As filed with the Securities and Exchange Commission on September 30, 2004
Registration No. 333-115243
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CONVERSION SERVICES INTERNATIONAL, INC.
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(Name of small business issuer in its charter)
Delaware 7379 20-1010495
----------------------------------------- ---------------------------------- -----------------------------------
State or jurisdiction of incorporation or Standard Industrial Classification (I.R.S. Employer Identification No.)
organization) Classification Code Number)
100 Eagle Rock Avenue
East Hanover, New Jersey 07936
Phone: (973) 560-9400
Fax: (973) 560-9500
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(Address and telephone number of principal executive office)
Scott Newman
President and Chief Executive Officer
Conversion Services International, Inc.
100 Eagle Rock Avenue
East Hanover, New Jersey 07936
Phone: (973) 560-9400
Fax: (973) 560-9500
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(Name, address and telephone number of agent for service)
Copies to:
Douglas S. Ellenoff, Esq.
Ellenoff Grossman & Schole LLP
370 Lexington Avenue, 19th floor
New York, New York 10017
Phone: (212) 370-1300
Fax: (212) 370-7889
Approximate date of proposed sale to the public: As soon as practicable after
the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH PROPOSED MAXIMUM
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AMOUNT OF
TO BE REGISTERED REGISTERED PER UNIT REGISTRATION FEE
--------------------------------------------------------------------------------------------------------------
shares of common stock, par value $0.001 454,240,492 (1) $0.21 (2) $12,085.98
per share
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shares of common stock, par value $0.001 89,249,999 (1) $0.14 (2) $ 1,583.12
per share, underlying convertible notes
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shares of common stock, par value $0.001 6,000,000 (1) $0.29 (2) $ 220.46
per share, underlying warrants
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shares of common stock, par value $0.001 3,000,000 (1) $0.31 (2) $ 117.83
per share, underlying warrants
--------------------------------------------------------------------------------------------------------------
shares of common stock, par value $0.001 3,000,000 (1) $0.35 (2) $ 133.04
per share, underlying warrants
--------------------------------------------------------------------------------------------------------------
shares of common stock, par value $0.001 4,166,666 $0.105 (2) $ 55.43
per share, underlying warrants
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shares of common stock, par value $0.001 6,000,000 (1) $0.14 (2) $ 106.43
per share, underlying warrants
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(1) Also registered hereby are such additional and indeterminable number of
shares as may be issuable due to adjustments for changes resulting from stock
dividends, stock splits and similar changes as well as anti-dilution provisions
applicable to the convertible notes and warrants.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933.
The securities registered hereby will be made on a continuous or delayed basis
in the future in accordance with Rule 415 under the Securities Act.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
Subject to Completion
Preliminary Prospectus dated September [_], 2004
565,657,157 SHARES OF COMMON STOCK
OF
CONVERSION SERVICES INTERNATIONAL, INC.
This prospectus relates to the offering for resale of shares of our common
stock by certain selling stockholders who received shares in both LCS Group,
Inc. (hereinafter referred to as LCS) and Conversion Services International,
Inc. (hereinafter referred to as CSI) in private financing transactions and
acquisitions.
We will bear all expenses, other than selling commissions and fees of the
selling stockholders, in connection with the registration and sale of the shares
being offered by this prospectus.
Our common stock is traded on the Over The Counter Bulletin Board under
the symbol "CSII." The closing price of our common stock on September 27, 2004,
was $0.21.
In this prospectus, the terms "CSI," "we," or "us" each refer to
Conversion Services International, Inc., which was formerly known as LCS Group,
Inc. In January 2004, we merged with and into a wholly owned subsidiary of LCS.
In connection with this transaction, among other things, LCS changed its name to
"Conversion Services International, Inc."
The selling stockholders who wish to sell their shares of our common stock
may offer and sell such shares on a continuous or delayed basis in the future.
These sales may be conducted in the open market or in privately negotiated
transactions and at market prices, fixed prices or negotiated prices. We will
not receive any of the proceeds from the sale of the shares of common stock
owned by the selling stockholders.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. YOU SHOULD REVIEW CAREFULLY
AND CONSIDER THE INFORMATION DESCRIBED UNDER THE HEADING "RISK FACTORS"
BEGINNING ON PAGE 3.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Subject to Completion, dated ____ __, 2004
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY.............................................................1
RISK FACTORS...................................................................3
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.............................15
BUSINESS......................................................................16
MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS...................25
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................................32
USE OF PROCEEDS...............................................................32
SELLING STOCKHOLDERS..........................................................33
PLAN OF DISTRIBUTION..........................................................35
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS..................36
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................43
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS..........................44
DESCRIPTION OF SECURITIES.....................................................46
SHARES ELIGIBLE FOR FUTURE SALE...............................................48
EXPERTS.......................................................................48
LEGAL MATTERS.................................................................48
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES..................................................48
FINANCIAL STATEMENTS.........................................................F-1
Any prospective investor should not rely on any information not contained
in this document. We have not authorized anyone to provide any other information
to the contrary. This document may only be used where it is legal to sell these
securities. The information in this document may only be accurate as of and on
the date of this document.
PROSPECTUS SUMMARY
The following summary contains basic information about us and this
prospectus. Because it is a summary, it does not contain all of the information
that you should consider before investing in our common stock. For a more
complete understanding of our company, our business and a possible investment in
our common stock, you should read the entire prospectus carefully, including the
Risk Factors starting on page 3.
OVERVIEW OF OUR BUSINESS
Conversion Services International, Inc. is a technology and software firm
providing professional services to the Global 2000 as well as mid-market
clientele. Our core competency areas include strategic consulting, data
warehousing, business intelligence and data management consulting. By leveraging
best practices and methodologies, we help organizations set strategy to reach
their goals and deliver them via best practices implementations. Our business
and technology offerings help clients improve performance and maximize returns
on technology investments. Our capabilities include benchmarking, tool
selection, business intelligence, data warehousing, analytics, process
improvement and application development and support.
OUR SERVICES
As a full service data warehousing, business intelligence and strategy
consulting firm, we offer services in the following solution categories:
STRATEGIC CONSULTING
o Project Management (PMO)
o Data Warehousing and Business Intelligence Strategic Planning
o Business Technology Alignment
o Tool Analysis and Recommendation
o Integration Management, M&A
o Compliance (HIPAA, Basel II, Sarbanes-Oxley)
o Process Improvement (Lean, Six Sigma)
o Organizational Analysis and Assessment (M&A)
o Methodology, process, procedures
o Acquisition Readiness
o Information, Process and Infrastructure (IPI) Diagrams
o RFP creation and responses
o Training and Education
BUSINESS INTELLIGENCE
o Architecture and Implementation
o Ad-Hoc Query and Analysis
o Enterprise Reporting Solutions
o Online Analytical Processing
o Analytics and Dashboards
o Business Performance Management
o Business Intelligence Competency Center
o Proof of Concepts and Prototypes
o BI Strategy
o Data Mining
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DATA WAREHOUSING
o DW Design, Development and Implementation
o Departmental Data Warehousing
o Federated Data Warehousing
o Conforming Facts/Dimensions
o Proof of Concepts and Prototypes
o Data Mart Delivery
o Outsourcing
o Data Architecture / Database
o Extract, Transformation and Loading
o Data Warehouse Framework
DATA MANAGEMENT
o Data Quality Center of Excellence
o Data Profiling
o Data Quality / Cleansing
o Data Transformation
o Data Migrations and Conversions
o Metadata Management
o Enterprise Information Integration (EII)
o Integration Management
o Enterprise Information Architecture
o Quality Assurance Testing (Verification, Validation, Certification)
During the six month period ended June 30, 2004, five of our clients
accounted collectively for approximately 52% of total revenues. During the six
month period ended June 30, 2003, four of our clients accounted collectively for
approximately 55% of total revenues. For the year ended December 31, 2003, two
of our clients accounted collectively for approximately 43% of our total
revenues. During the fiscal year ended December 31, 2002, two of our clients
accounted collectively for approximately 59% of our total revenues. With the
recent acquisition of new businesses and our objective of acquiring more this
year, we believe that our reliance on these clients will continue to decline
this year and in the future. Nevertheless, the loss of any of our largest
clients could have a material adverse effect on our business.
PURPOSE OF THIS PROSPECTUS
This prospectus relates to the resale of shares of our common stock owned
by, or issuable upon conversion of notes or exercise of warrants, by certain
selling stockholders who will use this prospectus to resell their shares of
common stock. We will not receive any proceeds from sales by the selling
stockholders. However, we will receive proceeds, to be used for working capital
purposes, upon the exercise of warrants held by certain selling stockholders.
For further information about the selling stockholders see "Selling
Stockholders."
OUR CORPORATE INFORMATION
Our offices are located at 100 Eagle Rock Avenue, East Hanover, New Jersey
07936, and our telephone number is (973) 560-9400.
2
THE OFFERING
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COMMON STOCK OFFERED: The selling stockholders are offering up to
565,657,157 shares of our common stock. The
selling stockholders will determine when
they will sell their shares.
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COMMON STOCK OUTSTANDING: We have 768,510,668 shares of common stock
issued and outstanding as of September 27,
2004.
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USE OF PROCEEDS: We will not receive any of the proceeds from
the sale of shares of common stock offered
by the selling stockholders. However, we
will receive proceeds, to be used for
working capital purposes, upon the exercise
of warrants held by certain selling
stockholders.
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TRADING MARKET: Our common stock is currently listed on the
OTC Bulletin Board under the trading symbol
"CSII."
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RISK FACTORS: Investment in our common stock involves a
high degree of risk. You should carefully
consider the information set forth in the
"Risk Factors" section of this prospectus as
well as other information set forth in this
prospectus, including our financial
statements and related notes.
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RISK FACTORS
An investment in our securities is extremely risky. You should carefully
consider the following risks, in addition to the other information presented in
this prospectus, before deciding to buy our securities. If any of the following
risks actually materialize, our business and prospects could be seriously
harmed, the price and value of our securities could decline and you could lose
all or part of your investment. The risks and uncertainties described below are
intended to be the material risks that are specific to us and to our industry.
RISKS RELATING TO OUR BUSINESS
BECAUSE WE DEPEND ON A SMALL NUMBER OF KEY CLIENTS, NON-RECURRING REVENUE AND
CONTRACTS TERMINABLE ON SHORT NOTICE, OUR BUSINESS COULD BE ADVERSELY AFFECTED
IF WE FAIL TO RETAIN THESE CLIENTS AND/OR OBTAIN NEW CLIENTS AT A LEVEL
SUFFICIENT TO SUPPORT OUR OPERATIONS AND/OR BROADEN OUR CLIENT BASE.
During the six month period ended June 30, 2004, five of our clients
accounted collectively for approximately 52% of total revenues. During the six
month period ended June 30, 2003, four of our clients accounted collectively for
approximately 55% of total revenues. For the year ended December 31, 2003, two
of our clients accounted collectively for approximately 43% of our total
revenues. During the fiscal year ended December 31, 2002, two of our clients
accounted collectively for approximately 59% of our total revenues. With the
recent acquisition of new businesses and our objective of acquiring more this
year, we believe that our reliance on these clients will continue to decline
this year and in the future. The loss of any of our largest clients could have a
material adverse effect on our business. In addition, our contracts provide that
our services are terminable upon short notice, typically not more than 30 days.
Non-renewal or termination of contracts with these or other clients without
adequate replacements could have a material and adverse effect upon our
business. In addition, a large portion of our revenues are derived from
information technology consulting services that are generally non-recurring in
nature. There can be no assurance that we will:
3
o obtain additional contracts for projects similar in scope to those
previously obtained from our clients;
o be able to retain existing clients or attract new clients;
o provide services in a manner acceptable to clients;
o offer pricing for services which is acceptable to clients; or
o broaden our client base so that we will not remain largely dependent
upon a limited number of clients that will continue to account for a
substantial portion of our revenues.
CERTAIN CLIENT-RELATED COMPLICATIONS MAY MATERIALLY ADVERSELY AFFECT OUR
BUSINESS.
We may be subject to additional risks relating to our clients that could
materially adversely affect our business, such as delays in clients paying their
outstanding invoices, lengthy client review processes for awarding contracts,
delay, termination, reduction or modification of contracts in the event of
changes in client policies or as a result of budgetary constraints, and/or
increased or unexpected costs resulting in losses under fixed-fee contracts,
which factors could also adversely affect our business.
WE HAVE A HISTORY OF LOSSES AND WE COULD INCUR LOSSES IN THE FUTURE.
During the fiscal year ended December 31, 2003, we had a decrease in
revenues and gross profits, and we sustained an operating loss and cannot be
sure that we will operate profitably in the future.
During the fiscal year ended December 31, 2003, our revenues decreased by
$1.8 million from $16.2 million for the year ended December 31, 2002 to $14.4
million for the year ended December 31, 2003. In addition, our gross profits
decreased by approximately 5.8%. Accordingly, we sustained a net loss in the
approximate amount of ($307,000).
During the six month period ended June 30, 2004, our revenues increased by
$4.7 million from $7.1 million for the six month period ended June 30, 2003 to
$11.8 million for the six month period ended June 30, 2004. In addition, our
gross profits increased by 1.8 percentage points, from 28.4% for the six month
period ended June 30, 2003 to 30.2% for the six month period ended June 30,
2004. However, we sustained a net loss for six month period ended June 30, 2004
of ($691,546), a decrease of ($721,426) as compared to net income of $29,880 for
the six month period ended June 30, 2003.
WE HAVE A SIGNIFICANT AMOUNT OF DEBT, WHICH, IN THE EVENT OF A DEFAULT, COULD
HAVE MATERIAL ADVERSE CONSEQUENCES UPON US.
On August 16, 2004, we entered into a security agreement with Laurus
Master Fund, Ltd., pursuant to which we have borrowed $3,200,000 as of September
27, 2004. Such loan is collateralized and secured by all of our corporate
assets. The degree to which we are leveraged could have important consequences
to us, including the following:
o A portion of our cash flow must be used to pay interest on our
indebtedness and therefore is not available for use in our business;
o Our indebtedness increases our vulnerability to changes in general
economic and industry conditions;
o Our ability to obtain additional financing for working capital,
capital expenditures, general corporate purposes or other purposes
could be impaired; and
4
o Our failure to comply with restrictions contained in the terms of
our borrowings could lead to a default which could cause all or a
significant portion of our debt to become immediately payable.
o If we default, the loans will become due and we may not have the
funds to repay the loans, and we could discontinue our business and
investors could lose all their money.
In addition, certain terms of such loan require the prior consent of
Laurus Master Fund, Ltd. on many corporate actions including, but not limited
to, mergers and acquisitions--which is part of our ongoing business strategy.
OUR REVENUES ARE DIFFICULT TO FORECAST.
We may increase our general and administrative expenses in the event that
we increase our business and/or acquire other businesses, while our operating
expenses for sales and marketing and costs of services for technical personnel
to provide and support our services also increases. Additionally, although most
of our clients are large, creditworthy entities, at any given point in time, we
may have significant accounts receivable balances with clients that expose us to
credit risks if such clients either delay or elect not to pay or are unable to
pay such obligations. If we have an unexpected shortfall in revenues in relation
to our expenses, or significant bad debt experience, our business could be
materially and adversely affected.
OUR PROFITABILITY WILL SUFFER IF WE ARE NOT ABLE TO MAINTAIN OUR PRICING,
UTILIZATION OF PERSONNEL AND CONTROL OUR COSTS. A CONTINUATION OF CURRENT
PRICING PRESSURES COULD RESULT IN PERMANENT CHANGES IN PRICING POLICIES AND
DELIVERY CAPABILITIES.
Our gross profit margin is largely a function of the rates we are able to
charge for our information technology services. Accordingly, if we are not able
to maintain the pricing for our services or an appropriate utilization of our
professionals without corresponding cost reductions, our margins will suffer.
The rates we are able to charge for our services are affected by a number of
factors, including:
o our clients' perceptions of our ability to add value through our
services;
o pricing policies of our competitors;
o our ability to accurately estimate, attain and sustain engagement
revenues, margins and cash flows over increasingly longer contract
periods;
o the use of globally sourced, lower-cost service delivery
capabilities by our competitors and our clients; and
o general economic and political conditions.
Our gross margins are also a function of our ability to control our costs
and improve our efficiency. If the continuation of current pricing pressures
persists it could result in permanent changes in pricing policies and delivery
capabilities and we must continuously improve our management of costs.
5
UNEXPECTED COSTS OR DELAYS COULD MAKE OUR CONTRACTS UNPROFITABLE.
In the future, we may have many types of contracts, including
time-and-materials contracts, fixed-price contracts and contracts with features
of both of these contract types. Any increased or unexpected costs or
unanticipated delays in connection with the performance of these engagements,
including delays caused by factors outside our control, could make these
contracts less profitable or unprofitable, which would have an adverse effect on
all of our margins and potential net income.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE FAIL TO ADAPT TO EMERGING AND
EVOLVING MARKETS.
The markets for our services are changing rapidly and evolving and,
therefore, the ultimate level of demand for our services is subject to
substantial uncertainty. Most of our historic revenue was generated from
providing information technology services only. During the last several years,
we have focused our efforts on providing data warehousing services in particular
since we believe that there is going to be an increased need in this area. Any
significant decline in demand for programming, applications development,
information technology or data warehousing consulting services could materially
and adversely affect our business and prospects.
Our ability to achieve growth targets is dependent in part on maintaining
existing clients and continually attracting and retaining new clients to replace
those who have not renewed their contracts. Our ability to achieve market
acceptance, including for data warehousing, will require substantial efforts and
expenditures on our part to create awareness of our services.
IF WE SHOULD EXPERIENCE RAPID GROWTH, SUCH GROWTH COULD STRAIN OUR MANAGERIAL
AND OPERATIONAL RESOURCES, WHICH COULD ADVERSELY AFFECT OUR BUSINESS.
Any rapid growth that we may experience would most likely place a
significant strain on our managerial and operational resources. If we continue
to acquire other companies, we will be required to manage multiple relationships
with various clients, strategic partners and other third parties. Further growth
(organic or by acquisition) or an increase in the number of strategic
relationships may increase this strain on existing managerial and operational
resources, inhibiting our ability to achieve the rapid execution necessary to
implement our growth strategy without incurring additional corporate expenses.
WE FACE INTENSE COMPETITION AND OUR FAILURE TO MEET THIS COMPETITION COULD
ADVERSELY AFFECT OUR BUSINESS.
Competition for our information technology consulting services, including
data warehousing, is significant and we expect that this competition will
continue to intensify due to the low barriers to entry. We may not have the
financial resources, technical expertise, sales and marketing or support
capabilities to adequately meet this competition. We compete against numerous
large companies, including, among others, multi-national and other major
consulting firms. These firms have substantially greater market presence, longer
operating histories, more significant client bases and greater financial,
technical, facilities, marketing, capital and other resources than we have. If
we are unable to compete against such competitors, our business will be
adversely affected.
Our competitors may respond more quickly than us to new or emerging
technologies and changes in client requirements. Our competitors may also devote
greater resources than we can to the development, promotion and sales of our
services. If one or more of our competitors develops and implements
methodologies that result in superior productivity and price reductions without
adversely affecting their profit margins, our business could suffer. Competitors
may also:
o engage in more extensive research and development;
o undertake more extensive marketing campaigns;
6
o adopt more aggressive pricing policies; and
o make more attractive offers to our existing and potential employees
and strategic partners.
In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties that
could be detrimental to our business.
