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, 2000
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]
Issuer's revenues for the year ended June 30, 2000 were $2,137,998. The
aggregate market value of Common Stock held by non-affiliates of the registrant
at September 22, 2000, based upon the last reported sales prices on the OTCBB of
$2.8125 was $17,350,863. As of September 22,2000, there were 13,567,859 Shares
of Common Stock outstanding.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PART I
<S> <C> <C>
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 27
</TABLE>
2
<PAGE>
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. 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.
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 SierraNet,
Inc. The monthly payments were received consistently up until the time
SierraNet, Inc. was acquired by M&A West, Inc. (OTC/BB: MAWI). The Company
received its portion of cash proceeds as disclosed in the financial statements
and maintains a 19% interest in 153,846 shares of MAWI or 29,230 shares. On
October 1, 2000 the MAWI stock was trading at approximately $5 per share. Based
on the acquisition agreement it appears that there is a possibility for the
acquisition to be unwound and thus Hyperdynamics Management, based on
conservative accounting principles, is waiting for complete resolution to
determine the value of its 19% interest.
Initiation and Sale 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.
3
<PAGE>
On September 30, 1999, management decided that the Wired & Wireless business was
not conducive to its business plan to become the premier Integrated Technology
Service Provider (ITSPTM). Thus it sold the subsidiary to Joseph Barris and Ted
Tarver, In the transaction Wired & Wireless took all of its assets and
liabilities and the Company received a revenue sharing agreement. Cash flows
received to date have totaled $4,515. In November the President of Wired &
Wireless was in a serious hunting accident and on a long road to recovery. Any
future revenue is contingent on the recovery of the President and the rebuilding
of their business.
Addition of key management
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 the Company's capabilities. A major area of focus for Mr. Briers has
been 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. The addition of Mr. Briers enhanced the
primary mission focus of the Company's target market for its integrated IT
services.
The Company's first Enterprise Wide Mid-range System Project
On June 3, 1999 the Company announced a significant Enterprise Wide 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. Revenues to date have totaled $1,503,634 as of June 30, 2000.
The Company has completed the planning, design, and development phase I together
with its key partner Great Plains software. In phase I a custom point-of-sale
application has been developed and is currently being rolled out to the Mattress
Firm stores nation-wide. This is a custom web-based application that integrates
via Microsoft Site Server and Great Plains eEnterprise accounting software to
run at the point-of-sale workstation without any additional software than a
standard web browser. Hyperdynamics designed the system to use the Internet as
the primary connectivity thereby bypassing the need for much more costly private
wide area networking. These facts coupled with the utilization of Microsoft SQL
server on the back-end makes this retail point-of-sale system one of the most
feature rich, integrated, scalable and cost effective system available today.
Based on the success of this project and a growing number of opportunities in
our pipeline, the Company has a growing confidence in its ability to obtain more
and more enterprise level system projects. Additionally, the Mattress Firm has
indicated the possibility of significant follow-on business with respect to
Phase II of this project which is expected to address more customization in
inventory control including bar-coding among other things. These projects are
perfect lead -ins for our new Integrated Technology Centers, the first of which
is being built in Houston, Texas at the Westwood Technology Center.
4
<PAGE>
Current Direction of Business Plan
Mission Statement
To be the premier integrated technology service provider (ITSPTM)
that maximizes our clients' return on their technology investment
Hyperdynamics has a mission to be a premier integrated technology services
provider (ITSPTM). The information technology (IT) industry is the most dynamic
and rapidly growing industry in the history of free commerce. Through its
initial strategies, Hyperdynamics will build its core IT knowledge base and
infrastructure capability to position it to be a leader in the e-Business
economy of the future. Its primary goal is to position itself to capture its
share of what we perceive to be the largest potential recurring revenue base in
history.
Hyperdynamics has refined and continues to develop the best cost/beneficial IT
services. To maintain flexibility the Company has grouped its approach to IT
services into three groupings.
CONVENTIONAL IT SERVICES are provided on a highly flexible basis to
help companies with existing IT infrastructures to plan, design,
implement, and manage their own telecommunications, wide area
networking, server and workstation systems, operating systems, and
integrated software applications. Our clients dictate to which degree
we get involved in any one or all of these defined areas of IT.
EBUSINESS MIGRATION SERVICES are provided to specifically address the
evolution of our clients IT systems to support the new ways of doing
business such as business to business and business to consumer
e-Commerce and Internet marketing. Hyperdynamics Corporation designs
and implement transaction based, mission critical eCommerce systems
for its clients.
ITHOSTING SERVICES are provided to handle a company's complete
end-to-end IT requirements and literally become our clients IT
department by contract. The Company is continuing to develop its IT
hosting infrastructure to allow it to professionally manage our
clients centralized servers in a true data center environment.
Over the last five years, the technology industry has proven out and tested all
manner of service delivery models. During that time, the client has assumed
varying levels of risk, responsibility, and management of the IT processes.
Three models have risen to the top as the most cost-effective, performance
enhancing, and results-focused:
- The outsource IT services organization,
- The Internet Service Provider (ISP)
- And the Application Service Provider (ASP).
HyperDynamics combines all three delivery models into a single,
customer-directed delivery model - the Integrated Technology Service Provider or
ITSP as it has come to be known. By bringing together the power of the ITSP
5
<PAGE>
to the emerging growth and mid-market clients, HyperDynamics allows its
customers yet another avenue of competitive advantage in their unique market
places.
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.
Our Central Message to Customers
HyperDynamics enables you for tomorrow today. We do this through comprehensive
IT services and applications hosting that maximize your returns. We deliver
best of breed technology and rapid deployment methodologies to empower your
business. At HyperDynamics, we're focused on today so you can focus on
tomorrow.
The phenomenal information technology (IT) industry
You cannot talk about information technology (IT) without having a major focus
on the Internet and e-Business. The Internet and all of its parts 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 in the right place at the right time.
The Emerging Digital Economy II, published by the US Department of commerce
discloses the following statistics and estimates in June 1999:
A. THE EXPANSION OF THE INTERNET
1. Total people across the globe with Internet access has grown to 171
million worldwide
2. From 1998 to 1999 web users increased 55%, Internet hosts rose by 46%,
web servers increased by 128%, and new web addresses rose 137%
3. 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.
4. 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.
5. Concerning electronic commerce in the digital economy:
"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."
6
<PAGE>
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".
B. 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."
C. 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.
D. 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.
7
<PAGE>
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 integrated technology service provider (ITSPTM), application
service provisioning is a primary subset of the business plan we
implemented over two years ago. With our strategy for our cost/benefit
designed IT hosting centers, we will provide the best end-to-end
services for our clients at the best possible cost. This will allow
our clients to focus on what makes them money.
IT HOSTING AND EXSOURCING
In the December 1999 Forrester research report, "The exSourcing
Imperative", the research writers identify a "new breed of
outsourcer", the "exSourcer". In the report Forrester defines the
exSourcer as:
"A help provider that manages multi-company processes and
technologies across the Internet."
In the report, Forrester graphically depicts the difference between
the traditional IT outsourcing model from the new exSourcing strategy.
In traditional IT outsourcing, the Company is the centerpiece
surrounded by its PC, Data Center, and Network outsourcers with custom
integration requirements for each of its Customers, Partners, and
Suppliers having diverse systems needing to access its system
processes. With the exSourcing model, the exSourcer becomes the
centerpiece by extending its clients integrated multi-company process
services such as ordering, account status, and inventory management to
its customers, vendors, and partners. The exSourcer primarily utilizes
the Internet as the connection point between the transacting parties
and must manage the relationships between them.
Hyperdynamics' business plan for IT hosting has significant
similarities and cross over with Forrester's exSourcing concept. While
maintaining its flexibility to provide conventional IT services and
moving towards the IT hosting model, the Company will naturally be
developing and performing more and more business process services.
Hyperdynamics is positioned to become the premier ITSPTM providing
complete end-to-end IT hosting services on an outsourced and
ultimately exSourced basis.
8
<PAGE>
E. 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 IT hosting strategy to
intensely cross train our IT professionals and build our 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.
Ultimately, IT hosting 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. Network
based video applications will be integrated in a like manner. 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.
