FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 17598
CONSYGEN, INC.
(Exact name of registrant as specified in its charter)
Texas 76-0260145
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10201 South 51st Street, Suite 140, Phoenix, Arizona 85044
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 496-4545
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
N/A
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.003
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Title of class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the closing price of such stock as quoted
on the National Association of Securities Dealers, Inc.'s OTC Bulletin Board as
of August 25, 1997, was approximately $53,000,000. The number of shares of
common stock outstanding at that date was 13,909,831 shares, $.003 par value.
Documents Incorporated By Reference
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Part Item
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1. ConSyGen, Inc. Definitive Proxy Statement with
respect to its Annual Meeting of Stockholders
to be held on November 20, 1997. III 10,11,12,13
PART I
CONSYGEN, INC.
ITEM 1. BUSINESS
Overview
ConSyGen, Inc., a Texas corporation ("ConSyGen-Texas'), was
incorporated on September 28, 1988 as C-Square Ventures, Inc. ConSyGen-Texas was
formed for the purpose of obtaining capital in order to take advantage of
domestic and foreign business opportunities which may have profit potential. On
March 16, 1989, ConSyGen-Texas (then C Square Ventures, Inc.)
completed an initial public offering.
Acquisition of ConSyGen, Inc.
ConSyGen-Texas entered into an agreement, dated as of August 28, 1996,
to acquire 100% of the issued and outstanding shares of ConSyGen, Inc., a
privately held Arizona corporation formed on October 11, 1979
("ConSyGen-Arizona") (f/k/a International Data Systems, Inc.). Immediately prior
to the acquisition transaction, ConSyGen-Texas effected a 1-for-40 reverse split
of its common stock. ConSyGen-Texas closed the acquisition of ConSyGen-Arizona
on September 5, 1996. As a result of the acquisition, ConSyGen-Arizona became a
wholly-owned subsidiary of ConSyGen-Texas. The transaction has been treated as a
reverse acquisition (purchase), with ConSyGen-Arizona being the acquirer and
ConSyGen-Texas being the acquired company.
In connection with the acquisition, ConSyGen-Texas issued an aggregate
of 9,275,000 shares of its common stock directly to the stockholders of
ConSyGen-Arizona, in exchange for all of the issued and outstanding shares of
ConSyGen-Arizona. Upon the closing of the acquisition, ConSyGen-Texas issued an
additional 3,850,000 shares of common stock to various consultants for services
rendered. Such shares were registered under the Securities Act of 1933, as
amended, pursuant to a Registration Statement on Form S-8. In addition,
ConSyGen-Texas issued 150,000 shares of common stock to a consultant for
services to be rendered. Following the closing of the acquisition,
ConSyGen-Arizona's stockholders held a larger portion of the voting rights of
ConSyGen-Texas than was held after the acquisition by the persons who were
ConSyGen-Texas stockholders prior to the acquisition (approximately 69% at
closing). In connection with the acquisition, outstanding options to purchase
1,275,000 shares of ConSyGen-Arizona's common stock granted under its
Non-Qualified Stock Option Plan were terminated and ConSyGen-Texas adopted a new
Non-Qualified Stock Option Plan and issued options to purchase 1,275,000 shares
of common stock at an exercise price of $1.00 per share. In addition,
ConSyGen-Arizona terminated warrants to purchase 1,000,000 shares of its common
stock in connection with the acquisition, and ConSyGen-Texas reserved for
issuance replacement warrants to purchase 1,000,000 shares of its common stock
at an exercise price of $5.00 per share.
ConSyGen-Texas and its wholly-owned subsidiary, ConSyGen-Arizona, are
hereafter collectively referred to as the "Company".
Recent Financings
In 1996, prior to the acquisition, ConSyGen-Arizona raised
approximately $1,200,000 in a private placement of debt. The debt bore interest
at a rate of 10% per annum, was unsecured, and was to be repaid in one year. As
additional consideration to the lenders, ConSyGen-Arizona agreed to issue
warrants to purchase an aggregate of 1,000,000 shares of ConSyGen-Arizona's
common stock at an exercise price of $5.00 per share. The warrants were to
become exercisable one year from the date of the loan, had a term of two years
and were callable upon 60 days notice. As described above, in connection with
ConSyGen-Texas' acquisition of ConSyGen-Arizona, ConSyGen-Arizona terminated
these warrants and ConSyGen-Texas reserved for issuance new warrants to purchase
1,000,000 shares of ConSyGen-Texas common stock on the same terms and
conditions. Following the loan transaction, on September 5, 1996, ConSyGen-Texas
agreed to issue an aggregate of 200,000 shares of its common stock in
cancellation of ConSyGen-Arizona's debt in the amount of approximately
$1,200,000 and certain other indebtedness.
In March 1997, ConSyGen-Texas raised $1,000,000 before deducting
finder's fees of $100,000 through a private placement of convertible notes (the
"Notes") in the principal amount of $1,000,000. The Notes are unsecured, bear
interest at the rate of 6% per annum, are payable in March 2000, and are
convertible into common stock of ConSyGen-Texas. The principal amount of the
Notes is convertible into common stock of ConSyGen-Texas at a rate equal to the
lesser of (1) $10.85 per share or (2) that price which is equal to 70% of the
average closing bid price of the common stock for the five trading days
preceding the date of conversion.
In June 1997, the Company raised approximately $1,080,000, before
deducting a finder's fee of approximately $80,000, through the private placement
of 120,000 shares of common stock at a price of $9.00 per share.
In late August 1997, the Company accepted subscriptions to purchase an
aggregate 100,000 shares of Common Stock for aggregate consideration of $504,000
(net of finders fees). The Company expects to receive the proceeds of these
subscriptions ($504,000) in early September, 1997.
Description of Business of ConSyGen, Inc.
ConSyGen-Texas' business consists solely of the business of its wholly
owned subsidiary, ConSyGen-Arizona. Until 1995, ConSyGen-Arizona licensed its
proprietary computer software, which was used in the hotel and airline
industries, and also provided software maintenance services. In 1996,
ConSyGen-Arizona discontinued its practice of software licensing and providing
software maintenance services.
ConSyGen-Arizona is currently engaged in the business of rendering
automated software conversion services, although it did not generate significant
operating revenue from its conversion business during fiscal 1997.
ConSyGen-Arizona uses its proprietary toolsets to provide fully automated
conversions of mainframe hardware applications to open systems and to convert
software so that it is Year 2000 compliant.
The Company's products currently consist of the ConSyGen Conversion
toolset and the ConSyGen 2000 toolset. The ConSyGen Conversion toolset can be
used to enhance existing applications or to automatically migrate applications
to a client/server environment. The ConSyGen Conversion toolset also has the
capability for full replacement of all data storages to enhanced data storages
(e.g. relational data bases). For example, the Company can automatically convert
software running on older BULL, IBM, Unisys, etc., mainframes so that it can run
on the new client/server platforms (often called downsizing). The Company's
ConSyGen 2000 toolset is a fully-automated toolset that automatically corrects
dates in both source code and data to be compliant for the Year 2000 and beyond.
The ConSyGen 2000 toolset is employed in executing the assessment and correction
phases of Year 2000 compliance.
Sales, Marketing and Distribution
The Company markets its products and services to a wide range of
business and governmental organizations. The Company's sales and marketing
efforts are implemented through its direct sales force, supported by promotion
through trade articles and trade shows that address the software maintenance
market, its independent sales representative program, and arrangements with
system integrators that provide computer related services to end-users.
The Company seeks to distribute its services through direct sales,
independent sales representatives, and system integrators that provide computer
related services to end-users, including year 2000 compliance services. In
general, under the arrangements with systems integrators, the integrator will
contract with the Company to provide conversion services, including year 2000
correction services to the integrator's customers. The Company believes that
this approach affords it the opportunity to have its services marketed to a wide
range of potential customers. The Company has entered into such arrangements
with several major corporations, including Unisys, Strategia Corporation, Agiss
Software Corporation, SCB Computer Technology, and Millennium Enterprises. In
addition, the Company has implemented an independent sales representative
program, under which the Company engages individuals on a non-exclusive basis to
refer conversion business to the Company, including year 2000 conversions. The
Company intends to enter into additional distribution and/or marketing
arrangements, particularly with service providers or strategic systems
integrators, for its software products.
Competition
The market for The Company's software products and solutions, including
its solutions for the year 2000 problem and client/server migration, is
intensely competitive and is characterized by rapid change in technology and
user needs and the frequent introduction of new products. The Company's
principal competitors in the software tools market include CCD Online, Progeni,
Forecross, and Alydaar.
The Company believes that the principal factors affecting competition
in the software tools market include product performance and reliability,
product functionality, ability to respond to changing customer needs, ease of
use, training, quality of support and price. The primary competitive factors in
the solutions markets, including the year 2000 compliance market, are price,
service, the expertise and experience of the service personnel and the ability
of such personnel to provide solutions to application problems. Other than
technical expertise and, with respect to the year 2000 compliance market, the
limited time available until the year 2000 arrives, there are no significant
proprietary or other barriers to entry that could prevent potential competitors
from developing or acquiring similar tools or providing competing solutions in
the Company's market.
The Company's ability to compete successfully in the sale of its
conversion services will depend in large part upon its ability to attract new
customers, enhance its product and respond effectively to continuing
technological change by developing new products and solutions. The Company
believes that its tools will enable it to compete effectively with other service
providers/tool vendors for the year 2000 market and the systems migration
market. The Company believes that its primary competitive advantages are cost,
performance, including speed and accuracy, and support.
Research and Development
The Company plans to continue to expend a significant portion of its
available funds on research and development to enhance the functionality and
performance of its ConSyGen Conversion and ConSyGen 2000 toolsets. The Company's
development of new products has been accomplished primarily with in-house
development personnel and resources.
As of May 31, 1997, the Company had 13 employees engaged in product
development. Since May 31, 1997, the Company has hired four additional persons
to perform research and development. All of the Company's research and
development employees are located at the Company's Phoenix, Arizona
headquarters. In addition to developing new products, the Company seeks to
continually improve its existing products.
During the five (5) months ended May 31, 1997 and the years ended
December 31, 1996, 1995 and 1994, research and development expenditures were
$335,000, $740,000, $492,000 and $558,000, respectively.
Employees
The Company had 20 employees as of May 31, 1997, including two in sales
and marketing, 13 in research, development and support, and five in corporate
operations and administration. Since May 31, 1997, the Company has hired four
additional persons to perform research and development. In light of the
Company's plans for expansion and growth in order to capture a significant share
of the year 2000 compliance market, the future success of the Company will
depend in large part upon its continued ability to attract and retain highly
skilled and qualified personnel. Competition for such personnel is intense in
the computer software industry, particularly for talented software developers,
service consultants and sales and marketing personnel. None of the Company's
employees is represented by a collective bargaining agreement. The Company
believes that its relations with its employees are good.
