10QSB/A 1 0001.txt MARKED TO SHOW CHANGES UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 TO FORM 10-QSB/A (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the Quarter Ended March 31, 2000 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 0-21441 MEDISYS TECHNOLOGIES, INC. (Exact name of small business issuer as specified in its charter) Utah 72-1216734 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 144 Napoleon Street, Baton Rouge, Louisiana, 70802 (address of principal executive officers) Issuer's telephone number: (225) 343-8024 9624 Brookline Avenue, Baton Rouge, Louisiana, 70809 (former address of principal executive officers) 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 [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date: Class Outstanding as of March 31, 2000 Common Stock, 59,004,773 Par Value $0.0005 per value Transitional Small Business Disclosure Format (check one): Yes [ ]; No [ X ] MEDISYS TECHNOLOGIES, INC. TABLE OF CONTENTS Page PART I Item 1. Financial Statements . . . . . . . . . . . . . . . . 3 Item 2. Management's Discussion and Analysis or Plan of Operation . . . . . . . . . . . . . . . . . . . . 21 PART II Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . 24 Item 2. Changes in Securities and Use of Proceeds. . . . . . 25 Item 3. Defaults Upon Senior Securities. . . . . . . . . . . 25 Item 4. Submissions of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . . . . 25 Item 5. Other Information. . . . . . . . . . . . . . . . . . 26 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 26 SIGNATURES . . . . . . . . . . . . . . . . . . . . . 27 PART I Item 1. Financial Statements The following unaudited Financial Statements for the period ended March 31, 2000, have been prepared by the Company. Medisys Technologies, Inc. Consolidated Financial Statements March 31, 2000 and December 31, 1999 MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets ASSETS March 31, December 31, 2000 1999 (Unaudited) CURRENT ASSETS Cash $ 1,315,550 $ 290,269 Accounts receivable, net (Note 1) 340 222,100 Accounts receivable, related parties - 50,572 Advances 2,500 2,500 Inventory (Note 1) 7,729 396,601 Prepaid expenses 21,328 21,802 Total Current Assets 1,347,447 983,844 FIXED ASSETS (Note 1) Computers and equipment 54,455 73,341 Machinery and equipment - 301,087 Buildings and improvements 2,195 463,803 Furniture and fixtures 34,410 50,248 Vehicles - 19,915 Accumulated depreciation (70,948) (314,751) Total Fixed Assets 20,112 593,643 OTHER ASSETS Deposits 835 36,039 Patent and trademark costs, net (Note 1) 501,834 492,254 Total Other Assets 502,669 528,293 TOTAL ASSETS $ 1,870,228 $ 2,105,780 MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Continued) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) March 31, December 31, 2000 1999 (Unaudited) CURRENT LIABILITIES Accounts payable $ 70,328 $ 924,490 Customer deposits - 94,096 Accrued expenses 109,836 261,786 Payable - shareholders (Note 2) 18,456 140,758 Notes payable - current portion (Note 8) - 56,695 Notes payable - shareholders (Note 5) 12,500 25,000 Line of credit - 250,000 Reserve for discontinued operations (Note 11) 1,726,923 - Debentures payable - related parties (Note 3) - 92,000 Total Current Liabilities 1,938,043 1,844,825 LONG-TERM DEBT Notes and debentures payable (Note 8) 1,000,000 304,490 Total Long-Term Debt 1,000,000 304,490 TOTAL LIABILITIES 2,938,043 2,149,315 COMMITMENTS AND CONTINGENCIES (Note 7) STOCKHOLDERS' EQUITY (DEFICIT) Common stock: 100,000,000 shares authorized of $0.0005 par value, 59,004,773 and 47,055,644 shares issued and outstanding, respectively 29,502 23,527 Additional paid-in capital 15,825,362 10,743,768 Stock subscriptions receivable (Note 4) (675,000) (1,075,000) Prepaid expenses (Note 7) (1,964,500) - Accumulated deficit (14,283,179) (9,735,830) Total Stockholders' Equity (Deficit) (1,067,815) (43,535) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 1,870,228 $ 2,105,780 MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) For the Three Months Ended March 31, 2000 1999 REVENUES $ 623 $ 1,773 OPERATING EXPENSES Cost of sales 679 403 Product research and development 1,639,435 42,651 Depreciation and amortization 3,855 4,279 Selling, general and administrative 1,368,594 138,042 Total Operating Expenses 3,012,563 185,375 OPERATING LOSS (3,011,940) (183,602) OTHER INCOME (EXPENSES) Interest income 6,545 252 Interest expense (162,000) (30,052) Total Other Income (Expenses) (155,455) (29,800) LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (3,167,395) (213,402) INCOME TAXES - - LOSS FROM CONTINUING OPERATIONS (3,167,395) (213,402) INCOME (LOSS) FROM DISCONTINUED OPERATIONS (Note 11) (1,379,954) 7,818 NET LOSS $ (4,547,349) $ (205,584) BASIC LOSS PER SHARE (Note 1) Loss from continuing operations $ (0.06) $ (0.01) Loss from discontinued operations (0.03) 0.00 Basic Loss Per Share $ (0.09) $ (0.01) MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit)
Additional Stock Common Stock Paid-In Subscription Prepaid Accumulated Shares Amount Capital Receivable Expenses Deficit Balance, December 31, 1998 34,009,757 $17,004 $ 8,122,813 $ (175,000) $ - $(8,048,209) Common stock issued for subscription receivable 5,555,555 2,778 997,222 (1,000,000) - - Common stock issued for services rendered 2,121,619 1,061 424,282 - - - Common stock issued for accrued wages 324,477 162 89,838 - - - Common stock canceled (972,214) (486) 486 - - - Common stock issued to convert debentures payable 1,435,000 717 302,283 - - - Issuance of common stock from exercise of common stock warrants 8,889 5 9,995 - - - Common stock issued for interest expense 1,184,118 592 277,408 - - - Common stock issued for cash 3,388,443 1,694 519,441 - - - Cash received on stock subscription receivable - - - 100,000 - - Net loss for the year ended December 31, 1999 - - - - - (1,687,621) Balance, December 31, 1999 47,055,644 $23,527 $10,743,768 $(1,075,000) $ - $(9,735,830)
MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
Additional Stock Common Stock Paid-In Subscription Prepaid Accumulated Shares Amount Capital Receivable Expenses Deficit Balance, December 31, 1999 47,055,644 $23,527 $10,743,768 $(1,075,000) $ - $ (9,735,830) Common stock issued for cash (unaudited) 2,888,332 1,444 697,306 - - - Issuance of common stock from exercise of common stock warrants (unaudited) 188,833 95 83,238 - - - Common stock issued to convert debentures and notes payable (unaudited) 588,500 294 144,206 - - - Common stock issued for services rendered (unaudited) 2,783,464 1,392 1,902,319 - - - Cash received on stock subscription receivable (unaudited) - - - 400,000 - - Warrants issued below market value (unaudited) - - 142,775 - - - Conversion discount on debentures (see Note 10) (unaudited) - - 150,000 - - - Common stock issued for prepaid services (unaudited) 5,500,000 2,750 1,961,750 - (1,964,500) - Net loss for the three months ended March 31, 2000 (unaudited) - - - - - (4,547,349) Balance, March 31, 2000 (unaudited) 59,004,773 $29,502 $15,825,362 $ (675,000) $(1,964,500) $(14,283,179)
MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) For the Three Months Ended March 31, 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (4,547,349) $ (205,584) Adjustments to reconcile net income to net cash used by operating activities: Common stock issued for services and interest 1,903,711 78,786 Assets written down from discontinued operations 1,212,418 - Depreciation and amortization 3,855 4,279 Warrants issued below market value 142,775 - Conversion discount on debentures 150,000 - Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (340) 1,960 (Increase) decrease in inventory - (2,564) (Increase) decrease in deposits - (4,000) Increase (decrease) in accounts payable 5,479 3,224 Increase (decrease) in accrued expenses (119,328) 89,979 Increase (decrease) in reserve for discontinued operations 167,536 (7,817) Net Cash Used by Operating Activities (1,081,243) (41,737) CASH FLOWS FROM INVESTING ACTIVITIES Increase in patent costs (9,902) (10,016) Purchase of fixed assets (11,919) - Net Cash Used by Investing Activities (21,821) (10,016) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds (payments) from payable - shareholders (8,774) 4,570 Proceeds from the issuance of common stock 1,098,750 28,000 Proceeds from the exercise of warrants 83,333 - Proceeds from debentures payable 1,000,000 - Net Cash Provided by Financing Activities $ 2,173,309 $ 32,570 MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Continued) (Unaudited) For the Three Months Ended March 31, 2000 1999 NET INCREASE (DECREASE) CASH AND CASH EQUIVALENTS $ 1,070,245 $ 19,183 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 245,305 25,022 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,315,550 $ 5,839 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION CASH PAID FOR Income taxes $ - $ - Interest $ 19,646 $ 7,157 NON-CASH FINANCING ACTIVITIES Stock issued for services and interest expense $ 1,903,711 $ 138,786 Stock issued in payment of accrued expenses and accounts payable $ - $ 60,000 Stock issued to convert debentures and notes payable $ 144,500 $ - Stock issued for prepaid expenses $ 1,964,500 $ - MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements March 31, 2000 and December 31, 1999 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Business Organization The Company was incorporated on March 17, 1983 under the laws of the State of Utah. The Company subsequently ceased its original business activity in 1985 and thereafter primarily investigated and sought new business opportunities and was reclassified as a development stage company until December of 1998 when it acquired Phillips Pharmatech Labs, Inc. The Company has a wholly-owned subsidiary Medisys Technologies, Inc. (Medisys) which was incorporated in the State of Louisiana, on January 21, 1991, for the purpose of developing a device for the assistance of childbirth under a patent which was applied for in May 1990 and granted on June 15, 1992. Medisys has been classified as a development stage company since all activities to date have been related to the development of a childbirth assistance device as well as other medical devices. On August 6, 1992 the Company acquired all of the outstanding common stock of Medisys. For accounting purposes the acquisition has been treated as a recapitalization of Medisys with Medisys as the acquirer. Phillips Pharmatech Labs, Inc. (Phillips) was organized under the laws of the State of Florida on December 13, 1994. It was incorporated for the purpose of engaging in the manufacturing and bottling of health supplements and other health related and natural products. On December 22, 1998, the Company completed an acquisition and share exchange agreement whereby Medisys issued 15,602,147 shares of its common stock in exchange for all of the outstanding common stock of Phillips. The shares issued by Medisys represented 50% of the total shares of the Company's common stock issued and outstanding immediately following the acquisition. The acquisition is accounted for as a purchase of