9
<PAGE>
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
eEnterprise 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
expanding IT hosting infrastructure. This will allow the Company to
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 IT 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 sixteen (16) full time employees. The Company uses independent
contractors to minimize fixed overhead prior to its initiation of its first
Integrated Technology Center (ITC), expected to come on-line in late November
2000. While utilization of independent contractors reduces the Company's gross
profits in the interim, management believes that it ultimately minimizes its
risk during its transition to the new IT hosting business model. Direct
employment is expected to increase dramatically with the opening of its ITC. No
employees are represented by a union and the Company believes that its labor
relations are good.
Key Vendors and Technical Certifications
In the past two years Hyperdynamics has positioned itself to successfully shift
its primary revenue base more clearly to IT services while maintaining technical
expertise to continue selling hardware and software components on a convention
basis, especially to its larger customers. To support this goal the Company has
enhanced or maintained certifications with Microsoft as a Microsoft Solution
Provider, Great Plains Software and Seibel sales management as eEnterprise
reseller, Intel Product Dealer and now Intel Premier Partner, Citrix Systems
Certified reseller, 3Com Network Systems Integrator, Xerox Peripherals reseller,
Extreme Networks Premier VAR, and CCC Networks authorized reseller just to name
a few. With its relationship with Intel, the Company has the capability to
provide custom hardware solutions along with its IT hosting services. This
capability provides a tighter integration for its services.
In conjunction for its plans to establish its first ITC at the Westwood
Technology Center as discussed below, the Company negotiated with major
International Exchange Carriers to decide on its key Internet backbone partner
for its redundant and scalable bandwidth requirements. Based on the ability to
deliver a redundant fiber based On-Net solution and their co-marketing plan
presented as the "HyperGrowth" plan, AT&T has become that partner. Other
carriers considered either did not have a strong co-marketing plan or could not
deliver the requirements in the time specified. Management feels that this
accomplishment is another milestone that has positioned the Company for true
"HyperGrowth", as AT&T puts it.
10
<PAGE>
Subsequent Events
Stock Buyback Program. On April 25, 2000 we announced a stock buy back program
for up to 500,000 shares of our common stock. We have purchased 71,000 shares to
date in the open market. Our last open market purchase occurred on July 24,
2000, of which 2,500 shares were purchased subsequent to June 30, 2000. We do
not intend to make any more purchases of our stock under this program.
In August 2000, we announced an exchange offer. We anticipate delivering the
exchange offer disclosure materials to our shareholders shortly after we file
this Form 10-KSB. Our Board of Directors approved an Exchange Offering for a
minimum of 6,620,676 shares up to a maximum of 11,917,216 shares of our common
stock. Under the terms of the exchange, shareholders will exchange 100 shares of
the company's common stock for a Unit. Each Unit consists of one share of 9%
series B redeemable preferred stock (stated value $200), 100 redeemable Class A
warrants, 100 redeemable Class B warrants and 100 redeemable Class C warrants.
ABOUT THE PREFERRED: The preferred stock (stated value $200) will pay a 9%
dividend on a quarterly basis in arrears. As long as the units trade as
originally issued, the dividend will be credited automatically as a reduction of
the exercise price of the Class A warrant until fully paid, then to the exercise
price of the Class B warrant until fully paid, and then to the exercise price of
the Class C warrant until fully paid. Thereafter, or in the event that all of
the Unit's component securities are detached, the dividends will be paid in cash
or shares of common stock, at our discretion. The preferred stock is redeemable
at its stated value plus accrued dividends. The preferred stock is not
convertible into common stock.
ABOUT THE WARRANTS: Each Class A, B, and C warrant will have an exercise of
price of $1.35 per share and will expire after 7-1/2, 15 and 22-1/2 years,
respectively. Beginning no sooner than one year and one day after the completion
of the exchange, and only after the daily closing bid price on the common stock
is over $5 for a period of 20 consecutive trading days, we may, at our
discretion, call for redemption the Class A, B, or C warrants at a redemption
price of $.01 per warrant. In the event that the Class A, B or C warrants are
not detached from the unit, then the dividend payments from the preferred stock
will fully pay for the exercise price of the Class A, B and C warrants in 7-1/2,
15 and 22-1/2 years, respectively, at which time the warrants will be
automatically exercised into shares of common stock.
Our shareholders should carefully read the Exchange Offer and related materials
that we will be sending out within a reasonable time because they contain
important information, including various risks, terms and conditions to the
Exchange Offer. Shareholders can obtain the Exchange Offer and related materials
free at the SEC's Web site at www.sec.gov or from the information agent or
exchange agent. Shareholders are urged to carefully read these materials prior
to making any decision with respect to the Exchange Offer. There is no assurance
that the minimum number of shares will be exchanged.
The board of directors of HyperDynamics has approved the Exchange Offer.
However, neither we nor our board of directors make any recommendation to
shareholders as to whether to exchange or refrain from exchanging their shares.
Shareholders must make their own decision as to whether to exchange some or all
of their shares.
11
<PAGE>
Item 2 PROPERTIES
The office of the Company is currently located at 2656 South Loop West, Suite
103, Houston, Texas 77054 where the Company leases approximately 3,000 sq. ft.
of commercial office space. 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.
On May 9, 2000 the Company signed a 10-year lease with AGB Westwood, LTD to
lease its new facilities at the Westwood Technology Center, a 540,000 square
foot development in Houston, Texas. After tremendous design efforts were put
forth working with Moody Rambin Interests, Lamereaux and Associates-Architects,
Day Brown Rice Engineering, and Smith Commercial Construction were exerted to
design the first Hyperdynamics Integrated Technology Center, build-out initiated
on September 12, 2000. AGB Westwood, LTD is one of the largest Real Estate
development partnerships that focus on picking selected properties around the
country and retrofitting them into technology centers. Basic features expected
upon the completion of WTC are redundant power sources from Reliant Energy with
an Automatic Transfer Over (ATO) switching capability in case of a power outage.
Additionally, it is expected that power available to the facility will hit 100
watts per square foot so as to support rapid growth for companies like
Hyperdynamics.
Under the lease the company leased approximately 15,236 sq. ft. of space to be
used initially for corporate offices, data center and integration center
operations as well as marketing and sales for its new HypersourceTM services
model. Additionally, plans for specified technical training areas are included.
The Company also has a right of first offer on an adjacent 15,000 sq. ft. In the
facility, the data center component will provide the guts of the operation as
the focal point for AT&T's redundant fiber co-location and with features such as
FM200 fire suppression, N+1 redundant power with battery backups, backup
electric generator, redundant air conditioning, 24 inch raised flooring, leak
detection, and security system. The more costly data center component has been
designed to be as modular as possible so that the Company can more easily match
up capital investment outlay with the closure of new Hypersource service
contracts.
Hyperdynamics paid the first and last months rent of the 60-month lease upon
signing. Upon commencement of the lease the Company will receive a 6 month free
rent period and then on the 7th month after commencement begin paying $17,775
per month or $14 per square foot. Should the Company not elect to cancel the
lease, as is its right, beginning the 55th month of the lease the rate will
change to $20,632 per month or $16.25 per square foot. Per mutual agreement by
AGB Westwood and Hyperdynamics on September 22, 2000, the parties are in
agreement to commence the lease on November 1, 2000.
Item 3 LEGAL PROCEEDINGS
Arbitration has commenced between Charterbridge Financial Group, Inc. (the
claimant) and us (the respondent). Charterbridge is claiming that it was
entitled to receive warrants to purchase up to 100,000 shares of our common
stock, exercisable at $0.75 per share in connection with an investor relations
contract with us. This arbitration was filed in June 2000. We believe that
Charterbridge breached the contract and is owed nothing. The parties are
presently in settlement negotiations.
12
<PAGE>
We were named as a defendant in litigation in which the plaintiff, Cherie Dunn,
is claiming that she was entitled to receive options to purchase up to 55,000
shares of our common stock, exercisable at $1.00 per share in connection with an
employment agreement with us. The case is styled Cherie Dunn v. Hyperdynamics
Corporation, No. 2000-27220, 80th Judicial District Court, Harris County, Texas.
This suit was filed in June 2000. We dispute the plaintiff's allegations.
Initial discovery has recently commenced in this matter.