Executive Officers
Information concerning the Executive Officers of the Company is as
follows. Executive Officers are elected annually by and serve at the pleasure of
the Board of Directors.
Robert L. Stewart (age 78) Mr. Stewart is the Chairman of the Board of
ConSyGen-Texas and ConSyGen-Arizona. He has served in this capacity at
ConSyGen-Texas since its acquisition of ConSyGen-Arizona and at ConSyGen-Arizona
since 1980. Mr. Stewart previously served as President and Chief Executive
Officer of ConSyGen-Arizona from 1980 until January 15, 1997 and as President
and Chief Executive Officer of ConSyGen-Texas from the time of the acquisition
until January 15, 1997.
Ronald I. Bishop (age 60) Mr. Bishop has served as President, Chief
Executive Officer and a member of the Board of Directors of ConSyGen-Texas and
ConSyGen-Arizona since January 15, 1997. From September, 1986 to January 1,
1995, Mr. Bishop served as Vice President and Director of Operations of Motorola
Computer Group for Asia, and from January 2, 1995 to January 3, 1997, he served
as Vice President and Director of Operations for Motorola Computer Group for
South America.
Leslie F. Stewart (age 43) Mr. Stewart is the Secretary and a member of
the Board of Directors of ConSyGen-Texas and ConSyGen-Arizona. He has served in
these capacities at ConSyGen-Texas since its acquisition of ConSyGen-Arizona and
at ConSyGen-Arizona since 1985. Mr. Stewart is Robert L. Stewart's son.
Jeffrey R. Richards (age 56) Mr. Richards is Executive Vice President
of ConSyGen-Texas and ConSyGen-Arizona. He has served as Executive Vice
President of ConSyGen-Texas since its acquisition of ConSyGen-Arizona. Mr.
Richards served as a member of the Board of Directors of ConSyGen-Arizona from
June, 1996 to January, 1997, and has served as Executive Vice President since
September, 1995.
ITEM 2. PROPERTIES
The Company's principal administrative, research and development,
customer support and marketing facilities are located in approximately 5,000
square feet of space in Phoenix, Arizona. The Company occupies these premises
under a lease agreement expiring October 31, 1998. The Company believes that its
facilities are adequate for its current needs and that suitable additional space
will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
The National Association of Securities Dealers, Inc. ("NASD") in
December 1996 advised the Company that it is conducting a routine review of
trading in ConSyGen-Texas' common stock following the acquisition of
ConSyGen-Arizona. The NASD made a written inquiry of the Company, to which the
Company responded in writing in January 1997. The NASD made inquiry with respect
to, among other things, a private placement by ConSyGen-Arizona, the acquisition
of ConSyGen-Arizona by ConSyGen-Texas, and the issuance of common stock by the
Company during 1996. The NASD has not yet responded in writing to the Company's
written response. Although it is not possible to determine the outcome of this
review, the outcome could have a material adverse effect on the Company and the
price of and trading market for the Company's common stock.
ITEM 4. SUBMISSION TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Recent Sales of Unregistered Securities
On March 3, 1997, the Company issued options to purchase an aggregate
405,000 shares of common stock of the Company to employees of the Company in
consideration for services.
None of the foregoing options were registered under the Securities Act
of 1933, as amended (the "Act"). To the extent that the issuance of the options
constituted "sales" within the meaning of the Act, the securities issued in such
transactions were not registered under the Act in reliance upon the exemption
from registration set forth in Section 4(2) thereof, relating to sales by an
issuer not involving any public offering. Each of the foregoing transactions, to
the extent constituting "sales" within the meaning of the Act, were exempt under
Section 4(2) thereof based on the following facts: to the knowledge of the
issuer, there was no general solicitation, there were a limited number of
purchasers, the purchasers were provided with or had access to information about
the issuer, and the purchasers were sophisticated about business and financial
matters.
On March 20, 1997, ConSyGen-Texas raised $1,000,000, before deducting
finder's fees of $100,000, through a private placement of convertible notes (the
"Notes") in the principal amount of $1,000,000. The Notes were sold in a
transaction exempt from Section 5 of the Act, pursuant to Rule 506 of Regulation
D promulgated thereunder ("Rule 506"). The Notes were sold exclusively to
"accredited investors", within the meaning of Regulation D, and there was no
general solicitation.
In June 2, 1997, the Company raised $1,080,000, before deducting a
finder's fee of approximately $75,000, through the private sale of 120,000
shares of common stock at a price of $9.00 per share. The shares of Common Stock
were sold in a transaction exempt from Section 5 of the Act, pursuant to Rule
506. The shares were sold exclusively to "accredited investors" and there was no
general solicitation.
Record Holders
As of August 26, 1997, there were 338 record holders. This number does
not include those stockholders holding stock in "nominee" or "street" name.
Market Information
The Company's Common Stock has been quoted on the National Association
of Securities Dealers, Inc.'s OTC Bulletin Board since September 1997. Prior to
September 1996, there was no trading market for the Company's Common Stock.
Accordingly, no quotations were available during fiscal 1996 or the first
quarter of fiscal 1997. The following over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down, or commission, and may
not necessarily represent actual transactions. There is a limited trading market
for the Company's Common Stock.
<TABLE>
<CAPTION>
---------------------- ------------------------------------ ----------------------------------------
Year Ended May 31, 1997 Year Ended May 31, 1996
---------------------- ------------------------------------ ----------------------------------------
Quoted Bid Quoted Bid
---------------------- ------------------------------------ ----------------------------------------
High Low High Low
---------------------- ---------------- ------------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
First Quarter $ -- $ -- $ -- $ --
---------------------- ---------------- ------------------- ------------------ ---------------------
Second Quarter 16.25 3.50 -- --
---------------------- ---------------- ------------------- ------------------ ---------------------
Third Quarter 13.25 6.50 -- --
---------------------- ---------------- ------------------- ------------------ ---------------------
Fourth Quarter 13.125 8.50 -- --
---------------------- ---------------- ------------------- ------------------ ---------------------
</TABLE>
Dividends
It is the Company's current policy to retain any future earnings to
finance the continuing development of its business. The company has not paid any
dividends since the initial public offering of its stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial information
and should be read in conjunction with the Consolidated Financial Statements of
the Company and the related notes thereto and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in this
report.
<TABLE>
<CAPTION>
-------------------------------- -------------------- ---------------------------------------------------
Five Months Ended Years Ended December 31
May 31 (in thousands except per share data)
-------------------------------- -------------------- ---------------------------------------------------
1997 1996 1995 1994 1993 1992
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-------------------------------- -------------------- ----------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
-------------------------------- -------------------- ----------- ---------- --------- --------- --------
Revenues $20 $44 $329 $790 $854 $819
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-------------------------------- -------------------- ----------- ---------- --------- --------- --------
Net Loss (1648) (6621) (1120) (655) (595) (50)
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-------------------------------- -------------------- ----------- ---------- --------- --------- --------
Net Loss per Common Share (.12) (.70) (.18) (.11) (.17) (.05)
----- ----- -----
-------------------------------- -------------------- ----------- ---------- --------- --------- --------
-------------------------------- -------------------- ----------------------------------------------------
Year Ended Years Ended December 31
May 31 (in thousands except per share data)
-------------------------------- -------------------- ----------------------------------------------------
-------------------------------- -------------------- ----------- ---------- --------- -------- ----------
1997 1996 1995 1994 1993 1992
-------------------------------- -------------------- ----------- ---------- --------- -------- ----------
-------------------------------- -------------------- ----------- ---------- --------- -------- ----------
BALANCE SHEET DATA:
-------------------------------- -------------------- ----------- ---------- --------- -------- ----------
Cash and Cash Equivalents $21 $83 $3 $14 $1 --
-------------------------------- -------------------- ----------- ---------- --------- -------- ----------
-------------------------------- -------------------- ----------- ---------- --------- -------- ----------
Working Capital Deficit (857) (820) (1460) (795) (3363) (6853)
-------------------------------- -------------------- ----------- ---------- --------- -------- ----------
-------------------------------- -------------------- ----------- ---------- --------- -------- ----------
Total Assets 211 222 173 64 230 423
-------------------------------- -------------------- ----------- ---------- --------- -------- ----------
-------------------------------- -------------------- ----------- ---------- --------- -------- ----------
Long-Term Debt 1000 -- -- -- -- --
-------------------------------- -------------------- ----------- ---------- --------- -------- ----------
-------------------------------- -------------------- ----------- ---------- --------- -------- ----------
Stockholders' Deficit (1720) (742) (1392) (779) (3325) (6819)
-------------------------------- -------------------- ----------- ---------- --------- -------- ----------
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
ConSyGen, Inc., a Texas corporation ("ConSyGen-Texas'), was
incorporated on September 28, 1988 as C Square Ventures, Inc. ConSyGen-Texas was
formed for the purpose of obtaining capital in order to take advantage of
domestic and foreign business opportunities which may have profit potential. On
March 16, 1989, ConSyGen-Texas (then C Square Ventures, Inc.) completed an
initial public offering.
Acquisition of ConSyGen, Inc.
ConSyGen-Texas entered into an agreement, dated as of August 28, 1996,
to acquire 100% of the issued and outstanding shares of ConSyGen, Inc., a
privately held Arizona corporation formed on October 11, 1979
("ConSyGen-Arizona") (f/k/a International Data Systems, Inc.). Immediately prior
to the acquisition transaction, ConSyGen-Texas effected a 1-for-40 reverse split
of its common stock. ConSyGen-Texas closed the acquisition of ConSyGen-Arizona
on September 5, 1996. As a result of the acquisition, ConSyGen-Arizona became a
wholly-owned subsidiary of ConSyGen-Texas. The transaction has been treated as a
reverse acquisition (purchase), with ConSyGen-Arizona being the acquirer and
ConSyGen-Texas being the acquired company.
In connection with the acquisition, ConSyGen-Texas issued an aggregate
of 9,275,000 shares of its common stock directly to the stockholders of
ConSyGen-Arizona, in exchange for all of the issued and outstanding shares of
ConSyGen-Arizona. Upon the closing of the acquisition, ConSyGen-Texas issued an
additional 3,850,000 shares of common stock to various consultants for services
rendered. Such shares were registered under the Securities Act of 1933, as
amended, pursuant to a Registration Statement on Form S-8. In addition,
ConSyGen-Texas issued 150,000 shares of common stock to a consultant for
services to be rendered. Following the closing of the acquisition,
ConSyGen-Arizona's stockholders held a larger portion of the voting rights of
ConSyGen-Texas than was held after the acquisition by the persons who were
ConSyGen-Texas stockholders prior to the acquisition (approximately 69% at
closing). In connection with the acquisition, outstanding options to purchase
1,275,000 shares of ConSyGen-Arizona's common stock granted under its
Non-Qualified Stock Option Plan were terminated and ConSyGen-Texas adopted a new
Non-Qualified Stock Option Plan and issued options to purchase 1,275,000 shares
of common stock at an exercise price of $1.00 per share. In addition,
ConSyGen-Arizona terminated warrants to purchase 1,000,000 shares of its common
stock in connection with the acquisition, and ConSyGen-Texas reserved for
issuance replacement warrants to purchase 1,000,000 shares of its common stock
at an exercise price of $5.00 per share.