Phillips. b. Fixed Assets Fixed assets are stated at cost less accumulated depreciation. Expenditures for small tools, ordinary maintenance and repairs are charged to operations as incurred. Major additions and improvements are capitalized. Depreciation is computed using the straight- line method over estimated useful lives as follows: Leasehold improvements 5 years Furniture and fixtures 5 years Computers and equipment 5 years Depreciation expense for the three months ended March 31, 2000 and 1999 was $3,533 and $3,957, respectively. MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements March 31, 2000 and December 31, 1999 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) c. Patent and Trademark Costs The capitalized costs of obtaining patents consists of legal fees and associated filing costs. These patent costs will be amortized over the shorter of their legal or useful lives. The Company has numerous patents in various stages of development and the application process. Several patents have been granted but are being developed further in a continuation-in-part (CIP) status until the development of a commercial product is complete, the related product has received FDA (Food and Drug Administration) clearance and is in a marketable condition ready for sale. Once patents have been granted, FDA approval obtained, and sales commenced, no further costs associated with the patent are capitalized. As of December 31, 1999, the Company did have one patented product for which sales have commenced with the related costs being amortized over the estimated useful life (17 years) of the patent. Management has determined that estimated future cash flows from this product will be sufficient to recover the capitalized basis of the costs associated with that patent. The other patents for which costs have been capitalized are considered to have continued viability according to management of the Company with no significant events occurring which would impair the value of the capitalized costs associated with the individual patents. The Company has also incurred costs associated with obtaining trademarks related to the Company's existing and future products. Those costs have been capitalized and will be amortized over the estimated useful life of the trademarks once approval has been received and usage begins. These trademarks are considered to have continued viability according to management with no significant events occurring which would impair the value of the capitalized costs associated with the trademarks. Patent and trademark costs incurred are as follows: March 31, December 31, 2000 1999 (Unaudited) Patents $ 495,454 $ 485,552 Trademarks 11,961 11,961 Subtotal 507,415 497,513 Less accumulated amortization (5,581) (5,259) Total $ 501,834 $ 492,254 Amortization expense for the three months ended March 31, 2000 and 1999 was $322. d. Accounting Method The Company's financial statements are prepared using the accrual method of accounting. The Company has elected a December 31 year end. MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements March 31, 2000 and December 31, 1999 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) e. Cash and Cash Equivalents For purposes of financial statement presentation, the Company considers all highly liquid investments with a maturity of three months or less, from the date of purchase, to be cash equivalents. f. Income Taxes No provision for federal income taxes has been made at March 31, 2000 due to accumulated operating losses. The Company has accumulated approximately $15,000,000 of net operating losses as of March 31, 2000, which may be used to reduce taxable income and income taxes in future years. The use of these losses to reduce future income taxes will depend on the generation of sufficient taxable income prior to the expiration of the net operating loss carryforwards. The carryforwards expire as follows: Year of Net Operating Expiration Loss 2006 $ 8,667 2007 269,551 2008 802,338 2009 960,966 2010 1,162,772 2011 1,498,725 2012 2,092,689 2018 1,252,501 2019 1,687,621 2020 4,547,349 $ 14,283,179 In the event of certain changes in control of the Company, there will be an annual limitation on the amount of net operating loss carryforwards which can be used. The potential tax benefits of the net operating loss carryforwards have been offset by a valuation allowance of the same amount. g. Principles of Consolidation The consolidated financial statements include the accounts of Medisys Technologies, Inc. (parent), Medisys Technologies, Inc. (Medisys) a wholly owned subsidiary and Phillips Pharmatech, Inc. (Phillips) a wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. h. Revenue Recognition Revenue is recognized upon shipment of goods to the customer. MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements March 31, 2000 and December 31, 1999 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) i. Inventory Inventory is carried at the lower of cost or market value using the first-in, first-out method. j. Basic Loss Per Share For the Three Months Ended March 31, 2000 1999 Basic loss per share from continuing operations: Income (loss) - numerator $ (3,167,395) $ (213,402) Shares - denominator 53,409,477 34,502,734 Per share amount $ (0.06) $ (0.01) Basic loss per share from discontinued operations: Income (loss) - numerator $ (1,379,954) $ 7,818 Shares - denominator 53,409,477 34,502,734 Per share amount $ (0.03) $ 0.00 The basic loss per share of common stock is based on the weighted average number of shares issued and outstanding during the period of the financial statements. Shares to be issued from warrants and options are not included in the computation because they would have an antidilutive effect on the net loss per common share. k. Advertising The Company follows the policy of charging the costs of advertising to expense as incurred. l. Credit Risks Medisys maintains its cash accounts primarily in one bank in Louisiana and Phillips maintains its cash accounts primarily in one bank in Florida. The Federal Deposit Insurance Corporation insures accounts to $100,000. The Company's accounts occasionally exceed the insured amount. m. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management of the Company and its Subsidiaries 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 those estimates. MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements March 31, 2000 and December 31, 1999 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) n. Accounts Receivable Accounts receivable are shown net of the allowance for doubtful accounts of $-0- at March 31, 2000 and December 31, 1999. o. Change in Accounting Principle In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires companies to record derivatives as assets or liabilities, measured at fair market value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The adoption of this statement had no material impact on the Company's financial statements. p. Reclassification Certain reclassifications have been made to the December 31,1999 balance sheet to conform to the current period's presentation. NOTE 2 - PAYABLE - SHAREHOLDERS From time to time, the Company receives advances from certain shareholders. The company also advances funds to shareholders. The outstanding balances of these advances fluctuates during the year and do not have specific repayment terms although the advances are generally considered to be due or payable on demand. Accordingly, the related receivable or payable has been reflected as current in the accompanying consolidated financial statements. At March 31, 2000, the balance payable to shareholders totaled $18,456. At December 31, 1999, the balance payable to shareholders totaled $67,230. NOTE 3 - DEBENTURES PAYABLE - RELATED PARTIES The Company also has notes payable (debentures) to various shareholders in the aggregate of $-0- and $92,000 at March 31, 2000 and December 31, 1999, respectively. The balance of $92,000 was converted into 180,000 shares of common stock during the first quarter of 2000. MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements March 31, 2000 and December 31, 1999 NOTE 4 - STOCK SUBSCRIPTION RECEIVABLE During 1999, the Company issued 5,555,555 shares of common stock for $1,000,000. Payment for the common stock was made with a non-interest bearing promissory note. Those shares are being held in escrow as collateral until the note is paid. As of March 31, 2000, $500,000 on the note had been paid. During 1996, the Company issued 100,000 shares of restricted common stock upon the exercise of common stock warrants representing the same number of shares, having an exercise price of $1.75 per share. Payment for the common stock was made with a non-interest bearing four year promissory note. The related shares are being held by the Company as collateral for the promissory note. The shares have been reflected as issued and outstanding with a corresponding $175,000 stock subscription receivable reflected as a reduction of stockholders' equity. NOTE 5 - NOTES PAYABLE - SHAREHOLDERS Notes payable - shareholders consisted of the following: March 31, December 31, 2000 1999 (Unaudited) Note payable to Richard L. Apel, unsecured, dated November 2, 1993 at 8%; principal and interest delinquent since August 18, 1994. $ - $ 12,500 Note payable to Cynthia F. Vatz, unsecured, dated October 19, 1993 at 8%; principal and interest delinquent since August 18, 1994. 12,500 12,500 Total 12,500 25,000 Less current portion (12,500) (25,000) Total long-term portion $ - $ - The note payable is technically in default. The related note holder has not demanded repayment however the Company is in the process of locating this shareholder and negotiating repayment terms. NOTE 6 - COMMON STOCK During 1999, the Company issued 324,477 shares of its common stock in satisfaction of accrued wages of $90,000. The Company issued 1,435,000 shares of its common stock to convert $303,000 of debentures payable. The Company issued 3,305,737 shares of its common stock for services and interest expense. The shares issued for services and interest were valued at the trading price of the common stock on the date the shares were issued. The Company issued 3,388,443 shares of its common stock for cash of $521,135. The Company issued 8,889 shares of its common stock from the exercise of warrants for cash of $10,000. Finally, certain officers and directors of the Company canceled 972,214 shares of common stock and the shares were reissued to convert a portion of the debentures payable. MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements March 31, 2000 and December 31, 1999 NOTE 6 - COMMON STOCK (Continued) During 2000, the Company issued 738,500 shares of its common stock in satisfaction for debentures and notes payable of $144,500. The Company issued 2,783,464 shares of its common stock for services. The services were valued at the trading price of the common stock on the date the shares were issued. The Company issued 2,888,332 shares of its common stock for cash at approximately $0.24 per share. Finally, the Company issued 188,833 