This prospectus is filed pursuant to rule 424(b)(4). *
File Number 333-31180.
HYPERDYNAMICS CORPORATION
2,328,113 SHARES OF COMMON STOCK
This prospectus relates to the resale of our common stock by selling
stockholders listed on page 40.
Our common stock trades on the Over-the Counter Bulletin Board, also called
the OTCBB, under the trading symbol "HYPD". On February 24, 2000, the closing
bid for our common stock as reported on the OTCBB was $5.00 per share.
RISK FACTORS. OUR COMMON STOCK IS SPECULATIVE AND INVOLVES A HIGH DEGREE
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OF RISK. YOU SHOULD CAREFULLY READ AND CONSIDER OUR RISK FACTORS SECTION ON
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PAGE 4 BEFORE MAKING AN INVESTMENT DECISION.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of the prospectus. Any representation to the contrary is a
criminal offense.
THE DATE OF THIS PROSPECTUS IS March 16, 2000
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. The selling security holders are offering to
sell, and seeking offers to buy, shares of common stock only in jurisdictions
where offers and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus, regardless of the
time of delivery of this prospectus or of any sale of common stock.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Summary of Information in the Prospectus. . . . . . . . . . . . 1
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . 4
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . 13
Price Range of Common Stock . . . . . . . . . . . . . . . . . . 13
Our Dividend Policy . . . . . . . . . . . . . . . . . . . . . . 14
Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . 14
Our Business. . . . . . . . . . . . . . . . . . . . . . . . . . 18
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Executive Compensation. . . . . . . . . . . . . . . . . . . . . 33
Certain Relationships and Related Transactions. . . . . . . . . 35
Principal Stockholders. . . . . . . . . . . . . . . . . . . . . 36
Description of Securities . . . . . . . . . . . . . . . . . . . 37
Selling Stockholders. . . . . . . . . . . . . . . . . . . . . . 40
Plan of Distribution. . . . . . . . . . . . . . . . . . . . . . 41
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 42
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . 43
Other Available Information . . . . . . . . . . . . . . . . . . 43
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . 44
Financial Statements. . . . . . . . . . . . . . . . . . . . . . 44
</TABLE>
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SUMMARY OF INFORMATION IN THE PROSPECTUS
This prospectus summary highlights selected information contained in this
prospectus. To understand this offering fully, you should read the entire
prospectus carefully, including the risk factors beginning on page 4 and the
financial statements beginning on page F-1. Unless otherwise indicated, this
prospectus assumes that none of our outstanding options or warrants are
exercised into shares of our common stock, nor any shares of our Series A
Preferred Stock are converted into shares of our common stock.
HYPERDYNAMICS CORPORATION
We are an Information Technology Service Provider ("ITSP"). The services
we provide are ITHosting services, conventional information technology services
and e-Business services. We provide our customers with fully-hosted information
technology hosting solutions which we can scale to meet the customer's needs.
We provide these information technology hosting solutions at our location on our
servers with our staff of information technology experts. The customer uses
our solutions and facilities instead of the customer's own computer system and
staff. From the customer's location, the customer accesses its information
from us via the Internet. We began our information technology hosting business
in 1999. We have also been in the conventional information technology solutions
business since 1988, and we have also been in the e-Business solutions business
since 1996.
We have the capability to host all or a portion of a customer's information
technology requirements. Our solutions allow the customer to use our
information technology skills and computer systems, instead of the customer
purchasing more computer hardware and software and hiring more computer staff.
Our mission is to be a premier ITSP. The information technology ("IT")
industry is one of the most dynamic and rapidly growing industries. Through our
initial roll up strategy, Hyperdynamics will build our core IT knowledge base to
position us as a leader in the e-Business economy of the future.
In August, 1996, we acquired MicroData Systems, Inc., which changed its
name to ITHost.net Corporation in 1999. We obtained our core business plan from
MicroData. Since 1988, MicroData has provided conventional IT services to help
our clients plan, design, implement, and manage their IT infrastructures. The
acquisition of MicroData set the stage for our initial goal of acquiring
technically competent IT service companies in roll up transactions.
Our strategy targets technically competent IT service companies with
specialties in all areas of IT. We look for debt free IT service companies with
substantial technical expertise and key people with an entrepreneurial spirit.
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IThost.net Corporation is a full service IT services company. We provide
three categories of IT services:
- - We have been in the conventional information technology solutions business
since 1988.
- - We have been in the e-Business solutions business since 1996. - We began
our information technology hosting business in 1999.
CONVENTIONAL IT SERVICES
Conventional IT Services are provided 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 decide the
extent of our involvement in any or all of these areas of IT.
E-BUSINESS SERVICES
e-Business 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-Business and Internet marketing.
ITHOSTING SERVICES
IThosting Services are provided to handle a client's complete IT
requirements and we literally become our clients IT department by contract. We
are continuing to develop our IThost.net infrastructure to allow us to
professionally manage our clients centralized servers in a true data center
environment.
We maintain a flexible service model as more clients are brought on-line.
We have the capability to host all or a portion of a customer's information
technology requirements. Our solutions allow the customer to use our
information technology skills and computer systems, instead of the customer
purchasing more computer hardware and software and hiring more computer staff.
We provide our customers with:
- - A complete off-site information technology resource for real time business
operations solutions, e-Business transactional solutions and business data
solutions.
- - Application software and e-Business transaction software which resides on
our servers. In providing this service, we are sometimes referred to as
being an Applications Service Provider ("ASP"). However, the scope of our
service is much greater than typical ASP's. Therefore we call ourselves an
ITSP.
- - Broad bandwidth, high speed Internet service.
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- - Data access, manipulation, mining, warehousing and storage.
Our Information technology hosting solutions enhance a customer's:
- - Internet strategies
- - E-Business solutions
- - Enterprise asset and operational functionality and control
- - Marketing Management
- - General Business Operations
- - Data Base Management
We provide our customers with:
- - Our state-of-the-art computer servers, facilities and staff.
- - Our 24/7 customer service.
- - Integration of our hosting solutions with the customer's existing computer
system.
- - Training.
We also provide conventional information technology solutions for a
customer's own computer network. We also enable a customers' e-Business web
presence by migrating the customer's conventional business methods to the
e-Business model through web site design, maintenance and hosting.
Our information technology hosting solutions, conventional information
technology solutions and e-Business solutions are provided through our
wholly-owned subsidiary, ITHost.net Corporation.
Our web site is www.hyd.net, however, the information contained on our web
site is not part of this prospectus. Our principal executive offices are
located at Hyperdynamics Corporation, 2656 South Loop West, Suite 103, Houston,
Texas 77054, tel. (713) 660-9771.
RECENT EVENTS
In January, 2000, we sold 3,000 shares of our new issue Series A Preferred
Stock for a total of $3,000,000 in cash to three accredited investors. As part
of this transaction, we also issued to the three investors a total of 300,000
Investor Warrants to purchase shares of our common stock at a price of $5.9125
per share which are immediately exercisable and expire on January 6, 2005. The
Investor Warrant provides that in no event shall the holder exercise the Warrant
if upon exercise of the Warrant, the holder would benefically own more than 4.9%
of our outstanding common stock. As part of this transaction, we issued 180,000
Placement Warrants to the placement agent to purchase shares of our common stock
at a price of $7.095 per share which are immediately exercisable and expire on
January 6, 2005 and 120,000 Consultant Warrants to one individual to purchase
shares of our common stock at a price of $7.095 per share which are immediately
exercisable and expire on January 6, 2005. This was a private placement offering
of securities.
In September, 1999, we sold our formerly wholly-owned subsidiary, Wired and
Wireless Corporation because it no longer fit into our business plan.
3
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THE OFFERING
Common stock outstanding......12,726,503 shares of common stock
Common stock to be
offered by our
selling
stockholders.......2,328,113 shares, which includes 1,728,113 shares underlying
Series A Preferred Stock and 600,000 shares underlying
Investor Warrants, Placement Warrants and Consultant
Warrants.
Market for our
common stock.......Our common stock trades on the Over-the Counter Bulletin
Board, also called the OTCBB, under the trading symbol
"HYPD". The market for our common stock is highly volatile.
We can provide no assurance that there will be a market in
the future for our common stock.
RISK FACTORS
Any investment in shares of our common stock involves a high degree of
risk. You should carefully consider the following information about these
risks, together with the other information contained in this prospectus, before
you decide to buy our common stock. If any of the following risks actually
occur, our business would likely suffer. In these circumstances, the market
price of our common stock could decline, and you may lose all or part of the
money you paid to buy our common stock.
OUR INFORMATION TECHNOLOGY HOSTING BUSINESS IS NEW AND SUBJECT TO THE RISKS OF A
NEW BUSINESS
We began our information technology hosting business in 1999 and we have
one information technology hosting customer at this time, although we have
several customers for our conventional information technology business and our
e-Business solutions business. We only have just begun to market our
information technology hosting business. This business is extremely
competitive and we may not be able to increase our customer base at a sufficient
rate to fund operations.
WE HAVE HAD AND COULD HAVE LOSSES, DEFICITS, AND DEFICIENCIES IN LIQUIDITY WHICH
COULD IMPAIR OUR ABILITY TO GROW
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Our ability to achieve profitability depends on our ability to successfully
develop and market our information technology hosting solutions. There is no
assurance that we will be able to accomplish this in a profitable manner. We
are subject to all of the risks inherent in a growing venture, including the
need to develop marketing expertise and produce significant revenue. We may
incur losses, deficits and deficiencies in liquidity for the foreseeable future
due to the significant costs associated with providing our customers with
information technology hosting solutions.
For fiscal 1998, we had a net loss of $(558,324), a deficit of $(1,201,191)
and positive stockholders' equity of $378,517. For fiscal 1999, we had a net
loss of $(184,546), a deficit of $1,385,737 and positive stockholders' equity of
$336,597. For the first six months of fiscal 2000, we had net income of
$231,910, a deficit of $(1,153,827) and positive stockholders' equity of
$646,007.
WE WILL NEED MORE FINANCING FOR GROWTH
We have limited financial resources. Until our operating results improve,
we must obtain outside financing to fund the expansion of our business and to
meet our obligations as they become due. Any additional debt or equity
financing may be dilutive to our shareholders. Financing must be provided from
our operations, or from the sale of equity securities, borrowing, or other
sources of third party financing. The sale of equity securities could dilute
our existing stockholders' interest, and borrowings from third parties could
result in our assets being pledged as collateral and loan terms which would
increase our debt service requirements and could restrict our operations. There
is no assurance that capital will be available from any of these sources, or, if
available, upon terms and conditions acceptable to us.
YOU HAVE A RISK OF DILUTION. THE ISSUANCE OF THESE SHARES WILL HAVE A DILUTIVE
EFFECT ON OUR COMMON STOCK AND MAY LOWER OUR STOCK PRICE. WE HAVE RESERVED A
SIGNIFICANT NUMBER OF SHARES OF OUR COMMON STOCK FOR ISSUANCE UPON THE
CONVERSION OF SERIES A PREFERRED STOCK, AND THE EXERCISE OF OUR WARRANTS AND
OPTIONS.
As of February 22, 2000, we had outstanding 3,000 shares of our Series A
Preferred Stock that can be converted into shares of our common stock. The
number of shares we will issue upon the conversion of our Series A Preferred
Stock fluctuates with our common stock market price, cannot be determined until
the day of conversion and is calculated by a formula set forth in the
designation certificate of the Series A Preferred Stock. There is no limit on
the number of shares of our common stock that may be issued upon the conversion
of Series A Preferred Stock. The Series A Preferred Stock could have conversion
prices that are below our current market price. If conversions of the Series A
Preferred Stock option occur, shareholders may be subject to an immediate
dilution in the per share net tangible book value. The Series A Preferred Stock
may be converted into common stock at any time prior to January 30, 2002, when
it automatically converts into common stock.
As of February 22, 2000, we had outstanding a total of 2,258,648 options
and warrants to purchase our common stock at exercise prices ranging from $.50
to $7.095 per share, which are near or below market prices. Of these, 1,658,648
options and warrants expire at various times through the year 2002, and 600,000
warrants expire in January, 2005. If the exercise of warrants or options occur
at below market prices, shareholders will be subject to an immediate dilution in
the per share net tangible book value.
5
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We have reserved a large number of shares to be issued on the conversion of
Series A Preferred Stock, and upon the exercise of all outstanding options and
warrants. The issuance of these shares will dilute our common stock per share
net tangible book value and may hurt our stock price.
As of February 22, 2000, we have reserved:
- - 2,000,000 shares of our authorized and unissued common stock in connection
with the future conversion our Series A Preferred Stock and the future
exercise of the Investor Warrants, Placement Warrants and Consultant
Warrants. The Series A Preferred Stock may be converted into common stock
at any time prior to January 30, 2002, when it automatically converts into
common stock; and
- - 1,658,648 shares of our authorized and unissued common stock in connection
with the future exercise of other outstanding options and warrants.
These reserve amounts are our good faith estimate of the number of shares
that we believe we need to reserve. Of the total of 2,328,113 shares of our
common stock that we are registering in this offering, 1,728,113 shares are in
connection with the future conversion of Series A Preferred Stock. We can
provide no assurance as to how many shares we will ultimately need to issue upon
the conversion of Series A Preferred Stock. If we are required to issue
additional shares we will be required to file an additional registration
statement for those shares, a process which will be costly and time consuming.
THE SALE OF OUTSTANDING SHARES COULD RESULT IN A LOW MARKET PRICE FOR YOUR
COMMON STOCK. THERE IS A LIMITED PUBLIC FLOAT FOR OUR COMMON STOCK AND YOU MAY
NOT BE ABLE TO SELL YOUR SHARES AT THE PRICE OR IN THE VOLUME YOU DESIRE
As of February 22, 2000, we had outstanding 12,726,503 shares of common
stock, out of which approximately 8,139,095 shares are restricted securities.
Approximately 6,815,000 shares of our restricted common stock has been held by
our shareholders for more than two years, of which 1,015,000 could be sold into
the market immediately without volume limits pursuant to Rule 144 because they
are held by non-affiliates. The balance, 5,800,000 shares, are held by
affiliates and could be sold into the market immediately subject to volume
limits pursuant to Rule 144.
Approximately 200,000 shares of our restricted common stock has been held
by our shareholders for more than one year and less than two years and could be
sold into the market immediately with volume limits pursuant to Rule 144. By
January, 2001, substantially all of our restricted shares of common stock will
be freely tradeable subject to Rule 144. As the restrictions on resale end and
these shares are sold into the market, the price of our common stock could drop
significantly if the holders of these restricted shares sell them or are
perceived by the market as intending to sell them.