ConSyGen-Texas and its wholly-owned subsidiary, ConSyGen-Arizona, are
hereafter collectively referred to as the "Company".
Recent Financings
In 1996, prior to the acquisition, ConSyGen-Arizona raised
approximately $1,200,000 in a private placement of debt. The debt bore interest
at a rate of 10% per annum, was unsecured, and was to be repaid in one year. As
additional consideration to the lenders, ConSyGen-Arizona agreed to issue
warrants to purchase an aggregate of 1,000,000 shares of ConSyGen-Arizona's
common stock at an exercise price of $5.00 per share. The warrants were to
become exercisable one year from the date of the loan, had a term of two years
and were callable upon 60 days notice. As described above, in
connection with ConSyGen-Texas' acquisition of ConSyGen-Arizona,
ConSyGen-Arizona terminated these warrants and ConSyGen-Texas reserved for
issuance new warrants to purchase 1,000,000 shares of ConSyGen-Texas common
stock on the same terms and conditions. Following the loan transaction, on
September 5, 1996, ConSyGen-Texas agreed to issue an aggregate of 200,000 shares
of its common stock in cancellation of ConSyGen-Arizona's debt in the amount of
approximately $1,200,000 and certain other indebtedness.
In March 1997, ConSyGen-Texas raised $1,000,000 before deducting
finder's fees of $100,000 through a private placement of convertible notes (the
"Notes") in the principal amount of $1,000,000. The Notes are unsecured, bear
interest at the rate of 6% per annum, are payable in March 2000, and are
convertible into common stock of ConSyGen-Texas. The principal amount of the
Notes is convertible into common stock of ConSyGen-Texas at a rate equal to the
lesser of (1) $10.85 per share or (2) that price which is equal to 70% of the
average closing bid price of the common stock for the five trading days
preceding the date of conversion.
In June 1997, the Company raised approximately $1,080,000, before
deducting a finder's fee of approximately $80,000, through the private placement
of 120,000 shares of common stock at a price of $9.00 per share.
In late August 1997, the Company accepted subscriptions to purchase an
aggregate 100,000 shares of Common Stock for aggregate consideration of $504,000
(net of finders fees). The Company expects to receive the proceeds of these
subscriptions ($504,000) in early September, 1997.
Description of Business of ConSyGen, Inc.
ConSyGen-Texas' business consists solely of the business of its wholly
owned subsidiary, ConSyGen-Arizona. Until 1995, ConSyGen-Arizona licensed its
proprietary computer software, which was used in the hotel and airline
industries, and also provided software maintenance services. In 1996,
ConSyGen-Arizona discontinued its practice of software licensing and providing
software maintenance services.
ConSyGen-Arizona is currently engaged in the business of rendering
automated software conversion services, although it did not generate significant
operating revenue from its conversion business during fiscal 1997.
ConSyGen-Arizona uses its proprietary toolsets to provide fully automated
conversions of mainframe hardware applications to open systems and to convert
software so that it is Year 2000 compliant. The Company's ConSyGen Conversion
toolset automatically converts software to run on a different hardware platform.
For example, the Company can automatically convert software running on older
BULL, IBM, Unisys, etc., mainframes so that it can run on the new Client/Server
platforms (often called downsizing). The company's ConSyGen 2000 toolset is a
fully-automated toolset that automatically corrects dates in both source code
and data to be compliant for the Year 2000 and beyond.
Material Changes in Results of Operations
ConSyGen Texas' fiscal year end is May 31. Effective January 1, 1997,
ConSyGen-Arizona changed its fiscal year from December 31 to May 31 to coincide
with the fiscal year end of its parent company, ConSyGen-Texas. Since
ConSyGen-Texas' acquisition of ConSyGen-Arizona has been accounted for as a
reverse acquisition (purchase), with ConSyGen-Arizona being the acquirer and
ConSyGen-Texas being the acquired company, only the historical operations of
ConSyGen-Arizona are presented for periods through the date of acquisition.
Subsequent to the acquisition date, the consolidated operations of the Company
are presented. Accordingly, the financial statements presented are for the 5
month period ended May 31, 1997, and for the years ended December 31, 1996,
1995, and 1994.
Net Losses
For the year ended December 31, 1996, the Company incurred net losses
of $6.6 million, compared with net losses of $1.1 million in 1995 and $655,000
in 1994. An explanation of these losses is set forth below.
Revenues
For the years ended December 31, 1996, 1995, and 1994, the Company had
revenues of $44,000, $329,000 and $790,000, respectively. The decreases in
operating revenue are primarily attributable to the Company's abandonment of its
software licensing and maintenance business. The Company abandoned software
licensing and maintenance so that it could focus on the development of software
for use in providing conversion services, including Year 2000 conversion
services.
Cost of Sales
For the years ended December 31, 1996, 1995 and 1994, cost of sales
were $0, $200,000 and $213,000, respectively. The $200,000 decrease in cost of
sales from 1995 to 1996 was attributable to the abandonment of the Company's
software licensing and maintenance business.
Software Development Costs
For the years ended December 31, 1996, 1995, and 1994, software
development costs were $740,000, $492,000, and $588,000, respectively. The
$248,000 increase in software development costs from 1995 to 1996 was primarily
attributable to the Company's shift in focus from software maintenance to the
development of software for use in providing conversion services, including Year
2000 conversion services. The $96,000 decrease in software development costs
from 1994 to 1995 was primarily attributable to the Company's transition from
providing software maintenance services to providing conversion services, as
well as limited capital resources.
General and Administrative Expenses
For the year ended December 31, 1996, general and administrative
expenses were approximately $5,650,000, compared with approximately $594,000 for
the year ended December 31, 1995, an increase of $5,056,000. This increase in
general and administrative expenses was primarily attributable to an increase in
non-cash charges of $4,868,000, related to the issuance of common stock to
consultants for services, and increased professional fees and salaries and
related expenses. General and administrative expenses of $594,000 in 1995
compared with $577,000 for the year ended December 31, 1994, an increase of
approximately $17,000. This increase in general and administrative expenses was
primarily attributable to an increase in non-cash charges of $300,000, related
to the issuance of common stock to consultants for services, partially offset by
a decrease of $283,000 in other general and administrative expenses. This
decrease in other general and administrative expenses was attributable to a
decrease in activity relating to the Company's transition from providing
software maintenance services to providing conversion services, as well as
limited capital resources.
Depreciation and Amortization Expense
For the year ended December 31, 1996, depreciation and amortization
expense was approximately $117,000, compared with $50,000 for the year ended
December 31, 1995, an increase of $67,000. This increase is attributable
primarily to a $59,000 increase in amortization of debt issuance expenses
incurred in connection with obtaining debt financing. Depreciation and
amortization expense of $50,000 in 1995 compared with $8,000 for the year ended
December 31, 1994, an increase of $42,000. This increase is attributable
primarily to amortization of $40,000 of debt issuance expense incurred in
connection with obtaining debt financing.
Material Changes in Financial Condition, Liquidity and Capital
Resources
The Company is currently experiencing, and has in the past experienced,
a severe working capital deficiency and has historically incurred substantial
and recurring losses. At this time, the Company is not generating any
significant revenue. The Company continues, however, to incur substantial costs
and expenses in connection with its business operations and the development of
its software. At August 29, 1997, subject to receipt of $504,000 in proceeds of
subscriptions accepted by the Company in late August 1997 (as described below),
the Company will need to raise additional capital within approximately two
months. If the Company is unable to raise additional capital or generate
significant revenue within the next two to three months, the Company will not be
able to fund its continuing operations and continue as a going concern, in which
case there would be a material adverse effect on the Company, its business and
the price of its common stock.
The Company's cash balances were approximately $21,000 at May 31, 1997,
compared with $83,000 at December 31, 1996. The Company had a working capital
deficit of approximately $857,000 at May 31, 1997, compared with a working
capital deficit of approximately $820,000 at December 31, 1996, a $37,000
increase in the working capital deficit. This increase in the working capital
deficit is primarily attributable to a decrease in cash in the amount of
$62,000.
To remedy the working capital deficit, the Company is actively seeking
to raise capital through a private offering of equity and or debt securities and
has increased its marketing efforts, including establishing strategic alliances
and an independent sales representative program, in order to have its services
marketed to a wide range of customers. Since May 31, 1997, the Company has,
through the private sale of equity securities, raised additional equity. In
early June 1997, the Company raised approximately $1,000,000, net of finders
fees, through the private sale of common stock. The Company has been using these
funds to fund its continuing operations. In late August 1997, the Company
accepted subscriptions to purchase an aggregate 100,000 shares of Common Stock
for aggregate consideration of $504,000 (net of finders fees). The Company
expects to receive the proceeds of these subscriptions ($504,000) in early
September, 1997. There can be no assurance that the Company will in the future
be able to raise sufficient funds to continue its operations. Nor can there be
any assurance that the Company will be able to internally generate sufficient
funds to continue its operations. The failure of the Company to raise sufficient
additional funds, either through additional financing or continuing operations,
will have a material adverse effect on the Company, its business and the price
of its stock. The issuance of additional equity securities or rights to acquire
equity securities will dilute the interest of the current stockholders of the
Company.
As of May 31, 1997, the Company had committed to spend approximately
$200,000 for capital expenditures, consisting of $170,000 for computer equipment
and $30,000 for furniture and fixtures. The Company has since incurred
approximately $200,000 in capital expenditures for these purposes, of which
$150,000 was paid out of the Company's then available cash.
Impact of Inflation
Increases in the inflation rate are not expected to affect the
Company's operating expenses. Although the Company has no current plans to
borrow additional funds, if it were to do so at variable interest rates, any
increase in interest rates would increase the Company's cost of borrowed funds.
Seasonality
The Company's operations are not affected by seasonal fluctuations,
although the Company's cash flows may at times be affected by fluctuations in
the timing of cash receipts from large contracts.