New competitors, including large computer hardware, software, professional
services and other technology companies, may enter our markets and rapidly
acquire significant market share. As a result of increased competition and
vertical and horizontal integration in the industry, we could encounter
significant pricing pressures. These pricing pressures could result in
substantially lower average selling prices for our services. We may not be able
to offset the effects of any price reductions with an increase in the number of
clients, higher revenue from consulting services, cost reductions or otherwise.
In addition, professional services businesses are likely to encounter
consolidation in the near future, which could result in decreased pricing and
other competition.
IF WE FAIL TO ADAPT TO THE RAPID TECHNOLOGICAL CHANGE CONSTANTLY OCCURRING IN
THE AREAS IN WHICH WE PROVIDE SERVICES, INCLUDING DATA WAREHOUSING, OUR BUSINESS
COULD BE ADVERSELY AFFECTED.
The market for information technology consulting services and data
warehousing is rapidly evolving. Significant technological changes could render
our existing services obsolete. We must adapt to this rapidly changing market by
continually improving the responsiveness, functionality and features of our
services to meet clients' needs. If we are unable to respond to technological
advances and conform to emerging industry standards in a cost-effective and
timely manner, our business could be materially and adversely affected.
WE DEPEND ON OUR MANAGEMENT. IF WE FAIL TO RETAIN KEY PERSONNEL, OUR BUSINESS
COULD BE ADVERSELY AFFECTED.
There is intense competition for qualified personnel in the areas in which
we operate. The loss of existing personnel or the failure to recruit additional
qualified managerial, technical and sales personnel, as well as expenses in
connection with hiring and retaining personnel, particularly in the emerging
area of data warehousing, could adversely affect our business. We also depend
upon the performance of our executive officers and key employees in particular,
Messrs. Scott Newman and Glenn Peipert. Although we have entered into employment
agreements with Messrs. Newman and Peipert, the loss of either of these
individuals could have a material adverse effect upon us. In addition, we have
not obtained "key man" life insurance on the lives of either Messrs. Newman or
Peipert.
We will need to attract, train and retain more employees for management,
engineering, programming, sales and marketing, and client service and support
positions. As noted above, competition for qualified employees, particularly
engineers, programmers and consultants, continues to be intense. Consequently,
we may not be able to attract, train and retain the personnel we need to
continue to offer solutions and services to current and future clients in a cost
effective manner, if at all.
IF WE FAIL TO RAISE CAPITAL THAT WE MAY NEED TO SUPPORT AND INCREASE OUR
OPERATIONS, OUR BUSINESS COULD BE ADVERSELY AFFECTED.
7
Our future capital uses and requirements will depend on numerous factors,
including:
o the extent to which our solutions and services gain market
acceptance;
o the level of revenues from current and future solutions and
services;
o the expansion of operations;
o the costs and timing of product and service developments and sales
and marketing activities;
o the costs related to acquisitions of technology or businesses; and
o competitive developments.
We may require additional capital in order to continue to support and
increase our sales and marketing efforts, continue to expand and enhance the
solutions and services we are able to offer to current and future clients and
fund potential acquisitions. This capital may not be available on terms
acceptable to us, if at all. In addition, we may be required to spend
greater-than-anticipated funds if unforeseen difficulties arise in the course of
these or other aspects of our business. As a consequence, we will be required to
raise additional capital through public or private equity or debt financings,
collaborative relationships, bank facilities or other arrangements. We cannot
assure you that such additional capital will be available on terms acceptable to
us, if at all. Any additional equity financing is expected to be dilutive to our
stockholders, and debt financing, if available, may involve restrictive
covenants and increased interest costs. Our inability to obtain sufficient
financing may require us to delay, scale back or eliminate some or all of our
expansion programs or to limit the marketing of our services. This could have a
material and adverse effect on our business.
WE COULD HAVE POTENTIAL LIABILITY TO OUR CLIENTS THAT COULD ADVERSELY AFFECT OUR
BUSINESS.
Our services involve development and implementation of computer systems
and computer software that are critical to the operations of our clients'
businesses. If we fail or are unable to satisfy a client's expectations in the
performance of our services, our business reputation could be harmed or we could
be subject to a claim for substantial damages, regardless of our responsibility
for such failure or inability. In addition, in the course of performing
services, our personnel often gain access to technologies and content which
include confidential or proprietary client information. Although we have
implemented policies to prevent such client information from being disclosed to
unauthorized parties or used inappropriately, any such unauthorized disclosure
or use could result in a claim for substantial damages. Our business could be
adversely affected if one or more large claims are asserted against us that are
uninsured, exceed available insurance coverage or result in changes to our
insurance policies, including premium increases or the imposition of a large
deductible or co-insurance requirements. Although we maintain general liability
insurance coverage, including coverage for errors and omissions, there can be no
assurance that such coverage will continue to be available on reasonable terms
or will be available in sufficient amounts to cover one or more large claims.
WE DO NOT INTEND TO PAY DIVIDENDS ON SHARES OF OUR COMMON STOCK IN THE
FORESEEABLE FUTURE.
We have never paid cash dividends on our common stock other than
distributions resulting from our past tax status as a Subchapter S corporation.
Our current Board of Directors does not anticipate that we will pay cash
dividends in the foreseeable future. Instead, we intend to retain future
earnings for reinvestment in our business and/or to fund future acquisitions. In
addition, the security agreement with Laurus Master Fund, Ltd. requires that we
obtain their consent prior to paying any dividends.
8
OUR MANAGEMENT GROUP OWNS OR CONTROLS A SIGNIFICANT NUMBER OF THE OUTSTANDING
SHARES OF OUR COMMON STOCK AND WILL CONTINUE TO HAVE SIGNIFICANT OWNERSHIP OF
OUR VOTING SECURITIES FOR THE FORESEEABLE FUTURE.
Scott Newman and Glenn Peipert, our principal stockholders and our
executive officers and two of our directors, beneficially own approximately
39.2% and 19.6%, respectively, of our outstanding common stock. Robert C.
DeLeeuw, our Senior Vice President and President of our wholly owned subsidiary,
DeLeeuw Associates, LLC, owns approximately 10.4% of our outstanding common
stock. As a result, these persons will have the ability, acting as a group, to
effectively control our affairs and business, including the election of
directors and subject to certain limitations, approval or preclusion of
fundamental corporate transactions. This concentration of ownership of our
common stock may:
o delay or prevent a change in the control;
o impede a merger, consolidation, takeover or other transaction
involving us; or
o discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us.
THE AUTHORIZATION AND ISSUANCE OF "BLANK CHECK" PREFERRED STOCK COULD HAVE AN
ANTI-TAKEOVER EFFECT DETRIMENTAL TO THE INTERESTS OF OUR STOCKHOLDERS.
Our certificate of incorporation allows the Board of Directors to issue
preferred stock with rights and preferences set by our board without further
stockholder approval. The issuance of shares of this "blank check preferred"
under particular circumstances could have an anti-takeover effect. For example,
in the event of a hostile takeover attempt, it may be possible for management
and the board to endeavor to impede the attempt by issuing shares of blank check
preferred, thereby diluting or impairing the voting power of the other
outstanding shares of common stock and increasing the potential costs to acquire
control of us. Our Board of Directors has the right to issue blank check
preferred without first offering them to holders of our common stock, as the
holders of our common stock have no preemptive rights.
WE ARE NOT CURRENTLY COMPLIANT WITH THE SARBANES-OXLEY ACT.
The enactment of the Sarbanes-Oxley Act in July 2002 created a significant
number of new corporate governance requirements. Such requirements will require
us to make changes to our current corporate governance practices. Although we
expect to implement the requisite changes to become compliant with the new
requirements, we are not currently. Currently, only one of the members of our
Board of Directors is considered to be independent. We may not be able to
attract a sufficient number of directors in the future to satisfy this future
requirement if it becomes applicable to us.
OUR SERVICES OR SOLUTIONS MAY INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF
OTHERS.
We cannot be sure that our services and solutions, or the solutions of
others that we offer to our clients, do not infringe on the intellectual
property rights of third parties, and we may have infringement claims asserted
against us or against our clients. These claims may harm our reputation, cost us
money and prevent us from offering some services or solutions. In some
instances, the amount of these expenses may be greater than the revenues we
receive from the client. Any claims or litigation in this area, whether we
ultimately win or losE, could be time-consuming and costly, injure our
reputation or require us to enter into royalty or licensing arrangements. We may
not be able to enter into these royalty or licensing arrangements on acceptable
terms.
9
WE COULD BE SUBJECT TO SYSTEMS FAILURES THAT COULD ADVERSELY AFFECT OUR
BUSINESS.
Our business depends on the efficient and uninterrupted operation of our
computer and communications hardware systems and infrastructure. We currently
maintain our computer systems in our facilities at our offices in New Jersey and
Texas. We do not have complete redundancy in our systems and therefore any
damage or destruction to our systems would significantly harm our business.
Although we have taken precautions against systems failure, interruptions could
result from natural disasters as well as power losses, telecommunications
failures and similar events. Our systems are also subject to human error,
security breaches, computer viruses, break-ins, "denial of service" attacks,
sabotage, intentional acts of vandalism and tampering designed to disrupt our
computer systems. We also lease telecommunications lines from local and regional
carriers, whose service may be interrupted. Any damage or failure that
interrupts or delays network operations could materially and adversely affect
our business.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE FAIL TO ADEQUATELY ADDRESS
SECURITY ISSUES.
We have taken measures to protect the integrity of our technology
infrastructure and the privacy of confidential information. Nonetheless, our
technology infrastructure is potentially vulnerable to physical or electronic
break-ins, viruses or similar problems. If a person or entity circumvents its
security measures, they could jeopardize the security of confidential
information stored on our systems, misappropriate proprietary information or
cause interruptions in our operations. We may be required to make substantial
additional investments and efforts to protect against or remedy security
breaches. Security breaches that result in access to confidential information
could damage our reputation and expose us to a risk of loss or liability.
RISKS RELATING TO ACQUISITIONS
WE FACE INTENSE COMPETITION FOR ACQUISITION CANDIDATES.
There is a high degree of competition among companies seeking to acquire
interests in information technology service companies such as those we may
target for acquisition. We are expected to continue to be an active participant
in the business of seeking business relationships with, and acquisitions of
interests in, such companies. A large number of established and well-financed
entities, including venture capital firms, are active in acquiring interests in
companies that we may find to be desirable acquisition candidates. Many of these
investment-oriented entities have significantly greater financial resources,
technical expertise and managerial capabilities than we do. Consequently, we may
be at a competitive disadvantage in negotiating and executing possible
investments in these entities as many competitors generally have easier access
to capital, on which entrepreneur-founders of privately-held information
technology service companies generally place greater emphasis than obtaining the
management skills and networking services that we can provide. Even if we are
able to compete with these venture capital entities, this competition may affect
the terms and conditions of potential acquisitions and, as a result, we may pay
more than expected for targeted acquisitions. If we cannot acquire interests in
attractive companies on reasonable terms, our strategy to build our business
through acquisitions may be inhibited.
WE WILL ENCOUNTER DIFFICULTIES IN IDENTIFYING SUITABLE ACQUISITION CANDIDATES
AND INTEGRATING NEW ACQUISITIONS.
A key element of our expansion strategy is to grow through acquisitions.
If we identify suitable candidates, we may not be able to make investments or
acquisitions on commercially acceptable terms. Acquisitions may cause a
disruption in our ongoing business, distract management, require other resources
and make it difficult to maintain our standards, controls and procedures. We may
not be able to retain key employees of the acquired companies or maintain good
relations with their clients or suppliers. It may be required to incur
additional debt and to issue equity securities, which may be dilutive to
existing stockholders, to effect and/or fund acquisitions.
10
WE CANNOT ASSURE YOU THAT ANY ACQUISITIONS WE MAKE WILL ENHANCE OUR BUSINESS.
We cannot assure you that any completed acquisition will enhance our
business. Since we anticipate that acquisitions could be made with both cash and
our common stock, if we consummate one or more significant acquisitions, the
potential impacts are:
o a substantial portion of our available cash could be used to
consummate the acquisitions and/or we could incur or assume
significant amounts of indebtedness; and
o losses resulting from the on going operations of these acquisitions
could adversely affect our cash flow;and
o our stockholders could suffer significant dilution of their interest
in our common stock.
Also, we are required to account for acquisitions under the purchase
method, which would likely result in our recording significant amounts of
goodwill. The inability of a subsidiary to sustain profitability may result in
an impairment loss in the value of long-lived assets, principally goodwill and
other tangible and intangible assets, which would adversely affect our financial
statements.
RISKS RELATING TO OUR COMMON STOCK
OUR RELATIONSHIP WITH OUR MAJORITY STOCKHOLDERS PRESENTS POTENTIAL CONFLICTS OF
INTEREST, WHICH MAY RESULT IN DECISIONS THAT FAVOR THEM OVER OUR OTHER
STOCKHOLDERS.
Our principal beneficial owners, Scott Newman and Glenn Peipert, provide
management and financial assistance to us. When their personal investment
interests diverge from our interests, they and their affiliates may exercise
their influence in their own best interests. Some decisions concerning our
operations or finances may present conflicts of interest between us and these
stockholders and their affiliated entities. Given that our Board of Directors
only has one independent member, our ability to comply with state corporate law
and/or the requirements of the Sarbanes-Oxley Act of 2002 may be impaired.
THE LIMITED PRIOR PUBLIC MARKET AND TRADING MARKET MAY CAUSE POSSIBLE VOLATILITY
IN OUR STOCK PRICE.
There has only been a limited public market for our securities and there
can be no assurance that an active trading market in our securities will be
maintained. The Over The Counter Bulletin Board (OTCBB) is an unorganized,
inter-dealer, over-the-counter market which provides significantly less
liquidity than NASDAQ and the national securities exchange, and quotes for
securities quoted on the OTCBB are not listed in the financial sections of
newspapers as are those for NASDAQ and the national securities exchange. In
addition, the overall market for securities in recent years has experienced
extreme price and volume fluctuations that have particularly affected the market
prices of many smaller companies. The trading price of our common stock is
expected to be subject to significant fluctuations including, but not limited
to, the following:
o quarterly variations in operating results and achievement of key
business metrics;
o changes in earnings estimates by securities analysts, if any;
11
o any differences between reported results and securities analysts'
published or unpublished expectations;
o announcements of new contracts or service offerings by us or our
competitors;
o market reaction to any acquisitions, joint ventures or strategic
investments announced by us or our competitors;
o demand for our services and products;
o shares being sold pursuant to Rule 144 or upon exercise of warrants;
and
o general economic or stock market conditions unrelated to our
operating performance.
These fluctuations, as well as general economic and market conditions, may
have a material or adverse effect on the market price of our common stock.
THERE ARE LIMITATIONS IN CONNECTION WITH THE AVAILABILITY OF QUOTES AND ORDER
INFORMATION ON THE OTCBB.
Trades and quotations on the OTCBB involve a manual process and the market
information for such securities cannot be guaranteed. In addition, quote
information, or even firm quotes, may not be available. The manual execution
process may delay order processing and intervening price fluctuations may result
in the failure of a limit order to execute or the execution of a market order at
a significantly different price. Execution of trades, execution reporting and
the delivery of legal trade confirmation may be delayed significantly.
Consequently, one may not able to sell shares of our common stock at the optimum
trading prices.
THERE ARE DELAYS IN ORDER COMMUNICATION ON THE OTCBB.
Electronic processing of orders is not available for securities traded on
the OTCBB and high order volume and communication risks may prevent or delay the
execution of one's OTCBB trading orders. This lack of automated order processing
may affect the timeliness of order execution reporting and the availability of
firm quotes for shares of our common stock. Heavy market volume may lead to a
delay in the processing of OTCBB security orders for shares of our common stock,
due to the manual nature of the market. Consequently, one may not able to sell
shares of our common stock at the optimum trading prices.
PENNY STOCK REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY OF OUR
SECURITIES.
The SEC has adopted regulations which generally define a "penny stock" to
be any equity security that has a market price (as defined) of less than $5.00
per share or an exercise price of less than $5.00 per share, subject to certain
exceptions. As a result, our shares of common stock are subject to rules that
impose additional sales practice requirements on broker-dealers who sell such
securities to persons other than established clients and "accredited investors".
For transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the SEC relating to the penny stock market. The
broker-dealer must also disclose the commission payable to both the
broker-dealer and the registered representative, current quotations for the
12
securities and, if the broker-dealer is the sole market maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell our shares of common stock and
may affect the ability of investors to sell such shares of common stock in the
secondary market and the price at which such investors can sell any of such
shares.
Investors should be aware that, according to the SEC, the market for penny
stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include:
o control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer;
o manipulation of prices through prearranged matching of purchases and
sales and false and misleading press releases;
o "boiler room" practices involving high pressure sales tactics and
unrealistic price projections by inexperienced sales persons;
o excessive and undisclosed bid-ask differentials and markups by
selling broker-dealers; and
o the wholesale dumping of the same securities by promoters and
broker-dealers after prices have been manipulated to a desired
level, along with the inevitable collapse of those prices with
consequent investor losses.
Our management is aware of the abuses that have occurred historically in
the penny stock market.
THERE IS A RISK OF MARKET FRAUD.
OTCBB securities are frequent targets of fraud or market manipulation. Not
only because of their generally low price, but also because the OTCBB reporting
requirements for these securities are less stringent than for listed or NASDAQ
traded securities, and no exchange requirements are imposed. Dealers may
dominate the market and set prices that are not based on competitive forces.
Individuals or groups may create fraudulent markets and control the sudden,
sharp increase of price and trading volume and the equally sudden collapse of
the market price for shares of our common stock.
THERE IS LIMITED LIQUIDITY ON THE OTCBB.
When fewer shares of a security are being traded on the OTCBB, volatility
of prices may increase and price movement may outpace the ability to deliver
accurate quote information. Due to lower trading volumes in shares of our common
stock, there may be a lower likelihood of one's orders for shares of our common
stock being executed, and current prices may differ significantly from the price
one was quoted by the OTCBB at the time of one's order entry.
THERE IS A LIMITATION IN CONNECTION WITH THE EDITING AND CANCELING OF ORDERS ON
THE OTCBB.
Orders for OTCBB securities may be canceled or edited like orders for
other securities. All requests to change or cancel an order must be submitted
to, received and processed by the OTCBB. Due to the manual order processing
involved in handling OTCBB trades, order processing and reporting may be
delayed, and one may not be able to cancel or edit one's order. Consequently,
one may not able to sell shares of our common stock at the optimum trading
prices.
13
INCREASED DEALER COMPENSATION COULD ADVERSELY AFFECT THE STOCK PRICE.
The dealer's spread (the difference between the bid and ask prices) may be
large and may result in substantial losses to the seller of shares of our common
stock on the OTCBB if the stock must be sold immediately. Further, purchasers of
shares of our common stock may incur an immediate "paper" loss due to the price
spread. Moreover, dealers trading on the OTCBB may not have a bid price for
shares of our common stock on the OTCBB. Due to the foregoing, demand for shares
of our common stock on the OTCBB may be decreased or eliminated.
ADDITIONAL AUTHORIZED SHARES OF OUR COMMON STOCK AND PREFERRED STOCK AVAILABLE
FOR ISSUANCE MAY ADVERSELY AFFECT THE MARKET.
