountants
Item 1 - Part 1 - Financial Statements
Accountant's Review Report
Board of Directors and Shareholder
Phoenix Resources Technologies, Inc.
We have reviewed the accompanying balance sheets of Phoenix Resources
Technologies, Inc. (a Nevada corporation) as of April 30, 2000 and 1999 and the
accompanying statements of operations and comprehensive income for the six and
three months ended April 30, 2000 and 1999 and statements of cash flows for the
six months ended April 30, 2000 and 1999. These financial statements are
prepared in accordance with the instructions for Form 10-QSB, as issued by the
U. S. Securities and Exchange Commission, and are the sole responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression on an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be 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 A to the
financial statements, the Company has no viable operations or significant assets
and is dependent upon significant shareholders to provide sufficient working
capital to maintain the integrity of the corporate entity. These circumstances
create substantial doubt about the Company's ability to continue as a going
concern and are discussed in Note A. The financial statements do not contain any
adjustments that might result from the outcome of these uncertainties.
S. W. HATFIELD, CPA
Dallas, Texas
May 26, 2000
P. O. Box 820395 9002 Green Oaks Circle, 2nd Floor
Dallas, Texas 75382-0395 Dallas, Texas 75243-7212
214-342-9635 (voice) (fax) 214-342-9601
800-244-0639 [email protected]
3
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<TABLE>
<CAPTION>
Phoenix Resources Technologies, Inc.
Balance Sheets
April 30, 2000 and 1999
(Unaudited)
April 30, April 30,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
------
Current Assets
Cash on hand and in bank $ 15,922 $ -
------------ ------------
Other Assets
Option to acquire an unrelated entity 264,871 -
------------ ------------
Total Assets $ 280,793 $ -
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities
Accounts payable to related party $ 10,097 $ -
Judgment payable - 306,621
------------ ------------
Total current liabilities 10,097 306,621
------------ ------------
Commitments and Contingencies
Shareholders' Equity
Preferred stock - $0.001 par value.
50,000,000 shares authorized.
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.
100,000,000 shares authorized.
9,665,100and 272,400 shares issued
and outstanding, respectively 9,665 272
Additional paid-in capital 17,843,322 13,338,940
Accumulated deficit (16,778,291) (12,672,633)
------------ ------------
1,074,696 666,779
Stock subscription receivable (70,600) (240,000)
Treasury stock - at cost (560,000 shares) (733,400) (733,400)
------------ ------------
Total shareholders' equity 270,696 (306,621)
------------ ------------
Total Liabilities and Shareholders' Equity $ 280,793 $ -
============ ============
</TABLE>
See Accountant's Review Report.
The accompanying notes are an integral part of these financial statements.
4
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<TABLE>
<CAPTION>
Phoenix Resources Technologies, Inc.
Statements of Operations and Comprehensive Income
Six and Three months ended April 30, 2000 and 1999
(Unaudited)
Six months Six months Three months Three months
ended ended ended ended
April 30, April 30, April 30, April 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ - $ - $ - $ -
---------- ---------- ---------- ----------
Expenses
Consulting, legal and
professional fees 2,154,185 - 2,139,252 -
Management fees to
related party 210,000 - 105,000 -
Other general and
administrative fees 53,031 - 48,900 -
Compensation expense for
issuances of common
stock at less than
"fair value" 1,680,075 - 1,537,325 -
---------- ---------- ---------- ----------
Total expenses 4,097,291 - 3,830,477 -
---------- ---------- ---------- ----------
Loss from continuing operations
before income taxes and other
income (expenses) (4,097,291) - (3,830,477) -
Other income (expenses)
Interest income and other 12 - 12 -
Interest on judgment payable - (13,310) - (6,555)
---------- ---------- ---------- ----------
Loss before income taxes (4,097,279) (13,310) (3,830,465) (6,655)
Income tax expense - - - -
---------- ---------- ---------- ----------
Net Loss (4,097,279) (13,310) (3,830,465) (6,655)
Other comprehensive income - - - -
---------- ---------- ---------- ----------
Comprehensive Loss $(4,097,279) $(13,310) $(3,830,465) $ (6,555)
========= ========== =========== ==========
Loss per share of common stock
outstanding, computed on net loss
- basic and fully diluted $(0.44) $(0.01) $(0.40) $(0.02)
==== ==== ==== ====
Weighted-average number of
shares outstanding 9,301,281 272,400 9,466,156 272,400
========= ========== =========== ==========
</TABLE>
See Accountant's Review Report.