6
<PAGE>
The possibility that a substantial amount of the shares registered in this
offering may be sold in the public market could have an adverse impact on the
market price of our common stock. There is no assurance that stockholders will
be able to sell the shares for any particular price. No prediction can be made
as to the effect that sales of shares of our common stock or even the mere
availability of such shares for sale, will have on the market prices. The
possibility that substantial amounts of common stock may be sold in the public
market by the holders of these shares, or the perception by the market of an
intention by the holders to sell these shares, would likely have an adverse
effect on prevailing market prices for the common stock and could impair our
ability to raise capital through the sale of our equity securities.
WE ARE DEPENDENT ON OUR PRESENT MANAGERS AND OUR ABILITY TO GROW COULD BE
IMPAIRED IF WE LOST THEIR SERVICES
Our success is substantially dependent upon the time, talent, and
experience of Kent Watts, our President and Chief Executive Officer. We have an
employment agreement with Mr. Watts. However, we have no key man insurance on
Mr. Watts. The loss of the services of Mr. Watts would have a material adverse
impact on us. No assurance can be given that a replacement for Mr. Watts could
be located in the event of his unavailability. In order for us to expand, we
must continue to improve and expand the level of expertise of our personnel and
we must attract, train and manage qualified managers and employees to oversee
and manage the expanded operations. Demand for computer industry personnel is
high. There is no assurance that we will be in a position to offer competitive
compensation to attract or retain such personnel. You should not invest unless
you are willing to entrust all aspects of our management to our directors and
officers.
WE MAY NOT BE ABLE TO MANAGE GROWTH AND THIS COULD RESULT IN A WEAKENING OF OUR
FINANCIAL AND COMPETITIVE POSITION
Our intention is to expand business operations by acquiring companies and
starting new businesses. This expansion will subject us to a variety of risks
associated with rapidly growing companies. In particular, our plans may place a
significant strain on our day-to-day operations. There can be no assurance that
our systems, controls or personnel will be sufficient to meet these demands.
Inadequacies in these areas could have a material adverse effect on our
business, financial condition and results of operations.
OUR CUSTOMER CONTRACTS REQUIRE US TO MEET SPECIFIED PERFORMANCE LEVELS AND WE
MAY MISJUDGE THE LEVEL OF PERFORMANCE THAT WE ARE ABLE TO PROVIDE
If we misjudge the time or the constraints in which we provide solutions or
are unable to maintain any agreed upon performance levels for customers, our
customers may become dissatisfied. We do not know if we can consistently
achieve the service levels we agree on with our customers.
WE HAVE NEVER PAID A CASH DIVIDEND AND IT IS LIKELY THAT THE ONLY WAY YOU WILL
REALIZE A RETURN ON YOUR INVESTMENT IS BY SELLING YOUR SHARES
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We have never paid cash dividends on any of our securities. Our Board of
Directors does not anticipate paying cash dividends in the foreseeable future.
We currently intend to retain future earnings to finance our growth. As a
result, your return on an investment in our stock will likely depend on your
ability to sell our stock at a profit.
THERE IS LIMITED MARKET LIQUIDITY FOR OUR SECURITIES AND THERE ARE PENNY STOCK
SECURITIES LAW CONSIDERATIONS THAT COULD LIMIT YOUR ABILITY TO SELL YOUR SHARES
At February 22, 2000, the closing price of our stock was near or above
$5.00 per share. If our closing stock price were fall below $5.00, our stock
would be considered "penny stock", and the sale of our stock would be subject to
the "penny stock rules" of the Securities and Exchange Commission. The penny
stock rules require broker-dealers to take steps before making any penny stock
trades in customer accounts. The penny stock rules require a broker-dealer to:
- - Advise a customer of the lowest offer and highest bid for our stock
- - Advise a customer of the broker dealer's compensation
- - Make a special written suitability determination for the customer and
receive the customer's prior written agreement
If we were to become subject to the penny stock rules, there could be delays in
the trading of our stock. The market liquidity of our stock could be adversely
affected.
THE MARKET PRICE OF YOUR SHARES WILL BE VOLATILE
The stock market price of technology companies like us has been volatile.
Securities markets may experience price and volume volatility. The market price
of our stock may experience wide fluctuations as it has in the recent past which
could be unrelated to our financial and operating results.
WE COULD ISSUE PREFERRED STOCK AND THIS COULD HARM YOUR INTERESTS
We presently have authorized 20,000,000 shares of preferred stock, par value
$.001 per share, from which 5,000 shares have been designated as Series A
Preferred Stock, of which 3,000 shares of Series A Preferred Stock are presently
outstanding. Other shares of preferred stock, if issued, would be entitled to
preferences over the common stock. The shares of preferred stock, when and if
issued, could adversely affect the rights of the holders of common stock, and
could prevent holders of common stock from receiving a premium for their common
stock. An issuance of preferred stock could result in a class of securities
outstanding that would have preferences with respect to voting rights and
dividends and in liquidation over the common stock, and could (upon conversion
or otherwise) enjoy all of the rights of holders of common stock. The Board's
authority to issue preferred stock could discourage potential takeover attempts
and could delay or prevent a change in control of us through merger, tender
offer, proxy contest or otherwise by making such attempts more difficult to
achieve or more costly.
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WE MAY SEEK BUSINESS COMBINATIONS WITH OTHER FIRMS AND ISSUE MORE
SECURITIES WHICH COULD DILUTE YOUR INTERESTS AND PUT MORE OF OUR SHARES INTO THE
MARKET
We may enter into business combinations with other firms by exchanging
stock. This would enable us to acquire additional assets without spending cash.
However, it may result in dilution in per share net tangible book value to
existing shareholders, and put more of our shares into the market.
WE MAY NOT BE ABLE TO COMPETE FOR BUSINESS AND THIS WOULD SUBSTANTIALLY IMPAIR
OUR GROWTH
There are other companies which are engaged in the same business as us.
Many of our competitors are more established companies with substantially
greater capital resources and substantially greater marketing capabilities. No
assurances can be given that we will be able to successfully compete with such
companies. We anticipate that the number of competitors will increase in the
future.
IF WE WERE UNSUCCESSFUL IN PREVENTING OTHERS FROM USING OUR INTELLECTUAL
PROPERTY, WE WOULD LOSE A COMPETITIVE ADVANTAGE
We have common law rights to the service marks "Hyperdynamics", "ITHost"
and ITHost.net" based upon our substantial and continuous use of these
trademarks in interstate commerce. However, we have not registered these
service marks. There can be no assurance that the steps we have taken to
protect our service marks will be adequate to deter misappropriation. Any
attempts by us that we make to defend our intellectual property would be
expensive and time consuming.
WE DEPEND ON THIRD PARTY TELECOMMUNICATIONS VENDORS OVER WHOM WE HAVE NO CONTROL
AND THIS COULD IMPAIR OUR REVENUES
Our information technology hosting business and our e-Business solutions
business is dependent upon other companies to supply telecommunications services
and computer equipment which we use to provide our information technology
hosting solutions. Any failure to obtain needed services in a timely fashion
and at an acceptable cost could have a material adverse effect on our business.
Moreover, a disruption in telecommunications capacity, which is provided by
third parties, could prevent us from providing our services. Although we have
not been affected by a network outage, major network outages have occurred in
the past. Were such an outage to affect us, we may not be able to deliver an
adequate level of service to our customers.
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WE DEPEND ON THIRD PARTY SOFTWARE VENDORS OVER WHOM WE HAVE NO CONTROL AND THIS
COULD IMPAIR OUR REVENUES
We depend on other companies to supply the software which we use to provide
our information technology hosting solutions. Any failure to obtain needed
software or services in a timely fashion and at an acceptable cost could have a
material adverse effect on our business. Our ability to provide cost efficient
and reliable information technology hosting solutions to our clients is key to
our business strategy. We will derive revenues from projects in which we
customize, implement, or host applications developed by a variety of software
vendors. We have software license agreements with these software vendors. All
the agreements may be terminated upon a breach of the agreement. We cannot be
sure that any of our agreements with software vendors will be renewed in the
future. If any of these agreements are terminated, not renewed, or we cannot
continue to use the software for any reason, we may have to discontinue services
or delay their introduction unless we can find, license, and package comparable
software. In addition, we can provide no assurance that if we were able to
obtain similar software products, that the terms of the licensing agreement
would be favorable, or that our clients would accept comparable software
products as substitutes.
Not only is our success dependent upon the continued popularity of the
product offerings of our current vendors, it is also dependent on our ability
to establish relationships with new vendors in the future. As new software
applications are released, if we are unable to enter into agreements with these
software vendors, we may be unable to compete.
WE FACE SECURITY RISKS IN CONNECTION WITH OUR ABILITY TO PROTECT OUR HARDWARE
FROM DAMAGE, COMPUTER HACKERS OR COMPUTER VIRUSES
Our success largely depends on the efficient and uninterrupted operation of
our computer and communications hardware systems. All of our computer and
communications hardware is currently located at a leased facility in Houston,
Texas. Our hardware is vulnerable to:
- - computer viruses
- - physical or electronic break-ins
- - physical vulnerability to damage
- - interruption from fire, flood, long-term power loss, and
telecommunications failures
These events could lead to delays, loss of data, or interruptions in
service which could subject us to liability and harm our reputation. We
believe that we have sufficient internal disaster recovery resources to
implement and establish a full and rapid recovery from disasters of these types.
We currently do not carry any business interruption insurance to compensate us
for losses that may occur. We currently do not have any business liability
insurance to compensate for any losses or claims that may arise from our
business operations, such as claims by our customers.
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A significant barrier to online business and communications is the secure
transmission of confidential information over public networks. We rely on
technology to provide the security to secure the transmission of confidential
information. However, we can provide no assurance that advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments will not result in a compromise or breach of the methods used to
protect customer data. If any compromise of our security were to occur, our
reputation and business would suffer. A party who is able to circumvent our
security measures could misappropriate proprietary information or cause
interruptions in our operations or the operations of our customers. We may be
required to expend significant capital and other resources to protect against
security breaches or to alleviate problems caused by security breaches.
IN THE FUTURE, OUR INABILITY TO MEET CUSTOMER NEEDS FOR ERROR-FREE HOSTING
SERVICES COULD RESULT IN LOSSES AND SUBSTANTIAL LIABILITY
The hosting solutions we provide our clients are critical to their
businesses. Any defects or errors in our services or any failure to meet
clients' expectations could result in:
- - delayed or lost revenues due to adverse client reaction
- - requirements to provide additional services to a client at no charge
- - claims for substantial damages against us, regardless of our
responsibility for such failure, which may not be limited by the
contractual terms of our engagement
We currently do not have any business liability insurance to compensate for
any losses or claims that may arise from our business operations.
WE ARE DEPENDENT ON THE GROWTH IN DEMAND FOR INFORMATION TECHNOLOGY HOSTING
SOLUTIONS
Our ability to increase revenues and achieve profitability depends, in
part, on the growth in demand for and the acceptance of information technology
hosting solutions by small and medium-sized businesses. The market for these
solutions has only begun to develop and is evolving rapidly. We believe that
many potential clients are not currently aware of the advantages of outsourcing
information technology solutions. However, it is possible that these solutions
may never achieve market acceptance. If the market for our solutions does not
grow, or grows less rapidly than we currently anticipate, our revenues will
suffer.
OUR BUSINESS IS DEPENDENT ON THE INTERNET, WHICH WE DO NOT CONTROL
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Our success will depend, in large part, upon the maintenance of the
Internet infrastructure, as a reliable network backbone with the necessary
speed, data capacity, and security. To the extent that the Internet continues
to experience increased numbers of users and increased requirements of users, we
can provide no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it or that the performance or reliability
of the Internet will not be adversely affected. Furthermore, the Internet has
experienced a variety of outages and other delays as a result of damage to
portions of its infrastructure, and these outages and delays could hinder our
ability to provide solutions.
WE INDEMNIFY OUR DIRECTORS AND OFFICERS AND THIS REDUCES THE LIKELIHOOD OF
SHAREHOLDER LITIGATION
Delaware General Corporation Law permits a corporation organized under
Delaware law to indemnify directors and officers with respect to any matter in
which the director or officer acted in good faith and in a manner he reasonably
believed to be not opposed to our best interests, and, with respect to any
criminal action, had reasonable cause to believe his conduct was lawful.
Our Bylaws provide that our directors and officers are indemnified by us if
that person is a party to a matter by reason of being a director or officer.
These provisions may discourage stockholders from bringing suit against a
director for breach of fiduciary duty and may reduce the likelihood of
derivative litigation brought by our stockholders on our behalf against a
director.
WE ARE SUBJECT TO THE DELAWARE ANTI-TAKEOVER LAW AND THIS COULD PREVENT A
TAKEOVER AND ANY POSSIBLE PREMIUM PRICE FOR YOUR SHARES
We are subject to the General Corporation Law of the State of Delaware,
including the anti-takeover law. The law restricts the ability of a public
Delaware corporation from engaging in a business combination with an interested
stockholder for a three year period that begins on the date of the transaction
in which the person became an interested stockholder. As a result, persons who
may desire to acquire us may find it difficult to effect an acquisition with us.
This could deprive our shareholders of certain opportunities to sell or
otherwise dispose of their stock at above-market prices pursuant to such
transactions.
INFORMATION ABOUT FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements about our future.
Forward-looking statements include statements about our:
- - plans
- - objectives
- - goals
- - strategies
- - expectations for the future
- - future performance and events
- - underlying assumptions for all of the above
- - other statements which are not statements of historical facts
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These forward-looking statements involve risks and uncertainties which
could cause our actual results to materially differ from our forward-looking
statements. We make these forward-looking statements based on our analysis of
internal and external historical trends, but there can be no assurance that we
will achieve the results set forth in these forward-looking statements. Our
forward-looking statements are expressed in good faith and we believe that there
is a reasonable basis for us to make them.
In addition to other factors discussed in this prospectus, the following
are important factors that could cause our actual results to materially differ
from our forward-looking statements:
- - our ability to respond to changes in the information technology
marketplace
- - competitive factors
- - the availability of financing on terms and conditions acceptable to us
- - the availability of personnel with information technology skills
We have no obligation to update or revise these forward looking statements to
reflect future events.
USE OF PROCEEDS
We will not receive any proceeds upon the sale of the common stock issuable
upon the conversion of our Series A Preferred Stock by the selling stockholders.
If all the warrants in this offering are exercised, the net proceeds to us from
the exercise of the warrants, after the deduction of offering expenses, will be
approximately $3,833,200. We intend to use the net proceeds for working capital
and general corporate purposes. We will pay for the cost of registering the
shares of common stock in this offering.
PRICE RANGE OF COMMON STOCK
Our common stock trades on the Over-the Counter Bulletin Board, also called
the OTCBB, under the trading symbol "HYPD". This table states the quarterly
high and low bid prices per share for our common stock. The bid prices reflect
inter-dealer prices, without retail markup, markdown, or commission and may not
represent actual transactions.
