SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(AMENDMENT NO. 2)
(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 under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from __________ to __________
Commission File Number 0-17598
CONSYGEN, INC.
----------------------------------------------
(Name of Small Business Issuer in Its Charter)
TEXAS 76-0260145
------------------------------- -------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
125 SOUTH 52ND STREET, TEMPE, AZ 85281
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(480) 394-9100
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
To Be So Registered Each Class Is To Be Registered
------------------- ------------------------------
----------------------------- ------------------------------
----------------------------- ------------------------------
Securities registered under Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.003
-----------------------------
(Title of Class)
-----------------------------
(Title of Class)
<PAGE>
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 [X] No [ ]
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 the 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 $0.6875. 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-KSB.
<PAGE>
Part II, Item 7, "Financial Statements", is hereby amended and restated to
include the report of Wolinetz, Gottlieb & Lafazan, P.C., the Company's former
independent accountants. No other changes were made to the financial statements
or notes thereto. The consolidated financial statements as amended and restated
begin on page F-1 of this Annual Report on Form 10-KSB and follow the signature
page of this amendment.
Part IV, Item 13, "Exhibits, Financial Statement Schedules, and Reports on Form
8-K", is hereby amended and restated as follows:
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Report of King, Weber & Associates, P.C., Independent Accountants
Report of Wolinetz, Gottlieb & Lafazan, P.C., Independent Accountants
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.
(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.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Amendment No. 2 to Form 10-KSB
to be signed on its behalf by the undersigned, thereunto duly authorized.
CONSYGEN, INC.
By: /s/ Eric J. Strasser
------------------------------------
Eric J. Strasser, Vice President
and Chief Financial Officer
(Principal Financial Officer)
Dated: May 2, 2000
<PAGE>
Annual Report on Form 10-KSB
Item 7, Item 13(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 King, Weber & Associates, P.C., Independent Accountants F-2
Report of Wolinetz, Gottlieb & Lafazan, P.C., Independent Accountants F-2A
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, 1999, 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 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>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
ConSyGen, Inc. (A Texas Corporation)
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity (deficit), and cash flows for year ended May 31, 1998 of
ConSyGen, Inc. (a Texas Corporation) and its subsidiary. 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 results of operations and cash flows for
the year ended May 31, 1998 of ConSyGen, Inc. (a Texas Corporation) in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring losses from operations
which 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/ WOLINETZ, GOTTLIEB & LAFAZAN, P.C.
Rockville Centre, New York
July 17, 1998
F-2A
<PAGE>
CONSYGEN, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
May 31,
1999
------------
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>
CONSYGEN, INC.
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 35,100 105 (105) -- -- --
Common Stock
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. 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.
<TABLE>
<CAPTION>
Share Loss Shares Per Share
- ----- ------------ ----------- ---------
<S> <C> <C> <C>
Net Income (Loss) $(4,945,805)
Preferred stock dividends N/A
BASIC EARNINGS PER SHARE
Loss available to common stockholders $(0.32) $(4,945,805) $15,363,146 $(0.32)
Effect of dilutive securities N/A
DILUTED EARNINGS PER SHARE N/A
</TABLE>
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
Futniture 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 status 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 regards to lawsuit filed by
ConSyGen $3.5 million debenture holders, reimbursement of 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:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Exercise Exercise
1999 Price 1998 Price
--------- ------ --------- ------
<S> <C> <C> <C> <C>
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 813,841 866,130
end of year
Price per share of options $0.82-$4.75 $3.50-$10.00
outstanding
Weighted average remaining 7.6 years 8.9 years
contractual lives
Weighted average fair value of options $0.42 $1.73
granted during the year
</TABLE>
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