In 1984, we failed to file financial statements as required by Utah law within
thirteen months after our 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 issued
an Order by which an offering exemptions which would be otherwise applicable and
available to us by reason of Section 61-1-14 of the Utah Code were revoked by
the Utah Order until such time as we filed financial statements as required by
Rule 10.2-1(b)(7) of the Division. The State of Utah vacated this order in July
2000.
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 21, 2000, the company held its annual shareholder meeting as disclosed
its proxy statement filed in June 2000. The shareholder meeting was for
shareholders of record at May 8, 2000. There was 13,007,888 shares outstanding
on that date. All nominated directors were duly elected and Malone & Bailey,
PLLC was ratified as the auditor for the fiscal year end June 30, 2000. There
was no other business conducted.
The voting results including proxy's received were as follows:
Total shares voting in person and by proxy totaled 11,362,122 or 87% of the
outstanding shares as of the date of record
<TABLE>
<CAPTION>
Directors Elected
# of shares FOR # of shares AGAINST # of shares ABSTAIN
<S> <C> <C> <C>
Kent Watts 11,362,122 0 0
Robert J. Hill 11,362,122 0 0
Harry Briers 11,362,122 0 0
Bobby Lewis 11,362,122 0 0
Christopher
St. Laurent 11,362,122 0 0
RATIFY MALONE & BAILEY, PLLC
# of shares FOR # of shares AGAINST # of shares ABSTAIN
11,362,122 0 0
OTHER BUSINESS - NONE DISCUSSED
# of shares FOR # of shares AGAINST # of shares ABSTAIN
11,359,622 1,000 1,500
</TABLE>
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>
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
2000
First Quarter 1.1250 0.6800
Second Quarter 5.0625 0.5000
Third Quarter 7.7500 3.6250
Fourth Quarter 4.7500 1.1875
</TABLE>
On September 22, 2000, the last bid for the Common Stock as reported by the
OTCBB was $2.8125 per share. On September 21, 2000, there were approximately
3,000 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, 2000, 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
In October 1999 we issued a total of 275,000 warrants to purchase shares of
common stock to one vendor as payment in kind for business and financing
services rendered. These warrants are immediately exercisable at an exercise
price of $1.50 per share. The expiration date of these warrants is September,
2002. This was a private placement made in reliance on Section 4(2) of the Act.
In December 1999, we issued a total of 57,500 options to purchase shares of
common stock to 10 employees as payment in kind for employment (bonuses and
incentive compensation). 17,500 of these options are immediately exercisable at
an exercise price of $2.00 per share. 40,000 of the options vest at future dates
at the discretion of the board with exercise price of $2.00. The expiration date
of these options is November, 2001. This was a private placement made in
reliance on Section 4(2) of the Act.
In March 2000, we issued 100,000 shares of section 144 restricted common stock
pursuant to the exercise and payment of $50,000 or $.50 per share of outstanding
Consultant Warrants with Mr. Randy Massey.
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, 2000 and 1999.
General
With its focus heavily on the The Mattress Firm Project in FYE 2000 the Company
recognized some promising core revenues. Having limited capital resources for
the first half of the year and with its intense focus on this project, the
ability for the Company to close substantial follow-on business was curtailed.
The Company's priorities were clearly to make this project run as smooth as
possible and to focus its sites on establishing its new Integrated Technology
Center (ITC) at the Westwood Technology Center in Houston, Texas. The Company
has been able this year to move forward with its IT hosting business plan by
leasing its new facilities at the Westwood Technology Center and contracting
with AT&T for its fiber based backbone. AT&T is providing redundant physical
path fiber to be colocated at the new ITC and is also working with Hyperdynamics
with respect to co-marketing and business development through their
"Hypergrowth" program. The Company has also been able to implement new and
improved business development strategies associated with the new ITC with help
from Interneed as a consulting partner in Houston that has helped to define our
complete marketing and sales strategy. However, with all of this progress
towards the new IT hosting plan, the slowing down of Phase I of The Mattress
Firm Project and cost overruns in the fourth quarter curtailed revenues and
gross profit percentages. Regardless of its operational difficulties, the
Company is now on a fast track to its new Integrated Technology Center (ITC) and
is expected to go on-line in late November or early December 2000. Management
is expecting increasing revenues in the second quarter of 2001. Based on
current
16
<PAGE>
activity for increasing demand and quotation for end-to-end Hypersource services
to be provided at its new ITC; additional potential business with The Mattress
Firm for phase II of their requirements; and other mid-range systems projects
expected to be closed, management expects major revenue and gross profit
increases by the third quarter of FYE 2001.
With the focus of the Company to be the Premier Integrated Technology Service
Provider (ITSPTM) the Company is in a transition to a heavier mix of higher
contribution margin business as an IT service company. The acquisition strategy
of the Company has not yet been implemented. It has been delayed thus far
because of difficulties to negotiate acceptable capital structures and a
technology market that has seriously retracted in recent months.
Results of Operations
Revenues increased to $2,137,998 for the year ended 2000, from $938,306 as
restated for 1999. The 128% increase was due to the major emphasis and focus on
the major e-Business project with The Mattress Firm and information technology
services and e-Business related sales. The Mattress Firm was 71% of current year
business and was the reason for the increase. We continue to service their needs
for hardware and follow-on project requirements as their system continues to be
rolled out to their retail sites.
Cost of revenues increased to $1,962,150 (91.78% of revenue) for the year ended
2000, from $747,046 (79.6% of revenue) as restated for 1999. The reason for the
significant increase cost of sales is related directly to the increase in
related revenues, however the increase in the percentage of cost of sales to
revenue needs further explanation. During the year the Company made some
substantial decisions to position itself for its new IT hosting business model.
At least for the first 1/2 of the fiscal year we were not in a position to move
forward with the new IT hosting business model. With respect to its largest core
project regarding the Mattress Firm, management decided not to hire the
necessary programming consulting group that would add substantially to its fixed
overhead. Instead we contracted with Great Plains Consulting to perform a
substantial portion of the custom development performed on this project during
the year. This was done in an effort to minimize fixed overhead during a period
of time that we expected to be in a major transitional state. Towards the end of
the third quarter we were already heavily focused on the major transition to the
new business model being implemented with the Westwood Technology Center. By the
end of the fourth quarter it became apparent that the Mattress Firm contract had
incurred cost overruns to the extent that our billings were immediately cut
short. In an effort to maintain a higher level of customer satisfaction and be
positioned properly for significant future business, management was compelled to
give approximately $80,000 in credits, which in effect reduce our revenues and
worsened our gross profit percentages because we had committed a certain amount
already to our sub-contractors. Management expects cost of sales as a percentage
to improve significantly in the future.
Selling, General and Administrative expenses increased to $669,485 (31.31% of
revenue) for the year ended 2000, as compared to $259,324 (33.86% of revenue) as
restated for 1999.The increase was partly due to increased selling expenses
which increased to $196,595 as a result of substantial sales commissions paid
for the year ended 2000 compared to $58,393 as restated for 1999. Legal and
accounting expenses increased by approximately $36,000. The remaining increase
was due to an increased level of overall increase in salaries (both cash and
value of options), travel, general office, rent, utilities, and etc. across the
board. Management has considered this necessary to get prepared for the expected
increase in activity resulting from its new Integrated Technology Center.
Management expects selling, general, and administrative expenses to decrease
significantly on a percentage of revenue basis as activity levels increase.
17
<PAGE>
Net Loss. The net loss of the Company was $(616,048) for the year ended 2000, or
($0.04) per share, compared to $(184,546) or ($0.01) per share as restated for
1999. The net loss available to shareholders was $(666,132). This amount
includes the deduction for preferred stock dividends.
The negative results is due to Phase I of the Company's core eBusiness project
with The Mattress Firm coming to a close at the same time that it began its
transition to its new business model. Also Selling, General, and Administrative
expenses have continued to increase partly in preparation for its new revenue
model associated with its first Integrated Technology Center currently being
built in Houston at the Westwood Technology Center. Management expects revenues
and margins to dramatically increase in the coming periods as a result of its
key agreements with AT&T and by putting in this key infrastructure and its full
blown marketing plan to fill it to capacity.
