SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) September 5, 1996
CONSYGEN, INC.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Exact Name of Registrant as Specified in Its Charter)
Texas 0-17598 76-0260145
. . . . . . . . . . . . . . . . . . . . . . . . . . .
(State or Other (Commission (I.R.S. Employer
Jurisdiction File Number) Identification No.)
of Incorporation)
10201 S. 51st Street, Suite 140, Phoenix, AZ 85044
. . . . . . . . . . . . . . . . . . . . . . . . . . .
(Address of Principal Executive Offices) (Zip Code)
(602) 496-4545
Registrant's telephone number, including area code . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
(Former Name or Former Address, If Changed Since Last Report)
ITEM 5. OTHER EVENTS
The following are the audited consolidated financial statements of the
Registrant and its wholly-owned subsidiary for the 12 month periods ended
December 31, 1996 and December 31, 1995.
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 December 31, 1996 and 1995, and the
related consolidated statements of operations, changes in stockholders' deficit,
and cash flows for each of the three years in the period ended December 31,
1996. 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 December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, 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 10 and 11.
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
April 18, 1997
CONSYGEN, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
------
December 31,
-------------------------
1996 1995
-------- --------
<S> <C> <C>
Current Assets:
Cash $ 83,204 $ 3,419
Accounts Receivable - 1,876
Debt Issuance Expense (Net of Accumulated
Amortization of $139,000 in 1996 and $40,000 in 1995) 50,000 100,000
Prepaid Expenses 10,976 -
-------- --------
Total Current Assets 144,180 105,295
Furniture and Equipment (Net of Accumulated
Depreciation of $102,583 in 1996 and $84,352 in 1995) 72,513 60,517
Other Assets 5,283 6,789
-------- --------
Total Assets $ 221,976 $ 172,601
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current Liabilities:
Notes Payable $ 343,507 $ 225,311
Loans Payable 160,000 88,000
Loans Payable - Related Parties 143,877 870,010
Accounts Payable 97,199 117,201
Accrued Liabilities 219,801 256,738
Deferred Revenues - 7,386
-------- --------
Total Current Liabilities 964,384 1,564,646
-------- --------
Commitments and Contingencies
Stockholders' Deficit:
Common Stock, $.003 Par Value, 500,000,000 Shares
Authorized, Issued and Outstanding 13,686,231 Shares
in 1996 and 6,699,994 Shares in 1995 41,059 20,100
Additional Paid-In Capital 16,438,365 9,188,619
Accumulated Deficit (17,221,832) (10,600,764)
----------- ----------
Total Stockholders' Deficit (742,408) (1,392,045)
----------- ----------
Total Liabilities and Stockholders' Deficit $ 221,976 $ 172,601
=========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
CONSYGEN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For The Year Ended
----------------------------------------------------
December 31,
----------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues $ 43,552 $ 328,546 $ 790,466
-------------- -------------- --------------
Costs and Expenses:
Cost of Sales - 199,561 213,068
Software Development 740,000 492,399 587,552
General and Administrative Expenses 5,767,410 644,204 585,196
Interest Expense 157,210 112,779 59,788
-------------- -------------- --------------
Total Costs and Expenses 6,664,620 1,448,943 1,445,604
-------------- -------------- --------------
Net Loss $ (6,621,068) $ (1,120,397) $ (655,138)
============== ============== ==============
Weighted Average Common Shares Outstanding 9,438,062 6,116,661 595,832
============== ============== ==============
Net Loss Per Common Share $ (.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 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Additional Total
---------- -----
Common Stock 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 YEARS ENDED DECEMBER 31, 1996 ,1995 AND 1994
(Continued)
<TABLE>
<CAPTION>
Additional Total
---------- -----
Common Stock 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)
========== ======== =========== ============ ===========
</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 Year Ended
----------------------------------------------------
December 31,
----------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Loss $ (6,621,068) $ (1,120,397) $ (655,138)
Adjustments to Reconcile Net Loss to Net Cash
Provided (Used) by Operating Activities:
Depreciation 18,231 10,494 8,215