The accompanying notes are an integral part of these financial statements.
5
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<TABLE>
<CAPTION>
Phoenix Resources Technologies, Inc.
Statements of Cash Flows
Six months ended April 30, 2000 and 1999
(Unaudited)
Six months Six months
ended ended
April 30, April 30,
2000 1999
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $(4,097,279) $ (13,310)
Adjustments to reconcile net income to net cash
provided by operating activities
Compensation expense for issuances of
common stock at less than "fair value" 1,680,075 -
Common stock issued for consulting expenses 2,090,175 -
Increase (decrease) in
Accounts payable to a related party 10,097 -
Judgment payable - 13,310
----------- -----------
Net cash provided by operating activities (316,932) -
----------- -----------
Cash Flows from Investing Activities
Cash advanced for option to acquire
an unrelated entity (261,646) -
----------- -----------
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 611,000 -
Cash paid to facilitate sale of common stock (16,500) -
----------- -----------
Net cash provided by financing activities 594,500 -
----------- -----------
Increase in Cash and Cash Equivalents 15,922 -
Cash and cash equivalents at beginning of period - -
----------- -----------
Cash and cash equivalents at end of period $ 15,922 $ -
=========== ===========
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>
See Accountant's Review Report.
The accompanying notes are an integral part of these financial statements.
6
<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 has 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 does 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.
7
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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 April 30, 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 April 30, 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, the Company acquired by assignment an option to purchase up
to 100% of HHPN Development Corporation (HHPN), an unrelated company located in
San Diego, California. HHPN has 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% of HHPN for $2,500,000, to be paid in
monthly installments of between $17,000.00 and $200,000.00 per month, pursuant
to a budget acceptable to the Boards of both HHPN and the Company. As of April
30, 2000, the Company has paid a total of approximately $265,000 in such
installments, either directly to or on behalf of HHPN. The Company also has
options to purchase an additional 25% interest in HHPN for $50,000,000 and the
remaining 25% interest for $125,000,000. 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. These
options expire on February 10, 2002.
8
<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.
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.
9
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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.
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."
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.
10
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Phoenix Resources Technologies, Inc.
Notes to Financial Statements - Continued
Note 7 - Stock Options - continued
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, an 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, an 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.
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.
11
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Phoenix Resources Technologies, Inc.
Notes to Financial Statements - Continued
Note 7 - Stock Options - continued
On February 16, 2000, the Company granted options to purchase 5,000 shares of
the Company's common stock at an exercise price of $0.01 per share under the
1999 Nonqualifying Stock Option Plan to the law firm, Duane Morris & Heckscher
for legal services.
On February 17, 2000, options to purchase 5,000 common shares were exercised by
Duane Morris Heckscher; and the shares issued for total proceeds of $50 to the
Company. The quoted market price of the Company's stock at the date of exercise
was approximately $16.25. 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 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.
12
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Phoenix Resources Technologies, Inc.
Notes to Financial Statements - Continued
Note 7 - Stock Options - continued
On April 28, 2000, the Company granted options to purchase 5,000 shares of the
Company's common stock at an exercise price of $0.01 per share under the 1999
Nonqualifying Stock Option Plan to the law firm, Duane Morris & Heckscher.
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 in
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.