<TABLE>
<CAPTION>
(Our fiscal year ends on June 30) High Bid Low Bid
--------- --------
<S> <C> <C>
Fiscal 1998:
- ---------------------------------------
First Quarter $ 2.125 $ 1.00
Second Quarter 1.75 0.51
Third Quarter 1.375 0.156
Fourth Quarter 0.875 0.25
Fiscal 1999:
- ---------------------------------------
First Quarter $ 1.25 $ 0.25
Second Quarter 2.25 0.78125
Third Quarter 3.50 0.28125
Fourth Quarter 1.375 0.46875
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Fiscal 2000 (through February 18, 2000)
First Quarter $ 1.125 $ .625
Second Quarter 5.0625 .625
Third Quarter 7.75 4.00
</TABLE>
On February 22, 2000, the closing bid on our common stock as reported on
the OTCBB was $5.00 per share. On February 22, 2000, we had approximately 107
record stockholders and approximately 1,600 beneficial stockholders of our
common stock. On February 22, 2000, we had 12,726,503 shares of our common
stock outstanding.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Fidelity Transfer
Company, 1800 South West Temple, Suite 301, Salt Lake City, Utah 84115,
tel.(801) 484-7222.
OUR DIVIDEND POLICY
We have not paid and do not intend to pay cash dividends on our common
stock in the foreseeable future. Our current dividend policy is to retain all
earnings, if any, to provide funds for operation and expansion of our business.
Our declaration of dividends, if any, will be subject to the discretion of our
Board of Directors, who may consider such factors as our results of
operations, financial condition, capital needs, acquisition strategy, among
others. We cannot pay dividends on our common stock until all dividends due on
our Series A Preferred Stock have been paid.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Hyperdynamics Corporation is an information technology service provider
("ITSP"). We maximize our client's return on their investment in technology.
Our strategy provides flexible technology solutions so that our customers may
transition and migrate to the fully-hosted e-business model. We presently have
approximately 20 customers for our services. Our fiscal year ends on June 30.
IT HOSTING
In fiscal 1999, we began concentrating our efforts on providing
fully-hosted information technology hosting solutions to our customers through
our wholly-owned subsidiary, ITHost.net Corporation. We also continue to
provide our customers with conventional information technology solutions, and
e-Business solutions such as web site design, web site maintenance and web site
hosting. Our goal is to become the out-source IT department for our clients.
We expect our revenues from IThosting to increase in the coming quarters.
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E-BUSINESS PROJECTS
E-Business Hosting. We now have underway a major project with The Mattress
------------------
Venture, LP to supply a complete new point-of-sale system for over 130 "Mattress
Firm" retail stores nationwide. This project involves the use of customized,
retail point-of-sale software, based on applications from Great Plains Software.
We are an eEnterprise strategic partner of Great Plains Software. This retail
point-of-sale software will be rolled out over the next few months. During
1999, we installed Great Plains Software financial system applications at The
Mattress Firm, LP and this solution is in use for accounting and financial
reporting. We have received approximately $1 million in revenue from this
project since April, 1999. Our goal is to ultimately host, at our facility, the
retail point-of-sale solution and the accounting solution.
E-Business Migration. During 1999, we started a project with Drydiaper.com,
- ---------------------
Inc. to develop a complete e-Business web-site for them called Drybabies.com,
which is scheduled for launch this Spring. We believe that this project could
become a fully-hosted, fully integrated enterprise e-solutions project covering
manufacturing, retail store point-of-sale and delivery. The Web-site will
ultimately allow orders to be taken through the web site and be shipped without
"hands-on product" until shipment. This project can our customer with greater
managerial control because it will integrate inventory control with the
manufacturing process.
CONVENTIONAL IT SERVICES
During 1999 we continued to provide hardware and software for networks,
systems and servers to our customers. We intend to continue providing these
services while we educate our customers on the our new information technology
solutions. Approximately one-fourth of our revenue in 1999 came from network
and system integration customers. Our goal is to transition and migrate all of
our customers to the e-business model and the IThosting model.
RESULTS OF OPERATIONS
The Three Months Ended December 31, 1999 Compared To
The Three Months Ended December 31, 1998
Our sales increased to $712,422 for the three months ended December 31,
1999 compared to $177,265 for the same period in 1998. The increase in revenue
is a result of the continuation of large projects started in 1999 while
successfully closing new business in addition to these large projects.
Our cost of revenues increased correspondingly to $444,294 for the three
months ended December 31, 1999 compared to $91,878 for the same period in 1998.
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For the three month period ended December 31, 1999, our gross margin
decreased to 37.70% compared to 48.2% for the same period in 1998. The decrease
was due to a portion of the our service revenue that was contracted out to a
third party, thereby reducing our gross margin percentage for the quarter.
Our selling, general and administrative expenses increased to $159,879 in
the three month period ended December 31, 1999 compared to $150,046 for the same
period in 1998. The increase was primarily due to the addition of personnel to
our sales staff.
Our net income was $101,460 for the three month period ended December 31,
1999. This compares to a net loss of $(85,019) for the same period in 1998.
The positive results are due to the continuing policy to control overhead while
maintaining a flexible approach to providing our information technology services
while closing an increasing number of longer term, more lucrative e-business
based contracts. Additionally, the staff that we have added have either
directly been added to our sales force or have allowed other persons in our
organization to focus more heavily on developing our Company's revenues.
The Six Months Ended December 31, 1999 Compared To
The Six Months Ended December 31, 1998
Our sales increased to $955,811 for the six months ended December 31, 1999
compared $334,168 for the same period in 1998. The increase in revenue is a
result of the continuation of large projects started in 1999 while successfully
closing new business in addition to these large projects.
Our cost of revenues increased correspondingly to $542,547 for the six
months ended December 31, 1999. This compared to $202,055 for the same period
in 1998.
For the six months period ended December 31, 1999, our gross margin
increased to 43.24% compared to 39.5% for the same period in 1998. The increase
overall for the six months is due to increasing efficiencies overall within the
organization to provide more cost effective services.
Our selling, general and administrative expenses increased to $295,379 in
the six month period ending December 31, 1999 compared to $269,545 for the same
period in 1998. The increase was primarily due to the addition of personnel to
sales staff.
Our net income was $231,910 for the six months ended December 31, 1999.
This compares to a net loss of $(163,830) for the same period in 1998. The
positive results are due to the continuing policy to control overhead while
maintaining a flexible approach to providing our information technology services
while closing an increasing number of longer term, more lucrative e-business
based contracts. Additionally, the staff that we have added have either
directly been added to our sales force or have allowed other persons in our
organization to focus more heavily on developing our Company's revenues.
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The Fiscal Year Ended June 30, 1999 Compared To
The Fiscal Year Ended June 30, 1998
Revenues increased to $1,498,124 for the fiscal year ended 1999, from
$820,535 for 1998. The 83% increase was primarily due to the major emphasis
and focus on the information technology services and e-business related sales
compared to a divided focus with equipment sales in 1998.
Cost of revenues increased to $870,151 (58% of revenue) for the fiscal year
ended 1999, from $702,164 (86% of revenue) for 1998.
Selling, General and Administrative expenses increased to $774,378 (52% of
revenue) for the fiscal year ended 1999, as compared to $693,001 (84% of
revenue) for 1998. The increase was primarily due to increased labor costs
associated with establishing the e-business programs and information technology
hosting services.
Our net loss was $(184,546) for the fiscal year ended 1999, or ($0.02) per
share, compared to $(558,324) or ($0.07) per share for 1998.
During the first two quarters of fiscal 1999, we had profits of $2,565 and
$22,304. This improvement was a result of the culmination of core projects for
e-business and information technology hosting services.
LIQUIDITY AND CAPITAL RESOURCES
In January, 2000, we raised $3,000,000 in cash through the sale of our
securities in a private placement of our securities. We could receive
additional capital upon the exercise of warrants and options. As of February
22, 2000, we had no long-term debt and we have no plans to incur long term debt.
As of February 22, 2000, we had cash on hand in the amount of approximately $2.5
million. At December 31, 1999, our current ratio of current assets to current
liabilities was 3.01. This improvement compares to a current ratio of .92 at
December 31, 1998.
We continue to seek a buyer for our interest in a revenue sharing
agreement related to SierraNet, Inc, which is an Internet service provider,
because it no longer fits into our business plan. We have received an average
of $3,000 per month as our share of SierraNet's revenue. Our interest in
SierraNet is 4% of its gross revenue and 19% of gross sale proceeds of the sale
of any significant sale of the assets or stock of Sierra-Net.
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In September, 1999, we sold our formerly wholly-owned subsidiary, Wired and
Wireless Corporation because it no longer fit into our business plan. 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 provides that we will receive 10% of the proceeds
related to a third party acquiring or merging with Wired and Wireless. Our
interest in this revenue sharing agreement is vested.
We are now realizing increased sales and profits. Our success to date has
been accomplished with limited capital resources. We believe that we can attain
further success since we have completed raising a significant amount of capital.
We are now in a position to finance our internal growth and to evaluate business
acquisition candidates.
We continue to revise and update our ITSP business plan. We are reviewing
financing strategies for our next round of capital raising.
As of June 30, 1999, we had approximately $1,300,000 in unused net
operating tax loss carry-forwards of which $640,000 expire in 2012, $550,000
expire in 2013 and $110,000 expire in 2019. We are restricted in our ability to
use these tax loss carry-forwards because we had a change in stock ownership in
1998 that exceeded 50% of our then outstanding stock. As a result of this
change in stock ownership, the carry-forward of our net operating loss of
$940,000 at January, 1998 is limited to $151,000 per year. Our operating losses
after January, 1998, are not restricted. We may not be able to use all our net
operating loss carry-forwards before they expire.
YEAR 2000
We have not had any Year 2000 deficiencies internally or externally. We do
not expect to have any Year 2000 deficiencies internally or externally. Our
internet activities are hosted at our offices and we currently use the services
of Concentric Network for our primary Internet access circuits. Concentric is a
large national tier-1 Internet backbone provider. If a Year 2000 deficiency
occurs internally or externally, we will shift our internal and external
resources to fix the deficiency. We do not expect any Year 2000 deficiency to
require an expenditure of more than $10,000.
OUR BUSINESS
INTRODUCTION
We are an Information Technology Service Provider ("ITSP"). We can
maximize our client's return on their investment in technology. The services we
provide are ITHosting services, conventional information technology services and
e-Business services. We provide our customers with fully-hosted information
technology hosting solutions which we can scale to meet the customer's needs.
We provide these information technology hosting solutions at our location on our
servers with our staff of information technology experts. The customer uses
our services, solutions and facilities instead of the customer's own computer
system and staff. From the customer's location, the customer can access its
information from us via the Internet. We began our information technology
hosting business in 1999. We have also been in the conventional information
technology solutions business since 1988, and we have also been in the
e-Business solutions business since 1996. Our goal is to become the premier
ITSP.
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Our web site is www.hyd.net, however, the information contained on our web
site is not part of this prospectus. Our principal executive offices are
located at Hyperdynamics Corporation, 2656 South Loop West, Suite 103, Houston,
Texas 77054, tel. (713) 660-9771.
THE INTERNET CREATES OPPORTUNITIES FOR US
We believe that the number of Internet users, uses and usages is increasing
rapidly. We are strategically positioned in the Internet market. We believe
that there are not enough trained IT professionals capable of handling the
increase in Internet usage. Companies will find it increasingly difficult to
hire competent information technology ("IT") professionals. The solution for
these companies is to outsource their information technology needs to firms like
us. We believe that many companies will want to realize the cost savings and
manpower savings that outsourcing their IT needs can provide. This new approach
to e-Business has created a new market niche that we anticipated and now seek to
exploit.
OUR BUSINESS MODEL
Our market is small to medium size businesses. Our sales effort is made
using our own web site, our direct sales force, trade shows, and, of course,
word of mouth from our current customer base.
Although our business model concentrates primarily upon serving the
sometimes neglected small and medium sized business markets, we also have the
skills necessary to service large clients with superior solutions, at
competitive costs. Our goal is to become the market leader in complete IT
hosting as a low cost alternative for small to medium size businesses developing
their own internal information technology department. Our conventional IT
services, and e-commerce solutions, though currently profitable, will become
less important to our revenue growth, as the outsourcing of IT services become a
necessity to small business. We look to expand our Internet point of presence
(POP) to allow for a national presence for our IT hosting services. We are
presently developing our first IT hosting service and processing center that
will provide facilities for the expansion of our marketing campaign to a
national level.
While the Company has previously been serving a regional market centered in
Houston, Texas, we believe that we can have a national market reach in the near
future. In the past, a significant portion of our marketing effort has been at
trade shows. We are planning a marketing and advertising campaign in the near
future.
We are actively seeking candidates for acquisition that will fit our
business model. We have a three-stage acquisition and investment strategy that
we believe will allow us to grow quickly but that we believe will not adversely
affect our financial resources. First, we plan to acquire the best of the IT
providers in major domestic markets. We will analyze the top 25 percent of
these companies nationally. We will try to acquire those that are the most
profitable while also fulfilling our expansion needs.
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Next, we plan to acquire e-commerce related businesses that will be linked
together by their common focus on technology. This will include both technology
companies, such as Microsoft Solution Providers, and e-commerce companies.
While most of this expansion will be horizontal within their market niche, we
will begin to vertically integrate e-commerce businesses if they are profitable
and promising. We plan to develop custom designed IT hosting centers in major
markets. These centers will provide both regional hosting capabilities and
increased marketing possibilities as we move from being a regional provider to a
national provider.
INFORMATION TECHNOLOGY SERVICES
Information technology services are defined as the functions of planning,
designing, implementing, and managing:
- - Telecommunications including wide area networking and the Internet
- - Local area networking
- - Server and workstation computer systems
- - Operating systems
- - Integrated software applications
All of the above collectively provide for the effective management and the
distribution of transactional and decision support data.
The information technology ("IT") services and solutions that we provide
are:
- - Conventional IT services and solutions
- - e-Business IT services and solutions
- - IT hosting services and solutions
We provide our IT hosting solutions, conventional IT solutions and
e-Business IT solutions through our wholly-owned subsidiary, ITHost.net
Corporation (formerly, MicroData Systems, Inc.).
We provide comprehensive, integrated, end-to-end, full service information
technology solutions to small and medium-sized businesses. We provide our
solutions in our data center with 24-hour monitoring and customer service. Our
information technology hosting business model enables our customers to lower
their overall cost of information technology and use our state-of-the-art
information technology infrastructure and software, without the customer having
to make a large up-front investment in computers or personnel.
The visible costs of a business operating its own information technology
("IT") system includes the cost of network bandwidth, system administration,
hardware, software and personnel. We believe that the shortage in technical
professionals has resulted in the inability of small and medium-sized businesses
to compete with larger corporations for adequately trained and experienced
personnel. The cost of buying or upgrading a system can be costly. The
invisible cost of a business installing and operating its own system is the cost
of management being distracted from its core business activities.