Stock Issuance for Services 5,167,961 300,000 500,000
Change in Allowance for Doubtful Accounts - (15,910) -
Loss on Abandonment - - 29,016
Amortization of Debt Issuance Expense 99,000 40,000 -
Loan Interest - Additional Paid-In Capital 90,802 67,016 21,493
Changes in Operating Assets and Liabilities:
Accounts Receivable 1,876 35,381 149,164
Other Assets (9,470) 11,502 2,497
Accounts Payable (26,802) 13,603 9,934
Accrued Liabilities 43,905 90,658 83,357
Deferred Revenues (7,386) (1,215) 8,601
-------------- -------------- --------------
Net Cash Provided (Used) by Operating Activities (1,242,951) (568,868) 157,139
-------------- -------------- --------------
Cash Flows From Investing Activities:
Purchases of Furniture and Equipment (30,227) (60,927) (9,594)
-------------- -------------- --------------
Net Cash (Used) by Investing Activities (30,227) (60,927) (9,594)
-------------- -------------- --------------
Cash Flows From Financing Activities:
Proceeds of Debt Financing 1,123,700 - -
Proceeds of Loans and Notes Payable 305,396 212,492 50,000
Payments of Loans and Notes Payable (50,000) (3,200) (8,700)
Proceeds of Loans Payable - Related Parties 11,271 433,407 324,802
Payments of Loans Payable - Related Parties (37,404) (23,351) (587,175)
Repayment of Loans Receivable - Related Parties - - 86,167
-------------- -------------- --------------
Net Cash Provided (Used) by Financing Activities 1,352,963 619,348 (134,906)
-------------- -------------- --------------
Net Increase (Decrease) in Cash 79,785 (10,447) 12,639
Cash - Beginning of Year 3,419 13,866 1,227
-------------- -------------- --------------
Cash - End of Year $ 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 Year Ended
----------------------------------------------------
December 31,
----------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Supplemental Cash Flow Information:
Cash Paid for Interest $ 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
DECEMBER 31, 1996
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
("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. The exchange resulted in
ConSyGen-Arizona's stockholders holding a larger portion of voting rights of
ConSyGen-Texas than was held by the 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 9). 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
9). 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 acquiror 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 Subsidiary Business
----------------------------------
ConSyGen-Arizona was incorporated in Arizona on October 11, 1979.
It is currently engaged in the business of rendering automated software
conversion services, including "year 2000" conversions in the United States and
abroad. Prior to 1996, ConSyGen-Arizona licensed its proprietary computer
software used in the hotel and airline industries, and provided software
maintenance services. During 1989, management formalized plans to focus its
efforts on automated conversion services. In 1996 ConSyGen-Arizona discontinued
its practice of software licensing and providing maintenance services.
ConSyGen-Arizona's future operations are dependent, in part, upon its ability to
protect and further develop its proprietary software conversion technology.
ConSyGen-Arizona operates in an industry where its competitors have greater
capital resources to devote to the development and marketability of their
technologies. ConSyGen-Arizona believes that its proprietary software provides
fully automated conversion solutions including year 2000 conversion services.
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
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 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 this regard include forming
strategic alliances with computer hardware and consulting firms to perform data
conversions and "year 2000" conversions using the Company's proprietary
technological processes (see Note 10). In addition, in March 1997 the Company
raised $1 million in convertible debt financing (see Note 11), and the Company
intends to raise additional funds. However, the success of these planned
measures cannot be determined at this time. Continuation of the Company is
dependent on (1) achieving sufficiently profitable operations and (2) obtaining
adequate financing. 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.
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, Inc., an Arizona
corporation ("ConSyGen-Arizona"). Significant intercompany accounts and
transactions have been eliminated.
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.
