MATERIAL CHANGES IN RESULTS OF OPERATIONS
Although the Company is actively marketing its ConSyGen 2000 and ConSyGen Conversion toolsets, the Company is not currently generating significant revenue from its ConSyGen 2000 or its ConSyGen Conversion toolset, or otherwise. Although the Company has completed several pilot (non-revenue generating) Year 2000 conversion projects, and is currently working on two revenue generating conversion projects, the Company has not yet completed a revenue generating Year 2000 conversion project. 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 have been focused on the further development of its ConSyGen Conversion toolset, including extending the toolset to cover new hardware environments. Such further development and extension of the toolset was necessary, as the toolset was limited in application to Honeywell/BULL systems and the Company desired to significantly increase the speed of conversions. The Company recently entered into three revenue generating contracts, pursuant to which the Company is providing conversion services, including both migration and Year 2000 correction services.
Quarterly and Six Month Periods Ended November 30, 1997 and 1996
Net Losses. For the quarter ended November 30, 1997, the Company incurred net losses of $1,010,000, compared with net losses of $4,816,000 for the comparable prior quarter, a decrease of $3,806,000. For the six months ended November 30, 1997, the Company incurred net losses of $1,754,000, compared with net losses of $6,168,000 for the comparable prior period, a decrease of
$4,414,000. An explanation of these losses is set forth below.
Revenues. For the quarter ended November 30, 1997, the Company had operating revenue of $121,000, compared with no operating revenue for the comparable prior period. For the six months ended November 30, 1997, the Company had $121,000 in operating revenue, compared with no operating revenue in the comparable prior period. This revenue was related to a conversion services contract which the Company is currently performing. The Company has abandoned its software licensing and maintenance business and is now focused on the marketing of its conversion services, including its Year 2000 conversion services.
Software Development Expenses. For the quarter ended November 30, 1997, software development expenses were $294,000, compared with $263,000 for the quarter ended November 30, 1996, an increase of approximately $31,000. For the six months ended November 30, 1997, software development expenses were $578,000, compared with $473,000 for the comparable prior period, an increase of $105,000. These 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 conversion services, including Year 2000 conversion services.
General and Administrative Expenses. For the quarter ended November 30, 1997, general and administrative expenses were approximately $706,000, compared with approximately $4,479,000 for the quarter ended November 30, 1996, a decrease of $3,773,000. This decrease in general and administrative expenses was primarily attributable to a decrease of $4,173,000 in non-cash compensation
expenses (related to stock issued for services), offset by the following: a $123,000 increase in expenses associated with the Company's status as a public company; a $244,000 increase in payroll and related expenses, and a $33,000 increase in other general expenses. For the six months ended November 30, 1997, general and administrative expenses were $1,040,000, compared with $5,506,000
for the comparable prior period, a decrease of $4,466,000. This decrease in general and administrative expenses was primarily attributable to a decrease of $5,062,000 in non-cash compensation expenses (related to stock issued for services), offset by the following: a $257,000 increase in expenses associated with the Company's status as a public company and a $339,000 increase in payroll and related expenses.
Depreciation Expense. For the quarter ended November 30, 1997, depreciation expense was approximately $25,000, compared with $5,000 for the comparable prior period, an increase of $20,000. For the six months ended November 30, 1997, depreciation expense was $38,000, compared with $10,000, for the comparable prior period. These increases are attributable primarily to purchases of furniture and equipment.
Amortization Expense. For the quarter ended November 30, 1997, amortization of debt issuance expense was $9,000, compared with $11,000 for the comparable prior period, a decrease of $2,000. For the six months ended November 30, 1997, amortization of debt issuance expense was $17,000, compared with $73,000 for the comparable prior period, a decrease of $56,000. These decreases
are attributable to certain debt issuance expenses having been fully amortized.
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At November 30, 1997 the Company continued to incur, and has
historically incurred, substantial and recurring losses. For the six months ended November 30, 1997, the Company did not generate significant operating revenue. The Company continues, however, to incur substantial costs and expenses in connection with its business operations. As noted above, the Company recently entered into three revenue generating contracts, pursuant to which the Company
is providing conversion services, including both migration and Year 2000 correction services.
The Company's cash and cash equivalent balances were approximately $4,683,000 at November 30, 1997, compared with $21,000 at May 31, 1997. The Company had working capital of approximately $4,321,000 at November 30, 1997, compared with a working capital deficit of approximately $857,000 at May 31, 1997, an increase in working capital of approximately $5,178,000. This ncrease in working capital is primarily attributable to proceeds from the sale of Common Stock.