ITEM 7A. QUANTITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
- ----------------------------------
The Board of Directors and Stockholders
ConSyGen, Inc. (A Texas Corporation)
We have audited the accompanying consolidated balance sheet of ConSyGen, Inc. (a
Texas corporation) and its subsidiary as of May 31, 1997 and December 31, 1996,
and the related consolidated statements of operations, changes in stockholders'
deficit, and cash flows for the five months ended May 31, 1997 and the years
ended December 31, 1996, 1995 and 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ConSyGen, Inc. (a
Texas corporation) and its subsidiary as of May 31, 1997 and December 31, 1996,
and the consolidated results of their operations and their cash flows for the
five months ended May 31, 1997 and the years ended December 31, 1996, 1995 and
1994 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring losses from operations
and has a working capital and stockholders' deficit. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are described in Notes 12 and 13.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
WOLINETZ, GOTTLIEB & LAFAZAN, P.C.
Rockville Centre, New York
July 15, 1997
<TABLE>
<CAPTION>
CONSYGEN, INC. AND SUBSIDIARY
-----------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
ASSETS
------
May 31, December 31,
1997 1996
---- ----
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 21,483 $ 83,204
Accounts Receivable -- --
Debt Issuance Expense (Net of Accumulated
Amortization of $55,556 in 1997 and $139,000 in 1996) 33,336 50,000
Prepaid Expenses 18,225 10,976
------------ ------------
Total Current Assets 73,044 144,180
------------ ------------
Furniture and Equipment (Net of Accumulated Depreciation
of $112,063 in 1997 and $102,583 in 1996) 72,031 72,513
------------ ------------
Other Assets:
Debt Issuance Expense - Net of Current Portion 61,108 --
Other Assets 4,596 5,283
------------ ------------
Total Other Assets 65,704 5,283
------------ ------------
Total Assets $ 210,779 $ 221,976
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Notes Payable $ 259,507 $ 343,507
Loans Payable 160,000 160,000
Loans Payable - Related Parties 139,177 143,877
Accounts Payable 62,704 97,199
Accrued Liabilities 308,899 219,801
------------ ------------
Total Current Liabilities 930,287 964,384
Long-Term Debt 1,000,000 --
------------ ------------
Total Liabilities 1,930,287 964,384
------------ ------------
Commitments and Contingencies
Stockholders' Deficit:
Common Stock, $.003 Par Value, 16,666,666 Shares
Authorized, Issued and Outstanding 13,796,231 Shares
in 1997 and 13,686,231 Shares in 1996 41,389 41,059
Additional Paid-In Capital 17,108,689 16,438,365
Accumulated Deficit (18,869,586) (17,221,832)
------------ ------------
Total Stockholders' Deficit (1,719,508) ( 742,408)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 210,779 $ 221,976
============ ============
The accompanying notes are an integral part of the financial statements
</TABLE>
CONSYGEN, INC. AND SUBSIDIARY
-----------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
<TABLE>
<CAPTION>
For The
Five Months
Ended For The Year Ended
May 31, December 31,
------------- -------------------------------------------
1997 1996 1995 1994
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 20,000 $ 43,552 $ 328,546 $ 790,466
------------- ------------ ------------ -----------
Costs and Expenses:
Cost of Sales -- -- 199,561 213,068
Software Development 334,868 740,000 492,399 587,552
General and Administrative Expenses 1,211,502 5,650,179 593,710 576,981
Interest Expense 56,348 157,210 112,779 59,788
Depreciation and Amortization 65,036 117,231 50,494 8,215
------------ ------------ ------------ -----------
Total Costs and Expenses 1,667,754 6,664,620 1,448,943 1,445,604
------------ ------------ ------------ -----------
Net Loss $ (1,647,754) $ (6,621,068) $ (1,120,397) $ (655,138)
============ ============ ============ ===========
Weighted Average Common Shares
Outstanding 13,700,231 9,438,062 6,116,661 5,958,327
============ ============ ============ ===========
Net Loss Per Common Share $ (.12) $ (.70) $ (.18) $ (.11)
============ ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
CONSYGEN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE PERIOD JANUARY 1, 1994 THROUGH MAY 31, 1997
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------- Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1994 5,499,994 $ 16,500 $ 5,483,500 $ (8,825,229) $ (3,325,229)
Issuance of ConSyGen-Arizona
Common Stock as Payment of Debt 500,000 1,500 498,500 -- 500,000
Debt Cancellation by Related Party -- -- 2,680,210 -- 2,680,210
Interest on Loans -- -- 21,493 -- 21,493
Net Loss -- -- -- ( 655,138) ( 655,138)
------------ ------------ ------------ ------------ ------------
Balance - December 31, 1994 5,999,994 18,000 8,683,703 (9,480,367) ( 778,664)
Issuance of ConSyGen-Arizona
Common Stock for Services 700,000 2,100 347,900 -- 350,000
Interest on Loans -- -- 67,016 -- 67,016
Debt Issuance Expense -- -- 90,000 -- 90,000
Net Loss -- -- -- (1,120,397) (1,120,397)
------------ ------------ ------------ ------------ ------------
Balance - December 31, 1995
(Carried Forward) 6,699,994 20,100 9,188,619 (10,600,764) (1,392,045)
------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
CONSYGEN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE PERIOD JANUARY 1, 1994 THROUGH MAY 31, 1997
(Continued)
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------- Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1995
(Brought Forward) 6,699,994 $ 20,100 $ 9,188,619 $(10,600,764) $(1,392,045)
Issuance of ConSyGen-Arizona
Common Stock for Services 98,000 294 48,706 -- 49,000
Issuance of ConSyGen-Arizona
Common Stock as Payment of Debt 700,000 2,100 347,900 -- 350,000
Donated Capital - Debt Cancellation
by Stockholder -- -- 350,000 -- 350,000
Issuance of ConSyGen-Arizona
Common Stock for Services 1,777,006 5,331 883,172 -- 888,503
Interest on Loans -- -- 90,802 -- 90,802
Effect of Reverse Acquisition 111,231 334 (7,134) -- (6,800)
Issuance of Common Stock
for Services 4,126,352 12,379 4,267,078 -- 4,279,457
Issuance of Common Stock as
Payment of Debt 173,648 521 1,182,022 -- 1,182,543
Donated Capital - Debt Cancellation -- -- 87,200 -- 87,200
Net Loss -- -- -- (6,621,068) (6,621,068)
----------- ------------ ----------- ------------ ------------
Balance - December 31, 1996 13,686,231 41,059 16,438,365 (17,221,832) ( 742,408)
Interest on Loans -- -- 14,404 -- 14,404
Issuance of Common Stock
for Services 110,000 330 655,920 -- 656,250
Net Loss -- -- -- (1,647,754) ( 1,647,754)
----------- ------------ ----------- ------------ ------------
Balance - May 31, 1997 13,796,231 $ 41,389 $ 17,108,689 $(18,869,586) $ (1,719,508)
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
CONSYGEN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For The
Five Months
Ended For The Year Ended
May 31, December 31,
------------- ------------------------------------------
1997 1996 1995 1994
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net Loss $(1,647,754) $(6,621,068) $(1,120,397) $ (655,138)
Adjustments to Reconcile Net Loss to Net Cash
Provided (Used) by Operating Activities:
Depreciation 9,480 18,231 10,494 8,215
Stock Issued for Services 656,250 5,167,961 300,000 --
Change in Allowance for Doubtful Accounts -- -- (15,910) --
Loss on Abandonment -- -- -- 29,016
Amortization of Debt Issuance Expense 55,556 99,000 40,000 --
Loan Interest - Additional Paid-In Capital 14,404 90,802 67,016 21,493
Changes in Operating Assets and Liabilities:
Accounts Receivable -- 1,876 35,381 149,164
Prepaid Expenses and Other Assets (6,562) (9,470) 11,502 2,497
Accounts Payable (34,495) (26,802) 13,603 9,934
Accrued Liabilities 89,098 43,905 90,658 83,357
Deferred Revenues -- (7,386) (1,215) 8,601
----------- ----------- ----------- -----------
Net Cash (Used) by Operating
Activities (864,023) (1,242,951) (568,868) (342,861)
----------- ----------- ----------- -----------
Cash Flows From Investing Activities:
Purchases of Furniture and Equipment (8,998) (30,227) (60,927) (9,594)
----------- ----------- ----------- -----------
Net Cash (Used) by Investing Activities (8,998) (30,227) (60,927) (9,594)
----------- ----------- ----------- -----------
Cash Flows From Financing Activities:
Proceeds of Debt Financings 1,000,000 1,123,700 -- --
Proceeds of Loans and Notes Payable -- 305,396 212,492 50,000
Payments of Loans and Notes Payable (84,000) (50,000) (3,200) (8,700)
Proceeds of Loans Payable - Related Parties -- 11,271 433,407 324,802
Payments of Loans Payable - Related Parties (4,700) (37,404) (23,351) (87,175)
Repayment of Loans Receivable - Related Parties -- -- -- 86,167
Payments for Debt Issuance Expense (100,000) -- -- --
----------- ----------- ----------- -----------
Net Cash Provided by Financing
Activities 811,300 1,352,963 619,348 365,094
----------- ----------- ----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents (61,721) 79,785 (10,447) 12,639
Cash and Cash Equivalents - Beginning of Period 83,204 3,419 13,866 1,227
----------- ----------- ----------- -----------
Cash and Cash Equivalents - End of Period $ 21,483 $ 83,204 $ 3,419 $ 13,866
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
CONSYGEN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
For The
Five Months
Ended For The Year Ended
May 31, December 31,
------------- ------------------------------------------
1997 1996 1995 1994
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Supplemental Cash Flow Information:
Cash Paid for Interest $ 182 $ 3,300 $ 24,491 $ 14,919
============= ============ =========== ===========
Cash Paid for Income Taxes $ - $ - $ - $ -
============= ============ =========== ===========
Supplemental Disclosure of Non-Cash Financing
Activities:
Cancellation of Debt into Additional
Paid-In Capital - Related Parties $ - $ 350,000 $ - $ 2,680,210
============= ============ ========== ===========
Issuance of Common Stock as Debt Issuance
Expense $ - $ 49,000 $ 50,000 $ -
============= ============ =========== ===========
Issuance of Common Stock as Payment of
Debt - Related Parties $ - $ 350,000 $ - $ 500,000
============= ============ =========== ==========
Debt Issuance Expense as Additional Paid-In
Capital $ - $ - $ 90,000 $ -
============= ============ =========== ==========
Effect of Reverse Acquisition - Accounts
Payable Acquired $ - $ 6,800 $ - $ -
============= ============ =========== ==========
Issuance of Common Stock as Payment of Debt $ - $ 1,182,543 $ - $ -
============ ============ =========== ==========
Cancellation of Debt into Additional Paid-In
Capital $ - $ 87,200 $ - $ -
============= ============ =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997
NOTE 1 - Operations and Basis of Presentation
------------------------------------
History of ConSyGen, Inc., (f/k/a C Square Ventures, Inc.)
