UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarterly period ended August 31, 1998
Commission File Number: 17598
CONSYGEN, INC.
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(Exact name of Registrant as specified in its charter)
Texas 76-0260145
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 South 52nd Street, Tempe, Arizona 85281
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(Address of principal executive offices) (Zip Code)
(602) 394-9100
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(Registrant's telephone number, including area code)
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) Yes (X) No ( ) and (2) has been
subject to such filing requirements for the past 90 days. Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
15,342,064 shares of Common Stock, $.003 par value, as of October 12, 1998.
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CONSYGEN, INC.
INDEX
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements.
Consolidated Balance Sheets,
August 31, 1998 and May 31, 1998 2
Consolidated Statements of Operations - Three
Months Ended August 31, 1998 and August 31, 1997 3
Consolidated Statements of Cash Flows - Three
Months Ended August 31, 1998 and August 31, 1997 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II OTHER INFORMATION
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K. 10
SIGNATURES 11
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED IN THIS REPORT AND IN DOCUMENTS
INCORPORATED BY REFERENCE HEREIN CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURIRIES EXCHANGE ACT OF 1934. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED
HEREIN OR INCORPORATED BY REFERENCE HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL
FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE
FOREGOING, THE WORDS "BELIEVES," "PLANS," "ANTICIPATES," "EXPECTS," "ESTIMATES,"
AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS ON WHICH SUCH FORWARD-LOOKING
STATEMENTS ARE BASED ARE REASONABLE, THERE CAN BE NO ASSURANCE THAT SUCH
ASSUMPTIONS WILL PROVE TO BE ACCURATE, AND ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT
MAY CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE SET FORTH UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS REPORT.
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PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSYGEN, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
August 31, May 31,
1998 1998
---- ----
Current Assets:
Cash and Cash Equivalents $ 3,858,058 $ 4,991,434
Accounts Receivable 272,450 338,192
Debt Issuance Expense Net 62,601 62,601
Prepaid Expenses 43,102 40,000
Other Current Assets 9,635 7,135
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Total Current Assets 4,245,846 5,439,362
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Property and Equipment Net 1,249,648 1,207,842
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Other Assets:
Debt Issuance Expense Net of Current Portion 237,793 250,402
Other Assets 5,795 6,496
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Total Other Assets 243,588 256,898
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Total Assets $ 5,739,082 $ 6,904,102
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts Payable $ 74,768 $ 134,157
Notes Payable 60,000 60,000
Accrued Liabilities 221,198 205,840
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Total Current Liabilities 355,966 399,997
LongTerm Debt 3,500,000 3,500,000
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Total Liabilities 3,855,966 3,899,997
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Commitments & Contingencies
Stockholders' Equity :
Common Stock, $.003 par Value, Authorized
40,000,000 Shares, Issued 15,412,064 Shares
at August 31, 1998 and 15,407,653 Shares
at May 31, 1998 46,236 46,223
Additional Paidin Capital 25,311,680 25,306,532
Accumulated Deficit (23,074,800) (21,948,650)
Treasury Stock, at cost ( 70,000 shares) (400,000) (400,000)
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Total Stockholders' Equity 1,883,116 3,004,105
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Total Liabilities and Stockholders' Equity $ 5,739,082 $ 6,904,102
============ ============
The accompanying notes are an integral part of the financial statements.
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CONSYGEN, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For The Three Months
Ended August 31,
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1998 1997
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Revenues $ 147,964 $ --
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Costs and Expenses:
Cost of Conversion Services 226,090 --
Software Development 193,801 284,045
Selling, General and Administrative 809,927 333,813
Expenses
Interest Expense 54,000 110,664
Depreciation and Amortization 43,650 21,403
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Total Costs and Expenses 1,327,468 749,925
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Loss from Operations (1,179,504) (749,925)
Interest Income 53,354 5,915
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Net Loss $ (1,126,150) $ (744,010)
============ ============
Weighted Average Common Shares Outstanding 15,341,093 13,919,831
Net Loss per Commion Share $ (0.07) $ (0.05)
============ ============
The accompanying notes are an integral part of the financial statements.