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Our information technology hosting solutions relieve the customer of the
burden of:
- - Installing and maintaining hardware and software
- - Managing and operating a computer network
- - Recruiting, training and retaining personnel
Our hosting solutions are suitable for a customer's business operations and
web site e-commerce activities. A customer, including, for example, a pure
e-commerce customer, can utilize our solutions to completely avoid establishing
their own system infrastructure because we provide our:
- - Physical facility, server hardware, software and staff.
- - Internet connections
- - Security measures, such as firewalls, virus scanning intrusion detection
and 24 hour monitoring
- - Administration and management
- - Backup of data.
- - Disaster recovery
- - Physical site security
- - Off-site data storage
Our IT solutions give our clients the ability to decide how much of their
Information Technology infrastructure they want to internalize, and how much
they want to outsource to us. We offer a substantial suite of independent
services providing conventional IT services, e-Business migration services, and
complete IT hosting services. We also derive significant benefits from our
model as a comprehensive solutions provider in various different IT segments.
Other companies provide conventional Information Technology services, including
design, installation, and service. We plan to be the market leader in
comprehensive end-to-end Information Technology hosting services, in addition to
providing traditional services. Complete hosting services allow our clients to
concentrate on their core business functions, while not having to worry about
any on-site hardware and its upkeep, while reducing their personnel and
equipment costs. Clients will be provided with a virtual IT department located
at our facility, and staffed by our IT professionals. Our IT solutions will
also maintain external connections in such a way that our clients will receive
all of the tangible benefits of an on-site IT department.
OUR STRATEGIC VISION
In 1996, we acquired MicroData Systems Inc., which has provided
conventional IT services to their clients since 1988. We obtained our core
business plan from MicroData Systems and we continue to serve its conventional
IT clients. In 1999, we renamed our MicroData Systems subsidiary "IThost.net
Corporation" because of our focus on providing IT hosting services. We had been
positioning ourselves as an Information Technology Services Provider (ITSP)
prior to the emergence of the ITSP sub-category called Application Service
Provider ("ASP"). We have developed a comprehensive services package allowing
our clients to obtain full Information Technology support and assistance from
our IT hosting services.
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In the early 1990's, we realized the implications that the growth of the
Internet would have on Information Technology. The number of trained and
capable IT professionals available to businesses desiring to build an Internet
presence has not kept pace with demand . This shortage of professionals
ultimately led to the market niche that IThost.net is seeking to exploit. We
are implementing an aggressive growth-oriented business model of acquiring
IT-based companies, with an emphasis on internal talent and experience. We
believe that we can increase our effectiveness in providing clients with a
significant cost savings and superior results as an alternative to their having
a complete internal IT department. We are also seeking strategic partnering
with other IT firms.
We currently have a concentration of customers in the Houston, Texas area
market. We are negotiating with a planned, major technology center in Houston
as well as with three tier 1 Internet access providers. We have plans to
implement a high bandwidth, nationally accessible ITHost.net network, and we are
developing our first IT hosting service and processing center that we believe
will expand our scope of operations from a local provider to having a
significant national market presence.
We will not follow what we perceive to be the ".com" financial statement
model, which appears to emphasize the value of losses and deficits. Instead,
we plan to grow our business more conservatively, by acquiring companies that
fit into our business plan while we retain what we consider to be a sound
balance sheet in preparation for future rounds of financing. Our long range
objective is to begin the vertical integration of the IT industry.
The present revenue stream from our conventional IT services currently is
our largest segment. We believe that our e-Business IT services and IT hosting
services will be more important segments in the future. We anticipate
significant near term growth of our comprehensive IT hosting services. We are
in a unique position to expand our IT hosting services, given the nationwide
shortage of IT professionals. We have concluded that IT hosting will be our
flagship service and that it will have the highest gross margin and be most
significant revenue stream by 2003. This is based on our internal assessment of
our IT hosting as a strategic market, our innovative industry-superior, services
at a reasonable cost, and our debt-free and liquid financial position
OUR IT HOSTING SOLUTIONS
We provide our customers with information technology hosting solutions that
we can scale to meet the customer's needs. We provide the information
technology solutions at our location on our servers, with our staff of
information technology experts. The customer uses our solutions and facilities
instead of the customer's own IT infrastructure and staff. From the customer's
location, the customer accesses its information from us via the Internet. We
have the capability to host all or a portion of a customer's information
technology requirements. Our solutions allow the customer to use our
information technology skills and IT infrastructure, instead of the customer
purchasing more infrastructure such as costly hardware and software and hiring
more computer staff.
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We provide our customers with:
- - A complete off-site information technology resource for real time business
operations solutions, e-commerce transactional solutions and business
data solutions.
- - Application software and e-commerce transaction software which resides on
our servers.
- - Broad bandwidth Internet service.
- - Data: access, manipulation, mining, warehousing and storage.
Our Information technology hosting solutions enhance a customer's:
- - Internet strategies
- - E-commerce solutions
- - Enterprise asset and operational functionality and control
- - Marketing Management
- - General Business Operations
- - Data Base Management
We provide our customers with:
- - Our state-of-the-art computer servers, facilities and staff.
- - Our 24/7 customer service.
- - Integration of our hosting solutions with the customer's existing computer
system.
- - Training.
OUR E-BUSINESS IT SOLUTIONS
We enable a customers' e-Business and e-Commerce web presence by migrating the
customer's conventional business methods to the e-Business model of e-Business
IT and sales through web site design, maintenance and hosting. We provide
wholly integrated IT services, coupled with high-speed Internet access for
businesses. By providing remote network and system administration services
over the same high-speed connection, costs are significantly reduced and the
consumer benefits greatly improved. We will provide complete electronic based
sales for our clients, enabling them to completely outsource their e-Business
Internet connections to us. This outsourcing allows the client to simply and
easily receive sales orders, rather than worry about often inefficient and
costly internal systems management and decision-making. At the same time, we
encourage our clients to provide us with input about the design and
implementation of their e-commerce activities.
OUR CONVENTIONAL IT SOLUTIONS
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We provide conventional information technology solutions for a customer's
own computer network. Our conventional IT services play interconnected roles
in helping clients internalize their own IT infrastructure. We advise our
clients about developing an IT management plan and creating a technology vision
for the future. We help our clients implement their IT strategy. Our
conventional IT services include customized research, specialized system design,
and assistance in finding the most appropriate and cost effective IT solutions.
Our IT professionals install and integrate our clients' new systems. We
provide application training on the new system, ongoing network management,
operating system software support and provide high-end technical competence to
keep the new IT system current and efficient. Our conventional IT services
provide our clients with complete system coordination, from the blueprint design
period, through installation and training, with continuing system upkeep and
maintenance.
OUR CAPABILITIES
Information Technology Management
Every organization should have a technology vision. Our IT professionals
implement and maintain that vision for our customers. Unless an organization
makes a decision to invest in the internal development of its own information
technology department (and in doing so are able to find qualified staff) it will
lack the technology leadership vision that can determine success or failure for
any organization. We have the ability to provide information technology
management for our customers.
Technology Research and System Design Services
Prior to implementation, a network diagram, including network addressing,
domain naming, user name conventions, security scheming, etc., must be created.
Many configuration decisions must be made with the various aspects of
information technology systems before any implementation work is started. We
can provide these types of research and design services as part of our
integrated product sales. Our products are fully tested to minimize problems
for the customer upon installation. These services are also made available as
free standing consulting services for custom integration jobs.
Installation and Implementation Services
Once the designs for telecommunications, wide area network, local area
network, workstation and server systems, and integrated software applications is
complete, we perform installation and configuration of equipment and software
based on the design. We have a policy of completely pre-configuring and testing
before we deliver to the customer's site.
Application Training.
We provide substantial application training to our clients as new
applications are installed across a client's organization. We provide training
services for all new systems, desktop applications, group applications, and
mission critical software applications. One criteria we have set for regarding
our own acquisition strategy is the acquisition candidate's own training
capabilities.
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Ongoing Network Management, System Administration, and Support
We provide network management and operating system administration services.
PC integration and support is also available, as well as the development of an
application help desk with on-line network assistance. The technical talents
to provide these services are found in companies like us that are certified by
software and hardware vendors such as Microsoft. We are a certified Microsoft
Solution Provider.
Internet Server, FaxServer, Citrix Server and SQL Server Administration
Certain high-end components of an information system require an IT
department that has significant experience and training. These areas can be
handled only by top-level technical administrators. In addition to our
acquisition strategy, we must maintain a strong continuing education program to
keep up with the evolution of server technology. These high level services are
the corner stone that allow us to provide the most valuable integrated
application technology that ultimately provides our customers with increased
productivity. Our customers don't have to develop and maintain this expensive
internal expertise because we provide it to them.
Mission Critical Software Applications, Software Integration, and
Development Services
We provide design, research, evaluation, and testing services to determine
and recommended the purchase of certain mission critical applications. The
purchase of any mission critical software application will be based on the
current market quote provided by us or the selected vendor. Any installation,
implementation, and configuration services performed beyond the specific quote
are performed as additional services. Our ability to provide services to
implement enterprise-wide applications gives us enhanced revenue potential.
These implementations take the most experienced professionals and provide the
best long-term benefits to the customer. They are relatively expensive and can
provide significant revenue to us.
Operating System and Application Software Support
We provide support services for our customers on a nation-wide toll free
number. We have a corporate policy and procedure whereby we use what we sell.
This enables us to handle a substantial amount of problem resolutions over the
phone. Any time a customer installs or upgrades, they run the risk of having
problems that they cannot resolve. We would like to be the company responsible
for making these changes in a controlled manner, but we can also help the
customer when they do it themselves and encounter difficulties.
IT Hosting
25
<PAGE>
We believe that the most significant part of our growth will be
attributable to our subsidiary, IThost.net Corporation, which provides complete
Information Technology hosting for businesses that desire to completely
outsource their information technology needs. This covers more significant and
beneficial services than merely hosting a static e-commerce web site. Complete
IT hosting provided by us involves providing total Information Technology
services as a virtual IT department that is not physically located at the
client's location. Since the client's virtual IT department will be located at
our location, we and our clients will have reduced expenses associated with IT
maintenance. With the virtual IT department based at our location, the client's
e-Business and IT systems will receive our continuous attention. We believe
that companies are coming to the conclusion that there is a better cost/benefit
to using the existing infrastructure and technical talents of professional
information technology service providers like us. The concept of professional
ITSP's providing complete end-to-end IT services is what we refer to as
Information Technology Hosting. A major difference in IT Hosting versus
outsourcing is the "virtual" component. Because of the rapid expansion of the
Internet these services can be provided irrespective of geographic location.
We provide our full service customers with high-bandwidth, high-speed
Internet connections. This provides our clients with their own private,
wide-area network. The option of complete IT hosting provides small and medium
sized businesses with a realistic alternative to their developing a complete IT
department and e-commerce site, without the risks and difficulties associated
with hiring IT professionals and purchasing expensive hardware.
IT Hosting is a way for companies to avoid the cost, risk, and management
burden of implementing their own in-house information technology department. Our
clients can concentrate on their core business and let us provide them with the
latest and best technology available to help them compete. Our clients are able
to obtain these superior capabilities at a lower cost compared to implementing
and staffing their own IT department. Our client's capabilities and speed to
migrate their conventional business methods to the e-commerce model is greatly
enhanced.
We support and continually develop and expand our "www.hyd.net" point of
presence ("POP") on the Internet. We provide integrated IT services coupled
with high-speed Internet access for business. By providing remote network and
system administration services over the same high-speed connection, the
cost/benefit to the customer is leveraged. In effect, our customers receive a
private wide area network connection to their IT service provider. We have now
coined the phrase, "Information Technology Service Provider", or "ITSP" versus
the more limited concept of a "Internet Service Provider" (ISP) or an
Application Service Provider ("ASP").
We are initiating our"ITHOST.NET" national point of presence (POP) on the
Internet whereby we will be the virtual IT department for our expanding IT
Hosting customers.
To explain the concept of Information Technology Hosting (IT Hosting), it
is necessary to look at the increasing standards and requirements of providing
IT services as the scope of the services increases from static web-site hosting
to real-time e-commerce, e-Business and data base transaction hosting. There is
a parallel increase in the level of fault tolerance, and in the need for highly
trained technical staff. There is also a need for physical access to system
components, and cost levels associated with handling the increased levels of
hosting services.
26
<PAGE>
The reason for a client to select full service IT Hosting is the cost
savings and the superior results, when compared to the client keeping their IT
in-house. Our goal to provide the best cost/benefit solution that is customized
for the customer. A customer that uses our services to process transactions
cannot afford to have their system go down. This customer will normally pay
more than a customer that only needs static information that is not highly time
sensitive. We target our ITHOST.NET solutions toward the customer that needs
highly reliable systems, but may not be able or willing to invest in their own
infrastructure. These customers learn quickly that they can leverage our
ITHOST.NET infrastructure and obtain a better level of service at a lower cost
compared to doing it themselves.
Our IT HOSTING Center provides our customers with:
- - Clean power
- - FM200 or similar fire suppression
- - Key card security with palm print
- - Scalability of resources
- - Scalability of bandwidth starting with a Burstable DS-3 up to
a direct OC-xxx
- - Redundant primary Internet circuits with a goal to be attached to multiple
backbone providers in the design of a multi-homed gateway
- - Capability to eventually implement redundant server farms
that can ultimately be setup in a fail-over mode
- - Centralized network monitoring and management capability
- - Full physical access to all central site components on a 24/7 basis
by adequately cross trained IT Hosting center technicians
- - Network operating center to monitor complete network
- - Dedicated air conditioning for adequate continued cooling of equipment
- - Engineered electrical requirements including battery backup and backup
generator
- - Professional IT Hosting Center Staffing and Management
- - Full time monitoring of systems 24/7 by cross trained IT Hosting center
technicians that are trained in Windows NT Server administration,
Hardware troubleshooting, Network troubleshooting, Citrix Administration,
and MSSQLserver 7.0 administration
- - Scheduled and scripted system administration by certified Windows NT
Server operating system administrator, certified MSSQL 7.0
administrator, Certified Citrix Administrator, Certified Hardware
specialists, Certified network administrators, and certified application
specialists
- - Immediate access to Certified technical resources during regular business
hours
- - On-call services available upon monitored events so that system
automaticallynotifies on-call certified technicians by alarm and pager
The geographical dispersion of remote sites creates an interesting problem
to determine the optimum cost/benefit solution for connectivity of remote sites
to the Internet so that they each have the best performance in terms of
availability and minimum latency. Before the Internet, the only answer was to
develop expensive private wide area networks on a custom design basis.