ConSyGen, Inc., a Texas corporation ("ConSyGen-Texas'), was
incorporated on September 28, 1988 as C Square Ventures, Inc. ConSyGen-Texas was
formed for the purpose of obtaining capital in order to take advantage of
domestic and foreign business opportunities which may have profit potential. On
March 16, 1989, ConSyGen-Texas (then C Square Ventures, Inc.) completed an
initial public offering.
On September 5, 1996, ConSyGen-Texas acquired 100% of the
issued and outstanding shares of ConSyGen, Inc., a privately held Arizona
corporation formed on October 11, 1979 ("ConSyGen-Arizona") (f/k/a International
Data Systems, Inc.). On June 25, 1996, International Data Systems, Inc. changed
its name to ConSyGen, Inc. Immediately prior to the acquisition transaction,
ConSyGen-Texas effected a 1-for-40 reverse split of its common stock. In
connection with the acquisition, ConSyGen-Texas issued an aggregate of 9,275,000
shares of its common stock directly to the stockholders of ConSyGen-Arizona in
exchange for all of the issued and outstanding shares of ConSyGen-Arizona. Upon
the closing of the acquisition, the Company issued 3,850,000 shares of common
stock to various consultants for services rendered. Such shares were registered
under the Securities Act of 1933, as amended, pursuant to a Registration
Statement on Form S-8. In addition, the Company issued 150,000 shares of common
stock to a consultant for services to be rendered. These 4,000,000 shares were
valued at $1.00 per share, which was management's best estimate of fair market
value at the time of issuance. The exchange resulted in ConSyGen-Arizona's
stockholders holding a larger portion of voting rights of ConSyGen-Texas than
was held after the acquisition by the persons who were ConSyGen-Texas
stockholders prior to the acquisition (approximately 69% at closing). In
connection with the acquisition, outstanding options to purchase 1,275,000
shares of ConSyGen-Arizona's common stock granted under its Non-Qualified Stock
Option Plan were terminated and ConSyGen-Texas adopted a new Non-Qualified Stock
Option Plan (see Note 11). In addition, ConSyGen-Arizona terminated warrants to
purchase 1,000,000 shares of its common stock in connection with the
acquisition, and ConSyGen-Texas issued replacement warrants to purchase
1,000,000 shares of its common stock (see Note 11). As a result of the
acquisition, ConSyGen-Arizona became a wholly-owned subsidiary of
ConSyGen-Texas. The transaction has been treated as a reverse acquisition
(purchase) with ConSyGen-Arizona being the acquirer and ConSyGen-Texas being the
acquired company. Consequently, only the historical operations of
ConSyGen-Arizona are presented for the periods through September 5, 1996.
Subsequent to the acquisition, ConSyGen-Texas changed its name to ConSyGen, Inc.
(A Texas corporation).
ConSyGen-Texas and its wholly-owned subsidiary
ConSyGen-Arizona are hereafter collectively referred to as the "Company".
Description of Business
ConSyGen-Texas' business consists solely of the business of
its wholly-owned subsidiary, ConSyGen-Arizona. The Company is currently engaged
in the business of rendering automated software conversion services, including
"year 2000" conversions, although it did not realize any significant operating
revenue from its conversion business during fiscal 1997. Until 1995,
ConSyGen-Arizona licensed its proprietary computer software used in the hotel
and airline industries, and provided software maintenance services. In 1996
ConSyGen-Arizona discontinued its practice of software licensing and providing
maintenance services.
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997
NOTE 1 - Operations and Basis of Presentation (Continued)
------------------------------------
Basis of Presentation
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
suffered recurring losses from operations and at May 31, 1997 had a working
capital deficit of approximately $857,000 and a deficiency in stockholders'
equity of approximately $1,720,000. These factors raise substantial doubt about
the Company's ability to continue as a going concern. Continuation of the
Company is dependent on (1) achieving sufficiently profitable operations and (2)
obtaining adequate financing. Management's plans in this regard include forming
additional strategic alliances with computer hardware and consulting firms and
implementation of an independent sales representative program (see Note 12). In
addition, in June 1997 the Company raised net proceeds of approximately $1
million through the private sale of its common stock. In late August 1997, the
Company accepted subscriptions to purchase an aggregate 100,000 shares of Common
Stock for aggregate consideration of $504,000 (net of finders fees). The Company
expects to receive the proceeds of these subscriptions ($504,000) in early
September, 1997 (see Note 13). The Company intends to raise additional funds.
However, the success of these planned measures cannot be determined at this
time. The financial statements do not include any adjustment relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
Fiscal Year
ConSyGen-Texas' fiscal year end is May 31. Effective January
1, 1997, ConSyGen-Arizona changed its fiscal year from December 31 to May 31 to
coincide with the fiscal year end of its parent company, ConSyGen-Texas. Since
ConSyGen-Texas' acquisition of ConSyGen-Arizona has been accounted for as a
reverse acquisition (purchase), with ConSyGen-Arizona being the acquirer and
ConSyGen-Texas being the acquired company, only the historical operations to
ConSyGen-Arizona are presented for periods through the date of acquisition.
Subsequent to the acquisition date, the consolidated operations of the Company
are presented. Accordingly, the financial statements presented are for the five
month period ended May 31, 1997 and for the years ended December 31, 1996, 1995,
and 1994.
NOTE 2 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of
ConSyGen-Texas and its wholly-owned subsidiary, ConSyGen-Arizona. Significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997
NOTE 2 - Summary of Significant Accounting Policies (Continued)
Revenue Recognition
Revenue is recognized in accordance with Statement of Position
91-1, "Software Revenue Recognition". Accordingly, revenue from software
licensing is recognized when delivery of the software has occurred, a signed
noncancelable license agreement has been received from the customer and any
remaining obligations under the license agreement are insignificant. Revenue
which related to insignificant obligations was deferred and was recognized as
the obligations were fulfilled. Revenue in 1995 and 1994 from software license
fees that were related to the Company's obligation to provide certain
post-contract customer support without charge for the first year of the license
was unbundled from the license fee at its fair value and was deferred and
recognized straight-line over the contract support period. Revenue from annual
or other renewals of maintenance contracts (including long-term contracts) was
deferred and recognized straight-line over the term of the contracts. In 1996,
the Company discontinued its practice of software licensing and entering into
maintenance contracts. Conversion service revenue is recognized upon completion
of the conversion service.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less at the time of purchase to be cash equivalents.
Furniture and Equipment
Furniture and equipment is stated at cost, less accumulated
depreciation. Deprecation is computed by both straight-line method and
accelerated methods over the estimated useful lives of the related assets, which
approximate five years.
Debt Issuance Expense
Costs associated with the Company's debt financing
transactions have been capitalized. These costs include the value of common
stock issued, both by the Company or directly from a significant stockholder, as
consideration for obtaining various loans. Such costs are being amortized over
the terms of the related loans.
Research and Development
Research and development expenditures, including the cost of
software development, are expensed as incurred.
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997
NOTE 2 - Summary of Significant Accounting Policies (Continued)
Employee Stock Plans
The Company accounts for its stock option plans in accordance
with provisions of the Accounting Principle Board's Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees." In 1995, the Financial Accounting
Standards Board released Statement of Financial Accounting Standard No. 123
(SFAS 123), "Accounting for Stock Based Compensation." SFAS 123 provides an
alternative to APB 25 and is effective for fiscal years beginning after December
15, 1995. The Company will continue to account for its employee stock option
plans in accordance with the provisions of APB 25, and therefore will be
required to disclose certain pro-forma information in the notes to its financial
statements. SFAS 123 is not expected to have a material effect on the Company's
financial condition or results of operations.
Fair Value of Financial Instruments
The estimated fair value of financial instruments has been
determined by the Company using available market information and valuation
methodologies. Considerable judgment is required in estimating fair values.
Accordingly, the estimates may not be indicative of the amounts the Company
could realize in a current market exchange. The carrying amounts of cash,
accounts receivable and accounts payable approximate fair value.
Loss Per Share
Prior to the acquisition, the computation of net loss per
share is based on the weighted average number of outstanding common shares of
ConSyGen-Arizona. Following the acquisition, shares presented are adjusted for
the effect of the reverse acquisition. Common stock equivalents have not been
included in this calculation since their inclusion would be antidilutive.
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard No. 128, Earnings per Share
(SFAS 128). SFAS 128, which applies to entities with publicly held common stock,
simplifies the standards for computing earnings per share previously required in
APB Opinion No. 15, Earnings per Share, and makes them comparable to
international earnings per share standards. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. Earlier adoption is not permitted. Management is currently reviewing
the provisions of SFAS 128, however, it does not believe that adoption of this
new accounting pronouncement will have a material impact on the calculation and
presentation of earnings per share.
NOTE 3 - Loans Payable - Related Parties
Loans payable to related parties with interest imputed at 10%
per annum, are due on demand and are unsecured (see Note 9).
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997
NOTE 4 - Notes Payable
Notes payable consist of the following:
<TABLE>
<CAPTION>
May 31, December 31,
1997 1996
------- ------------
<S> <C> <C>
Note payable, bearing interest at 10% per annum, no stated
maturity and unsecured. As additional consideration to the
lender for making the loan, a significant stockholder
personally transferred to the lender 30,000 shares of his
common stock, valued at $1.00 per share. The value of such
shares has been capitalized as debt issuance expense. $ 30,000 $ 30,000
Note payable, bearing interest at 10% per annum, due July 31,
1996 and unsecured. Since August 1, 1996, the Company has been
in default under the terms of the Note, and interest has been
accruing at the default rate of 18% per annum. As additional
consideration to the lender for making the loan, a significant
stockholder personally transferred to the lender 60,000 shares
of his common stock, valued at $1.00 per share. The value of
such shares has been capitalized
as debt issuance expense. 100,000 100,000
Note payable, bearing interest at the prime rate, original
maturity June 30, 1989 and unsecured. 23,000 23,000
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31,1997
NOTE 4 - Notes Payable (Continued)
May 31, December 31,
1997 1996
---- ----
Note payable, bearing interest at 10% per annum, due on demand
and unsecured. 23,317 23,317
Note payable, bearing interest at 10% per annum, payable on
demand, and unsecured. As additional consideration to the
lender for making the loan, the Company issued 25,000 shares
of its common stock to the lender valued at $1.00 per share.
The value of such shares has been capitalized as debt issuance
expense. 25,000 25,000
Note payable, with interest imputed at 10% per annum, no
stated maturity and unsecured. 23,190 23,190
Note payable, with interest imputed at 10% per annum, no
stated maturity and unsecured. 5,000 5,000
Note payable, bearing interest at 10% per annum, payable on
demand, and unsecured. - 84,000
Note payable, bearing interest at 10% per annum, payable on
demand and unsecured. As additional consideration to the
lender for making the loan, the Company issued 50,000 shares
of its common stock to the lender valued at $1.00 per share.