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CONSYGEN, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Three Months Ended
August 31,
--------------------------
1998 1997
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Cash Flows from Operating Activities:
Net Loss $(1,126,150) $ (744,010)
Adjustments to Reconcile Net Loss to
Net Cash (Used) by Operating Activities:
Depreciation 28,000 13,070
Amortization of Debt Issuance Expense 15,650 8,333
Loan Interest - Additional Paidin Capital -- 8,607
Changes in Operating Assets and Liabilities:
Accounts Receivable 65,742 --
Prepaid Expenses and Other Assets (7,942) 7,800
Accounts Payable (59,389) 52,243
Accrued Liabilities 15,358 (88,094)
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Net Cash (Used) by Operating Activities (1,068,731) (742,051)
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Cash Flows from Investing Activities:
Purchases of Furniture and Equipment (69,806) (232,656)
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Net Cash (Used) by Investing Activities (69,806) (232,656)
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Cash Flows from Financing Activities:
Proceeds from Sale of Common Stock 5,161 1,080,000
Commissions on Sale of Common Stock -- (75,600)
Payments of Loans and Notes Payable -- (23,190)
Proceeds of Loans payable -- Related Parties -- 23,190
Payments of Loans payable -- Related Parties -- (92)
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Net Cash Provided by Financing Activities 5,161 1,004,308
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Net Increase in Cash and Cash Equivalents (1,133,376) 29,601
Cash and Cash Equivalents -- Beginning of Period 4,991,434 21,483
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Cash and Cash Equivalents -- End of Period $ 3,858,058 $ 51,084
=========== ===========
Supplemental Cash Flow Information:
Cash Paid for Interest $ -- $ 95,000
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NonCash Financing and Investing Activities:
Issuance of Common Stock as Commissions
on Sale of Common Stock $ -- $ 21,600
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Common Stock Subscibed- Net of Finder's Fees $ -- $ 504,000
=========== ===========
The accompanying notes are an integral part of the financial statements.
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CONSYGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1998
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of ConSyGen,
Inc., a Texas corporation ("ConSyGen-Texas") and its wholly-owned subsidiary,
ConSyGen, Inc., an Arizona corporation ("ConSyGen-Arizona"). Significant
intercompany accounts and transactions have been eliminated.
ConSyGen-Texas and its wholly-owned subsidiary ConSyGen-Arizona are
hereafter collectively referred to as the "Company."
In the opinion of the Company, the accompanying unaudited consolidated
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the results of operations and
cash flows for the periods presented.
Results of operations for interim periods are not necessarily
indicative of the results of operations for a full year due to external factors
that are beyond the control of the Company.
NOTE 2 - STOCKHOLDERS' EQUITY (DEFICIT)
STOCK OPTIONS
During June 1998, the Company granted to certain officers options to
purchase an aggregate of 210,000 shares of Common Stock pursuant to the
Company's 1997 Amended and Restated Non-Qualified Stock Option Plan. The options
had a term of 10 years, exercise prices of 2.875 per share, and were exercisable
as follows: 25% were immediately exercisable and the remaining 75% became
exercisable in 24 equal monthly installments commencing one month from the date
of grant.
During June 1998, the Company granted to certain directors options to
purchase an aggregate of 20,000 shares of Common Stock pursuant to the Company's
1997 Amended and Restated Non-Qualified Stock Option Plan. The options had a
term of 10 years, exercise prices of 2.875 per share, and were exercisable as
follows: 50% were immediately exercisable and the remaining 50% became
exercisable in 12 equal monthly installments commencing one month from the date
of grant.
Mr. Ronald I. Bishop resigned as president, chief executive officer and
a member of the board of directors of ConSyGen-Texas and ConSyGen-Arizona on
June 30, 1998. He received $75,000 in severance compensation, and the exercise
period of his vested options to purchase 669,205 shares was extended from three
months to three years.