27
<PAGE>
Using the Internet as the primary wide area network backbone is interesting
to look at. One approach is to determine the optimum connectivity with the most
reliable connection and the most efficient route path across the United States
to the central IT Hosting site. Sometimes, but not always, the path spanning
the fewest nationwide backbone providers will normally provide the most
efficient routes and use the fewest router hops. This approach would require
finding one nationwide Internet backbone provider to provide local connectivity
to all the remote sites. It would normally be optimal for this provider to be
the same provider as the central site backbone provider. One additional benefit
from this approach could be bargaining power due to an increase in economies of
scale. Coupled with all of the other services that ITHOST.NET can provide to
our customers, even greater economies can be reached. We believe that in this
manner our customers could achieve the best IT performance and reliability,
while having a low cost. This approach supports our customers' use of
ITHOST.NET as their exclusive IT source.
Another approach to determining the optimum remote site connectivity would
be to evaluate each and every single location independently for the optimum
carrier in the area. This approach could take considerably more time and
effort, but might result in a cost savings. However, the money saved versus
the total value in having a nationwide single source with an optimal solution
may not provide justification for this approach. Depending on the national
provider, there will most likely be some remote sites that would have to use a
different ISP because of the lack of POP of the nationwide carrier in certain
rural areas.
Depending on the approach and the connectivity products available from
nationwide backbone providers, a client should establish standards so that some
conformity and similarity can be maintained across the organization. Different
regions have different services available. For example, DSL is not available
everywhere and where it is available, a client may not be able to get DSL
service, depending on the region's infrastructure development. Some standards
for low cost remote access to consider are:
- - DSL where available and reasonably priced
- - ISDN as an alternative to DSL
- - Dial-up phone line with standardized modem
Each client site will have either a DSL, ISDN, or Frame Relay supported
router and a Dialup modem for backup. Based on the rare situation where primary
Internet access could not be connected, a modem should be configured at each
site to be able to dial the backdoor login through a 1-800 dialup to our
ITHOST.NET backdoor. ITHOST.NET is creating a large frame relay based network
that rides on an already extensive Internet backbones. This is a virtual
private WAN across the Internet.
By using IT Hosting, a customer can:
- - Establish a high quality redundant central-site access for its mission
critical applications
- - Have its servers professionally managed in a professionally designed data
center environment
- - Expand its physical presence around the world and have a cost effective
way for the best possible connectivity (world-wide) at a cost
substantially less than conventional wide area networks
28
<PAGE>
- - Have a single source for problem reporting, determination, and resolution
for any component of its IT system
OUR VENDOR RELATIONSHIPS
Microsoft. We have embraced the Microsoft software technology platform as
---------
our primary operating system for over 3 years. In 1999, we became certified as
a Microsoft Solutions Provider through our subsidiary, IThost.net Corporation.
We rely heavily on the support given by Microsoft and use their operating system
software, Web server software platform, database platform and many other
applications.
Great Plains Software, Inc. In 1999, we received the eEnterprise and
-----------------------------
Dynamics certifications and authorizations from Great Plains Software, which
establishes our capabilities for Great Plains as:
- - eEnterprise Partner
- - Dynamics Partner
- - International Partner Authorization
- - Service Management Series
- - Great Plains Siebel Front Office
- - Project Accounting Series
- - Enterprise Reporting
We use the Great Plains platform to develop many of our applications such
as the point of sale for our client, The Mattress Firm, and the new
Drybabies.com. We intend to continue to enhance this strategic relationship and
become a designated ASP.
Citrix Systems, Inc. In 1999, we received the highest level Citrix Gold
----------------------
authorization and certification, which establishes our capabilities to
administer Citrix's software for high end application servers. Citrix Metaframe
technology, and the Microsoft NT Terminal Server technology (originally
developed by Citrix) are significant resources that enable our IThosting
strategy.
Cognos. We are an authorized Partner with Cognos. Cognos provides leading
------
edge business intelligence software.
Intel. In 1999, we made substantial progress towards a certification as an
-----
Intel Authorized Service Provider. This is Intel's highest certification. We
embrace the idea of providing the best cost/benefit solution for high-end
rack-mounted servers by using the Intel brands because of Intel's processing
power and scalability.
Computer Associates. We are a VIP Partner with Computer Associates, a
--------------------
leader in pro-active based network management software to facilitate remote
monitoring and the administration of networked systems. We will use significant
portions of their management software platform.
29
<PAGE>
Cisco Systems. We are an authorized reseller for Cisco products. Cisco is
--------------
the leader in enterprise networking products. We have decided to standardize our
router equipment around Cisco products.
Extreme Networks. We are an authorized reseller for Extreme Networks, a
-----------------
leader in gigabit ethernet based high speed switch technology.
COMPETITION
Our competitors include:
- - Other full service information technology hosting providers. We are not yet
aware of any companies that have the same strategy as ours to grow, develop
and provide IT hosting services. However, there are companies that provide
turn-key IT hosting like us.
- - Specialized hosting providers, such as application service providers or
e-commerce transaction hosting providers.
- - The Application Service Provider ("ASP") market, which is increasingly
competitive. Becoming a general ASP is a natural progression for many types
of segmented IT services companies including ISP's. The tremendous growth
and potential size of the ASP market is attracting many start-ups as well
as extensions of existing businesses from different industries.
- - Systems integrators that provide planning, design, implementation, and
maintenance of IT systems remain our competitors, while we believe that
they will experience an increasing disadvantage with respect to pricing and
other benefits provided by IT hosting like ours.
- - Internet service providers that provide the on-ramp access portion of what
we do as an ITSP. They may evolve into ASPs.
INTELLECTUAL PROPERTY
Our intellectual property is important to our success. We have unique
standards for our business strategy and our approach to providing IT services.
We rely on our trademarks and service marks, trade secrets and confidentiality
agreements to protect our competitive interests. We have common law rights to
the service marks "Hyperdynamics", IThost", "IThost.net", "HYPD", "HYP.NET",
"HYPD.COM", "ITSP", and "MicroData Systems" based upon our substantial and
continuous use of these service marks in interstate commerce. However, although
we plan to register each of these marks, we have not done so yet.
EMPLOYEES
30
<PAGE>
Our employees are our most precious resource. We are implementing a
strategy to develop and maintain the most talented cross-trained IT
professionals in the IT services industry. As of February 22, 2000, we employed
twelve persons on a full-time basis, all of whom are in management, technical,
sales or administrative positions. The growth in the number of our technical
employees is expected to continue on fast pace. We expect to retain the
technical employees of companies that we may acquire. No employees are covered
by a collective bargaining agreement. We consider relations with our employees
to be satisfactory.
INSURANCE
We carry hazard and general liability insurance. We do not carry flood
insurance, business interruption, business liability insurance, or key man life
insurance.
FACILITIES
Our offices are located at 2656 South Loop West, Suite 103, Houston, Texas
77054 where we lease approximately 3,000 square feet of commercial office space.
We pay $3,065 per month as rent for this office space. This lease is a month to
month lease. We believe that our offices are adequate for our present needs and
that suitable space will be available to accommodate our future needs.
RECENT EVENTS
In January, 2000, we sold 3,000 shares of our new issue Series A Preferred
Stock for a total of $3,000,000 in cash to three accredited investors. As part
of this transaction, we also issued to the three investors a total of 300,000
Investor Warrants to purchase shares of our common stock at a price of $5.9125
per share which are immediately exercisable and expire on January 6, 2005.The
Investor Warrant provides that in no event shall the holder exercise the Warrant
if upon exercise of the Warrant, the holder would benefically own more than 4.9%
of our outstanding common stock. As part of this transaction, we issued 180,000
Placement Warrants to the placement agent to purchase shares of our common stock
at a price of $7.095 per share which are immediately exercisable and expire on
January 6, 2005 and 120,000 Consultant Warrants to one individual to purchase
shares of our common stock at a price of $7.095 per share which are immediately
exercisable and expire on January 6, 2005. This was a private placement offering
of securities.
We are in negotiations for additional space at an information technology
service center that is presently under development by others. We have proposed
that we initially lease 15,000 square feet. We are also in negotiations with
three, tier-1 Internet backbone providers and related fiber access companies to
customize a multi-homed backbone design for this information technology service
center. We anticipate a resolution to all of these negotiations by June, 2000.
In September, 1999, we sold our formerly wholly-owned subsidiary, Wired and
Wireless Corporation because it no longer fit into our business plan. 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 provides that we will receive 10% of the proceeds
related to a third party acquiring or merging with Wired and Wireless. Our
interest in this revenue sharing agreement is vested.
31
<PAGE>
Other
Prior to January, 1997 our name was Ram-Z Enterprises, Inc.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the name, age and position of each of our
executive officers and directors.
<TABLE>
<CAPTION>
Name Age Position
- ------------------------ --- ------------------------------------------------
<S> <C> <C>
Kent Watts 41 Director, Chief Executive Officer, President and
Chief Accounting Officer
Robert J. Hill 46 Director and Vice President
Lewis Ball 69 Secretary
</TABLE>
Our Directors are elected annually and hold office until the next annual
meeting of our stockholders 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 any of our directors and
executive officers. Board vacancies are filled by a majority vote of the Board.
BIOGRAPHIES OF OUR EXECUTIVE OFFICERS AND DIRECTORS
Kent Watts became Chairman of the Board of Directors and our CEO in 1997.
He has served as our Director, CEO and Chief Financial Officer since then. Mr.
Watts assumed the position of President in 1997. Mr. Watts has been a certified
public accountant in Texas since 1985 and a licensed Real Estate broker in Texas
since 1979. He received a Bachelor of Business Administration Degree from the
University of Houston in 1983. Mr. Watts founded our ITHost.net Corporation
subsidiary (formerly, MicroData Systems, Inc.), in 1988. He has extensive
experience working with management information systems. Mr. Watts has been
involved in the design, implementation and management of heterogeneous,
multi-protocol networks. He has substantial technical experience with a variety
of operating systems, relational databases, and client-server based software
applications.
32
<PAGE>
Robert J. Hill has served as our Chief Operating Officer and Director since
1996. In 1997, Mr. Hill assumed the position of Vice President. Before joining
us, Mr. Hill served for two years as vice president of Hudson-Trinity
Incorporated, a privately-held Internet service provider and network engineering
company that was an outsourcing service provider of 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 an MBA degree from the South Eastern Institute
of Technology and a BA degree from the State University of New York at Potsdam.
Lewis E. Ball has served as our Secretary since 1997 and as the Chief
Financial Officer from June 1996 to January 1997. He has been a financial
consultant to a number of companies since 1993. Mr. Ball has served as a
director of JVWeb, Inc. since 1997 and as secretary and treasurer of JVWeb, Inc.
since 1998. Mr. Ball has many years of industry experience as a chief Financial
Officer with Stevenson Services, Inc. and Richmond Tank Car Company (from 1983
to 1993). Mr. Ball is a Certified Public Accountant and a Certified Management
Accountant. Mr. Ball has a B.B.A. in Finance from the University of Texas, and
he did post-graduate work in accounting at the University of Houston.
INFORMATION CONCERNING OUR BOARD OF DIRECTORS AND ITS COMMITTEES
We have no compensation committee, no audit committee and no nominating
committee. Decisions concerning executive officer compensation for 1999 were
made by the full Board of Directors. Messrs. Watts and Hill are also our
officers. There is no family relationship between any of our directors and
executive officers.
EXECUTIVE COMPENSATION
The following sets forth all forms of compensation we paid our executive
officers for our fiscal years ended June 30, 1999, 1998 and 1997. No executive
officer of ours received compensation that exceeded $100,000 during 1999.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Annual Compensation Long Term Compensation
-------------------- ------------------------
Awards Payouts
----------------------- ----------------
Other Securities
Name and Annual Restricted Underlying
Principal Fiscal Compen- Stock Options/ LTIP All
Position Year Salary Bonus Sation Awards SARs Payouts Other
- --------------- ------ ------- -------- ----------- ----------- ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kent
Watts (1) 1999 $84,000 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
CEO, President 1998 84,000 -0- -0- -0- -0- -0- -0-
and CFO 1997 60,000 -0- -0- -0- -0- -0- -0-
Robert J. (1) 1999 72,000 -0- -0- -0- -0- -0- -0-
Hill 1998 72,000 -0- -0- -0- -0- -0- -0-
V.P. 1997 72,000 -0- -0- -0- 130,000 -0- -0-
<FN>
(1) We provide executive officers with other personal benefits which do not
exceed the lesser of $50,000 or 10% of annual compensation. These amounts
are omitted.
</TABLE>
33
<PAGE>
CHIEF EXECUTIVE OFFICER COMPENSATION
On July 21, 1999, we gave Mr. Watts an employment agreement which provides
for a base salary of $100,000 annually and a performance-based incentive of 5%
of our adjusted net income, up to an additional $100,000 in salary. The maximum
salary under this agreement is $200,000 annually. Mr. Watts will receive
options to purchase up to 7,000 shares of common stock at an exercise price of
$1.00 per share for each $1,000,000 of revenue generated during our fiscal year
ending June 30, 2000 that is in excess of the revenues reported for the fiscal
year ended June 30, 1999.
DIRECTOR COMPENSATION
We do not currently pay any cash fees to our Directors, but we pay Directors'
expenses in attending board meetings. There have been no director meeting
expense reimbursements for 1999 and 1998.
EMPLOYEE STOCK OPTION PLAN
We have been successful in attracting and retaining qualified personnel.
We believe that our future success will depend in part on our continued ability
to attract and retain highly qualified personnel. We pay wages and salaries
that we believe are competitive. We believe that equity ownership is an
important factor in our ability to attract and retain skilled personnel,
including consultants. We have adopted an employee stock option plan. This is
not a written plan. Up to 1,620,000 options to purchase common stock may be
granted pursuant to this plan. These options will vest over a five-year or
other negotiated period. These options will have an exercise price to be
determined at the time of each grant. based on the then current market value of
the stock. Our President has the authority to negotiate stock option agreements
with our employees and our consultants. The purpose of the stock option plan
will be to further our interests by providing incentives in the form of stock
options to key employees, consultants, and directors who contribute materially
to our success and profitability. The grants will recognize and reward
outstanding individual performances and contributions and will give the
recipients a proprietary interest in us, thus enhancing their personal interest
in the our continued success and progress. This plan will assist us in
attracting and retaining key employees and directors. As of February 22, 2000,
options to purchase 1,517,060 shares have been granted under this plan of which
646,581 options have already been exercised.
34
<PAGE>
As of February 22, 2000, we had outstanding 870,479 unexercised options
granted under other employment or consulting agreements. As of February 22,
2000, we had 102,940 shares of common stock that we could issue pursuant to
other employment or consulting agreements. As of February 22, 2000, there were
69,212 shares of common stock that we previously registered on Form S-8 in
connection with compensation agreements, but have not yet issued.
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 381,181 options, and currently
holds 343,819 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.
35
<PAGE>
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 our 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.