The following table summarizes all options granted from December 31, 1999
through April 30, 2000:
Options Options Options Options Exercise price
granted exercised terminated outstanding per share
------- --------- ---------- ----------- --------------
745,000 292,000 298,000 155,000 $0.01 - $7.00
======= ======= ======= =======
The weighted average exercise price of all issued and outstanding options at
April 30, 2000 was approximately $6.77.
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.
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Phoenix Resources Technologies, Inc.
Notes to Financial Statements - Continued
Note 8 - Litigation - continued
Agricultural Protection Credit Association - continued
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.
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 management of the company's affairs including: acquisition of projects,
raising monies, administration (i.e. bookkeeping, photocopying, faxing, office
space, telephone charges, supplies, news dissemination) and other related
operational costs. Cyclone has billed the Company a total of $210,000 for the
period from November 1, 1999 through April 30, 2000 and the Company has an
outstanding balance due Cyclone of approximately $10,000 as of April 30, 2000.
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Phoenix Resources Technologies, Inc.
Notes to Financial Statements - Continued
Note 9 - Related Party Commitments
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.
Note 11 - Subsequent Events
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 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 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.
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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) Plan of Operations
The Company has been reorganized and its operations to date have been in the
areas of setting up its organization and financing. The Company has exercised an
option to acquire a 50% interest in HHPN Development Corp. and its products.
HHPN Development Corp., has created a suite of Web development tools, also known
as a web application server, code named DBPanacea, which are 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. 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. In the six 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 had
no operating revenue in the last two years. The Company has incurred aggregate
general and administrative expenses of approximately $2,417,216. Further, the
Company has charged operations approximately $1,320,000 for the 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 six months ended April 30, 2000 was $(0.40).
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 April 30, 2000, the
Company has paid a total of approximately $265,000.00 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.
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.
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.
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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 edition and
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 advantages and there is no guarantee that it
will be able to do so. Most of the Company's existing competitors have more
resources, which will make it difficult for the Company to compete.
There are certain risk factors associated with the Company and products
including XLiRAD which are described in what follows. In such description the
Company is referred to as "We", with "Our" denoting the possessive.
(2) a) 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 $21,689.
For the three months ended January 31, 2000 we had generated no revenue and a
net loss of $291,577. We expect to increase expenditures in several areas of our
business, particularly in sales and marketing in order to execute our Business
Plan.
b) 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. 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.
c) SUBSTANTIAL DILUTION TO NEW INVESTORS
At April 30, 2000 we had a net tangible book value of $270,696 or
approximately $0.03 per share of common stock. 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. After giving effect
to the receipt of the maximum estimated net proceeds from our sale of the
250,000 units containing 250,000 shares of common stock, at the price of $10.00
per unit (after deducting estimated offering expenses payable by us), the net
tangible book value as of April 30, 2000, would have been approximately
$2,770,696 or $0.30 per share of common stock. This would represent an immediate
increase in the net tangible book value per share of common stock of $0.27 to
existing shareholders and an immediate dilution of $9.70 per share to new
investors purchasing our units in the offering. Dilution is determined by
subtracting net tangible book value per share after the offering from the
offering price to investors.
d) DISAPPOINTING QUARTERLY REVENUE AND OPERATING RESULTS COULD CAUSE
THE PRICE OF OUR COMMON STOCK TO FALL.
Our quarterly revenue and operating results are difficult to predict
and may fluctuate significantly from quarter to quarter. If our quarterly
revenue or operating results fall below the expectations of investors, the price
of our common stock could fall substantially. As of July 3, 2000, 4,900 shares
of our common stock traded with a high of $10.75, a low of $10.00 and a closing
price of $10.00.
Our quarterly revenue may fluctuate for several reasons, including the
following:
- the market for web application servers and related database
software is in an early stage of development and it is
therefore difficult to accurately predict customer demand; and
- the sales cycle for the Company's products is expected to
vary substantially from customer to customer. As a result, we
have difficulty determining whether and when we will receive
license revenue from a particular customer.
