UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant To Section 13 Or 15(D) Of The Securities Exchange
Act Of 1934; For The Fiscal Year Ended: June 30, 1999
Or
[ ] Transition Report Pursuant To Section 13 Or 15(D) Of The Exchange Act
Of 1934
Commission File Number: 000-25496
HYPERDYNAMICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 87-0400335
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2656 South Loop West, Suite 103
Houston, Texas 77054
(Address of principal executive offices, including zip code)
(713) 839-9300
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on which Registered
---------------------- ---------------------
N/A N/A
Securities registered pursuant to 12(g) of the Exchange Act:
Title of Each Class
Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
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Issuer's revenues for the year ended June 30, 1999 were $1,498,124. The
aggregate market value of Common Stock held by non-affiliates of the registrant
at September 14, 1999, based upon the last reported sales prices on the OTCBB
was $4,020,878 . As of September 14, 1999, there were 12,409,503 Shares of
Common Stock outstanding.
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TABLE OF CONTENTS
PART I
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Item 1 Business 3
Item 2 Properties 12
Item 3 Legal Proceedings 12
Item 4 Submission of Matters to a Vote of Security Holders 13
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 14
Item 6 Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
Item 7 Financial Statements 19
Item 8 Changes in and Disagreements With Accountants in Accounting and
Financial Disclosure 19
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of The Exchange Act 20
Item 10 Executive Compensation 22
Item 11 Security Ownership of Certain Beneficial Owners and Management 24
Item 12 Certain Relationships and Related Transactions 26
Item 13 Exhibits and Reports on Form 8-K 26
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PART I
Item 1 BUSINESS
Historical Background of Business
The Company changed its name to HyperDynamics Corporation in January 1997. The
Company was formerly known as RAM-Z Enterprises, Inc. and was incorporated under
the laws of the State of Utah on July 29, 1983. The Company was formed
originally for the purpose of investing in one or more high-technology products,
such as medical devices, computer hardware and software or such other products
that the Company deemed advisable. The Company went public on December 19, 1983,
pursuant to a Regulation D offering. The Company sold 5,000,000 shares at $0.02
cents per share. The aggregate dollar amount raised in the Regulation D offering
was one hundred thousand dollars ($100,000). After several unsuccessful
investments and higher than expected operating expenses, the Company did not
have the funds necessary to continue its business operation after 1985. On May
17, 1994 the management formed a Delaware corporation named RAM-Z Enterprises,
Inc., for the purpose of merging with and changing the domicile of the Company.
The State of Utah approved the merger on May 27, 1994. The merger of the two
companies was on the basis of one share of common stock exchanged for one share
of common stock in the surviving corporation.
On August 26, 1996 a reorganization was completed. This reorganization was
pursuant to an Agreement and Plan of Reorganization (the Plan). The parties to
the Plan were RAM-Z Enterprises, Inc. (the "Company"), its Principal
Stockholders, HyperDynamics Corporation, a Texas corporation, and certain
stockholders of HyperDynamics, who owned more than eighty percent (80%) of the
outstanding voting securities of HyperDynamics and who executed and joined in
the Plan. The HyperDynamics Stockholders became the controlling stockholders of
the Company in a business combination transaction that was effected in the form
of a "reverse acquisition". Immediately prior to the completion of the Plan, the
Company had no material assets, liabilities or business operations. The "reverse
acquisition" by RAM-Z was accounted for by the purchase method of accounting in
the fiscal year ended June 30, 1997. Consequently, all prior financial statement
history of RAM-Z is eliminated in the combination.
HyperDynamics was formed March 7, 1996, to facilitate the acquisitions of one or
more computer hardware/services-related companies, and to facilitate the merger
with RAM-Z, which was a registered 12(g) company under the Securities Act of
1934, as amended, with no recent ongoing operations to date. Houston Creative
Connections, Inc. ("HCCI") and MicroData Systems, Inc. ("MDS") were acquired by
HyperDynamics on August 15, 1996, in transactions accounted for as poolings of
interest.
At the time of the adoption of the Plan, the Company had 50,000,000 shares of
voting common stock issued and outstanding. As a condition to the Plan, which
was an exchange agreement between the Company and the HyperDynamics
Stockholders, the stockholders approved and the Company effected a share
consolidation or reverse split in the ratio of one post-consolidation share for
every 44.428648 pre-consolidation shares held by a stockholder. This was done
provided, however, that no single stockholder's share ownership was reduced to
fewer than 100 post-consolidation shares.
The consideration used by the HyperDynamics Stockholders to acquire their
respective interests in the Company was 4,577,000 shares of $0.001 par value
common voting stock of HyperDynamics, amounting to one hundred percent (100%) of
the outstanding voting securities of HyperDynamics, for 4,577,000
post-consolidation shares of $0.001 par value common voting stock of the Company
in addition to issuing an additional 355,000 shares to financial advisors.
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HCCI and MDS had the opportunity, under certain circumstances, to rescind their
portions of the merger transaction on or before June 30, 1997.
Divestiture of Houston Creative Connections, Inc. ("HCCI")
On February 6, 1997, the Company, through its subsidiary, HyperDynamics
Corporation, a Texas corporation ("HyperDynamics"), divested its subsidiary,
HCCI. HyperDynamics acquired HCCI in July 1996 and HCCI operated as a wholly
owned subsidiary of HyperDynamics pursuant to the terms of a share exchange and
acquisition agreement called the HCCI Reorganization Agreement (the "HCCI
Reorganization Agreement"). HyperDynamics entered into an Agreement and Plan of
Reorganization with the Company in August 1996. In February, 1997, the former
shareholders of HCCI and the Company (the "Parties") agreed that the original
business objectives envisioned at the time of the HCCI Reorganization Agreement
had not been achieved, and that each of the Parties had unique management
styles. The Parties agreed that the business objectives and goals of the Company
and HCCI were not compatible and that it would be in the best interests of the
Parties to pursue their goals and objectives independent of one another. The
Parties further agreed that certain other conditions as contemplated by the HCCI
Reorganization Agreement had not been satisfied as of that time. On February 7,
1997, the Parties entered into a Divestiture Agreement in which the former
shareholders of HCCI agreed to deliver 2,102,000 shares of the Company's common
stock to the Company, and the Company agreed to deliver 1,000 shares of HCCI
common stock to the former shareholders of HCCI. This represented a complete
unwinding of the consideration of the Parties under the HCCI Reorganization
Agreement. The 2,102,000 shares of the Company's common stock were canceled. A
significant portion of the Company's Assets were divested in connection with the
Divestiture Agreement.
Adjustment and correction of valuation of MDS
In January of 1997, the Board of Directors of the Company agreed with the former
shareholders of MDS that in the event of a divestiture of HCCI that the Company
would issue to the former shareholders of MDS 700,000 shares of common stock of
the Company. The Board agreed to issue the additional 700,000 shares as
recognition of the need to adjust and correct the valuation received by the
former shareholders of MDS. The Reorganization Agreement entered into between
the Company and MDS in July, 1996 (the "MDS Reorganization Agreement") had
originally formed the basis for the original transaction between the Company and
MDS and resulted in MDS becoming a wholly owned subsidiary of the Company. In
consideration for the Board of Directors' action, the former shareholders of MDS
agreed to waive certain rescission rights that were contained in the MDS
Reorganization Agreement. Consequently, as a result of the divestiture of HCCI,
the Company issued to the former shareholders of MDS 700,000 shares of common
stock of the Company.
The Company name change
On January 6, 1997 a "Unanimous Written Consent of the Board of Directors of
RAM-Z Enterprises, Inc." was executed to amend the Company's Articles of
Incorporation to reflect the name of the Company to be formerly changed to
Hyperdynamics Corporation. This was done subsequent to a shareholder meeting
where the name change was approved by vote of the shareholders. On January 7,
1997 a Certificate of Amendment of Certificate of Incorporation was duly filed
with the State of Delaware, thus effecting the name change.
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Investment in Revenue Sharing Agreement
On May 1, 1997, Hyperdynamics entered into a revenue sharing agreement with
Internet Finance and Equipment, Inc. (A Florida Corporation referred to as
"IF&E") and Sierra-Net, Inc. (A Nevada Corporation referred to as "Sierra-Net").
This agreement was pursuant to a "Stock Purchase Agreement" dated April 1, 1997
between Net Telecommunications, Inc., ISP.NET, Inc. and Hyperdynamics, as
amended on April 25, 1997 whereby Hyperdynamics facilitated the acquisition of
Sierra-Net through the issuance of 177,000 shares of the Company's restricted
common stock. Hyperdynamics received a 4% interest in the gross revenues of
Sierra-Net, Inc. (A Nevada based Internet Service Provider) as well as the right
to 19% of the proceeds pursuant to any partial or complete sale of Sierra-Net,
Inc. The monthly payments have been received consistently through the end of
the year ended June 30, 1999. The payments have been recorded as a reduction to
the book value of the revenue sharing agreement balance sheet amount that is
reflected in the financial statements as of June 30, 1999.
Initiation of Wired & Wireless Corporation
On October 17, 1997 Wired & Wireless Corporation was established as a wholly
owned subsidiary of the Company to plan, design and implement information
systems for customers using wireless technologies such as multipoint /
multichannel distribution systems (MMDS) and low-power multipoint / multichannel
distribution systems (LMDS).
