SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended May 31, 1999
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.
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(Name of Small Business Issuer in Its Charter)
Texas 76-0260145
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
125 South 52nd Street Tempe, Az 85281
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (480) 394-9100
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
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N/A
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Par Value $.003
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.Yes [ ] No [X]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year $[742,134].
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 Over the Counter Bulletin Board as of December 20, 1999, was
approximately $.6875. The number of shares of Common Stock, $.003 par value per
share, outstanding at that date was 15,474,301 shares.
This Form 10-KSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Cautionary
Factors that May Affect Future Results" of this Form 10-K.
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PART I
CONSYGEN, INC.
ITEM 1. BUSINESS
UNPROFITABLE OPERATING HISTORY AND LIMITED FINANCIAL RESOURCES.
The Company has not historically been profitable, and as of May 30, 1999,
had suffered cumulative operating losses aggregating $[4,945,805], and at May
30, 1999, had a net capital deficiency and a net working capital deficiency.
These conditions raise substantial doubts about the ability of the Company to
continue as a going concern. During fiscal 2000, the Company expects to meet its
working capital and other cash requirements with cash derived from operations
and other financing as required, although there can be no assurance that the
Company will generate cash from its operations in the near future or that the
Company will obtain financing on acceptable terms. The Company has suffered
material recurring losses from operations and has had difficulty meeting its
short-term obligations, including payroll obligations. Additionally, the Company
has no cash on hand. The Company must continue to improve the efficiency of its
operations to achieve and maintain positive cash flow from operations. See
"Business-Restructuring and New Business Focus," "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources. There is no assurance, however, that the Company will be able
to continue as a going concern, that cash from operations and the other sources
described above will be achieved or will be sufficient for the Company's needs,
or that the Company will be able to achieve profitability on a consistent basis.
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 (the "Acquisition"), ConSyGen-Texas effected a 1-for-40 reverse
split of its common stock, $.003 par value per share (the "Common Stock").
ConSyGen-Texas closed the Acquisition on September 5, 1996. As a result of the
Acquisition, ConSyGen-Arizona became a wholly-owned subsidiary of
ConSyGen-Texas. The Acquisition was treated as a reverse acquisition (purchase),
with ConSyGen-Arizona being the acquirer and ConSyGen-Texas being the acquired
company.
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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. After the Acquisition, ConSyGen-Arizona's stockholders
held approximately 69% of the outstanding Common Stock of ConSyGen-Texas.
In connection with the Acquisition, outstanding options to purchase
1,275,000 shares of ConSyGen-Arizona's common stock previously 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 an equal
number of shares of Common Stock at an exercise price of $1.00 per share. In
addition, warrants to purchase 1,000,000 shares of ConSyGen-Arizona's common
stock at $5.00 per share issued in connection with the private placement of
approximately $1,200,000 in debt earlier in 1996 (the "Pre-Acquisition Debt")
were terminated, and ConSyGen-Texas issued replacement warrants to purchase
1,000,000 shares of Common Stock at $5.00 per share. The warrants became
exercisable on August 1, 1997, expired on September 5, 1998, and are redeemable
upon 60 days' notice. ConSyGen-Texas also issued an aggregate of 200,000 shares
of its Common Stock in cancellation of the Pre-Acquisition Debt certain other
indebtedness. The Pre-Acquisition Debt provided for interest at the rate of 10%
per annum, was unsecured, and was to be repaid in one year. ConSyGen-Texas and
its wholly-owned subsidiary, ConSyGen-Arizona, are hereinafter collectively
referred to as the "Company."
POST ACQUISITION FINANCING
Since the closing of the Acquisition on September 5, 1996, the Company has
raised an aggregate of approximately $11,000,000 in net proceeds from private
financing transactions involving the sale of Common Stock and notes or
debentures convertible into Common Stock of the Company. See Item 7 of this
report ("Recent Financings") for a description of each individual transaction.
Of the total amount raised, approximately $6,800,000 was obtained through the
sale of Common Stock, and approximately $4,200,000 from the sale of convertible
notes or debentures. In October 1997, the Company issued 30,747 shares of Common
Stock including 19,912 shares to related parties, in satisfaction of outstanding
indebtedness in the aggregate amount of $250,575. On October 1, 1999 a $150,000
loan was arranged from the Hamburg Trust, interest rate for the first 90 days is
1.5% per month increasing to 2% with interest payments due at the first of each
month. Also, on October 1, 1999 a second loan was obtained from Daniel Rehm for
$70,000 with the same interest rates and payment structure. On October 21, 1999
a $90,000 loan was arranged from Daniel Rehm with an interest rate of 2% per
month. Payments are due on the first of each month. Collateral for this loan is
a second mortgage on the Company's building located at 125 S. 52nd Street,
Tempe, AZ 85281. On November 3, 1999 a $65,000 loan was arranged from Daniel
Rehm with an interest rate of 1.5% per month. Payments are due on the first of
each month. Collateral for this loan is a second mortgage on the Company's
building located at 125 S. 52nd Street, Tempe, AZ 85281. On October 15, 1999 a
$310,000 loan was arranged from the Hamburg Trust with an interest rate of 1.75%
per month. Payments are due on the first of each month. Collateral for this load
is a second mortgage on the Company's building located at 125 S. 52nd Street,
Tempe, AZ 85281.
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DESCRIPTION OF BUSINESS OF CONSYGEN, INC.
OVERVIEW
The Company's business consists solely of the business of its wholly-owned
subsidiary, ConSyGen-Arizona. ConSyGen-Arizona began business in 1979 for the
purpose of developing and marketing vertical market software for the hotel and
airline industries. In addition to providing these software packages, for many
of its clients, ConSyGen-Arizona converted these applications from proprietary
Honeywell computers to open systems (UNIX-compliant hardware), using an
internally-developed approach which automated the conversion process. 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.
In 1991, in response to growing business demand for migration of older
software applications from mainframe computers to open systems, ConSyGen-Arizona
commenced development of a fully-automated capability to allow clients to move
software applications from mainframes to open systems, while simultaneously
performing migration to alternative databases and providing replacement of
existing languages (primarily, COBOL). This process, also known as "down-sizing"
or "re-hosting," was designed to move application software from expensive,
inflexible, proprietary mainframe computers to newly-available, lower-cost,
open-system computers, thereby opening up more effective environments, while
substantially reducing operating costs. After significant research and
development, an automated software conversion toolset - ConSyGen ConversionSM
was completed.
Full automation of this otherwise-manual process eliminates most of the
manual conversion tasks, thereby reducing effort, time and expense, while
improving accuracy and reducing testing requirements.
In early 1996, ConSyGen-Arizona began to expand the existing conversion
capability to deal specifically with the Year 2000 problem; that is the
inability of a software application to recognize the Year 2000.
ConSyGen-Arizona's objective was to develop a fully automated process for the
identification and correction of date occurrences in software applications.
Prior to the fiscal year ended May 31, 1998, the Company's Year 2000 toolset,
which provides automated date conversions, had been utilized only in pilot
(non-revenue generating) projects. Automation of the process by which software
is made compliant for the Year 2000 and beyond, as compared with a manual
process, offers the benefits of speed; accuracy; reduced staffing, time and
cost; and higher confidence in the delivered result. Client staff involvement is
reduced to project-related tasks (such as test planning), and to confirmation of
some date origins and cross-references in the software.
Through March 31, 1999, ConSyGen-Arizona marketed services related to its
primary software products -ConSyGen 2000 and ConSyGen Conversion. As of March
31, 1999, the Company no longer markets ConSyGen Conversion. Marketing is
performed by ConSyGen directly, through selected teaming partners, and through
strategic alliances. See "Sales, Marketing and Distribution." Although the
Company continues to actively market its ConSyGen 2000 toolsets, the Company, to
date, has not generated any significant revenue, either from its ConSyGen 2000
or its ConSyGen Conversion toolset, or otherwise.
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Although the Company completed several revenue generating Year 2000
conversion projects during the fiscal year ended May 31, 1999, the Company did
not complete a revenue generating migration project during the year. The Company
did complete several revenue generating migration projects from 1993 to 1995,
but the Company has not since completed such a project. Instead, the Company's
efforts, through March 1999, focused on the further development of its ConSyGen
Conversion toolset, including extending the toolset to cover new hardware
environments. As of March 1999, the Company discontinued the marketing and
development of its ConSyGen Conversion product.
The Company has been focusing on its ConSyGen 2000 toolset and recently
expanded its Year 2000 service offerings to full solutions through informal
partnering relationships with companies such as Piercom, Inc. and ESSP, Ltd.
that provide additional remediation services for client/server environments and
embedded chips.
In late 1998, the Company developed and introduced a new product,
"Counterfeit COP," a counterfeit detection device designed to offer multiple
forms of protection. Counterfeit COP is fitted with a 13 watt UV light, which
enables it to check the paper consistency of all forms of domestic currency,
hidden emblems on credit cards, drivers licenses, travelers checks, event
tickets, casino chips, and various governmental documents. Counterfeit COP also
provides a user with the ability to check water marks with a unique back light
system. Management believes that the power provided by the 13 watt UV light
makes Counterfeit COP accurate, quick, and easy to use.
RESTRUCTURING AND NEW BUSINESS FOCUS
The Company has incurred significant operating losses. For the fiscal year
ended May 31, 1999, the Company incurred net loss of $4,945,805. In light of
these losses, in June 1999, the Company began implementing an aggressive
restructuring program. This program includes the following eight specific
objectives:
(1) to strengthen management and leadership;
(2) to obtain financial stability;
(3) to streamline the organization;
(4) to increase productivity and efficiency of operations;
(5) to focus sales and marketing strategies on core businesses;
(6) to diversify product and service offerings;
(7) to improve the corporate image; and
(8) to increase shareholder value.
The first step of the Company's restructuring program was to strengthen
executive and senior management and create an efficient operational structure.
The Company's management team has been completely replaced. Mr. Thomas S.
Dreaper, resigned as President and Chief Executive Officer of the Company on
March 24, 1999, Mr. A. Lewis Burridge was appointed President and Chief
Executive Officer of the Company by the Board of Directors on March 24, 1999,
and Mr. Steven M. Smith was appointed Executive Vice President and Chief
Operating Officer of the Company by the Board of Directors on June 1, 1999.
Other material changes in management include the resignation of Mr. Jeff Weiss
from the Company's Board of Directors in June 1999, Mr. John Caldwell joined the
Company's Board of Directors in June 1999, Jason Genet joined the Company in
April 1999 as a consultant and was appointed Vice President of Business
Development in October 1999, Mr. Jim Vales, Vice President of Technical Services
resigned from the Company in June 1999, Mr. Robert Roth , Vice President of
Sales and Marketing resigned from the Company in August 1999, Mr. Joseph Bodnar,
Vice President of International Operations resigned from the Company in December
1999.
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The Company also focused on (i) reducing operating costs, (ii) its core lines of
business, and (iii) began planning for the Company's future. Currently, the
Company has two primary lines of business; Year 2000 Services (ConSyGen Year
2000) and Business/Consumer Products (Counterfeit COP). Recent efforts have
reformulated these lines of business into what management believes to be the
best sources of potential revenue. Prior to its restructuring, the Company
marketed Counterfeit COP through direct sales with regional, domestic offices
and a large sales force. The Company determined that the direct sales approach
was too costly and has revised its sales efforts to a reseller/distribution
based model. The Company already has seen positive results from this change in
increased sales of Counterfeit Cop. Additionally, as of December 15, 1999, the
new management team has decreased staff from 44 employees to 29 employees,
reduced the number of facilities from eight regional offices to one corporate
headquarters and significantly reduced many of its other fixed costs.
Management believes that the ConSyGen Year 2000 and Counterfeit COP
services and products have limited long-term future viability. Management
believes that in three years, the Year 2000 issue will be resolved by a majority
of organizations and businesses, and therefore that the Year 2000 conversion
products and services will no longer be necessary. However, management believes
that in the next three years, many smaller companies, governmental entities,
foreign countries and foreign entities, which are not on track to resolve their
Year 2000 issues by the end of 1999, will continue to require Year 2000
conversion products and services. Moreover, that many Year 2000 issues will
surface after January 1, 2000. Management also believes, that because the
technology used in its Counterfeit COP product eventually will become superceded
by more advanced technology and counterfeiters will find ways to thwart
detection devices such as Counterfeit COP, the Counterfeit COP product, in its
present form, will remain viable for approximately two years. The Company
anticipates continued demand for its ConSyGen Year 2000 and Counterfeit Cop
services and products, but is preparing for the future by beginning to explore
the development of E-Commerce Solutions, Internet Services and Business
Productivity Software products.
THE YEAR 2000 ISSUE AND MARKET
The Year 2000 problem relates to the inability of many existing computer
systems to process information or logic completely or accurately involving the
Year 2000 and beyond. The problem results from the traditional use of two-digit
date fields to perform computations and decision-making functions. For example,
a program using a two-digit date field may misinterpret "00" as the year 1900
rather than as 2000. As a result, many legacy systems are at risk. For example,
unless Year 2000 compliance is completed in certain systems, credit cards and
ATM cards may expire prematurely and insurance policies that span three to seven
years may not be able to be written. These date-dependent programs are
ubiquitous in legacy software applications used in many critical business
operations.