The Company believes that it now has sufficient capital to fund its continuing operations for approximately twelve months.
As of January 1998, the Company had no material commitments with respect to capital expenditures.
IMPACT OF INFLATION
Increases in the inflation rate are not expected to affect the Company's operating expenses. Although the Company has no current plans to borrow additional funds, if it were to do so at variable interest rates, any increase in interest rates would increase the Company's cost of borrowed funds.
SEASONALITY
The Company's operations are not affected by seasonal fluctuations, although the Company's cash flows may at times be affected by fluctuations in the timing of cash receipts from large contracts.
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES
On September 29, 1997, the Company sold 900,000 shares of Common Stock in a private placement for gross proceeds of $5,276,250. In connection with this offering, the Company paid the following finder's fee: approximately $185,000 in cash and 31,500 shares of Common Stock. The net proceeds of this offering were
approximately $5.1 million. The securities were offered and sold exclusively to "accredited investors," within the meaning of Rule 501 under the Securities Act of 1933, as amended (the "Act").
In October 1997, the Company issued 30,747 shares of Common Stock in payment of indebtedness in the aggregate amount of $250,575.
The sale of all of the foregoing securities was exempt from registration under Section 5 of the Act, pursuant to Rule 506 of Regulation D promulgated thereunder. The facts relied upon by the issuer were as follows: all the investors were "accredited investors," within the meaning of Rule 501 under the Act; the securities were not offered or sold by means of general solicitation or advertising; investors were provided information about the Company and given the opportunity to ask questions of and receive answers from management of the Company; and the issuer took reasonable steps to assure that the purchasers were not "underwriters" within the meaning of Section 2(11) of the Act.
On November 10, 1997, the Company issued to a consultant of the Company warrants to purchase an aggregate of 100,000 shares of Common Stock at an exercise price of $5.00 per share. The warrants were issued to the consultant in consideration of services rendered to the Company. The sale of these warrants was exempt from registration under Section 5 of the Act, pursuant to Section
4(2) of the Act and the rules and regulations thereunder. The facts relied upon by the issuer were as follows: the consultant is an "accredited investor," within the meaning of Rule 501 under the Act; the warrants were not offered or sold my means of any general solicitation or advertising; the consultant is sophisticated about business and financial matters and knowledgeable about the
Company and its prospects; and the issuer took reasonable steps to assure that the consultant was not an underwriter within the meaning of Section 2(11) under the Act.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting in Lieu of Annual Meeting of the Stockholders of the Company was held on November 20, 1997. At such Meeting, the Stockholders of the Company re-elected Robert L. Stewart, Leslie F. Stewart and Ronald I. Bishop as the directors of the Company.
The number of votes cast with respect to the election of directors was as follows:
DIRECTOR FOR AGAINST ABSTAIN
-------- --- ------- -------
Robert L. Stewart 10,700,342 15,902 117,466
Leslie F. Stewart 10,700,323 15,921 117,466
Ronald I. Bishop 10,715,742 502 117,466
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------------------
2 Plan of Acquisition between the Company and the stockholders
of ConSyGen, Inc., an Arizona corporation, dated August 28,
1996, filed as Exhibit 2 to the Company's Current Report on
Form 8-K, dated September 5, 1996 and incorporated herein by
reference.
3.1 Articles of Incorporation of the Company, as amended.(1)
3.2 By-Laws of the Company, filed as Exhibit 3.B to the Company's
Registration Statement on Form S-18, File No. 33-22900-FW, and
incorporated herein by reference.
4.1 Specimen common stock certificate, filed as Exhibit 4.B to the
Company'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
the issuance of warrants to purchase an aggregate of 1,000,000
shares of the Company's Common Stock, $.003 par value.(2)
4.3 Subscription Agreement between the Company and Little Wing,
L.P. for convertible debt of the Company (including Summary of
Terms).(2)
4.4 Subscription Agreement between the Company and Tonga Partners,
L.P. for convertible debt of the Company (including Summary of
Terms).(2)
4.5 Form of Subscription Agreement used in connection with Rule
506 offering in the aggregate amount of $1,080,000.(1)
4.6 Form of Subscription Agreement used in connection with Rule
506 offering in the aggregate amount of $882,500.(1)
4.7 Form of Common Stock Purchase Warrant issued to a consultant,
Howard R. Baer, in August 1997.(1)
4.8 Common Stock Purchase Warrant issued to Howard R. Baer's
designee, Kevin C. Baer, in August 1997.(1)
4.9 Subscription Agreement used in Rule 506 offering in the
aggregate amount of $5,276,250.(3)
4.10 Form of Subscription Agreement used in connection with
issuance of shares in payment of indebtedness in the aggregate
amount of approximately $250,000.(3)
----------------------
(1) Filed as an Exhibit, with the same Exhibit number, to the Company'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 Company'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 Company's
Registration Statement on Form S-1, File No. 333-40649, and incorporated herein
by reference.