Two industry veterans were hired in October of 1997. Ted W. Tarver, former
President of Wireless Cable Connection, Inc. was hired as President of the new
subsidiary. Assets purchased by the Company from Wireless Cable Connection, Inc.
include an interest in contingent contract receivables for consulting of
$144,000 based on wireless frequency licenses granted and to be granted by the
Federal Communications Commission (FCC) to be granted to third parties. The
acquisition of certain Wireless Cable Connection assets was negotiated and
finalized with the receipt of certain sellable inventory assets as reflected in
inventory at June 30, 1998. The purchase also included miscellaneous equipment
and software used for evaluating and building out wireless markets. The
acquisition was finalized on June 23, 1998 when the company paid 100,000 shares
of restricted common stock, then trading at $.51 per share. Additionally, on
October 21, 1997 the company hired Joseph R. Barris as the Vice President for
the newly established subsidiary. The company also purchased all rights to the
International customer sales list and to all future sales for wireless equipment
of Joseph Barris and Barris Communications, Inc. The company paid cash of
$40,000 in cash for these customers and the rights to the related sales
associated with each.
Addition to the MicroData Team
On June 23, 1998 the company hired Harry James Briers as the new "Director of
Integrated Information Systems". Mr. Briers also agreed with the company to
re-direct all of his consulting business, formally known as "Perfect Solutions"
in Houston, Texas. The agreement included that the Company obtains all of the
rights to all future sales for products and services to these customers. Mr.
Briers was issued 100,000 shares of restricted common stock in the transaction.
At the time of the agreement, the stock issued was trading at $.51 per share.
Mr. Briers carries an MBA from the University of Houston - at Clear Lake. His
focus on mission critical enterprise-wide software applications broadens the
scope of MicroData's capabilities. A major area of focus for Mr. Briers are
integrated enterprise level software applications like the Great Plains
client-server plus SQL mid-range accounting system. This enterprise level
accounting platform is targeted for progressive growth companies with $10
million to $500 million in revenues. Mr. Briers enhances the primary mission
focus of the Company's target market for its integrated IT services.
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MicroData implements mid-range system project
On June 3, 1999 the Company announced a significant mid-range system project.
MicroData Systems, Inc., (its wholly owned subsidiary) initiated an e-commerce
development project with The Mattress Venture, LP of Houston, Texas. The
Mattress Venture, LP at the time supported eighteen (18) Franchisee's
representing approximately one hundred thirty (130) stores across the country.
According to Furniture/Today magazine, The Mattress Firm is currently the 46th
largest furniture sales organization and fastest growing bedding specialty
retailer in the United States with projected annual sales in excess of one
hundred million dollars ($100,000,000). The initial project revenue was budgeted
at $800,000 and could increase depending upon the startup or acquisition of
additional stores. The Company has completed the planning phase of this core
project as of September 23, 1999 and is beginning the development phase. The
Company has recognized $329,276 in revenues off of this project through June 30,
1999.
MicroData Systems, Inc. was renamed to IThost.net Corporation
and Mr. Harry Briers is elected as President
On August 4, 1999 the Company announced that it has amended the articles of
incorporation of MicroData Systems, Inc. (A Texas Corporation and wholly owned
subsidiary) to change its name to "IThost.net Corporation". Management believes
that we must do everything possible to more clearly and easily communicate its
mission to be a premier Information Technology Service Provider (ITSP).
MicroData was founded in 1988 to provide computer and network technology
equipment to such customers as Lockheed, Rockwell, Johnson Space Center (JSC-
NASA), The Texas Medical Center, and Chevron, to name a few. The Subsidiary's
mission has now evolved to where it now plans, designs, implements, and manages
its clients IT (information technology) infrastructures. The Company believes
that the name "IThost.net" more accurately reflects its core business. While
IThost.net Corporation is focused on migrating conventional business to
e-business and to complete IT Hosting services, the name MicroData Systems, Inc.
has been reserved for the company to establish a division that continues to
provide more conventional IT services.
Mr. Harry Briers was elected president of IThost.net Corporation (Wholly owned
subsidiary of Hyperdynamics Corp.).
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Current Direction of Business Plan
As the United States Department of Commerce refers to "The Emerging Digital
Economy", in annual reports over the last two years, Hyperdynamics would like to
declare the "Digital Economy" officially emerged. The next report should be
entitled "The Burgeoning Digital Economy".
Mission Statement
To be the premier information technology services provider (ITSP) that
maximizes its client's return on their technology investment.
Vision Statement
The Company is in business to provide completely planned, designed, implemented
and managed Information Technology (IT) based environments for business. With
this directive the Company has developed and will develop on a continuing basis
it's own "ITHOST.NET" integrated IT environment to become the Company's fully
integrated product providing complete IT Hosting services.
In years past larger companies have had the luxury of having extensive resources
to implement and manage their information technology budgets. They have learned
that the more efficiently they balance their information technology (IT)
investment with benefits, the more they can earn as a result of lowered expenses
and increased productivity. As a rule, the smaller an organization becomes the
less likely it is to be able to take cost effective advantage of the latest and
best technology. Company's like ours, using the newest system management
technology help remove the gap between small and large organizations. By
acquiring technology based companies in the primary defined areas of information
technology, we provide a total cost effective and competent service acting as
the IT department. As a result our customers derive the benefits from highly
trained professionals in the IT field and only pay for the actual amount they
need.
The phenomenal information technology (IT) industry
You cannot talk about information technology (IT) without having a major focus
on the Internet, e-commerce, and e-business. The Internet and all of its
functionality has now become a primary component of any company's IT
infrastructure. Deciding how exactly to integrate with the Internet and
achieving the optimum integration requires significant technical expertise.
Hyperdynamics provides the design, implementation, and management services to
support complete IT Hosting of a clients IT Department with a emphasis on
e-Business (e-commerce is a subset of e-Business). The growth of the Internet
and rapid movement of conventional business to e-Business puts Hyperdynamics in
the middle of "The Millennium 2000 Gold Rush".
The Emerging Digital Economy II, published by the US Department of commerce
discloses the following statistics and estimates in June 1999:
The expansion of the Internet
- Total people across the globe with Internet access has grown
to 171 million worldwide
- From 1998 to 1999 web users increased 55%, Internet hosts rose by
46%, web servers increased by 128%, and new web addresses rose 137%
- IDC Corporation (IDC) was said to report that between 1998 and
1999 revenues of U.S. Internet service providers (ISPs) will rise
by 41%. IDC projects that these ISP revenues will continue growing at
a compound annual rate of 28% through 2003.
- As of June 8, 1999 Canada and the US make up 56.6% of total people
with Internet access. This equates to 37% of US citizens and 36% of
Canadians with Internet access at home or work.
- Concerning electronic commerce in the digital economy:
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"The newest innovations, which we label information technologies, have begun to
alter the manner in which we do business and create value, often in ways not
readily foreseeable even five years ago."
Alan Greenspan
Chairman, Federal Reserve Board
May 6, 1999
- In the Emerging Digital Economy II, Patricia Buckley wrote "Two
facets of the digital economy, electronic commerce (i.e. business
processes which shift transactions to the Internet or some other
non-proprietary, Web-based system) and the information technology
(IT) industries that make e-commerce possible, are growing and
changing at breathtaking speed".
The rise in e-commerce
- The 1998 "Emerging Digital Economy Report" sited last year that,
"In early 1998, forecasters were suggesting that business-to
-business e-commerce might rise to $300 billion by 2002." Most
forecasters now expect that to be a very low projection. "U.S.
Online Business trade will Soar to $1.3 Trillion by 2003", According
to Forrester Research's press release, December 17, 1998.
(http://www.forrester.com).
-------------------------
- "Early 1998 estimates suggested that Internet retailing might
reach $7 billion by 2000. In all probability, this level was
exceeded last year (1998), current private estimates of 1998 online
retail trade range between $7.0 billion and $15 billion. Forecasters
now project online retail sales in the range of $40 billion to $80
billion by 2002. And even these increased forecasts of both
business-to-business and business-to-consumer e-commerce may prove
to be low if a recent study financed by Cisco Systems, which
estimates that 1998 total e-commerce (both business-to-business
and business-to-consumer) was $102 billion, is a more accurate
estimate."
Increasing Global Markets
The Department of Commerce reports that the U.S. and Canadian share of world
Internet users has declined from 62 percent in 1997 to 57% in May 1999. The
report basically says that the rest of the world is catching up and the most
important aspect for the world to come online is the development of the critical
infrastructure in developing countries. U.S. companies will continuously have
opportunities for e-commerce in foreign countries and they will also have
increasing competition in a reciprocal manner.
New ways of doing business
Hyperdynamics facilitates its client's e-Business integration by defining new
business models, new processes, and dramatically changing the way they do
business. The explosion of e-Business is having an effect that goes way beyond
the tangible dollar value of the sales on the Internet. Companies that implement
effective e-Business models will have substantial competitive advantages by
providing timely and useful information through the web, expanding personal
choices, providing enriched services, and increasing productivity through
efficiency inherent with their newly integrated capabilities.
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In "The ASP Industry News", August/September 1999 edition, an article entitled
"It's Time to Get Out of the IT Business", Mr. Brad Bishop, CEO for AVCOM
Technologies writes about how Scott McNealy, CEO for Sun Microsystems is
advising businesses to stop buying computer hardware and software. Mr. Bishop
makes a case for "one of the hottest new trends in the computer industry:
application service provisioning (ASP). He writes "With application service
provisioning, you don't have to invest in the hardware, software and staff
needed to support mission-critical business applications." He further writes,
"Finding an ASP with experience in sophisticated enterprise applications is the
key to success. Application service provisioning demands highly secure,
high-speed data hosting and a wealth of expertise. Neither traditional ISP's or
system integrators have all the necessary skills. It takes a special breed".