Liquidity and Capital Resources
At June 30, 2000 the Company's current ratio of current assets to current
liabilities was 6.16. This compares to 2.52 for 1999. The Company has
dramatically improved its current ratio primarily through obtaining additional
capital financing through its Reg D private placement completed during the third
quarter of the year. The Company does not have any long-term debt. In the
process of increasing its marketing and sales activities in preparation for
bringing the new IT hosting facility on-line, the Company is evaluating the
opportunities for strategic partners that could provide financing for up to an
additional $10,000,000 equity financing to be used for implementing additional
IT hosting centers 2 & 3 in strategic locations around the country and for key
acquisitions of technically talented IT consulting and integration firms. Thus,
the Company is talking with several potential business partners that could
potentially provide capital to implement Integrated Technology Centers 2, 3, and
4.
The Company is in a position to obtain additional capital upon the exercise of
previously issued warrants and outstanding options for common stock.
The Company is continuing its plans to raise necessary capital to qualify it to
be listed on an exchange such as the NASDAQ or American Stock Exchange. 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 would include plans to acquire
entrepreneurial based and technically talented companies to enhance the
Company's e-Business and IT Hosting capabilities. No assurance can be given that
the Company will qualify for or become listed on the American or Nasdaq stock
exchanges or that it will be successful in raising additional capital through
the sale of its securities.
In an effort to enhance shareholder value, on August 31, 2000 the Company's
Board of Directors approved an exchange offering for a minimum of 50% to a
maximum of 90% of the company's common stock. Under the terms of the exchange,
shareholders will exchange 100 shares of the company's common stock for a unit.
Each unit consists of one share of 9% series B redeemable preferred stock
(stated value $200), 100 redeemable class A warrants, 100 redeemable class B
warrants and 100 redeemable class C warrants.
18
<PAGE>
It is currently planned that the preferred stock (stated value $200) will pay a
9% dividend on a quarterly basis in arrears. As long as the units trade as
originally issued, the dividend will be credited automatically as a reduction of
the exercise price of the class A warrant until fully paid, then to the exercise
price of the class B warrant until fully paid, and then to the exercise price of
the class C warrant until fully paid. Thereafter, or in the event that all of
the unit components are detached, the dividends shall be paid in cash or shares
of common stock, at the discretion of the company. The preferred stock is to be
redeemable at its stated value plus accrued dividends. The preferred stock is
not convertible into common stock.
At this time it is anticipated that each class A, B, and C warrant will have an
exercise of price of $1.35 and will expire after 7 1/2, 15 and 22 1/2 years,
respectively. Beginning no sooner than one year and one day after the completion
of the exchange, and only after the daily closing bid price on the common stock
is over $5 for a period of 20 consecutive trading days, the company may, at its
discretion, call for redemption the class A, B, or C warrants. In the event that
the class A, B or C warrants are not detached from the unit, then the dividend
payments from the preferred stock will fully pay for the exercise price of the
class A, B and C warrants in 7 1/2, 15 and 22 1/2 years, respectively, at which
time the warrants will be automatically exercised into shares of common stock.
Shareholders will be urged to read carefully the exchange offer and related
materials that the company will be sending out within a reasonable time after
the filing of this annual report because they contain important information,
including various risks, terms and conditions to the exchange offer.
Shareholders will be able to obtain the exchange offer and related materials
free at the SEC's Web site at www.sec.gov or from the Company's to-be-announced
-----------
information agent. The Company makes absolutely no assurances that the minimum
number of shares of common stock (50%) will be exchanged.
The board of directors of HyperDynamics has approved the exchange offer.
However, neither the company nor its board of directors will make any
recommendation to shareholders as to whether to exchange or refrain from
exchanging their shares. Shareholders will be required to make their own
decision as to whether to exchange some or all of their shares. Announcement as
to the exchange agent for the exchange offer is still pending.
Factors affecting future results
This year the Company gained significant experience with large custom eBusiness
projects and it succeeded in raising its necessary core capital.
The degree that the Company is successful in designing, building, and
implementing its first new Integrated Technology Center (ITC) and the degree and
speed that it is also able to begin to sell out its capacity will go a long way
to determining the positive future results of operations.
The implementation of the Company's new ITC Marketing plan co-developed with the
help of Interneed, a business development firm in Houston, is expected to steer
Hyperdynamics to success.
Once in its new ITC, the Company must continue to increase its recurring revenue
base, continue to close project oriented eBusiness contracts, raise additional
capital to start building ITC 2, 3, and 4, and to start making some core
acquisitions of successful IT services companies to combine with its ITC
strategy. These are the goals established by management for the fiscal year to
end June 2001.
Management is very pleased with the results of FYE 2000 results and is more
excited than ever about the Company's future and ability to grow steadily and on
a profitable basis.
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.
Name Position Age
Kent Watts Director, Chief Executive Officer, 42
and Chief Accounting Officer
Robert J. Hill Director, Executive Vice President 46
Harry J. Briers Director, Vice President - Operations 37
Chief Operating Officer
Bobby P. Lewis Director 59
Christopher
St. Laurent Director 33
Lewis Ball Secretary 69
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 42, became Chairman of the Board of Directors and was named
the Company's President and Chief Executive Officer on June 4, 1997. 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 and has been MicroData's CEO until he became President and
Chief Executive Officer of Hyperdynamics Corporation. He has extensive
experience working with management information systems. Mr. Watts has been
involved in the design, implementation and management of heterogeneous,
multiprotocol 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 46, 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. In July, 1997, Mr. Hill was appointed
vice-president of the Company. 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
20
<PAGE>
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.
Harry James Briers, age 37, has been a Director since March 2, 2000. Mr.
Briers was also elected as Vice President of Operations for Hyperdynamics
Corporation and named the Chief Operating Officer. From 1988 until May of 1998,
Mr. Briers owned and operated Perfect Solutions, a software consulting firm in
Houston, Texas. He was named President of Ithost.net Corporation (wholly owned
subsidiary) in May of 1999. He served as the Director of Integrated Information
Systems when he joined the company in May of 1998. Prior to that, he founded and
operated Perfect Solutions, an office automation systems provider, for over ten
years. He has extensive experience in the selling and implementation of mission
critical software applications. Prior work experience included consulting for
Ernst and Young in their Entrepreneurial Services Group. Harry has BS in
Accounting and a MBA from the University of Houston - Clear Lake.
Bobby P. Lewis, age 59, has been a Director since March 2, 2000. From 1995
through 1998, Mr. Lewis was chairman of BPL Investments, Inc. Since 1998 Mr.
Lewis, has been an independent investor and associate with Prudential Allied
Realtors in Pearland, Texas. Mr. Lewis specializes in commercial Real Estate and
is expected to be instrumental with regard to the Company's strategies
pertaining to integration of Technology and Real Estate. Mr. Lewis has also been
a past Director of Total World Telecom, a publicly traded long distance carrier
in the early 1990's. Mr. Lewis has a B.S. degree in Mathematics from University
of Memphis and MS in Systems Management from University of Southern California.
Christopher D. St. Laurent, age 33, has been a Director since March 13,
2000. From 1992 through 1994, Mr. St. Laurent was an Investment Analyst with
Central United Life Insurance Co. From 1994 through 1997, Mr. St. Laurent was
Chief Operating Officer / Financial Analyst with Paul L. Comstock Co. Mr. St.
Laurent is the Managing Partner for Vista Analytics, LLC of Sugarland, Texas.
Vista Analytics provides financial services and back-office support for
Financial Advisors by assisting them in everything from capital market research
and asset allocation modeling to the ongoing monitoring of client portfolios,
and everything in between. Mr. St. Laurent's strong financial management
background is expected to provide valuable insight for management. He has a
Finance degree from the University of Houston and carries NASD licenses Series 2
and 63.
Lewis E. Ball, age 69, has served as the secretary of the Company since
1997 and as the Chief Financial Officer from June 1996 to January 1997. Mr.