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
related to insignificant obligations is deferred and recognized as the
obligations are fulfilled. Revenue from software license fees related to the
Company's obligation to provide certain post-contract customer support without
charge for the first year of the license is unbundled from the license fee at
its fair value and is deferred and recognized straight -line over the contract
support period. Revenue from annual or other renewals of maintenance contracts
(including long-term contracts) is 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.
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 2 - Summary of Significant Accounting Policies (Continued)
------------------------------------------
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.
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.
Product Development
-------------------
Under the criteria set forth in Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed", capitalization of software development costs
begins upon the establishment of technological feasibility of the product. The
establishment of technological feasibility and the ongoing assessment of the
recoverability of these costs require considerable judgment by management with
respect to certain external factors, including, but not limited to, anticipated
future gross product revenues, estimated economic product lives and changes in
software and hardware technology. Amounts related to internal software
development that could be capitalized under this statement were immaterial.
Employee Stock Plans
--------------------
The Company accounts for its stock option and employee stock
purchase 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 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 an
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.
Earnings Per Share
------------------
The computation of earnings per share is based on the weighted
average number of outstanding common shares as adjusted for the 1 for 40 reverse
split. Stock issued by ConSyGen-Arizona was converted to the Company equivalent
shares using the exchange ratio of 1 for 1 as though the Company has issued the
shares at the beginning of the periods. Common stock equivalents have not been
included in this calculation since their inclusion would be antidilutive.
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
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 8).
NOTE 4 - Notes Payable
-------------
Notes payable consist of the following:
December 31,
-------------------------
1996 1995
-------- --------
Note payable, bearing Interest
at 24% per annum, no stated
maturity, and unsecured. As
additional consideration to
the lender for making the
loan, the Company granted the
lender an option to purchase
100,000 shares of the
Company's common stock at
$1.00 per share. $ - $ 50,000
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 issued
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 issued 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
Notes payable, bearing
interest at 10% per annum, due
on demand and unsecured. 23,317 22,311
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 4 - Notes Payable (Continued)
-------------
Notes payable consist of the following:
December 31,
-------------------------
1996 1995
-------- --------
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 -
Note payable, with interest
imputed at 10% per annum, and
unsecured. 23,190 -
Note payable, with interest
imputed at 10% per annum and
unsecured. 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 -
--------- ---------
$ 343,507 $ 225,311
========= =========
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 5 - Loans Payable
-------------
Loans payable consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
-------- --------
<S> <C> <C>
Loan payable, with interest imputed at 10% per
annum, due on demand and unsecured. $ 52,000 $ 30,000
Loan payable to consultant, non-interest
bearing, due on demand and unsecured
(see Note 10). - 50,000
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 -
--------- ---------
$ 160,000 $ 88,000
========= =========
</TABLE>
NOTE 6 - Commitments and Contingencies
-----------------------------
Leases
------
The Company's corporate offices are leased under a noncancelable
operating lease, which expires in 1998. Rental expense aggregated $61,434,
$49,884 and $48,144 in 1996, 1995 and 1994, respectively. Future minimum rental
payments are as follows:
Year Ending
December 31,
-------------
1997 $ 55,496
1998 48,630
----------
$ 104,126
==========
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 6 - Commitments and Contingencies (Continued)
-----------------------------
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.
Regulatory Agency Filings
-------------------------
The Company is delinquent with respect to certain filings it is
required to make with the Securities and Exchange Commission ("SEC") pursuant to
the provisions of the Securities Exchange Act of 1934 ("the 1934 Act"). It is
not possible to make a determination as to the consequences of failing to timely
file with the SEC under the 1934 Act. The Company is currently in the process of
remedying these delinquencies.
NOTE 7 - 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. In 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. As of December 31, 1996, the Company had a net operating loss
carryforward (NOLC) for federal and state income tax purposes of approximately
$15,600,000, which begins to expire in 1997.
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 based on a long-term tax
exempt rate.