Hyperdynamics exists to be that special breed. With our positioning as an
information technology service provider (ITSP), application service provisioning
is a primary subset of the business plan we implemented a year ago.
The shortage of IT workers and related strategy
In the United States there was reported vacancies of approximately 350,000
information technology (IT) related jobs in 1997. The Labor Department projects
the need for an additional 95,000 IT jobs annually between now and the year
2005. With only an estimated 25,000 new IT graduates coming out into the
workforce annually, there is a serious shortage of IT talent. According to the
Emerging Digital Economy II, published by the US Department of Commerce in June
of 1999, "Organizations, both public and private, continue to experience real
difficulty in recruiting and retaining employees with specialized IT skills."
This presents a serious growth opportunity for Hyperdynamics Corporation because
of its acquisition strategy to acquire information technology based companies
with a heavy emphasis on the talent and experience within each company. By
obtaining the talent, we believe that coupled with a reasonable marketing plan
that we will continue to substantially increase IT service revenues.
In addition to its acquisition strategy, the "ITHOST.NET" strategy to intensely
cross train its IT professionals and build its virtual IT department will
increasingly attract top technical talent. This integrated service is positioned
towards total IT outsourcing. One of the reasons that there is a shortage of IT
professionals is due to the lack of standards established across all areas of a
company's IT infrastructure. With a lack of standards, companies create a maze
of complex system designs. The larger and more diverse the organization,
generally the more complex the system. This is what has spawned the emergence of
enterprise-wide application technology. Larger companies invest large amounts of
resources in the implementation of these types of applications that allow the
organization to standardize the way it does business. The enterprise
applications cross over departmental boundaries, subsidiary lines, and possibly
even industry lines in the case of conglomerates or modified conglomerates.
Business managers are learning that by standardizing the components used for
each area of information systems that the ultimate total cost of ownership will
be greatly reduced. The hard dollar benefits are somewhat difficult to evaluate
because some of the real benefits are long-term in nature. The soft-dollar
benefits, such as increased organizational productivity are unfortunately not
often considered until a competitor is able to provide a product or service more
efficiently and your company is fighting to stay in business. Hyperdynamics' IT
professionals have developed a complete standards based information system
design and is providing a one-stop IT Hosting option for its clients.
ITHOST.NET will provide a complete design from the integrated voice and data
phone system to the integrated enterprise-wide software applications which run
geographically independent across an organizations network infrastructure. One
challenge will be to make the services flexible enough to handle a wide-range of
companies in many different industries without compromising foundational
standards. This is the reason that partnership with companies like Great Plains
Software is so important.
An integrated information technology environment includes all factors associated
with the design, implementation, and maintenance of an organization's Intranet
and Internet related communications. Technologies such as ATM (Asynchronous
Transfer Mode) allow the real world convergence of voice, video, and data across
a single fiber and/or copper cable plant. With this technology a computer
workstation can now be transformed into a complete communication device that
through standards based applications will allow a single cable connection to
seamlessly support integrated applications such as video conferencing,
telephone, voice mail and email, and many other enterprise-wide productivity
based applications.
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The Company maintains a strong strategy to continue to develop and leverage it's
own Information Systems Infrastructure and will continue to invest in the
automation of the administratively based public company overhead. The commitment
that it has made to the Great Plains CS+ SQL mid-range system is evidence of
substantial progress in this area. Based on this strategy, the Company will
benefit from an ever increasing cost/benefit through economies of scale as it
reaches it's critical mass through acquisition as well as building on it's
initial infrastructure obtained through MDS. This will allow the Company to help
its subsidiaries operate more efficiently as well and result in maximizing
profits for its shareholders.
To keep up with technology as it changes so rapidly, the Company will continue
to invest in technical certification and excellence. We believe that growing
technical expertise will open doors for an increasing opportunity to provide
total turnkey IS services. We expect the long-term results to be strong
recurring contract service revenue. This will continue to strengthen the
company's value and related stock price in years to come.
Employees and Independent Contractors
The Company has ten (10) full time employees. The Company uses independent
contractors to minimize fixed overhead. No employees are represented by a union
and the Company believes that its labor relations are good.
Subsidiary -IThost.net Corporation (Formerly MicroData Systems, Inc. (MDS))
The primary focus in fiscal year end June 30, 1999 was on the fulfillment of the
MDS's goal to establish itself as a complete information technology service
provider (ITSP). MicroData's increasing capabilities have provided the
foundation for the company to build on its plan to be the Premier Information
Technology Service Provider and to initiate its IT Hosting service.
During the year MDS successfully shifted its revenue base clearly more to IT
services. To support this goal MDS enhanced or maintained certifications with
Microsoft as a Microsoft Solution Provider, Great Plains Software as eEnterprise
reseller, Intel Product Dealer, Citrix Systems Certified reseller, 3Com Network
Systems Integrator, Xerox Peripherals reseller, and Extreme Networks Premier VAR
to name a few. With its relationship with Intel, the Company has the capability
to provide custom hardware solutions along with its IT services. This capability
provides a tighter integration for its services.
IThost.net Corporation (Formerly MDS) plans to implement and market its IT
Hosting infrastructure by the second quarter of fiscal year end June 30, 2000.
It has registered ITHOST.NET as its Internet address to establish its national
presence.
Subsidiary - Wired & Wireless Corporation
Wired & Wireless is continuing to provide wireless equipment for wireless
television to customers in Mexico and South America. Ted Tarver, President for
Wired & Wireless has negotiated with primary suppliers to provide certain key
inventory items on a consignment basis. The primary goal for Wired & Wireless is
to continue to increase its wireless equipment sales with an increasing number
of customers.
Hyperdynamics Corporation provides complete IT Hosting services, acting in the
capacity of its clients IT department, and services its clients by migrating
conventional business to e-Business. It also continues to provide conventional
based IT services through its MicroData division. This gives the Company the
flexibility to service its clients in a way that they feel the most comfortable
while being educated about the new ways of acquiring IT Hosting services.
Hyperdynamics expects to continue to grow from expanding operations as well as
through acquisition in the fiscal year ending June 30, 2000.
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Item 2 PROPERTIES
The office of the Company is located at 2656 South Loop West, Suite 103,
Houston, Texas 77054 where the Company leases approximately 3,000 sq. ft. of
commercial office space for itself, Wired & Wireless Coroporation, and MicroData
Systems, Inc. The Company pays $3,065 per month. This is a month to month lease.
In the center of the space the Company has developed its communications and
computer room which serves as the network server center, wide area network hub
including its Internet point of presence (POP), and central telephone room. The
space is secured by a monitored alarm system. The Company has plans to either
expand its facilities at the current location or to lease new facilities for a
corporate office as it continues to grow. Additionally, Wired & Wireless has
leased approximately 5,000 square feet of warehouse facility to hold its
wireless inventory and consigned inventory, if any. The Company pays $1,700 per
month for this facility. This lease expires on May 1, 2000. The Company believes
that its offices and warehouse are adequate for its present future needs.
Item 3 LEGAL PROCEEDINGS
In 1984, the Company failed to file financial statements as required by Utah law
within thirteen months after its public offering in 1983. On June 17, 1987 the
Division of Securities of the Department of Commerce (formerly known as the
Securities Division of the Department of Business Regulation) of the State of
Utah (the "Division") issued an Order (the "Utah Order") by which Utah Order any
offering exemptions which would be otherwise applicable and available to the
Company by reason of Section 61-1- 14 of the Utah Code were revoked by the Utah
Order until such time as the Company filed financial statements as required by
Rule 10.2-1(b)(7) of the Division. Therefore, the Company may not offer
unregistered securities in Utah, except that under the federal National
Securities Markets Improvement Act of 1996 the Company may offer for sale
unregistered securities in Utah if such offerings comply with Rule 506 of
Regulation D of the Securities Act of 1933 as amended. Rule 506 offerings are
exempt from state regulation other than state notice and fee requirements. In
the future, the Company may seek to vacate the Utah Order. However, the Company
has thus far been unsuccessful in locating records related to the financial
information that the Company failed to file in 1983 and 1984, and the Company
has been unsuccessful in locating the individuals who founded the Company in
1983. Thus, the Company's corporate memory on this matter is unavailable at this
time. The Company believes that earlier attempts to vacate the Utah Order were
unsuccessful because the Company was a shell company at the time the attempts to
vacate the Utah Order occurred. The Company believes that since the Company is
now an operating Company with assets and revenues related to operations, as
opposed to assets and revenues related only to fund raising, the Company may be
in a better position to petition Utah to vacate the Utah Order.
The Company is not a party to any other material pending litigation.
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Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 26, 1999, the company held its annual shareholder meeting as disclosed
in the proxy statement "PRE 14A" filed on July 14, 1999. The shareholder meeting
was for shareholders of record at July 14, 1999. There was 12,405,503 shares
outstanding on that date. All nominated directors were duly elected, a
preferred class of stock was authorized by the shareholders for the directors to
use as they see fit with regard to capitalization. John B. Evans II, CPA was
ratified as the auditor for the fiscal year end June 30, 1999.