shares of its common stock from the exercise of warrants for cash of $83,333. NOTE 7 - COMMITMENTS AND CONTINGENCIES During 1996, the Company adopted a Simplified Employee Pension (SEP) Plan. The Plan enables the Company to make an annual discretionary contribution to be allocated to employees on a prorata basis according to their compensation for the year. In addition, employees have the option to make voluntary Retirement Savings Contributions in amounts not to exceed 15% of their annual compensation. The Company elected to not make a contribution for the year ended December 31, 1999. The Company has no other bonus, profit sharing or deferred compensation plans for the benefit of its employees, officers or directors except if discussed elsewhere. The Company currently has employment contracts with Edward P. Sutherland and Kerry Frey whereby they each will receive salaries of $12,500 per month. Any additional compensation to these employees is to be in the form of an annual cash bonus or the granting of stock and/or stock options at the discretion of the Board of Directors. The cash bonus is not designed to exceed 50% of their annual compensation and stock bonuses are not designed to exceed 100% of their annual compensation. However, additional compensation may be awarded by the Board of Directors under the terms of the employment contracts. Medisys entered into a lease agreement with a related party for its office space located in Louisiana. The lease is for a period of one year at a rate of $900 per month, expiring in September 2000. Legal Issues On March 16, 2000, the Company filed a Complaint against Brett Phillips, Elbert Carl Anderson, William H. Morris, Marilyn Morris and Barbara Larkins in the United States District Court in and for the Middle District of Louisiana, alleging various securities law violations and related claims in connection with the 1998 acquisition by the Company from the defendants of Phillips Pharmatech Labs, Inc. The Company is seeking recission of the acquisition, damages and other relief. The Company anticipated that these defendants would file various retaliatory claims. The Company believes that the suit filed is in the best interests of the shareholders and that it should not interfere with the core focus and business of the Company. MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements March 31, 2000 and December 31, 1999 NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued) Legal Issues (Continued) On May 9, 2000, E. Carl Anderson, William Morris and Brett Phillips, filed a derivative action lawsuit in the United States District Court, Middle District of Florida, cash number 8:00CV905-T 24F against the Company and the current directors of the Company. The action was filed by Messrs. Anderson, Morris and Phillips acting by and in behalf of the Company. The complaint alleges corporate waste in the form of excessive salaries and bonuses and other alleged wastes related to Phillips. The Complaint seeks injunctive relief and damages. Each of the plaintiffs in this action is also a defendant in the lawsuit previously filed by the Company on March 16, 2000 referenced above. The Company has not yet responded to the complaint and has not determined whether the action could cause material damages to the Company. Phillips is a party to various other legal proceedings. These primarily involve commercial claims and one action involves a former employee. The Company cannot predict the outcome of these lawsuits, legal proceedings and claims with certainty. Nevertheless, the Company believes that the outcome of all of these proceedings, even if determined adversely, would not have a material adverse effect on the Company's business or financial condition. There is a possibility that due to Phillips discontinuing its operations, both Phillips and the Company could be the subject of future actions. Manufacturing Agreement On January 19, 2000, the Company entered into a manufacturing agreement for the production of the Company's patented syringes. The Company has agreed to pay $500,000 cash and issue 7,000,000 shares of its common stock as part of the agreement. At March 31, 2000, $300,000 had been paid and 1,500,000 shares had been released from escrow as payment. The remaining 5,500,000 shares have been issued and have been classified as a prepaid expense because the services had not yet been performed at March 31, 2000. NOTE 8 - CONVERTIBLE DEBENTURES The Company received a $2,000,000 face value 6% convertible debenture due August 31, 2001. $1,000,000 of the debenture was received on February 28, 2000 which represents the balance due at March 31, 2000. An additional $500,000 will be received within five days of the filing of the registration statement and the final $500,000 will be received within five days of when the registration statement becomes effective. The conversion price of the debentures is the lower of 85% of the market price of the Company's common stock at the conversion date or $2.00. The conversion discount of 15% will be charged to interest expense and $150,000 has been expensed during the three months ended March 31, 2000. The Company also issued warrants to purchase 125,000 shares of the Company's common stock at an exercise price of $2.00 per share. MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements March 31, 2000 and December 31, 1999 NOTE 9 - COMMON STOCK WARRANTS As of March 31, 2000, the Company had outstanding warrants for the issuance of common stock as follows: Number of Date Expiration Exercise Estimated