We are authorized to issue 1,000,000,000 shares of our common stock. As of
September 27, 2004, there were 768,510,668 shares of common stock issued and
outstanding. However, the total number of shares of our common stock issued and
outstanding does not include shares reserved in anticipation of the conversion
of notes or the exercise of options or warrants. As of September 27, 2004, we
had 89,249,999 shares of common stock underlying convertible notes, and we have
reserved shares of our common stock for issuance in connection with the
potential conversion thereof. As of September 27, 2004, we had outstanding stock
options and warrants to purchase approximately 54,471,666 shares of our common
stock, the exercise price of which range between $0.105 and $0.20 per share, and
we have reserved shares of our common stock for issuance in connection with the
potential exercise thereof. Of the reserved shares, a total of 100,000,000
shares are currently reserved for issuance in connection with our 2003 Incentive
Plan, of which options to purchase an aggregate of 32,305,000 shares have been
issued under the plan. A significant number of such options and warrants contain
provisions for cashless exercise. To the extent such options or warrants are
exercised, the holders of our common stock will experience further dilution. In
addition, in the event that any future financing should be in the form of, be
convertible into or exchangeable for, equity securities, and upon the exercise
of options and warrants, investors may experience additional dilution.
The exercise of the outstanding derivative securities will reduce the
percentage of common stock held by our stockholders. Further, the terms on which
we could obtain additional capital during the life of the derivative securities
may be adversely affected, and it should be expected that the holders of the
derivative securities would exercise them at a time when we would be able to
obtain equity capital on terms more favorable than those provided for by such
derivative securities. As a result, any issuance of additional shares of common
stock may cause our current stockholders to suffer significant dilution which
may adversely affect the market.
In addition to the above-referenced shares of common stock which may be
issued without stockholder approval, we have 20,000,000 shares of authorized
preferred stock, the terms of which may be fixed by our Board of Directors. We
presently have no issued and outstanding shares of preferred stock and while we
have no present plans to issue any shares of preferred stock, our Board of
Directors has the authority, without stockholder approval, to create and issue
one or more series of such preferred stock and to determine the voting, dividend
and other rights of holders of such preferred stock. The issuance of any of such
series of preferred stock may have an adverse effect on the holders of common
stock.
14
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET.
From time to time, certain of our stockholders may be eligible to sell all
or some of their shares of common stock by means of ordinary brokerage
transactions in the open market pursuant to Rule 144, promulgated under the
Securities Act of 1933 (Securities Act), subject to certain limitations. In
general, pursuant to Rule 144, a stockholder (or stockholders whose shares are
aggregated) who has satisfied a one-year holding period may, under certain
circumstances, sell within any three-month period a number of securities which
does not exceed the greater of 1% of the then outstanding shares of common stock
or the average weekly trading volume of the class during the four calendar weeks
prior to such sale. Rule 144 also permits, under certain circumstances, the sale
of securities, without any limitation, by our stockholders that are
non-affiliates that have satisfied a two-year holding period. Any substantial
sale of our common stock pursuant to Rule 144 or pursuant to any resale
prospectus may have material adverse effect on the market price of our
securities.
DIRECTOR AND OFFICER LIABILITY IS LIMITED.
As permitted by Delaware law, our certificate of incorporation limits the
liability of our directors for monetary damages for breach of a director's
fiduciary duty except for liability in certain instances. As a result of our
charter provision and Delaware law, stockholders may have limited rights to
recover against directors for breach of fiduciary duty. In addition, our
certificate of incorporation provides that we shall indemnify our directors and
officers to the fullest extent permitted by law.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Plan of
Operation," and "Description of Business" in this prospectus are forward-looking
statements. These statements involve known and unknown risks, uncertainties and
other factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance, or achievements expressed or implied
by forward-looking statements. Such factors include, among other things, those
listed under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," "proposed," "intended," or "continue" or
the negative of these terms or other comparable terminology. You should read
statements that contain these words carefully, because they discuss our
expectations about our future operating results or our future financial
condition or state other "forward-looking" information. There may be events in
the future that we are not able to accurately predict or control. Before you
invest in our securities, you should be aware that the occurrence of any of the
events described in these risk factors and elsewhere in this prospectus could
substantially harm our business, results of operations and financial condition,
and that upon the occurrence of any of these events, the trading price of our
securities could decline and you could lose all or part of your investment.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, growth rates,
levels of activity, performance or achievements. We are under no duty to update
any of the forward-looking statements after the date of this prospectus to
conform these statements to actual results.
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15
BUSINESS
Conversion Services International, Inc. is a technology and software firm
providing professional services to the Global 2000 as well as mid-market
clientele. Our core competency areas include strategic consulting, data
warehousing, business intelligence and data management consulting. Our clients
are primarily in the financial services, pharmaceutical, healthcare and
telecommunications industries, although we do have clients in other industries.
Our clients are primarily located in the northeastern United States. CSI enables
organizations to leverage their corporate information assets by providing
strategy, process, methodology, data warehousing, business intelligence,
enterprise reporting and analytic solutions. Our organization delivers value to
our clients, utilizing a unique combination of business acumen, technical
proficiency, experience and a proven set of "best practices" methodologies to
deliver cost effective services through either fixed price or time and material
engagements. CSI is committed to being a leader in data warehousing and business
intelligence consulting, allowing us to be a valuable asset and trusted advisor
to our customers.
We believe that our primary strengths that distinguish us from our
competitors are our:
o understanding of data management solutions;
o ability to provide solutions that integrate people, improve process
and integrate technologies;
o extensive service offerings as it relates to data warehousing,
business intelligence, strategy and data quality;
o our perspective regarding the accuracy of data and our data
purification process,
o best practices methodology, process and procedures;
o experience in architecting, recommending and implementing large and
complex data warehousing and business intelligence solutions; and
o ability to establish centers of excellence within client
organizations to address data quality and business intelligence.
Our goal is to be the premier provider of data warehousing, business
intelligence and related strategic consulting services, as well as data quality
products for organizations seeking to leverage and improve the quality of their
corporate information. In support of this goal we intend to:
o enhance our brand and mindshare;
o continue growth both organically and via acquisition;
o increase our geographic coverage;
o expand our client relationships;
o continue to enhance and expand the capabilities of the Evoke
Software Corporation software product;
o introduce new and creative service offerings; and
o leverage our strategic alliances.
We are committed to being a leader in data warehousing and business
intelligence consulting. As a data warehousing and business intelligence
specialist, we approach business intelligence from a strategic perspective,
providing integrated data warehousing and business intelligence strategy and
technology implementation services to clients that are attempting to leverage
their enterprise information. Our matrix of services includes strategy
consulting, data warehousing and business intelligence architecture and
implementation solutions, data quality solutions and data management solutions.
We have developed a methodology which provides a framework for each stage of a
client engagement, from helping the client conceive its strategy, to
architecting, engineering and extending its information. We believe that our
integrated methodology allows us to deliver reliable, robust, scalable, secure
and extensible business intelligence solutions in rapid timeframes based on
accurate information.
16
We are a Delaware corporation formerly named LCS Group, Inc. In January
2004, a privately held company named Conversion Services International, Inc.
("Old CSI") merged with and into our wholly owned subsidiary, LCS Acquisition
Corp. In connection with such transaction: (i) a 14-year old information
technology business became our operating business, (ii) the former stockholders
of Old CSI assumed control of our Board of Directors and were issued
approximately 84.3% of the outstanding shares of our common stock at that time
(due to subsequent events, that percentage of ownership has decreased), and
(iii) we changed our name to "Conversion Services International, Inc."
OUR SERVICES
As a full service data warehousing, business intelligence and strategy
consulting firm, we offer services in the following solution categories:
STRATEGIC CONSULTING
o Project Management (PMO)
o Data Warehousing & Business Intelligence Strategic Planning
o Business Technology Alignment
o Tool Analysis and Recommendation
o Integration Management, M&A
o Compliance (HIPAA, Basel II, Sarbanes-Oxley)
o Process Improvement (Lean, Six Sigma)
o Organizational Analysis and Assessment (M&A)
o Methodology, process, procedures
o Acquisition Readiness
o Information, Process and Infrastructure (IPI) Diagrams
o RFP creation and responses
o Training and Education
BUSINESS INTELLIGENCE
o Architecture and Implementation
o Ad-Hoc Query and Analysis
o Enterprise Reporting Solutions
o Online Analytical Processing
o Analytics and Dashboards
o Business Performance Management
o Business Intelligence Competency Center
o Proof of Concepts and Prototypes
o BI Strategy
o Data Mining
DATA WAREHOUSING
o DW Design, Development and Implementation
o Departmental Data Warehousing
o Federated Data Warehousing
o Conforming Facts/Dimensions
o Proof of Concepts and Prototypes
17
o Data Mart Delivery
o Outsourcing
o Data Architecture / Database
o Extract, Transformation and Loading
o Data Warehouse Framework
DATA MANAGEMENT
o Data Quality Center of Excellence
o Data Profiling
o Data Quality / Cleansing
o Data Transformation
o Data Migrations and Conversions
o Metadata Management
o Enterprise Information Integration (EII)
o Integration Management
o Enterprise Information Architecture
o Quality Assurance Testing (Verification, Validation, Certification)
RECENT ACQUISITIONS
We will also continue to pursue strategic acquisitions that strengthen our
ability to compete and extend our ability to provide clients with a core
comprehensive services offering. In February 2004, we added personnel of the
business intelligence consulting division of Software Forces, LLC, an award
winning partner of Crystal Decisions.
In November 2003, the Company executed an Independent Contractor Agreement
with Leading Edge Communications Corporation ("LEC"), whereby CSI agreed to be a
subcontractor for LEC, and to provide consultants as required to LEC. In return
for these services, CSI receives a fee from LEC based on the hourly rates
established for consultants subcontracted to LEC.
CSI acquired 49% of all issued and outstanding shares of common stock of
LEC as of May 1, 2004. The acquisition was completed through a Stock Purchase
Agreement between CSI and Mary Ferrara, the sole stockholder of LEC. In
connection with the acquisition, CSI (i) repaid a bank loan on behalf of the
seller in the amount of $35,000; (ii) repaid an LEC bank loan in the amount of
$38,000; and (iii) satisfied an LEC obligation for $10,000 of prior compensation
to an employee.
In March 2004, through our subsidiary DeLeeuw Conversion LLC ("DeLeeuw
Sub"), we acquired DeLeeuw Associates, Inc. ("DeLeeuw Associates"), a management
consulting firm in the information technology sector with core competency in
delivering Change Management Consulting, including both Six Sigma and Lean
domain expertise to enhance service delivery, with proven process methodologies
resulting in time to market improvements within the financial services and
banking industries. The acquisition (the "DeLeeuw Acquisition") was completed
pursuant to that certain Acquisition Agreement by and between CSI, DeLeeuw and
Robert C. DeLeeuw (the "Acquisition Agreement"). In connection with the DeLeeuw
Acquisition, we: (i) paid Mr. DeLeeuw, as the sole stockholder of DeLeeuw
Associates, $1,900,000, $500,000 of which has been deposited into an escrow
account for a period of one year and may be reduced based upon claims for
indemnification that may be made pursuant to the Acquisition Agreement; (ii)
issued 80,000,000 shares of our common stock to Mr. DeLeeuw, 7,200,000 of which
have been deposited into an escrow account for a period of one-year and may be
reduced based upon claims for indemnification that may be made pursuant to the
Acquisition Agreement; and (iii) issued options to purchase 2,000,000 shares of
our common stock to certain employees of DeLeeuw Associates. DeLeeuw Sub changed
its name to "DeLeeuw Associates, LLC."
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In June 2004, through our subsidiary Evoke Asset Purchase Corp.
("Acquisition Sub"), we acquired substantially all of the assets and assumed
substantially all of the liabilities of Evoke Software Corporation, a
privately-held California corporation ("Evoke") which designs, develops, markets
and supports software programs for data analysis, data profiling and database
migration applications and provides related support and consulting services. The
acquisition (the "Evoke Acquisition") was completed pursuant to that certain
Asset Purchase Agreement (the "Asset Purchase Agreement") by and between CSI,
Acquisition Sub and Evoke. In connection with the Evoke Acquisition, we: (i)
issued 72,543,956 shares of our common stock to Evoke, 7,150,000 of which have
been deposited into an escrow account for a period of one-year and may be
reduced based upon claims for indemnification that may be made pursuant to the
Asset Purchase Agreement; (ii) issued 5% of the outstanding shares of
Acquisition Sub to Evoke; (iii) issued 3,919,093 shares of our common stock to
certain executives of Evoke as a severance payment and to certain employees as
retention shares; (iv) agreed to pay $448,154 in deferred compensation ($189,583
to be paid over a seven month period and the remainder to be paid over a twelve
month period) to certain employees of Evoke; and (v) assumed substantially all
of Evoke's liabilities. Acquisition Sub changed its name to "Evoke Software
Corporation."
Approximately 5,500,000 shares issued to WHRT I Corp. are subject to a
lock-up period after the Registration Statement is effective, in which such
shares shall be released and freely tradable one month following the effective
date of this Registration Statement. The remainder of the shares issued to WHRT
I Corp. are subject to a lock-up period after this Registration Statement is
effective as follows (the following assumes the Registration Statement has been
declared effective by the SEC): (i) 20% shall be released and freely tradable on
October 1, 2004; (ii) 20% shall be released and freely tradable on January 1,
2005; (iii) 20% shall be released and freely tradable on April 1, 2005; (iv) 20%
shall be released and freely tradable on July 1, 2005; and (v) 20% shall be
released and freely tradable on October 1, 2005.
Integration of DeLeeuw's Change Management Consulting practices with CSI's
Data Warehousing and Business Intelligence core competency "The Center for Data
Warehousing" will continue throughout 2004. The Change Management, Six Sigma and
Lean methodology have been introduced to our clients along with our innovative
Information, Process and Infrastructure (IPI) Diagrams, which provide detailed
blueprints of our client's information, business processes and infrastructure on
a single highly detailed diagram. These diagrams can be leveraged for risk
management, compliance, validation, planning and budgeting requirements. The IPI
diagram offering, launched in the first quarter of 2004, continues to receive
favorable reaction from our clients. In addition, we expanded our Data Warehouse
Assessment, Business Technology Alignment (BTA) and Quality Management Offering
(QMO) related offerings will be the focus of our marketing and communications
programs for 2004. A QMO offering is a combination of methodologies, best
practices and automated techniques leveraged to establish and enforce standards
and procedures as it relates to elevating the quality of executive information
in an efficient and effective manner. We believe that these offerings will drive
greater understanding and demand for both data warehousing and business
intelligence implementations by delivering best practices methodologies, tools
and techniques to reduce risk, time to market and total cost of ownership of
these engagements. Our business strategy is to continue to enhance and expand
our offerings which include best practices, process improvement, methodologies,
advisory services and implementation expertise.
Evoke is managed and operated as a subsidiary company, but its integration
is limited to infrastructure and back office operations. CSI has a multi-year
record of leveraging the Evoke suite of products, which will continue under a
Value Added Reseller and Systems Integration partnership. In addition to the
existing Evoke field and engineering personnel, a number of business development
and support resources are being transitioned into Evoke to bolster the
organizational infrastructure required to advance the companies growth plans.
The data analysis and profiling technology developed and marketed by Evoke is
receiving economic and development assistance from CSI to enhance and extend the
current technology platform. As a result, Evoke released a new version of Axio
in September 2004, and is planning a major release in the first quarter of 2005.
The major emphasis will be on automating many of the project related tasks
associated with data proofing, as well as the introduction of a workflow driving
user interface to reduce the learning curve and increase time to proficiency.
Evoke is planning to include data cleansing and operational data quality
monitoring, as well as quality scorecard modules, to the existing data quality
platform. The combined expertise and synergy between CSI and Evoke has also
resulted in the introduction of value based services offerings. These offerings
include: Best Practices Methodology, Quality Improvement Programs (QIP) and
Quick Start Services Programs to accelerate Return on Investment and knowledge
transfer.
19
We believe that as new opportunities are created, Global 2000 companies
will continue the trend of expanding the utilization of external consulting
expertise to support corporate initiatives focused on maximizing Return On
Investment (ROI), leveraging existing technology infrastructure though
optimizations and best practices and will continue to leverage and derive value
from corporate information assets such as data warehousing, business
intelligence and analytics. We believe that we are uniquely positioned to expand
our client foot print by delivering unique business value resulting from our 15
years of domain expertise, proven best practices, methodologies, processes and
automation within data warehousing architecture and implementation. Our ability
to apply Six Sigma and Lean core competency to client processes and
implementation strategies further strengthens our competitive standing. With our
recently acquired subsidiary Evoke, CSI is well positioned to support the
increasing industry emphasis on data quality and the use of automation to reduce
the costs associated with data warehouse and business intelligence projects,
data migrations and conversions, as well as packaged application implementations
such as Enterprise Resource Planning (ERP), Customer Relationship Management
(CRM) and Supply Chain Management (SCM) by leveraging the automation and
validation gained by the use of data profiling technology.
RECENT FINANCINGS
In May 2004, pursuant to the complete conversion of an unsecured
convertible line of credit note issued in October 2003, the participating
investor received 16,666,666 shares of our common stock, plus interest paid in
cash. Further in May 2004, we raised an additional $2.0 million pursuant to a
new five-year unsecured promissory note with the same investor. In June 2004, we
replaced the May 2004 note by issuing a five-year $2.0 million unsecured
convertible line of credit note with the same investor. The note accrues
interest at an annual rate of 7%, and the conversion price of the shares of
common stock issuable under the note is equal to $0.105 per share. The
conversion price on the October 2003 note was adjusted to a fixed conversion
price of $0.105 per share on September 1, 2004, and 2,380,953 additional shares
of common stock were issued to the participating investor. In addition, such
investor received a warrant to purchase 4,166,666 shares of our common stock,
which has an exercise price of $0.105 per share. This warrant expires in June
2009.
In August 2004, we replaced our $3,000,000 line of credit with North Fork
Bank with a revolving line of credit with Laurus Master Fund, Ltd. ("Laurus"),
whereby we will have the ability to borrow up to $6,000,000 based upon eligible
accounts receivable. This revolving line, effectuated through a $2,000,000
convertible minimum borrowing note and a $4,000,000 revolving note, provides for
advances at an advance rate of 90% against eligible accounts receivable, with an
annual interest rate of prime rate (as reported in the Wall Street Journal) plus
1%, and maturing in three years. The interest rate on these notes will be
decreased by 1.0% for every 25% increase in our stock price above the fixed
conversion price prior to an effective registration statement and 2.0%
thereafter up to a minimum of 0.0%. This line of credit is secured by
substantially all the corporate assets. Both the $2,000,000 convertible minimum
borrowing note and the $4,000,000 revolving note provide for conversion at the
option of the holder of the amounts outstanding into our common stock at a fixed
conversion price of $0.14 per share. In the event that we issue stock or
derivatives convertible into our stock for a price less the aforementioned fixed
conversion price, then the fixed conversion price is reset using a weighted
average dilution calculation. Additionally, in exchange for a secured
convertible term note bearing interest at prime rate (as reported in the Wall
Street Journal) plus 1%, Laurus has made available to us an additional
$5,000,000 to be used for acquisitions. This note is convertible into our common
stock at a fixed conversion price of $0.14 per share. In the event that we issue
our stock or derivatives convertible into our stock for a price less than the
fixed conversion price, then the fixed conversion price is reset to the lower
price. This note matures in three years. The proceeds of this loan are
20
restricted for use for approved acquisition targets identified by us that are
approved by Laurus. A portion of Laurus's revolving line of credit were used to
pay off all outstanding borrowings from North Fork Bank. We issued Laurus a
common stock purchase warrant that provides Laurus with the right to purchase
12,000,000 shares of our common stock. The exercise price for the first
6,000,000 shares acquired under the warrant is $0.29 per share, the exercise
price for the next 3,000,000 shares acquired under the warrant is $0.31 per
share, and the exercise price for the final 3,000,000 shares acquired under the
warrant is $0.35 per share. The common stock purchase warrant expires on August
15, 2011. We paid $749,000 in brokerage and transaction closing related costs.