Many organizations lack the internal resources to address adequately the
Year 2000 problem in a timely manner. A number of solutions providers, including
the Company, have developed special programs to meet the needs of Year 2000
compliance. Although the Company believes that many organizations in the United
States have addressed their Year 2000 issues or have many alternatives,
including the Company's services, to address these issues, the Company believes
that organizations located outside of the Unites States are far behind those in
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the United States. As a result, the Company anticipates that demand for Year
2000 tools and solutions in international markets will grow. Since the problem
requires a large number of programs and systems to be corrected, it is
anticipated that most organizations will not have adequate internal resources to
perform all the Year 2000 conversion tasks. Consequently, most organizations
will attempt to utilize highly-automated solutions and in many cases to
outsource the conversion to service providers who can achieve economies of scale
by setting up procedures, or "factories," that utilize automation tools and
well-defined processes for Year 2000 compliance.
The Company believes that the following are the major approaches to Year
2000 solutions:
MANUAL APPROACH - Conversions are performed manually by programmers. The
drawbacks of this approach include the possibility that there may be
insufficient personnel available with the skills requisite to do the work, the
length of time required to perform manual conversions and a high rate of error.
In addition, since there is no assurance that all of a client's systems will be
found or corrected, in-depth and prolonged testing is required.
TOOLS - Basic software products designed to read through client programs,
and to identify anything resembling a date. Having acquired these
often-expensive tools, clients are required to train staff in their use. This
approach, though faster than a purely manual approach, is still lengthy,
arduous, and error-prone, and does not ensure that all of a client's programs
are actually being examined or that all dates are being found.
TOOL-ASSISTED - Due to the problems associated with client staff shortages,
there now exist many service providers who use a combination of tools and
specialized staff. Although the quality and range of these new tools is
improving dramatically, and although many of the vendors describe their service
as "automated," there is still a level of manual programming required. This
approach, though faster than a client could provide, is still error-prone, and
does not ensure that all of a client's programs are actually being examined or
that all dates are being found.
The Company offers a fully automated Year 2000 correction service. This
means that 100% of a client's code is collected and analyzed automatically, date
fields are identified automatically, and the correction of the identified and
confirmed date fields is done automatically. The only manual intervention
involves setup and quality control functions.
The Company believes that ConSyGen 2000's ability both to identify and to
automatically convert software, so that it is compliant for the Year 2000 and
beyond, is unique among the various solutions being offered and that its fully
automated Year 2000 conversion service offers several advantages, including
consistency of changes throughout all cross-referenced date fields and programs,
error reduction, reduced testing, and reduced conversion time. While the Company
believes that the fully automated feature of the ConSyGen 2000 conversion
service positions it to compete efficiently in the Year 2000 market, as
described above, the Company has not generated any significant revenue from Year
2000 related services or otherwise, but management is hopeful that through its
new business focus and restructuring, revenues from its Year 2000 related
services will be forthcoming.
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CONSYGEN 2000 CONVERSION SERVICES
Although the actual identification and conversion of Year 2000 occurrences
in client programs is performed automatically through the ConSyGen 2000 toolset,
there are a range of associated tasks in a Year 2000 conversion project, and
each project is managed according to the following phases:
IMPACT ASSESSMENT - ConSyGen offers an optional impact assessment service.
ConSyGen does not require the performance of an impact assessment to provide
pricing for a conversion project. Since the conversion project is fully
automated, and since ConSyGen's pricing is based on the number of lines of
client code (not on the number of identified date occurrences), ConSyGen
provides a fixed-price quotation based on the client's estimate of its system's
size. The fixed price is adjusted if the actual system size exceeds the client's
estimate by more than 10%.
DATE ESTIMATION - ConSyGen uses a proprietary parser to review all received
client source entities, and generates a report of all identified candidate date
fields, summarized by source entity. A detailed report, identifying each
candidate date field, is also available to project staff.
CATALOGING - On receipt of client source entities (control language
programs, application programs, copy members, and data definitions), ConSyGen
conducts a cataloging exercise, in which client code is analyzed in detail in
order to identify and report any missing source entities, any programs without
initiating control programs, any system utilities, and any non-standard
technical conditions (e.g., other languages) within the applications. If
necessary, ConSyGen will extend the ConSyGen 2000 toolset to accommodate these
non-standard technical conditions.
This process is iterative, and is repeated until all source members have
been received and read, and all technical issues have been resolved. At
completion of cataloging, ConSyGen 2000 will have confirmed that all of the
client's environment has been received in a form that can be read and processed
by the toolset, and the exact size of the client's environment, with exact line
and entity counts, which is then used to confirm the fixed price for the
project.
The cataloging exercise also generates a detailed hierarchical report of
all of the relationships within the client's environment. This report is used to
enable the client to define the composition of the converted code deliverables
("Work Units") and to prepare test plans. Since the ConSyGen 2000 toolset can
convert several million lines of code in a single overnight pass, Work Units may
be as large as the client requires (e.g., 1 million lines); they will be
converted and delivered in a client-defined sequence to enable a regular and
manageable approach to the preparation of test plans and to testing.
The successful completion of this cataloging exercise means that there are
substantially fewer errors due to missing programs during the automated
identification and conversion exercises, and that a full set of data
cross-references will be able to be established in preparation for the
conversion process.
IDENTIFICATION - From the information derived during the cataloging
exercise, all source components are searched automatically to identify all date
occurrences using known date identifiers, client-specified naming conventions
for date occurrences, and data fields with known implicit or explicit date
characteristics. All procedural logic involving date occurrences or date-holding
data variables will be automatically identified to provide a basis for
determining translation rules for both storage locations and the procedural
logic.
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ConSyGen 2000 searches all client information and reports the first use of
each date condition ("origin"). As far as possible, the desired new date formats
will be identified automatically for each original occurrence and matched with
the origin date occurrence and all of its cross-referenced date fields within
the client's programs. This provides an efficient and accurate method of
preparing the system for conversion.
CONVERSION - ConSyGen's Year 2000 conversion service is fully automated.
There is no manual intervention by ConSyGen or the client in the actual
conversion process, and there is no requirement for any manual modifications to
the delivered code. The only manual intervention involves setup and quality
control functions. ConSyGen expects that there will be only a limited number of
errors in the delivered code, and that any identified errors will be corrected
rapidly and fully by re-translation of the affected Work Unit.
DATA CONVERSION - After conversion, the Company generates extract/re-load
and data re-population programs to assist the client to correct data in their
data files and databases and to allow the client to prepare for testing. Actual
change of the data is the client's responsibility.
TESTING - The client is responsible for testing of the converted programs,
using test plan which are prepared on the basis of reports generated by the
Company during the project. The Company supervises the performance of a set of
tests on the initial set of programs delivered to the client.
INDEPENDENT VERIFICATION AND VALIDATION
While many commercial organizations and government institutions appear to
have completed their Year 2000 remediation projects, problems have been
identified. Many organizations and institutions have already experienced delays
and other problems, which typically have been due to the failure of their
remediation efforts to have identified all source date references.
The IV&V software tool offered by the Company automatically locates and
documents all source date references. Organizations can use the IV&V services to
confirm that all source date references have been corrected before any
undiscovered source date references cause problems. Additionally, organizations
that have not yet completed remediation of their Year 2000 problem can use this
service to identify the potential or magnitude of their non-compliance.
AUDIT SERVICES
A client organization must first conduct an analysis of their Year 2000
issues to understand the level of remediation needed to correct their Year 2000
problems. Compliance is not limited to just application programs. In response to
this need, the Company has developed a flexible 12-step evaluation program,
which includes the testing of third-party providers. The audit services offered
by the Company evaluate the effectiveness of an organization's Year 2000
remediation program and identifies any areas that are deficient. Management
believes this service addresses all stages of a Year 2000 program (awareness,
inventory and assessment, remediation, testing and IV&V, implementation and
contingency planning) and covers the entire scope of a client's business
(products and services, IT hardware/software, facilities and equipment, and
supply chains).
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BUSINESS/CONSUMER PRODUCTS - COUNTERFEIT COP
According to third-party sources, counterfeit crime is expected to increase
to a cost of over $2 billion in the Year 2000, up from $186 million in 1998.
Additionally, these sources indicate that the reason for the dramatic increase
in counterfeit crime is the increased sophistication of offenders and lower
costs of computers and software. Counterfeiting in the past was a crime
requiring a considerable investment of time, money and resources. The
anticipated increase of $1.8 billion in the costs of counterfeiting is a result
of the ease with which the tools of counterfeiting can be obtained.
The Company's Counterfeit COP product provides users with an affordable and
effective method of counterfeit detection. Counterfeit COP can be used to check
credit cards, traveler's checks and other items used as monetary exchange and
many forms of identification documents.
To test currency, one places it on Counterfeit COP's pressure sensitive
platform. A bright blue glow indicates a suspicious bill. The next step is to
examine the bill for its security thread. The security thread is illuminated and
corresponds to specific denominations ($100 is red, $50 is yellow, and $20 is
green). After checking the security thread, a user applies pressure to the
platform to identify the invisible watermark, if any, used for additional
security.
Most credit cards have a hologram that can be verified under the
Counterfeit COP's 13 watt UV lamp. To authenticate, one simply places the item
on the unit to verify the proper hologram. Most international currencies have
security threads and watermarks like U.S. currency. The process of detection is
therefore the same. Travelers' checks, U.S. Government checks, passports,
driver's licenses, and other forms of identification are authenticated through
the same process of imbedded holograms and/or watermarks.
The Company believes market potential for Counterfeit COP exists with
respect to any institution dealing with the exchange of protected currency,
documents or cards. The Company plans to distribute its Counterfeit COP product
in the United States and abroad.
SALES, MARKETING AND DISTRIBUTION
The market for the Company's products and services consists of a wide range
of business and governmental organizations which require the kinds of products
and services that the Company provides. Historically, the Company's sales and
marketing efforts were implemented through a direct sales force, supported by
promotion through articles in trade publications and trade shows that address
the software maintenance market, its independent sales representative program,
teaming partners (distributors which provide local service) and arrangements
with system integrators that provide computer-related services to end users. The
Company considered its sales and marketing efforts unsatisfactory. Revenues
generated from sales of the Company' products and services amounted to
approximately $751,000 for the fiscal year ended May 31, 1999. See the Financial
Statements included herein.
In conjunction with its restructuring, the Company has redirected its
sales, marketing and distribution efforts and strategies to sell its products
through resellers and distributors. The Company has established several informal
reseller relationships with resellers which management believes possess
established customer bases and large sales forces. These relationships include
resellers in Europe and Asia. There can be no assurance that this change in
sale, marketing and distribution efforts will be successful.
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COMPETITION
The market for the Company's Year 2000 services is intensely competitive,
includes major industry leaders and smaller software companies, and is
characterized by rapid change in technology and user needs and the frequent
introduction of new products. Many of the Company's competitors have
substantially greater name recognition, market presence, and financial and
technical and marketing resources than the Company.
The Company believes that the primary competitive factors in the Year 2000
compliance market are speed and accuracy. 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. Specifically, in the international market, the Company anticipates
having to compete against small regional software companies that provide Year
2000 remediation through manual efforts.
With respect to Counterfeit Cop, the Company faces competition from
counterfeit detection pens and other ultra violet machines sold by Cash Scan,
Alder and others. The Company believes Counterfeit COP is a more accurate and
thorough detection device compared to those products offered by its competitors.
Management believes its new reseller and distribution approach will allow it to
effectively compete against its competitors' products. However, many of the
Company's competitors have substantially greater financial, technical and
marketing resources than the Company and there can be no assurance that the
Company's new distribution approach will prove to be effective.
RESEARCH AND DEVELOPMENT
Integral to the Company's restructuring efforts, which began in June 1999,
was the establishment of research and development activities. The Company has
identified three additional lines of business and related markets that the
Company may enter sometime in the future. These are E-Commerce Solutions,
Internet Services, and Business Productivity Software. The Company plans to add
strategic research and developmental resources as part of the restructuring
process as well as reassigning resources to such efforts. The Company does not
plan on expending further funds for research and development of Year 2000
services or Counterfeit COP. However, as the Company has been focusing all
available funds on its on-going business, research and development efforts of
these new lines of businesses is at a very premature stage, and there can be no
assurance that any of these efforts will produce marketable products. As of May
31, 1999, the Company had six employees engaged in product development. All of
the Company's research and development employees are located at the Company's
Tempe, Arizona headquarters.
Effective January 1, 1997, the Company changed from a calendar year to a
May 31 fiscal year. During the year ended May 31, 1999, May 31, 1998, five (5)
months ended May 31, 1997 and the year ended December 31, 1996, research and
development expenditures were approximately $625,000, $1,046,000, $335,000, and
$740,000, respectively.
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EMPLOYEES
As of May 31, 1999, the Company had 44 full-time employees, including six
in sales and marketing, six in research, development and support, seven in
conversion services, fifteen in business products division and ten in corporate
operations and administration. As of December 15, 1999, the Company had 29
full-time employees. 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.