Warrants Issued Dates Prices Proceeds 300,000 1995 2005 $2.6250 $ 787,500 2,684,432 1996 2000-2001 $1.0000 - $4.2500 6,506,741 977,737 1997 2000-2002 $0.6875 - $1.8750 1,188,211 5,194,322 1998 2000-2005 $0.2500 - $4.2500 9,929,502 1,514,525 1999 2001-2002 $0.4000 - $0.7500 748,263 3,298,002 2000 2003 $0.5000 - $2.0000 4,551,710 13,969,018 $ 23,711,927 During 1999, the Company completed private placements of common stock wherein the purchaser of one share of the Company's common stock received one-half (1/2) a warrant to purchase common stock at prices ranging from $0.50 to $0.75 per share. The Company issued 1,244,525 common stock warrants pursuant to these private placements. The Company also issued 270,000 common stock warrants as bonuses to certain officers and directors of the Company exercisable at $0.40 per share. All common stock warrants issued in 1999 had exercise prices at or above the trading price of the shares. During the first quarter of 2000, the Company completed private placements of common stock wherein the purchaser of one share of the Company's common stock received one-half (1/2) a warrant to purchase common stock at prices ranging from $0.50 to $0.75 per share, which was at or above the trading price of the shares. The Company issued 1,444,166 common stock warrants pursuant to these private placements. The Company also issued 103,836 common stock warrants as additional compensation for services rendered during the quarter exercisable at $0.50 per share. These warrants were issued at $1.375 below the trading price of the shares on the date of issuance and the difference has been expensed in the current period. Finally, an additional 1,625,000 warrants to purchase common stock of the Company at an exercise price of $2.00 per share were issued as additional compensation for the financing arrangement entered into during the quarter. These warrants were issued at exercise prices at or above the trading price of the shares. MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements March 31, 2000 and December 31, 1999 NOTE 10 - GOING CONCERN The Company's consolidated financial statements have been prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has incurred significant losses since inception, relating to its research and development efforts and has had no significant operating revenues until the acquisition of Phillips in December 1998. In 1999, the Company was able to raise working capital through the private placement of its common stock. The Company has now closed a private placement of combined debt and equity of up to $14,000,000 for operating capital of which $1,000,000 has been received in 2000. The Company believes cash flow projections now show the Company's reserves should be adequate to cover its operating needs as well as its needs for the expansion of its research and development projects and for the initial commercialization of its proprietary products. The Company also expects to generate additional revenue from the sales of its proprietary products. NOTE 11 - SUBSEQUENT EVENTS On May 18, 2000, Phillips ceased all operations. The following is a summary of the loss from discontinued operations resulting from the elimination of the operations of Phillips. The financial statements have been retroactively restated to reflect this event. The Company has established a reserve for discontinued operations of $1,726,923 which consists of net liabilities in excess of recoverable assets at March 31, 2000. No tax benefit has been attributed to the discontinued operations. March 31, 2000 1999 NET SALES $ 300,431 $ 717,112 OPERATING EXPENSES Cost of sales 267,480 502,821 General and administrative 172,775 182,162 Depreciation 20,066 17,154 Total Operating Expenses 460,321 702,137 INCOME (LOSS) FROM OPERATIONS (159,890) 14,975 OTHER INCOME (EXPENSES) Loss on write down of assets (1,212,418) - Interest expense (7,646) (7,157) Total Other Income (Expense) (1,220,064) (7,157) INCOME (LOSS) BEFORE INCOME TAXES (1,379,954) 7,818 INCOME TAXES - - INCOME (LOSS) FROM DISCONTINUED OPERATIONS $(1,379,954) $ 7,818 Item 2. Management's Discussion and Analysis or Plan of Operation Results of Operations On May 18, 2000, Phillips Pharmatec Labs, Inc. ("Phillips"), a wholly owned subsidiary of Medisys Technologies, Inc. (the"Company"), ceased all operations. Accordingly, the Company has eliminated the operations of Phillips from its financial results and its financial statements have been retroactively restated to reflect this event. The Company has established a reserve for discontinued operations of $1,726,923 which consists of net liabilities in excess of recoverable assets at March 31, 2000. Without Phillips' results, the Company had only nominal revenues of $623 for the for the three month period ("first quarter") ended March 31, 2000 compared to $1,773 for the comparable 1999 period. The Company does not expect a significant increase in revenues until it begins full commercial marketing of one or more of its products, which is expected for introduction in the fourth quarter of 2000. During the first quarter of 2000, the Company expended $1,639,435 for product research and development, a sharp increase from the $42,651 expended in the 1999 period. The increase is due to finalizing the CoverTipTM technology in preparation for commercial release and to secure additional intellectual property rights. Selling, general and administrative expenses increased to $1,368,594 for the first quarter of 2000 compared to $138,042 for the first quarter of 1999, primarily due to