The value of such shares has been capitalized as debt issuance
expense. 30,000 30,000
----------- -----------
$ 259,507 $ 343,507
========= =========
</TABLE>
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997
NOTE 5 - Loans Payable
Loans payable consist of the following:
<TABLE>
<CAPTION>
May 31, December 31,
1997 1996
---- ----
<S> <C> <C>
Loan payable, with interest imputed at 10% per
annum, due on demand and unsecured. $ 52,000 $ 52,000
Loan payable, non-interest bearing, due on
demand and unsecured. 8,000 8,000
Loan payable, with interest imputed at 10% per
annum, due on demand and unsecured. 100,000 100,000
--------- ---------
$160,000 $160,000
========= =========
</TABLE>
NOTE 6 - Long-Term Debt
In March 1997, ConSyGen-Texas raised $1,000,000, before
deducting finder's fees of $100,000, through a private placement of convertible
notes (the "Notes") in the principal amount of $1,000,000. The Notes are
unsecured, bear interest at the rate of 6% per annum, are payable in March 2000,
and are convertible into common stock of ConSyGen-Texas. The principal amount of
the Notes is convertible into common stock of ConSyGen-Texas at a rate equal to
the lesser of (1) $10.85 per share (115% of the closing bid price of the common
stock on March 21,1997); or (2) that price which is equal to 70% of the average
closing bid price of the common stock for the five trading days preceding the
date of conversion. ConSyGen-Texas is obligated to register the shares of common
stock issuable upon conversion of the Notes, under the Securities Act of 1933,
as soon as practicable after the closing date. The Notes provide that if the
underlying shares are not registered within 90 days of closing, ConSyGen-Texas
is obligated to pay penalties amounting to 2% of the principal amount of the
Notes. In addition, the Company is obligated to pay penalties equal to 3% of the
principal amount of the Notes for each subsequent month after expiration of the
90 day period during which the underlying shares are not registered under the
Securities Act of 1933. At July 15, 1997, the underlying shares had not been
registered under the Securities Act of 1933. ConSyGen-Texas may compel
conversion of the Notes at any time after the expiration of six months after the
effective date of the Registration Statement. The Notes are redeemable, at a
price equal to 130% of the principal amount of the Notes, in the event that the
price of ConSyGen-Texas' common stock is less than the bid price on March 21,
1997.
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997
NOTE 7 - Commitments and Contingencies
Leases
The Company's corporate offices are leased under a
noncancelable operating lease, as amended, which expires October 31, 1998.
Rental expense aggregated $31,503 for the five months ended May 31, 1997, and
$61,434, $49,884 and $48,144 for the years ended December 31, 1996, 1995 and
1994, respectively. Future minimum rental payments are as follows:
Year Ending
May 31,
-------
1998 $ 87,586
1999 37,090
-----------
$ 124,676
===========
Legal Proceedings
From time to time, the Company may be named in legal actions
which are incidental to the industry in which the Company operates. Currently,
the Company is not a party to any legal proceedings.
NASD Review
The National Association of Securities Dealers, Inc. ("NASD")
in December 1996 advised the Company that it is conducting a routine review of
trading in ConSyGen-Texas' common stock following the acquisition of
ConSyGen-Arizona. The NASD made a written inquiry of the Company, to which the
Company responded in writing in January 1997. The NASD made inquiry with respect
to, among other things, a private placement by ConSyGen-Arizona, the acquisition
of ConSyGen-Arizona by ConSyGen-Texas, and issuance of common stock by the
Company during 1996. The NASD has not yet responded in writing to the Company's
written response. Although it is not possible to determine the outcome of this
review, the outcome could have a material adverse effect on the Company and the
price of and trading market for the Company's common stock.
NOTE 8 - Income Taxes
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards, No. 109, "Accounting for Income
Taxes". Deferred income taxes are provided with respect to differences between
results of operations for financial reporting purposes and income tax purposes.
For the five months ended May 31, 1997, and the years ended December 31, 1996,
1995 and 1994, the Company generated net operating losses.
Deferred tax assets and liabilities are recorded based on
differences between the financial statement and tax bases of assets and
liabilities and the tax rates in effect when those differences are expected to
reverse. Effective May 31, 1997, the Company will file its federal corporation
income tax return on a consolidated basis. As of May 31, 1997, the Company had a
net operating loss carryforward (NOLC) for federal income tax purposes of
approximately $16,000,000, which begins to expire in 1998. Pursuant to Section
382 of the Internal Revenue Code, due to changes in the ownership of the
Company, the utilization of these loss carryforwards may be subject to an annual
limitation.
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997
NOTE 8 - Income Taxes (Continued)
For income tax purposes, the NOLC may be used by the Company
to offset future taxable income. However, due to the Company's historical
operating results, the Company has placed a 100% valuation reserve on the NOLC.
The following table sets forth the components of deferred taxes at:
May 31, December 31,
1997 1996
---- ----
Deferred Tax Assets $ - $ 10,000
Net Operating Loss Carryforwards 6,000,000 5,880,000
Less: Valuation Reserve (6,000,000) (5,890,000)
------------ ------------
$ -0- $ -0-
============= ============
Income tax benefit attributable to net loss differed from the
amounts computed by applying the statutory Federal Income tax rate applicable
for each period as a result of the following:
Five Months Ended Year Ended
May 31, 1997 December 31, 1996
------------ -----------------
Computed "expected" tax benefit $ 337,000 $ 2,251,000
Decrease in tax benefit resulting
from:
Net operating loss for which no
benefit is currently available ( 337,000) (2,251,000)
------------ ------------
$ -0- $ -0-
============ ============
NOTE 9 - Related Party Transactions
A significant shareholder, who is also an officer and director
of the Company, and his relatives and affiliates have advanced funds to the
Company on an as needed basis. As of May 31, 1997 and December 31, 1996, such
shareholder and relatives had outstanding advances of $139,177 and $143,877 (see
Notes 3 and 10). In May 1997, in connection with the significant stockholder's
private sale of 300,000 shares of common stock of the Company to certain
individuals, the Company agreed to use its best efforts to register such shares
for resale by such individuals under the Securities Act of 1933 within 120 days
of the closing of the sale.
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997
NOTE 10 - Stockholders' Deficit
In February 1994, ConSyGen-Arizona converted $500,000 of a
loan payable to a significant shareholder into 500,000 shares of common stock.
In addition, an affiliate of a significant shareholder canceled certain loans it
had made to ConSyGen-Arizona in the amount of $2,680,210. This amount was
credited to ConSyGen-Arizona's additional paid-in capital.
In October 1995, ConSyGen-Arizona's board of directors
increased the number of its authorized shares of common stock to 20,000,000 and
changed the stated par value of such shares from $1 to $.01 per share. All
periods presented have been retroactively adjusted to reflect this change.
In November 1995, ConSyGen-Arizona issued 700,000 shares of
common stock to advisors and consultants of ConSyGen-Arizona as consideration
for services rendered, including 100,000 shares issued to a consultant as a
retainer for services to be rendered. For accounting purposes the shares were
valued at $.50 per share, which was management's best estimate of fair value at
the date of issuance. The accompanying financial statements include a charge of
$300,000 for the issuance of 600,000 of such shares, which is included in
general and administrative expenses. In addition, $50,000 has been capitalized
and subsequently amortized as debt issuance expense in connection with the
issuance of the remaining 100,000 shares.
ConSyGen-Arizona has recognized a financial (imputed) interest
charge on loans and notes payable as to which there were originally no stated
interest rates. The interest has been charged to operations and credited to
additional paid-in capital and is summarized as follows:
Five Months Ended Year Ended
----------------- ----------
May 31, December 31,
------- ------------
1997 1996 1995 1994
------- ------- ------- -------
Significant Stockholder $ 5,854 $72,179 $65,516 $21,493
Others 8,550 18,623 1,500 --
------- ------- ------- -------
$14,404 $90,802 $67,016 $21,493
======= ======= ======= =======
During 1996, ConSyGen-Arizona issued to a significant
shareholder, who is also an officer and director of the Company, an aggregate of
2,477,006 shares of common stock, of which 700,000 were issued in satisfaction
of a $700,000 loan payable to such stockholder, and the remaining 1,777,006
shares were issued as compensation for services rendered by such person in his
capacity as an officer and director of ConSyGen-Arizona. In addition, 98,000
shares of common stock were issued to certain individuals as consideration for
advancing funds to ConSyGen-Arizona. For accounting purposes, all the shares
were valued at $.50 per share, which was management's best estimate of fair
value at the date of issuance.
During 1996 the Company issued to a consultant for services
100,000 shares of common stock valued at $1.00 per share, which was management's
best estimate of fair value at date of issuance.
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997
NOTE 10 - Stockholders' Deficit (Continued)
Debt Financings
During 1995 ConSyGen-Arizona entered into an agreement with a
consultant, as supplemented in 1996, under which the consultant agreed to assist
ConSyGen-Arizona in obtaining financing. As noted above, ConSyGen-Arizona issued
100,000 shares of its common stock to the consultant as a retainer for services
to be rendered. In 1996 such consultant assisted ConSyGen-Arizona in raising
approximately $1,200,000 in a private placement of debt. The debt bore interest
at a rate of 10% per annum, was unsecured, and was to be repaid in one year. As
additional consideration to the lenders, ConSyGen-Arizona agreed to issue
warrants to purchase an aggregate of 1,000,000 shares of ConSyGen-Arizona's
common stock at an exercise price of $5.00 per share. The warrants would have
become exercisable one year from the date of the loan, had a term of two years
and were callable upon 60 days notice. As described in Note 11, in connection
with ConSyGen-Texas' acquisition of ConSyGen-Arizona, ConSyGen-Arizona
terminated these warrants and ConSyGen-Texas reserved for issuance new warrants
to purchase 1,000,000 shares of ConSyGen-Texas common stock on the same terms
and conditions.
Following the loan transaction in September 1996, the
Company's consultant transferred common stock of ConSyGen-Texas held by it to
the lenders in exchange for ConSyGen-Arizona's debt. As a result of this
transaction, ConSyGen-Arizona's obligation to repay the lenders was extinguished
and ConSyGen-Arizona became obligated to repay such consultant. Subsequently,
ConSyGen-Texas and the consultant agreed that ConSyGen-Texas would issue an
aggregate of 200,000 shares of its common stock to such consultant, of which
173,648 shares was in cancellation of ConSyGen-Arizona's debt acquired by the
consultant from the lenders and 26,352 shares were as payment for services.
In May 1997, the Company entered into a new agreement with the
consultant which supersedes all prior agreements with the consultant. Under this
agreement, the Company (1) granted the consultant, until June 1998, a right of
first refusal with respect to future financings and (2) issued the consultant
100,000 shares of common stock, in full satisfaction of all amounts owing under
all existing arrangements with the consultant. These 100,000 shares, which are
restricted under the Securities Act of 1933, were valued at $6.00 per share. In
addition, the Company issued the consultant warrants to purchase 300,000 shares
of common stock (see Note 13). The consultant agreed to provide such consulting
services as the Company may request until June 1998. In addition, the consultant
would be entitled to receive compensation, in an amount to be agreed upon, if
any individual previously introduced by the consultant to the Company makes an
investment in the Company.