The voting results including proxy's received were as follows:
<TABLE>
<CAPTION>
Directors Elected
# of shares FOR # of shares AGAINST # of shares ABSTAIN
<S> <C> <C> <C>
Kent Watts 9,709,352 0 1,000
Robert J. Hill 9,709,352 0 1,000
Ted W. Tarver 9,709,352 0 1,000
</TABLE>
Authorization to amend Articles of Incorporation to provide 20,000,000 shares of
Preferred Stock
# of shares FOR # of shares AGAINST # of shares ABSTAIN
7,601,368 5,200 116,300
RATIFY JOHN B. EVANS II, CPA
# of shares FOR # of shares AGAINST # of shares ABSTAIN
9,706,352 5,000 0
OTHER BUSINESS - NONE DISCUSSED
# of shares FOR # of shares AGAINST # of shares ABSTAIN
9,686,672 5,180 18,500
13
<PAGE>
PART II
Item 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range Of Common Stock
The Company's Common Stock is traded on the OTCBB under the symbol "HYPD." The
following table sets forth the quarterly high and low bid prices per share for
the Common Stock, as reported by the OTCBB. The bid prices reflect inter-dealer
quotations, do not include retail markup, markdown, or commission and do not
necessarily reflect actual transactions.
<TABLE>
<CAPTION>
High Bid Low Bid
<S> <C> <C>
1998
First Quarter 2.1250 1.0000
Second Quarter 1.7500 0.5100
Third Quarter 1.3750 0.1560
Fourth Quarter 0.8750 0.2500
1999
First Quarter 1.2500 0.25000
Second Quarter 2.2500 0.78125
Third Quarter 3.5000 0.28125
Fourth Quarter 1.3750 0.46875
</TABLE>
On September 21, 1999, the last bid for the Common Stock as reported by the
OTCBB was $0.78125 per share. On September 21, 1999, there were approximately
450 stockholders of record of the Common Stock.
The Company has not paid, and the Company does not currently intend to pay cash
dividends on its common stock in the foreseeable future. The current policy of
the Company's Board of Directors is to retain all earnings, if any, to provide
funds for operation and expansion of the Company's business. The declaration of
dividends, if any, will be subject to the discretion of the Board of Directors,
which may consider such factors as the Company's results of operations,
financial condition, capital needs and acquisition strategy, among others.
Recent Sales of Unregistered Securities
During the year ended June 30, 1999, the following transactions were effected by
the Company in reliance upon exemptions from registration under the Securities
Act of 1933 as amended (the "Act") as provided in Section 4(2) thereof. Each
certificate issued for unregistered securities contained a legend stating that
the securities have not been registered under the Act and setting forth the
restrictions on the transferability and the sale of the securities. No
underwriter participated in, nor did the Company pay any commissions or fees to
any underwriter in connection with any of these transactions. None of the
transactions involved a public offering. The Company believes that each person
14
<PAGE>
had knowledge and experience in financial and business matters which allowed
them to evaluate the merits and risk of the receipt of these securities of the
Company. The Company believes that each person was knowledgeable about the
Company's operations and financial condition.
On April 1, 1999, the Company issued an option to purchase up to 350,000 shares
of common stock of the Company to Michael Watts as compensation under a
consulting agreement. The fair market value of the common stock on the date of
the grant of this option was $.50 per share. This option has a strike price of
$.50 per share and expires on April 1, 2001. Michael Watts is the brother of
Kent Watts, who is a Director, President and CFO of the Company .
On April 1, 1999, the Company issued an option to purchase up to 30,000 shares
of common stock of the Company to Heidi Youtsey as compensation for consulting
services in connection with marketing. The fair market value of the common
stock on the date of the grant of this option was $.50 per share. This option
has a strike price of $.50 per share and expires on April 1, 2001.
On April 1, 1999, the Company issued an option to purchase up to 100,000 shares
of common stock of the Company to Ted Tarver, who is a Director of the Company,
as compensation. The fair market value of the common stock on the date of the
grant of this option was $.50 per share. This option has a strike price of $.50
per share and expires on April 1, 2001.
On April 1, 1999, the Company issued a warrant to purchase up to 200,000 shares
of common stock of the Company to Randy Massey as compensation as a consultant
in relation to acquisitions. The fair market value of the common stock on the
date of the grant of this warrant was $.50 per share. This warrant has a strike
price of $.50 per share and expires on April 1, 2002.
On April 1, 1999, the Company issued a warrant to purchase up to 150,000 shares
of common stock of the Company to Colleen Wilkins as compensation as a marketing
consultant. The fair market value of the common stock on the date of the grant
of this warrant was $.50 per share. This warrant has a strike price of $.50 per
share and expires on April 1, 2001.
15
<PAGE>
Item 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION
The Company is including the following cautionary statement to make applicable
and take advantage of the safe harbor provision of the Private Securities
Litigation Reform Act of 1995 for any forward-looking statements made by, or on
behalf of, the Company. This Annual Report on Form 10-KSB contains
forward-looking statements. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, expectations, future events or
performance and underlying assumptions and other statements which are other than
statements of historical facts. Certain statements contained herein are
forward-looking statements and, accordingly, involve risks and uncertainties
which could cause actual results or outcomes to differ materially from those
expressed in the forward-looking statements. The Company's expectations,
beliefs and projections are expressed in good faith and are believed by the
Company to have a reasonable basis, including without limitations, management's
examination of historical operating trends, data contained in the Company's
records and other data available from third parties, but there can be no
assurance that management's expectations, beliefs or projections will result or
be achieved or accomplished. In addition to other factors and matters discussed
elsewhere herein, the following are important factors that, in the view of the
Company, could cause actual results to differ materially from those discussed in
the forward-looking statements: the ability of the Company to respond to changes
in the information system environment, competition, the availability of
financing, and, if available, on terms and conditions acceptable to the Company,
and the availability of personnel in the future. The Company has no obligations
to update or revise these forward looking statements to reflect future events.
The following discussion should be read in conjunction with the financial
statements and notes thereto for the fiscal years ended June 30, 1999 and 1998.
General
With its focus heavily on Wired & Wireless in FYE 1998 the Company started to
aggressively pursue some promising core revenues from a significant customer in
Mexico, Central & South America. Unforeseen delays, in the culmination of these
core sales put an unexpected strain on the Company's continued ability to grow
in other areas and to capitalize itself with adequate working capital and
investment capital.
In 1999, the Company successfully shifted its primary focus of the Company to be
the Premier Information Technology Service Provider (ITSP). The Subsidiary,
MicroData, shifted its sales and marketing efforts from lower margin equipment
sales to higher contribution margin business as an IT service company.
Subsequent to the fiscal year 1999 MicroData's name was changed to IThost.net
Corporation. The acquisition strategy of the Company has not yet been
implemented. It has been delayed thus far due to time consuming negotiations of
acceptable capital structures and the belief by management that the Company's
stock has been undervalued in recent months.
16
<PAGE>
Results of Operations
Revenues increased to $1,498,124 for the year ended 1999, from $820,535 for
1998. The 83% increase was primarily due to the major emphasis and focus on the
information technology services and e-Business related sales compared to a
divided focus with Wired & Wireless Subsidiary's equipment sales the
year before.
Cost of revenues increased to $870,151 (58% of revenue) for the year ended 1999,
from $702,164 (86% of revenue) for 1998.
Selling, General and Administrative expenses increased to $774,378 (52% of
revenue) for the year ended 1999, as compared to $693,001 (84% of revenue) for
1998.The increase was primarily due to increased labor costs associated with
establishing the e-Business programs and IT Hosting services.
The Net Loss of the Company was $(184,546) for the year ended 1999, or
($0.02) per share, compared to $(558,324) or ($0.07) per share for 1998.
During the last two quarters of 1999 the Company reported profits of $2,565 and
$22,304 respectively. This improvement was a result of the culmination of core
projects for e-Business and IT Hosting services.
Liquidity and Capital Resources
The Company has no long-term debt obligations or other related requirements or
contingencies.
The Company has a need for additional working capital to implement the
e-Business and IT Hosting services as well as to recognize its growing sales
forecast. It has invested in equipment and software infrastructure out of its
working capital as it has been able to.
The Company needs both additional investment capital and working capital to
Continue developing its core sales and IT service capabilities.
Estimated working capital requirements of $500,000 is needed to allow the
Company to substantially increase its current sales forecast of IT services.
While continuing to increase its sales and marketing, core business obtained in
the last quarter of 1999 is very important to the continued progress of
operations.
As of October 8, 1999 management has three plans to obtain additional needed
working capital.
1. The Company is proceeding to facilitate the sale of SierraNet, Inc. of which
it has a 19% interest in the proceeds of such sale. It is expected that this
sale could generate up to $475,000 of additional working capital.
2. The Company is in negotiations with and evaluating the sale of its wholly
owned Subsidiary Wired and Wireless Corporation. It has been determined that
this transaction would result in immediate improvement of its working
capital and result in an extra-ordinary gain for the Company.
3. The Company is preparing a private placement memorandum to raise an
additional $1,000,000 to $2,000,000 dollars of working capital and
investment capital for implementing its IT hosting infrastructure as well
facilitate an acquisition.
In addition to raising working capital, the Company plans to implement its plans
to raise capital to qualify it to be listed on a national Stock Exchange such as
NASDAQ. The Company is in negotiation with various private investors to
structure a private transaction that could potentially help to qualify the
Company for listing on a stock exchange. Additional strategies to raise capital
will be implemented as the Company moves towards its more strategically based
acquisitions. Upon qualifying for listing on an exchange, the Company intends to
prepare an underwriting package to attract the right team for a new securities
registration to be used to raise substantially more capital to support its IT
Hosting business plan. This new registration will include plans to acquire
Entrepreneurial based and technically talented companies to enhance the
Company's e-Business and IT Hosting capabilities.