stock issued for services, salaries and warrants issued below current market price. The operating loss for the first quarter of 2000 was $3,011,940 compared to a loss of $183,602 for the 1999 period. This is attributed to increased research and development costs, stock issued for services, product manufacturing and increased general and administrative expenses. Also, interest expense increased to $162,000 for the first quarter of 2000 compared to $30,052, primarily due to conversion discount on debentures issued. Because of the Phillips closure, the Company recognized a loss from discontinued operations of $1,379,954 for the first quarter of 2000, resulting in a net loss for the quarter of $4,547,349, or $0.09 per share. Prior to ceasing operations, Phillips had net sales of $300,431 for the first quarter of 2000 compared with $717,112 for the same period in 1999. Cost of sales decreased to $267,480 for the first quarter of 2000 from $502,821 in the 1999 period, reflecting the decrease in sales. General and administrative expenses decreased to $172,775 for the first quarter of 2000 from $182,162 in the 1999 first quarter. Phillips also recorded a loss on the write down of assets or $1,212,418 for the first quarter of 2000 related to its ceasing operations. Phillips' net loss for the first quarter of 2000 was $1,379,954 compared to net income of $7,818 for the 1999 period. The Company has not completed an assessment of whether the operations may recommence or what further potential material losses may occur as a result of the Phillips closing. Liquidity and Capital Resources The Company has historically derived its working capital from financing activities, including private loans and raising capital through the sale of securities. Working capital at March 31, 2000 was a negative $590,596 compared to a negative $860,981 at December 31, 1999. Cash used by operating activities for the first quarter of 2000 was $1,081,243, compared to $41,737 for the 1999 period. This is primarily attributed to the net loss for the quarter and was partially offset by common stock issued for services and interest of $1,903,711 and the $1,212,418 write down from Phillips discontinuing operations. Also during the first quarter of 2000, the Company realized $2,173,309 from financing activities, primarily due to $1,098,750 realized from the sale of common stock and $1,000,000 from the issuance of a convertible debenture. At March 31, 2000, the Company had cash of $1,315,550 compared to $290,269 at December 31, 1999. The increase in cash is due to the sale of stock and issuance of the debenture. Also at March 31, 2000, the Company had total assets of $1,870,228 and stockholders' deficit of $1,067,815. In comparison, at December 31, 1999 the Company had total assets of $2,105,780 and total stockholders' deficit of $43,535. The increase in stockholders' deficit is directly related to the discontinued operations of Phillips. Management believes that the Company has sufficient capital resources and commitments to fund anticipated operations through the end of 2000. The Company intends to acquire additional equity or debt capital through private sources and/or a public offering, although there can be no assurance that the Company could successfully complete any such offering. Through March 31, 2000, the Company entered into a firm agreement for the acquisition of up to $14 million of capital from private sources. Through May 15, 2000, the Company had realized $1,500,000 of this funding. Initial proceeds are being used primarily to begin the production and commercial launch of the Company's lead product, the CoverTipTM, and for general corporate expenses. Additional funds, as realized, will be used for the development of SofDrawTM , PreSafTM and other general corporate business. If additional funding is not realized or if the Company is unable to commercially market its products under development, it could experience a further need for cash during fiscal 2000. In this event, the Company could experience further losses and may be forced to curtail operations or postpone product development and expansion plans. The Company's continuation as a going concern is directly dependent upon its ability to market its products under development and to realize additional funds from its current financing. Net Operating Loss The Company has accumulated approximately $15,000,000 of net operating loss carryforwards as of March 31, 2000, which may be offset against taxable income and income taxes in future years. The use of these losses to reduce future income taxes will depend on the generation of sufficient taxable income prior to the expiration of the net operating loss carryforwards. The carry-forwards expire in the year 2020. In the event of certain changes in control of the Company, there will be an annual limitation on the amount of net operating loss carryforwards which can be used. No tax benefit has been reported in the financial statements for the period ended March 31, 2000 because there is a 50% or greater chance that the carryforward will not be used. Accordingly, the potential tax benefit of the loss carryforward is offset by a valuation allowance of the same amount. Inflation In the opinion of management, inflation has not had a material effect on the operations of the Company. Year 2000 The Year 2000 issue results from a computer industry-wide practice of representing years with only two digits instead of four. Beginning in the year 2000, date code fields need to accept four digit entries to distinguish twenty-first