These costs were deducted from the $5,000,000 restricted cash balance being
provided to us by Laurus.
In September 2004, we issued to Sands Brothers Venture Capital LLC, Sands
Brothers Venture Capital III LLC and Sands Brothers Venture Capital IV LLC
(collectively, "Sands") three subordinated secured convertible promissory notes
equaling $1,000,000 (the "Notes"), each with an annual interest rate of 8%
expiring September 22, 2005. The Notes are secured by substantially all
corporate assets, subordinate to Laurus. The Notes are convertible into shares
of our common stock at the election of Sands at any time following the
consummation of a convertible debt or equity financing with gross proceeds of $5
million or greater to us (a "Qualified Financing"). The conversion price of the
shares of our common stock issuable upon conversion of the Notes shall be equal
to a price per share of common stock equal to forty percent (40%) of the price
of the securities issued pursuant to a Qualified Financing. If no Qualified
Offering has been consummated by September 8, 2005, then Sands may elect to
convert the Notes at a fixed conversion price of $0.14 per share. In the event
that we issue stock or derivatives convertible into our stock for a price less
the aforementioned fixed conversion price, then the fixed conversion price is
reset using a weighted average dilution calculation. We also issued Sands three
common stock purchase warrants (the "Warrants") providing Sands with the right
to purchase 6,000,000 shares of our common stock. The exercise price of the
shares of our common stock issuable upon exercise of the Warrants shall be equal
to a price per share of common stock equal to forty percent (40%) of the price
of the securities issued pursuant to a Qualified Financing. If no Qualified
Offering has been consummated by September 8, 2005, then Sands may elect to
exercise the Warrants at a fixed conversion price of $0.14 per share. The latest
that the Warrants may expire is September 8, 2008. Finally, we engaged Sands
Brothers International Limited as our non-exclusive financial advisor at $6,000
per month for a period of one year.
CLIENTS
For more than 14 years, we have helped our clients develop strategies and
implement technology solutions to help them leverage corporate information.
Our clients are primarily in the financial services, pharmaceutical,
healthcare and telecommunications industries and are primarily located in the
northeastern United States. During the six month period ended June 30, 2004,
five of our clients accounted for approximately 52% of total revenues. During
the six month period ended June 30, 2003, four of our clients accounted
collectively for approximately 55% of total revenues. For the year ended
December 31, 2003, two of our clients accounted collectively for approximately
43% of our total revenues. During the fiscal year ended December 31, 2002, two
of our clients accounted collectively for approximately 59% of our total
revenues. As we continue to pursue and consummate acquisitions, our dependence
on these customers should be less significant. We do not have long-term
contracts with any of these customers. The loss of any of our largest customers
could have a material adverse effect on our business.
21
MARKETING
We currently market our services through our Director of Marketing and
Corporate Communications, investors relations firm and public relations firm,
and our sales force comprised of 10 employees, and we also receive new business
through client referrals. We are planning to engage an investor relations firm,
as well as an advertising and public relations firm, in order to expand our
brand awareness, and are further engaging, or expect to engage, in the following
sales related programs and activities:
o Web Site Promotion: Our website (www.csiwhq.com) has recently been
reformatted to reflect our vision and business plan. We will be
currently promoting our website through various internet search
engines.
o Trade Show Participation: We expect that exposure in trade shows
should further solidify our position in our industry. In the proper
setting, the trade show can be viewed as a mobile mini-showroom
concept to demonstrate our services. We enrolled as a Gold Level
Sponsor for the Digital Consulting Institute (DCI) Customer
Relationship Management Conference and Technology Showcase in New
York in May 2004, and we are currently enrolled as Gold Level
Sponsor for DCI's Business Intelligence and Data Warehouse
Conference in Boston in September 2004.
o Seminars with Vendors: We expect that joint seminars with leading
software vendors should also stimulate new business lead
generations. We also expect to enhance our perception as an expert
in individual product areas.
o Vendor Relations: We are identifying key vendor relationships. With
the ability to leverage CSI's fourteen year history, we intend to
continue to forge and maintain relationships with technical, service
and industry vendors.
o Expanded Direct Sales Activities: We are developing a campaign for
our sales personnel that will include lead generation, cross selling
and up-selling.
PROTECTION AGAINST DISCLOSURE OF CLIENT INFORMATION
As our core business relates to the storage and use of client information,
which is often confidential, we have implemented policies to prevent client
information from being disclosed to unauthorized parties or used
inappropriately. Our employee handbook, which every employee receives and signs
an acknowledgement of, mandates that it is strictly prohibited for employees to
disclose client information to third parties. Our handbook further mandates that
disciplinary action be taken against those who violate such policy, including
possible termination. Our outside consultants sign non-disclosure agreements
prohibiting disclosure of client information to third parties, among other
things, and we perform background checks on employees and outside consultants.
INTELLECTUAL PROPERTY
Our trademark registration applications for the marks "TECH SMART BUSINESS
WISE", "QUALITY MANAGEMENT OFFICE" AND "QMO" are presently pending before the
United States Patent and Trademark Office. Further, we have over 30 domestic and
foreign trademarks relating to Evoke Software Corporation and its products. We
use non-disclosure agreements with our employees, independent contractors and
clients to protect information which we believe are proprietary or constitute
trade secrets.
22
COMPETITION
To our knowledge, there are no publicly-traded competitors that focus
solely on data warehousing and business intelligence consulting and strategy.
However, we have numerous competitors in the general marketplace, including data
warehouse and business intelligence practices within large international,
national and regional consulting and implementation firms, as well as smaller
boutique technology firms. Many of our competitors are large companies that have
substantially greater market presence, longer operating histories, more
significant client bases, and financial, technical, facilities, marketing,
capital and other resources than we have. We believe that we compete with these
firms on the basis of the quality of its services, industry reputation and
price. We believe our competitors include firms such as:
o Accenture,
o Cap Gemini Ernst & Young,
o IBM Global Services,
o Keane,
o Bearing Point, and
o Answerthink.
EMPLOYEES
As of June 30, 2004, we had 39 outside consultants, 101 consultants on the
payroll and 65 non-consultant employees. Outside consultants not on the payroll
represent corporations with which we have long standing relationships. None of
our employees are represented by a labor union or subject to a collective
bargaining agreement. We have never experienced a work stoppage and we believe
that our relations with employees are good.
LEGAL PROCEEDINGS
On June 29, 2004, Viant Capital LLC commenced legal action against us in
the United States District Court for the Southern District of New York. Through
an agreement with Viant, Viant had the exclusive right to obtain private equity
transactions on our behalf from February 18 to May 17, 2004. Viant alleges that
it is owed a fee of approximately $450,000 relating to our loan from a private
investor in May 2004. Management believes that this loan does not qualify as a
private equity transaction and we intend to vigorously defend this action. As of
September 27, 2004, there have been no material developments in the suit. The
Company has estimated the probable loss related to this suit to be the agreed
upon contract signing fee of $75,000 and has recorded a liability for this
amount.
DESCRIPTION OF PROPERTY
The Company's corporate headquarters are located at 100 Eagle Rock Avenue,
East Hanover, New Jersey 07936, where it operates under an amended lease
agreement expiring December 31, 2010. Our monthly rent with respect to our East
Hanover, New Jersey facility is $24,965. In addition to minimum rentals, the
Company is liable for its proportionate share of real estate taxes and operating
expenses, as defined. DeLeeuw Associates, LLC has an office at Suite 1460,
Charlotte Plaza, 201 South College Street, Charlotte, North Carolina 28244.
DeLeeuw leases this space which has a stated expiration date of December 31,
2005. Our monthly rent with respect to our Charlotte, North Carolina facility is
$2,831.
23
Evoke leases offices in the following locations: Riata Corporate Park
Building VII, 12357-III Riata Trace Parkway, Austin, Texas; 1900 13th Street,
Boulder, Colorado; and Am Soldnermoos 17, D-85399 Hallbergmoos, Germany. The
expiration dates for these leases are July 2006, July 2006 and May 2005. Monthly
rentals for these offices are $22,872, $5,284 and $2,000, respectively.
Rent expense, including automobile rentals, totaled approximately
$1,152,000 and $1,239,000 in 2003 and 2002, respectively. The Company is
committed under several operating leases for automobiles that expire during
2007.
See Notes 8 and 13 to Consolidated Financial Statements.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS
THE FOLLOWING TABLE SETS FORTH CERTAIN STATEMENT OF OPERATIONS DATA FOR
THE PERIODS INDICATED EXPRESSED AS A PERCENTAGE OF TOTAL REVENUES:
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30
-------------------- -----------------------
2002 2003 2003 2004
-------------------- -----------------------
(Restated) (Unaudited) (Unaudited)
REVENUE 100.0% 100.0% 100.0% 100.0%
COST OF SERVICES 65.7 71.5 71.6 69.8
-------------------- -----------------------
GROSS PROFIT 34.3 28.5 28.4 30.2
-------------------- -----------------------
OPERATING EXPENSES
Selling and marketing 6.7 10.8 8.8 11.1
General and administrative 21.9 18.8 16.7 26.9
Depreciation and amortization 0.9 1.5 1.3 0.8
-------------------- -----------------------
29.5 31.1 26.8 38.8
-------------------- -----------------------
INCOME (LOSS) FROM OPERATIONS 4.8 (2.6) 1.6 (8.6)
-------------------- -----------------------
OTHER INCOME (EXPENSE)
Equity in losses from investments -- -- -- (0.1)
Other income -- -- -- 0.1
Interest income 0.0 0.0 -- 0.0
Interest expense (0.9) (0.9) (1.2) (1.2)
-------------------- -----------------------
(0.9) (0.9) (1.2) (1.2)
-------------------- -----------------------
INCOME (LOSS) BEFORE TAXES 3.9 (3.5) 0.4 (9.8)
-------------------- -----------------------
INCOME TAXES (BENEFIT)
Current 0.6 -- -- --
Deferred (0.5) (1.3) -- (3.9)
-------------------- -----------------------
0.1 (1.3) -- (3.9)
-------------------- -----------------------
NET INCOME (LOSS) 3.8 (2.2) 0.4 (5.9)
-------------------- -----------------------
UNSECURED CONVERTIBLE LINE OF CREDIT
BENEFICIAL CONVERSION FEATURE -- -- -- 5.7
NET INCOME (LOSS) ATTRIBUTABLE TO -------------------- -----------------------
COMMON STOCKHOLDERS 3.8% (2.2)% 0.4% (11.6)%
==================== =======================
PRO FORMA DATA:
Income before income taxes (benefit) --% --% 0.4% --%
Income taxes (benefit) -- -- 0.2 --
-------------------- -----------------------
Net Income (loss) --% --% 0.2% --%
==================== =======================
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
Revenue. Our revenues are primarily comprised of billings to clients for
consulting hours worked on client projects. Revenues for six months ended June
30, 2004 were $11.8 million, an increase of 65.9% over the six months ended June
30, 2003. This increase was primarily attributable to project design and
infrastructure projects obtained in the fourth quarter of 2003 that are still
ongoing, the acquisition of several new clients, business attributed to DeLeeuw
Associates, LLC during 2004, and a general increase in consulting business as
the overall demand for IT services improved.
Cost of services. Cost of services primarily includes payroll and benefits
costs for our consultants. Cost of services was $8.2 million, or 69.8% of
revenue for the six months ended June 30, 2004, compared to $5.1 million, or
71.6% of revenue for the six months ended June 30, 2003. The increase in
absolute dollars resulted primarily from costs related to consultants on project
design and infrastructure projects, the acquisition of DeLeeuw Associates, Inc.
in March 2004, and additional consultants hired to staff projects for the new
clients that we obtained. Cost of services declined as a percentage of revenue
due to a shift in the mix of business to higher level projects that have
increased hourly billing rates, and higher gross margin percentages associated
with them.
25
Selling and marketing. Selling and marketing expenses include payroll,
employee benefits and other headcount-related costs associated with sales and
marketing personnel and advertising, promotions, tradeshows, seminars and other
programs. Selling and marketing expenses were $1.3 million, or 11.1% of revenue,
for the six months ended June 30, 2004, compared to $0.6 million, or 8.8% of
revenue, for the six months ended June 30, 2003. Selling and marketing costs
increased in absolute dollars primarily due to increased payroll and related
costs associated with the increased headcount in our sales force. We have hired
additional salespeople as part of our strategy to gain new clients and increase
our revenue.
General and administrative. General and administrative costs include
payroll, employee benefits and other headcount-related costs associated with the
finance, legal, facilities, certain human resources and other administrative
headcount, and legal and other professional and administrative fees. General and
administrative costs were $3.2 million, or 26.9% of revenue, for the six months
ended June 30, 2004, compared to $1.2 million, or 16.7% of revenue, for the six
months ended June 30, 2003. General and administrative costs primarily increased
due to increased headcount resulting from the acquisition of DeLeeuw Associates,
Inc., increased salaries paid to our officers due to hiring a chief financial
officer during the fourth quarter of 2003 and increasing the salaries of our
other company officers to compensate them competitively with other public
companies our size. We also increased general and administrative headcount in
the first quarter to support the increased size of the business which increased
overall salary expense, incurred increased legal and accounting fees associated
with becoming a public company and higher insurance premiums due to the growth
of the Company.
Depreciation and amortization. Depreciation expense is recorded on our
property and equipment which is generally depreciated over a period between
three to seven years. Amortization is recorded for acquired intangible assets
that have a finite useful life and for financing costs. Amortization of acquired
intangible assets that have a finite useful life is recorded over the estimated
useful life of the asset. Financing costs are amortized over the life of the
related loans. Depreciation and amortization expenses were $0.1 million for the
six months ended June 30, 2004, compared to $0.1 million for the six months
ended June 30, 2003.
Other income (expense). We incur interest expense on loans from financial
institutions, from capital lease obligations related to the acquisition of
equipment used in our business, and on the outstanding convertible line of
credit notes. Amortization of the deferred financing costs is also recorded as
interest expense. Interest expense recorded was $0.1 million for the six months
ended June 30, 2004, compared to $0.1 million for the six months ended June 30,
2003. We earn interest income on deposits with our financial institution.
Interest income for the six month period ended June 30, 2004 was $1,900,
compared to zero for the six month period in the prior year. We recorded equity
income in our investment in DeLeeuw, Turkey of $7,700 for the six months ended
June 30, 2004, and an equity loss in our investment in LEC of $23,700 for the
six months ended June 30, 2004.
Income taxes. An income tax benefit of $0.5 million was recorded for the
six months ended June 30, 2004. This benefit was computed by multiplying our net
loss by our estimated effective tax rate of 40%. No income tax expense or
benefit was recorded in the prior year as the Company was an "S" Corporation
through September 30, 2003. Pro forma income taxes for the comparable six month
period in the prior year would have been an income tax provision of $12,000
using the effective tax rate of 40%.
26
YEARS ENDED DECEMBER 31, 2003 AND 2002
Revenue. For the year ended December 31, 2003, revenues decreased by
$1,800,000 from $16,200,000 for the year ended December 31, 2002 to $14,400,000
for the year ended December 31, 2003. Our revenues decreased by $4,400,000 with
an offsetting increase of $2,600,000 from those accounts acquired pursuant to
our acquisition of Scosys, Inc. The decrease was attributable primarily to the
soft market in information technology consulting services that existed in 2003,
generally.
Gross profit. Our gross profit percentage decreased to 28.5% of revenues
for the year ended December 31, 2003 from 34.3% for the year ended December 31,
2002. The decrease in gross profit percentage was due to a combination of higher
personnel costs and lower rates realized for billable consultants as a result of
the softer market. We expect that the gross profit margins will rise in future
quarters, as we begin to hire consultants on payroll, which we anticipate will
translate into higher margins.
Selling and marketing expenses. Selling and marketing expenses increased
$458,000 or 42% to $1,553,000 for the year ended December 31, 2003, and
increased as a percentage of revenue from 6.7% to 10.8%, respectively. The
increase in selling and marketing expenses was related primarily to our
strategic decision to capitalize on the projected upturn in information
technology consulting services. We hired a seasoned Vice President of Sales and
additional experienced sales executives. These expenses had the effect of
increasing sales salaries and commissions by $302,000 for the year ended
December 31, 2003 compared with the year ended December 31, 2002. Accordingly,
sales travel and entertainment, benefits and payroll taxes increased by
$103,000.
General and administrative expenses. General and administrative expenses
decreased by 23.9% or $847,000, to $2,702,000 for the year ended December 31,
2003, from $3,549,000 for the year ended December 31, 2002, and decreased as a
percentage of revenue to 18.8% from 21.8%, respectively. The decrease in general
and administrative expenses was related primarily to the reduction of in-house
developers salaries totaling $997,000. The reduction represents a combination of
developers that were terminated as part of a cost cutting movement and the
change in status of our in house development manager in 2002 (non-billable
status) to an on site customer project in 2003 (billable status). In connection
with the Scosys, Inc. acquisition, we incurred $159,000 in additional salaries
to support the acquisition. The reduction of rent expense by $106,000 was
another factor. We were able to negotiate a temporary reduction in rent as space
requirements diminished as a result of the termination of in-house developers.
Depreciation and amortization. Depreciation and amortization expenses
increased by $64,000 for the fiscal year ended December 31, 2003, compared to
the same period in 2002. Depreciation is computed principally by an accelerated
method and is based on the estimated useful lives of the various assets ranging
from three to seven years. The increase in amortization expense is attributable
to the increase in identifiable intangibles from the acquisition of Scosys, Inc.
Interest expense. We incurred $136,000 and $139,000 in interest expense
during the fiscal years ended December 31, 2003 and 2002, respectively, related
primarily to borrowings under our line of credit. Borrowings under the line of
credit were used to fund operating activities, to make payments under the
obligation in connection with the Scosys acquisition and for distributions to
stockholders. The decrease in interest expense reflects the increased average
outstanding borrowings and at a lower variable rate of interest charged in 2003.
27
LIQUIDITY AND CAPITAL RESOURCES
Cash totaled $0.6 million as of June 30, 2004 compared to $0.4 million as
of December 31, 2003. Our cash balance is primarily derived from customer
remittances, bank borrowings, equity and debt financing, and cash obtained from
acquired businesses, and is used for general working capital needs. We had
$83,000 on deposit with a financial institution as collateral for a letter of
credit and have classified this as restricted cash on our consolidated balance
sheet.
Cash used by operations during the years ended December 31, 2002 and 2003
and the six months ended June 30, 2003 and 2004 was $52,000, $0.5 million, $0.4
million and $1.3 million, respectively. Net cash used by operations for the six
months ended June 30, 2004 of $1.3 million increased by $0.9 million from $0.4
million for the six months ended June 30, 2003. This increase in cash usage was
primarily due to a $0.5 million increase in accounts receivable, the $0.7
million net loss and a $0.5 million deferred tax benefit increase, partially
offset by a $0.6 million increase in accounts payable and accrued expenses. Net
cash used for the year ended December 31, 2003 of $0.5 million increased by $0.5
million from $52,000 for the year ended December 31, 2002. This increase in cash
usage was due to a $0.1 million increase in accounts receivable, a $0.1 million
increase in the deferred tax benefit, and a $0.3 million net loss. Non-cash
expenses included depreciation, amortization, and the allowance for doubtful
accounts.