Lewis 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, Harry Briers, Bob Lewis,
Christopher St. Laurent and Lewis Ball have filed reports 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 2000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
AWARDS PAYOUTS
SECURITIES
OTHER UNDERLYING ALL
ANNUAL RESTRICTED OPTIONS OTHER
COMPE- STOCK SARS LTIP COMPEN-
NAME AND PRINCIPLE SALARY BONUS NSATION AWARDS PAYOUTS SATION
POSITION YEAR $ $ $ $ # $ $
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kent Watts (1)
Chief Executive 2000 100,000 $ -0- $ -0- -0- 15,000 $ -0- -0-
Officer 1999 84,000 -0- -0- -0- -0- -0- -0-
Chief Financial 1998 84,000 -0- -0- -0- -0- -0- -0-
Officer
</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 $1,000,000 of revenue
generated in fiscal year end June 30, 2000, by the Company, in excess of the
revenues reported for the fiscal year end June 30, 1999.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OF
OPTIONAL/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SH) DATE
<S> <C> <C> <C> <C>
Kent P. Watts
CEO 15,000 1.5% $ 2.00 11/30/01
</TABLE>
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. The board of directors
received 10,000, 2-year stock options each for a total of 50,000 for all 5
directors with a strike price of $5.9125 for their work on the FYE 2000 board.
On July 22, 2000, the strike price of these options was reduced to $3.000. There
have been no director meeting expense reimbursements for 2000 and 1999.
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, 2000,
options to purchase 1,574,560 shares have been granted under this plan and
1,088,407 of these have been exercised. This leaves 486,153 shares granted under
employment or consulting agreements but not yet to be exercised and 45,440
shares left to be granted pursuant to employment or consulting agreements. This
is a total of 531,593 shares available under the plan not yet issued.
The Company also had 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 22, 2000, 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 BENEFICIAL SHARES BENEFICIALLY OWNED
OWNER
Number Percent
<S> <C> <C>
KENT WATTS 1,040,000 (1) 7.550%
2656 SOUTH LOOP WEST,
SUITE 103
HOUSTON, TEXAS 77054
ROBERT J. HILL 115,055 (2) 0.835%
2656 SOUTH LOOP WEST,
SUITE 103
HOUSTON, TEXAS 77054
HARRY JAMES BRIERS 120,000 (3) 0.871%
2656 SOUTH LOOP WEST,
SUITE 103
HOUSTON, TEXAS 77054
BOBBY P. LEWIS 10,700 (4) 0.077%
2905 COUNTRY CLUB DRIVE
PEARLAND, TEXAS 77478
CHRISTOPHER D. ST. LAURENT 10,000 (5) 0.073%
ONE SUGAR CREEK CENTER,
SUITE 1045
HOUSTON, TEXAS 77478
LEWIS E. BALL 62,560 (6) 0.454%
2656 SOUTH LOOP WEST
SUITE 103
HOUSTON, TEXAS 77054
EMERALD BAY INTERESTS LTD 5,833,333 (7) 42.348%
ALL DIRECTORS AND EXECUTIVE 1,565,330 11.364%
OFFICERS AS A GROUP (6
PERSONS)
24
<PAGE>
<FN>
(1) This amount includes options to purchase 15,000 shares at $2.00 per share
and options to purchase 10,000 shares at $3.00 per share.
(2) This amount includes 3-year options to purchase 87,455 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.
(3) This amount includes currently exercisable options to purchase 10,000
shares of common stock of the Company at an exercise price of $2.00 per
share, and 10,000 options to purchase commons stock at $3.00 per share.
(4) This amount includes options to purchase up to 10,000 shares of our common
stock at an exercise price of $3.00 per share.
(5) This amount includes options to purchase up to 10,000 shares of our common
stock at an exercise price of $3.00 per share.
(6) 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.
(7) 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.
</TABLE>
25
<PAGE>
Item 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our Board of Directors has adopted a policy that all of our affairs will be
conducted by standards applicable to publicly-held corporations and that we will
not enter into any transactions or loans between us and our officers, directors
and 5% shareholders, unless the terms are no less favorable than we could obtain
from independent, third parties, and that these types of transactions must be
approved by our disinterested directors.
Michael Watts, the brother of Kent Watts, was retained by us in April 1996 as a
consultant for acquisition strategy. We granted 275,000 stock options to Michael
Watts. Our Board of Directors renewed the consulting agreement with Michael
Watts through March 2000. In December 1997, we amended the original consulting
agreement to include a total of 375,000 currently exercisable options which are
exercisable as follows: 1/3 of which are exercisable at a strike price of $.625
per share; 1/3 of which are exercisable at a strike price of $1.00 per share;
and 1/3 of which are exercisable at a strike price of $1.375 per share. All of
these options expire on June 30, 2000. In April 1999, we granted Michael Watts
an additional 350,000 options exercisable at a strike price of $.50 per share
that expire in March 2001, pursuant to the consulting agreement. Of these,
Michael Watts has previously exercised 487,362 options, and currently holds
237,638 options exercisable at a strike price of $.50 per share.
During 1997, we sold a convertible promissory note to Emerald Bay Interests LTD
for $350,000. The interest rate on the note was 10% and had a maturity date in
November 1997. At that time we were unable to pay off the note. In January 1998,
Emerald Bay Interests LTD agreed to convert the note into 5,833,333 shares of
our common stock. This resulted in Emerald Bay Interests LTD becoming a control
person of us.
In December 1998, Kent Watts purchased a convertible promissory note of ours
from a note holder. This note in the original principal amount of $25,000 had an
interest rate of 9% per annum and matured in May 1998. We had not made any
payments of principal or interest on the note. In May 1999, we paid off this
promissory note to Kent Watts at a 50% discount to the principal balance
remaining without any accrued interest, or $12,500. This transaction
extinguished our debt under this promissory note.
In September 1999, we sold 100% of the equity of our then wholly-owned
subsidiary, Wired and Wireless Corporation, to Ted W. Tarver, one of our
then-directors who resigned as our director in connection with the sale of Wired
& Wireless to him. We had concluded that Wired & Wireless no longer fit into our
business strategy. The consideration we received for this transaction was a
revenue sharing agreement that provides that we will receive, after the
effective date of the sale, 7% of the gross revenues of Wired & Wireless for the
first $714,286 of its revenue, 5% of its next $1,000,000 in revenue, and 3% of
its revenues thereafter. The revenue sharing agreement further provides that in
the event a third party acquires or merges with Wired and Wireless we will
receive 10% of the proceeds from such a transaction. The Wired and Wireless
subsidiary's asset value represented approximately 17.9% of the consolidated
assets at September 30, 1999. We had a loss of $184,546 for fiscal year end June
30, 1999 of which approximately 15%, or $27,625, was attributable Wired and
Wireless. The terms of the sale of Wired and Wireless Corporation to Mr. Tarver
were the result of negotiations between the parties, however no appraisal was
done. All of the disinterested directors voted in favor of the sale.
26
<PAGE>
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
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
None.
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 12th day of October 2000.
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:
Signature Title Date
/s/ Kent Watts Chairman of the Board, October 12, 2000
--------------------- Chief Executive Officer and
Kent Watts Chief Accounting Officer
/s/ Robert Hill Director October 12, 2000
---------------------
Robert Hill
/s/ Harry J. Briers Director October 12, 2000
---------------------
Harry J. Briers
27
<PAGE>
/s/ Christopher St. Laurent Director October 12, 2000
---------------------
Christopher St. Laurent
/s/ Bobby P. Lewis Director October 12, 2000
---------------------
Bobby P. Lewis
28
<PAGE>
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
Audited Financial Statements
Index To Financial Statements
PAGE
<S> <C>
Independent Auditor's Report F-2
Balance Sheets as of June 30, 2000 F-4
Consolidated Statements of Income for the years ended June 30, 2000 and 1999 F-5
Statements of Changes in Stockholders' Equity for the years ended June 30, 2000 and 1999 F-6
Statements of Cash Flows for the years ended June 30, 2000 and 1999 F-8
Notes to Financial Statements F-9
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
September 12, 2000
To the Board of Directors and Stockholders
HyperDynamics Corporation
Houston, Texas
We have audited the accompanying consolidated balance sheet of HyperDynamics
Corporation (a Delaware corporation) and subsidiaries as of June 30, 2000, and
the related consolidated statements of income, stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free 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.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HyperDynamics
Corporation as of June 30, 2000, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
/s/ MALONE AND BAILEY, PLLC
Houston, Texas
F-2
<PAGE>
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 sheet of HyperDynamics
Corporation (a Delaware corporation) and subsidiaries as of June 30, 1999, and
the related consolidated statements of income, stockholders' equity, and cash
flows for the year 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 audit.