ITEM 2. PROPERTIES
The Company's principal administrative, research and development, customer
support and marketing facilities are located in approximately 10,000 square foot
building at 125 South 52nd Street, Tempe AZ 85281. This property is subject to a
Trust Agreement, dated November 15, 1999, whereby Daniel B. Hamburg, Lillian
Hamburg and Robert Rehm are second beneficiaries, and the Company is the first
beneficiary. The Company's interest is encumbered in the amount of $465,000
representing the second beneficiaries various loans made to the Company. The
property is also subject to a Deed of Trust to secure a $550,000 Promissory Note
dated April 6, 1999, payable to American Savings Life Insurance Company. The
Company acquired the building in March 1998 for approximately $800,000 in cash.
The Company believes that its facilities are adequate for its current needs and
that suitable additional space will be available when needed.
The condition of the property is generally good and is properly insured.
ITEM 3. LEGAL PROCEEDINGS
On December 3, 1998, the three holders of the Company's outstanding
Convertible Debentures, Sovereign Partners Limited Partnership, a Delaware
limited partnership, Dominion Capital Fund, Ltd., a Bahamian Corporation, and
Canadian Advantage Limited Partnership, an Ontario, Canada, Limited Partnership,
commenced an action (Case No. 98CIV.8457 in the United States District Court of
the Southern District of New York) against the Company for specific performance
of the provisions of the Debentures which permit the holders to convert the debt
evidenced by the Debentures into shares of the Company's common stock. The
Debentures are described on page 10 of the Company's Registration Statement on
Form S-3, filed with the Securities and Exchange Commission, effective September
29, 1998.
On December 28, 1998, the Company filed an answer in that action denying
that, under the pertinent circumstances, the Company is obligated to effect any
such conversion. The Company also filed a counterclaim against holders, and new
claims against certain agents of the holders, in the same action, alleging that
the holders and the agents made material misrepresentations in connection with
the purchase and sale of the Debentures and made unlawful short sales of the
Company's Common Stock.
On February 1, 1999, Stephen M. Hicks, general partner of Sovereign Account
and two of the three holders of the Company's outstanding Convertible
Debentures, Sovereign Partners Limited Partnership and Dominion Capital Fund,
Ltd., served an action which was filed in the United States District Court for
the Southern District of New York against the Company and Thomas S. Dreaper, its
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former President and Chief Executive Officer, to recover damages for alleged
intentional and calculated defamation. Other parties, unrelated to ConSyGen,
were also named as defendants in the lawsuit on similar allegations. The
Plaintiffs seek compensation from ConSyGen and Dreaper each in the amount of
$1,000,000 or in such sum as the Court shall determine, together with exemplary
or punitive damages.
On February 4, 1999, Thomson Kernaghan & Co. Limited and Mark E. Valentine
served an action which was filed in the Ontario Court (General Division) against
the Company, Thomas S. Dreaper, its former President and Chief Executive
Officer, and Rajesh K. Kapur, its former Chief Financial Officer to recover
damages for alleged defamation. The Plaintiffs seek compensation from ConSyGen,
Dreaper and Kapur jointly and severally in the amount of $2,000,0000 for general
damages, $1,000,000 for libel and slander and for punitive damages plus costs.
ITEM 4. SUBMISSION TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET PRICE FOR AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
RECENT SALES OF UNREGISTERED SECURITIES
The Company furnishes the following information regarding sales of unregistered
securities during the fiscal year covered by this report:
RECORD HOLDERS
As of December 1, 1999, there were 126 record holders. This number does not
include those stockholders whose shares are held in "nominee" or "street" name.
MARKET INFORMATION
On May 11, 1999, the Company's Common Stock was delisted from the NASDAQ
SmallCap Market and started to trade on the National Association of Securities
Dealers, Inc.'s over-the-counter Bulletin Board. Prior to September 1996, there
was no trading market for the Company's Common Stock. Accordingly, no quotations
were available for the first quarter of fiscal 1997. The over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, markdown, or
commission, and may not necessarily represent actual transactions. There is a
limited trading market for the Company's Common Stock.
Year Ended Year Ended
May 31, 1999 May 31, 1998
Quoted Bid Quoted Bid
----------------- -----------------
High Low High Low
------- ------- ------- -------
First Quarter $3.1875 $1.0625 $ 15.00 $ 7.00
Second Quarter 2.4375 1.0312 11.125 5.75
Third Quarter 5.00 0.9375 7.375 3.75
Fourth Quarter 2.125 1.125 10.25 2.875
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 Common Stock.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-KSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference include the following: Unprofitable operating history
and limited financial resources; necessity of additional financing; the Company
is dependent on its new strategic direction to replace revenues from its Year
2000 and Counterfeit COP business; the Company's future results will depend on
its ability to manage change; the Company Faces Potential Liability To Clients
From Its Year 2000 Business; the Company may not be able to respond to rapid
technological change; the Company may be adversely affected if it loses key
personnel; the Company's results may be adversely affected by its future
international operations; the Company faces competition for Year 2000 and
Counterfeit COP business; the Company may not be able to develop successful
products; the Company may be adversely affected if it is not able to attract and
retain qualified professional; future regulations could be enacted that either
directly restrict the Company's business or indirectly impact the Company's
business by limiting the growth of internet commerce; Company's products and
services obsolete; intellectual property protection; effect Of Year 2000 problem
upon Company operations; and the Company might not be successful in implementing
its domestic and worldwide proposed transition from Year 2000 and expansion.
OVERVIEW
The Company continues to market its Consygen 2000 Conversion Services.
However, the Company recognizes that the opportunity for long-term revenue
generation in this market is diminishing. The Company believes there remain
short-term opportunities for its services in this market, especially in certain
foreign markets. The Company has not historically met its goals for revenue in
its conversion services business. The Company has had numerous contracts for its
conversion services and believes it has successfully completed those contracts.
However, the volume of such services has not met management's expectations nor
has that volume resulted in profitable operations.
The Company has attempted to introduce and market its Counterfeit Cop
product during the year ended May 31, 1999. At May 31, 1999, there had been no
significant sales of the Counterfeit Cop. Subsequent to May 31 1999, the Company
entered into distribution agreement with a third party that has a national
distribution network. The Company expects sales to begin with this third party
in the third quarter of fiscal 2000.
On June 16, 1999, the Company entered into an agreement with a third party
to acquire certain software. The software was represented to have unique
capabilities related to data base retrieval. The Company acquired the software
in connection with its attempts to move into other product lines including
internet commerce. The original purchase price for the software was $600,000.
The Company had estimated at the time of purchase that an additional $275,000
would be required to complete development of the software. The Company paid
$180,000 cash at the date of purchase but failed to make the $420,000 payment
due on July 30, 1999. The Company received a 30 day extension of the July 30,
1999 due date by making a payment of $50,000 against the balance due and issuing
120,000 shares of common stock to the seller of the software. The Company later
made a determination that the software would require significant additional
development and believed that the capabilities of the software were
misrepresented by the seller. The Company failed to make the final payment of
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$370,000 and the status of the software and its utilization by the Company are
presently uncertain. However, the Company is not likely to invest significant
additional resources into the development of this product and will likely
write-off its investment in this software in the first quarter of fiscal 2000.
Due to the lack of profitable operations and difficulties raising
additional capital, the Company has experienced significant cash flow
difficulties. Subsequent to May 31, 1999, the Company has borrowed approximately
$500,000. Some of those borrowings have come from a board member and significant
shareholder and other amounts have come from lenders with the Company's office
building serving as collateral on those borrowings. Even with the borrowings,
the Company has had difficulties meeting its payroll and other operating
obligations. The Company has fallen behind on scheduled payrolls and certain
members of management have deferred taking salaries.
The Company will continue to attempt to implement its business plan with
the continuation of its Year 2000 Services, marketing and distribution of the
Counterfeit Cop and introduction of new products and development of E-Commerce
business. There can be no assurances that the Company will be successful in any
of these areas. It has not been successful to-date in producing profitable
operations in its Year 2000 Services business. In addition, the Company will
require significant additional capital to move forward on any of these product
lines and new ventures.
The Company is involved in material litigation. The Company has become
involved in a dispute with its debenture holders. The debenture holders have
filed claims against the Company and certain of its former and current officers.
The litigation alleges that the Company failed to honor the debenture holders'
request to convert the debt to common stock. The Company refused to honor the
request because it believed there was inappropriate trading of the Company's
common stock on the part of the debenture holders. The litigation if resolve in
favor of the debenture holders could have a material adverse effect on the
Company. The aggregate claims against the Company in this litigation is
approximately $4,000,000. The Company has filed counter claims in this matter
and intends to vigorously defend its positions. The outcome of this litigation
remains uncertain.
On May 29, 1998, the Company completed a private placement of $3,500,000 in
principal amount of convertible debentures and warrants to purchase 105,000
shares of common stock (the "Warrant Shares") for aggregate net proceeds, after
payment of finders' fees and expenses, of approximately $3,200,000. The
debentures are convertible into common stock of the Company at a rate equal to
the lesser of $ 4.8818 per share or 80% of the average closing bid price of the
common stock on the over-the-counter-market for the 5 day trading period
immediately preceding the applicable conversion date. The warrants are
exercisable at a purchase price of $ 4.8818 per share, are exercisable as to one
third of the Warrant Shares at any time after May 29, 1998, as to another one
third after November 29, 1998, and as to the remainder of the Warrant Shares
after May 29, 1999, and expire on May 29, 2003.
The Agreement also contains restrictions upon the conversion of the
debentures which prevents any holder from converting any portion of the
debenture which would result in the holder being deemed (under applicable
Securities and Exchange Commission rules and regulations) the beneficial owner
of 4.99% or more of the Company's common stock then outstanding. Subject to
these restrictions, the debentures are convertible in accordance with the
provisions of the Agreement at any time after the earlier of September 25, 1998
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(120 days after the issue date) or upon the effectiveness of a registration
under the Securities Act of 1933 as amended of the shares underlying the
debentures required to be filed under the provisions of the registration rights
agreement executed concurrently with the Agreement. To the extent that the
debentures have not been converted by May 29, 2003 (the maturity date), the
remaining principal amount of the debentures will be automatically converted
into common stock of the Company. For a description of certain other provisions
contained in the agreements relating to the private placement of the convertible
debentures, see Item 5, "Recent Sales of Unregistered Securities."
On October 1, 1999 a $150,000 loan was arranged from the Hamburg Trust, interest
rate for the first 90 days is 1.5% per month increasing to 2% with interest
payments due at the first of each month. Also, on October 1, 1999 a second loan
was obtained from Daniel Rehm for $70,000 with the same interest rates and
payment structure. On October 21, 1999 a $90,000 loan was arranged from Daniel
Rehm with an interest rate of 2% per month. Payments are due on the first of
each month. Collateral for this loan is a second mortgage on the Company's
building located at 125 S. 52nd Street, Tempe, AZ 85281. On November 3, 1999 a
$65,000 loan was arranged from Daniel Rehm with an interest rate of 1.5% per
month. Payments are due on the first of each month. Collateral for this loan is
a second mortgage on the Company's building located at 125 S. 52nd Street,
Tempe, AZ 85281. On October 15, 1999 a $310,000 loan was arranged from the
Hamburg Trust with an interest rate of 1.75% per month. Payments are due on the
first of each month. Collateral for this loan is a second mortgage on the
Company's building located at 125 S. 52nd Street, Tempe, AZ 85281.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED MAY 31, 1999 TO TWELVE MONTHS ENDED MAY 31, 1998
For the year ended May 31, 1999, the Company incurred net losses of $4.9
million, compared with net losses of $3.1 million for twelve months ended May
31, 1998. An explanation of these losses is set forth below.
For the year ended May 31, 1999, the Company had revenues of $742,000,
compared with revenues of $815,000 for the twelve months ended May 31, 1998. The
Company started the Year 2000 ("Y2K") compliant services in fiscal 1998. The
Company is not currently generating any significant revenue. The Company's
ability to compete successfully in the sale of its Y2K and conversion services
will depend in large part upon its ability to attract customers.
For the year ended May 31, 1999, the Company's cost of conversion services
was $774,000 compared with $353,000 for twelve months ended May 31, 1998. 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. The increase in cost of conversion
services is primarily attributable to the redeployment of personnel, from
software development to the provision of conversion services, and the hiring of
additional personnel.
For the year ended May 31, 1999, software development costs were $622,000,
compared with $1,046,000 for the twelve months ended May 31, 1998. The decrease
in software development expenses are primarily attributable to the Company's
reduction of development work for Year 2000 tools used in providing Year 2000
conversion services and migration services.
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For the year ended May 31, 1999, selling, general and administrative
expenses were $3,992,000, compared with $2,297,000 for the twelve months ended
May 31, 1998. During the fiscal year 1999, the Company hired 24 sales personnel
for the Year 2000 sales and 15 sales personnel for the Counterfeit COP product,
which accounted for a $1,400,000 increase. The remaining increase is due to
communication and systems support, $200,000, and various corporate
administrative costs, $100,000.
COMPARISON OF YEAR ENDED MAY 31, 1998 TO TWELVE MONTHS ENDED MAY 31, 1997
For the year ended May 31, 1998, the Company incurred net losses of $3.1
million, compared with net losses of $8.0 million for twelve months ended May
31, 1997. An explanation of these losses is set forth below.