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997
NOTE 10 - Stockholders' Deficit (Continued)
Acquisition of ConSyGen-Arizona
On September 5, 1996, ConSyGen-Texas, pursuant to an exchange
agreement, acquired 100% of the issued and outstanding shares of
ConSyGen-Arizona directly from the stockholders of ConSyGen-Arizona. Immediately
prior to the acquisition, ConSyGen-Texas effected a 1-for-40 reverse split of
its common stock. In connection with the acquisition, ConSyGen-Texas issued an
aggregate of 9,275,000 shares of its common stock in exchange for all of the
issued and outstanding shares of ConSyGen-Arizona. Upon the closing of the
acquisition, ConSyGen-Texas issued 3,850,000 shares of common stock to various
consultants for services rendered. Such shares were registered under the
Securities Act of 1933, as amended, pursuant to a Registration Statement on Form
S-8. In addition, ConSyGen-Texas issued 150,000 shares of common stock to a
consultant for services to be rendered. These 4,000,000 shares were valued at
$1.00 per share, which was management's best estimate of fair market value at
the time of issuance. The accompanying financial statements include a charge of
$4,000,000 for the issuance of such shares, which is included in general and
administrative expenses. In connection with the acquisition, ConSyGen-Arizona
terminated all options and warrants to acquire its common stock, and
ConSyGen-Texas simultaneously adopted replacement options and warrants (see Note
11).
The exchange resulted in ConSyGen-Arizona's shareholders
holding a larger portion of the voting rights of ConSyGen-Texas than was held
after the acquisition by the persons who were ConSyGen-Texas stockholders prior
to the acquisition (approximately 69% at closing). The transaction has been
treated as a reverse acquisition (purchase) with ConSyGen-Arizona being the
acquirer and ConSyGen-Texas being the acquired company. Subsequent to the
acquisition, ConSyGen-Texas changed its legal name to ConSyGen, Inc.
NOTE 11 - Stock Option Plans and Warrants
In October 1995, ConSyGen-Arizona's Board of Directors
approved the ConSyGen-Arizona Non-Qualified Stock Option Plan (the "1995 Plan"),
which covered 1,275,000 shares of ConSyGen-Arizona's common stock. Under the
terms of the 1995 Plan, the exercise price per share may not be less than the
par value of ConSyGen-Arizona's common stock. Options may be granted for terms
of up to five years from the date of grant. At December 31, 1995, options to
purchase an aggregate of 1,275,000 shares were granted under the 1995 Plan. The
1995 Plan and all options outstanding thereunder were terminated effective as of
September 5, 1996, the closing of the ConSyGen-Texas acquisition. ConSyGen-Texas
adopted a new non-qualified stock option plan (the "1996 Plan") on September 5,
1996, covering 1,500,000 shares. At May 31, 1997, options to purchase an
aggregate of 1,225,000 shares were outstanding under the 1996 Plan.
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997
NOTE 11 - Stock Option Plans and Warrants (Continued)
On March 1, 1997, ConSyGen-Texas adopted the ConSyGen, Inc.
1997 Non-Qualified Stock Option Plan (the "1997 Plan") , which reserves for
issuance options to purchase 1,000,000 shares of common stock. In March 1997,
the Company granted options to the President and Chief Executive Officer of the
Company to purchase up to 400,000 shares of common stock at an exercise price of
$8.875 per share. The options expire 10 years from the date of grant. At the
date of grant, the options were immediately exerciseable.
Effective as of the closing of the ConSyGen-Texas acquisition,
ConSyGen-Arizona terminated warrants to purchase 1,000,000 shares of its common
stock, which were issuable in connection with ConSyGen-Arizona's $1,200,000 debt
financing in 1996. ConSyGen-Texas simultaneously reserved for issuance
replacement warrants to purchase 1,000,000 shares of its common stock on the
same terms. These warrants have an exercise price of $5.00 per share, become
exerciseable in August of 1997, expire in September 1998 and are callable upon
60 days notice.
The following tables summarize the activity under the 1995,
1996 and 1997 Plans along with common stock warrant activity for the periods
indicated:
Weighted
Price of Average
Options Option Exercise
Outstanding Grants Price
----------- ------ -----
Outstanding at December 31, 1994 -- --
Granted 1,275,000 $ .01
---------
Outstanding at December 31, 1995 1,275,000 -- $ .01
Terminated (1,275,000) -- --
Replacement Options 1,275,000 $1.00 --
Terminated (450,000) --
Granted 375,000 $1.00 --
Granted 50,000 $6.50 --
--------- -----
Outstanding at December 31, 1996 1,250,000 $ 1.00
Granted 405,000 $8.88-$10
Terminated (25,000)
--------- -----
Outstanding at May 31, 1997 1,630,000 $ 3.11
========= =====
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997
NOTE 11 - Stock Option Plans and Warrants (Continued)
Weighted
Price of Average
Warrants Warrant Exercise
Outstanding Grants Price
----------- ------ -----
Outstanding at December 31, 1995 --
Granted 1,000,000 $ 5.00
Outstanding at December 31, 1996 1,000,000 $ 5.00
Granted --
---------- ---------
Outstanding at May 31, 1997 1,000,000 $ 5.00
========== ========
At December 31, 1996, 293,750 options and 0 warrants to
purchase shares were exercisable. The weighted average exercise price of the
exercisable options is $1.
At May 31, 1997, 698,750 options and 0 warrants to purchase
shares were exercisable. The weighted average exercise price of the exercisable
options is $5.58.
At May 31, 1997 the average life of outstanding options and
warrants was 9.5 years and 1.3 years respectively and the average life of
exercisable options was 9.5 years.
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation", requires companies to measure employee stock
compensation plans based on the fair value method of accounting. However, the
Statement allows the alternative of continued use of Accounting Principles Board
(APB) Option No. 25, "Accounting for Stock Issued to Employees," with pro forma
disclosure of net income and earnings per share determined as if the fair value
based method had been applied in measuring compensation cost. The Company
adopted the new standard in 1996 and elected the continued use of APB Opinion
No. 25. Pro forma disclosure has not been provided, as the effect on 1996 net
earnings was immaterial.
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997
NOTE 12 - Sales and Marketing
The Company's sales and marketing strategy includes an
independent sales representative program, and entering into alliances with
system integrators that provide computer related services to end-users. Under
the sales representative program, the Company engages individuals on a
non-exclusive basis to refer business to the Company. In general, under the
alliances with systems integrators, the systems integrator will contract with
the Company to provide conversion services, including Year 2000 correction
services, to the integrator's customers. The Company believes that this approach
affords it the opportunity to have its services marketed to a wide range of
potential customers. The Company has entered into such alliances with several
major corporations, including Unisys Corporation, Strategia Corporation, Agiss
Software Corporation, SCB Computer Technology, and Millenium Enterprises.
NOTE 13 - Subsequent Events
Common Stock Private Placement
In June 1997 the Company sold 120,000 shares of its common
stock at $9.00 per share in a private placement for gross proceeds of
$1,080,000. In connection with the sale, the Company paid a 7% cash commission
and issued 3,600 shares of common stock as a finders fee. The Company has agreed
to use its best efforts to register the shares under the Securities Act of 1933,
as amended, within 120 days from the date of sale.
In late August 1997, the Company accepted subscriptions to
purchase an aggregate 100,000 shares of Common Stock for aggregate consideration
of $504,000 (net of finders fees). The Company expects to receive the proceeds
of these subscriptions ($504,000) in early September, 1997.
Warrant Issuance to Consultant
In July, 1997, in connection with the new agreement with the
Company's consultant (see Note 10), the Company agreed to issue the consultant
warrants to purchase 300,000 shares of common stock at a price of $5.00 per
share. The shares of common stock issuable upon exercise of these warrants will
be restricted securities under the Securities Act of 1933. The warrants are
immediately exerciseable, expire two years from the date of grant, and are
callable upon 60 days notice.
Increase in Common Shares Authorized
In July 1997, the Company amended its Articles of
Incorporation to increase its authorized common shares from 16,666,666 to
40,000,000 shares.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information concerning the Company's directors and executive officers
required by this Item is incorporated by reference to the text appearing under
Part I, Item 1 -- Business under the caption "Executive Officers". Information
concerning compliance with Section 16(a) of the Securities Exchange Act of 1934
is incorporated by reference to the Company's Definitive Proxy Statement for the
Annual Meeting of Stockholders to be held November 20, 1997.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated by reference from the
Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on November 20, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is incorporated by reference from the
Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on November 20, 1997.
Item 13. Certain Relationships and Related Transactions
Information required by this Item is incorporated by reference from the
Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on November 20, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K
(a) The following documents are filed as part of this report:
(1) Financial Statements
Consolidated Balance Sheets as of May 31, 1997 and December 31, 1996
Consolidated Statements of Operations for the five months ended May 31,
1997 and each of the years ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Stockholders' Deficit for the five months
ended May 31, 1997 and each of the years ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the five months ended May 31,
1997 and each of the years ended December 31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Statement of Management's Responsibility
(2) Financial Statement Schedules
No financial statement schedules are included since the information is
not applicable, not required, or is included in the financial
statements or notes thereto.
(3) Listing of Exhibits
<TABLE>
<CAPTION>
- ------------------------- ------------------------------------------------------------------------------------------- ------------
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ------------------------- ------------------------------------------------------------------------------------------- ------------
<S> <C> <C>
2 Plan of Acquisition between the Registrant and the stockholders of ConSyGen, Inc., an
Arizona corporation, dated August 28, 1996, filed as Exhibit 2 to the Registrant's
Current Report on Form 8-K dated September 5, 1996 and incorporated herein by reference.
- ------------------------- ------------------------------------------------------------------------------------------- ------------
3.1 Articles of Incorporation of the registrant, as amended. (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
3.2 By-Laws of the registrant, filed as Exhibit 3.B to the Registrant's Registration
Statement on Form S-18, File No. 33-22900 - FW, and incorporated herein by reference.
- ------------------------- ------------------------------------------------------------------------------------------- ------------
4.1 Specimen common stock certificate, filed as Exhibit 4.B to the Registrant's Registration
Statement on Form S-18, File No. 33-22900 - FW, and incorporated herein by reference.
