UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended November 30, 1999 Commission File Number: 17598 CONSYGEN, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Texas 76-0260145 ------------------------------ ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 125 South 52nd Street, Tempe, Arizona 85281 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (480) 394-9100 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) Yes [X] No [ ] and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 15,497,301 shares of Common Stock, $.003 par value, as of January 31, 2000. CONSYGEN, INC. INDEX PART I FINANCIAL INFORMATION: Item 1. Financial Statements. Consolidated Balance Sheet, November 30, 1999 2 Consolidated Statements of Operations - Three and six Months Ended November 30, 1999 and November 30, 1998 3 Consolidated Statements of Cash Flows - Three and six Months Ended November 30, 1999 and November 30, 1998 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II OTHER INFORMATION Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K. 17 SIGNATURES 18 CAUTION REGARDING FORWARD-LOOKING STATEMENTS CERTAIN STATEMENTS CONTAINED IN THIS REPORT AND IN DOCUMENTS INCORPORATED BY REFERENCE HEREIN CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURIRIES EXCHANGE ACT OF 1934. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN OR INCORPORATED BY REFERENCE HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE FOREGOING, THE WORDS "BELIEVES," "PLANS," "ANTICIPATES," "EXPECTS," "ESTIMATES," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS ON WHICH SUCH FORWARD-LOOKING STATEMENTS ARE BASED ARE REASONABLE, THERE CAN BE NO ASSURANCE THAT SUCH ASSUMPTIONS WILL PROVE TO BE ACCURATE, AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE SET FORTH UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS REPORT. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSYGEN, INC. CONSOLIDATED BALANCE SHEET ASSETS November 30, 1999 ------------- Current Assets: Cash and Cash Equivalents $ 14,327 Restricted cash 21,539 Accounts Receivable 14,243 Inventory 424,714 Prepaid Expenses 33,177 Other Current Assets 708 ------------ Total Current Assets 508,708 ------------ Property and Equipment - Net 1,283,439 ------------ Other Assets: Debt Issuance Expense 285,072 Other Assets 24,854 ------------ Total Other Assets 309,926 ------------ Total Assets $ 2,102,073 ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Accounts Payable $ 272,048 Notes Payable 527,450 Capital Lease - Current portion 7,529 Accrued Liabilities 995,470 Convertible debentures 3,500,000 ------------ Total Current Liabilities 5,302,497 Capital Lease - Long Term Portion 39,646 Mortgage - Long Term 542,777 Long-Term Debt 449,397 ------------ Total Liabilities 6,334,317 ------------ Commitments & Contingencies Stockholders' Equity : Common Stock, $.003 par Value, Authorized 40,000,000 Shares, Issued and outstanding 15,497,301 Shares at November 30, 1999 46,492 Additional Paid-in Capital 25,326,767 Accumulated Deficit (29,205,503) Treasury Stock, at cost ( 70,000 shares) (400,000) ------------ Total Stockholders' Equity (4,232,244) ------------ Total Liabilities and Stockholders' Equity $ 2,102,073 ============ The accompanying notes are an integral part of the financial statements. 2 CONSYGEN, INC. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) For the Three Months For the Six Months Ended November 30, Ended November 30, ----------------------------- ---------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Counterfeit Cop Revenue $ 30,412 -- $ 74,915 -- Software Services Revenue 35,023 $ 324,375 108,388 $ 472,339 ------------ ------------ ------------ ------------ Revenues 65,435 324,375 183,303 472,339 ------------ ------------ ------------ ------------ Costs and Expenses: Cost of Sales - Cop 7,270 -- 16,513 -- Cost of Sales - Software Services 65,880 211,197 270,563 437,287 Software Development 190,206 157,759 315,381 351,560 Selling, General and Administrative Expenses 598,325 1,160,382 1,382,261 1,970,309 Interest Expense 136,113 52,500 233,127 106,500 Depreciation and Amortization 65,992 49,078 125,002 92,728 ------------ ------------ ------------ ------------ Total Costs and Expenses 1,063,786 1,630,916 2,342,847 2,958,384 ------------ ------------ ------------ ------------ Loss from Operations (998,351) (1,306,541) (2,159,544) (2,486,045) Interest Income -- 42,330 5,755 95,684 Other Income -- -- 27,493 -- Other Expenses (2,500) -- (289,958) -- ------------ ------------ ------------ ------------ Net Loss $ (1,000,851) $ (1,264,211) $ (2,416,254) $ (2,390,361) ============ ============ ============ ============ Weighted Average Common Shares Outstanding 15,427,301 15,341,093 15,421,842 15,341,093 ============ ============ ============ ============ Net Loss per Common Share $ (0.06) $ (0.08) $ (0.16) $ (0.16) ============ ============ ============ ============ The accompanying notes are an integral part of the financial statements. 