For the year ended May 31, 1998, the Company had revenues of $815,000,
compared with revenues of $20,000 for twelve months ended May 31, 1997. The
Company started the Year 2000 ("Y2K") compliant services in fiscal 1998. The
increase in revenue was related to several completed and in process conversion
service contracts. The Company is not currently generating any significant
revenue. The Y2K market is anticipated to increase as many companies are yet to
start Year 2000 conversions. The Company's ability to compete successfully in
the sale of its conversion services will depend in large part upon its ability
to attract customers. (See Item 1, "Sales, marketing and Distribution")
For the year ended May 31, 1998, the Company's cost of conversion services
was $353,000 compared with $0 for twelve months ended May 31, 1997. There were
no year 2000 conversion services offered in the prior twelve months. 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. The increase in cost of conversion
services is primarily attributable to the redeployment of personnel, from
software development to the provision of conversion services, and the hiring of
additional personnel.
For the year ended May 31, 1998, software development costs were
$1,046,000, compared with $864,000 for the twelve months ended May 31, 1997. The
increases in software development expenses are primarily attributable to the
Company's hiring of additional personnel dedicated to the development of
software for use in providing Year 2000 conversion services and migration
services.
For the year ended May 31, 1998, selling, general and administrative
expenses were $2,299,000, compared with $6,792,000 for the twelve months ended
May 31, 1997. The decrease is primarily due to the non-cash charge of $4,900,000
in twelve months ended May 31, 1997, related to the issuance of common stock to
consultants for services offset by increase in salaries of $430,000, advertising
of $278,000 and professional fees of $226,000 for the year ended May 31, 1998.
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MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balances were approximately $739,000 at May 31, 1999,
compared with $4,991,000 at May 31, 1998. The Company had working capital
deficit of approximately $2,861,000 at May 31, 1999, compared with a working
capital of approximately $5,039,000 at May 31,1998, a $7,900,000 decrease in
working capital. The decrease in working capital is primarily attributable to a
net loss of approximately $4,949,000 during fiscal year 1999 and transfer of
convertible debenture of $3,500,000 from long term to short term liability due
to its delinquent status, which was offset by mortgage loan of $550,000. The
Company utilized the funds for operations and capital expenditures, comprised
mainly of expenditures for computer equipment. At the present time, the Company
is not generating sufficient revenue to cover its expenses, and there can be no
assurance that the Company will be able to generate such funds internally to
continue its operations. The failure of the Company to generate sufficient funds
either internally through operations or from outside sources will have a
material effect upon the subsequent ability of the Company to continue its
operations.
The Company has suffered material operating losses and is experiencing
difficulties meeting its current obligations, including regular payroll
obligations. Due to lack of ongoing revenue, the Company has not had adequate
working capital and since May 31, 1999, cash has almost exclusively come from
borrowings. The Company is attempting to raise sufficient equity capital to meet
its current obligations and to implement its new business plan. However, the
Company has experienced difficulty in doing so and there can be no assurances
that it will be successful in raising capital or implementing its new business
plan.
The Company has utilized significant resources in research and development
and marketing efforts. Those efforts must continue in order for the Company to
be successful in the implementation of its new strategic direction. (See
"Cautionary Factors" below) The Company will require additional capital, most
likely from private placements of equity, in order to meet its obligations and
to implement its new strategic direction.
Accounts receivable balances decreased to $8,000 at May 31, 1999 from
$338,000 at May 31, 1998. The decrease is directly attributable to the lower
revenue volume, particularly in the fourth quarter of fiscal 1999.
Inventory balances increased to $161,000 at May 31, 1999. The Company
previously maintained no inventories but due to its new product line,
Counterfeit Cop, the Company is purchasing finished product units directly from
a third party manufacturer. The Company had a purchase commitment of an
additional $464,000 of the Counterfeit Cop for which payment has been arranged
through the establishment of a letter of credit fully collateralized by a letter
of credit.
Accrued liabilities increased to $638,000 at May 31, 1999 from $206,000 at
May 31, 1998. The increase is primarily attributable to accrued interest on the
convertible debentures of $210,000 and approximately $250,000 in accrued legal
fees related to litigation with the debenture holders at May 31, 1999.
The Company used net cash in the amount of $173,000 for the purchase of
property and equipment in the year ended May 31, 1999. Most of that amount was
used in the purchase of building improvements, furnishings and computer
equipment. The Company took out a mortgage on its building in the year ended May
31, 1999. Net proceeds on the new debt were $550,000.
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The Company does not intend to require material capital expenditures in the
short term. However, as discussed above, the Company will require cash to
implement its new strategic direction. In June 1999, the Company entered into an
agreement with a third party to purchase certain technology. The terms of that
agreement include an original purchase price for the software of $600,000. The
Company had estimated at the time of purchase that an additional $275,000 would
be required to complete development of the software. The Company paid $180,000
cash at the date of purchase but failed to make the $420,000 payment due on July
30, 1999. The Company received a 30 day extension of the July 30, 1999 due date
by making a payment of $50,000 against the balance due and issuing 120,000
shares of common stock to the seller of the software. The Company later made a
determination that the software would require significant additional development
and believed that the capabilities of the software were misrepresented by the
seller. The Company failed to make the final payment of $370,000 and the status
of the software and its utilization by the Company are presently uncertain.
However, it is likely that the Company will abandon the project and write-off
its investment in the technology.
IMPACT OF INFLATION
Increases in the inflation rate are not expected to materially affect the
Company's operating expenses.
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.
YEAR 2000 COMPLIANCE.
The Company's Year 2000 preparedness efforts are diffenentiated between
information technology (IT) and non-IT systems. Non-IT systems are embedded
systems that support facilities infrastructures, such as micro-controllers in
lighting, heating/ventilation/air conditioning, securities, fire uninterrupted
power supply, telephone systems, and other such systems. IT services providers
for Year 2000 compliance for embedded systems. The Company has reasonable
assurance from its vendors that these systems are Year 2000 complaint. The
Company's IT systems include several UNIX-based and NT-based sever platforms and
a local area network. All such IT systems, including hardware and software, have
been either upgraded to the latest product versions that provide Year 2000
compliance or have had software "patches" applied (received from the vendors) to
achieve compliance. All such activity was completed by the end of the third
calendar quarter 1999.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
UNPROFITABLE OPERATING HISTORY AND LIMITED FINANCIAL RESOURCES. The Company
has not historically been profitable, and as of May 30, 1999, had suffered
cumulative operating losses aggregating over $25,000,000, and at May 30, 1999,
had a net capital deficiency and a net working capital deficiency. These
conditions raise substantial doubts about the ability of the Company to continue
as a going concern. During fiscal 2000, the Company expects to meet its working
capital and other cash requirements with cash derived from operations and other
financing as required, although there can be no assurance that the Company will
generate cash from its operations in the near future or that the Company will
obtain financing on acceptable terms. The Company has had difficulties meeting
its payroll and other operating obligations. The Company has fallen behind on
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scheduled payrolls and certain members of management have deferred taking
salaries. Additionally, the Company has no cash on hand. The Company must
continue to improve the efficiency of its operations to achieve and maintain
positive cash flow from operations. See "Business-Restructuring and New Business
Focus," "- Liquidity and Capital Resources,". There is no assurance, however,
that the Company will be able to continue as a going concern, that cash from
operations and the other sources described above will be achieved or will be
sufficient for the Company's needs, or that the Company will be able to achieve
profitability on a consistent basis.
ADDITIONAL FINANCING. The Company will require additional funds to continue
product development and marketing, and to support its working capital
requirements. The Company may seek such additional financing through private
placements of debt or equity financing, and through collaborative arrangement
with others. If adequate funds are not available when required or on acceptable
terms, the Company may be required to delay, scale back or eliminate its product
development activities and sales and marketing efforts. If this were to become
necessary, it could adversely affect the Company's business, results of
operations and financial condition.
THE COMPANY IS DEPENDENT ON ITS NEW STRATEGIC DIRECTION TO REPLACE REVENUES
FROM ITS YEAR 2000 AND COUNTERFEIT COP BUSINESS. Until the development of the
Company's new businesses the Company will derive substantially all of its
revenues from its Year 2000 and Counterfeit COP business. Management anticipates
that the Year 2000 and Counterfeit COP business will begin to decline, perhaps
dramatically, in the next few years. In order for the Company to sustain its
viability in the next few years, it will need to develop new products. The
successful development of any new products is dependent on a number of factors,
including availability of cash, the Company's ability to develop acceptable
products, anticipate the future changes and demands of applicable markets,
retrain or hire necessary personnel, and the Company's ability to provide
sufficient capital either from internally generated revenues or external sources
to properly fund the development of new products. Also, if the Company does not
complete the development of new products, it will need to seek other
opportunities to replace the revenues generated by its Year 2000 and Counterfeit
COP business. If the Company is unable to complete the development of new
products or find other sources of revenues, it could have a material adverse
affect on the Company's business, results of operations and financial condition.
THE COMPANY'S FUTURE RESULTS WILL DEPEND ON ITS ABILITY TO MANAGE CHANGE.
The Company expects to continue to experience periods of rapid change as it
implements its restructuring. The failure of the Company's new management team
to successfully manage the changing business could have a material adverse
impact on the Company's business, results of operations and financial condition.
THE COMPANY FACES POTENTIAL LIABILITY TO CLIENTS FROM ITS YEAR 2000
BUSINESS. There is increasing litigation arising out of failures or potential
failures in computer systems arising out of the Year 2000 problem. To date, the
Company is not a party to any litigation arising out of a Year 2000 failure. The
Company has attempted to limit its liability for Year 2000 claims through
provisions in contracts with customers, limiting damages, generally providing no
warranties on services through the Year 2000, and disclaiming all other
warranties. These contractual protections may not be enforceable in all
instances, and may not otherwise protect the Company from the substantial costs
involved in defending a Year 2000 claim. The Company currently self-insures
against the possibility of these costs. In the event the Company becomes a party
to any such litigation, the cost of defending such litigation or adverse outcome
could materially adversely affect the Company's business, results of operations
and financial condition.
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THE COMPANY MAY NOT BE ABLE TO RESPOND TO RAPID TECHNOLOGICAL CHANGE. Rapid
technological change characterizes the markets for Internet professional
services and Year 2000 services. The Company's future success will depend
significantly on its ability to improve existing services and products, offer
new services, and develop and market new products and services. The Company's
failure to adequately and timely respond to changing technology could result in
material adverse effects to its business, results of operations and financial
condition.
THE COMPANY MAY BE ADVERSELY AFFECTED IF IT LOSES KEY PERSONNEL. The
Company's success depends largely on the skills, experience and performance of
some key members of its senior management and technical personnel. The loss of
one or more of these key personnel could have a material adverse effect on the
business, results of operations and financial condition.
THE COMPANY'S RESULTS MAY BE ADVERSELY AFFECTED BY ITS FUTURE INTERNATIONAL
OPERATIONS. The Company anticipates that international business will account for
a growing portion of its revenues in 2000. The risks inherent in international
markets, include:
- unexpected changes in regulatory requirements;
- difficulties in staffing and managing foreign operations;
- political instability;
- potentially adverse tax consequences;
- potentially adverse differences in business customs, practices and
norms;
- differences in accounting practices;
- longer payment cycles;
- problems in collecting accounts receivable;
- fluctuations in currency exchange rates; and
- seasonal reductions in business activity during the summer months in
Europe.
Any of these could adversely impact the success of the Company's international
operations. The factors described above may have an adverse effect on the
Company's future international revenues and, consequently, on the Company's
business, results of operations and financial condition.
THE COMPANY FACES COMPETITION FOR YEAR 2000 AND COUNTERFEIT COP BUSINESS.
The Company's Year 2000 services have intense competition from two different
sources: remediation performed in-house and remediation and validation software
and services offered by direct competitors. Many of the Company's with respect
to its Year 2000 and Counterfeit COP business are better established, have
existing relationships with customers and have far greater resources than the
Company. As a result of this competition, the Company's revenues for its Year
2000 and Counterfeit COP business could decrease which would have a material
adverse effect on its business, results of operations and financial condition.
THE COMPANY MAY NOT BE ABLE TO DEVELOP SUCCESSFUL PRODUCTS. The Company
plans to develop new products. This plan is in a development stage and will
require significant expenditures of resources to complete the development
effort. The Company cannot be certain that it will have any cash on hand to
devote to the development and marketing of new products, new product
enhancements or new products compliant with present or emerging Internet
technology standards. Any delays in developing and releasing new products could
have a material adverse effect on the Company's business, results of operations
and financial condition.
22
<PAGE>
THE COMPANY MAY BE ADVERSELY AFFECTED IF IT IS NOT ABLE TO ATTRACT AND
RETAIN QUALIFIED PROFESSIONALS. The future success of the Company's new
strategic direction will depend on its ability to attract, train, motivate and
retain personnel who provide the Internet strategy, technology, marketing, and
creative skills required by clients. The Company believes that there is a
shortage of, and significant competition for, professionals with the advanced
technological skills necessary to perform the services related to E-Commerce
products and services. The Company intends to transfer current employees from
its Year 2000 business to its E-Commerce business. The transition will require
training in new technology and new skills sets applicable to E-Commerce
technology. Once trained, such individuals will be in higher demand because of
their new skill set. Additionally, not all of the Company's current personnel
will be able to acquire the skills necessary to transition to the Company's new
business. The Company cannot be certain that it will be successful in
attracting, transitioning or retaining qualified technological personnel in the
future. The Company's failure to do so could have a material adverse affect on
its ability to deliver and enhance its services.