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NOTE 2 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Mr. Thomas S. Dreaper joined the Company as president and chief
executive officer effective July 17, 1998. In connection with his employment,
the Company agreed to grant to Mr. Dreaper an option to purchase 1,000,000
shares of the Company's common stock at $2.8125 per share and on terms which
provide for vesting to the extent of 500,000 shares if and when the Company's
stock price closes at $5.00, and to the extent of the remaining 500,000 shares
if and when the Company's stock price closes at $10.00. Subject to the foregoing
provisions, Mr. Dreaper's options are to be exercisable at any time prior to
July 18, 2008.
Mr. Jeffery Richards resigned as vice president and director of sales
and marketing-international effective July 20, 1998. He received $19,750 in
severance compensation, and the exercise period of his vested options to
purchase 125,000 shares was extended from three months to one year.
NOTE 3 - NET LOSS PER SHARE
The computation of diluted net loss per share is not presented because
conversion, exercise or contingent issuance of securities that would have an
antidilutive effect on earnings per share.
NOTE 4 - SUBSEQUENT EVENTS
ORGANIZATION
Mr. J. Stephen Kelly resigned as executive vice president, chief
administrative officer, secretary of the Corporation and member of the board of
directors of ConSyGen-Texas and ConSyGen-Arizona on October 5, 1998. Severance
arrangements are being negotiated.
WARRANTS
On September 28, 1998, the Company issued notices of redemption to
holders of outstanding warrants to purchase an aggregate of 400,000 shares
having an exercise price of $5.00 per share. The redemption price is $.003 per
share, the par value of the Company's common stock, and is scheduled to take
place on November 28, 1998, subject to the rights of the holders of the Warrants
to exercise them prior to such date.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto
appearing elsewhere in the Report. The Company and its wholly-owned subsidiary,
ConSyGen-Arizona, are herein collectively referred to as the "Company."
MATERIAL CHANGES IN RESULTS OF OPERATIONS
NET LOSSES. For the quarter ended August 31, 1998, the Company incurred
net losses of $1,126,000, compared with net losses of $744,000 for the
comparable prior quarter, an increase of $382,000. An explanation of these
losses is set forth below.
REVENUES. For the quarter ended August 31, 1998, the Company had
operating revenue of $148,000, compared with no operating revenue for the
comparable prior periods. The increase in revenue was related to several
completed and in process conversion service contracts.
COST OF CONVERSION SERVICES. Cost of conversion services consists
primarily of personnel costs directly related to the performance of conversion
services by the Company. Before the commencement of revenue generating
operations, the personnel currently dedicated to the provision of conversion
services were dedicated to software development, and, accordingly, the costs
directly related to such personnel were previously included in software
development expense. For the quarter ended August 31, 1998, cost of conversion
services were $226,000, compared with no expense for the comparable prior
periods. The increase in cost of conversion services is primarily attributable
to the redeployment of personnel, from software development to the provision of
conversion services, as noted above, and the hiring of additional personnel. The
cost of conversion as a percentage of sales is high due to unabsorbed costs
attributable to low sales volume
SOFTWARE DEVELOPMENT EXPENSES. For the quarter ended August 31, 1998,
software development expenses were $194,000, compared with $284,000 for the
quarter ended August 31, 1997, a decrease of approximately $90,000. The decrease
in software development expenses is primarily attributable to the transfer of
certain personnel, from software development to the production department.
GENERAL AND ADMINISTRATIVE EXPENSES. For the quarter ended August 31,
1998, general and administrative expenses were $810,000, compared with $334,000
for the quarter ended August 31, 1997, an increase of approximately $476,000.
The increase in general and administrative expenses is primarily attributable to
the increase in payroll expenses of $280,000, advertising expenses of $36,000
and all other expenses of $161,000 which include expenses associated with the
Company's status as a public company.
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INTEREST EXPENSE. For the quarter ended August 31, 1998, interest
expense was $54,000, compared with $111,000 for the comparable prior period. The
current quarter interest expense is primarily composed of interest accrual on
$3,5000,000 principal amount of the Company's 6% Convertible Debentures.
DEPRECIATION EXPENSE. For the quarter ended August 31, 1998,
depreciation expense was approximately $28,000, compared with $13,000 for the
comparable prior period. The increase is primarily due to purchases of
computers, furniture and building.