Cash provided by (used in) investing activities consists primarily of
investments in acquired companies, equity investments in companies, and
purchases of property and equipment. Net cash provided by investing activities
was $0.1 million during the year ended December 31, 2002 and net cash used in
investing activities was $0.1 million, $19,000, and $1.8 million for the year
ended December 31, 2003 and the six months ended June 30, 2003 and 2004,
respectively. Net cash used for the six months ended June 30, 2004 of $1.8
million increased by $1.8 million from $19,000 for the six months ended June 30,
2003. This increase was due to net investments of $1.6 million for the
acquisitions of DeLeeuw and Evoke and the equity investment in LEC and a $0.2
million investment in property and equipment. Net cash provided by investing
activities for the year ended December 31, 2002 of $0.1 million was due to a
collection of a $0.2 million note receivable.
Cash provided by financing activities consists primarily of borrowings
under line of credit facilities, issuances of debt instruments, issuances of
equity instruments, and repayments of debt. Cash used in financing activities
was $0.1 million for the year ended December 31, 2002 and cash provided by
financing activities was $1.0 million, $0.4 million, and $3.3 million for the
year ended December 31, 2003 and the six months ended June 30, 2003 and 2004,
respectively. Net cash provided by financing activities for the six months ended
June 30, 2004 of $3.3 million increased by $2.9 million from $0.4 million for
the six months ended June 30, 2003. This increase was primarily due to the
issuance of $4.0 million in convertible line of credit notes, partially offset
by $0.4 million of increased principal payments on long-term debt as compared to
the prior year period.
In February 2004, we obtained $2.0 million in financing pursuant to an
October 2003 unsecured convertible line of credit note. In May 2004, pursuant to
the complete conversion of this unsecured convertible line of credit note, the
participating investor received 16,666,666 shares of our common stock, plus
interest. Further in May 2004, we raised an additional $2.0 million pursuant to
a new five-year unsecured promissory note with the same investor. In June 2004,
we replaced the May 2004 note by issuing a five-year $2.0 million unsecured
convertible line of credit note with the same investor. The note accrues at an
annual interest rate of 7%, and the conversion price of the shares of common
stock issuable under the note is equal to $0.105 per share. In addition, such
investor received a warrant to purchase 4,166,666 shares of our common stock at
an exercise price of $0.105 per share. This warrant expires in June 2009.
28
In March 2004, all outstanding amounts under our previous line of credit
and notes payable agreements with Fleet Bank, totaling $2.3 million, were repaid
and $2.5 million was borrowed from a new $3.0 million line of credit with North
Fork Bank (formerly TrustCompany Bank). The terms of this note with North Fork
Bank provided for interest accruing on advances at seven eighths of one percent
(7/8%) over the institution's prime rate. The line of credit agreement with
North Fork Bank contained both financial and non-financial covenants.
In August 2004, the Company replaced its $3.0 million line of credit with
North Fork Bank with a revolving line of credit with Laurus Master Fund, Ltd.
("Laurus"), whereby the Company will have access to borrow up to $6.0 million
based upon eligible accounts receivable. This revolving line, effectuated
through a $2.0 million convertible minimum borrowing note and a $4.0 million
revolving note, provides for advances at an advance rate of 90% against eligible
accounts receivable, with an annual interest rate of prime rate (as reported in
the Wall Street Journal) plus 1%, and maturing in three years. These notes will
be decreased by 1.0% for every 25% increase above the fixed conversion price
prior to an effective registration statement and 2.0% thereafter up to a minimum
of 0.0%. This line of credit is secured by substantially all the corporate
assets. Both the $2.0 million convertible minimum borrowing note and the $4.0
million revolving note provide for conversion at the option of the holder of the
amounts outstanding into the Company's common stock at a fixed conversion price
of $0.14 per share. In the event that the Company issues Company stock or
derivatives convertible into Company stock for a price less the aforementioned
fixed conversion price, then the fixed conversion price is reset using a
weighted average dilution calculation. Additionally, in exchange for a secured
convertible term note bearing interest at prime rate (as reported in the Wall
Street Journal) plus 1%, Laurus has made available to the Company an additional
$5.0 million to be used for acquisitions. This note is convertible into Company
common stock at a fixed conversion price of $0.14 per share. In the event that
the Company issues Company stock or derivatives convertible into Company stock
for a price less the fixed conversion price, then the fixed conversion price is
reset to the lower price. This note matures in three years. This cash will be
restricted for use until approved acquisition targets identified by the Company
are approved by Laurus. A portion of Laurus's revolving line of credit will be
used to pay off all outstanding borrowings from North Fork Bank. The Company
issued Laurus a common stock purchase warrant that provides Laurus with the
right to purchase 12.0 million shares of the Company's common stock. The
exercise price for the first 6.0 million shares acquired under the warrant is
$0.29 per share, the exercise price for the next 3.0 million shares acquired
under the warrant is $0.31 per share, and the exercise price for the final 3.0
million shares acquired under the warrant is $0.35 per share. The common stock
purchase warrant expires on August 16, 2011. The Company paid $0.75 million in
brokerage and transaction closing related costs. These costs were deducted from
the $5.0 million restricted cash balance provided to the Company by Laurus.
In September 2004, we issued to Sands Brothers Venture Capital LLC, Sands
Brothers Venture Capital III LLC and Sands Brothers Venture Capital IV LLC
(collectively, "Sands") three subordinated secured convertible promissory notes
equaling $1,000,000 (the "Notes"), each with an annual interest rate of 8%
expiring September 22, 2005. The Notes are secured by substantially all
corporate assets, subordinate to Laurus. The Notes are convertible into shares
of our common stock at the election of Sands at any time following the
consummation of a convertible debt or equity financing with gross proceeds of $5
million or greater to us (a "Qualified Financing"). The conversion price of the
shares of our common stock issuable upon conversion of the Notes shall be equal
to a price per share of common stock equal to forty percent (40%) of the price
of the securities issued pursuant to a Qualified Financing. If no Qualified
Offering has been consummated by September 8, 2005, then Sands may elect to
convert the Notes at a fixed conversion price of $0.14 per share. In the event
that we issue stock or derivatives convertible into our stock for a price less
the aforementioned fixed conversion price, then the fixed conversion price is
reset using a weighted average dilution calculation. We also issued Sands three
common stock purchase warrants (the "Warrants") providing Sands with the right
to purchase 6,000,000 shares of our common stock. The exercise price of the
shares of our common stock issuable upon exercise of the Warrants shall be equal
to a price per share of common stock equal to forty percent (40%) of the price
of the securities issued pursuant to a Qualified Financing. If no Qualified
Offering has been consummated by September 8, 2005, then Sands may elect to
exercise the Warrants at a fixed conversion price of $0.14 per share. The latest
that the Warrants may expire is September 8, 2008. Finally, we engaged Sands
Brothers International Limited as our non-exclusive financial advisor at $6,000
per month for a period of one year.
29
We believe existing cash, borrowing capacity under the line of credit or
alternative financing sources, and funds generated from operations should be
sufficient to meet operating requirements over the upcoming twelve month period.
We may raise additional funds through debt or equity transactions in order to
fund expansion, to develop new or enhanced products and services, to respond to
competitive pressures, or to acquire complementary businesses or technologies.
There is no assurance, however, that additional financing will be available, or
if available, will be available on acceptable terms. Any decision or ability to
obtain additional financing through debt or equity investment will depend on
various factors, including, among others, revenues, financial market conditions,
strategic acquisition and investment opportunities, and developments in the
Company's markets. The sale of additional equity securities or future conversion
of convertible debt would result in additional dilution to the Company's
stockholders.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue from consulting and professional services is recognized at the
time the services are performed, evidence of an arrangement exists, the fee is
fixed or determinable and collectibility is reasonably assured. Revenues for
large services projects are recognized using the percentage of completion method
for long-term construction type contracts where costs to complete the contract
could reasonably be estimated. Revenues recognized in excess of billings are
recorded as costs in excess of billings. Billings in excess of revenues
recognized are recorded as deferred revenues until revenue recognition criteria
are met. Reimbursements, including those relating to travel and other
out-of-pocket expenses, are included in revenues, and an equivalent amount of
reimbursable expenses are included in cost of services.
ACCOUNTS RECEIVABLE
The Company carries its accounts receivable at cost less an allowance for
doubtful accounts. On a periodic basis, the Company evaluates its accounts
receivable and adjusts the allowance for doubtful accounts, when deemed
necessary, based upon its history of past write-offs and collections,
contractual terms and current credit conditions.
AMORTIZATION
The Company amortizes deferred financing costs utilizing the effective
interest method over the term of the related debt instrument. Acquired customer
lists and contracts are amortized over an estimated useful life of five years.
Acquired software is amortized on a straight-line basis over an estimated useful
life of five years. Acquired customer contracts are amortized over an estimated
useful life of six years.
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the amounts paid in connection with a settlement
agreement with the Elligent Consulting Group to re-acquire the ownership rights
to the Company in 1998 and in connection with the acquisitions of Scosys,
DeLeeuw and Evoke. Additionally, as part of the Scosys, DeLeeuw and Evoke
acquisitions, the Company acquired intangible assets. FASB Statement 142 was
adopted as of January 1, 2002 for all goodwill recognized in the Company's
balance sheet as of December 31, 2001. This statement changed the accounting for
goodwill from an amortization method to an impairment-only approach, and
introduced a new model for determining impairment charges.
30
Goodwill and intangible assets are reviewed for impairment whenever events
or circumstances indicate impairment might exist, or at least annually. The
Company assesses the recoverability of its assets, in accordance with SFAS No.
142 "Goodwill and Other Intangible Assets," comparing projected undiscounted
cash flows associated with those assets against their respective carrying
amounts. Impairment, if any, is based on the excess of the carrying amount over
the fair value of those assets. The Company's goodwill and intangible assets
were evaluated and deemed not to be impaired at December 31, 2003. There have
been no events or circumstances that would indicate that there has been any
impairment during the six months ended June 30, 2004.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash and accounts receivable arising from its
normal business activities. The Company routinely assesses the financial
strength of its customers, based upon factors surrounding their credit risk,
establishes an allowance for doubtful accounts, and as a consequence believes
that its accounts receivable credit risk exposure beyond such allowances is
limited. At June 30, 2004, five customers comprised approximately 46% of the
Company's accounts receivable balance.
INCOME TAXES
The Company accounts for income taxes under an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactments of changes in the tax laws or rates.
On January 1, 2001, CSI elected to be an "S" Corporation, whereby the
stockholders account for their share of CSI's earnings, losses, deductions and
credits on their federal and various state income tax returns. CSI is subject to
New York City and various state income taxes. On September 30, 2003, CSI's "S"
Corporation status was revoked in connection with the conversion of convertible
subordinated debt into shares of common stock.
For informational purposes, the accompanying statements of operations
include an unaudited pro-forma adjustment for income taxes which would have been
recorded if CSI had not been an "S" Corporation.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any transactions, agreements or other contractual
arrangements that constitute off-balance sheet arrangements.
31
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
For the ten months ended December 31, 2003, we changed our independent
auditor and certifying accountant to Ehrenkrantz Sterling & Co. LLC
("Ehrenkrantz"). Prior thereto, we had engaged Eisner LLP as our independent
auditor and certifying accountant. There have been no disagreements with Eisner
LLP on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedures, which disagreements if not resolved
to the satisfaction of Eisner LLP would have caused them to make reference
thereto in their report.
On June 1, 2004, Ehrenkrantz merged with the firm of Friedman Alpren &
Green LLP. The new entity, Friedman LLP ("Friedman"), was retained by us, and
our Board of Directors approved this decision on June 7, 2004. For the period
since Ehrenkrantz's appointment through June 7, 2004, there have been no
disagreements with Ehrenkrantz on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Ehrenkrantz would have
caused them to make reference thereto in their report. In addition, for the
period since Ehrenkrantz's appointment through June 7, 2004, we did not consult
with Friedman regarding any matter that was the subject of a "disagreement" with
Ehrenkrantz, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and
the related instructions to Item 304 of Regulation S-K, or with regard to any
"reportable event," as that term is defined in Item 304(a)(1)(v) of Regulation
S-K, except as such consultations as may have been made with former employees of
Ehrenkrantz who are now employees of Friedman.
USE OF PROCEEDS
We will not receive any of the proceeds from the offering of common
stock for sale by the selling stockholders. However, we will receive proceeds,
to be used for working capital purposes, upon the exercise of warrants held by
certain selling stockholders.
32
SELLING STOCKHOLDERS
This prospectus relates to the offering for resale of 565,657,157 shares
of our common stock by certain selling stockholders who received shares in both
LCS and CSI in private financing transactions and acquisitions. The following
table and notes set forth, the name of each selling stockholder, the nature of
any position, office, or other material relationship, if any, which the selling
stockholder has had, within the past three years, with CSI or with any of our
predecessors or affiliates, the amount and percentage of shares of our common
stock that are beneficially owned by such stockholder, the amount to be offered
for the stockholder's account and the amount and percentage to be owned by such
stockholder upon completion of the offering.
The following table sets forth each stockholder who is offering shares of
our common stock for sale under this prospectus, any position, office or other
material relationship which such selling stockholder has had with us within the
past three years, the amount of shares owned by such stockholder prior to this
offering, the amount to be offered for such stockholder's account, the amount of
be owned by such stockholders following completion of the offering and (if one
percent or more) the percentage of the class to be owned by such stockholder
after the offering is complete. The prior-to-offering figures are as of
September 27, 2004. All share numbers are based on information that these
stockholders supplied to us. The table assumes that each stockholder will sell
all of its shares available for sale during the effectiveness of the
registration statement that includes this prospectus. Stockholders are not
required to sell their shares. Beneficial ownership is determined in accordance
with SEC rules and regulations and includes voting or investment power with
respect to the securities.
The percentage interset of each selling stockholder is based on the
beneficial ownership of such selling stockholder divided by the sum of the
current outstanding shares of common stock plus the additional shares, if any,
which would be issued to such selling stockholder (but not any other selling
stockholder) when converting notes, exercising warrants or other rights in the
future.
NUMBER OF SHARES
OF COMMON STOCK, NUMBER OF
NOT INCLUDING SHARES TOTAL NUMBER OF PERCENTAGE OF
WARRANTS, REPRESENTEDY SHARES OF COMMON COMMON STOCK COMMON STOCK
POSITION, OFFICE BENEFICIALLY BY WARRANTS STOCK BENEFICIALLY BENEFICIALLY
OR OTHER MATERIAL OWNED PRIOR TO BENEFICIALLY BENEFICIALLY OWNED AFTER THE OWNED AFTER TO
SELLING STOCKHOLDER RELATIONSHIP THE OFFERING(1) OWNED (1) OWNED (1) OFFERING THE OFFERING
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
NUMBER NUMBER PERCENTAGE
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Mathew and Kyle Szulik None 23,035,714 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Jermar Corp. None 22,526,190 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Redec & Associates LLC None 17,750,000 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Trust FBO Claire S. Adelson None 5,666,666 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Lawrence D. Share None 9,666,667 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Richard and Stacey Adelson None 2,561,904 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Alisa Farber Revocable Trust None 1,000,000 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Edward and Nancy McSorley None 4,047,619 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Ronald Kertes None 1,666,668 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Andrew Holder None 971,429 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Steven and Wendi Levitt None 714,286 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Ardmore Blouses None 485,714 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Patricia A. DeSalvo-Cavelius None 485,714 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
David Horowitz None 219,048 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Hare & Co. None 4,166,666 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
33
NUMBER OF SHARES
OF COMMON STOCK, NUMBER OF
NOT INCLUDING SHARES TOTAL NUMBER OF PERCENTAGE OF
WARRANTS, REPRESENTEDY SHARES OF COMMON COMMON STOCK COMMON STOCK
POSITION, OFFICE BENEFICIALLY BY WARRANTS STOCK BENEFICIALLY BENEFICIALLY
OR OTHER MATERIAL OWNED PRIOR TO BENEFICIALLY BENEFICIALLY OWNED AFTER THE OWNED AFTER TO
SELLING STOCKHOLDER RELATIONSHIP THE OFFERING(1) OWNED (1) OWNED (1) OFFERING THE OFFERING
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
NUMBER NUMBER PERCENTAGE
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Michael D. Mitchell, MD None 18,154,824 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Robert E. Morris None 1,100,000 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Alex Bruni None 1,000,000 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Gene R. Kazlow, Esq. None 500,000 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Janet M. Portelly None 500,000 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Lawrence J. Slavin None 200,000 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Roger Jones None 125,000 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
J.T. Shulman & Company, P.C. None 100,000 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Traffix, Inc. None 250,000 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
WHRT I Corp. None 72,543,956 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
John Giglio None 659,341 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Donald Townsend None 961,538 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Lacy Edwards None 1,785,714 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Andy Galewsky None 55,500 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Lee Pointer None 55,500 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Jeff Millman None 55,500 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Steve McWhirter None 39,000 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Richard Hasting None 39,000 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Sterling Runion None 39,000 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Terry Manning None 39,000 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Tim Leslie None 39,000 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Kimberly Livingston None 39,000 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Chris Buckley None 28,000 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Isabelle Knight None 28,000 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Eckhard Bogner None 28,000 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Alan Brignall None 28,000 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Scott Newman President, Chief 150,050,000 _____ 0 __%
Executive Officer
and Chairman
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Glenn Peipert Executive Vice 75,000,000 _____ 0 __%
President, Chief
Operating Officer
and Director
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Robert C. DeLeeuw Senior Vice 40,000,000 _____ 0 __%
President
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Laurus Master Fund, Ltd. None 82,107,141 12,000,000 _____ _____ __%
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Sands Brothers Venture Capital None 357,143 300,000 _____ _____ __%
LLC
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Sands Brothers Venture Capital None 6,071,429 5,100,00 _____ _____ __%
III LLC
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
Sands Brothers Venture Capital None 714,286 600,000 _____ _____ __%
IV LLC
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
TOTAL 543,490,491 22,166,666
------------------------------ ----------------- ---------------- ------------- ----------------- ---------------- ----------------
* Less than 1%
(1) Consists (as applicable) of shares of common stock that may be acquired
upon the conversion of outstanding notes and exercise of warrants.
Because the selling stockholders may, under this prospectus, sell all or
some portion of their common stock, only an estimate can be given as to the
amount of common stock that will be held by the selling stockholders upon
completion of the offering. In addition, the selling stockholders identified
above may have sold, transferred or otherwise disposed of all or a portion of
their common stock after the date on which they provided information regarding
their stockholdings.
34
PLAN OF DISTRIBUTION
Selling stockholders may offer and sell, from time to time, the shares of
our common stock covered by this prospectus. The term selling stockholders
includes donees, pledgees, transferees or other successors-in-interest selling
securities received after the date of this prospectus from a selling stockholder
as a gift, pledge, partnership distribution or other non-sale related transfer.