century dates from twentieth century dates (2000 or 1900). As a result, computer systems and/or software used by many companies needed to be upgraded to comply with such Year 2000 requirements. Through March 31, 2000, the Company has not experienced any significant problems associated with the Year 2000 issue nor has it been made aware of or experienced date related problems with any third-party software. Although it appears that the Year 2000 issue will not have a significant adverse effect on the Company, it continues to monitor the Year 2000 compliance of its internal systems. Undetected errors in its internal systems that may be discovered in the future could have a material adverse effect on its business, operating results or financial condition. Risk Factors and Cautionary Statements Forward-looking statements in this report are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The Company wishes to advise readers that actual results may differ substantially from such forward-looking statements. Forward- looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by the statements, including, but not limited to, the following: the ability of the Company to secure additional financing, the development of the Company's existing and new products, the potential market for the Company's products, competitive factors, and other risks detailed in the Company's periodic report filings with the Securities and Exchange Commission. PART II Item 1. Legal Proceedings On March 16, 2000, the Company filed a Complaint against Brett Phillips, Elbert Carl Anderson, William H. Morris, Marilyn Morris and Barbara Larkins in the United States District Court in and for the Middle District of Louisiana, alleging various securities law violations and related claims in connection with the 1998 acquisition by the Company from the defendants of Phillips Pharmatech Labs, Inc. The Company is seeking recission of the acquisition, damages and other relief. The Company anticipated that these defendants would file various retaliatory claims. The Company believes that the suit filed is in the best interests of the shareholders and that it should not interfere with the core focus and business of the Company. On May 9, 2000, E. Carl Anderson, William Morris and Brett Phillips, filed a derivative action lawsuit in the United States District Court, Middle District of Florida, case number 8:00CV905-T 24F, against the Company and the current directors of the Company. The action was filed by Messrs. Anderson, Morris and Phillips acting by and in behalf of the Company. The complaint alleges corporate waste in the form of excessive salaries and bonuses and other alleged wastes related to Phillips. The complaint seeks injunctive relief and damages. Each of the plaintiffs in this action is also a defendant in the lawsuit previously filed by the Company on March 16, 2000 referenced above. The Company has not yet responded to the complaint and has not determined whether the action could cause material damages to the Company. Phillips is a party to various other legal proceedings. These primarily involve commercial claims and one action involves a former employee. The Company cannot predict the outcome of these lawsuits, legal proceedings and claims with certainty. Nevertheless, the Company believes that the outcome of all of these proceedings, even if determined adversely, would not have a material adverse effect on the Company's business or financial condition. There is a possibility that due to Phillips discontinuing its operations, both Phillips and the Company could be the subject of future actions. Item 2. Changes in Securities and Use of Proceeds During the three month period ended March 31, 2000, the Company issued an aggregate of 11,949,129 shares of authorized, but previously unissued common stock. Of this amount, (i) 2,783,464 shares were issued in exchange for services rendered valued at $.68 per share; (ii) 2,888,332 shares were issued for cash of $698,750, or $0.24 per share; (iii) 5,500,000 shares were issued for prepaid service involving the acquisition of manufacturing capabilities for the CoverTipTM safety syringe, valued at $0.36 per share; (iv) 188,833 shares issued upon exercise of common stock warrants at an average of $0.44 per share; and (v) 588,500 shares for the conversion of debentures and notes payable and valued at $0.25 per share. Proceeds realized from the cash sales for general Company operations including reduction of debt, and developing and initial marketing of the CoverTipTM. The above issuances of shares were made in private transactions to persons having received information concerning the Company and its business operations. Accordingly, the Company relied upon the exemption from registration under the Securities Act of 1933, as amended (the "Act"), provided by Sections 4(2) and 3(a)(9) of the Act. Item 3. Defaults Upon Senior Securities This Item is not applicable to the Company. Item 4. Submissions of Matters to a Vote of Security Holders This Item is not applicable to the Company. Item 5. Other Information This Item is not applicable to the Company. Item 6. Exhibits and Reports on Form 8-K No reports on Form 8-K were filed by the Company during the three month period ended March 31, 2000. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MEDISYS TECHNOLOGIES, INC. BY: /S/ Edward P. Sutherland EDWARD P. SUTHERLAND Chairman, Chief Executive Officer, Treasurer and Director DATE: June 12, 2000 BY: /S/ Kerry Frey KERRY FREY President, Chief Operating and Director DATE: June 12, 2000