Factors effecting future results
As discussed in the Liquidity and Capital Resources section the Company has
significant needs for additional capital. The Company has minimal financial
resources due to its need for this growth capital. Should the Company be delayed
in obtaining these needed resources as planned, its planned growth through
expanding core operations as well as acquisition could slow down do to a natural
tightening of its cash flow.
17
<PAGE>
In order for the Company to be successful with its IThosting business plan, it
needs to strengthen its core IT infrastructure. On April 25, 1997, the Company
acquired a contract interest in revenues from SierraNet, Inc., a Nevada Internet
Service Provider. The third-party purchaser of SierraNet, Internet Finance and
Equipment, Inc. of Florida, agreed to this contract right in return for our
participation in financing their acquisition of SierraNet through issuance of
177,000 shares of the Company's restricted stock to the sellers. This contract
right provides the Company with 4% of monthly gross revenue of SierraNet, and
19% of sale proceeds should SierraNet be sold. The Revenue Sharing Agreement has
been consistently generating payments on a monthly basis. The Company is looking
into the possibility of facilitating the sale of SierraNet that would provide an
extraordinary gain and increase its working capital. This would allow the
Company to make several pending decisions to strengthen the IThost.net
infrastructure. It would also enrich the sales and marketing efforts and revenue
potential of IThost.net Corporation (the Company's wholly owned subsidiary).
In addition to the sale of SierraNet, the Company is evaluating the use of a
Reg-D private placement to raise its necessary working capital as well as the
prospect of a new registration under the 1933 Securities Act to raise
substantially more capital for its acquisition roll up plans.
The Company plans to primarily focus on its capital raising and acquisition
strategy for FYE 2000. The Company is extremely close to substantially
profitable operations on a recurring basis. Additionally, there are plans to
hire a Marketing and Sales vice president in FYE 2000 to focus on the sales of
its ITHOST.NET services. By closing additional core business, providing for
adequate capitalization, and establishing the relationship with the appropriate
underwriter, the Company expects to move into a rapid growth mode by the third
quarter of fiscal year 2000.
Year 2000 Issues and Y2K
All of the Company's hardware and software have been acquired and represented by
the sellers to be fully Y2K compliant. The Company presently anticipates no Y2K
impact in connection with its suppliers or customers. However, the Company is
presently assessing its Year 2000 compliance status and the status of its
suppliers and customers. Furthermore, since the Company's future revenues from
the Internet operations are wholly dependent on others being able to use their
own computers to connect to the Internet, there can be no assurance that the
Company will escape the consequences of a Year 2000 compliance deficiency. The
Company's web-sites are hosted at its central office and currently uses
Concentric Network for its primary access circuits. Concentric is a large
national tier-1 backbone provider.
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruption of business activities.
Based on ongoing assessments, the Company believes that no significant
modifications of existing computer software will be required. The Company
believes that its computer systems will function properly with respect to dates
in the year 2000 and thereafter. The Company also believes that costs related to
the Year 2000 issue will not be significant.
The Company has assessed its relationships with significant suppliers and
customers to determine the extent to which the Company is vulnerable to any
known third party's failure to remedy their own Year 2000 issues. Based on these
assessments, management believes that significant exposure does not exist with
respect to known third parties.
18
<PAGE>
Y2K Contingency Plans
In the event that the Company's computers ultimately are shown not to be Y2K
compliant, the Company will shift its internal and external programming
capabilities to addressing Y2K compliance.
Item 7 FINANCIAL STATEMENTS
The information required hereunder is included in this report as set forth in
the "Index to Financial Statements on page F-1.
Item 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL
DISCLOSURE
Not Applicable.
19
<PAGE>
PART III
Item 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Executive Officers and Directors
The following table sets forth the names and positions of each of the executive
officers and directors of the Company.
<TABLE>
<CAPTION>
Name Position Age
<S> <C> <C>
Kent Watts Director, Chief Executive Officer, 41
and Chief Accounting Officer
Robert J. Hill Director, Vice President 45
Ted W. Tarver Director, President for 44
Wired & Wireless Corporation
Lewis Ball Secretary 68
</TABLE>
Directors are elected annually and hold office until the next annual meeting of
the stockholders of the Company or until their successors are elected and
qualified. Officers are elected annually and serve at the discretion of the
Board of Directors. There is no family relationship between or among any of the
directors and executive officers of the Company. Board vacancies are filled by a
majority vote of the Board.
Kent Watts, age 41, became Chairman of the Board of Directors and was named the
companies President and Chief Executive Officer on June 4, 1997 simultaneously
with the resignation of Greg J. Micek. He has served as a Director, Chief
Financial Officer, and Chief Information Officer of the Company since January
17, 1997. Mr. Watts has been a certified public accountant in Texas since 1985
and a licensed Real Estate broker since 1979. He received a Bachelor of Business
Administration Degree from the University of Houston in 1983. Mr. Watts founded
MicroData Systems, Inc., a subsidiary of the Company, in 1988. He has extensive
experience working with management information systems. Mr. Watts has been
involved in the design, implementation and management of heterogeneous,
multi-protocol networks. He has substantial technical experience with a variety
of operating systems, relational databases, and client-server based software
applications. He brings to the Company an interesting blend of business and
technical experience.
Robert J. Hill, age 45, has served as the Chief Operating Officer of the Company
since June 1996 and as Chief Operating Officer and a Director of the Company
since August 26, 1996. Starting in July of 1997 Mr. Hill became the Vice
President of the Company and has served as the Vice President and a Director of
the Company to date. Before joining the Company, Mr. Hill served for two years
as vice president of Hudson-Trinity Incorporated, a privately-held Internet
service provider and network engineering company that also contracted senior
network engineers to Loral Space Systems, Inc., the principal civilian
contractor for the design, development and installation of NASA's new manned
space flight control center. Previously, Mr. Hill served for three years as
Acquisition Manager for Loral Space Systems, Inc. Mr. Hill has earned an MBA
degree from South Eastern Institute of Technology and a BA degree from the State
University of New York at Potsdam.
20
<PAGE>
Ted W. Tarver, age 44, was President of Wireless Cable Connection, Inc. (WCC)
until October of 1997 when he became President of Wired & Wireless Corporation
(Wholly owned subsidiary of HyperDynamics Corporation). Beginning in the
wireless industry in 1979 and while operating WCC, Mr. Tarver played major roles
in the development of over 50 wireless TV systems. Mr. Tarver has served as a
Director of the Company since February of 1998. He plans to use his wireless
technology experience to help the Wired & Wireless subsidiary establish itself
in the international wireless industry with a unique capability to provide
complete end to end wireless systems supporting voice, video, and data
applications over wireless infrastructures.
Lewis E. Ball, age 68, has served as the secretary of the Company since 1997
and as the Chief Financial Officer from June 1996 to January 1997. He has been
a financial consultant to a number of companies since 1993. Mr. Ball has
served as a director of JVWeb, Inc. since 1997 and as secretary and treasurer of
JVWeb, Inc. since 1998. Mr. Ball has many years of industry experience as a
chief Financial Officer with Stevenson Services, Inc. and Richmond Tank Car
Company (from 1983 to 1993). Mr. Ball is a Certified Public Accountant and a
Certified Management Accountant. Mr. Ball has a B.B.A. in Finance from the
University of Texas, and he did post-graduate work in accounting at the
University of Houston.
Certain Securities Filings
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The Company believes that Kent Watts, Bob Hill, Ted Tarver, and Lewis Ball have
filed reports under required under section 16(A).
21
<PAGE>
Item 10 EXECUTIVE COMPENSATION
The following table reflects all forms of compensation for services to the
Company for the fiscal years ended June 30, 1997, 1998 and 1999 of the executive
officers of the Company. No executive officer of the Company received
compensation that exceeded $100,000 during 1999.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
AWARDS PAYOUTS
OTHER RESTR SECURITIES ALL
ANNUAL ICTED UNDERLYING OTHER
NAME AND COMPE- STOCK OPTIONS LTIP COMPEN-
PRINCIPLE SALARY BONUS NSATION AWARDS SARS PAYOUTS SATION
POSITION YEAR $ $ $ $ # $ $
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kent Watts (1) 1999 $84,000 $-0- $-0- $-0- -0- $-0- $-0-
Chief Executive Officer 1998 84,000 -0- -0- -0- -0- -0- -0-
Chief Financial Officer 1997 60,000 -0- -0- -0- -0- -0- -0-
Robert J. Hill 1999 $72,000 $-0- $-0- $-0- -0- $-0- $-0-
Vice President 1998 72,000 -0- -0- -0- -0- -0- -0-
1997 72,000 -0- -0- -0- 130,000 -0- -0-
</TABLE>
Chief Executive Officer Compensation
On July 21, 1999, the Board of Directors of Hyperdynamics Corp. unanimously
agreed to the terms of a "Executive Employment Agreement" for Kent Watts. The
Agreement was duly executed on July 21, 1999 which establishes Mr. Watts as the
Company's President, Chief Executive Officer (CEO), and Chief Financial Officer
(CFO). In the agreement it is noted that the Company intends to hire a new CFO
at the time the board deems it to be beneficial to the Company. At that time,
Mr. Watts will continue his responsibilities as President and CEO while
relinquishing his duty as CFO.