The selling stockholders will act independently of us in making decisions with
respect to the timing, manner and size of each sale. Sales may be made on one or
more exchanges or in the over-the-counter market or otherwise, at prices and
under terms then prevailing or at prices related to the then current market
price or in negotiated transactions. The selling stockholders may sell their
securities by one or more of, or a combination of, the following methods:
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its own account pursuant to this prospectus;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
o block trades in which the broker-dealer so engaged will attempt to
sell the securities as agent but may position and resell a portion
of the block as principal to facilitate the transaction;
o an over-the-counter distribution in accordance with the rules of the
NASDAQ National Market;
o in privately negotiated transactions; and,
o in options transactions.
To the extent required, we may amend or supplement this prospectus to
describe a specific plan of distribution. In connection with distributions of
the securities or otherwise, the selling stockholders may enter into hedging
transactions with broker-dealers or other financial institutions. In connection
with those transactions, broker-dealers or other financial institutions may
engage in short sales of shares of our common stock in the course of hedging the
positions they assume with selling stockholders. The selling stockholders may
also sell shares of our common stock short and redeliver the securities to close
out their short positions. The selling stockholders may also enter into option
or other transactions with broker-dealers or other financial institutions that
require the delivery to the broker-dealer or other financial institution of
securities offered by this prospectus, which securities the broker-dealer or
other financial institution may resell pursuant to this prospectus, as
supplemented or amended to reflect the transaction. The selling stockholders may
also pledge securities to a broker-dealer or other financial institution, and,
upon a default, the broker-dealer or other financial institution, may affect
sales of the pledged securities pursuant to this prospectus, as supplemented or
amended to reflect the transaction.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. In effecting
sales, broker-dealers or agents engaged by the selling stockholders may arrange
for other broker-dealers to participate. Broker-dealers or agents may receive
commissions, discounts or concessions from the selling stockholders in amounts
to be negotiated immediately prior to the sale.
In offering the securities covered by this prospectus, the selling
stockholders and any broker-dealers who execute sales for the selling
stockholders may be treated as "underwriters" within the meaning of the
Securities Act in connection with sales. Any profits realized by the selling
stockholders and the compensation of any broker-dealer may be treated as
underwriting discounts and commissions.
35
The selling stockholders and any other person participating in a
distribution will be subject to the Securities Exchange Act of 1934 (Exchange
Act). The Exchange Act rules include, without limitation, Regulation M, which
may limit the timing of purchases and sales of any of the securities by the
selling stockholders and other participating persons. In addition, Regulation M
may restrict the ability of any person engaged in the distribution of the
securities to engage in market-making activities with respect to the particular
security being distributed for a period of up to five business days prior to the
commencement of the distribution. This may affect the marketability of the
securities and the ability of any person or entity to engage in market-making
activities with respect to the securities. We have informed the selling
stockholders that the anti-manipulation rules of the SEC, including Regulation M
promulgated under the Exchange Act, may apply to their sales in the market.
We will make copies of this prospectus available to the selling
stockholders for the purpose of satisfying the prospectus delivery requirements
of the Securities Act. The selling stockholders may indemnify any broker-dealer
that participates in transactions involving the sale of the securities against
certain liabilities, including liabilities arising under the Securities Act.
At the time a particular offer of securities is made, if required, a
prospectus supplement will be distributed that will set forth the number of
securities being offered and the terms of the offering, including the name of
any underwriter, dealer or agent, the purchase price paid by any underwriter,
any discount, commission and other item constituting compensation, any discount,
commission or concession allowed or re-allowed or paid to any dealer, and the
proposed selling price to the public.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the names and ages our current directors
and executive officers, the principal offices and positions with us held by each
person and the date such person became a director or executive officer. Our
Board of Directors elects our executive officers annually. Each year the
stockholders elect the members of our Board of Directors.
Our directors and executive officers are as follows:
YEAR FIRST ELECTED AS
NAME AN OFFICER OR DIRECTOR AGE POSITION(S) HELD
-------------------- ----------------------- ------- --------------------------
Scott Newman 2004 45 President, Chief Executive
Officer and Chairman
-------------------- ----------------------- ------- --------------------------
Glenn Peipert 2004 42 Executive Vice President,
Chief Operating
Officer and Director
-------------------- ----------------------- ------- --------------------------
Mitchell Peipert 2004 45 Vice President, Chief
Financial Officer,
Secretary and Treasurer
-------------------- ----------------------- ------- --------------------------
Lawrence K. Reisman 2004 45 Director
-------------------- ----------------------- ------- --------------------------
Robert C. DeLeeuw 2004 47 Senior Vice President and
President of DeLeeuw
Associates, LLC
-------------------- ----------------------- ------- --------------------------
36
SCOTT NEWMAN has been our President, Chief Executive Officer and Chairman
since January 2004. Mr. Newman founded the former Conversion Services
International, Inc. in 1990 (before its merger with and into the LCS) and is our
largest stockholder. He has over twenty years of experience providing technology
solutions to major companies internationally. Mr. Newman has direct experience
in strategic planning, analysis, design, testing and implementation of complex
big-data solutions. He possesses a wide range of software and hardware
architecture/discipline experience, including, client/server, data discovery,
distributed systems, data warehousing, mainframe, scaleable solutions and
e-business. Mr. Newman has been the architect and lead designer of several
commercial software products used by Chase, Citibank, Merrill Lynch and Jaguar
Cars. Mr. Newman advises and reviews data warehousing and business intelligence
strategy on behalf of our Global 2000 clients, including AT&T Capital, Jaguar
Cars, Cytec and Chase. Mr. Newman is a member of the Young Presidents
Organization, a leadership organization that promotes the exchange of ideas,
pursuit of learning and sharing strategies to achieve personal and professional
growth and success. Mr. Newman received his B.S. from Brooklyn College in 1980.
GLENN PEIPERT has been our Executive Vice President, Chief Operating
Officer and Director since January 2004. Mr. Peipert held the same positions
with the former Conversion Services International, Inc. since its inception in
1990. Mr. Peipert has over two decades of experience consulting to major
organizations about leveraging technology to enable strategic change. He has
advised clients representing a broad cross-section of rapid growth industries
worldwide. Mr. Peipert has hands on experience with the leading data warehousing
products. His skills include architecture design, development and project
management. He routinely participates in architecture reviews and
recommendations for our Global 2000 clients. Mr. Peipert has managed major
technology initiatives at Chase, Tiffany, Morgan Stanley, Cytec and the United
States Tennis Association. He speaks nationally on applying data warehousing
technologies to enhance business effectiveness and has authored multiple white
papers regarding business intelligence. Mr. Peipert is a member of the Institute
of Management Consultants, as well as TEC International, a leadership
organization whose mission is to increase the effectiveness and enhance the
lives of chief executives and those they influence. Mr. Peipert is the brother
of Mitchell Peipert, our Vice President, Chief Financial Officer, Secretary and
Treasurer. Mr. Peipert received his B.S. from Brooklyn College in 1982.
MITCHELL PEIPERT has been our Vice President, Chief Financial Officer,
Secretary and Treasurer since January 2004. Mr. Peipert is a Certified Public
Accountant who held the same positions with the former Conversion Services
International, Inc. from January 2001 to September 2002. From September 2002 to
December 2003, Mr. Peipert was Senior Sales Executive for NIA Group and
President of E3 Management Advisors. From April 1992 until January 2001, Mr.
Peipert served as Senior Vice President of Operations and Controller of TSR
Wireless LLC, where he directed the accounting, operations and human resources
functions. He also assisted the chief executive officer in strategic planning,
capital raising and acquisitions. Prior to his employment by TSR, he held
various managerial roles for Anchin, Block & Anchin, certified public
accountants, Merrill Lynch and Grant Thornton. Mr. Peipert is the brother of
Glenn Peipert, our Executive Vice President, Chief Operating Officer and
Director. Mr. Peipert received his B.S. from Brooklyn College in 1980 and
received his M.B.A. in Finance from Pace University in 1986.
LAWRENCE K. REISMAN has been a Director of our company since February
2004. Mr. Reisman is a Certified Public Accountant who has been the principal of
his own firm, The Accounting Offices of L.K. Reisman, since 1986. Prior to
forming his company, Mr. Reisman was a tax manager at Coopers & Lybrand and Peat
Marwick Mitchell. He routinely provides accounting services to small and
medium-sized companies, which services include auditing, review and compilation
of financial statements, corporate, partnership and individual taxation,
designing accounting systems and management consulting services. Mr. Reisman
received his B.S. and M.B.A. in Finance from St. John's University in 1981 and
1985, respectively.
37
ROBERT C. DELEEUW has been our Senior Vice President and the President of
our wholly owned subsidiary, DeLeeuw Associates, LLC, since March 2004. Mr.
DeLeeuw founded DeLeeuw Associates, LLC, formerly known as DeLeeuw Associates,
Inc., in 1991. Mr. DeLeeuw has over twenty-five years experience in banking and
consulting. During this time, he has managed and supported some of the largest
merger projects in the history of the financial services industry and has
implemented numerous large-scale business and process change programs for his
clients. He has been published in American Banker, Mortgage Banking Magazine,
The Journal of Consumer Lending and Bank Technology News where he has also
served as a member of the Editorial Advisory Board. Mr. DeLeeuw received his
B.S. from Rider University in 1979 and received his M.S. in Management from
Stevens Institute of Technology in 1986.
Directors do not receive compensation for their duties as directors.
CODE OF CONDUCT AND ETHICS
Our Board of Directors has adopted a Code of Conduct and Ethics which is
applicable to all directors, officers and employees of CSI and its subsidiaries,
including CSI's principal executive officer and principal financial officer,
principal accounting officer or controller, or other persons performing similar
functions.
EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years indicated, all
compensation awarded to, paid to or earned by the following type of executive
officers for the fiscal years ended December 31, 2001, 2002 and 2003: (i)
individuals who served as, or acted in the capacity of, our principal executive
officer for the fiscal year ended December 31, 2003; and (ii) our other most
highly compensated executive officer, who together with the principal executive
officer are our most highly compensated officers whose salary and bonus exceeded
$100,000 with respect to the fiscal year ended December 31, 2003 and who were
employed at the end of fiscal year 2003.
SUMMARY COMPENSATION TABLE*
LONG TERM COMPENSATION
----------------------------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
--------------------------------- ------------------------ -----------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
--------------------------- ---- ------- ----- ------------ ---------- ------------ ------- ------------
Scott Newman 2003 244,452 -- -- -- -- -- 206,686 (2)
President, Chief Executive
Officer and Chairman 2002 143,750 -- -- -- -- -- 259,418 (2)
2001 250,000 -- -- -- -- -- 220,000 (2)
Glenn Peipert 2003 223,016 -- -- -- -- -- 171,309 (2)
Executive Vice President,
Chief Operating Officer and
Director 2002 143,750 -- -- -- -- -- 199,166 (2)
2001 187,500 -- -- -- -- -- 165,633 (2)
----------------
* Salary reflects total compensation paid to these executives (both before
and after the merger described in Item 1).
38
(1) The annual amount of perquisites and other personal benefits, if any, did
not exceed the lesser of $50,000 or 10% of the total annual salary
reported for each named executive officer and has therefore been omitted.
(2) Amounts shown reflect distributions resulting from our past tax status as
a Subchapter S corporation, as well as expenses paid for by us.
OPTION GRANTS AS OF JUNE 30, 2004
The only executive officers or directors to receive options as of June 30,
2004 were Mitchell Peipert, who was granted an option to purchase 4,500,000
shares of common stock by our Board of Directors on March 29, 2004 at an
exercise price of $0.165 per share, and Lawrence K. Reisman, who was granted an
option to purchase 450,000 shares of common stock by our Board of Directors on
May 28, 2004 at an exercise price of $0.20 per share. One-third of the options
granted vest on the first anniversary, one-third of the options granted vest on
the second anniversary and one-third of the options granted vest on the third
anniversary. Mr. Peipert's option expires on March 28, 2014, and Mr. Reisman's
option expires on May 27, 2014.
As of June 30, 2004, options to purchase a total of 32,305,000 shares of
common stock were granted by our Board of Directors at an exercise prices
ranging from $0.165 to $0.20 per share. One-third of the options granted vest on
the first anniversary, one-third of the options granted vest on the second
anniversary and one-third of the options granted vest on the third anniversary.
The options expire on the ten year anniversary of their grant date.
All options described above have been issued pursuant to the 2003
Incentive Plan described below.
2003 INCENTIVE PLAN
General
The 2003 Incentive Plan was approved at a special meeting of our
stockholders on January 23, 2004. The Plan authorizes us to issue 100,000,000
shares of common stock for issuance upon exercise of options. It also authorizes
the issuance of stock appreciation rights, referred to herein as SARs. The Plan
authorizes us to grant:
o incentive stock options to purchase shares of our common stock,
o non-qualified stock options to purchase shares of common stock, and
o SARs and shares of restricted common stock.
The Plan may be amended, terminated or modified by our Board at any time,
subject to stockholder approval as required by law, rule or regulation. No such
termination, modification or amendment may affect the rights of an optionee
under an outstanding option or the grantee of an award.
Objectives
The objective of the Plan is to provide incentives to our officers, other
key employees, consultants, professionals and non-employee directors to achieve
financial results aimed at increasing stockholder value and attracting talented
individuals to CSI. Persons eligible to be granted incentive stock options under
the Plan will be those employees, consultants, professionals and non-employee
directors whose performance, in the judgment of a committee of our Board of
Directors, can have a significant effect on our success.
39
Oversight
The Board, acting as a whole, or a committee thereof appointed by our
Board, will administer the Plan by making determinations regarding the persons
to whom options should be granted and the amount, terms, conditions and
restrictions of the awards. The Board or such committee also has the authority
to interpret the provisions of the Plan and to establish and amend rules for its
administration subject to the Plan's limitations.
Types of grants
The Plan allows us to grant incentive stock options, non-qualified stock
options, shares of restricted stock, SARs in connections with options and
independent SARs. The Plan does not specify what portion of the awards may be in
the form of any of the foregoing. Incentive stock options awarded to our
employees are qualified stock options under the Internal Revenue Code.
Eligibility
Under the Plan, we may grant incentive stock options only to our officers
and employees, and we may grant non-qualified options to officers and employees,
as well as our directors, independent contractors and agents.
Statutory Conditions on Stock Options
Exercise Price. To the extent that Options designated as incentive stock
options become exercisable by an optionee for the first time during any calendar
year for common stock having a fair market value greater than One Hundred
Thousand Dollars ($100,000), the portions of such options which exceed such
amount shall be treated as nonqualified stock options. Incentive stock options
granted to any person who owns, immediately after the grant, stock possessing
more than 10% of the combined voting power of all classes of our stock, or of
any parent or subsidiary of ours, must have an exercise price at least equal to
110% of the fair market value of common stock on the date of grant and the term
of the option may not be longer than five years.
Expiration Date. Any option granted under the Plan will expire at the time
fixed by the Board or its committee, which cannot be more than ten (10) years
after the date it is granted or, in the case of any person who owns more than
10% of the combined voting power of all classes of our stock or of any parent or
subsidiary corporation, not more than five years after the date of grant.
Exerciseability. The Board or its committee may also specify when all or
part of an option becomes exercisable, but in the absence by such specification,
the option will ordinarily be exercisable in whole or part at any time during
its term. However, the Board or its committee may accelerate the exerciseability
of any option at its discretion.
Assignability. Options granted under the Plan are not assignable, except
by the laws of descent and distribution or as may be otherwise provided by the
Board or its committee.
Payment Upon Exercise Of Options
Payment of the exercise price for any option may be in cash, by withheld
shares that, upon exercise, have a fair market value at the time the option is
exercised equal to the option price, plus applicable withholding tax, or in the
form of shares of our common stock.
40
Stock Appreciation Rights
A Stock Appreciation Right is the right to benefit from appreciation in
the value of common stock. A SAR holder, on exercise of the SAR, is entitled to
receive from us in cash or common stock an amount equal to the excess of: (a)
the fair market value of common stock covered by the exercised portion of the
SAR, as of the date of such exercise, over (b) the fair market value of common
stock covered by the exercised portion of the SAR as of the date on which the
SAR was granted.
The Board or its committee may grant SARs in connection with all or any
part of an option granted under the Plan, either concurrently with the grant of
the option or at any time thereafter, and may also grant SARs independently of
options.
Tax Consequences
An employee or director will not recognize income on the awarding of
incentive stock options and nonstatutory options under the Plan.
An optionee will recognize ordinary income as the result of the exercise
of a nonstatutory stock option in the amount of the excess of the fair market
value of the stock on the day of exercise over the option exercise price.
An employee will not recognize income on the exercise of an incentive
stock option, unless the option exercise price is paid with stock acquired on
the exercise of an incentive stock option and the following holding period for
such stock has not been satisfied. The employee will recognize long-term capital
gain or loss on a sale of the shares acquired on exercise, provided the shares
acquired are not sold or otherwise disposed of before the earlier of:
(i) two years from the date of award of the option, or
(ii) one year from the date of exercise.
If the shares are not held for the required period of time, the employee
will recognize ordinary income to the extent the fair market value of the stock
at the time the option is exercised exceeds the option price, but limited to the
gain recognized on sale. The balance of any such gain will be a short-term
capital gain. Exercise of an option with previously owned stock is not a taxable
disposition of such stock. An employee generally must include in alternative
minimum taxable income the amount by which the price such employee paid for an
incentive stock option is exceeded by the option's fair market value at the time
his or her rights to the stock are freely transferable or are not subject to a
substantial risk of forfeiture.
EMPLOYMENT AGREEMENTS
Scott Newman, our President and Chief Executive Officer, agreed to a
five-year employment agreement dated as of March 26, 2004. The agreement
provides for an annual salary to Mr. Newman of $500,000 and an annual bonus to
be awarded by our to-be-appointed Compensation Committee. The agreement also
provides for health, life and disability insurance, as well as a monthly car
allowance. In the event that Mr. Newman's employment is terminated other than
with good cause, he will receive a payment of three year's base salary.
41
Glenn Peipert, Executive Vice President and Chief Operating Officer,
agreed to a five-year employment agreement dated as of March 26, 2004. The
agreement provides for an annual salary to Mr. Peipert of $375,000 and an annual
bonus to be awarded by our to-be-appointed Compensation Committee. The agreement
also provides for health, life and disability insurance, as well as a monthly
car allowance. In the event that Mr. Peipert's employment is terminated other
than with good cause, he will receive a payment of three year's base salary.
Mitchell Peipert, Vice President, Chief Financial Officer, Treasurer and
Secretary, agreed to a three-year employment agreement dated as of March 26,
2004. The agreement provides for an annual salary to Mr. Peipert of $200,000 and
an annual bonus to be awarded by our to-be-appointed Compensation Committee. The
agreement also provides for health, life and disability insurance, as well as a
monthly car allowance. In the event that Mr. Peipert's employment is terminated
other than with good cause, he will receive a payment of three year's base
salary.
Robert C. DeLeeuw, Senior Vice President and President of our wholly owned
subsidiary, DeLeeuw Associates, LLC, agreed to a three-year employment agreement
dated as of February 27, 2004. The agreement provides for an annual salary to
Mr. DeLeeuw of $350,000 and an annual bonus to be awarded by our to-be-appointed
Compensation Committee. The agreement also provides for health, life and
disability insurance. In the event that Mr. DeLeeuw's employment is terminated
other than with good cause, he will receive a payment of one year's base salary.