- ------------------------- ------------------------------------------------------------------------------------------- ------------
4.2 Form of Common Stock Purchase Warrant used in connection with issuance of warrants to
purchase an aggregate of 1,000,000 shares of the Registrant's Common Stock, $.003 par
value. (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
4.3 Subscription Agreement between the Registrant and Little Wing, L.P. for convertible debt
of the Registrant (including Summary of Terms). (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
4.4 Subscription Agreement between the Registrant and Tonga Partners, L.P. for convertible
debt of the Registrant (including Summary of Terms). (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
10.1 Agreement between the Registrant and Carriage House Capital, Inc., dated May 19, 1997,
superseding letter agreements (also filed as Exhibit 10.1 hereto) between Carriage House
Capital, Inc. and the Registrant's wholly-owned subsidiary, dated June 14, 1996 and
October 26, 1995. (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
10.2 Consulting Agreement between Carriage House Capital, Inc. and the Registrant dated July
10, 1996. (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
10.3 Consulting Agreement between Mikesco, Inc. and the Registrant dated July 10, 1996. (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
10.4 Consulting Agreement between Concorda Corp. and the Registrant dated July 10, 1996. (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
10.5 Consulting Agreement between Scarlet Investment Group, Inc. and the Registrant dated July
10, 1996. (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
10.6 Consulting Agreement between The Canter Corporation and the Registrant dated August 20,
1996. (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
10.7 Registrant's 1996 Non-Qualified Stock Option Plan. (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
10.8 Registrant's 1997 Non-Qualified Stock Option Plan. (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
10.9 Consulting Agreement between the Registrant and Innovative Research Associates, Inc. (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
10.10 Consulting Agreement between the Registrant and M.H. Meyerson & Co., Inc. dated August *
19, 1996.
- ------------------------- ------------------------------------------------------------------------------------------- ------------
21 List of Subsidiaries of the Registrant. *
- ------------------------- ------------------------------------------------------------------------------------------- ------------
27 Financial Data Schedule *
- ----------------------------------------------------------------------------------------------------------------------------------
- -----------------
(1) Filed as an Exhibit, with the same Exhibit number, to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended August 31, 1997, and
incorporated herein by this reference.
* Filed Herewith
- ----------------------------------------------------------------------------------------------------------------------------------
(b) The Company did not file a Current Report on Form 8-K during the 4th Quarter
of fiscal 1997.
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CONSYGEN, INC.
Registrant
By:/s/Ronald I. Bishop
--------------------------
Ronald I. Bishop, President
and Chief Executive Officer
Date: August 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/S/ Robert L. Stewart Chairman August 28, 1997
- -----------------------------
Robert L. Stewart
/S/ Ronald I. Bishop President, August 28, 1997
- -----------------------------
Ronald I. Bishop Chief Executive Officer
and Director
/S/ Leslie F. Stewart Secretary and Director August 28, 1997
- -----------------------------
Leslie F. Stewart
/S/ Kenneth Harvey Controller August 28, 1997
Kenneth Harvey
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
EXHIBIT INDEX
- ------------------------- ------------------------------------------------------------------------------------------- ------------
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ------------------------- ------------------------------------------------------------------------------------------- ------------
<S> <C> <C>
2 Plan of Acquisition between the Registrant and the stockholders of ConSyGen, Inc., an
Arizona corporation, dated August 28, 1996, filed as Exhibit 2 to the Registrant's
Current Report on Form 8-K dated September 5, 1996 and incorporated herein by reference.
- ------------------------- ------------------------------------------------------------------------------------------- ------------
3.1 Articles of Incorporation of the registrant, as amended. (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
3.2 By-Laws of the registrant, filed as Exhibit 3.B to the Registrant's Registration
Statement on Form S-18, File No. 33-22900 - FW, and incorporated herein by reference.
- ------------------------- ------------------------------------------------------------------------------------------- ------------
4.1 Specimen common stock certificate, filed as Exhibit 4.B to the Registrant's Registration
Statement on Form S-18, File No. 33-22900 - FW, and incorporated herein by reference.
- ------------------------- ------------------------------------------------------------------------------------------- ------------
4.2 Form of Common Stock Purchase Warrant used in connection with issuance of warrants to
purchase an aggregate of 1,000,000 shares of the Registrant's Common Stock, $.003 par
value. (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
4.3 Subscription Agreement between the Registrant and Little Wing, L.P. for convertible debt
of the Registrant (including Summary of Terms). (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
4.4 Subscription Agreement between the Registrant and Tonga Partners, L.P. for convertible
debt of the Registrant (including Summary of Terms). (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
10.1 Agreement between the Registrant and Carriage House Capital, Inc., dated May 19, 1997,
superseding letter agreements (also filed as Exhibit 10.1 hereto) between Carriage House
Capital, Inc. and the Registrant's wholly-owned subsidiary, dated June 14, 1996 and
October 26, 1995. (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
10.2 Consulting Agreement between Carriage House Capital, Inc. and the Registrant dated July
10, 1996. (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
10.3 Consulting Agreement between Mikesco, Inc. and the Registrant dated July 10, 1996. (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
10.4 Consulting Agreement between Concorda Corp. and the Registrant dated July 10, 1996. (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
10.5 Consulting Agreement between Scarlet Investment Group, Inc. and the Registrant dated July
10, 1996. (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
10.6 Consulting Agreement between The Canter Corporation and the Registrant dated August 20,
1996. (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
10.7 Registrant's 1996 Non-Qualified Stock Option Plan. (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
10.8 Registrant's 1997 Non-Qualified Stock Option Plan. (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
10.9 Consulting Agreement between the Registrant and Innovative Research Associates, Inc. (1)
- ------------------------- ------------------------------------------------------------------------------------------- ------------
10.10 Consulting Agreement between the Registrant and M.H. Meyerson & Co., Inc. dated August *
19, 1996.
- ------------------------- ------------------------------------------------------------------------------------------- ------------
21 List of Subsidiaries of the Registrant. *
- ------------------------- ------------------------------------------------------------------------------------------- ------------
27 Financial Data Schedule *
- ----------------------------------------------------------------------------------------------------------------------------------
- -----------------
(1) Filed as an Exhibit, with the same Exhibit number, to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended August 31, 1997, and
incorporated herein by this reference.
* Filed Herewith
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
EXHIBIT 10.10
M.H. MEYERSON & CO., INC. LETTERHEAD
August 19, 1996
Carl H. Canter
President
C-Square Ventures, Inc.
551 N.W. 77th Street, Suite 109
Boca Raton, FL. 33487-1330
Dear Mr. Canter:
THIS AGREEMENT (the "Agreement") is made as of August 19, 1996 between C-SQUARE
Ventures, Inc. ("C-SQUARE") and M.H. Meyerson & Co., Inc. ("MEYERSON").
In consideration of the mutual covenants contained herein and intending to be
legally bound hereby, the parties hereto agree as follows:
MEYERSON and C-SQUARE agree that MEYERSON will perform investment banking
services on the terms set forth below for a period of three years from the date
hereof. These services will be performed on a best efforts basis and will
include, without limitation, assistance in mergers, acquisitions, and internal
capital structuring and the placement of new debt and equity issues, all with
the objective of accomplishing C-SQUARE's business and financial goals. In each
instance, MEYERSON shall endeavor to assist, subject to market conditions, in
identifying corporate candidates and sources of private and institutional funds;
providing planning, structuring, strategic and other advisory services; and
assisting in negotiations on behalf of C-SQUARE. In each case, MEYERSON will
provide such services, and only such services, as C-SQUARE and MEYERSON mutually
agree. MEYERSON agrees to exert its best efforts to accomplish the goals
established by MEYERSON and C-SQUARE. MEYERSON and C-SQUARE shall comply with
all applicable laws including, without limitation, those of the National
Association of Securities Dealers, Inc., and the Securities and Exchange
Commission, in connection with the performance of this Agreement.
In exchange for and in consideration of the services to be rendered by MEYERSON
as aforesaid, C-SQUARE will grant to MEYERSON a total of 150,000 shares of
common Treasury stock with piggyback demand registration rights which MEYERSON
will pay for. If the Company should at any time or from time to time hereafter
issue any shares of Common Stock in connection with a stock split or a
recapitalization or as a dividend, then forth with upon such issue MEYERSON's
shares shall also be adjusted.
We will receive a non-accountable expense allowance of $3,500.00 upon the
signing of this agreement for due diligence and general corporate expenses.
MEYERSON shall be entitled to additional commissions arising out of any
transactions that are proposed or executed by us during the term of this
Agreement and to the extent that they are normal and ordinary for such
transactions. In addition, MEYERSON will be reimbursed for any reasonable out of
pocket expenses that it may incur in connection with its services on behalf of
the Company that is approved in advance by its Chief Financial Officer.
C-SQUARE agrees to indemnify and hold MEYERSON and its associates harmless from
and against all losses, claims, damages, liabilities, costs or expenses arising
out of MEYERSON entering into or performing services under this Agreement.
This Agreement shall be construed and enforced according to the laws of the
State of New Jersey and shall be binding upon each of the parties hereto and
their respective successors, assigns and designees; provided, however, that no
party hereto shall assign its rights or delegate its duties hereunder without
the prior written consent of the other party.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
M.H. MEYERSON & CO., INC. C-SQUARE VENTURES, INC.
s/Michael Silvestri s/Carl H. Canter
Michael Silvestri Carl H. Canter
President President
8/20/96
EXHIBIT 21
Subsidiaries of the Registrant
Subsidiary Jurisdiction of Incorporation
---------- -----------------------------
ConSyGen, Inc. Arizona
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 5-MOS 12-MOS
<FISCAL-YEAR-END> MAY-31-1997 DEC-31-1994
<PERIOD-START> JAN-01-1997 JAN-01-1994
<PERIOD-END> MAY-31-1997 DEC-31-1994
<CASH> 21,483 13,866
<SECURITIES> 0 0
<RECEIVABLES> 0 37,257
<ALLOWANCES> 0 15,910
<INVENTORY> 0 0
<CURRENT-ASSETS> 73,044 46,715
<PP&E> 184,094 83,942
<DEPRECIATION> 112,063 73,858
<TOTAL-ASSETS> 210,779 63,588
<CURRENT-LIABILITIES> 930,287 842,252
<BONDS> 0 0
0 0
0 0
<COMMON> 41,389 60,000
<OTHER-SE> (1,760,897)<F1> (838,664)<F1>
<TOTAL-LIABILITY-AND-EQUITY> 210,779 63,588
<SALES> 20,000 790,466
<TOTAL-REVENUES> 20,000 790,466
<CGS> 0 213,068
<TOTAL-COSTS> 0 213,068
<OTHER-EXPENSES> 1,211,502 576,981
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 56,348 59,788
<INCOME-PRETAX> (1,647,754) (655,138)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,647,754) (655,138)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,647,754) (655,138)
<EPS-PRIMARY> (.12) (.11)
<EPS-DILUTED> 0 0
<FN>
<F1> Accumulated deficit net of additional paid in capital.
</FN>
</TABLE>