COMPANY'S PRODUCTS AND SERVICES OBSOLETE. The markets for counterfeit
detection devices and Internet and electronic commerce products and services are
characterized by rapidly changing technology which results in product
obsolescence and short product life cycles. Accordingly, the Company's success
is dependent upon its ability to anticipate technological changes in the
industry and to conditionally identify, obtain and successfully market new
products and services that satisfy evolving technologies, customer preferences
and industry requirements. There can be no assurance that competitors will not
market products and services which have perceived advantages over those of the
Company or which render the Company's products and services obsolete or less
marketable.
INTELLECTUAL PROPERTY PROTECTION. While the Company believes that its
product and technologies are adequately protected against infringement by
confidentiality agreements, licensing agreements, copyright laws and the complex
nature of the products and technologies themselves, there can be no assurance of
effective protection. Monitoring and identifying unauthorized use of the
Company's technology may prove difficult, and the cost of distraction, and time
required for litigation may impair or completely frustrate the Company's ability
to guard adequately against such infringement.
EFFECT OF YEAR 2000 PROBLEM UPON COMPANY OPERATIONS. The Company, like any
other company, owns or uses computer software that may be impacted by the Year
2000 problem. During 1998, the Company began a review of the software it is
currently using in order to identify any systems that need to be made Year 2000
compliant. This review includes a survey of vendors of software or services to
the Company to ensure that their software is also Year 2000 compliant. The
Company intends to ensure that all such software will by Year 2000 compliant
well in advance of December 31, 1999. Management has not yet completed its
assessment of the Company's potential Year 2000 compliance costs and related
potential on the Company's operations, however, management does not believe that
the expense or effect of such compliance will be material to the Company.
THE COMPANY MIGHT NOT BE SUCCESSFUL IN IMPLEMENTING ITS DOMESTIC AND
WORLDWIDE PROPOSED TRANSITION FROM YEAR 2000 AND EXPANSION. The Company intends
to transition from the provision of Year 2000 products and services and
Counterfeit COP to the provision of products, services and solutions in the
23
<PAGE>
Internet and E-Commerce and systems integration and expand its operations
domestically and internationally; however, the Company has limited experience in
effectuating rapid expansion of in managing operations which are geographically
dispersed. There can be no assurance the Company's current management, personnel
and other corporate infrastructure will be adequate to manage the Company's
growth.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements of the Company are filed as part of
this Annual Report. See Index to Financial Statements on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
24
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a)
DIRECTORS
Andrew Lee (50). Mr. Lee was appointed to the Board of Directors on
February 24, 1998 to fill an existing vacancy. Mr. Lee is President and a
Director of Integrated Transportation Network Group Inc. Since 1997, Mr. Lee has
been the Co-Chairman of the Board and Co-Chief Executive Officer of Greater
Alliance Corporation, a financial service corporation. Since 1992, Mr. Lee has
been the President and Chief Executive Officer of First Shanghai Corporation, a
merchant bank, BOXX International Corporation, a computer and electronics
company, and TowerCom Inc., a software company. Mr. Lee also is Chairman of the
Board of Valentine USA Inc., a company that manufactures ladies' apparel.
Harvey C. Dietrich (64). Mr. Dietrich was appointed to the Board of
Directors on February 1999. Mr. Dietrich began a lifelong career in agriculture
as a live cattle buyer for various organizations in Arizona and California.
Currently he is an investor in live cattle, and owns and operates his own
cow/calf ranch in Northern Arizona. In addition, for 16 years, he owned and
operated Sun Land Beef Co., a large southwestern beef-packing house.
Messrs. Burridge and Stewart serve as directors of the Company, and their
biographies are noted below.
EXECUTIVE OFFICERS
The Company furnishes the following information concerning the executive
officers of the Company. Executive officers are elected annually by and serve at
the pleasure of the Board of Directors.
A. Lewis Burridge (79). Mr. Burridge has served as President and Chief
Executive Officer since March 1999 and has been a member of the Board of
Directors since June 1998. Prior thereto, Mr. Burridge served as a consultant to
various private and government organizations from 1995 to 1999 and worked with
Sterling Drug Inc. from 1956 to 1985. Mr. Burridge focused on the development of
Sterling's manufacturing and marketing companies throughout Asia for its medical
and consumer products in the Asia-Pacific area. He is currently a Director of
Massa, Inc., Trustee/Director of the Trinity College of Vermont and Director of
the United States-Philippines Tourism Advisory Council.
Robert L. Stewart (80). Mr. Stewart was appointed to the Board of Directors
in March 1999 and as Chairman of the Board on August 2, 1999. Mr. Stewart had
been the Chairman of the Board from 1980 until January 1999 and 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 September 5, 1996 to January 15, 1997.
Steven M. Smith (38). Mr. Smith joined the Company in May 1999 and was
elected Executive Vice President on June 15, 1999. He brings to ConSyGen 18
years of industry experience in the areas of Research, Product Development,
Marketing and Sales, Organizational Development, Operational Management,
Financial Management, and Large Scale Project Management. From 1994 to 1995 Mr.
Smith was Senior Business Consultant for Advanced Systems Consultants, Inc. From
1995 to 1998 Mr. Smith held several positions with MicroAge, Inc. including
Director of Operations and Director of Business Development.
25
<PAGE>
Rajesh K. Kapur (41). Mr. Kapur has served as Vice President and Chief
Financial Officer since March 2, 1998 and was promoted to Executive Vice
President and Chief Financial Officer on June 29, 1998. He also served as
Corporate Secretary from October 6, 1999 to June 24, 1999. From 1982 to 1988,
Mr. Kapur was employed as an Accounting Supervisor for Honeywell, Inc. From 1988
to 1995, Mr. Kapur was employed as Controller for California Micro Devices, Inc.
From 1995 to 1998 Mr. Kapur was employed as Controller for Dynaco Corporation,
Inc.
Jason M. Genet (27) Mr. Genet was an independent Consultant to the Company
from December 1998 to April 1999. In April 1999, Mr. Genet joined the Company
full time and was promoted to Managing Director of the Company's
Business/Consumer Products Division. Mr. Genet has held several high-level
Marketing and Sales positions over the past ten years both as a consultant and
manager. On October 1, 1999, Mr. Genet was promoted as Vice President of
Business Development.
Amelia C. Ulep (46). Mrs. Ulep joined the Company on July 1991 as a
bookkeeper. On October 1992, she was transferred to the Administrative
Department as Administrative Secretary to the Company. On July 1998, she was
promoted to Executive Administrator. She was elected Corporate Secretary on June
24, 1999.
Joseph R. Bodnar (60). Mr. Bodnar served as Vice President for
International Operations from June 15, 1999 to November 8, 1999. Mr. Bodnar
joined the Company in August 1997 with 30 years experience in the computer
industry and has held positions of Projects Director, Project Manager and
Consulting Analyst. Mr. Bodnar's background includes full life cycle custom
applications development and implementation to operating systems development,
and has successfully managed Y2K renovation projects on platforms including IBM,
DEC and Unisys.
Thomas S. Dreaper (56). Mr. Dreaper served as President, Chief Executive
Officer and a member of the Board of Directors of ConSyGen-Texas and
ConSyGen-Arizona from July 17, 1998 until his resignation on March 24, 1999. Mr.
Dreaper also served as Chairman of the Board from February 1999 to March 1999.
Mr. Dreaper has over 20 years of experience in the computer hardware and
software industry.
Stephen J. Kelly (43). Mr. Kelly was appointed Vice President and General
Counsel on February 12, 1998. He was appointed as Corporate Secretary of the
Company in March 1998. On June 29, 1998, Mr. Kelly was appointed to the Board of
Directors of the Company to fill an existing vacancy and was promoted to
Executive Vice President and Chief Administrative Officer. He served in this
capacity until his resignation on October 5, 1998.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
that the Company's directors and executive officers and persons owning more than
10% of the outstanding Common Stock, file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC"). Executive
officers, directors and beneficial owners of more than 10% of the Company's
Common Stock are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.
Based solely on copies of such forms furnished as provided above, or
written representation that no Form 5s were required, the Company believes that
during the fiscal year ended May 31, 1999, all Section 16(a) filing requirements
applicable to its executive officers, directors and beneficial owners of more
than 10% of its Common Stock were complied with.
26
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid to the Company's Chief Executive Officer and each of the Company's four
executive officers (other than the Chief Executive Officer) whose total annual
salary and bonus exceeded $100,000 (collectively the "Named Executive Officers")
during the fiscal year ended May 31, 1999.
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation
Compensation Awards
------------------------------ --------------
Securities
Underlying
Name and Principal Position Year Salary($) Bonus($) Options (#)(3)
- --------------------------- ---- --------- -------- --------------
A. Lewis Burridge
President and Chief Executive
Officer(1) 1999 $ 22,769 -- 1,010,000
Thomas S. Dreaper
Former President and Chief
Executive Officer 1999 $ 83,231 -- --
Ronald I. Bishop 1999 $ 87,500 -- 669,095
Former President and Chief 1998 $107,708 $1,083 900,000
Executive Officer 1997 $ 26,250 -- 400,000
J. Stephen Kelly
Former Executive Vice
President and Chief
Administrative Officer 1999 $ 46,269 -- 64,685
Robert L. Stewart 1999 $119,750 -- --
Former President and Chief 1998 $ 94,333 $1,429
Executive Officer 1997 $ 65,250 -- --
- ----------
(1) Mr. Burridge was appointed President and Chief Executive Officer effective
March 24, 1999.
(2) Mr. Dreaper served as President and Chief Executive Officer from July 17,
1998 to March 23, 1999. For information regarding Mr. Dreaper's
compensation arrangements, see "Certain Relationships and Related
Transactions." Mr. Bishop served as President and Chief Executive Officer
of the Company from January 15, 1997 to June 30, 1998. Mr. Stewart served
as President and Chief Executive Officer of the Company from September 5,
1996, the date the Company acquired ConSyGen-Arizona, through January 15,
1997. For information regarding compensation arrangements and changes in
terms of options in connection with Mr. Bishop's termination of employment,
see "Certain Relationships and Related Transactions."
(3) 1,000,000 options were granted to Mr. Burridge at $1.50 on March 30, 1999.
Options were granted to Mr. Bishop under the 1997 Amended and Restated
Non-Qualified Stock Option Plan. In November 1997, options to purchase
400,000 shares granted at an option price of $8.875 per share in March 1997
and options to purchase 500,000 shares granted at an option price of $5.50
per share in September 1997 were canceled and replaced by options to
27
<PAGE>
purchase 900,000 shares at an option price of $4.00 per share. See "Stock
Option Plans - Option Grants in Fiscal Year Ended May 31, 1998" and "Report
of Ronald I. Bishop and the Board of Directors on Executive Compensation
and Repricing of Options." Options provided to Members of the Board of
Directors are vested 50% immediately and 50% after one year. Options
provided to other employees including officers are vested at a rate of 1/48
per month.
OPTION GRANTS IN FISCAL YEAR 1999
The following table sets forth options granted during the Company's fiscal
year ended May 31, 1999 to the Named Executive Officers:
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------------------------
Potential
Realizable Value
At Assumed
Number of % of Total Annual Rates of
Shares Options Stock Price
Underlying Granted to Exercise Appreciation for
Options Employees in Price Expiration Option Term (1)
Name Granted(#) Fiscal Year ($/Share) Date 5% 10%
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
A. Lewis Burridge 1,010,000 29.0% $0.50 03/30/09 $241,115 $685,763
</TABLE>
- ----------
(1) The 5% and 10% assumed rates of annual compounded stock price appreciation
are mandated by the rules of the SEC and do not represent the Company's
estimate or projection of future prices of the Company's Common Stock or of
the potential realizable value of the options granted.
OPTION EXERCISES AND YEAR-END HOLDINGS
The following table sets forth the value of options held at the end of 1999
by the Named Executive Officers:
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options At 5/31/99 In-the-money Options At 5/31/99($)
Acquired On Value ---------------------------- ----------------------------------
Name Exercise(#) Realized (#) (#)Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ----------- ------------ ---------------------------- -------------------------
<S> <C> <C> <C> <C>
A. Lewis Burridge -- -- 105,000 / 905,000 -- / --
</TABLE>
28
<PAGE>
DIRECTOR COMPENSATION
The Company has a standard arrangement whereby directors who are not also
executive officers or employees of the Company receive compensation in the
amount of $1,000 for each meeting of the Board of Directors or of a committee of
the Board of Directors of which any such director is a member which is
physically attended by such director and $500 for each telephone meeting. In
addition, the Company has adopted a practice of granting to such directors
options to purchase 10,000 shares of the Company's Common Stock under the
Company's 1997 Amended and Restated Non-Qualified Stock Option Plan. The
following table shows information concerning options granted to directors during
the Company's fiscal year ended May 31, 1999.
Number of
Securities
Exercise Underlying
Expiration Price Options
Name Date Granted $/Share (1) Date
- ---- ---- ------- ----------- ----
Andrew Lee 02/24/98 10,000 $0.50 02/24/08
Harvey Dietrich 02/11/99 10,000 $0.50 02/11/09
John Caldwell 06/24/99 10,000 $0.50 06/24/09
- ----------
(1) All options exercisable 50% at date of grant and 50% one year from such
date.