PRINCIPAL STOCKHOLDERS
The following describes as of February 22, 2000, the beneficial ownership
of our outstanding common stock of :
- - each person known to us who beneficially owns more than 5% of the common
stock
- - each of our Directors
- - each of our executive officers
- - all of our executive officers and directors as a group
Each of these principal stockholders has sole voting and investment power
for the shares each owns.
<TABLE>
<CAPTION>
Name and Address of Number of Shares Percent of
Beneficial Owner Beneficially Owned Common Stock
- ------------------------------------------ ------------------- -------------
<S> <C> <C>
Kent Watts
2656 South Loop West, Suite 103
Houston, Texas 77054 1,015,000 8.0%
Robert J. Hill
2656 South Loop West, Suite 103
Houston, Texas 77054 127,600 (1) 1.0%
Lewis E. Ball
2656 South Loop West
Suite 103
Houston, Texas 77054 54,560 (2) 0.4%
Emerald Bay Interests LTD 5,833,333 46.7%
3rd Floor, Genesis Bldg.
Georgetown, Grand Cayman, BWI
All directors and executive officers as a
group (3 persons) 1,209,160 9.4%
_______________________________
<FN>
(1) This amount includes options to purchase up to 127,600 shares of our common
stock at a strike price of $1.25 per share.
(2) This amount includes options to purchase up to 8,760 shares of our common
stock at an exercise price of $.75 per share and options to purchase up to
33,300 shares of our common stock at an exercise price of $1.25 per share,
and warrants to purchase up to 12,500 shares of our common stock at an
exercise price of $.51 price share.
</TABLE>
36
<PAGE>
Mr. Hill has options purchase up to 127,600 shares of our common stock at a
strike price of $1.25 per share which expire on July 23, 2000. These options
were not in the money at the end of fiscal 1999.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of:
- - 50,000,000 shares of common stock, par value $.001 per share
- - 20,000,000 share of preferred stock, par value $.001 per share.
As of February 22, 2000, we had outstanding:
- - 12,726, 503 shares of common stock
- - 3,000 shares of Series A Preferred Stock
37
<PAGE>
COMMON STOCK
The holders of our common stock are entitled to one vote per share with
respect to all matters required by law to be submitted to our stockholders for
approval. The holders of common stock have the sole right to vote, except as
otherwise provided by law or by our Articles of Incorporation, including
provisions governing our preferred stock. Our common stock does not have any
cumulative voting, preemptive, subscription or conversion rights. Election of
directors and other general stockholder action requires the affirmative vote of
a majority of shares of our common stock represented at a meeting in which a
quorum is represented. The outstanding shares of common stock are validly
issued, fully paid and non-assessable. Upon the conversion of our Series A
Preferred Stock or the exercise of our warrants, the shares of common stock that
are being offered in this prospectus will be validly issued, fully paid and
non-assessable.
38
<PAGE>
Subject to the rights of any outstanding shares of preferred stock, the
holders of our common stock are entitled to receive dividends when, as and if
declared by our Board of Directors out of funds legally available for dividends.
Dividends may not be paid on our common stock until all dividends due on our
Series A Preferred Stock have been paid. In the event of our liquidation,
dissolution or winding up of the affairs, the holders of our common stock are
entitled to share ratably in all or our assets remaining available for
distribution to them after payment or provision for all liabilities and any
preferential liquidation rights of any preferred stock.
PREFERRED STOCK
Our board of directors has the authority, without action by our
stockholders, to designate and issue preferred stock in one or more series. Our
board of directors may also designate the rights, preferences, and privileges of
each series of preferred stock, any or all of which may be greater than the
rights of the common stock. It is not possible to state the actual effect of
the issuance of any shares of preferred stock on the rights of holders of the
common stock until the board of directors determines the specific rights of the
holders of the preferred stock. However, these effects might include:
- - restricting dividends on the common stock
- - diluting the voting power of the common stock
- - impairing the liquidation rights of the common stock
- - delaying or preventing a change in control of us without further action by
the stockholders.
SERIES A PREFERRED STOCK
Our Series A Preferred Stock is convertible into our common stock upon the
earlier of the effective date of a registration statement covering the shares of
common stock underlying Series A Preferred Stock, or the ninetieth day after the
issuance of each such share of Series A Preferred Stock. Each share of Series A
Preferred Stock outstanding on January 30, 2002 is converted automatically into
common stock.
The Series A Preferred Stock is convertible into our common stock in
accordance with the conversion formula which is:
$1,000.00 divided by the conversion price, where
- - The conversion price is the lessor of (i) $5.9125 or (ii) the "average
price at conversion".
- - The average price at conversion is defined to equal 80% of the five 5 day
average closing bid price for the our common stock immediately before the
conversion date.
There is no limit on the number of shares issuable upon conversion of the
Series A Preferred Stock. The conversion of Series A Preferred Stock may have a
severe dilutive effect.
39
<PAGE>
The following table sets forth the approximate number of shares of common
stock that the 3,000 shares of Series A Preferred Stock may be converted into,
if the average price at conversion is:
- - $7.3906 or more per share, resulting in a conversion price of $5.9125 per
share of common stock (which is a conversion price equal to the lessor of
$5.9125 or 80% of the "average price at conversion").
- - $5.9125 per share, resulting in a conversion price of $4.73 per share of
common stock.
- - 25% below $5.9125, or $4.4343 per share, resulting in a conversion price
of $3.5474 per share of common stock.
- - 50% below $5.9125, or $2.9562 per share, resulting in a conversion price
of $2.3649 per share of common stock.
- - 75% below $5.9125, or $1.4781 per share, resulting in a conversion price
of $1.1824 per share of common stock.
<TABLE>
<CAPTION>
Percentage of Our Shares
Outstanding At
Number of Shares February 22, 2000
Conversion Price Issuable on Conversion Issuable on Conversion
- ------------------------- ---------------------- -----------------------
<S> <C> <C>
5.9125 507,399 4.0%
4.73 634,249 5.0%
3.5474 845,689 6.7%
2.3649 1,268,552 10.0%
1.1824 2,537,212 20.0%
</TABLE>
If the shares issued upon the conversion of the Series A Preferred Stock
are sold, the price of our common stock may decrease due to these additional
shares being sold into the market. If the price of our common stock decreases,
the holders of the Series A Preferred Stock will receive a greater number of
shares upon the conversion of their Series A Preferred Stock. In addition, if
our stock price decreases, it could encourage short sales by the holders of the
Series A Preferred Stock. or others, which could cause our stock price to
further decrease.
Each share of Series A Preferred Stock has a stated value of $1,000.00.
Series A Preferred Stock is entitled to receive dividends at the rate of 4% per
annum of the stated value. Dividends are payable at the time these shares are
converted. The dividends may be paid in cash or in shares of common stock as
determined by us. The number of shares issued as a payment-in-kind for
dividends is determined by the market value of a share of common stock as of the
last day of the period for such stock dividend. Dividends are cumulative. Any
accumulations of dividends do not bear interest. In the event of our
liquidation, dissolution or winding-up, the holders of shares of the Series A
Preferred Stock are entitled to be paid out of our assets that are available for
distribution before any payment is made to the holders of common stock. Shares
of Series A Preferred Stock do not vote. The Series A Preferred Stock may be
converted into common stock at any time prior to January 30, 2002, when it
automatically converts into common stock.
WARRANTS AND OPTIONS
As of February 22, 2000, we had outstanding a total of 2,258,648 options
and warrants to purchase our common stock at exercise prices ranging from $.50
to $7.095 per share, which are near or below market prices. Of these, 1,658,648
options and warrants expire at various times through the year 2002, and 600,000
warrants expire in January, 2005.
In January, 2000, we issued a total of 300,000 Investor Warrants to
purchase shares of our common stock at a price of $5.9125 per share which are
immediately exercisable and expire on January 6, 2005. The Investor Warrant
provides that in no event shall the holder exercise the Warrant if upon exercise
of the Warrant, the holder would benefically own more than 4.9% of our
outstanding common stock. We also issued 180,000 Placement Warrants to the
placement agent to purchase shares of our common stock at a price of $7.095 per
share which are immediately exercisable and expire on January 6, 2005 and
120,000 Consultant Warrants to one individual to purchase shares of our common
stock at a price of $7.095 per share which are immediately exercisable and
expire on January 6, 2005.
SELLING STOCKHOLDERS
This prospectus relates to the resale of our common stock issuable upon
conversion of our Series A Preferred Stock and the exercise of Investor
Warrants, Placement Warrants and Consultant Warrants.
40
<PAGE>
This prospectus relates to the resale of up to 2,328,113 shares of common
stock by the selling stockholders. The number of shares of common stock that
will be issuable upon the conversion of the Series A Preferred Stock is based
upon fluctuations in the market price of our common stock, cannot be determined
until the day of conversion, and is calculated by a formula in the designation
certificate of the Series A Preferred Stock. There is no limit on the number of
shares issuable upon conversion of the Series A Preferred Stock. The actual
number of shares of our common stock that will be issuable and beneficially
owned upon conversion of the Series A Preferred Stock cannot be determined at
this time. The number of shares of our common stock underlying our Series A
Preferred Stock that we are registering in this offering is based upon two and
one-half (2.5) times the lessor of a common stock price of $5.9125 or the
average closing bid price on our common stock for the five days preceding the
filing of this registration statement. The actual number of shares issuable upon
conversion of the Series A Preferred Stock could be much greater.
The table below sets forth information concerning the resale of shares of
common stock by the selling stockholders. The table reflects: (i) the number of
shares issuable upon the conversion of all Series A Perferred Stock calculated
as if the conversion took place on February 24, 2000 and (ii) the number of
shares issuable upon exercise of all of the Investor, Placement and Consultant
Warrants. We will not receive any proceeds from the resale of common stock by
the selling stockholders. We will receive proceeds from the exercise of the
Investor Warrants, Placement Warrants and Consultant Warrants. Assuming all of
the shares registered below are sold by the selling stockholders, none of the
selling stockholders will continue to own any shares of our common stock.
<TABLE>
<CAPTION>
Shares Shares Shares Owned Percentage
Owned Offered After Offering Owned after
Selling Before For If All Offered Offering If All
Stockholder (1) Offering (2) Sale (3) Shares Are Sold (3) Shares Sold (3)
- --------------------------- ------------ -------- ------------------- ---------------
<S> <C> <C> <C> <C>
Cache Capital 315,418 315,418 -0- 0%
USA, L.P.
Carpe Diem, Ltd. 16,600 16,600 -0- 0%
41
<PAGE>
Wellington, LLC. 664,038 664,038 -0- 0%
J. P. Carey 180,000 180,000 -0- 0%
Securities, Inc.
Andrew Baum 120,000 120,000 -0- 0%
__________________________
<FN>
(1) No selling stockholder has held any position or office, or has had any
material relationship with us or any of our affiliates within the past
three years.
(2) Assumes that all Investor Warrants, Placement Warrants and Consultant
Warrants have been exercised and all Series A Preferred Stock has been
converted into common stock.
(3) Assumes no sales are effected by the Selling Stockholders during the
offering period other than pursuant to this offering.
</TABLE>
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, assignees, and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market, or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. There is no assurance that the selling stockholders will
sell any or all of the common stock in this offering. The selling stockholders
may use any one or more of the following methods when selling shares:
41
<PAGE>
- - Ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers
- - Block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction
- - Purchases by a broker-dealer as principal and resale by the broker-dealer
for its own account
- - An exchange distribution following the rules of the applicable exchange
- - Privately negotiated transactions
- - Short sales or sales of shares not previously owned by the seller
- - Broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share
- - A combination of any such methods of sale
- - Any other lawful method
The selling stockholders may also engage in:
- - Short selling against the box, which is making a short sale when the
seller already owns the shares
- - Buying puts, which is a contract whereby the person buying the contract
may sell shares at a specified price by a specified date
- - Selling calls, which is a contract giving the person buying the contract
the right to buy shares at a specified price by a specified date
- - Selling under Rule 144 under the Securities Act, if available, rather than
under this prospectus
- - Other transactions in our securities or in derivatives of our securities
and the subsequent sale or delivery of shares by the stock holder
- - Pledging shares to their brokers under the margin provisions of customer
agreements. If a selling stockholder defaults on a margin loan, the broker
may, from time to time, offer and sell the pledged shares.
Broker-dealers engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders in amounts to be negotiated. If any
broker-dealer acts as agent for the purchaser of shares, the broker-dealer may
receive commission from the purchaser in amounts to be negotiated. The selling
stockholders do not expect these commissions and discounts to exceed what is
customary in the types of transactions involved.
The selling stockholders and any broker-dealers or agents that are involved
in selling the shares may be considered to be "underwriters" within the meaning
of the Securities Act for such sales. An underwriter is a person who has
purchased shares from an issuer with a view towards distributing the shares to
the public. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
considered to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration
of the shares in this offering. However, we will not pay any commissions or any
other fees in connection with the resale of the common stock in this offering.
We have agreed to indemnify the selling shareholders and their officers,
directors, employees and agents, and each person who controls any selling
shareholder, in certain circumstances against certain liabilities, including
liabilities arising under the Securities Act. Each selling shareholder has
agreed to indemnify the Company and its directors and officers in certain
circumstances against certain liabilities, including liabilities arising under
the Securities Act.
If we are notified by a selling stockholder that they have a material that
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholder and the broker-dealer.
LEGAL PROCEEDINGS
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 any offering exemptions available under Utah law,
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. We
can not offer unregistered securities in Utah, except that under the federal
National Securities Markets Improvement Act of 1996, we may offer for sale
unregistered securities in Utah if the offerings comply with Rule 506 of
Regulation D of the Securities Act. Rule 506 offerings are exempt from state
regulation other than state notice and fee requirements.
42
<PAGE>
In the future, we may seek to vacate the Utah Order. However, we have thus
far been unsuccessful in locating records related to the financial information
that we failed to file in 1983 and 1984. Our present management joined us in
1996 and has been unable to locate or obtain the financial information from 1983
and 1984. We believe that our previous attempts to vacate the Order were
unsuccessful because we were a shell company at the time we previously attempted
to vacate the Order. We believe that since we are now an operating company with
assets and revenues related to operations, as opposed to assets related only to
fund raising and no revenues, we may be in a better position to petition Utah to
vacate the Order.
EXPERTS
Our annual financial statements in the prospectus of this Form SB-2
registration statement have been audited by John B. Evans II, Certified Public
Accountant, our independent auditor, as disclosed in his report appearing
elsewhere in this registration statement and are included in reliance on the
report given on the authority of John B. Evans II, Certified Public Accountant,
as an expert in accounting and auditing.
LEGAL MATTERS
Legal matters concerning the issuance of shares of common stock offered in
this registration statement will be passed upon by Axelrod, Smith & Kirshbaum.
Robert D. Axelrod beneficially own 4,000 shares of our common stock.
OTHER AVAILABLE INFORMATION
We are subject to the reporting requirements of the Securities and Exchange
Commission (the "Commission"). We file periodic reports, proxy statements and
other information with the Commission under the Securities Exchange Act of 1934.