42
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of our common stock, our only class of outstanding voting
securities as of September 27, 2004, based on 768,510,668 aggregate shares of
common stock outstanding as of such date, by: (i) each person who is known by us
to own beneficially more than 5% of our outstanding common stock with the
address of each such person, (ii) each of our present directors and officers,
and (iii) all officers and directors as a group:
AMOUNT OF PERCENTAGE OF
NAME AND ADDRESS OF COMMON STOCK OUTSTANDING COMMON
BENEFICIAL OWNER(1)(2) BENEFICIALLY OWNED STOCK BENEFICIALLY OWNED
-------------------------- ------------------ ------------------------
Scott Newman(3) 300,050,000 39.0%
-------------------------- ------------------ ------------------------
Glenn Peipert(4) 150,000,000 19.5%
-------------------------- ------------------ ------------------------
Mitchell Peipert(5) * *
-------------------------- ------------------ ------------------------
Robert C. DeLeeuw(6) 80,000,000 10.4%
-------------------------- ------------------ ------------------------
Lawrence K. Reisman(7) * *
-------------------------- ------------------ ------------------------
WHRT I Corp. (8) 72,543,956 9.4%
-------------------------- ------------------ ------------------------
All directors and officers
as a group (5 persons) 530,050,000 69.0%
-------------------------- ------------------ ------------------------
----------
* Represents less than 1% of the issued and outstanding Common Stock.
(1) Each stockholder, director and executive officer has sole voting power and
sole dispositive power with respect to all shares beneficially owned by
him, unless otherwise indicated.
(2) All addresses except for WHRT I Corp. are c/o Conversion Services
International, Inc., 100 Eagle Rock Avenue, East Hanover, New Jersey
07936.
(3) Mr. Newman is the Company's President, Chief Executive Officer and
Chairman of the Board.
(4) Mr. Glenn Peipert is the Company's Executive Vice President, Chief
Operating Officer and Director
(5) Mr. Mitchell Peipert is the Company's Vice President, Chief Financial
Officer, Secretary and Treasurer. Does not include an option to purchase
4,500,000 shares of common stock granted on March 29, 2004 at an exercise
price of $0.165 per share. One-third of the options granted vest on the
first anniversary, one-third of the options granted vest on the second
anniversary and one-third of the options granted vest on the third
anniversary. The option grant expires on March 28, 2014.
(6) Mr. DeLeeuw is the Company's Senior Vice President and the President of
the Company's wholly owned subsidiary, DeLeeuw Associates, LLC.
(7) Mr. Reisman is a Director. Does not include an option to purchase 450,000
shares of common stock granted on May 28, 2004 at an exercise price of
$0.20 per share. One-third of the options granted vest on the first
anniversary, one-third of the options granted vest on the second
anniversary and one-third of the options granted vest on the third
anniversary. The option grant expires on May 27, 2014.
(8) Based on a Schedule 13G filed with the Securities Exchange Commission on
July 8, 2004. WHRT I Corp.'s address is c/o Tudor Ventures, 50 Rowes
Wharf, 6th Floor, Boston, Massachusetts 02420.
43
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
As of June 30, 2004, Scott Newman and Glenn Peipert owed us an aggregate
of approximately $206,000, including accrued interest. These loans bear at 3%
per annum and are due and payable by December 31, 2005.
Dr. Michael Mitchell, the former President, Chief Executive Officer and
sole director of LCS, had loaned an aggregate of $930,707 to us. Mr. Alex Bruni,
LCS' Vice President and Secretary, had loaned us an aggregate of $36,500. These
loans were converted into shares of our common stock at the closing of the
merger of LCS and CSI. Dr. Mitchell and Mr. Bruni are each selling stockholders
hereunder.
On March 22, 2002, we issued 500,000 shares of our common stock to two of
our former directors, which we valued at $0.04 per share.
During our fiscal year ended February 28, 2003, A&J Marketing, Inc., a
company owned by Mr. Bruni, acquired the Golfpromo.net and PlayGolfNow.com
domain names after we had lost our right to these names because we were unable
to pay the fees needed to retain these rights. A&J Marketing subsequently opened
websites using these names and is now operating these websites.
Other than those described above, we have no material transactions which
involved or are planned to involve a direct or indirect interest of a director,
executive officer, greater than 5% stockholder or any family of such parties.
44
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information. Our common stock traded on the OTC Bulletin Board,
except as indicated below, and/or the Pink Sheets LLC under the symbol "LCSG"
from mid-1998 through July 16, 2003 and "LCSI" through February 2, 2004.
Beginning February 3, 2004, our common stock has traded on the OTC Bulletin
Board under the symbol "CSII."
The following chart sets forth the high and low bid prices for each
quarter from January 1, 2002 through June 30, 2004:
HIGH LOW
2002 BY QUARTER -------- --------
January 1 - March 31 $ 0.37 $ 0.03
April 1 - June 30 $ 0.51 $ 0.04
July 1 - September 30 $ 0.10 $ 0.04
October 1 - December 31 $ 0.05 $ 0.01
2003 BY QUARTER
January 1 - March 31 $ 0.04 $ 0.01
April 1 - June 30 $ 0.09 $ 0.08
July 1 - September 30 $ 0.19 $ 0.06
October 1 - December 31 $ 0.19 $ 0.06
2004 BY QUARTER
January 1 - March 31 $ 0.25 $ 0.13
April 1 - June 30 $ 0.26 $ 0.12
On September 27, 2004, the high and low bid prices for our common stock
were $0.20 and $0.23, respectively.
On April 21, 2004, we filed an application to list our common stock on the
American Stock Exchange. There can be no assurance, however, that such
application will be approved.
No prediction can be made as to the effect, if any, that future sales of
shares of our common stock or the availability of our common stock for future
sale will have on the market price of our common stock prevailing from
time-to-time. Sales of substantial amounts of our common stock in the public
market could adversely affect the prevailing market price of our common stock.
Record Holders. As of September 27, 2004, there were 474 registered
holders of our common stock, including shares held in street name. As of
September 27, 2004, there were 768,510,668 shares of common stock issued and
outstanding.
Dividends. We have not paid dividends on our common stock in the past and
do not anticipate doing so in the foreseeable future. We currently intend to
retain future earnings, if any, to fund the development and growth of our
business. In addition, the security agreement with Laurus Master Fund, Ltd.
requires that we obtain their consent prior to paying any dividends.
45
DESCRIPTION OF SECURITIES
The following description of our capital stock is a summary and is
qualified in its entirety by the provisions of our Certificate of Incorporation,
as amended. We are authorized to issue up to 1,000,000,000 shares of common
stock, par value $.001 per share. As of September 27, 2004, there were
768,510,668 shares of common stock issued and outstanding. We are authorized to
issue up to 20,000,000 shares of preferred stock, par value $.001. As of
September 27, 2004, there were 0 shares of preferred stock issued and
outstanding.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held
of record on all matters to be voted on by the stockholders. The holders of
common stock are entitled to receive dividends ratably, when, as and if declared
by the Board of Directors, out of funds legally available. In the event of a
liquidation, dissolution or winding-up of us, the holders of common stock are
entitled to share equally and ratably in all assets remaining available for
distribution after payment of liabilities and after provision is made for each
class of stock, if any, having preference over the common stock. The holders of
shares of common stock, as such, have no conversion, preemptive, or other
subscription rights and there are no redemption provisions applicable to the
common stock. All of the outstanding shares of common stock are validly issued,
fully-paid and nonassessable.
PREFERRED STOCK
The shares of preferred stock may be issued in series, and shall have such
voting powers, full or limited, or no voting powers, and such designations,
preferences and relative participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions providing for the issuance of such
stock adopted from time to time by our Board of Directors. Our Board of
Directors is expressly vested with the authority to determine and fix in the
resolution or resolutions providing for the issuances of preferred stock the
voting powers, designations, preferences and rights, and the qualifications,
limitations or restrictions thereof, of each such series to the full extent now
or hereafter permitted by the laws of the State of Delaware.
CONVERTIBLE NOTES
In June 2004, we issued a five-year $2.0 million unsecured convertible
line of credit note with a private investor. The note accrues interest at an
annual rate of 7%, and the conversion price of the shares of common stock
issuable under the note is equal to 75% of the average bid price (for the prior
ten trading days).
In August 2004, we replaced our $3,000,000 line of credit with North Fork
Bank with a revolving line of credit with Laurus Master Fund, Ltd. ("Laurus"),
whereby we will have the ability to borrow up to $6,000,000 based upon eligible
accounts receivable. This revolving line, effectuated through a $2,000,000
convertible minimum borrowing note and a $4,000,000 revolving note, provides for
advances at an advance rate of 90% against eligible accounts receivable, with an
annual interest rate of prime rate (as reported in the Wall Street Journal) plus
1%, and maturing in three years. The interest rate on these notes will be
decreased by 1.0% for every 25% increase in our stock price above the fixed
conversion price prior to an effective registration statement and 2.0%
thereafter up to a minimum of 0.0%. This line of credit is secured by
substantially all the corporate assets. Both the $2,000,000 convertible minimum
borrowing note and the $4,000,000 revolving note provide for conversion at the
option of the holder of the amounts outstanding into our common stock at a fixed
conversion price of $0.14 per share. In the event that we issue stock or
derivatives convertible into our stock for a price less the aforementioned fixed
conversion price, then the fixed conversion price is reset using a weighted
average dilution calculation.
46
In September 2004, we issued to Sands Brothers Venture Capital LLC, Sands
Brothers Venture Capital III LLC and Sands Brothers Venture Capital IV LLC
(collectively, "Sands") three subordinated secured convertible promissory notes
equaling $1,000,000 (the "Notes"), each with an annual interest rate of 8%
expiring September 22, 2005. The Notes are secured by substantially all
corporate assets, subordinate to Laurus. The Notes are convertible into shares
of our common stock at the election of Sands at any time following the
consummation of a convertible debt or equity financing with gross proceeds of $5
million or greater to us (a "Qualified Financing"). The conversion price of the
shares of our common stock issuable upon conversion of the Notes shall be equal
to a price per share of common stock equal to forty percent (40%) of the price
of the securities issued pursuant to a Qualified Financing. If no Qualified
Offering has been consummated by September 8, 2005, then Sands may elect to
convert the Notes at a fixed conversion price of $0.14 per share. In the event
that we issue stock or derivatives convertible into our stock for a price less
the aforementioned fixed conversion price, then the fixed conversion price is
reset using a weighted average dilution calculation.
WARRANTS
A private investor received a warrant to purchase 4,166,666 shares of our
common stock at $0.105 per share in June 2004. These warrants expire in June
2009.
Laurus received a warrant to purchase 12,000,000 shares of our common
stock. The exercise price for the first 6,000,000 shares acquired under the
warrant is $0.29 per share, the exercise price for the next 3,000,000 shares
acquired under the warrant is $0.31 per share, and the exercise price for the
final 3,000,000 shares acquired under the warrant is $0.35 per share. These
warrants expire in August 2011.
We issued Sands three common stock purchase warrants (the "Warrants")
providing Sands with the right to purchase 6,000,000 shares of our common stock.
The exercise price of the shares of our common stock issuable upon exercise of
the Warrants shall be equal to a price per share of common stock equal to forty
percent (40%) of the price of the securities issued pursuant to a Qualified
Financing. If no Qualified Offering has been consummated by September 8, 2005,
then Sands may elect to exercise the Warrants at a fixed conversion price of
$0.14 per share. The latest that the Warrants may expire is September 8, 2008.
OPTIONS
The only executive officers or directors to receive options as of June 30,
2004 were Mitchell Peipert, who was granted an option to purchase 4,500,000
shares of common stock by our Board of Directors on March 29, 2004 at an
exercise price of $0.165 per share, and Lawrence K. Reisman, who was granted an
option to purchase 450,000 shares of common stock by our Board of Directors on
May 28, 2004 at an exercise price of $0.20 per share. One-third of the options
granted vest on the first anniversary, one-third of the options granted vest on
the second anniversary and one-third of the options granted vest on the third
anniversary. Mr. Peipert's option expires on March 28, 2014, and Mr. Reisman's
option expires on May 27, 2014.
As of June 30, 2004, options to purchase a total of 32,305,000 shares of
common stock were granted by our Board of Directors at an exercise prices
ranging from $0.165 to $0.20 per share. One-third of the options granted vest on
the first anniversary, one-third of the options granted vest on the second
anniversary and one-third of the options granted vest on the third anniversary.
The options expire on the ten year anniversary of their grant date
TRANSFER AGENT
Olde Monmouth Stock Transfer Co., Inc., 200 Memorial Parkway, Atlantic
Highlands, New Jersey 07716, is the transfer agent for our shares of common
stock.
47
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our common stock in the public
market, or the perception that such sales may occur, could adversely affect the
prevailing market price of our common stock. This could adversely affect the
prevailing market price and our ability to raise equity capital in the future.
Subject to this Registration Statement being declared effective, all 565,657,157
shares of common stock sold in this offering will be freely transferable without
restriction or further registration under the Securities Act, except for any
shares that may be sold or purchased by our "affiliates." Shares purchased by
our affiliates will be subject to the volume and other limitations of Rule 144
of the Securities Act, or "Rule 144" described below. As defined in Rule 144, an
"affiliate" of an issuer is a person who, directly or indirectly, through one or
more intermediaries, controls, is controlled by or is under common control with
the issuer. These shares will be subject to the volume and other limitations of
Rule 144.
Under Rule 144 as currently in effect, beginning 90 days after the date of
this prospectus, a person who has beneficially owned restricted shares of common
stock for at least one year, including the holding period of any prior owner who
is not an affiliate, would be entitled to sell a number of the shares within any
three-month period equal to the greater of 1% of the then outstanding shares of
the common stock or the average weekly reported volume of trading of the common
stock (if such common stock is traded on NASDAQ or another exchange) during the
four calendar weeks preceding such sale. Immediately after the offering, 1% of
our outstanding shares of common stock would equal approximately 7,661,297
shares. Under Rule 144, restricted shares are subject to manner of sale and
notice requirements and requirements as to the availability of current public
information concerning us.
Under Rule 144(k), a person who is not deemed to have been an affiliate at
any time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any prior owner who is not an affiliate, is entitled to sell such shares
without regard to the volume or other limitations of Rule 144 just described.
EXPERTS
The audited financial statements for our company as of the year ended
December 31, 2003 included in this prospectus are reliant on the reports of
Friedman LLP, Livingston, New Jersey, independent certified public accountants,
as stated in their reports therein, upon the authority of that firm as experts
in auditing and accounting. Prior to our engagement of Friedman LLP, we had
engaged Ehrenkrantz Sterling & Co. LLC and Eisner LLP as our independent
auditors and certifying accountants. See "Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure."
LEGAL MATTERS
The legality of this offering of shares of our common stock has been
passed upon on our behalf by Ellenoff Grossman & Schole LLP, New York, New York.
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
We have indemnified each member of the Board of Directors and our
executive officers to the fullest extent authorized, permitted or allowed by
law. Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
48
For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form SB-2 under the
Securities Act, and the rules and regulations promulgated thereunder, with
respect to the common stock offered hereby. This prospectus, which constitutes a
part of the registration statement, does not contain all of the information set
forth in the registration statement and the exhibits thereto. Statements
contained in this prospectus as to the contents of any contract or other
document that is filed as an exhibit to the registration statement are not
necessarily complete and each such statement is qualified in all respects by
reference to the full text of such contract or document. For further information
with respect to us and the common stock, reference is hereby made to the
registration statement and the exhibits thereto, which may be inspected and
copied at the principal office of the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of all or any part thereof may be obtained at prescribed
rates from the Commission's Public Reference Section at such addresses. Also,
the SEC maintains a World Wide Web site on the Internet at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC.
We are in compliance with the information and periodic reporting
requirements of the Exchange Act and, in accordance therewith, will file
periodic reports, proxy and information statements and other information with
the SEC. Such periodic reports, proxy and information statements and other
information will be available for inspection and copying at the principal
office, public reference facilities and Web site of the SEC referred to above.
49
CONVERSION SERVICES INTERNATIONAL, INC.
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditor's Report.................................................F-1
Consolidated Balance Sheet...................................................F-2
Consolidated Statements of Operations........................................F-3
Consolidated Statements of Changes in Stockholders' Equity...................F-4
Consolidated Statements of Cash Flows........................................F-5
Notes to Consolidated Financial Statements...................................F-7
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Conversion Services International, Inc.
East Hanover, New Jersey
We have audited the accompanying consolidated balance sheet of Conversion
Services International, Inc. and subidiary as of December 31, 2003, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years ended December 31, 2003 and 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Conversion Services
International, Inc. and subsidiary as of December 31, 2003 and the consolidated
results of its operations and its cash flows for the years ended December 31,
2003 and 2002, in conformity with accounting principles generally accepted in
the United States of America.
/s/ Friedman L.L.P.
Livingston, New Jersey
March 30, 2004, except for Notes 1 and 9,
as to which the date is May 4, 2004
F-1
CONVERSION SERVICES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
2003 2004
------------ ------------
ASSETS (UNAUDITED)
CURRENT ASSETS
Cash $ 411,586 $ 553,338
Restricted cash -- 83,375
Accounts receivable, net of allowance
for doubtful accounts of $92,000 at
December 31, 2003 2,052,343 3,989,165
Account receivable from related parties -- 786,232
Prepaid expenses 113,803 255,674
Costs in excess of billings -- 26,428
Deferred tax asset 36,700 687,576
------------ ------------
TOTAL CURRENT ASSETS 2,614,432 6,381,788
------------ ------------
PROPERTY AND EQUIPMENT, at cost, net 270,696 627,959
------------ ------------
OTHER ASSETS
Due from stockholders, including
accrued interest of $21,600 at
December 31, 2003 203,623 206,354
Goodwill 1,094,206 2,506,224
Deferred loan costs, net of accumulated
amortization of $77,484 at
December 31, 2003 24,862 515,365
Intangible assets, net of accumulated
amortization of $89,710 at
December 31, 2003 344,290 6,275,095
Deferred tax asset 191,000 --
Equity investments -- 122,688
Security deposits 16,791 13,420
------------ ------------
1,874,772 9,639,146
------------ ------------
TOTAL ASSETS $ 4,759,900 $ 16,648,893
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Line of credit $ 1,782,699 $ 2,041,125
Current portion of long-term debt 461,981 68,137
Deferred revenue -- 1,303,287
Accounts payable and accrued expenses 1,025,248 3,632,446
------------ ------------
TOTAL CURRENT LIABILITIES 3,269,928 7,044,995
------------ ------------
LONG-TERM DEBT, net of current portion 233,928 2,099,618
------------ ------------
DEFERRED TAXES 36,900 336,900
------------ ------------
MINORITY INTEREST -- 199,400
------------ ------------
COMMITMENTS -- --
STOCKHOLDER'S EQUITY
Common stock, $.001 par value, 1,000,000
shares authorized, issued and outstanding 1,000 766,130
Additional paid in capital 1,446,250 7,788,169
Accumulated deficit (228,106) (1,586,319)
------------ ------------
TOTAL STOCKHOLDERS EQUITY 1,219,144 6,967,980
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 4,759,900 $ 16,648,893
============ ============
See Notes to Consolidated Financial Statements
F-2
CONVERSION SERVICES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
2002 2003 2003 2004
------------- ------------- ------------- -------------
(Restated) (UNAUDITED) (UNAUDITED)
REVENUE $ 16,244,790 $ 14,366,456 $ 7,097,806 $ 11,778,065
COST OF SERVICES 10,677,527 10,265,808 5,085,444 8,218,924
------------- ------------- ------------- -------------
GROSS PROFIT 5,567,263 4,100,648 2,012,362 3,559,141
------------- ------------- ------------- -------------
OPERATING EXPENSES
Selling and Marketing 1,095,072 1,552,766 625,606 1,303,863
General and administrative 3,549,423 2,701,934 1,180,931 3,162,907
Depreciation & amortization 149,463 213,158 95,228 98,471
------------- ------------- ------------- -------------
TOTAL OPERATING EXPENSES 4,793,958 4,467,858 1,901,765 4,565,241
------------- ------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS 773,305 (367,210) 110,597 (1,006,100)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE)
Equity in losses from investments -- -- -- (16,088)
Other income -- -- -- 7,006
Interest income 5,400 5,400 -- 1,873
Interest expense (139,152) (135,753) (80,717) (138,116)
------------- ------------- ------------- -------------
(133,752) (130,353) (80,717) (145,325)
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE TAXES 639,553 (497,563) 29,880 (1,151,425)
INCOME TAXES (BENEFIT)
Current 101,100 -- -- --
Deferred (78,700) (190,800) -- (459,879)
------------- ------------- ------------- -------------
22,400 (190,800) -- (459,879)
------------- ------------- ------------- -------------
NET INCOME (LOSS) 617,153 (306,763) 29,880 (691,546)
------------- ------------- ------------- -------------
UNSECURED CONVERTIBLE LINE OF CREDIT
BENEFICIAL CONVERSION FEATURE -- -- -- 666,667
------------- ------------- ------------- -------------
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ 617,153 $ (306,763) $ 29,880 $ (1,358,213)
============= ============= ============= =============
UNAUDITED PRO FORMA DATA:
Income before income taxes (benefit) $ -- $ -- $ 29,880 $ --
Income taxes (benefit) -- -- 11,952 --
------------- ------------- ------------- -------------
Net income $ -- $ -- $ 17,928 $ --
============= ============= ============= =============
NET INCOME (LOSS) PER SHARE (Unaudited) $ 0.00 $ (0.00) $ 0.00 $ (0.00)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES USED IN THE ACTUAL AND PRO
FORMA NET INCOME (LOSS) PER SHARE
CALCULATION (Unaudited) 593,000,000 593,000,000 593,000,000 650,075,398
============= ============= ============= =============
See Notes to Consolidated Financial Statements.