REPORT OF A. LEWIS BURRIDGE AND THE BOARD OF DIRECTORS ON REPRICING OF OPTIONS
The following table sets forth certain information concerning all
repricings of options held by any Named Executive Officer of the Company during
1999.
<TABLE>
<CAPTION>
Original
Number of Length of Exercise Original
Securities Market Price Price of Option
Underlying of Stock at Cancelled Term New Remaining
Options Time of or Amended Exercise at Date of
Name Date Repriced Repricing Option Price (1) Repricing
- ---- ---- -------- --------- ------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
A. Lewis Burridge 03/30/99 1,010,000 $0.4688 $1.50 $0.50 exp. 3/30/09
</TABLE>
- ----------
(1) Fair market value on date of grant as determined by the Board of Directors.
29
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 1, 1999 certain information
with respect to beneficial ownership of the Company's Common Stock by: (i) each
person known by the Company to own beneficially more than 5% of the Company's
Common Stock; (ii) each of the Company's directors; (iii) each of the executive
officers of the Company; and (iv) all directors and executive officers as a
group. This information is based upon information received from or on behalf of
the named person. Unless otherwise noted, each person identified possesses sole
voting and investment power over the shares listed.
Number of Shares
Name of and Nature of Percent
Beneficial Owner (2) (11) Beneficial Ownership of Class
- ------------------------- -------------------- --------
Robert L. Stewart 6,889,500 (1)(8) 44.66%
Chairman of the Board
A. Lewis Burridge 1,010,000 (2) 6.52%
President & Chief Executive Officer
Steven M. Smith 12,500 (3) *
Executive Vice President
Rajesh K. Kapur 120,937 (4) *
Executive Vice President
Chief Financial Officer
Joseph R. Bodnar 13,647 (5) *
Vice President
International Operations
Jason Genet 4,998 (6) *
Vice President
Business Development
Andrew Lee 10,000 (7) *
Director
John Caldwell 5,000 *
Director
Harvey Dietrich 5,000 *
Director
All executive officers and
directors as a group
(8 persons) 7,707,924 50.58%
Trinidad Cranbourne 1,000,000 (9) 6.50%
- ----------
* Less than one percent
(1) 5,889,000 of such shares are owned of record by The Loreto F. Stewart &
Robert L. Stewart Family Trust, a trust of which Mr. Stewart is the sole
trustee. The remaining 1,000,000 shares are owned of record by an entity
which is controlled by Mr. Stewart. Mr. Stewart shares voting and
investment power with respect to such 1,000,000 shares. Mr. Stewart's
address is the Company's offices: 125 South 52nd Street, Tempe, Arizona
85281.
30
<PAGE>
(2) Shares of Common Stock which Mr. Burridge has the right to purchase does
not include options to purchase 900,000 shares of the Company's common
stock in connection with his employment. Options were granted at an
exercise price of $0.50 per share and on terms which provide for vesting to
the extent of 100,000 shares on date per attached plan.
(3) Shares of Common Stock which Mr. Smith has the right to purchase upon
exercise of outstanding options, exercisable within 60 days.
(4) Shares of Common Stock which Mr. Kapur has the right to purchase upon
exercise of outstanding options, exercisable within 60 days.
(5) Shares of Common Stock which Mr. Bodnar has the right to purchase upon
exercise of outstanding options, exercisable within 60 days.
(6) Shares of Common Stock which Mr. Genet has the right to purchase upon
exercise of outstanding options, exercisable within 60 days.
(7) Shares of Common Stock, which Mr. Lee has the right to purchase upon
exercise of presently exercisable outstanding options.
(8) Includes 1,000,000 shares owned of record by GEO Co. Ltd. ("GEO"), which,
in addition to being controlled by Mr. Stewart through his equity ownership
of GEO, is controlled by his daughter, Trinidad Cranbourne. Mr. Stewart,
through his equity ownership of GEO, effectively has voting and investment
control of these shares. Ms. Cranbourne also has voting and investment
control of these shares. Ms. Cranbourne's address is 96 Pokfulam Road, 11-F
Flat B-2, YY Mansion, and Hong Kong.
(9) Does not include the following shares of Common Stock subject to conversion
within 60 days pursuant to the provisions of the Company's 6% Convertible
Debentures:
Dominion Capital Fund, Ltd. 765,565 shares
Canadian Advantage Limited Partnership 209,781 shares
Sovereign Partners Limited Partnership 765,565 shares
The Subscription Agreement relating to the sale of the Company's 6%
Convertible Debentures prohibits the conversion of any portion of a
debenture which would result in the holder being deemed the beneficial
owner of 4.99% or more of the issued and outstanding Common Stock of the
Company. Accordingly, the shares of Common Stock shown as beneficially
owned by each holder of the Convertible Debentures represents the maximum
number of such shares which, together with the Warrant Shares allocable to
such holder, is less than the 4.99 limit, determined at September 9, 1998,
as provided in the Subscription Agreement. Also included are 35,000 out of
a total of 105,000 shares of Common Stock issuable upon the exercise of
Common Stock Purchase Warrants to purchase Common Stock at $4.8818 per
share issued to the holders of the Convertible Debentures concurrently with
the sale of the Convertible Debentures (Warrants covering the balance of
70,000 shares are not exercisable within 60 days of September 9, 1998). The
Company has been advised by the holders of the Convertible Debentures that
they are not acting in concert and interpret the foregoing ownership
restriction as applicable to each holder of the Convertible Debentures
individually. Based upon the information furnished to the Company by the
holders of the Convertible Debentures such holders have no relationship to
the Company except as investors.
31
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 5, 1996, the Company acquired all of the issued and
outstanding common stock of ConSyGen-Arizona from the stockholders of such
corporation, including Robert L. Stewart, its Chief Executive officer and
controlling shareholder (the "Acquisition"). In connection with the Acquisition,
the Company issued an aggregate of 13,125,000 shares of its common stock, of
which 9,275,000 shares were issued to the stockholders of ConSyGen-Arizona,
including 8,187,000 shares to Robert L. Stewart. As a result of the Acquisition,
the former stockholders of ConSyGen-Arizona, including Mr. Stewart, became the
beneficial owners, in the aggregate, of approximately 69% of the issued and
outstanding common stock of the Company, and Mr. Stewart became the beneficial
owner of approximately 61% of such shares. As set forth in the Table under the
caption "Security Ownership of Certain Beneficial Owners and Management," Mr.
Stewart is currently the beneficial owner of approximately 48.47% of the
Company's common stock and, through his share ownership, may be deemed to
control the company. Carl H. Canter, the former controlling stockholder,
relinquished control as a result of the Acquisition.
Effective July 17, 1998, Thomas S. Dreaper joined the company as President
and Chief Executive Officer. The terms of Mr. Dreaper's employment provide for
an annual salary of $120,000 and options to purchase 1,000,000 shares of the
common stock of the Company. The options were granted to Mr. Dreaper at an
exercise price of $2.8125 per share, and are currently exercisable to the extent
of 500,000 shares if and when the Company's common stock attains a closing price
of $5.00 per share, and to the extent of the remaining 500,000 shares if and
when the share price attains closing price of $10.00 per share. The Option
expires July 17, 2008. No specific term of employment is currently specified.
Mr. Dreaper has resigned from the Company.
In July 1998, in connection with the termination of his employment and
position as President and Chief Executive Officer of the Company, Ronald I.
Bishop, was provided, as severance compensation, cash compensation in the amount
of $75,000 (6 months' salary), and an amended and restated Stock Option
Agreement fixing as vested 669,205 out of the total number of 900,000 shares
with respect to which options had been granted thereunder, and extending the
period within which options may be exercised after termination of employment
from 3 months to 3 years. Mr. Bishop has resigned from the Company.
In July 1998, in connection with the termination of his employment as Vice
President and Director of Sales and Marketing-International, Jeffrey R.
Richards, was provided, as severance compensation, cash compensation in the
amount of $19,750 (3 months' salary), and an amended and restated Stock Option
Agreement fixing as vested 125,000 out of the total number of 250,000 shares
with respect to which options had been granted thereunder, and extending the
period within which options may be exercised after termination of employment
from 3 months to 1 year from September 14, 1998. Mr. Richards has resigned from
the Company.
32
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K
(a) The following documents are filed as a part of this report:
(1) Financial Statements
Consolidated Balance Sheets as of May 31, 1999.
Consolidated Statements of Operations for year ended May 31, 1999
and May 31, 1998.
Consolidated Statements of Stockholders' Deficit for the year
ended May 31, 1999 and May 31, 1998.
Consolidated Statements of Cash Flows for the year ended May 31,
1999 and May 31, 1998.
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) The list of Exhibits which are filed with this report or which
are incorporated by reference herein is set forth in the Exhibit
Index, which appears following the Consolidated Financial
Statements, which Exhibit Index is incorporated herein by the
reference.
(b) The Company did not file any Current Reports on Form 8-K during the
fourth quarter ended May 31, 1999 of fiscal 1999.
33
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONSYGEN, INC.
Registrant
Date: December 28, 1999 By: /s/ A. Lewis Burridge
------------------------------
A. Lewis Burridge, President
and Chief Executive Officer
In accordance with 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/ A. Lewis Burridge President, December 28, 1999
- ------------------------ Chief Executive Officer
A. Lewis Burridge and Director
/s/ Robert L. Stewart Chairman and Director December 28, 1999
- ------------------------
Robert L. Stewart
34
<PAGE>
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.
4.2 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. (2)
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). *
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. *
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. *
10.7 Registrant's 1996 Non-Qualified Stock Option Plan. (2)
10.8 Registrant's Amended and Restated 1997 Non-Qualified Stock Option
Plan. (3)
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)
<PAGE>
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 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 10K
for the year ended May 31, 1997, and incorporated herein by reference.
* Filed herewith
<PAGE>
Annual Report on Form 10-KSB
Item 8, Item 14(a)
-----------------------------
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
EXHIBITS
------------------------------
YEAR ENDED MAY 31, 1999
ConSyGen, Inc.
TEMPE, ARIZONA
Index to Consolidated Financial Statements
Page Number
-----------
Report of Independent Accountants F-2
Consolidated Balance Sheets as of
May 31, 1999. F-3
Consolidated Statements of Operations
for year ended May 31, 1999 and May 31, 1998. F-4
Consolidated Statements of Stockholders' Deficit
for the year ended May 31, 1999 and May 31, 1998. F-5
Consolidated Statements of Cash Flows for
the year ended May 31, 1999 and May 31, 1998. F-6
Notes to Consolidated Financial Statements F-8
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
ConSyGen, Inc.
We have audited the accompanying consolidated balance sheet of ConSyGen, Inc.
and its subsidiary as of May 31, 1999 and the related consolidated statements of
operations, changes in stockholders' equity (deficit), and cash flows for year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free 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 audit provides 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. and
its subsidiary as of May 31, 1998, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated 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 material losses from
operations, has material current debt and is involved in material litigation,
for which the outcome is uncertain. These matters raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in this
regard are described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ KING, WEBER & ASSOCIATES, P.C.
Phoenix, Arizona
August 5, 1999
(except for Note 12, as to which
the date is November 3, 1999)
F-2
<PAGE>
CONSYGEN, INC.