3 CONSYGEN, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) For the Six Months Ended November 30, -------------------------- 1999 1998 ----------- ----------- Cash Flows from Operating Activities: Net Loss $(2,416,254) $(1,754,264) Adjustments to Reconcile Net Loss to Net Cash (Used) by Operating Activities: Depreciation and amortization 126,577 69,595 Write-off of investment in technology 230,000 Short-term debt financing costs expensed 93,529 Changes in Operating Assets and Liabilities: Accounts Receivable (5,809) (110,112) Inventories (264,968) 0 Prepaid Expenses and Other Assets (9,616) (15,987) Accounts Payable 221,722 (50,588) Accrued Liabilities 378,723 84,887 ----------- ----------- Net Cash (Used) by Operating Activities (1,646,096) (1,776,469) ----------- ----------- Cash Flows from Investing Activities: Utilization of certificate of deposit for inventory purchases 445,669 Purchases of Furniture and Equipment (68,049) (69,806) Purchase of technology (230,000) ----------- ----------- Net Cash (Used) by Investing Activities 147,620 (69,806) ----------- ----------- Cash Flows from Financing Activities: Proceeds from Sale of Common Stock 14,941 5,161 Payments of principal on loans (6,223) -- Proceeds of Loans payable - Related Parties 402,450 -- Proceeds on other notes payable 420,868 Payments for debt financing costs (40,871) Payments of principal on capital lease obligations (17,670) -- ----------- ----------- Net Cash Provided by Financing Activities 773,495 5,161 ----------- ----------- Net Decrease in Cash and Cash Equivalents (724,981) (1,841,114) Cash and Cash Equivalents - Beginning of Period 739,308 4,991,434 ----------- ----------- Cash and Cash Equivalents - End of Period $ 14,327 $ 3,150,320 =========== =========== Supplemental Cash Flow Information: Cash Paid for Interest $ 49,470 $ -- =========== =========== Non-Cash Financing and Investing Activities: Issuance of Common Stock as Loan Incentive $ 20,839 $ -- =========== =========== The accompanying notes are an integral part of the financial statements. 4 CONSYGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 1999 (Unaudited) NOTE 1 - BASIS OF PRESENTATION The consolidated financial statements include the accounts of ConSyGen, Inc., a Texas corporation ("ConSyGen-Texas") and its wholly-owned subsidiary, ConSyGen, Inc., an Arizona corporation ("ConSyGen-Arizona"). Significant intercompany accounts and transactions have been eliminated. ConSyGen-Texas and its wholly-owned subsidiary ConSyGen-Arizona are hereafter collectively referred to as the "Company." In the opinion of the Company, the accompanying unaudited consolidated financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the results of operations and cash flows for the periods presented. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year due to external factors that are beyond the control of the Company. NOTE 2 - STOCKHOLDERS' EQUITY (DEFICIT) STOCK OPTIONS The Company has issued new options during the six months ended November 30, 1999. The Company intends to compensate employees with additional options, and at November 30, 1999 720,000 options, with an exercise price of $0.50, have been granted. No employee options were exercised in the three months ended November 30, 1999. NOTE 3 - NET LOSS PER SHARE The computation of diluted net loss per share is not presented because conversion, exercise or contingent issuance of securities would have an antidilutive effect on loss per share. 5 NOTE 4 - 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 for 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 the holders, and new claims against certain agents of the holders, in the same action. On February 1, 1999, Stephen M. Hicks, general partner of Sovereign Partners and two of the three holders of the Company's outstanding Convertible Debentures, Sovereign Partners Limited Partnership, a Delaware limited partnership and Dominion Capital Fund Ltd., a Bahamian Corp. 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 former president and Chief executive officer, to recover damages for alleged intentional and calculated defamation. 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 Raj Kapur its chief financial officer to recover damages for alleged defamation. The Plaintiffs seek compensation from ConSyGen, Dreaper and Kapur jointly and severally each in the amount of $2,000,000 for general damages, cost of the action, applicable taxes and other relief as the Court shall determine. At present, given the status of the litigation and the facts and other information available to the Company, the Company is not in a position to make any estimate as to the likelihood of an adverse effect on the Company's financial condition or the amount of such an effect. 