AMORTIZATION EXPENSE. For the quarter ended August 31, 1998,
amortization expense was $16,000, compared with $8,000 for the quarter ended
August 31, 1997, an increase of $8,000. The increase in debt issuance expenses
is primarily attributable to the amortization of debt issuance expense
associated with the Company's 6% Convertible Debentures.
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of August 31, 1998, the Company had $3,858,000 in cash and cash
equivalents, compared with approximately $4,991,000 at May 31, 1998. The Company
had working capital of approximately $3,900,000 at August 31, 1998, compared
with a working capital of approximately $5,000,000 at May 31, 1998, a decrease
in working capital of approximately $1,100,000. The decrease in working capital
is primarily attributable to the net loss for the period of $1,100,000. The
Company had long-term debt of $3,500,000 at August 31, 1998 and at May 31, 1998.
The Company continues to incur significant losses. During the quarter
ended August 31, 1998, the Company's operations used approximately $1.1 million
in cash, an average of approximately $366,000 per month. The Company's cash
expenditures are increasing, primarily due to increases in sales and marketing
personnel. If the Company continues to incur significant losses, the Company's
liquidity could be materially and adversely affected. The Company does not
currently have any established bank credit facility, and there can be no
assurance that the Company will be able to obtain the additional capital in the
form of debt or equity financing necessary to continue its operations beyond
approximately March 31 of 1999 if no significant sales are realized.
The Company continues to hire additional sales and marketing personnel.
In the second fiscal quarter, the Company hired an additional 24 people for
sales and marketing in various regions of the U.S. In the short term, the
personnel costs associated with the increased sales efforts may adversely affect
operations and liquidity. There is no certainty that the increased sales efforts
will result in increased revenue in the longer term.
The Company expects to spend approximately $50,000 out of its available
cash for computer equipment during second fiscal quarter.
8
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IMPACT OF INFLATION
Increases in the inflation rate are not expected to effect 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 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 for large contracts.
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PART II --- OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
On August 27, 1998, the Company received a written inquiry from the
National Association of Securities Dealers ("NASD") requesting certain
information concerning the Company in connection with a review of the Company's
public filings. Among other matters, the NASD requested information regarding
the Company's financial condition and the private placement, on May 29, 1998, of
its 6% Convertible Debentures. The Company responded to the inquiry in writing
on September 17, 1998. The NASD has not, to date, responded to the Company's
response to its inquiry. The outcome of the NASD review may be the delisting of
the Company's common stock from the Nasdaq SmallCap Market, which could have a
material adverse effect upon the Company and the price of, and trading market
for, the Company's common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The list of Exhibits which are filed with this report or incorporated
by reference herein is set forth in the Exhibit Index that appears following the
signature page, which Exhibit Index is incorporated herein by this reference.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended August 31, 1998.
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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 thereunto duly authorized.
CONSYGEN, INC.
Date: October 14, 1998 By: /s/ Thomas s. Dreaper
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Thomas S. Dreaper, President
And Chief Executive Officer
(Principal Executive Officer)
Date: October 14, 1998 By: /s/ Rajesh K. Kapur
---------------- --------------------------------
Rajesh K. Kapur, Vice President
and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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EXHIBIT INDEX
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 Amended and Restated By-Laws of the Registrant. (4)
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.