Most of our expenses, such as employee compensation and rent, are
relatively fixed. Moreover, our expense levels are based, in part, on our
expectations regarding future revenues. As a result, any shortfall in revenue in
relation to our expectations could cause significant changes in our operating
results from quarter to quarter and could result in quarterly losses.
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e) 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. 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.
f) 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.
g) OUR FUTURE SUCCESS WILL DEPEND ON THE COMPANY'S ABILITY TO MARKET
AND SELL XLIRAD SUCCESSFULLY.
We expect that our future financial performance will depend
substantially upon sales of XLiRAD. The Company does not know when it will begin
commercial shipments of the XLiRAD product. Market acceptance of XLiRAD will
depend on the market for database software applications and customer demand for
the specific functionality of XLiRAD. We cannot assure you that either will
occur. In addition, we cannot assure you that XLiRAD will meet the performance
needs or expectations of our customers when shipped or that it will be free of
significant software defects or bugs. If XLiRAD does not meet customer needs or
expectations, for whatever reason, the Company's reputation could be damaged, or
HHPN could be required to upgrade or enhance the XLiRAD product, which could be
costly and time consuming.
h) OUR BUSINESS WILL BE ADVERSELY AFFECTED IF THE INTERNET DOES NOT
BECOME A VIABLE AND SUBSTANTIAL COMMERCIAL MEDIUM.
Our future success will depend upon the widespread adoption of the
Internet as a primary medium for commerce and other business applications. If
the Internet does not become a viable and substantial commercial medium, our
business, operating results and financial condition will be materially adversely
affected. The Internet has experienced, and is expected to continue to
experience, significant user and traffic growth. This growth has, at times,
caused user frustration with slow access and download times. The Internet
infrastructure may not be able to support the demands placed on it by continued
growth. Moreover, critical issues concerning the commercial use of the Internet,
such as security, reliability, cost, accessibility and quality of service,
remain unresolved and may negatively affect the growth of Internet use or the
attractiveness of commerce and business communication on the Internet. In
addition, the Internet could lose its viability due to delays in the development
or adoption of new standards and protocol to handle increased activity. As
commercial use of the Internet increases, federal, state and foreign agencies
could adopt regulations covering issues such as user privacy, content and
taxation of products and services. If enacted, government regulations could
limit the market for our products and services.
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i) 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.
j) REGULATIONS OR CONSUMER CONCERNS REGARDING PRIVACY ON THE INTERNET
COULD LIMIT MARKET ACCEPTANCE OF XLIRAD
The personalization features of XLiRAD 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.
XLiRAD uses 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 XLiRAD could be reduced.
k) WE COMPETE WITH ALLAIRE, BEA, IBM, ORACLE, MICROSOFT AND VIGNETTE.
We currently 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.
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l) 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.
m) 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.
n) OUR FAILURE TO ATTRACT AND RETAIN COMPETENT SALES PERSONNEL AND
DEVELOP AN EFFECTIVE DISTRIBUTION NETWORK WOULD ADVERSELY AFFECT OUR REVENUE
GROWTH AND FINANCIAL CONDITION.
In order for us to meet our revenue targets, we must attract competent
sales personnel and develop an effective distribution network with indirect
channel partners, including original equipment manufacturers, value-added
resellers and systems integrators. A failure to do so could have a material
adverse effect on our business, operating results and financial condition. There
is intense competition for sales personnel in our business, and there can be no
assurance that we will be successful in attracting, integrating, motivating and
retaining new sales personnel. Future channel partners may choose to devote
greater resources to marketing and supporting the products of other companies.
In addition, we will need to resolve potential conflicts among the sales force
and channel partners.
o) PRTI/HHPN HAVE 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.
p) PRTI/HHPN MAY BE UNABLE TO HIRE AND RETAIN THE SKILLED PERSONNEL WE
NEED TO SUCCEED.