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 holder, reimbursement of legal expense 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. 6 NOTE 5 - DEBT The Company borrowed $402,000 from an officer who is its largest single shareholder. Of that amount, the Company used $50,000 for an extension of time to pay the balance on a purchased technology. The balance was used for working capital purposes. The loans have been classified as long-term debt in the accompanying balance sheet. NOTE 6 - PURCHASED TECHNOLOGY 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 stock was transferred from the holdings of an officer who is the largest single shareholder. 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, the Company determined that it will not invest significant additional resources into the development of this product and has written-off its investment in this software in the first quarter of fiscal 2000. NOTE 7 - SUBSEQUENT EVENTS The Company has borrowed additional funds subsequent to November 30, 1999. The Company obtained an additional $394,000 through loans from outside parties. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto appearing elsewhere in the Report. The Company and its wholly-owned subsidiary, ConSyGen-Arizona, are herein collectively referred to as the "Company." 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 continues to market its Counterfeit Cop. For the three and six months ended November 30, 1999, sale of the Counterfeit Cop were $30,000 and $75,000 respectively. Subsequent to November 30 1999, the Company entered into distribution agreements with a third parties that have national distribution networks. The Company expects sales to begin with these third parties in the third quarter of fiscal 2000. Due to the lack of profitable operations and difficulties raising additional capital, the Company has experienced significant cash flow difficulties. During the six months ended November 30, 1999, the Company borrowed approximately $1,000,000. 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. The Company's borrowing rate has been extremely high on some of these loans which contained premiums or stock incentives for the lenders. 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. 8 The Company is involved in material litigation. The Company continues in its 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 resolved 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 Company will continue its defense in this matter or will attempt to negotiate a settlement with the debenture holders. The outcome of this litigation remains uncertain. RESULTS OF OPERATIONS REVENUE for the three and six months ended November 30, 1999, was $65,000 and $183,000 respectively compared to $324,000 and $472,000 for comparative periods in the previous year. The decrease in revenue reflects the change in the Company's strategic direction from the Year 2000 services. The current year revenues include that for Year 2000 services of $35,000 and $108,000 for the three and six months ended November 30, 1999, respectively. Year 2000 service revenues for comparable periods in the previous year were $324,000 and $472,000, representing all revenue for those periods. COST OF SALES-COP, represents the cost of obtaining units from the Company's supplier. These costs represent 23% and 21% of related revenue for the three and six months ended November 30, 1998, respectively. Near term gross margins on the Counterfeit Cop may vary as the Company analyzes its pricing structure under the new distribution agreements. COST OF CONVERSION SERVICES was 189% and 251% of the related revenue for the for the three and six months ended November 30, 1999, respectively. Theses categories include certain fixed costs that, when allocated, are greater than the sales generated. Cost of conversion services was 65% and 93% of the related revenue for the three and six months ended November 30, 1999, respectively. The variances for fiscal 2000 reflect the changes of personnel from Year 2000 services to other product lines and research and development. SOFTWARE DEVELOPMENT EXPENSES. For the three and six months ended November 30, 1999, software development expenses were $190,000 and $315,000 respectively, compared with $158,000 and $352,000 for the comparable prior periods. The increase in software development expenses for the three month period ended November 30, 1999, is due to reassignment of technical personnel to research and 9 development activities as the Company had very little in Year 2000 services. Although the Company has attempted to reduce its overall expenses, certain employees are dedicated to research and development as the Company attempts to develop new products for its new strategic direction. These personnel are assigned to development of the Company's prospective E-Commerce products. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three and six months ended November 30, 1999, selling, general and administrative expenses were $598,000 and $1,382,000 respectively, compared with $1,160,000 and $1,970,309 the comparable prior periods. In general, the Company has attempted to reduce operating expenses as it experiences cash shortages. The decrease of $784,000 and $810,000 for the three and six months ended November 30, 1999, respectively is due primarily to reductions in personnel costs. Also, the Company has significantly reduced marketing expenses related to the Year 2000 services. INTEREST EXPENSE. For the three and six months ended November 30, 1999, interest expense was $136,000 and $233,000 compared with $53,000 and $107,000 for the comparable prior periods. The prior year interest expense is primarily composed of interest accrual on $3,5000,000 principal amount of the Company's 6% Convertible Debentures and $550,000 mortgage. However, the Company incurred significant new debt in the six months ended November 30, 1999. Some of the debt was issued at signifcant discounts. The Company issued Notes payable of approximately $685,000 and received $600,000 cash for those notes. The notes had short-term maturities so much of that discount had been amortized as interest expense at November 30, 1999. DEPRECIATION AND AMORTIZATION EXPENSE. For the three and six months ended November 30, 1999, depreciation expense was approximately $65,992 and $125,002 respectively, compared with $49,078 and $92,728 for the comparable prior periods. The increase is primarily due to purchases of additional computers, furniture and building improvements . Numerous options granted to employees were repriced by the Company in the year ended May 31, 1999. Under the Proposed Interpretation, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, AN INTERPRETATION OF APB OPINION NO. 25, issued by the Financial Accounting Standards Board, these constitute variable awards that may require the Company to recognize compensation expense. Subsequent to November 30, 1999, the price of the Company's common stock was consistently higher than the exercise price of these options. Some of these options were exercised in the third quarter of fiscal 2000 which will result compensation expense being recognized. 10 MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES 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. As of November 30, 1999, the Company had $14,000 in cash and cash equivalents, compared with approximately $739,000 at May 31, 1999. The Company had working capital deficit of approximately $4,793,000 at November 30, 1999, compared with a working capital deficit of approximately $2,861,000 at May 31, 1999, an increase in working capital deficit of approximately $1,932,000. The decrease in working capital is primarily attributable to the net loss for the six months of $2,416,000 less new long term debt of approximately $400,000. The Company had convertible debentures of $3,500,000 at November 30, 1999 and at May 31, 1999. The Company's inventory balance increased to $425,000 at November 30, 1999, compared to $161,000 at May 31, 1999. The increase of $264,000 relates to a purchase commitment for units of the Counterfeit Cop. As discussed above, the Company anticipates more significant sales of the Counterfeit Cop to commence in the third quarter of fiscal 2000. The Company continues to incur significant losses. During the six months ended November 30, 1999, the Company's operations used approximately $1,646,000 in cash, an average of approximately $274,000 per month. The decrease in Company's cash expenditures due to decrease in sales and marketing personnel are being offset by increase in litigation expenses. If the Company continues to incur significant losses, the Company's liquidity could be materially and adversely affected. The Company does not currently have any established bank credit facility, and there can be no assurance that the Company will be able to obtain the additional capital in the form of debt or equity financing necessary to continue its operations and if no significant sales are realized. Current liabilities have increased to $5,302,000 as compared to $4,272,000 at May 31, 1999 due to accrued interest payable on convertible debentures and other debt and accrued legal fees related to the same. Accrued liabilities has also increased due to accrued payroll. Payroll has been deferred by certain officers and employees. Payroll liabilities at November 30, 1999 were approximately $275,000 compared to approximately $72,000 at May 31, 1999. The Company has 11 failed to make several scheduled payrolls. The Company incurred approximately $465,000 in new short term debt in the six months ended November 30, 1999. The Company has also defaulted on certain short-term debt it entered into in the second quarter of fiscal 2000. Subsequent to November 30, 1999, the Company incurred additional debt of approximately $394,000. 