I conducted my audit 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 audit provides a reasonable basis for my 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 the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
/s/ JOHN B. EVANS II
F-3
<PAGE>
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
CONSOLIDATED BALANCE SHEET
June 30, 2000
ASSETS
Current Assets
<S> <C>
Cash $ 1,033,435
Restricted certificate of deposit 436,300
Accounts receivable, net of allowance for
doubtful accounts of $6,884 537,193
Inventory 225,647
Revenue interest 28,865
Prepaid expenses 40,707
Note receivable 400,000
Other current assets 48,190
------------
Total Current Assets 2,750,337
Property and Equipment, net of accumulated
depreciation of $54,916 52,268
Other Assets
Intangible assets, net of accumulated
amortization of $21,250 29,750
Deposits 20,632
------------
TOTAL ASSETS 2,852,987
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 418,478
Dividends payable 44,826
------------
Total Current Liabilities 463,304
------------
TOTAL LIABILITIES 463,304
------------
Stockholders' Equity
Preferred stock, par value $.001; stated value
$1,000; 20,000,000 authorized; 2,560 shares
issued and outstanding 3
Common Stock, par value $.001; 50,000,000 shares
authorized; 13,021,821 shares issued and outstanding 13,022
Additional paid in capital 4,378,443
Retained (deficit) (2,001,785)
------------
Total Stockholders' Equity 2,389,683
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,852,987
============
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements
F-4
<PAGE>
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
CONSOLIDATED INCOME STATEMENTS
For the Years Ended June 30, 2000 and 1999
(Restated)
2000 1999
------------ ------------
<S> <C> <C>
Revenues $ 2,137,998 $ 938,306
Cost of Revenues 1,962,150 747,046
------------ ------------
GROSS MARGIN 175,848 191,260
Operating Expenses
Selling 196,595 58,393
General and administration 472,890 259,324
Startup costs for ITHost.net 170,284
Depreciation and amortization 47,221 19,761
------------ ------------
Total Operating Expenses 886,990 337,478
------------ ------------
OPERATING (LOSS) (711,142) (146,218)
Other Income (Expense)
Revenue sharing income 18,162
(Loss) on disposal of assets (12,316) (7,972)
Gain on sale of revenue sharing
agreement 21,000
Impairment loss on revenue interest
received from sale of Wired and Wireless (104,998)
Interest (expense) (4,703)
Interest income 46,749 1,461
Other income 512
------------ ------------
Total Other Income (Expense) (31,403) (10,702)
------------ ------------
LOSS FROM CONTINUING OPERATIONS (742,545) (156,920)
(Loss) from discontinued operations,
net of income tax benefit of $0 and
$0, respectively (568) (27,626)
Gain on sale of discontinued operations,
Net of income tax benefit of $0 and
$0, respectively 127,065
------------ ------------
NET INCOME (LOSS) (616,048) (184,546)
Preferred dividends (50,084)
------------ ------------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS $ (666,132) $ (184,546)
============ ============
Income (loss) per common share
Continuing operations $ (.05) $ (.01)
Discontinued operations $ .01
Weighted average shares outstanding 12,609,770 12,264,945
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements
F-5
<PAGE>
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended June 30, 2000 and 1999
AS RESTATED
PREFERRED COMMON PREFERRED COMMON
SHARES SHARES AMOUNT AMOUNT
------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
BALANCES, June 30, 1998 12,208,321 $ 12,208
Common stock issued
for cash 201,182 201
Net (loss)
------------ ---------
BALANCES, June 30, 1999 12,409,503 12,409
Common stock issued
for cash 428,000 428
cashless exercise of
options 27,600 28
Issuance of stock options
and warrants
Repurchase and cancellation
of common stock purchased
on the open market (68,500) (69)
Sale of convertible Preferred
Stock Series A, net 3,000 $ 3.00
Preferred stock dividends
Conversion of preferred stock
to common stock (440) 222,541 $ (.44) 223
Payment of preferred
stock dividends in
common shares 2,676 3
Net (loss)
------------ ------------ ----------- ---------
BALANCES, June 30, 2000 2,560 13,021,820 $ 2.56 $ 13,022
============ ============ =========== =========
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements
F-6
<PAGE>
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended June 30, 2000 and 1999
(Continued)
AS RESTATED
ADDITIONAL
PAID-IN RETAINED
CAPITAL (DEFICIT) TOTALS
------------- ------------- ------------
<S> <C> <C> <C>
BALANCES, June 30, 1998 $ 1,567,500 $ (1,201,191) $ 378,517
Common stock issued
for cash 142,424 142,625
Net (loss) (184,546) (184,546)
------------- ------------- ------------
BALANCES, June 30, 1999 1,709,924 (1,385,737) 336,596
Common stock issued
for cash 228,070 228,498
cashless exercise of
options (28)
Issuance of stock options
and warrants 25,106 25,106
Repurchase and cancellation
of common stock purchased
on the open market (143,764) (143,833)
Sale of convertible Preferred
Stock Series A, net 2,604,187 2,604,190
Preferred stock dividends (50,084) (50,084)
Conversion of preferred stock
to common stock (223)
Payment of preferred
stock dividends in
common shares 5,255 5,258
Net (loss) (616,048) (616,048)
------------- ------------- ------------
BALANCES, June 30, 2000 $ 4,378,443 $ (2,001,785) $ 2,389,683
============= ============= ============
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements
F-7
<PAGE>
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2000 and 1999
(Restated)
2000 1999
------------- ------------
<S> <C> <C>
Cash flows from operating activities
Net (loss) $ (616,048) $ (184,546)
Adjustments to reconcile net (loss) to cash
provided from operating activities
Depreciation and amortization 47,221 25,761
Loss on disposition of assets 12,315 7,972
(Gain) on sale of revenue sharing agreement (21,000)
(Gain) on sale of discontinued operations (127,065)
Impairment loss on assets received from
from sale of subsidiary 104,998
Writedown of capitalized intangible asset 6,755
Intrinsic value of options issued for services 25,106
Loss from discontinued operations 568 26,726
Changes in:
Accounts receivable, net (852,506) (44,526)
Accounts receivable - other 25,012
Inventory (173,687) (12,452)
Collection of revenue interest 1,263 45,800
Prepaid expenses (37,359)
Other current assets (48,190)
Accounts payable and accrued expenses 353,343 18,947
------------- ------------
NET CASH (USED) BY OPERATING ACTIVITIES (1,324,286) (91,306)
Cash flows from investing activities
Purchases of property and intangibles (9,336) (72,509)
Cash investment in discontinued operations (6,566) (28,192)
Proceeds from sale of revenue interest 85,500
Security deposit paid (20,632)
(Increase) decrease in restricted cash (436,300) 94,000
------------- ------------
NET CASH (USED) BY INVESTING ACTIVITIES (387,334) (6,701)
Cash flows from financing activities
Proceeds from sale of common stock 228,498 142,625
Proceeds from sale of preferred stock 2,604,190
Purchases of common stock (143,833)
------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,688,855 142,625
------------- ------------
Net increase in cash 977,235 44,618
CASH AT BEGINNING OF PERIOD 56,200 11,582
------------- ------------
CASH AT END OF PERIOD $ 1,033,435 $ 56,200
============= ============
SUPPLEMENTAL DISCLOSURES
Interest paid in cash $ 4,703
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements
F-8
<PAGE>
HYPERDYNAMICS CORPORATION
NOTES CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Nature of business. Hyperdynamics Corporation ("Company"), was a Texas
corporation formed in March 1996. The Company sells and supports computer
hardware and software.
During the fiscal year ended June 30, 1998, the Company began operations through
a wholly-owned subsidiary, Wired and Wireless Corporation ("Wireless").
Wireless was sold in September 1999. Another wholly-owned subsidiary,
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 of the Company. Significant inter-company accounts
and transactions have been eliminated. The Company's financial statements have
been restated to reflect the divestiture of Wireless.
Estimates and assumptions. Preparing financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses at the balance sheet date and for the period then ended. Actual
results could differ from these estimates.