4.3 Subscription Agreement used in connection with the Rule 506 sale of
Convertible Debentures in the aggregate principal amount of $3,500,000
(including form of Convertible Debenture, form of Warrant, and form of
Registration Rights Agreement, attached as Exhibits A, B and D,
respectively, to the Subscription Agreement). (6)
4.4 Form of Common Stock Purchase Warrant to purchase an aggregate of 10,000
shares issued in partial payment of finders' fees in connection with
sale of Convertible Debentures in aggregate principal amount of
$3,500,000. (6)
4.5 Form of Subscription Agreement used in connection with Rule 506 sale of
120,000 shares for gross proceeds of $1,080,000. (1)
4.6 Form of Subscription Agreement used in connection with Rule 506 sale of
152,000 shares for gross proceeds of $882,500. (1)
4.7 Form of Common Stock Purchase Warrant to purchase 200,000 shares issued
to consultant, Howard R, Baer, on August 1, 1997. (1)
4.8 Form of Common Stock Purchase Warrant to purchase 100,000 shares issued
to Howard R, Baer's designee, Kevin C. Baer, on August 1, 1997. (1)
4.9 Subscription Agreement used in connection with Rule 506 sale of 900,000
shares for gross proceeds of $5,276,250. (3)
4.10 Form of Subscription Agreement used in connection with issuance of
30,747 shares in payment of indebtedness in the aggregate amount of
$250,575. (3)
4.11 Common Stock Purchase Warrant to purchase 100,000 shares issued to a
consultant's designee, Irvington International Limited, as of November
10, 1997. (3)
4.12 Agreement dated as of July 17, 1998 between the Registrant and Tom S.
Dreaper relating to employment and grant of options to purchase
1,000,000 shares of common stock of the Registrant. (6)
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10.7 Registrant's 1996 Non-Qualified Stock Option Plan. (2)
10.8 Registrant's Second Amended and Restated 1997 Non-Qualified Stock Option
Plan. *
10.9 Consulting Agreement between the Registrant and M.H. Meyerson & Co.,
Inc. dated August 19, 1996. (5)
10.10 Form of Indemnification Contract between the Registrant and each
executive officer and director of the Registrant. (3)
10.11 Agreement between the Registrant and Carriage House Capital, Inc.,
effective as of September 1, 1997, terminating all existing agreements
between the Registrant and Carriage House Capital, Inc., and its
affiliates. (3)
27 Financial Data Schedule. *
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(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 reference.
(2) 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, 1996, and
incorporated herein by reference.
(3) Filed as an Exhibit, with the same Exhibit number, to the Registrant's
Registration Statement on Form S-1, File No. 333-40649, and incorporated
herein by reference.
(4) Filed as an Exhibit, with the same Exhibit number, to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended February 28, 1998,
and incorporated herein by reference.
(5) Filed as Exhibit No. 10.10 to the Registrant's Annual Report on Form
10-K for the year ended May 31, 1997, and incorporated herein by
reference.
(6) Filed as an Exhibit, with the same Exhibit number, to the Registrant's
Annual Report on Form 10-K for the year ended May 29, 1998, and
incorporated herein by reference.
* Filed herewith
EXHIBIT 10.8
CONSYGEN, INC.
SECOND AMENDED AND RESTATED
1997 NON-QUALIFIED STOCK OPTION PLAN
SECTION I. PURPOSE OF THE PLAN.
The purposes of this ConSyGen, Inc. Second Amended and Restated 1997
Non-Qualified Stock Option Plan (the "1997 Plan") are (i) to provide long-term
incentives and rewards to those key employees (the "Employee Participants") of
ConSyGen, Inc., a Texas corporation (the "Corporation") and its subsidiaries (if
any), and any other persons (the "Non-employee Participants") who are in a
position to contribute to the long-term success and growth of the Corporation
and its subsidiaries, (ii) to assist the Corporation in retaining and attracting
executives and key employees with requisite experience and ability, and (iii) to
associate more closely the interests of such executives and key employees with
those of the Corporation's stockholders.
SECTION II. DEFINITIONS.
"COMMON STOCK" is the $.003 par value common stock of the
Corporation.
"COMMITTEE" is defined in Section III, paragraph (a).
"CORPORATION" is defined in Section I.
"EMPLOYEE PARTICIPANTS" is defined in Section I.
"FAIR MARKET VALUE" of any property is the value of the property
as reasonably determined by the Committee.
"1997 PLAN" is defined in Section I.
"NON-EMPLOYEE PARTICIPANTS" is defined in Section I.
"NON-QUALIFIED OPTION" is a Stock Option which does not qualify as an
Incentive Stock Option or for which the Committee provides, in the terms
of such option and at the time such option is granted, that the option
shall not be treated as an Incentive Stock Option.