CONSOLIDATED BALANCE SHEET
May 31,
1999
ASSETS ------------
Current Assets:
Cash and Cash Equivalents $ 739,308
Restricted Cash 467,208
Accounts Receivable 8,434
Inventory 161,320
Prepaid Expenses 15,849
Other Current Assets 19,274
------------
Total Current Assets 1,411,393
------------
Property and Equipment - Net 1,307,518
------------
Other Assets:
Debt Issuance Expense 277,076
Other Assets 14,000
------------
Total Other Assets 291,076
------------
Total Assets $ 3,009,987
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts Payable $ 50,326
Notes Payable 60,000
Capital Lease - Current portion 11,063
Mortgage - Current portion 12,886
Accrued Liabilities 637,586
Convertible Debentures 3,500,000
------------
Total Current Liabilities 4,271,861
Capital lease - Long Term Portion 53,782
Mortgage - Long Term 536,114
------------
Total Liabilities 4,861,757
------------
Commitments & Contingencies
Stockholders' Deficit :
Common Stock, $.003 par Value, Authorized
40,000,000 Shares, Issued 15,475,101 46,425
Additional Paid-in Capital 25,291,054
Accumulated Deficit (26,789,249)
Treasury Stock, at cost (70,000 shares) (400,000)
------------
Total Stockholders' Equity (1,851,770)
------------
Total Liabilities and Stockholders' Deficit $ 3,009,987
============
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
CONSYGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Year Ended May 31,
----------------------------------
1999 1998
---- ----
Revenues $ 742,134 $ 814,835
------------ ------------
Costs and Expenses:
Cost of Conversion Services 773,953 353,076
Software Research and Development 622,134 1,045,847
Selling, General and Administrative
Expenses 3,992,074 2,297,262
Interest Expense 227,046 164,504
Depreciation and Amortization 203,863 172,191
------------ ------------
Total Costs and Expenses 5,819,070 4,032,880
------------ ------------
Loss from Operations (5,076,936) (3,218,045)
Interest Income 131,131 138,981
------------ ------------
Net Loss $ (4,945,805) $ (3,079,064)
============ ============
Loss Per Common Share:
Weighted Average Common Shares
Outstanding 15,363,146 14,765,559
============ ============
Net Loss Per Common Share - Basic $ (0.32) $ (0.21)
============ ============
Net Loss Per Common Share - Diluted $ (0.32) $ (0.21)
============ ============
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MAY 31, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock Additional Total
--------------------- Paid-In Accumulated Treasury Stockholders'
Shares Amount Capital Deficit Stock Equity (Deficit)
---------- ------- ------------ ------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance - June 1, 1997 13,796,231 $41,389 $ 16,936,467 $(18,697,364) -- $(1,719,508)
Issuance of Common Stock
- - Private Placements - Net
of Finders' Fees 1,172,000 3,516 6,908,966 -- -- 6,912,482
Issuance of Common Stock -
Finders' Fees on Sale of
Common Stock 35,100 105 (105) -- -- --
Issuance of Common Stock -
Services and other 24,000 72 129,828 -- -- 129,900
Issuance of Common Stock as
Payment of Debt 339,280 1,018 1,087,282 -- -- 1,088,300
Issuance of Common Stock -
Stock Options Exercised 21,130 63 21,067 -- -- 21,130
Issuance of Common Stock as
Payment of Debt - Related
Parties 19,912 60 162,215 -- -- 162,275
Interest on Loans -- -- 13,590 -- -- 13,590
Expenses of Stock offerings -- -- (125,000) -- -- (125,000)
Purchase of Treasury stock,
at cost (70,000) Shares -- -- -- -- (400,000) (400,000)
Net Loss -- -- -- (3,079,064) -- (3,079,064)
---------- ------- ------------ ------------ --------- -----------
Balance - May 31, 1998 15,407,653 $46,223 $ 25,134,310 $(21,776,428) $(400,000) $ 3,004,105
Issuance of Common Stock -
Stock Options Exercised 67,448 202 89,728 -- -- 89,930
Net Loss -- -- -- (4,945,805) -- (4,945,805)
---------- ------- ------------ ------------ --------- -----------
Balance - May 31, 1999 15,475,101 $46,425 $ 25,224,038 (26,722,233) $(400,000) $(1,851,770)
========== ======= ============ ============ ========= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
CONSYGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Year Ended May 31,
----------------------------
1999 1998
---- ----
Cash Flows from Operating Activities:
Net Loss $(4,945,805) $(3,079,064)
Adjustments to Reconcile Net Loss to
Net Cash (Used) by Operating Activities:
Depreciation 140,962 77,747
Stock Issued for Services and Other -- 129,900
Increase in Allowance for Doubtful Accounts -- 29,000
Amortization of Debt Issuance Expense 62,901 94,444
Loan Interest - Additional Paid-in Capital -- 13,590
Changes in Operating Assets and Liabilities:
Restricted Cash (467,208) --
Accounts Receivable 329,758 (367,192)
Inventory (161,320) --
Prepaid Expenses and Other Assets (22,436) (30,810)
Accounts Payable (83,831) 71,453
Accrued Liabilities 428,716 (96,759)
Deferred Revenues -- --
----------- -----------
Net Cash (Used) by Operating Activities (4,718,263) (3,157,691)
----------- -----------
Cash Flows from Investing Activities:
Capital Expenditures (240,638) (1,213,558)
----------- -----------
Net Cash (Used) by Investing Activities (240,638) (1,213,558)
----------- -----------
Cash Flows from Financing Activities:
Proceeds of Debt Financings 620,640 3,500,000
Proceeds from Sale of Common Stock -- 7,238,752
Finders' Fees Paid on Sales of Common Stock -- (326,269)
Expenses of Stock Offerings -- (125,000)
Proceeds of Loans and Notes Payable -- --
Payments of Loans and Notes Payable -- (277,508)
Payments of Debt Financings (3,795) --
Proceeds of Loans payable -- Related Parties -- 23,190
Payments of Loans payable -- Related Parties -- (92)
Payments for Debt Issuance Expense -- (313,003)
Purchase of treasury stock -- (400,000)
Proceeds of Stock Options Exercised 89,930 21,130
----------- -----------
Net Cash Provided by Financing Activities 706,775 9,341,200
----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents (4,252,126) 4,969,951
Cash and Cash Equivalents -- Beginning of Period 4,991,434 21,483
----------- -----------
Cash and Cash Equivalents -- End of Period $ 739,308 $ 4,991,434
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
CONSYGEN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For The Year Ended May 31,
----------------------------
1999 1998
---- ----
Supplemental Cash Flow Information:
Cash Paid for Interest $ 6,988 $ 214,718
=========== ===========
Cash Paid for Income Taxes $ -- $ --
=========== ===========
Supplemental Disclosure of Non-Cash
Financing Activities:
Issuance of Common Stock as Payment of Debt-
Related Parties $ -- $ 162,275
=========== ===========
Issuance of Common Stock as payment of Debt $ -- $ 1,088,300
=========== ===========
Issuance of Common Stock as Commissions
on Sale of Common Stock $ -- $ 206,269
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
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
obtaining capital in order to take advantage of domestic and foreign business
opportunities, which might 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.) ("the acquisition"). On June 25, 1996, International Data
Systems, Inc. changed its name to ConSyGen, Inc. 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 directly to the stockholders of
ConSyGen-Arizona in exchange for all of the issued and outstanding shares of
ConSyGen-Arizona (see Notes 11 and 12). 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. 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
The Company renders automated software conversion services, including "year
2000" conversions and sells a counterfeit detection device called the
Counterfeit Cop.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has suffered material
recurring losses from operations and has had difficulty meeting its short-term
obligations, including payroll obligations. The Company also has material
uncertainties related to litigation. The Company has encountered recent
difficulties attracting capital and is not generating positive cash flows from
operations. In the case of an unfavorable result in the Company's litigation
with debenture holders, and required material repayment of principal or payment
of damages would likely exceed the Company's resoruces to meet such
requirements. 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 is attempting to raise additional capital from various
sources and is positioning the Company to move into other product lines and
technologies. However, there can be no assurances that the Company will be
successful in accomplishing these objectives. The financial statements do not
include any adjustments relating to the recoverability and classification of
assets and liabilities that might be necessary should the Company be unable to
continue as a going concern.
F-8
<PAGE>
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
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.
RECLASSIFICATIONS
Certain items in prior year financial statements have been reclassified to
conform with the current period presentation.
REVENUE RECOGNITION
Revenues from fixed-price contracts are principally recognized on
achievement of specified performance milestones negotiated with customers. This
method, which recognizes revenues on substantially the same basis as the
percentage-of-completion method, is used because management considers milestones
to be the best available measure of progress on these contracts. Provision for
estimated losses on uncompleted contracts is made in the period in which such
losses are determinable.
Revenue for "counterfeit cop" product sales is recognized upon product
shipment to customers and resellers.
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. The
carrying amount of all cash and cash equivalents approximates fair value because
of the short-term maturity of these instruments.
RESTRICTED CASH
The Company was required to establish a cash balance with a financial
institution as collateral under a letter of credit related to the production and
inventory of its new product line. The letter of credit outstanding at May 31,
1999 is equal to the $464,281 in cash set aside in a collateral account.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is computed principally by the straight-line method over the
estimated useful lives of the related assets, which ranges from three to ten
years except real property which is depreciated over 40 years.
F-9
<PAGE>
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
DEBT ISSUANCE COSTS
Costs associated with the Company's debt financing transactions have been
capitalized. Such costs are being amortized over the terms of the related
agreements. At May 31, 1999, debt issuance costs are amortized over a 5 to 15
year period.
RESEARCH AND DEVELOPMENT
Research and development expenditures, including the cost of software
development, are expensed as incurred.
INVENTORIES
Inventories consist of units of the Company's "Counterfeit Cop" and work in
process on certain unbilled and unearned service contracts. Counterfeit Cop
inventory is recorded at the lower of cost or market on a FIFO (first-in,
first-out) basis. Inventories on May 31, 1999 consisted of:
Counterfeit Cop 154,988
WIP 6,332
--------
Total $161,320
========
STOCK-BASED COMPENSATION
Statements of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, ("SFAS 123") established accounting and disclosure
requirements using a fair-value based method of accounting for stock-based
employee compensation. In accordance with SFAS 123, the Company has elected to
continue accounting for stock based compensation using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." The pro forma effect of the fair value method is
discussed in Note 10.
FINANCIAL INSTRUMENTS
Financial instruments consist primarily of cash, accounts receivable, and
obligations under accounts payable, accrued expenses, debentures, notes payable,
mortgage debt and capital lease instruments. The carrying amounts of cash,
accounts receivable, accounts payable and accrued expenses approximate fair
value because of the short maturity of those instruments. The carrying value of
the Company's capital lease arrangements approximates fair value because the
instruments were valued at the retail cost of the equipment at the time the
Company entered into the arrangements. Because the mortgage debt was recently
incurred, the estimated fair value of the mortgage debt approximates the
outstanding principal balance at May 31, 1999. The fair value of the related
party notes payable cannot be estimated because of the affiliated nature of the
agreements. The fair value of the convertible debentures could not be estimated
because of the convertible features of the debentures and the matters discussed
in Note 6.
F-10
<PAGE>
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, ACCOUNTING FOR
INCOME TAXES. In accordance with SFAS No. 109, deferred tax assets and
liabilities are established for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities at
enacted tax rates expected to be in effect when such amounts are realized or
settled.
LOSS PER SHARE
Net loss per share is calculated using the weighted average number of
shares of common stock outstanding during the year. In 1998, the Company adopted
SFAS No. 128 EARNINGS PER SHARE the effect of such was not material.
Convertible debt (Note 6) and outstanding options (Note 10) were not
considered in the calculation for diluted earnings per share for the year ended
May 31, 1999 because the effect of their inclusion would be anti-dilutive.
Loss Shares Per Share
------------ ---------- ---------
Net Income (Loss) $(4,945,805)
Preferred stock dividends N/A
BASIC EARNINGS PER SHARE
Loss available to common stockholders $(4,945,805) 15,363,146 $(0.32)
Effect of dilutive securities N/A
DILUTED EARNINGS PER SHARE N/A
Debentures convertible to 3,051,929 shares of common stock and options and
warrants to purchase 2,109,260 shares of common stock were outstanding at May
31, 1999. These securities were excluded from the computation of diluted
earnings per share because the effect of their inclusion would be anti-dilutive.
ADVERTISING EXPENSES
The Company expenses its advertising expenses as incurred. Advertising
expense totaled $301,970 and $278,167 for the years end May 31, 1999 and 1998
respectively. Advertising expense is included in selling general and
administration expenses in the accompanying statements of operations.
F-11
<PAGE>
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
1999
----------
Land $ 152,792
Building and improvements 743,511
Computers 587,024
Furniture and fixtures 134,793
Auto 20,170
----------
1,638,290
Less: Accumulated depreciation 330,772
----------
$1,307,518
Total property and equipment includes $ 49 ,969 under capital leases at May
31, 1999. Related accumulated amortization on these leases was $4,164.
NOTE 4 - NOTES PAYABLE
Notes payable consist of the following:
May 31, 1999 May 31, 1998
------------ ------------
Note payable, bearing interest at 10% per
Annum, no stated maturity and unsecured. $30,000 $30,000
Note payable, non-interest bearing, 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. 25,000 25,000
Note payable, non-interest bearing,
payable on demand and unsecured. 5,000 5,000
------- -------
$60,000 $60,000
======= =======
F-12
<PAGE>
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
NOTE 5 - MORTGAGE
On April 6, 1999, the Company obtained a mortgage on its building for
$550,000. The loan bears interest at 13% and is payable over a 15-year period in
monthly principal and interest payment of $6,959. The following represents
future principal payments for the years ending May 31:
2000 $ 12,886
2001 14,665
2002 16,689
2003 18,993
2004 21,614
Thereafter 464,153
--------
Total 549,000
Less current portion 12,886
--------
Long-term portion $536,114
========
Subsequent to May 31, 1999, the Company increased the mortgage on its building
to $700,000.
NOTE 6 - CONVERTIBLE DEBENTURES
On May 29, 1998, the Company completed a private placement of $3,500,000 in
principal amount of convertible debentures. The debentures bear interest at 6%
per annum and have a maturity date of May 29, 2003. The debentures include
warrants to purchase 105,000 shares of the Company's common stock ("Warrant
Shares"). The aggregate net proceeds to the Company after payment of finders'
fees and expenses was approximately $3,200,000. Included in the finders' fees
paid in connection with the placement of the convertible debentures, the Company
issued warrants to purchase 10,000 shares of its common stock.
The debentures are convertible into the Company's common stock at a rate
equal to the lesser of $4.88 per share or 80% of the average closing bid price
of the common stock for the five day period immediately preceding the applicable
conversion date. The warrants are exercisable at a rate of $4.88 per share and
may be exercised as to one third of the Warrant Shares at any time after May 29,
1998, as to another one third, after November 29, 1998, as to the remaining one
third after May 29, 1999. The warrants expire on May 29, 2003.