We will provide without charge to each person who receives a copy of this
prospectus, upon written or oral request, a copy of any information that is
incorporated by reference in this prospectus (not including exhibits to the
information that is incorporated by reference unless the exhibits are themselves
specifically incorporated by reference). Requests should be directed to
Hyperdynamics Corporation, Attn. Kent Watts, 2656 South Loop West, Suite 103,
Houston, Texas 77054, Voice: (713) 660-9771, Fax: (713) 660-9775. Our Internet
address is www.hyd.net
43
<PAGE>
We have filed a Registration Statement on Form SB-2 under the Securities
Act of 1993 Act with the Commission in connection with the securities offered by
this prospectus. This prospectus does not contain all of the information that is
in the registration statement. For further information with respect to us and
the registration statement, you may inspect without charge, and copy our
filings, at the public reference room maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of this material may also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. Information about
the public reference room is available from the Commission by calling
1-800-SEC-0330.
The Commission maintains a web site on the Internet that contains reports,
proxy and information statements and other information regarding issuers that
file electronically with the Commission. The address of the site is
www.sec.gov. Visitors to the site may access such information by searching the
EDGAR archives on this web site.
INDEMNIFICATION
Delaware General Corporation Law permits a corporation organized under
Delaware law to indemnify directors and officers with respect to any matter in
which the director or officer acted in good faith and in a manner he reasonably
believed to be not opposed to our best interests, and, with respect to any
criminal action, had reasonable cause to believe his conduct was lawful.
Our Bylaws provide that our directors and officers are indemnified by us if
that person is a party to a matter by reason of being a director or officer.
These provisions may discourage stockholders from bringing suit against a
director for breach of fiduciary duty and may reduce the likelihood of
derivative litigation brought by our stockholders on our behalf against a
director.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
FINANCIAL STATEMENTS
Our financial statements begin on page F-1.
44
<PAGE>
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
Audited Financial Statements
Index To Audited Financial Statements
<S> <C>
Independent Auditor's Report F-2
Balance Sheets as of June 30, 1999 and 1998 F-3
Statements of Income for the years ended June 30, 1999 and 1998 F-5
Statements of Changes in Stockholders' Equity for the years
ended June 30, 1999 and1998 F-7
Statements of Cash Flows for the years ended June 30, 1999 and 1998 F-8
Notes to Financial Statements F-10
</TABLE>
F - 1
<PAGE>
Independent Auditor's Report
JOHN B. EVANS II
CERTIFIED PUBLIC ACCOUNTANT
Three Riverway, Suite 120
Houston, Texas 77056-1909
Voice (713) 623-2898
Fax (713) 960-8128
September 24, 1999
To the Board of Directors
HyperDynamics Corporation
Houston, Texas
I have audited the accompanying consolidated balance sheets of
HyperDynamics Corporation (a Delaware corporation) and subsidiaries as of June
30, 1999 and June 30, 1998, and the related consolidated statements of income,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. My responsibility
is to express an opinion on these financial statements based on my audits.
I conducted my audits in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. I believe that my audits provide a reasonable basis for our
opinion.
In my opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
HyperDynamics Corporation as of June 30, 1999 and June 30, 1998, and the results
of its operations and its cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/ JOHN B. EVANS, II
F - 2
<PAGE>
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 1999 and 1998
ASSETS
Current Assets 1999 1998
<S> <C> <C>
Cash $ 67,483 $ 4,908
Certificate of deposit (restricted) 94,000
Accounts receivable - trade 86,386 149,249
other 5,001 30,013
Inventory 96,960 65,508
Revenue interest - current portion 35,970 35,970
Pre-paid Expenses 40,000
Other
-------- --------
TOTAL CURRENT ASSETS 291,800 419,648
-------- --------
Property and Equipment 108,435 83,153
Other Assets
Revenue Interest net of current portion 58,658 104,458
Intangible assets - net 59,592 51,000
Other Assets - deposits 5,048 4,348
------------ ------------
TOTAL OTHER ASSETS 123,298 159,806
-------- --------
TOTAL ASSETS $523,533 $662,607
======== ========
</TABLE>
F - 3
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
Accounts payable $ 171,037 $ 271,212
Accrued expenses 11,200 525
Accrued taxes 4,699 12,353
------------ ------------
TOTAL CURRENT LIABILITIES 186,936 284,090
------------ ------------
TOTAL LIABILITIES 186,936 284,090
------------ ------------
Stockholders' Equity
Common stock, par value $0.001;
50,000,000 shares 12,409 12,208
authorized; 12,409,503 and 12,208,321shares
issued and outstanding.
Additional paid-in capital 1,709,925 1,567,500
Retained (deficit) (1,385,737) (1,201,191)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 336,597 378,517
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY $ 523,533 $ 662,607
============ ============
</TABLE>
See accompanying notes.
F - 4
<PAGE>
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended June 30, 1999 and 1998
1999 1998
<S> <C> <C>
Revenues $ 1,498,124 $ 820,535
Cost of Revenues 870,151 702,164
------------ -----------
GROSS MARGIN 627,973 118,371
------------ -----------
Operating Expenses
Selling 49,298 39,988
General and
Administrative 725,080 653,013
Depreciation and
Amortization 25,761 14,293
------------ -----------
TOTAL OPERATING
EXPENSES 800,139 707,294
------------ -----------
OPERATING LOSS (172,166) (588,923)
Other Income (Expense)
Other income / expenses (1,166) 3,750
Gain on sale of securities 29,980
Loss on disposal of asset (7,972)
Interest income 1,461 297
Interest expense (4,703) (3,428)
------------ -----------
TOTAL OTHER
INCOME (EXPENSE) (12,380) 30,599
------------ -----------
LOSS FROM
CONTINUING
OPERATIONS (184,546) (558,324)
------------ -----------
NET LOSS $ (184,546) $ (558,324)
============ ===========
F - 5
<PAGE>
Loss per Common Share
Continuing operations (0.02) (0.07)
Discontinued operations N/A N/A
NET LOSS PER
COMMON SHARE $ (0.02) $ (0.07)
Weighted average shares
outstanding 12,264,945 8,362,335
</TABLE>
See accompanying notes.
F - 6
<PAGE>
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Years Ended June 30, 1999 and 1998
COMMON STOCK RETAINED
SHARES AMOUNT PAID IN CAPITAL (DEFICIT) TOTALS
<S> <C> <C> <C> <C> <C>
BALANCES - JUNE 30, 1997 5,596,989 $ 5,597 $ 696,111 $ (642,867) $ 58,841
Common stock issued for cash 6,411,332 6,411 769,589 776,000
Common stock issued to purchase 100,000 100 50,900 51,000
certain assets of Wireless cable
connection
Common stock issued to purchase 100,000 100 50,900 51,000
interest in customer list of Perfect
Solutions, Inc.
Net (loss) (558,324) (558,324)
------------- ---------- ---------------- ------------ ---------
BALANCES - JUNE 30,1998 12,208,321 $ 12,208 $ 1,567,500 $(1,201,191) $378,517
Common stock issued for cash 201,182 201 142,424 142,625
Net (loss) (184,546) (184,546)
------------- ---------- ---------------- ------------ ---------
BALANCES - JUNE 30, 1999 12,409,503 $ 12,409 $ 1,709,924 $(1,385,737) $336,597
============= ========== ================ ============ =========
</TABLE>
See accompanying notes.
F - 7
<PAGE>
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended June 30, 1999 and 1998
1999 1998
Cash flows from operating activities
<S> <C> <C>
Net (loss) $(184,546) $(558,324)
Adjustments to reconcile net income
to cash provided from operating activities
Depreciation and amortization 25,761 14,293
Loss on disposal of assets 7,972
Gain on sale of securities (29,980)
Changes in:
Certificates of deposit 94,000 (24,000)
Accounts receivable - Trade 62,863 (105,349)
Other 25,012 (29,275)
Inventory (31,452) (38,771)
Prepaid expenses 40,000 (23,759)
Revenue sharing 45,800 36,572
Deposits and other (700) (1,000)
Net increase (decrease) accruals / payables
Accounts payable - trade (100,175) 79,550
Accrued expenses 10,675 (30,437)
Accrued taxes (7,653) 12,353
Other 1 1
---------- ----------
NET CASH PROVIDED (USED)
FROM OPERATING ACTIVITIES (12,442) (698,126)
Cash flows from investing activities
Purchases of property, equipment, and intangibles (67,608) (25,514)
Proceeds on sale of securities 29,980
----------
NET CASH USED BY
INVESTING ACTIVITIES (67,608) 4,466
Cash flows from financing activities
Net increase (decrease) in bank line of credit (70,000)
Short-term convertible notes (37,500)
Reduction in notes payable
Sales of common stock 142,625 776,000
---------- ----------
NET CASH PROVIDED (USED)
FROM FINANCING ACTIVITIES 142,625 668,500
F - 8
<PAGE>
Net increase (decrease)in cash 62,575 (25,160)
CASH AT BEGINNING OF PERIOD 4,908 30,068
---------- ----------
CASH AT END OF PERIOD 67,483 $ 4,908
========== ==========
Supplemental Information
Interest paid 4,703 3,428
</TABLE>
See accompanying notes.
F - 9
<PAGE>
HYPERDYNAMICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Business. Hyperdynamics Corporation (the "Company"), was a Texas corporation
formed in March 1996 to acquire and operate information systems service
companies. In August, 1996, the Company completed a "reverse merger" with Ram-Z
Enterprises, Inc., a Delaware corporation and a publicly-traded shell, whereby
the Company's shareholders acquired the Delaware corporation shell, which was
renamed Hyperdynamics Corporation, in exchange for stock. A business acquired
in May 1996 was MicroData Corporation ("MicroData").
During the past year, the Company began operations through a wholly-owned
subsidiary, Wired and Wireless Corporation ("Wireless"). MicroData is a
complete information systems service company including its legacy as a computer
hardware reseller. Wireless plans, designs and implements wireless information
systems. The fiscal year-end is June 30.
Basis of Presentation. The consolidated financial statements include the
accounts of MicroData and Wireless. Significant inter-company accounts and
transactions have been eliminated.
Use of Estimates. Preparing financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, and expenses. Actual results could differ from those
estimates.
Cash includes demand deposit bank accounts. Company policy includes any highly
liquid investments with original maturities of three months or less.
Restricted cash is cash on deposit at a bank to back an international letter of
credit for ongoing foreign purchases of computer components.
Receivables are written down, where appropriate, to the estimated collectible
amount in the opinion of management.
Inventory is stated at the lower of cost or market using the first-in first-out
basis (FIFO).
Inventory at June 30, by major classification, were as follows:
F - 10
<PAGE>
<TABLE>
<CAPTION>
- - Year Ended - -
1999 1998
-------- -------
<S> <C> <C>
Hardware and Software $ 51,960 $39,508
Electronic Wireless Equipment 45,000 26,000
-------- -------
$ 96,960 $65,508
======== =======
</TABLE>
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Leasehold Improvements, Machinery and Equipment, and Depreciation is calculated
using the straight-line method over the useful lives of property and equipment.
Depreciation expense for was $19,890 for 1999 and $14,293 for 1998. A summary of
property and equipment is as follows:
<TABLE>
<CAPTION>
- - Year Ended - -
1999 1998
--------- ---------
<S> <C> <C> <C>
Computer equipment 3 years $193,313 $149,689
Other 5 years 20,303 18,755
--------- ---------
Total cost 213,616 168,444
Less: accumulated depreciation (105,181) (85,291)
--------- ---------
Net carrying value $108,435 $ 83,153
========= =========
</TABLE>
F - 11
<PAGE>
Intangible Property and Amortization is calculated using the straight-line
method over 10 years. Amortization expense for 1999 was $5,871. A Summary of
Intangible Property is as follows:
<TABLE>
<CAPTION>
- - Year Ended - -
1999 1998
-------- -------
<S> <C> <C>
Intangible Property - Perfect Solutions $51,000 $51,000
Web-site Development and Other 14,463 0
-------- -------
Total cost 65,463 51,000
Less: accumulated amortization (5,871) 0
-------- -------
Net carrying value 59,592 51,000
-------- -------
</TABLE>
Earnings (Loss) Per Share calculations are presented in accordance with
Financial Accounting Standards Statement 128, and are calculated on the basis of
the weighted average number of common shares outstanding during the year. They
include the dilutive effect of common stock equivalents, principally stock
options, in years with net income.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes are not due since the Company has had losses since inception. The
Company has filed its annual tax returns for 1998 and 1997 and reported a net
operating losses (NOLs) of :
- - Year Ended - -
1998 1997
------- ---------
556,089 662,607
This is a total potential NOL currently reported on the Company's last two 1120
federal tax returns of $1,218,696. These potential NOL carry forwards with the
addition of the 1999 loss of about $184,546 may be utilized to reduce future
taxable income. These amounts expire at various dates beginning in year 2012.
The Company is currently in the process of preparing its current 1120 tax return
for fiscal year end June 30, 1999.
Reclassifications of certain prior year amounts were made to conform with the
current year presentation.
F - 12
<PAGE>
NOTE 2 - GOING CONCERN REMOVED IN 1999
In 1998 the following footnote was presented with Auditor's appropriate
Qualification:
Since inception, the Company has incurred substantial recurring operating losses
resulting in cash flow problems.
The Company has in the past relied almost entirely upon cash proceeds from stock
sales for working capital requirements. There can be no assurance that present
or future conditions will be conducive to funding current working capital needs
from proceeds from stock sales. Absent stock sales, the Company is uncertain
how it is going to fund working capital requirements. The financial statements
do not include any adjustments that might be necessary if the Company is unable
to continue as a going concern.
In 1999 the "Going Concern Qualification" has been removed based on the
following:
1. The Company's loss for 1999 was from the first two quarters of the fiscal
year and was considerably less than prior years.
2. The Company generated positive results of operations in the last two quarters
of 1999.
3. The Company was able to generate $142,625 of new capital from Financing
Activities according to the Statement of Cash Flows. This is only $41,921 short
of the entire loss for the year. It appears that the Company maintains the
ability to obtain more capital through its "Financing Activities".
4. The Company has no debt.
5. The sales of the Company increased substantially for the year and
management's forecast for sales in fiscal year 2000 continues to grow. The
Company has a Contract with The Mattress Ventures, LP which will generate at
least another $700,000 in sales in fiscal year 2000.
On October 8, 1999 management reported an improved current Ratio (Current Assets
/ Current Liabilities) as of September 30, 1999 of 2.12 compared to 1.56 as of
June 30, 1999. The Quick Ratio (Current Assets - Inventory + Prepaid Expenses /
Current Liabilities) was reported to improve to 1.20 as of September 30, 1999
compared to .66 as of June 30, 1999.
In summary, the Company's sales forecast, potential gross profits, and ability
to raise additional capital are substantially enhanced over the prior year.