"PARENT CORPORATION" has the meaning provided in Section 424(e) of
the Code.
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"PARTICIPANTS" are all persons who are either Employee Participants
or Non-employee Participants.
"PERMANENT AND TOTAL DISABILITY" has the meaning provided in Section
22(e)(3) of the Code.
"RULE 16b-3" means Securities and Exchange Commission Rule 16b-3.
"SECTION 16" means Section 16 of the Securities Exchange Act of 1934,
as amended, or any similar or successor statute, and any rules,
regulations, or policies adopted or applied thereunder.
"STOCK OPTIONS" are rights granted pursuant to this 1997 Plan to
purchase shares of Common Stock at a fixed price.
"SUBSIDIARY CORPORATION" has the meaning provided in Section 424(f)
of the Code.
SECTION III. ADMINISTRATION.
(a) THE COMMITTEE. This 1997 Plan shall be administered by the Board of
Directors or by a compensation committee consisting solely of two or more
"non-employee directors", as defined in Rule 16b-3, who shall be designated by
the Board of Directors of the Corporation (the administering body is hereafter
referred to as the "Committee"). The Committee shall serve at the pleasure of
the Board of Directors, which may from time to time, and in its sole discretion,
discharge any member, appoint additional new members in substitution for those
previously appointed and/or fill vacancies however caused. A majority of the
Committee shall constitute a quorum and the acts of a majority of the members
present at any meeting at which a quorum is present shall be deemed the action
of the Committee. No person shall be eligible to be a member of the Committee if
that person's membership would prevent the plan from complying with Section 16,
if applicable to the Corporation.
(b) AUTHORITY AND DISCRETION OF THE COMMITTEE. Subject to the express
provisions of this 1997 Plan and provided that all actions taken shall be
consistent with the purposes of this 1997 Plan, and subject to ratification by
the Board of Directors only if required by applicable law, the Committee shall
have full and complete authority and the sole discretion to: (i) determine those
persons who shall constitute key employees eligible to be Employee Participants;
(ii) select the Participants to whom Stock Options shall be granted under this
1997 Plan; (iii) determine the size and the form of the Stock Options, if any,
to be granted to any Participant; (iv) determine the time or times such Stock
Options shall be granted including the grant of Stock Options in connection with
other awards made, or compensation paid, to the Participant; (v) establish the
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terms and conditions upon which such Stock Options may be exercised and/or
transferred, including the exercise of Stock Options in connection with other
awards made, or compensation paid, to the Participant; (vi) make or alter any
restrictions and conditions upon such Stock Options and the Stock received on
exercise thereof, including, but not limited to, providing for limitations on
the Participant's right to keep any Stock received on termination of employment;
(vii) determine whether the Participant or the Corporation has achieved any
goals or otherwise satisfied any conditions or requirements that may be imposed
on or related to the exercise of Stock Options; and (viii) adopt such rules and
regulations, establish, define and/or interpret these and any other terms and
conditions, and make all determinations (which may be on a case-by-case basis)
deemed necessary or desirable for the administration of this 1997 Plan.
(c) APPLICABLE LAW. This 1997 Plan and all Stock Options shall be
governed by the law of the state in which the Corporation is incorporated.
SECTION IV. TERMS OF STOCK OPTIONS.
(a) AGREEMENTS. Stock Options shall be evidenced by a written agreement
between the Corporation and the Participant awarded the Stock Option. This
agreement shall be in such form, and contain such terms and conditions (not
inconsistent with this 1997 Plan) as the Committee may determine. The agreement
shall include the following or a similar statement: "This stock option is not
intended to be an Incentive Stock Option, as that term is described in Section
422 of the Internal Revenue Code of 1986, as amended."
(b) TERM. Stock Options shall be for such periods as may be determined
by the Committee.