The contract allows for a base salary of $100,000 annually with a performance
based incentive salary based on 5% of adjusted net income, up to an additional
$100,000 in salary. Therefore, maximum salary under the Agreement is $200,000
annually. Additionally, Mr. Watts will receive 7,000 options with a strike price
of $1.00 per share for unrestricted common stock for each $1,000,000 of revenue
generated in fiscal year end June 30, 2000, by the Company, in excess of the
revenues reported for the fiscal year end June 30, 1999.
22
<PAGE>
Director Compensation
The Company does not currently pay any cash directors' fees, but it pays the
expenses of its directors in attending board meetings. There have been no
director meeting expense reimbursements for 199 and 1998.
Employee Stock Option Plan
The Company has been successful in attracting and retaining qualified personnel,
the Company believes that its future success will depend in part on its
continued ability to attract and retain highly qualified personnel. The Company
pays wages and salaries that it believes are competitive. The Company also
believes that equity ownership is an important factor in its ability to attract
and retain skilled personnel including consultants, and the Board of Directors
of the Company has adopted an employee stock option program.
Options to purchase 1,620,000 shares of registered common stock have been
approved under the Plan. Such options will vest over a five-year or other
negotiated period and will have a strike at a price set at the time of grant and
based on the then current market value of the stock. The President of the
Company has the authority as given by the Board of Directors to negotiate stock
option agreements with corporate consultants as well. As of September 21, 1999,
options to purchase 1,517,060 shares have been granted under this plan and
646,581 of these have been exercised. This leaves 870,479 shares granted under
employment or consulting agreements but not yet to be exercised and 102,940
shares left to be granted pursuant to employment or consulting agreements. This
is a total of 973,419 shares available under the plan not yet issued.
The Company also has 5,000 remaining shares available to issue pursuant to the
S-8 filing on August 13, 1996 and 64,212 shares available pursuant to the S-8
filing on December 31, 1996.
The purpose of the stock option program will be to further the interest of the
Company, its subsidiaries and its stockholders by providing incentives in the
form of stock options to key employees, consultants, and directors who
contribute materially to the success and profitability of the Company. The
grants will recognize and reward outstanding individual performances and
contributions and will give such persons a proprietary interest in the Company,
thus enhancing their personal interest in the Company's continued success and
progress. This program will also assist the Company and its subsidiaries in
attracting and retaining key employees and directors.
23
<PAGE>
Item 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information at September 21, 1999, with
respect to the beneficial ownership of shares of Common Stock by (1) each person
who owns beneficially more than 5% of the outstanding shares of Common Stock,
(2) each director of the Company, (3) each executive officer of the Company and
(4) all executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF SHARES BENEFICIALLY OWNED
BENEFICIAL OWNER
- -------------------
NUMBER PERCENT
<S> <C> <C>
Kent Watts
2656 South Loop West, Suite 103
Houston, Texas 77054 1,015,000 7.93
Robert J. Hill
2656 South Loop West, Suite 103 139,600 (1)
Houston, Texas 77054 1.09
Ted W. Tarver
2656 South Loop West, Suite
103
Houston, Texas 77054 300,000 (2) 2.34
Lewis E. Ball
2656 South Loop West
Suite 103
Houston, Texas 77054 54,560 (3) 0.43
Emerald Bay Interests LTD 5,933,333 (4) 46.34
All directors and executive officers as a
group (4 persons) 1,509,160 11.79
Other Group which may be affiliated 1,410,900 (5) 11.02
<FN>
(1) This amount includes 3-year options to purchase 139,600 shares of the
common stock of the company for a strike price of $1.25 per share which was
granted 130,000 on July 23, 1997 and 9,600 on August 10, 1996.
(2) This amount includes currently exercisable options to purchase up to
100,000 shares of common stock of the Company at an exercise price of $.50 per
share, and currently exercisable warrants to purchase up to 100,000 shares of
common stock of the Company at an exercise price of $.51 per share.
(3) This amount includes currently exercisable options to purchase up to
8,760 shares of common stock of the Company at an exercise price of $.75 per
share, currently exercisable options to purchase up to 33,300 shares of common
stock of the Company at an exercise price of $1.25 per share, and currently
exercisable warrants to purchase up to 12,500 shares of common stock of the
Company at an exercise price of $.51 price share.
(4) Due to Registrant's inability to pay certain liabilities as they become
due, Registrant's Board of Directors approved on July 15, 1997 a bridge
financing arrangement (the "Financing") with Emerald Bay Interests, LTD ("EBI").
The total debt of $350,000 plus accrued interest was converted to 5,833,333
shares of the company's common stock.
24
<PAGE>
(5) On August 15, 1996 the Company went through a reorganization which
resulted in the issuance of 1,540,000 shares of common stock to certain
shareholders. The following is the total remaining outstanding shares at
September 21, 1999, that the Company believes may be a group acting in concert
with regard to control of the Company. The Company's stock issuance records show
the following list:
</TABLE>
NAME # OF SHARES
Peterson 25,000
Thompson 102,150
Klausmeyer 237,250
Strawn 339,300
Cicero Cinzano 50,000
HuggerMugger 102,200
Segal/Alex Trust 45,000
FYJIGIM 45,000
Nationsbank/Thompson family trust 45,000
Flicker 70,000
Q-Marq 115,000
Eurotrade 160,000
Tobem 100,000
-------
Total 1,410,900
25
<PAGE>
Item 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Board of Directors of the Company has adopted a policy that Company affairs
will be conducted in all respects by standards applicable to publicly-held
corporations and that the Company will not enter into any future transactions
and/or loans between the Company and its officers, directors and 5% shareholders
unless the terms are no less favorable than could be obtained from independent,
third parties and will be approved by a majority of the independent,
disinterested directors of the Company.
Michael Watts, the brother of Kent Watts, has conducted certain securities
brokerage business with Emerald Bay Interests, LTD. Michael Watts was retained
by the Company in April, 1996 as a consultant in the area of acquisitions.
Under that agreement the Company granted 275,000 stock options to Michael Watts.
The Board of Directors has renewed the consulting agreement with Michael Watts
through March, 2000. In December, 1997, the Company adjusted the original
consulting agreement to include a total of 375,000 currently exercisable options
exercisable 1/3 at $.625, 1/3 at $1.00, and 1/3 at $1.375 per share expiring on
June 30, 2000. In April 1, 1999, pursuant to the consulting agreement, the
Company granted to Michael Watts 350,000 currently exercisable options
exercisable at $.50 per share expiring in March, 2001. Some of these options
have been exercised. As of June 30, 1999 Michael Watts has exercised all options
except 343,819 options at $.50 strike price.
In December, 1998, Kent Watts purchase a convertible promissory note of the
Company from a note holder. The Company had not made any payments of principal
or interest on the note. This promissory note was paid off to Kent Watts by the
Company at a 50% discount to the principal balance remaining and without any
accrued interest, to Kent Watts in May, 1999. The Company paid $12,500 to Mr.
Watts. This transaction extinguished the debt.
Item 13 EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed with this Annual Report or are
incorporated herein by reference:
Exhibit Number Description
21.1 Subsidiaries of Registrant
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
26
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Exchange Act,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 24th day of March 1999.
HyperDynamics Corporation
By: /s/ Kent Watts
--------------------
Kent Watts, Chairman of the Board,
Chief Executive Officer, and Chief Accounting Officer
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons in the capacities and on the dates
indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Kent Watts Chairman of the Board, Septermber 24, 1999
- --------------------- Chief Executive Officer and
Kent Watts Chief Accounting Officer
/s/ Robert Hill Director September 24, 1999
- ---------------------
Robert Hill
/s/ Ted W. Tarver Director September 24, 1999
- ---------------------
Ted W. Tarver
</TABLE>
27
<PAGE>
HYPERDYNAMICS CORPORATION
Audited Financial Statements
Index To Financial Statements
Independent Auditor's Report F-2
Balance Sheets as of June 30, 1999 and 1998 F-3
Statements of Income for the years ended June 30, 1999 and 1998 F-4
Statements of Changes in Stockholders' Equity for the years
ended June 30, 1999 and 1998 F-5
Statements of Cash Flows for the years ended June 30, 1999 and 1998 F-6
Notes to Financial Statements F-7
F-1
<PAGE>
Independent Auditor's Report
JOHN B. EVANS II
CERTIFIED PUBLIC ACCOUNTANT
Three Riverway, Suite 120
Houston, Texas 77056-1909
Voice (713) 623-2898
Fax (713)960-8128
September 24, 1999
To the Board of Directors
HyperDynamics Corporation
Houston, Texas
I have audited the accompanying consolidated balance sheets of HyperDynamics
Corporation (a Delaware corporation) and subsidiaries as of June 30, 1999 and
June 30, 1998, and the related consolidated statements of income, stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. My responsibility is to express
an opinion on these financial statements based on my audits.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audits provide a reasonable basis for our opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HyperDynamics
Corporation as of June 30, 1999 and June 30, 1998, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ JOHN B. EVANS, II
F-2
<PAGE>
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 1999 and 1998
ASSETS
Current Assets 1999 1998
<S> <C> <C>
Cash $ 67,483 $ 4,908
Certificate of deposit (restricted) 94,000
Accounts receivable - trade 86,386 149,249
other 5,001 30,013
Inventory 96,960 65,508
Revenue interest - current portion 35,970 35,970
Pre-paid Expenses 40,000
Other
------------ ------------
TOTAL CURRENT ASSETS 291,800 419,648
Property and Equipment 108,435 83,153
Other Assets
Revenue Interest net of current portion 58,658 104,458
Intangible assets - net 59,592 51,000
Other Assets - deposits 5,048 4,348
------------ ------------
TOTAL OTHER ASSETS 123,298 159,806
TOTAL ASSETS $ 523,533 $ 662,607
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 171,037 $ 271,212
Accrued expenses 11,200 525
Accrued taxes 4,699 12,353
TOTAL CURRENT LIABILITIES 186,936 284,090
------------ ------------
TOTAL LIABILITIES 186,936 284,090
------------ ------------
Stockholders' Equity
Common stock, par value $0.001; 50,000,000 shares 12,409 12,208
authorized; 12,409,503 and 12,208,321shares issued and outstanding.