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 and other
tax assets. The following table sets forth the components of deferred taxes at
December 31, 1996:
Accrued Liabilities and Other $ 10,000
Net Operating Loss Carryforwards 5,880,000
Valuation Reserve (5,890,000)
------------
$ -0-
============
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 8 - 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 December 31, 1996 and 1995, such shareholder and
relatives had outstanding advances of $143,877 and $870,010 (see Notes 3 and 9).
NOTE 9 - 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 issued to a consultant. 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 such shares, which
is included in general and administrative expenses. The remaining $50,000 has
been capitalized as debt issuance expense.
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:
Year Ended
------------------
December 31,
------------------
1996 1995 1994
---------- ---------- ----------
Significant Stockholder $ 72,179 $ 65,516 $ 21,493
Others 18,623 1,500 -
---------- ---------- ----------
$ 90,802 $ 67,016 $ 21,493
========== ========== ==========
In October 1995, ConSyGen-Arizona's Board of Directors approved the
Non-Qualified Stock Option Plan (the "Plan"), which covers 1,275,000 shares of
ConSyGen-Arizona's common stock. Under the terms of the 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 Plan. The Plan and all options outstanding thereunder were
terminated effective as of September 5, 1996, the closing of the ConSyGen-Texas
acquisition. A new non-qualified stock option plan covering 1,500,000 shares was
simultaneously adopted by ConSyGen-Texas. At December 31, 1996, options to
purchase an aggregate of 1,500,000 shares were outstanding under the new Plan.
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 9 - Stockholders' Deficit (Continued)
---------------------
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.
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.
Debt Financings
---------------
During 1996 ConSyGen-Arizona entered into an agreement with a
consultant under which the consultant agreed to assist ConSyGen-Arizona in
obtaining financing. 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 become exercisable one year from the date of the loan, have a term of
two years and are callable upon 60 days notice. In connection with
ConSyGen-Texas's 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. ConSyGen-Arizona issued 100,000 shares of its common stock to the
consultant as a retainer for services to be rendered. Such shares were valued at
$.50 per share and have been capitalized as debt issuance expense. Such
consultant had loaned the Company $84,000 at December 31, 1996. This $84,000
loan was repaid by the Company in March 1997.
Following the loan transaction, 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. On September 5, 1996, 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.
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 9 - 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. The exchange resulted in
ConSyGen-Arizona's shareholders holding a larger portion of the voting rights of
ConSyGen-Texas than was held by the 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 acquiror and
ConSyGen-Texas being the acquired company. Subsequent to the acquisition,
ConSyGen-Texas changed its legal name to ConSyGen, Inc.
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 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 change of $4,000,000 for the issuance of such
shares, which is included in general and administrative expenses.
NOTE 10 - Strategic Alliances
-------------------
The Company's sales and marketing strategy is to enter into
alliances with system integrators that provide computer related services to
end-users. In general, under these arrangements, the systems integrator will
contract with the Company to provide conversion services, including Year 200
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 11 - Subsequent Events
-----------------
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 are 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 preceeding 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. ConSyGen-Texas is obligated to
pay certain penalties if the underlying share are not registered under the
Securities Act of 1933 within 90 days of the date of Closing. 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
DECEMBER 31, 1996
NOTE 11 - Subsequent Events (Continued)
-----------------
In March 1997 the Company granted options to an 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 after 10 years from the date of grant. At
the date of grant, options to purchase 100,000 shares vested immediately and the
remaining balance vests in equal monthly installments commencing one year from
the date of grant.
ITEM 7. EXHIBITS
(a) Financial Statements of Business Acquired.
(b) Exhibits.
Exhibit No. Description of Exhibit
27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ConSyGen, Inc.
--------------------------------
(Registrant)
Date: June 2, 1997 /s/Ronald I. Bishop
-------------------
Ronald I. Bishop
(President)
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
27 Financial Data Schedule
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