(c) PURCHASE PRICE. The purchase price of shares purchased pursuant to
any Stock Option shall be determined by the Committee, and shall be paid by the
Participant or other person permitted to exercise the Stock Option in full upon
exercise, (i) in cash, (ii) by delivery of shares of Common Stock (valued at
their Fair Market Value on the date of such exercise), (iii) any other property
(valued at its Fair Market Value on the date of such exercise), or (iv) any
combination of cash, stock and other property, with any payment made pursuant to
subparagraphs (ii), (iii) or (iv) only as permitted by the Committee, in its
sole discretion. In no event will the purchase price of Common Stock be less
than the par value of the Common Stock.
(d) RESTRICTIONS. At the discretion of the Committee, the Common Stock
issued pursuant to the Stock Options granted hereunder may be subject to
restrictions on vesting or transferability. For the purposes of this limitation,
options shall be taken into account in the order granted.
-3-
<PAGE>
(e) WITHHOLDING OF TAXES. Pursuant to applicable federal, state, local
or foreign laws, the Corporation may be required to collect income or other
taxes upon the grant of a Stock Option to, or exercise of a Stock Option by, a
holder. The Corporation may require, as a condition to the exercise of a Stock
Option, or demand, at such other time as it may consider appropriate, that the
Participant pay the Corporation the amount of any taxes which the Corporation
may determine is required to be withheld or collected, and the Participant shall
comply with the requirement or demand of the Corporation. In its discretion, the
Corporation may withhold shares to be received upon exercise of a Stock Option
if it deems this an appropriate method for withholding or collecting taxes.
(f) SECURITIES LAW COMPLIANCE. Upon exercise (or partial exercise) of a
Stock Option, the Participant or other holder of the Stock Option shall make
such representations and furnish such information as may, in the opinion of
counsel for the Corporation, be appropriate to permit the Corporation to issue
or transfer Stock in compliance with the provisions of applicable federal or
state securities laws. The Corporation, in its discretion, may postpone the
issuance and delivery of Stock upon any exercise of this Option until completion
of such registration or other qualification of such shares under any federal or
state laws, or stock exchange listing, as the Corporation may consider
appropriate. Furthermore, the Corporation is not obligated to register or
qualify the shares of Common Stock to be issued upon exercise of a Stock Option
under federal or state securities laws (or to register or qualify them at any
time thereafter), and it may refuse to issue such shares if, in its sole
discretion, registration or exemption from registration is not practical or
available. The Corporation may require that prior to the issuance or transfer of
Stock upon exercise of a Stock Option, the Participant enter into a written
agreement to comply with any restrictions on subsequent disposition that the
Corporation deems necessary or advisable under any applicable federal and state
securities laws. Certificates of Stock issued hereunder shall bear a legend
reflecting such restrictions.
(g) RIGHT TO STOCK OPTION. No employee of the Corporation or any other
person shall have any claim or right to be a participant in this 1997 Plan or to
be granted a Stock Option hereunder. Neither this 1997 Plan nor any action taken
hereunder shall be construed as giving any person any right to be retained in
the employ of the Corporation. Nothing contained hereunder shall be construed as
giving any person any equity or interest of any kind in any assets of the
Corporation or creating a trust of any kind or a fiduciary relationship of any
kind between the Corporation and any such person. As to any claim for any unpaid
amounts under this 1997 Plan, any person having a claim for payments shall be an
unsecured creditor.
(h) INDEMNITY. Neither the Board of Directors nor the Committee, nor any
members of either, nor any employees of the Corporation or any parent,
subsidiary, or other affiliate, shall be liable for any act, omission,
interpretation, construction or determination made in good faith in connection
with their responsibilities with respect to this 1997 Plan, and the Corporation
-4-
<PAGE>
hereby agrees to indemnify the members of the Board of Directors, the members of
the Committee, and the employees of the Corporation and its parent or
subsidiaries in respect of any claim, loss, damage, or expense (including
reasonable counsel fees) arising from any such act, omission, interpretation,
construction or determination to the full extent permitted by law.
(i) PARTICIPATION BY FOREIGNERS. Without amending this 1997 Plan, the
Committee may modify grants made to participants who are foreign nationals or
employed outside the United States so as to recognize differences in local law,
tax policy, or custom.