Additional paid-in capital 1,709,925 1,567,500
Retained (deficit) (1,385,737) (1,201,191)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 336,597 378,517
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY $ 523,533 $ 662,607
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended June 30, 1999 and 1998
1999 1998
<S> <C> <C>
Revenues $ 1,498,124 $ 820,535
Cost of Revenues 870,151 702,164
------------ -----------
GROSS MARGIN 627,973 118,371
Operating Expenses
Selling 49,298 39,988
General and Administrative 725,080 653,013
Depreciation and Amortization 25,761 14,293
------------ -----------
TOTAL OPERATING EXPENSES 800,139 707,294
OPERATING LOSS (172,166) (588,923)
Other Income (Expense)
Other income / expenses (1,166) 3,750
Gain on sale of securities 29,980
Loss on disposal of asset (7,972)
Interest income 1,461 297
Interest expense (4,703) (3,428)
------------ -----------
TOTAL OTHER INCOME (EXPENSE) (12,380) 30,599
------------ -----------
LOSS FROM CONTINUING OPERATIONS (184,546) (558,324)
------------ -----------
NET LOSS $ (184,546) $ (558,324)
============ ===========
Loss per Common Share
Continuing operations (0.02) (0.07)
Discontinued operations N/A N/A
NET LOSS PER COMMON SHARE $ (0.02) $ (0.07)
Weighted average share outstanding 12,264,945 8,362,335
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Years Ended June 30, 1999 and 1998
COMMON STOCK
SHARES AMOUNT PAID IN CAPITAL RETAINED (DEFICIT) TOTALS
<S> <C> <C> <C> <C> <C>
BALANCES - JUNE 30, 1997 5,596,989 $ 5,597 $ 696,111 $ (642,867) $ 58,841
Common stock issued for cash 6,411,332 6,411 769,589 776,000
Common stock issued to purchase 100,000 100 50,900 51,000
certain assets of Wireless cable
connection
Common stock issued to purchase 100,000 100 50,900 51,000
interest in customer list of Perfect
Solutions, Inc.
Net (loss) (558,324) (558,324)
---------- ------- ---------------- ------------------- ----------
BALANCES - JUNE 30,1998 12,208,321 $12,208 $ 1,567,500 $ (1,201,191) $ 378,517
Common stock issued for cash 201,182 201 142,424 142,625
Net (loss) (184,546) (184,546)
---------- ------- ---------------- ------------------- ----------
BALANCES - JUNE 30, 1999 12,409,503 $12,409 $ 1,709,924 $ (1,385,737) $ 336,597
========== ======= ================ =================== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended June 30, 1999 and 1998
1999 1998
Cash flows from operating activities
<S> <C> <C>
Net (loss) $(184,546) $(558,324)
Adjustments to reconcile net income to cash provided from operating activities
Depreciation and amortization 25,761 14,293
Loss on disposal of assets 7,972
Gain on sale of securities (29,980)
Changes in:
Certificates of deposit 94,000 (24,000)
Accounts receivable - Trade 62,863 (105,349)
Other 25,012 (29,275)
Inventory (31,452) (38,771)
Prepaid expenses 40,000 (23,759)
Revenue sharing 45,800 36,572
Deposits and other (700) (1,000)
Net increase (decrease) accruals / payables
Accounts payable - trade (100,175) 79,550
Accrued expenses 10,675 (30,437)
Accrued taxes (7,653) 12,353
Other 1 1
---------- ----------
NET CASH PROVIDED (USED) FROM OPERATING ACTIVITIES (12,442) (698,126)
Cash flows from investing activities
Purchases of property, equipment, and intangibles (67,608) (25,514)
Proceeds on sale of securities 29,980
---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (67,608) 4,466
Cash flows from financing activities
Net increase (decrease) in bank line of credit (70,000)
Short-term convertible notes (37,500)
Reduction in notes payable
Sales of common stock 142,625 776,000
---------- ----------
NET CASH PROVIDED (USED) FROM FINANCING 142,625 668,500
ACTIVITIES
Net increase (decrease)in cash 62,575 (25,160)
CASH AT BEGINNING OF PERIOD 4,908 30,068
---------- ----------
CASH AT END OF PERIOD 67,483 $ 4,908
========== ==========
Supplemental Information
Interest paid 4,703 3,428
</TABLE>
See accompanying notes.
F-6
<PAGE>
HYPERDYNAMICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Business. Hyperdynamics Corporation (the "Company"), was a Texas corporation
- --------
formed in March 1996 to acquire and operate information systems service
companies. In August, 1996, the Company completed a "reverse merger" with Ram-Z
Enterprises, Inc., a Delaware corporation and a publicly-traded shell, whereby
the Company's shareholders acquired the Delaware corporation shell, which was
renamed Hyperdynamics Corporation, in exchange for stock. A business acquired
in May 1996 was MicroData Corporation ("MicroData").
During the past year, the Company began operations through a wholly-owned
subsidiary, Wired and Wireless Corporation ("Wireless"). MicroData is a
complete information systems service company including its legacy as a computer
hardware reseller. Wireless plans, designs and implements wireless information
systems. The fiscal year-end is June 30.
Basis of Presentation. The consolidated financial statements include the
- -----------------------
accounts of MicroData and Wireless. Significant inter-company accounts and
transactions have been eliminated.
Use of Estimates. Preparing financial statements requires management to make
- ------------------
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, and expenses. Actual results could differ from those
estimates.
Cash includes demand deposit bank accounts. Company policy includes any highly
- ----
liquid investments with original maturities of three months or less.
Restricted cash is cash on deposit at a bank to back an international letter of
- ----------------
credit for ongoing foreign purchases of computer components.
Receivables are written down, where appropriate, to the estimated collectible
- -----------
amount in the opinion of management.
Inventory is stated at the lower of cost or market using the first-in first-out
- ---------
basis (FIFO).
Inventory at June 30, by major classification, were as follows:
<TABLE>
<CAPTION>
- - Year Ended - -
1999 1998
------- -------
<S> <C> <C>
Hardware and Software $51,960 $39,508
Electronic Wireless Equipment 45,000 26,000
------- -------
$96,960 $65,508
======= =======
</TABLE>
F-7
<PAGE>
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Leasehold Improvements, Machinery and Equipment, and Depreciation is calculated
- ------------------------------------------------------------------
using the straight-line method over the useful lives of property and equipment.
Depreciation expense for was $19,890 for 1999 and $14,293 for 1998. A summary of
property and equipment is as follows:
<TABLE>
<CAPTION>
- - Year Ended - -
1999 1998
---------- --------
<S> <C> <C> <C>
Computer equipment 3 years $ 193,313 $149,689
Other 5 years 20,303 18,755
---------- --------
Total cost 213,616 168,444
Less: accumulated depreciation (105,181) (85,291)
---------- ---------
Net carrying value $ 108,435 $ 83,153
========== =========
</TABLE>
Intangible Property and Amortizationis calculated using the straight-line method
- ------------------------------------
over 10 years. Amortization expense for 1999 was $5,871. A Summary of Intangible
Property is as follows:
<TABLE>
<CAPTION>
- - Year Ended - -
1999 1998
---------- --------
<S> <C> <C>
Intangible Property - Perfect Solutions $ 51,000 $51,000
Web-site Development and Other 14,463 0
----------- -------
Total cost 65,463 51,000
Less: accumulated amortization (5,871) 0
----------- -------
Net carrying value 59,592 51,000
=========== =======
</TABLE>
Earnings (Loss) Per Share calculations are presented in accordance with
- ----------------------------
Financial Accounting Standards Statement 128, and are calculated on the basis of
the weighted average number of common shares outstanding during the year. They
include the dilutive effect of common stock equivalents, principally stock
options, in years with net income.
F-8
<PAGE>
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes are not due since the Company has had losses since inception.
- -------------
The Company has filed its annual tax returns for 1998 and 1997 and reported a
net operating losses (NOLs) of :
- - Year Ended - -
1998 1997
------- ---------
556,089 662,607
This is a total potential NOL currently reported on the Company's last two 1120
federal tax returns of $1,218,696. These potential NOL carry forwards with the
addition of the 1999 loss of about $184,546 may be utilized to reduce future
taxable income. These amounts expire at various dates beginning in year
2012. The Company is currently in the process of preparing its current 1120
tax return for fiscal year end June 30, 1999.
Reclassifications of certain prior year amounts were made to conform with the
- -----------------
current year presentation.
NOTE 2 - GOING CONCERN REMOVED IN 1999
In 1998 the following footnote was presented with Auditor's appropriate
Qualification:
Since inception, the Company has incurred substantial recurring operating losses
resulting in cash flow problems.