Item 6. EXHIBITS AND REPORTS IN FORM 8-K - CONTINUATION
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------------------
4.11 Common Stock Purchase Warrant issued to a consultant's
designee, Irvington International Limited, in November,
1997.(3)
10.1 Agreement between the Company and Carriage House Capital, Inc.
dated May 19, 1997, superseding letter agreements (also filed
as Exhibit 10.1) between Carriage House Capital, Inc. and the
Company's wholly-owned subsidiary, dated June 14, 1996 and
October 26, 1995.(2)
10.2 Consulting Agreement between Carriage House Capital, Inc. and
the Company dated July 10, 1996.(2)
10.3 Consulting Agreement between Mikesco, Inc. and the Company
dated July 10, 1996.(2)
10.4 Consulting Agreement between Concorda Corp. and the Company
dated July 10, 1996.(2)
10.5 Consulting Agreement between Scarlet Investment Group, Inc.
and the Company dated July 10, 1996. (2)
10.6 Consulting Agreement between The Canter Corporation and the
Company dated August 20, 1996.(2)
10.7 Company's 1996 Non-Qualified Stock Option Plan.(2)
10.8 Company's Amended and Restated 1997 Non-Qualified Stock Option
Plan.(3)
10.9 Consulting Agreement between the Company and Innovative
Research Associates, Inc.(2)
10.10 Form of Indemnification Contract between the Company and each
executive officer and director of the Company.(3)
10.11 Agreement between the Company and Carriage House Capital,
Inc., effective as of September 1, 1997, terminating all
existing agreements between the Company and Carriage House
Capital, Inc. and its affiliates.(3)
27 Financial Data Schedule
(b) Reports on Form 8-K
Not applicable.
-------------------------------
(2) Filed as an Exhibit, with the same Exhibit number, to the Company'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 Company's
Registration Statement on Form S-1, File No. 333-40649, and incorporated herein
by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSYGEN, INC.
Date: January 14, 1998 By: /s/ Ronald I. Bishop
--------------------------------- --------------------
Ronald I. Bishop, President
and Chief Executive Officer
Date: January 14, 1998 By: /s/ Kenneth Harvey
--------------------------------- ------------------
Kenneth Harvey, Controller
(Chief Accounting Officer)
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------------------
2 Plan of Acquisition between the Company and the stockholders
of ConSyGen, Inc., an Arizona corporation, dated August 28,
1996, filed as Exhibit 2 to the Company's Current Report on
Form 8-K, dated September 5, 1996 and incorporated herein by
reference.
3.1 Articles of Incorporation of the Company, as amended.(1)
3.2 By-Laws of the Company, filed as Exhibit 3.B to the Company's
Registration Statement on Form S-18, File No. 33-22900-FW, and
incorporated herein by reference.
4.1 Specimen common stock certificate, filed as Exhibit 4.B to the
Company'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
the issuance of warrants to purchase an aggregate of 1,000,000
shares of the Company's Common Stock, $.003 par value.(2)
4.3 Subscription Agreement between the Company and Little Wing,
L.P. for convertible debt of the Company (including Summary of
Terms).(2)
4.4 Subscription Agreement between the Company and Tonga Partners,
L.P. for convertible debt of the Company (including Summary of
Terms).(2)
4.5 Form of Subscription Agreement used in connection with Rule
506 offering in the aggregate amount of $1,080,000.(1)
4.6 Form of Subscription Agreement used in connection with Rule
506 offering in the aggregate amount of $882,500.(1)
4.7 Form of Common Stock Purchase Warrant issued to a consultant,
Howard R. Baer, in August 1997.(1)
4.8 Common Stock Purchase Warrant issued to Howard R. Baer's
designee, Kevin C. Baer, in August 1997.(1)
4.9 Subscription Agreement used in Rule 506 offering in the
aggregate amount of $5,276,250.(3)
-----------------------------
(1) Filed as an Exhibit, with the same Exhibit number, to the Company'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 Company'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 Company's
Registration Statement on Form S-1, File No. 333-40649, and incorporated herein
by reference.