NOTE 3 - REVENUE SHARING INTEREST
In May 1997, the Company purchased a revenue interest in the Sierra-Net
subsidiary of Internet Finance & Equipment, Inc. by issuing 177,000 shares of
stock. Sierra-Net is an internet service provider in Nevada. The Company
valued this transaction at $177,000. Collections have been averaging $3,000 per
month since. The interest is 4% of gross revenue and 19% of gross sale proceeds
if any significant assets or stock of Sierra-Net are sold.
F - 13
<PAGE>
NOTE 3 - REVENUE SHARING INTEREST (continued)
The current portion of this interest represents management's estimate of cash
receipts over the next 12 months.
NOTE 4 - MERGERS AND DIVESTITURE
In October 1997, the Company formed a new subsidiary, Wired and Wireless
Corporation, to plan, design and implement wireless information systems. The
Company purchased the equipment and inventory and hired the sole stockholder of
Wireless Cable Connection, Inc. in exchange for 100,000 shares of stock to the
stockholder.
In June 1998, the Company purchased the customer list and hired the sole owner
of Perfect Solutions in exchange for 100,000 shares of stock to the stockholder.
The equipment, inventory, and customer lists were valued at their fair market
values which approximated the fair market value of the stock at those times.
All of the assets were capitalized and valued at $102,000.
In October 1997, purchased the customer list and accounts receivable and hired
the sole stockholder of Barris Communications, Inc. for $40,000 cash. The
payment was charged to operations.
Employment agreements were signed with all three key persons involved, with
expiration dates ranging from June 1998 to May 1999.
NOTE 5 - STOCK OPTIONS AND WARRANTS
Beginning with fiscal 1997, the Company adopted the disclosure requirements of
FASB Statement 123, Accounting for Stock Based Compensation Plans. The
Company's Stock Option Plan provides for the grant of non-qualified options to
directors, employees and consultants of the Company, and opportunities for
directors, officers, employees and consultants of the Company to make purchases
of stock in the Company. In addition, the Company issues stock warrants from
time to time to employees, consultants, stockholders and creditors as additional
financial incentives. The plans and warrants issuance are administered by the
Board of Directors of the Company, who have substantial discretion to determine
which persons, amounts, time, price, exercise terms, and restrictions, if any.
Options differ from warrants in that the options awards are immediately
exercisable and are assignable. In contrast, warrants have employment
termination restrictions, vesting periods and are non-transferable.
F - 14
<PAGE>
The Company uses the intrinsic value method of calculating compensation expense,
as described and recommended by APB Opinion 25, and allowed by FASB Statement
123. During the years ended June 30, 1999 and 1998, no compensation expense was
recognized for the issuance of these options and warrants, because no option
prices were below market prices at the date of grant. In addition, 78,182 and
577,999 options were exercised in 1999 and 1998 respectively. As of June 30,
1999, almost all outstanding warrants are payments for consulting and
professional services. Summary information on each are as follows:
<TABLE>
<CAPTION>
Weighted Weighted
average average
Options Share Price Warrants Share Price
--------- ------------- --------- ------------
<S> <C> <C> <C> <C>
Year ended June 30, 1999:
Outstanding at
June 30, 1997 710,660 1.02 605,000 1.25
Granted 711,000 1.26 70,850 1.00
Exercised (577,999) (.96)
Canceled (375,000) (1.25) (600,000) 1.25
--------- ------------- --------- ------------
Outstanding at
June 30, 1998 468,661 $ 1.27 75,850 $ 1.02
Granted 480,000 .50 350,000 0.50
Exercised (78,182) .70
--------- ------------- --------- ------------
Canceled
Outstanding at
June 30, 1999 870,479 .90 425,850 0.59
--------- ------------- --------- ------------
</TABLE>
F - 15
<PAGE>
NOTE 5 - STOCK OPTIONS AND WARRANTS (Continued)
Additional disclosures as of June 30, 1999 are:
<TABLE>
<CAPTION>
Options
<S> <C>
$.50 - $1.375
-------------
Total options
Number of shares 870,479
Weighted average exercise price $ 0.90
Remaining life 2-4 years
All are currently exercisable options.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Warrants Warrants Warrants
$ 0.50 $ 1.00 $ 1.25
---------- --------- ---------
Total warrants
Number of shares 350,000 70,850 5,000
Weighted average
exercise price $ 0.50 $ 1.00 $ 1.25
Remaining life 2-3 years 1 year 1 year
All are currently exercisable warrants.
</TABLE>
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for awards under those
plans consistent with the Black-Scholes option-pricing model suggested by FASB
Statement 123, the Company's net losses and loss per share would have been
increased to the pro forma amount indicated below:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net loss -As reported $ (184,546) $ (558,324)
-Pro forma (640,323) (1,105,031)
Net loss per share -As reported (0.02) (0.07)
-Pro forma (0.05) (0.13)
</TABLE>
F - 16
<PAGE>
Variables used in the Black-Scholes option-pricing model include (1) 6.0%
risk-free interest rate, (2) expected option life is the actual remaining life
of the options as of each year end, (3) expected volatility is the actual
historical stock price fluctuation volatility and (4) zero expected dividends.
NOTE 6 - BANK CREDIT FACILITIES, SHAREHOLDER NOTES PAYABLE, AND OTHER FINANCING
In May of FYE 1998 the Company issued a letter of credit from Frost National
Bank to secure a vendor purchase for wireless equipment purchased from Hexawave,
Inc. The LOC was secured by a $94,000 Certificate of Deposit. The CD was
released and the vendor was paid on August 24, 1998.
During 1997, the company received $350,000 from Emerald Bay, LTD (EBLTD)an
offshore investor for a convertible note at 10% that had matured on November 15,
1997. The Company attempted to find additional investors to pay the loan off,
but was not able to do so in the time frame required. EBLTD converted its note
plus accrued interest to 5,833,333 shares on January 12, 1998 after a negotiated
reduction to the conversion rights from 3 cents per share to 6 cents per share.
NOTE 7 - MAJOR CUSTOMERS AND VENDORS
A summary of significant customers and vendors for the years ended June 30, 1999
and 1998, together with their respective size as a percent of total sales and
purchases for the years then ended is as follows:
F - 17
<PAGE>
<TABLE>
<CAPTION>
Percent of Percent of
Totals 1999 Totals 1998
- -------------------------------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Sales
Comband, S.A. de C.V. (Mexico) 31% $ 460,890 42% $345,000
ADC Telecommunications 11% $ 163,500
The Mattress Ventures, LP 22% $ 329,276
Purchases
Hexawave, Inc. 50% 314,000
ATI 7% $ 59,163
CCW 17% $ 147,500
<PAGE>
Great Plains Software 18% $ 159,362
</TABLE>
<PAGE>
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company is liable on an office lease for $3,065 per month on a
month-to-month lease.
The predecessor shell company, RAM-Z Enterprises, has an order restricting
certain exemptions on sales of securities by it in the State of Utah, based on
actions of former owners in the mid-1980's.
The Company has no lawsuits pending or threatened against it.
F - 18
<PAGE>
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
Interim Unaudited Financial Statements
Index To Interim Unaudited Financial Statements
<S> <C>
Unaudited Consolidated Balance Sheet
at December 31, 1999 (unaudited) F-20
Unaudited Consolidated Statements of Income
for the three
and six months ended December 31, 1999
and 1998 (both unaudited) F-22
Unaudited Consolidated Statements of
Cash Flows for the six
months ended December 31, 1998
and 1998 (both unaudited) F-23
Notes to Unaudited Consolidated Financial Statements F-24
</TABLE>
F - 19
<PAGE>
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
Interim Unaudited Financial Statements
HYPERDYNAMICS CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1999
<S> <C>
ASSETS
Current Assets
Cash - Operating $ 3,583
Other 2,351
Accounts Receivable - trade 306,239
other 28,001
Inventory 88,148
Revenue interest current portion 85,970
Prepaid expenses 65,212
----------
TOTAL CURRENT ASSETS 579,504
PROPERTY AND EQUIPMENT
Computers, communication &
IS infrastructure 159,359
Office furniture and equipment 10,152
Leasehold improvements 11,188
----------
Total property and equipment 180,699
Accumulated depreciation (111,231)
----------
TOTAL NET PROPERTY AND
EQUIPMENT 69,468
OTHER ASSETS
Investment in revenue sharing - long term 106,827
Intangible assets - net (PS customer list) 45,900
----------
Other 101,598
----------
TOTAL OTHER ASSETS 254,325
----------
TOTAL ASSETS $ 903,297
==========
</TABLE>
See notes to unaudited financial statements.
F - 20
<PAGE>
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
Interim Unaudited Financial Statements
HYPERDYNAMICS CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1999
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 168,576
Accrued payroll taxes 2,459
Sales taxes payable 21,255
------------
TOTAL CURRENT LIABILITIES 192,290
OTHER LIABILITIES AND
DEFERRED INCOME
Deferred Revenue 65,000
------------
TOTAL LIABILITIES AND
DEFERRED INCOME 65,000
STOCKHOLDERS' EQUITY
Common stock, par value $0.001; 12,564
50,000,000 shares authorized;
12,564,503 shares issued and outstanding.
Additional paid-in capital 1,787,270
Retained (deficit) (1,153,827)
------------
TOTAL STOCKHOLDERS'
EQUITY 646,007
------------
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY $ 903,297
============
</TABLE>
See notes to unaudited financial statements.
F - 21
<PAGE>
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
Interim Unaudited Financial Statements
HYPERDYNAMICS CORPORATION
AND SUBSIDIARIES
Consolidated Income Statements
3 Months and 6 Months Ended December 31, 1999 and 1998
3 MONTHS ENDED 6 MONTHS ENDED
DECEMBER 31 DECEMBER 31
------------------- --------------------
1999 1998 1999 1998
-------- --------- -------- ----------
<S> <C> <C> <C> <C>
Revenues $712,422 $177,265 $955,811 $ 334,168
Cost of Revenues 444,294 91,878 542,547 202,055
-------- --------- -------- ----------
GROSS MARGIN 268,128 85,387 413,264 132,113
Operating Expenses
Selling 36,901 2,298 41,215 7,969
General and
Administrative 122,978 147,748 254,164 261,576
Interest 0 3,277 0 3,277
Depreciation 6,250 8,340 12,500 15,149
-------- --------- -------- ----------
TOTAL OPERATING
EXPENSES 166,129 161,663 307,879 287,971
-------- --------- -------- ----------
OPERATING
INCOME/(LOSS) 101,999 (76,276) 105,385 (155,858)
</TABLE>
See notes to unaudited financial statements.
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
Interim Unaudited Financial Statements
<S> <C> <C> <C> <C>
Other Income (Expense)
Gain on Sale of
Discontinued Operations (568) 0 127,065 0
Loss from Discontinued
Operations 0 654 (568) 0
Other 29 (9,397) 28 (7,972)
------------ ------------ ------------ ------------
NET INCOME/(LOSS)
BEFORE
INCOME TAXES 101,460 (85,019) 231,910 (163,830)
------------ ------------ ------------ ------------
Income Tax (Benefit) 0 0 0 0
NET INCOME/(LOSS) $ 101,460 ($85,019) $ 231,910 ($163,830)
NET INCOME/(LOSS)
PER COMMON SHARE $ .01 $ (.01) $ .02 $ (.02)
Weighted average
shares outstanding 12,437,329 12,208,321 12,437,329 12,208,321
</TABLE>
See notes to unaudited financial statements.
F - 22
<PAGE>
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
Interim Unaudited Financial Statements
HYPERDYNAMICS CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
6 Months Ended December 31, 1999 and 1998
1999 1998
--------- ----------
<S> <C> <C>
Cash flows from operating activities
Net Income/(Loss) 105,414 $(163,830)
Adjustments to reconcile net income to
cash provided from operating activities
Depreciation and amortization 12,500 15,149
Sale of Discontinued Operations 127,633 0
Loss from Discontinued Operations (568) 0
Note conversion 0 7,972
Decrease in equipment from discontinued operations 26,468 0
Net (increase) decrease receivables and other
Certificate of deposit - restricted 0 94,000
Accounts receivable - trade (219,853) (44,912)
Other (23,000) 30,000
Due from officers 0 0
Inventory (16,664) (33,946)
Prepaid expenses (60,164) 0
Revenue sharing (50,000) 20,037
Deposits and Other assets (111,169) 0
Net increase (decrease) accruals / payables
Accounts payable - trade 7,659 60,754
Accrued expenses (10,120) 9,436
Accrued taxes 19,015 (5,890)
Other 53,800 (5,950)
--------- ----------
</TABLE>
See notes to unaudited financial statements.
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
Interim Unaudited Financial Statements
<S> <C> <C>
NET CASH (USED) BY
OPERATING ACTIVITIES (139,049) (17,180)
Cash flows from investing activities
Purchase of property and equipment 0 (13,911)
--------- --------
</TABLE>
<TABLE>
<CAPTION>
HYPERDYNAMICS CORPORATION
Interim Unaudited Financial Statements
<S> <C> <C>
NET CASH PROVIDED (USED)
FOR INVESTING ACTIVITIES 0 (13,911)
Cash flows from financing activities
Sale of common stock - related party 50,000 0
Sale of common stock 27,500 0
Increase in short-term convertible notes 0 27,680
--------- ---------
NET CASH PROVIDED FROM
FINANCING ACTIVITIES 77,500 27,680
--------- ---------
NET DECREASE IN CASH (61,549) (3,411)
CASH AT BEGINNING OF PERIOD 67,483 4,908
--------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 5,934 $ 1,549
Supplemental Information
Interest paid $ 0 $ 0
</TABLE>
See notes to unaudited financial statements.
F - 23
<PAGE>
HYPERDYNAMICS CORPORATION
Interim Unaudited Financial Statements
HYPERDYNAMICS CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. The unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. The financial statements contained herein should be read
in conjunction with the audited financial statements of the Company.
Accordingly, footnote disclosures which would substantially duplicate the
disclosure in those statements has been omitted. Certain reclassifications were
made to financials as of December 31, 1998 in order to conform to the current
presentation.
2. During the quarter and six months ended December 31, 1999, warrants for
275,000 unregistered common stock with a strike price of $2.00 per share were
granted to Robert Gleckman pursuant to a consulting agreement. During the same
period 57,500 options with a strike price of $2.00 per share for registered
common stock under S-8 registration were granted to employees.
3. During the second quarter ending December 31, 1999,100,000 options were
exercised at $.50 per share by Michael E. Watts, brother of Kent Watts,
President for the Company and 100,000 shares were issued as a result. During the
same period 55,000 options were exercised at $.50 per share by others and the
55,000 shares were issued. This is a total of 155,000 options exercised for the
period ended December 31, 1999 for a total of $77,500.
See notes to unaudited financial statements.
F - 24
<PAGE>