The debentures may be converted at any time after 120 days from issue by
the holder through the maturity date. Mandatory conversion is effected on the
maturity date if the debentures have not yet been converted as of that date. The
debentures contain certain restrictions on future borrowings, allow for interest
to be paid in additional shares of the Company's common stock. The debentures
limit the number the shares issuable under conversion and exercise of warrants
to 3,051,929.
The debt was recorded at the face amount of the debentures. The initial
conversion rate of the debentures and the exercise price of the warrants were at
rates equal to or greater than the quoted market price of the Company's common
stock at the date of issuance. Management believes that there was no value to
ascribe to the warrants at the time of issuance.
F-13
<PAGE>
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
The debentures are to be repaid by conversion into common stock except in
the event of default, in which case, repayment is to be made in cash. The
Company has incurred several events of default as defined by the debenture. The
technical defaults relate to the failure to make interest payments and failure
to honor the holders' request to convert the debentures. Accordingly, as stated
in the debenture agreement, the debt is classified as current.
The Company entered into a dispute with the four debenture holders in
September 1998. The holders submitted requests for conversion of the debentures
and the Company would not honor that request. The Company has questioned the
propriety of certain trading of the Company's common stock alleged to have been
conducted by the debenture holders. The dispute has led to claims and counter
claims filed by both parties in Canadian and U.S. courts. The aggregate claims
against the Company and certain of its officers in these matters are
approximately $4 million. In addition, damages may be payable to the debenture
holders under the terms of the debenture agreement should the Company fail to
prevail in this matter. Those damages could range from $50,000 to $700,000.
There may be additional amounts if the cases are decided in favor of the
debenture holders. There may be court and litigation costs. Due to the Company's
financial condition, if the debenture holders attempt to force repayment of the
debt due to the alleged default, the Company presently has no resources to meet
the obligation. The Company intends to vigorously defend its position. However,
the outcome of these cases is presently uncertain.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company's former corporate offices were leased under a non-cancelable
operating lease, as amended, which expired October 31, 1998. During the fiscal
year ended May 31, 1999 the Company leased sales offices from one to six month's
duration. Rental expense aggregated $45,000 for the year ended May 31, 1999 and
$120,000 for the year ended May 31, 1998. Future minimum rental commitments
total $12,000 for the year ended May 31, 2000.
CAPITAL LEASES
The Company leased certain software and computer equipment in Fiscal Year
1999. Future minimum lease payments are as follows for the years ended May 31:
2000 $ 19,592
2001 $ 19,215
2002 $ 19,215
2003 $ 19,215
2004 $ 12,717
--------
Total $ 89,954
Less amount representing interest 25,109
--------
Present Value of minimum Lease Payments 64,845
Less Current Portion 11,063
--------
Long-term Portion $ 53,782
========
F-14
<PAGE>
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
PURCHASE COMMITMENT
In December 1998, the Company entered into a commitment to purchase 30,000
units of inventory, of which 10,115 were purchased as of May 31, 1999. The
Company was required to obtain a letter of credit, which is collateralized by
certificate of deposit.
LEGAL PROCEEDINGS
On August 10, 1999, Thomas S. Dreaper, former President and CEO of
ConSyGen, Inc. served an action which was filed in the United States District
Court for the District of Nevada against the Company and A. Lewis Burridge, its
President and CEO to receive indemnification in regard to a lawsuit filed by
ConSyGen $3.5 million debenture holders, reimbursement of legal expenses he has
incurred, for damages for breach of the indemnification contract in an amount in
excess of $75,000 and exemplary and punitive damages in an amount in excess of
$1,000,000. Due to uncertainties related to the claims filed by the debenture
holders (Note 6), the outcome of this litigation cannot yet be estimated.
CONCENTRATION OF CREDIT RISK
The Company's cash, cash equivalents and accounts receivable are subject to
potential credit risk. The Company's cash management and investment policies
restrict investments to highly-liquid investments. Cash and cash equivalents
exceeded the FDIC and SIPC insurance limits by $9,837 at May 31, 1999.
NOTE 8 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
A deferred tax liability of $13,600 existed at May 31, 1999, relating to
book and tax differences in the bases of property and equipment.
A deferred tax asset totaling $8,134,000 was primarily offset by a
valuation allowance of $8,120,000 and the deferred tax liability. The valuation
allowance was provided due to the uncertainty of future realization of federal
and state net operating loss carryforwards that give rise to approximately
$8,092,000 of the deferred tax asset. The balance of the deferred tax asset
relates to differences in book and tax accounting relative to the compensated
absences and allowances on accounts receivable. The Company has federal and
state net operating loss carryforwards of $20,982,000 at May 31, 1999. The
federal loss carryforwards expire in 2010 through 2018 and state loss
carryforwards expire 1999 through 2003.
Income taxes for years ended May 31:
1999 1998
----------- -----------
Current Benefit $ 2,091,000 1,000,000
Deferred Benefit (Provision) (2,091,000) (1,000,000)
----------- -----------
Net income tax provision $ -0- $ -0-
=========== ===========
F-15
<PAGE>
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
The income tax benefit of $2,091,000 generated for the year ended May 31,
1999 was offset by an increase in the valuation allowance of $2,078,000. The
valuation allowance was increased due to uncertainties as to the Company's
ability to generate sufficient taxable income to utilize the net operating loss
carryforwards.
A reconciliation for the differences between the effective and statutory
income tax rates is as follows:
1999
-----------------------
Federal statutory rates $(1,682,604) (34)%
State income taxes - net of federal benefit (395,907) (8)%
Valuation allowance for operating loss
carryforwards 2,078,818 42%
Other (307) --%
----------- ----
Effective rate $ -0- -0-%
----------- ----
NOTE 9 - STOCKHOLDERS' EQUITY (DEFICIT)
During June 1997, the Company sold 120,000 shares of its common stock in a
private placement for gross proceeds of $1,080,000. In connection with the sale,
the Company paid finders' fees of $75,000 in cash and 3600 shares of common
stock valued at $21,600.
On September 6, 1997, the Company completed the sale of 152,000 shares of
its common stock in a private placement for gross proceeds of $882,500. In
connection with the sale, the Company paid finders' fees of $66,000.
On September 29, 1997, the Company sold 900,000 shares of its common stock
in a private placement for gross proceeds of $5,276,250. In connection with the
sale, the Company paid finders' fees of $184,667 in cash and 31,500 shares of
common stock valued at $184,669.
TREASURY STOCK
In March 1998, the Company purchased 70,000 shares of its common stock for
$400,000 in cash from a former consultant.
ACQUISITION OF CONSYGEN-ARIZONA
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 (the "Acquisition"), ConSyGen-Texas effected a 1-for-40 reverse
split of its common stock. ConSyGen-Texas closed the Acquisition on September 5,
1996. As a result of the Acquisition, ConSyGen-Arizona became a wholly-owned
subsidiary of ConSyGen-Texas. The Acquisition was treated as a reverse
acquisition (purchase), with ConSyGen-Arizona being the acquirer and
ConSyGen-Texas being the acquired company.
F-16
<PAGE>
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
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
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. After the Acquisition, ConSyGen-Arizona's stockholders
held approximately 69% of the outstanding common stock of ConSyGen-Texas.
NOTE 10 - STOCK OPTIONS
The Company grants stock options from time to time to executives and key
employees. The options are available for grant under several option plans. The
plans generally cover key employees and other "Non-Employee Participants" and
grants typically vest over five years and expire ten years from the date of
grant. The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," and continues to account for stock based compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". Accordingly, no compensation cost
has been recognized for the stock options granted. Had compensation cost for the
Company's stock options been determined based on the fair value at the grant
date for awards in 1999 and 1998, consistent with the provisions of SFAS No.
123, the Company's net loss and loss per share would have been increased to the
pro forma amounts indicated below:
1999 1998
----------- -----------
Net Loss - as reported $(4,945,835) $(3,079,064)
Net Loss - pro forma $(5,857,984) $(5,502,783)
Basic Loss per share - as reported $ (0.32) $ (0.21)
Basic Loss per share - pro forma $ (0.38) $ (0.37)
Diluted loss per share on a pro forma basis is not presented because the
effect of such would be anti-dilutive.
Under the provisions of SFAS No. 123, the number of options used to
determine net earnings and earnings per share under a pro forma basis were;
proportionately vested options granted of 715,000 for the year ended May 31,
1999 and 1,400,969 proportionately vested options for the year ended May 31,
1998.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions for years
ended May 31:
1999 1998
---- ----
Dividend yield None None
Volatility 2.806 0.300
Risk free interest rate 5.75% 7.00%
Expected asset life 5 years 3 years
F-17
<PAGE>
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options, which have no vesting or transferability
restrictions. These matters were taken into consideration when estimating the
fair value of the Company's options. However, the Company's options have
characteristics significantly different than traded options.
Under the various option plans, the total number of shares of common stock
that may be granted is 3,500,000. At May 31,1999, 2,686,159 have been granted
under those plans. In addition, during the year ended May 31, 1999, the board of
directors approved the granting of 1,000,000 options to the current president
and chief executive officer. Those options were exercisable at $1.50 per share,
repriced to $0.50 on September 30, 1999, expire in ten years and vest over five
years.
The summary of activity for the Company's stock options is presented below:
Weighted Weighted
Average Average
Exercise Exercise
1999 Price 1998 Price
----------- ------- ------------ -------
Options outstanding at beginning
of year 2,633,870 $2.62 1,630,000 $3.11
Granted 2,445,000 $1.53 1,480,000 $1.22
Exercised (67,448) $1.32 (21,130) $6.50
Terminated/Expired (1,445,000) $2.10 (455,000) $4.19
Options outstanding at end of year 2,658,421 $1.91 2,633,870 $2.62
Options exercisable at end of year 1,994,260 $2.26 1,400,969 $2.84
Options available for grant at
end of year 813,841 866,130
Price per share of options
outstanding $0.82-$4.75 $3.50-$10.00
Weighted average remaining
contractual lives 7.6 years 8.9 years
Weighted average fair value of
options granted during the year $ 0.42 $ 1.73
There were 1,555,000 options, granted in previous years that were repriced
in the year ended May 31, 1999. The original exercise price on the repriced
options varied from $1.75 to $5.50. The options were repriced to an exercise
price of $1.50. No compensation expense was recognized due to these
modifications in the year ended May 31, 1999 due to the repriced option exercise
price exceeding the trading price of the Company's stock at May 31, 1999.
The Company has issued warrants to purchase common stock. At May 31, 1998,
there were 1,515,000 warrants outstanding at exercise prices ranging from $4.88
to $5.00 with a weighted average exercise price of $4.99. Of these warrants, all
have expired in the year ended May 31, 1999, except for 115,000 warrants issued
in connection with the issuance of the convertible debentures. These warrants
have an exercise price of $5.00.
F-18
<PAGE>
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
NOTE 11 - SALES AND MARKETING
The market for the Company's products and services consists of business and
governmental organizations. The Company's sales and marketing efforts are
implemented through a direct sales force, supported by promotion through
articles in trade publications and trade shows that address the software
maintenance market, teaming partners, distributors, and arrangements with system
integrators that provide computer-related services to end users. The Company
operates in one business segment.
NOTE 12 - SUBSEQUENT EVENTS
On June 16, 1999, the Company entered into an agreement with a third party
to acquire certain software. The software was represented to have unique
capabilities related to data base retrieval. The Company acquired the software
in connection with its attempts to move into other product lines including
Internet commerce. The original purchase price for the software was $600,000.
The Company had estimated at the time of purchase that an additional $275,000
would be required to complete development of the software. The Company paid
$180,000 cash at the date of purchase but failed to make the $420,000 payment
due on July 30, 1999. The Company received a 30 day extension of the July 30,
1999 due date by making a payment of $50,000 against the balance due and issuing
120,000 shares of common stock to the seller of the software. The Company later
made a determination that the software would require significant additional
development and believed that the capabilities of the software were
misrepresented by the seller.
The Company failed to make the final payment of $370,000 and the status of
the software and its utilization by the Company is presently uncertain. However,
it is likely that the Company will write off its investment in this software in
the first quarter of fiscal 2000.
The Company has experienced serious cash flow difficulties. The Company has
borrowed funds to meet current operating obligations. Subsequent to May 31,
1999, the Company borrowed funds from board member and significant shareholder.
A net proceeds to the Company under these agreements was $179,505. The repayment
agreement with the lender is in the form of a non-interest bearing demand note
of $96,573 and 332,500 shares of the Company's common stock.
Subsequent to May 31, 1999, the Company also secured additional financing
of $150,000 collateralized by a second mortgage on the Company's building. The
Company borrowed additional funds from a third party under two separate notes,
the terms of which resulting in the Company receiving net proceeds of $120,000
with repayment of $155,000 within seven days from the dates of the loans. The
Company failed to make the repayment when due. Interest accrues at a rate of 2%
per month on the past due balance.
Subsequent to May 31, 1999, the Company granted 720,000 options to purchase
the Company's common stock to numerous employees. The options are exercisable at
$0.50 per share.
F-19
EXHIBIT 21
Subsidiaries of the Registrant
Subsidiary Jurisdiction of Incorporation
---------- -----------------------------
ConSyGen, Inc. Arizona
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