The Company has in the past relied almost entirely upon cash proceeds from stock
sales for working capital requirements. There can be no assurance that present
or future conditions will be conducive to funding current working capital needs
from proceeds from stock sales. Absent stock sales, the Company is uncertain
how it is going to fund working capital requirements. The financial statements
do not include any adjustments that might be necessary if the Company is unable
to continue as a going concern.
In 1999 the "Going Concern Qualification" has been removed based on the
following:
1. The Company's loss for 1999 was from the first two quarters of the fiscal
year and was considerably less than prior years.
2. The Company generated positive results of operations in the last two
quarters of 1999.
3. The Company was able to generate $142,625 of new capital from Financing
Activities according to the Statement of Cash Flows. This is only $41,921
short of the entire loss for the year. It appears that the Company maintains
the ability to obtain more capital through its "Financing Activities".
4. The Company has no debt.
5. The sales of the Company increased substantially for the year and
management's forecast for sales in fiscal year 2000 continues to grow. The
Company has a Contract with The Mattress Ventures, LP which will generate at
least another $700,000 in sales in fiscal year 2000.
On October 8, 1999 management reported an improved current Ratio (Current Assets
/ Current Liabilities) as of September 30, 1999 of 2.12 compared to 1.56 as of
June 30, 1999. The Quick Ratio (Current Assets - Inventory + Prepaid Expenses /
Current Liabilities) was reported to improve To 1.20 as of September 30, 1999
compared to .66 as of June 30, 1999.
In summary, the Company's sales forecast, potential gross profits, and ability
to raise additional capital are substantially enhanced over the prior year.
NOTE 3 - REVENUE SHARING INTEREST
In May 1997, the Company purchased a revenue interest in the Sierra-Net
subsidiary of Internet Finance & Equipment, Inc. by issuing 177,000 shares of
stock. Sierra-Net is an internet service provider in Nevada. The Company
valued this transaction at $177,000. Collections have been averaging $3,000 per
month since. The interest is 4% of gross revenue and 19% of gross sale proceeds
if any significant assets or stock of Sierra-Net are sold.
F-9
<PAGE>
NOTE 3 - REVENUE SHARING INTEREST (continued)
The current portion of this interest represents management's estimate of cash
receipts over the next 12 months.
NOTE 4 - MERGERS AND DIVESTITURE
In October 1997, the Company formed a new subsidiary, Wired and Wireless
Corporation, to plan, design and implement wireless information systems. The
Company purchased the equipment and inventory and hired the sole stockholder of
Wireless Cable Connection, Inc. in exchange for 100,000 shares of stock to the
stockholder.
In June 1998, the Company purchased the customer list and hired the sole owner
of Perfect Solutions in exchange for 100,000 shares of stock to the stockholder.
The equipment, inventory, and customer lists were valued at their fair market
values which approximated the fair market value of the stock at those times.
All of the assets were capitalized and valued at $102,000.
In October 1997, purchased the customer list and accounts receivable and hired
the sole stockholder of Barris Communications, Inc. for $40,000 cash. The
payment was charged to operations.
Employment agreements were signed with all three key persons involved, with
expiration dates ranging from June 1998 to May 1999.
F-10
<PAGE>
NOTE 5 - STOCK OPTIONS AND WARRANTS
Beginning with fiscal 1997, the Company adopted the disclosure requirements of
FASB Statement 123, Accounting for Stock Based Compensation Plans. The
Company's Stock Option Plan provides for the grant of non-qualified options to
directors, employees and consultants of the Company, and opportunities for
directors, officers, employees and consultants of the Company to make purchases
of stock in the Company. In addition, the Company issues stock warrants from
time to time to employees, consultants, stockholders and creditors as additional
financial incentives. The plans and warrants issuance are administered by the
Board of Directors of the Company, who have substantial discretion to determine
which persons, amounts, time, price, exercise terms, and restrictions, if any.
Options differ from warrants in that the options awards are immediately
exercisable and are assignable. In contrast, warrants have employment
termination restrictions, vesting periods and are non-transferable.
The Company uses the intrinsic value method of calculating compensation expense,
as described and recommended by APB Opinion 25, and allowed by FASB Statement
123. During the years ended June 30, 1999 and 1998, no compensation expense was
recognized for the issuance of these options and warrants, because no option
prices were below market prices at the date of grant. In addition, 78,182 and
577,999 options were exercised in 1999 and 1998 respectively. As of June 30,
1999, almost all outstanding warrants are payments for consulting and
professional services. Summary information on each are as follows:
<TABLE>
<CAPTION>
Weighted Weighted
average average
Options Share Price Warrants Share Price
--------- ------------- --------- ------------
<S> <C> <C> <C> <C>
Year ended June 30, 1999:
Outstanding at
June 30, 1997 710,660 1.02 605,000 1.25
Granted 711,000 1.26 70,850 1.00
Exercised (577,999) (.96)
Canceled (375,000) (1.25) (600,000) 1.25
--------- ------------- --------- ------------
Outstanding at
June 30, 1998 468,661 $ 1.27 75,850 $ 1.02
Granted 480,000 .50 350,000 0.50
Exercised ( 78,182) .70
Canceled --------- ------------- --------- ------------
Outstanding at
June 30, 1999 870,479 .90 425,850 0.59
========= ============= ========= ============
</TABLE>
F-11
<PAGE>
NOTE 5 - STOCK OPTIONS AND WARRANTS (Continued)
Additional disclosures as of June 30, 1999 are:
<TABLE>
<CAPTION>
Options
<S> <C>
$ .50-$1.375
------------------
Total options
Number of shares 870,479
Weighted average exercise price $ 0.90
Remaining life 2-4 years
All are currently exercisable options.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Warrants Warrants Warrants
$ 0.50 $ 1.00 $ 1.25
------------------ ------- -------
Total warrants
Number of shares 350,000 70,850 5,000
Weighted average exercise price $ 0.50 $ 1.00 $ 1.25
Remaining life 2-3 years 1 year 1 year
All are currently exercisable warrants.
</TABLE>
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for awards under those
plans consistent with the Black-Scholes option-pricing model suggested by FASB
Statement 123, the Company's net losses and loss per share would have been
increased to the pro forma amount indicated below:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net loss -As reported $ (184,546) $ (558,324)
-Pro forma (640,323) (1,105,031)
Net loss per share -As reported (0.02) (0.07)
-Pro forma (0.05) (0.13)
</TABLE>
Variables used in the Black-Scholes option-pricing model include (1) 6.0%
risk-free interest rate, (2) expected option life is the actual remaining life
of the options as of each year end, (3) expected volatility is the actual
historical stock price fluctuation volatility and (4) zero expected dividends.
F-12
<PAGE>
NOTE 6 - BANK CREDIT FACILITIES, SHAREHOLDER NOTES PAYABLE, AND OTHER FINANCING
In May of FYE 1998 the Company issued a letter of credit from Frost National
Bank to secure a vendor purchase for wireless equipment purchased from Hexawave,
Inc. The LOC was secured by a $94,000 Certificate of Deposit. The CD was
released and the vendor was paid on August 24, 1998.
During 1998, the company received $350,000 from Emerald Bay, LTD (EBLTD)an
offshore investor for a convertible note at 10% that had matured on November 15,
1997. The Company attempted to find additional investors to pay the loan off,
but was not able to do so in the time frame required. EBLTD converted its note
plus accrued interest to 5,833,333 shares on January 12, 1998 after a negotiated
reduction to the conversion rights from 3 cents per share to 6 cents per share.
NOTE 7 - MAJOR CUSTOMERS AND VENDORS
A summary of significant customers and vendors for the years ended June 30, 1999
and 1998, together with their respective size as a percent of total sales and
purchases for the years then ended is as follows:
<TABLE>
<CAPTION>
Percent of Percent of
Totals 1999 Totals 1998
---- -------- -------- --------
<S> <C> <C> <C> <C>
Sales
Comband, S.A. de C.V. (Mexico) 31% $460,890 42% $345,000
ADC Telecommunications 11% $163,500
The Mattress Ventures, LP 22% $329,276
Purchases
Hexawave, Inc. 50% 314,000
ATI 7% $ 59,163
CCW 17% $147,500
Great Plains Software 18% $159,362
</TABLE>
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company is liable on an office lease for $3,065 per month on a
month-to-month lease.
The predecessor shell company, RAM-Z Enterprises, has an order restricting
certain exemptions on sales of securities by it in the State of Utah, based on
actions of former owners in the mid-1980's.
The Company has no lawsuits pending or threatened against it.
F-13
<PAGE>
EXHIBIT 21.1
Subsidiaries owned by the Company:
IThost.net Corporation (Formerly MicroData Systems, Inc.), A Texas Corporation
Wired and Wireless Corporation, A Texas Corporation
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 67483
<SECURITIES> 0
<RECEIVABLES> 86386
<ALLOWANCES> 0
<INVENTORY> 96960
<CURRENT-ASSETS> 291800
<PP&E> 213617
<DEPRECIATION> 105181
<TOTAL-ASSETS> 523533
<CURRENT-LIABILITIES> 186936
<BONDS> 0
0
0
<COMMON> 12409
<OTHER-SE> 324188
<TOTAL-LIABILITY-AND-EQUITY> 523533
<SALES> 1498124
<TOTAL-REVENUES> 1490447
<CGS> 870151
<TOTAL-COSTS> 800139
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4703
<INCOME-PRETAX> (184546)
<INCOME-TAX> 0
<INCOME-CONTINUING> (184546)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (184546)
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
</TABLE>