Restricted cash is a certificate of deposit at a bank to back a letter of credit
for construction of the Company's new facility. The CD matures on May 9, 2001
and accrues interest at 6.6% annually.
Revenue and cost recognition. Revenue from consulting is recognized when
services are rendered. Revenue from hardware and software sales are recognized
when goods are shipped. Advertising costs are expensed as incurred.
Accounts receivable are written down to the estimated collectible amount in the
opinion of management. The allowance for bad debts as of June 30, 2000 was
$6,884.
PREPAID EXPENSES CONSISTS OF $14,584 PREPAID ON A PUBLIC RELATIONS CONTRACT THAT
EXPIRES IN JANUARY 2001, $21,123 PREPAID RENT, AND A $5,000 ADVANCE TO A
DIRECTOR USED DURING SEPTEMBER 2000.
Inventory is stated at the lower of cost or market using the first-in first-out
basis (FIFO).
Other current assets includes a $43,988 return merchandise authorization from a
vendor, which was collected in July 2000, and $4,202 accrued interest income on
the restricted CD, which is expected to be received in May 2001.
F-9
<PAGE>
HYPERDYNAMICS CORPORATION
NOTES CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Property and Equipment. The Company calculates depreciation for financial
reporting using the straight-line method over the useful lives of the assets.
A summary of property and equipment is as follows:
Software 3 years $ 35,069
Office equipment and furniture 5 years 31,940
Leasehold improvements 5 years 40,175
---------
Total cost 107,184
Less: accumulated depreciation (54,916)
---------
Net carrying value $ 52,268
=========
Intangible Property consists of a customer list purchased in May 1998 for
$51,000, net of accumulated amortization of $21,250. Amortization is calculated
on a straight-line basis over 5 years.
The Company follows Statement of Financial Accounting Standards No. 121,
Impairment of Long-Lived Assets, by reviewing such assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
Accounts payable and accrued expenses:
Accounts payable $ 374,023
Accrued payroll and payroll tax 4,398
State sales tax payable 40,057
---------
$ 418,478
=========
Income taxes are computed using the tax liability method of accounting, whereby
deferred income taxes are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates that will be in effect when the differences reverse.
Startup costs for ITHost.net consist of training costs for the new information
technology center that will open in fiscal 2001. The IT center will operate as
a information services provider to businesses who wish to outsource their
technology needs.
Stock options are accounted for by following Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations,
and by following Statement of Financial Accounting Standards No. 123, Accounting
for Stock Based Compensation, which established a fair-value-based method of
accounting for stock-based compensation plans.
Loss per share is reported under Statement No. 128 of the Financial Accounting
Standards Board (FAS 128"), which requires the calculation of
F-10
<PAGE>
HYPERDYNAMICS CORPORATION
NOTES CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)
basic and diluted earnings per share. Basic earnings per share exclude any
dilutive effects of options, warrants, and convertible securities.
Diluted earnings per share are not shown here because such effect would be
anti-dilutive.
Cash and cash equivalents include all highly liquid investments purchased with
original maturities of three months or less.
Non-cash transactions include the conversion of $400,000 in accounts receivable
to a note receivable.
Reclassifications of certain prior year amounts were made to conform with the
current year presentation.
NOTE 2 - CONCENTRATION OF CREDIT RISK
The Company maintains significant deposits at one bank located in Houston,
Texas. As of June 30, 2000, the Company had $494,128 on deposit, before
deducting outstanding checks, and only $100,000 is insured under federal law.
Additionally, the Company owns shares in various money market funds at brokerage
firm, and money market funds are not insured under federal law. As of June 30,
2000, the value of these funds totaled $1,029,168.
NOTE 3 - NOTE RECEIVABLE
On September 27, 2000, the major customer of the Company, Malachi Mattress
America, Inc., ("Malachi") converted $432,439 of then-outstanding invoices into
a note receivable in the amount of $400,000. These invoices were all for
services performed and recognized by the Company as of June 30, 2000. The note
receivable accrues interest at 10% annually. Interest is payable quarterly and
the unpaid principal and interest is due on March 27, 2001. Accordingly, the
Company recognized the $32,439 discount given to Malachi as a bad debt in the
year ended June 30, 2000 and has recorded the note as a current asset.
NOTE 4 - SALE OF REVENUE INTEREST
In May 1997, the Company purchased a 4% revenue interest in the Sierra-Net
subsidiary of Internet Finance & Equipment, Inc. by issuing 177,000 shares of
stock valued at $177,000. Since that time, the Company has been receiving
expected cash flows and amortizing its carrying value appropriately. On March
6, 2000, substantially all assets of Sierra-Net were purchased by M&A West, Inc.
(stock trading symbol "MAWI"), for cash and MAWI stock. Sierra-Net may only sell
1/6 of the shares per month during the first six months after the MAWI shares
are registered (the "lock-up period"). As of September 12, 2000, these shares
had not been registered.
F-11
<PAGE>
HYPERDYNAMICS CORPORATION
NOTES CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 4 - SALE OF REVENUE INTEREST (Continued)
This sale includes a "put" provision whereby Sierra-Net can demand repurchase of
its MAWI stock for $16.25 per share. The provision expires at the end of the
lock-up period. If Sierra-Net exercises this provision, MAWI may refuse to
repurchase the stock and Sierra-Net can then elect to rescind the entire
transaction and return the MAWI shares and all of the cash received up front. As
of September 12, 2000, these shares were trading at around $6 per share.
According to the May 1997 agreement, the Company's share of any Sierra-Net asset
sales is 19%, and accordingly, the Company received $85,500 as its share of the
cash received by Sierra-Net. $73,500 of this cash is shown as a reduction of the
remaining $93,365 carrying value of the Sierra-Net Revenue Interest and the
remaining $12,000 was recognized during the fiscal year ended June 30, 2000.
Profit will be recognized on this transaction commensurate with the previous
monthly revenue stream until the "put" provision expires. Accordingly, an
additional $9,000 of gain was recognized during the year ended June 30, 2000.
This corresponds to $21,000, or $3,500 per month over six months.
NOTE 5 - SALE OF WIRED AND WIRELESS
In September 1999, the Company sold its Wireless subsidiary to the Wireless
founder in exchange for a 5% net revenue interest. This asset was valued at
$100,000 and Wireless' net book value at that time was a deficit $27,065,
resulting in a recorded gain on sale of $127,065. Cash flows received since
that date total $4,515, and the principal balance of $100,000 was amortized by
$669. In November 1999, a hunting accident severely injured the founder and key
employee of Wireless. The balance of the revenue interest and a minor
receivable of $5,667 have been written off as of June 30, 2000, because there
have been no revenues since the accident, and the asset is contingent upon the
recovery of the founder and successful rebuilding of the business.
NOTE 6 - LETTER OF CREDIT
On May 10, 2000, the Company entered into a letter of credit for $436,300 with
Frost Bank expiring on May 10, 2001. The purpose of the letter of credit is to
guarantee the funding of construction draws for the buildout of the Company's
new office space. The letter of credit is guaranteed by security interest in a
certificate with deposit with Frost Bank that may not be redeemed until the
letter of credit expires. There were no draws against this letter of credit as
of June 30, 2000 nor as of September 12, 2000, the date of our report. See note
12.
NOTE 7 - INCOME TAXES
Income taxes are not due since the Company has had losses since inception. The
Company has net operating losses of $610,000 and $180,000 in tax in the years
ended June 30, 2000 and 1999, respectively. As of June 30, 2000, the Company
had approximately $1,910,000 in unused net operating loss carryforwards which
expire $640,000 in 2012, $550,000 in 2013, $110,000 in
F-12
<PAGE>
HYPERDYNAMICS CORPORATION
NOTES CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 7 - INCOME TAXES (Continued)
2014, and $610,000 in 2015. Internal Revenue Section 382 restricts the ability
to use these carryforwards whenever an ownership change as defined occurs. The
Company incurred such an ownership change on January 14, 1998, when $350,000 of
debt was converted to 5,833,333 shares of stock, which then represented 50.7% of
total outstanding shares. As a result of this ownership change, the Company's
Net Operating loss as of January 14, 1998 of $940,000 is restricted to $151,000
per year. Losses occurring after that date are not restricted.