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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.
q) THE MARKET FOR WEB APPLICATION SERVERS IS RAPIDLY CHANGING, AND THE
FAILURE OF THE XLIRAD PRODUCT TO SATISFY THE WEB DEVELOPER COMMUNITY WOULD
ADVERSELY AFFECT THE COMPANY'S OPERATING RESULTS.
If the XLiRAD product does not satisfy the web developer community or
otherwise fails to obtain sufficient market acceptance, our business, operating
results and financial condition would be materially adversely affected. We
believe that a significant factor to our initial acceptance will be the
Company's ability to create and maintain strong relationships with the community
of web developers. This community demands rapid improvements in the performance,
features and reliability of our products, as well as a high level of customer
service. Due in part to the emerging nature of the web application server and
related interactive database software and the substantial resources available to
many market participants, we believe there is a limited time in which to achieve
product adoption.
r) OUR EFFORTS TO DEVELOP BRAND AWARENESS MAY BE UNSUCCESSFUL, WHICH
COULD LIMIT OUR ABILITY TO ACQUIRE NEW CUSTOMERS AND GENERATE REVENUE GROWTH.
We believe that developing and maintaining awareness of the "XLiRAD"
brand name is critical to achieving widespread acceptance of the product. If we
fail to promote this brand or incur significant related expenses, our business,
operating results and financial condition could be materially adversely
affected. To promote the XLiRAD brand, we may find it necessary to increase our
marketing budget or otherwise increase our financial commitment to creating and
maintaining brand awareness among potential customers. Competitors that use
marks that are similar to our brand names may cause confusion among actual and
potential customers, which could prevent us from achieving significant brand
recognition.
s) TO BE COMPETITIVE, HHPN MUST CONTINUE TO ENHANCE THE XLIRAD PRODUCT.
To be competitive, HHPN must develop and introduce product enhancements
and new products which increase the customers' ability to develop and deploy Web
applications. If HHPN fail to develop and introduce new products and
enhancements successfully and on a timely basis, it could have a material
adverse effect on our business, operating results and financial condition.
t) 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.
u) IF WE LOSE THE SERVICES OF RON WILKINS, THEODORE STROUT OR JOHN
CARTER OUR BUSINESS WOULD SUFFER.
Our future success depends to a significant degree on the skills,
experience and efforts of our President, Ron Wilkins. In addition the final
development of the HHPN products depends upon the skills, experience and efforts
of Theodore Strout and John Carter. The loss of the services of Ron Wilkins,
Theodore Strout and John Carter 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. We do not have employment agreements with any of our
executive officers, and we do not have any key person life insurance.
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v) 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.
w) 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.
x) OUR SUCCESS DEPENDS ON HHPN's ABILITY TO PROTECT ITS PROPRIETARY
TECHNOLOGY.
Our success depends to a significant degree upon the protection of the
HHPN software and other proprietary technology. The unauthorized reproduction or
other misappropriation of HHPN's 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.
y) CLAIMS BY OTHER COMPANIES THAT HHPN INFRINGES THEIR COPYRIGHTS OR
PATENTS COULD ADVERSELY AFFECT HHPN's FINANCIAL CONDITION.
If any of the HHPN products violate third party proprietary rights,
HHPN 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 the
HHPN product 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. HHPN has 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.
z) OUR BUSINESS COULD BE ADVERSELY AFFECTED IF THE HHPN PRODUCTS FAIL
TO PERFORM PROPERLY.