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. The Company has abandoned the project and wrote-off its investment in the technology. Due to the Company's dispute with its debenture holders, scheduled interest payments have been accrued but not paid. The non-payment of interest represent a technical default under the terms of the debenture. If the Company's common stock is delisted from Nasdaq SmallCap, it would constitute another event of default. A remedy of default includes the holders declaring the debt immediately payable. The Company has asserted substantial claims against the debenture holders but there can be no assurance that the Company will be successful in its litigation with the Debenture Holders. The Company believes that due to the dispute, the remedies for default are also uncertain the debt is classified as short-term. IMPACT OF INFLATION Increases in the inflation rate are not expected to effect the Company's operating expenses. Although the Company has no current plans to borrow additional funds, if it were to do so at variable interest rates, any increase in interest rates would increase the Company's borrowed funds. SEASONALITY The Company's operations are not affected by seasonal fluctuations, although the Company's cash flows may at times be affected by fluctuations in the timing for large contracts. 12 YEAR 2000 COMPLIANCE The Company's review of its own operating systems does not indicate any Year 2000 problems. There can be no assurance that the Year 2000 issue can be resolved by third parties such as banks, electric, water and phone utility companies prior to the upcoming change in century. Although the Company may incur costs resulting from increased charges by such third party service providers resulting from the impact of Year 2000 issues and related corrective efforts, the likelihood or amount of such costs is too speculative to estimate at this time. CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS MATERIAL LITIGATION. The Company is involved in significant material litigation, the outcome of which presently remains uncertain. If such litigation matters are resolved unfavorably, this could have a material adverse effect on the Company and its financial conditions. UNPROFITABLE OPERATING HISTORY AND LIMITED FINANCIAL RESOURCES. The Company has not historically been profitable, and as of November 30, 1999, had suffered cumulative operating losses aggregating over $25,000,000, and at November 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 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. 13 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. 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. 14 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. 15 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. 16 PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. The list of Exhibits which are filed with this report or incorporated by reference herein is set forth in the Exhibit Index that appears following the signature page, which Exhibit Index is incorporated herein by this reference. (b) Reports on Form 8-K. The Company filed form 8-K on 12/30/98, which reported a legal action against the Company, on December 3, 1998, 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. 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 the 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. 17 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: February 2, 1999 By: /s/ A. Lewis Burridge ------------------------------------ A. Lewis Burridge, President (Principal Executive Officer) 18 EXHIBIT INDEX 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) 4.4 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) 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) 4.11 Common Stock Purchase Warrant to purchase 100,000 shares issued to a consultant's designee, Irvington International Limited, as of November 10, 1997. (3) 4.12 Agreement dated as of July 17, 1998 between the Registrant and Tom S. Dreaper relating to employment and grant of options to purchase 1,000,000 shares of common stock of the Registrant. (6) 10.7 Registrant's 1996 Non-Qualified Stock Option Plan. (2) 10.8 Registrant's Second Amended and Restated 1997 Non-Qualified Stock Option Plan. (5) 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 November 30, 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 Annual Report on Form 10-K for the year ended May 29, 1998, and incorporated herein by reference. (5) Filed as an Exhibit No. 10.8 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended August 31, 1998, and incorporated herein by reference. (6) Filed as an Exhibit No. 4.12 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended August 31, 1998, and incorporated herein by reference. * Filed herewith