NOTE 8 - PREFERRED STOCK
In January 2000, 3,000 shares of Series A preferred stock was sold to investors
for $3,000,000. Expenses of the offering totaled $395,810, resulting in net
proceeds of $2,604,190. The preferred stock is convertible into the Company's
common stock at a price of the lower of the trading price when purchased at
$5.25 or 80% of the current 5 day trading average. All or portions of the 3,000
shares outstanding may be converted at any time, and all shares outstanding as
of January 30, 2002 will be automatically converted. 300,000 warrants with an
exercise price of $5.9125 (reduced to $3 per share effective July 21, 2000) were
issued to the investors in connection with this offering and warrants for
300,000 shares with an exercise price of $7.095 were issued to promoters.
The preferred stock is non-voting and pays dividends of 4%, payable at
conversion in either cash or shares of common stock. As of June 30, 2000,
$50,084 in dividends were earned, of which $5,255 were paid with the issuance of
2,677 shares of common stock in conjunction with the conversion of 440 shares of
the preferred stock to 222,541 shares of common stock during April, May, and
June 2000. The remaining dividends earned, $44,826, have been accrued.
Additional conversions occurred in July and August 2000: 130 shares of preferred
were cancelled and 376,253 shares of common stock were issued.
NOTE 9 - COMMON STOCK
Common stock was issued pursuant to the exercise of options during the year
ended June 30, 2000. $228,502 was collected for the issuance of 432,000 shares
of common stock. Additionally, an officer of the company elected to exercise an
option to purchase 40,145 shares at an exercise price of $1.25 per share or
$50,181 total purchase price. The Company repurchased 12,545 of his previously
owned shares at $4 per share, the then market price. This offset the entire
amount due from the officer, in effect resulting in a cashless exercise by the
officer of 27,600 net shares issued.
On April 18,2000, the Board authorized the repurchase of up to 500,000 shares of
Company stock on the open market at a price not to exceed $2.50 per share.
Between that date and June 30, 2000, 68,500 shares had been repurchased at
prices ranging from $2.50 to $1.50 per share, for a total cost of $143,833.
These shares have been deemed cancelled as of June 30, 2000.
F-13
<PAGE>
HYPERDYNAMICS CORPORATION
NOTES CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 10 - 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 year ended June 30, 2000, $25,106 in compensation expense was
recognized for the issuance of 177,015 options and warrants ranging in exercise
price from $.75 to $1.25 per share, because these option prices were below
market prices at the date of grant. During the year ended June 30, 1999, no
compensation expense was recognized for the issuance of options and warrants,
because no option prices were below market prices at the date of grant. Options
and warrants to purchase 1,107,500 shares of common stock that had no intrinsic
value were issued during the year ended June 30, 2000. In addition, 459,600 and
78,182 options were exercised and 219,560 and 0 shares expired in 2000 and 1999
respectively As of June 30, 2000, 300,000 outstanding warrants are
noncompensatory. The balance of the outstanding warrants and options are
payments for consulting and professional services. Summary information regarding
options and warrants is as follows:
<TABLE>
<CAPTION>
Weighted Weighted
average average
Options Share Price Warrants Share Price
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Year ended June 30, 1999:
Granted and outstanding 948,661 $ .88 425,850 $ .59
Exercised (78,182) .70
---------- ----------- -----------
Outstanding at
June 30, 1999 870,479 .90 425,850 .59
Year ended June 30, 2000:
Granted 267,015 1.18 1,017,500 3.43
Exercised (372,145) .68 (100,000) .50
Expired (134,515) 1.21 (72,500) 1.02
---------- ----------- ----------- -----------
Outstanding at
June 30, 2000 630,834 $ 1.47 1,270,850 $ 3.57
========== =========== =========== ===========
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
NOTES CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 10 - STOCK OPTIONS AND WARRANTS (Continued)
Options outstanding and exercisable as of June 30, 2000:
- - Outstanding - - Exercisable
Number Remaining Number
Exercise Price of Shares life of Shares
---------- --------- -----------
<S> <C> <C> <C>
$ .50 308,819 1 years 308,819
.50 50,000 2 years 50,000
.75 8,760 1 years 8,760
1.00 5,000 1 years 5,000
1.25 120,755 1 years 120,755
1.25 6,000 2 years 6,000
2.00 51,500 2 years 16,500
5.91 50,000 2 years 50,000
5.91 30,000 3 years 30,000
-------- -------
630,834 595,834
======== =======
Warrants outstanding and exercisable as of June 30, 2000:
- - Outstanding - - Exercisable
Number Remaining Number
Exercise Price of Shares life of Shares
---------- --------- -----------
$ .50 308,819 1 years 308,819
.50 50,000 2 years 50,000
.75 8,760 1 years 8,760
1.00 5,000 1 years 5,000
1.25 120,755 1 years 120,755
1.25 6,000 2 years 6,000
2.00 51,500 2 years 16,500
5.91 50,000 2 years 50,000
5.91 30,000 3 years 30,000
---------- -----------
630,834 595,834
========== ===========
</TABLE>
Had compensation cost for the Companys 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 Companys net losses and loss per share would have been
increased to the pro forma amount indicated below:
<TABLE>
<CAPTION>
(in thousands) 2000 1999
------------ ----------
<S> <C> <C>
Net loss available for common
shareholders -As reported $ (666,132) $(184,546)
-Pro forma (2,516,212) (640,323)
Net loss per share -As reported $ (0.05) $ (0.02)
-Pro forma (0.20) (0.05)
</TABLE>
F-15
<PAGE>
HYPERDYNAMICS CORPORATION
NOTES CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 10 - STOCK OPTIONS AND WARRANTS (Continued)
Variables used in the Black-Scholes option-pricing model include (1) 5.0%
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.
NOTE 11 - MAJOR CUSTOMERS AND VENDORS
A summary of significant customers and vendors for the year ended June 30, 2000
together with their respective size as a percent of total sales and purchases
follows:
<TABLE>
<CAPTION>
2000 Volume % of Total
----------- ----------
<S> <C> <C>
Sales
Mattress Mattress America, Inc. $ 1,503,634 71%
Purchases
Great Plains Software $ 939,215 57%
Ingram Micro 351,280 21%
Arrow Electronics 242,358 11%
</TABLE>
NOTE 12- COMMITMENTS AND CONTINGENCIES
The Company is liable on its current office lease for $3,065 per month on a
month-to-month lease. Lease expense for the years ended June 30, 2000 and 1999,
respectively, totaled $36,678 and $34,321.
The Company signed a lease for additional space for its new Information
Technology ("IT") center during May 2000. The lease term is ten years and there
are two five-year renewal options. The base rent is $0 for months 1-6, $17,775
for months 7-54, and $20,632 for months 55-120. Additional Common Area
Maintenance charge will be assessed. The commencement date for rent is November
1, 2000. At June 30, 2000, future minimum payments are $35,550 in 2001,
$213,304 per year in years 2002-2005, $236,156 in year 2006, $247,585 per year
in years 2007-2010, and 185,688 in 2011.
On August 31, 2000, the Company engaged a general contractor to perform the
buildout of the IT center. The total price of the buildout, including design
fees, is expected to be $827,011, of which the landlord will pay $334,720 and
the Company will pay $492,291. The new facility is expected to be ready as of
November 1, 2000. No costs associated with the buildout had been incurred as of
June 30, 2000.
The Company entered into an employment contract in July 1999 with its CEO/ CFO.
Under this contract, the Company will pay $100,000 per year in salary. The
contract expires on June 30, 2001.
F-16
<PAGE>
HYPERDYNAMICS CORPORATION
NOTES CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 13 - SUBSEQUENT EVENTS
The Company announced its plans to make an exchange offering to its common
shareholders on August 31, 2000. 100 common shares may be exchanged for one
unit consisting of one share of 9% series B redeemable preferred stock (stated
value $200), 100 redeemable Class A warrants with exercise price of $1.35 per
share expiring 7.2 years from the date of issue, 100 redeemable Class B warrants
with exercise price of $1.35 per share expiring 15 years from the date of issue,
and 100 redeemable Class C warrants with exercise price of $1.35 per share
expiring 22.2 years from the date of issue.
F-17
<PAGE>