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Software products as complex as ours may contain undetected errors or
"bugs," which result in product failures or security breaches or otherwise fail
to perform in accordance with customer expectations. The occurrence of errors
could result in loss of or delay in revenue, loss of market share, failure to
achieve market acceptance, diversion of development resources, injury to our
reputation, or damage to our efforts to build brand awareness, any of which
could have a material adverse effect on our business, operating results
condition.
aa) WE COULD INCUR SUBSTANTIAL COSTS AS A RESULT OF PRODUCT LIABILITY
RELATING TO END USERS' CRITICAL BUSINESS OPERATIONS.
bb) Many of the web applications that will be developed and deployed
with the HHPN product will be critical to the operations of the end users'
businesses. Any failure in an end user's web application could result in a claim
for substantial damages against us, regardless of our responsibility for the
failure. HHPN and the Company do not maintain general liability insurance,
including coverage for errors and omissions and there can be no assurance that
any coverage will be available on reasonable terms or will be available in
amounts sufficient to cover one or more large claims, or that if such insurance
is obtained that the insurer will not disclaim coverage as to any future claim.
cc) NO DIVIDENDS ANTICIPATED TO BE PAID
The Company has never paid any dividends and does not anticipate paying
dividends in the forseeable 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.
dd) THE PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE
VOLATILE AND YOU MIGHT NOT BE ABLE TO SELL YOUR SHARES AT A PRICE WHICH EXCEEDS
THE PRICE PAID FOR THE SHARES WHICH ARE CONTAINED IN THE UNIT.
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
Internet-related 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 3, 2000.
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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.
ee) WE WILL INVEST THE PROCEEDS FROM THIS UNIT OFFERING 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 June
14, 2000 the Company had paid HHPN the sum of $334,061. See, Form 10-QSB of the
Company for the quarterly period ended April 30, 2000. 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.
(3) 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 fiscal year 2000
while the Company pursues other financing alternatives.
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At April 30, 2000, the Company had cash and cash equivalents of approximately
$16,000 compared to $-0- at April 30, 1999. Working capital, defined as current
assets less current liabilities, was approximately $6,000 at April 30, 2000 as
compared to $-0- at April 30, 1999. The Company had current assets of
approximately $16,000 and cumulative stockholders' equity of $270,696 at April
30, 2000 compared to current assets of $-0- and cumulative stockholders' deficit
of $(306,621) at April 30, 1999.
The Company had no capital expenditures for the six months ended April 30, 2000.
However, t he Company anticipates that it will need to purchase equipment in the
near future to implement the launch of its products.
Net cash flow provided by financing activities increased from $-0- at April 30,
1999 to $594,500 for the period ended April 30, 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 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.
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<PAGE>
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.
(4) 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.
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26
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Part II - Other Information
Item 1 - Legal Proceedings
See Notes to the Financial Statements
Item 2 - Changes in Securities
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.
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.
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."
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, an 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.
27
<PAGE>
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, an 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.
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 10, 2000, the Company sold 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 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 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 February 16, 2000, the Company granted options to purchase 5,000 shares
of the Company's common stock at an exercise price of $0.01 per share under
the 1999 Nonqualifying Stock Option Plan to the law firm, Duane Morris &
Heckscher for legal services.
On February 17, 2000, options to purchase 5,000 common shares were
exercised by Duane Morris & Heckscher; and the shares issued for total
proceeds of $50 to the Company. The quoted market price of the Company's
stock at the date of exercise was approximately $16.25. 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 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
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<PAGE>
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.
On April 28, 2000, the Company granted options to purchase 5,000 shares of
the Company's common stock at an exercise price of $0.01 per share under
the 1999 Nonqualifying Stock Option Plan to the law firm, Duane Morris &
Heckscher.
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 in 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 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.
Item 3 - Defaults on Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
The Company has held no regularly scheduled, called or special meetings of
shareholders during the reporting period.
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
10.5 Equity Line Agreement by and between Phoenix Resources Technologies,
Inc. and Eurofund Derivatives Ltd. on April 12, 2000
10.6 Investor Relations Agreement by and between Phoenix Resources
Technologies, Inc. and Teamwork Kommunikations, GmbH
10.7 Consulting Agreement by and between Phoenix Resources Technologies,
Inc. and The Geneva Group, Inc.
27.1 Financial Data Schedule
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(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.
May 30 , 2000 /s/ Benjamin E. Traub
-------- -----------------------
Benjamin E. Traub
President and Director
30