SECTION V. AMENDMENT AND TERMINATION: ADJUSTMENTS UPON CHANGES IN STOCK.
The Board of Directors of the Corporation may at any time, and from time
to time, amend, suspend or terminate this 1997 Plan or any portion thereof,
provided that no amendment shall be made without approval of the Corporation's
stockholders if such approval is necessary to comply with any applicable rules
or regulations of the Securities and Exchange Commission, including Rule 16b-3
(or any successor rule thereunder), or the rules and regulations of any exchange
or stock market on which the Corporation's securities are listed or quoted.
Except as provided herein, no amendment, suspension or termination of this 1997
Plan may affect the rights of a Participant to whom a Stock Option has been
granted without such Participant's consent. If there shall be any change in the
Common Stock or to any Stock Option granted under this 1997 Plan through merger,
consolidation, reorganization, recapitalization, stock dividend, stock split or
other change in the corporate structure of the Corporation, appropriate
adjustments may be made by the Committee (or if the Corporation is not the
surviving corporation in any such transaction, the Board of Directors of the
surviving corporation, or its designee) in the aggregate number and kind of
shares subject to this 1997 Plan, and the number and kind of shares and the
price per share subject to outstanding options. In connection with the
foregoing, the Committee may issue new Stock Options in exchange for outstanding
Stock Options.
SECTION VI. SHARES OF STOCK SUBJECT TO THE PLAN.
The number of shares of Common Stock that may be the subject of awards
under this 1997 Plan shall not exceed an aggregate of 3,500,000 shares. Shares
to be delivered under this 1997 Plan may be either authorized but unissued
shares of Common Stock or treasury shares. Any shares subject to an option
hereunder which for any reason terminates, is canceled or otherwise expires
unexercised, and any shares reacquired by the Corporation due to restrictions
imposed on the shares, shares returned because payment is made hereunder in
stock of equivalent value rather than in cash, and/or shares reacquired from a
recipient for any other reason shall, at such time, no longer count towards the
aggregate number of shares which have been the subject of Stock Options issued
hereunder, and such number of shares shall be subject to further awards under
-5-
<PAGE>
this 1997 Plan, provided, first, that the total number of shares then eligible
for award under this 1997 Plan may not exceed the total specified in the first
sentence of this Section VI, and second, that the number of shares subject to
further awards shall not be increased in any way that would cause this 1997 Plan
or any Stock Option to not comply with Section 16, if applicable to the
Corporation.
SECTION VII. EFFECTIVE DATE AND TERM OF THIS PLAN.
The effective date of this 1997 Plan is March 1, 1997 (the "Effective
Date") and awards under this 1997 Plan may be made for a period of ten years
commencing on the Effective Date. The period during which a Stock Option may be
exercised may extend beyond that time as provided herein.
DATE OF APPROVAL BY STOCKHOLDERS: N/A
DATE OF ORIGINAL APPROVAL BY BOARD OF DIRECTORS: March 1, 1997
AMENDED AND RESTATED: September 10, 1997
SECOND AMENDED AND RESTATED: August 25, 1998
-6-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> AUG-31-1998
<CASH> 4,991,434
<SECURITIES> 0
<RECEIVABLES> 338,192
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,245,846
<PP&E> 1,425,652
<DEPRECIATION> 217,810
<TOTAL-ASSETS> 6,904,102
<CURRENT-LIABILITIES> 355,966
<BONDS> 0
0
0
<COMMON> 46,236
<OTHER-SE> 1,836,880<F1>
<TOTAL-LIABILITY-AND-EQUITY> 5,739,082
<SALES> 147,964
<TOTAL-REVENUES> 147,964
<CGS> 226,090
<TOTAL-COSTS> 226,090
<OTHER-EXPENSES> 1,047,378
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,000
<INCOME-PRETAX> (1,179,504)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,179,504)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,179,504)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> 0
<FN>
<F1>
OTHER SE CONSISTS OF:
ADDITIONAL Pid in Capital 25,311,680
Accumulated Deficit (23,074,800)
Treassury stock, at cost (400,000)
-----------
1,836,880
===========
</FN>
</TABLE>