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------------------
4.10 Form of Subscription Agreement used in connection with
issuance of shares in payment of indebtedness in the aggregate
amount of approximately $250,000.(3)
4.11 Common Stock Purchase Warrant issued to a consultant's
designee, Irvington International Limited, in November,
1997.(3)
10.1 Agreement between the Company and Carriage House Capital, Inc.
dated May 19, 1997, superseding letter agreements (also filed
as Exhibit 10.1) between Carriage House Capital, Inc. and the
Company's wholly-owned subsidiary, dated June 14, 1996 and
October 26, 1995.(2)
10.2 Consulting Agreement between Carriage House Capital, Inc. and
the Company dated July 10, 1996.(2)
10.3 Consulting Agreement between Mikesco, Inc. and the Company
dated July 10, 1996.(2)
10.4 Consulting Agreement between Concorda Corp. and the Company
dated July 10, 1996.(2)
10.5 Consulting Agreement between Scarlet Investment Group, Inc.
and the Company dated July 10, 1996.(2)
10.6 Consulting Agreement between The Canter Corporation and the
Company dated August 20, 1996.(2)
10.7 Company's 1996 Non-Qualified Stock Option Plan.(2)
10.8 Company's Amended and Restated 1997 Non-Qualified Stock Option
Plan.(3)
10.9 Consulting Agreement between the Company and Innovative
Research Associates, Inc.(2)
10.10 Form of Indemnification Contract between the Company and each
executive officer and director of the Company.(3)
10.11 Agreement between the Company and Carriage House Capital,
Inc., effective as of September 1, 1997, terminating all
existing agreements between the Company and Carriage House
Capital, Inc. and its affiliates.(3)
27 Financial Data Schedule
------------------------
(2) Filed as an Exhibit, with the same Exhibit number, to the Company'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 Company's
Registration Statement on Form S-1, File No. 333-40649, and incorporated herein
by reference.
ÿTYPE:ÿÿEX-27
ÿSEQUENCE:ÿÿ2
ÿDESCRIPTION:ÿÿFINANCIAL DATA SCHEDULE
ÿARTICLE:ÿÿ 5
ÿPERIODÿTYPE:ÿÿ 6-MOS
ÿFISCALÿYEARÿEND:ÿÿ MAY-31-1998
ÿPERIODÿSTART:ÿÿ JUN-01-1997
ÿPERIODÿEND:ÿÿ NOV-30-1997
ÿCASH:ÿÿ 4,683,434
ÿSECURITIES:ÿÿ 0
ÿRECEIVABLES:ÿÿ 0
ÿALLOWANCES:ÿÿ 0
ÿINVENTORY:ÿÿ 0
ÿCURRENTÿASSETS:ÿÿ 4,777,066
ÿPP&E:ÿÿ 460,784
ÿDEPRECIATION:ÿÿ 150,361
ÿTOTALÿASSETS:ÿÿ 5,138,431
ÿCURRENTÿLIABILITIES:ÿÿ 455,655
ÿBONDS:ÿÿ 0
ÿPREFERREDÿMANDATORY:ÿÿ 0
ÿPREFERRED:ÿÿ 0
ÿCOMMON:ÿÿ 45,163
ÿOTHERÿSE:ÿÿ 3,637,613ÿF1:ÿÿ
ÿTOTALÿLIABILITYÿANDÿEQUITY:ÿÿ 5,138,431
ÿSALES:ÿÿ 121,000
ÿTOTALÿREVENUES:ÿÿ 160,588
ÿCGS:ÿÿ 36,914
ÿTOTALÿCOSTS:ÿÿ 36,914
ÿOTHERÿEXPENSES:ÿÿ 1,672,984
ÿLOSSÿPROVISION:ÿÿ 0
ÿINTERESTÿEXPENSE:ÿÿ 204,954
ÿINCOMEÿPRETAX:ÿÿ (1,754,264)
ÿINCOMEÿTAX:ÿÿ 0
ÿINCOMEÿCONTINUING:ÿÿ (1,754,264)
ÿDISCONTINUED:ÿÿ 0
ÿEXTRAORDINARY:ÿÿ 0
ÿCHANGES:ÿÿ 0
ÿNETÿINCOME:ÿÿ (1,754,264)
ÿEPSÿPRIMARY:ÿÿ (.12)
ÿEPSÿDILUTED:ÿÿ 0
ÿFN:ÿÿ
ÿF1:ÿÿOther SE consists of:
Additional Paid-in-Capital 24,261,463
Accumulated Deficit (20,623,850)
-----------
3,637,613
=========== |