F-3
CONVERSION SERVICES INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ADDITIONAL RETAINED TOTAL
CAPITAL PAID-IN EARNINGS STOCKHOLDERS'
STOCK CAPITAL (DEFICIT) EQUITY
----------- ----------- ----------- -----------
Balance, January 1, 2002, as
restated $ 900 $ 140,800 $ 190,424 $ 332,124
Net income -- -- 617,153 617,153
Distributions to stockholders -- -- (178,340) (178,340)
----------- ----------- ----------- -----------
Balance, December 31, 2002, as 900 140,800 629,237 770,937
restated
Net loss -- -- (306,763) (306,763)
Issuance of 100,000 shares of
Common
Stock of Conversion Services
International, Inc. 100 1,522,338 -- 1,522,438
Distributions to stockholders -- (216,888) (550,580) (767,468)
----------- ----------- ----------- -----------
Balance, December 31, 2003 $ 1,000 $ 1,446,250 $ (228,106) $ 1,219,144
Net loss -- -- (691,546) (691,546)
----------- ----------- ----------- -----------
Relative fair value of warrants
issued -- 500,000 -- 500,000
Fair value of stock grants to
employees -- 87,125 -- 87,125
Costs incurred in connection with
LCS
Golf merger -- (95,678) -- (95,678)
Issuance of 592,000,000 shares of
Common Stock of Conversion
Services International, Inc. in
connection with the reverse merger
into LCS Golf 592,000 (592,000) -- --
Issuance of 80,000,000 shares of
Common Stock of Conversion
Services International, Inc. in
connection with the acquisition of
DeLeeuw Associates, Inc. 80,000 2,078,246 -- 2,158,246
Issuance of 16,666,666 shares of
Common Stock of Conversion
Services International, Inc. in
connection with the conversion of
debt into Company stock 16,667 1,983,333 -- 2,000,000
Issuance of 76,463,049 shares of
Common Stock of Conversion
Services International, Inc. in
connection with the acquisition of
Evoke Software Corporation 76,463 1,712,351 -- 1,788,814
Compensation expense for stock
options issued to non-employees -- 1,875 -- 1,875
Unsecured convertible line of
credit beneficial conversion feature -- 666,667 (666,667) --
----------- ----------- ----------- -----------
Balance, June 30, 2004 (Unaudited) $ 766,130 $ 7,788,169 $(1,586,319) $ 6,967,980
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements
F-4
CONVERSION SERVICES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------ ------------------------
2002 2003 2003 2004
--------- --------- --------- -----------
(Restated) (UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 617,153 $(306,763) $ 29,880 $ (691,546)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation 108,890 95,837 50,682 43,652
Amortization of intangible assets and deferred
loan costs 40,573 117,321 33,596 62,352
Deferred tax benefit (78,700) (190,800) -- (459,879)
Compensation expense for stock options and stock
issued -- -- -- 89,000
Allowance for doubtful accounts (75,000) 42,000 36,000 65,368
Write-off deferred loan costs -- -- -- 24,862
Loss on disposal of equipment -- -- -- 35,496
Loss on equity investments -- -- -- 16,088
Conversion of accrued interest to additional
paid-in capital -- 22,438 -- --
Changes in operating assets and liabilities:
Decrease in accounts receivable (180,980) (268,325) (618,242) (1,133,077)
(Increase) decrease in prepaid expense 73,139 (50,611) 2,487 (48,618)
(Increase) decrease in security deposits 1,250 (2,070)
Increase in costs in excess of billings -- -- -- (26,428)
Increase in due from stockholders -- -- 50,000 (2,731)
Decrease in accounts payable and accrued expenses (548,661) (327) 46,185 642,566
Decrease in deferred revenue (10,000) -- -- 49,244
--------- --------- --------- -----------
Net cash used in operating activities (52,336) (541,300) (369,412) (1,333,651)
--------- --------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (41,050) (93,640) (19,351) (186,389)
Investment in DeLeeuw Associates, net of cash
acquired -- -- -- (2,010,266)
Investment in Evoke Software Corp., net of cash
acquired -- -- -- 466,583
Equity investment in Leading Edge Communications
Corp. -- -- -- (83,000)
Collection (issuance) of note receivable 210,000 2,100 -- --
Acquisition of intangible assets and goodwill (82,277) (11,951) -- --
--------- --------- --------- -----------
Net cash provided by (used in) investing 86,673 (103,491) (19,351) (1,813,072)
activities --------- --------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft 5,661 (5,661) -- (51,900)
Net advances under line of credit 454,137 1,112,863 949,863 2,041,125
Line of credit repayment -- -- -- (1,789,110)
Principal payments on long-term debt (308,828) (777,957) (291,875) (657,882)
Deferred loan costs in connection with long-term debt (23,241) -- -- --
Deferred loan costs in connection with line of credit -- -- -- (30,534)
Issuance of convertible debt -- 1,500,000 225,000 4,000,000
Principal payments on capital lease obligations -- -- -- (44,171)
Due from stockholders (5,400) (5,400) -- --
Distributions to stockholders (178,340) (767,468) (439,784) --
Restricted cash -- -- -- (83,375)
Costs incurred in connection with LCS merger -- -- -- (95,678)
--------- --------- --------- -----------
Net cash provided by (used in) financing (56,011) 1,056,377 443,204 3,288,475
activities --------- --------- --------- -----------
NET INCREASE (DECREASE) IN CASH (21,674) 411,586 54,441 141,752
CASH, beginning of year 21,674 -- -- 411,586
--------- --------- --------- -----------
CASH, end of year $ -- $ 411,586 $ 54,441 $ 553,338
========= ========= ========= ===========
See Notes to Consolidated Financial Statements.
F-5
CONVERSION SERVICES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------- -------------------------
2002 2003 2003 2004
--------- -------- ---------- -----------
(Restated) (UNAUDITED) (UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 135,066 $ 89,630 $ 57,989 $ 60,046
Cash paid for income taxes 229,007 28,258 -- --
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
During 2003 and 2002, the Company entered into various capital
lease arrangements for computer -- 227,139
equipment in the amount of $23,556 and $2,928, respectively
During 2002, the Company financed the acquisition of certain
intangibles through an obligation due to a
third party in the amount of $700,811
During 2004, the Company acquired substantially all of the assets
and liabilities of Evoke Software Corporation. The following assets and
liabilities were obtained as a result of the acquisition
Acquired cash -- -- -- 497,492
Acquired accounts receivable -- -- -- 579,839
Acquired customer contracts -- -- -- 1,962,000
Acquired tradename -- -- -- 316,528
Acquired computer software -- -- -- 1,381,000
Acquired other assets -- -- -- 89,883
Acquired furniture and equipment -- -- -- 183,717
Acquired deferred revenue -- -- -- (1,254,043)
Acquired liabilities -- -- -- (1,936,693)
In March 2004, the Company acquired DeLeeuw
Associates, Inc. The following assets and liabilities were obtained as
a result of the acquisition
Acquired accounts receivable -- -- -- 975,513
Acquired approved vendor status -- -- -- 1,597,000
Acquired tradename -- -- -- 722,000
Acquired goodwill -- -- -- 452,875
Acquired investment in limited liability company -- -- -- 55,776
Acquired deferred tax liability -- -- -- (300,000)
Acquired liabilities -- -- -- (285,651)
In May 2004, a $2,000,000 Unsecured Convertible Line of Credit Note
was converted into 16,666,666 shares of Company common stock. The
conversion price was $0.12 per share, which represented 75% of the
market price on the date of conversion. The $666,667 effect of this
beneficial conversion feature is reflected in the Company's statement
of operations for the current period
See Notes to Consolidated Financial Statements
F-6
CONVERSION SERVICES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Conversion Services International, Inc. ("CSI") was incorporated in the State of
Delaware and has been conducting business since 1990. CSI and Doorways, Inc., a
wholly-owned subsidiary of CSI, (together the "Company") are principally engaged
in the information technology services industry in the following areas: Data
Warehousing, Business Intelligence, Management consulting and professional
services, on credit, to its customers principally located in New Jersey and New
York. In November 2002, the Company acquired the operations of Scosys, Inc. that
is engaged in the information technology services industry. Included in the
Company's results of operations related to Scosys were the following:
YEARS ENDED DECEMBER 31
-----------------------
2003 2002
---------- ----------
Revenues $3,034,000 $ 456,000
Cost of Services 2,169,000 335,000
---------- ----------
Gross Profit 865,000 121,000
General and Adminstrative 159,000 10,000
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of CSI
and its wholly-owned subsidiary, Doorways, Inc. All intercompany transactions
and balances have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue from consulting and professional services is recognized at the time the
services are performed, evidence of an arrangement exists, the fee is fixed or
determinable and collectibility is reasonably assured.
ACCOUNTS RECEIVABLE
The Company carries its accounts receivable at cost less an allowance for
doubtful accounts. On a periodic basis, the Company evaluates its accounts
receivable and changes the allowance for doubtful accounts, when deemed
necessary, based on its history of past write-offs and collections, contractual
terms and current credit conditions.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and includes equipment held under
capital lease agreements. Depreciation, which includes amortization of leased
equipment, is computed principally by an accelerated method and is based on the
estimated useful lives of the various assets ranging from three to seven years.
When assets are sold or retired, the cost and accumulated depreciation are
removed from the accounts and any gain or loss is included in operations.
Expenditures for maintenance and repairs have been charged to operations. Major
renewals and betterments have been capitalized.
F-7
AMORTIZATION
The Company amortizes deferred loan costs on a straight-line basis over the term
of the related loan instrument. The Company amortizes acquired customer lists
and contracts over an estimated useful life of 5 years.
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the amounts paid in connection with a settlement agreement
with the Elligent Consulting Group to re-acquire the ownership rights to the
Company and in connection with the acquisition of Scosys, Inc. Additionally, as
part of the Company's acquisition of Scosys, Inc., executed in November 2002,
the Company acquired intangible assets. The Company adopted FASB Statement 142
as of January 1, 2002 for all goodwill recognized in the Company's balance sheet
as of December 31, 2001. This statement changed the accounting for goodwill from
an amortization method to an impairment-only approach, and introduced a new
model for determining impairment charges.
Goodwill and intangible assets are reviewed for impairment whenever events or
circumstances indicate impairment might exist or at least annually. The Company
assesses the recoverability of its assets, in accordance with SFAS No. 142
"Goodwill and Other Intangible Assets," comparing projected undiscounted cash
flows associated with those assets against their respective carrying amounts.
Impairment, if any, is based on the excess of the carrying amount over the fair
value of those assets. The Company's goodwill and intangible assets were not
impaired at December 31, 2003.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures 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.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk are cash and accounts receivable arising from its normal business
activities. The Company routinely assesses the financial strength of its
customers, based upon factors surrounding their credit risk, establishes an
allowance for doubtful accounts, and as a consequence believes that its accounts
receivable credit risk exposure beyond such allowances is limited. At December
31, 2003, one customer approximated 25% of the Company's accounts receivable
balance.
The Company maintains its cash with a high credit quality financial institution.
Each account is secured by the Federal Deposit Insurance Corporation up to
$100,000.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising costs amounted
to approximately $8,000 and $5,700 for the years ended December 31, 2003 and
2002, respectively.
INCOME TAXES
The Company accounts for income taxes under an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. In estimating future tax consequences, the
Company generally considers all expected future events other than enactments of
changes in the tax laws or rates.
F-8
On January 1, 2001, CSI elected to be an "S" Corporation whereby, the
shareholders account for their share of CSI"s earnings, losses, deductions and
credits on their Federal and various state income tax returns. CSI is subject to
New York City and various state income taxes. On September 30, 2003, CSI's "S"
Corporation status was revoked in connection with the conversion of convertible
subordinated debt into common shares. Effective October 1, 2004, as a result of
the revocation, the Company's tax status reverts to a C Corporation and on a
prospective basis, the Company would expect to have an effective income tax rate
of approximately 40%.
DERIVATIVES
In September 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133 " Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"), which requires the recognition of all derivatives as either assets or
liabilities measured at fair value, with changes in value reflected as current
period income (loss) unless specific hedge accounting criteria are met. The
effective date of SFAS No. 133, as amended by SFAS No. 138, is for fiscal years
beginning after September 15, 2000. The Company adopted SFAS No. 133 as of
January 1, 2001, resulting in no material impact upon adoption. SFAS No. 133 did
not have a material impact on the financial results for the years ended December
31, 2003 and 2002.
RECLASSIFICATIONS
Certain amounts in prior periods have been reclassified to conform to the 2003
presentation.
RESTATEMENT OF FINANCIAL STATEMENTS
The following is a brief description of the differences between the Company's
original accounting treatment and the revised accounting treatment that it has
concluded is appropriate and has been reflected in the accompanying financial
statements for the respective periods.
Recognition of interest income on Due from Stockholders - Retained earnings at
January 1, 2002 has been adjusted to reflect interest income on loans receivable
due from stockholders. The Company's original accounting did not include any
adjustments to its financial statements for interest due on these loans. These
loans receivable bear interest at 3% per annum and are due and payable by
December 31, 2005. The revised accounting resulted in an increase to retained
earnings of $10,800 as of January 1, 2002. The Company also recorded an
additional $5,400 as interest income as a result of the correction of this error
for the year ended December 31, 2002.
Recognition of Additional Intangibles and Goodwill related to acquisition of
Scosys, Inc. - Retained earnings at December 31, 2002 has been reduced by
approximately $11,000 to reflect additional amortization expense on certain
acquired intangibles and interest expense on an obligation to a third party in
connection with the acquisition of Scosys, Inc. (See Note 5). The Company's
original accounting did not properly include the amount of intangibles acquired
in connection with the Scosys, Inc. acquisition in November 2002. In connection
with this acquisition, the Company recorded an additional $351,723 in intangible
assets and $349,088 in goodwill and a corresponding obligation of $700,811 to a
third party. (See Note 7)
Stockholders' Equity - Common stock has been reduced by $1,000 and Additional
paid in capital has been increased by $1,000 at January 1, 2002 to reflect the
consolidated results of the Company which were previously reported as affiliated
and combined entities.
F-9
NOTE 2: RECENT PRONOUNCEMENTS
On August 16, 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Specifically, this standard
requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. The entity is
required to capitalize the cost by increasing the carrying amount of the related
long-lived asset. The capitalized cost is then depreciated over the useful life
of the related asset and the liability is accreted, with changes to the
operating expense, to the estimated settlement obligation amount. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss. The standard is effective for fiscal
years beginning after June 15, 2002. The Company adopted SFAS No. 143 as of as
of January 1, 2003 and this adoption had no material impact on the Company's
consolidated financial statements for the year ended December 31, 2003.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144).
SFAS 144 supersedes Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and certain provisions of APB Opinion No. 30 "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS 144 establishes standards for long-lived assets to be
disposed of, and redefines the valuation and presentation of discontinued
operations. SFAS 144 is effective for fiscal years beginning after December 15,
2001, and interim periods within those fiscal years. The adoption of SFAS 144
did not have a material effect on the Company's consolidated financial position,
results of operations, and cash flows.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing or other exit or disposal activity. Previous accounting
guidance was provided by EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". SFAS No. 146 replaces EITF 94-3. SFAS 146
is to be applied prospectively to exit or disposal activities initiated after
December 31, 2002. The Company adopted SFAS No. 146 as of January 1, 2003 and
this adoption had no material impact on the Company's consolidated financial
statements for the year ended December 31, 2003.
In November 2002, the EITF reached consensus on EITF No. 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables". This consensus requires that
revenue arrangements with multiple deliverables be divided into separate units
of accounting if the deliverables in the arrangement meet specific criteria. In
addition, arrangement consideration must be allocated among the separate units
of accounting based on their relative fair values, with certain limitations. The
Company will be required to adopt the provisions of this consensus for revenue
arrangements entered into after June 30, 2003, and the Company has decided to
apply it on a prospective basis. The Company does not have any revenue
arrangements that would have a material impact on its financial statements with
respect to EITF No. 00-21.
In November 2002, the FASB issued FASB Interpretation, or FIN No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN No. 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. However, a liability does not have to be recognized for a
parent's guarantee of its subsidiary's debt to a third party or a subsidiary's
F-10
guarantee of the debt owed to a third party by either its parent or another
subsidiary of that parent. The initial recognition and measurement provisions of
FIN No. 45 are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002 irrespective of the guarantor's fiscal year
end. The disclosure requirements of FIN No. 45 are effective for financial
statements with annual periods ending after December 15, 2002. The Company does
not have any guarantees that would require disclosure under FIN No. 45.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based
Compensation - Transition and Disclosure - an Amendment to SFAS No. 123". SFAS
No. 148 provides alternative methods of transition for a voluntary change to the
fair value-based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 for
public companies. This statement is effective for fiscal years beginning after
December 15, 2002. The Company adopted the disclosure requirements of SFAS No.
148 as of January 1, 2003 and plans to continue to follow the provisions of APB
Opinion No. 25 for accounting for stock based compensation.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities -- An Interpretation of ARB No. 51", which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN No. 46 provides guidance related to identifying
variable interest entities (previously known generally as special purpose
entities, or SPEs) and determining whether such entities should be consolidated.
FIN No. 46 must be applied immediately to variable interest entities created or
interests in variable interest entities obtained, after January 31, 2003. For
those variable interest entities created or interests in variable interest
entities obtained on or before January 31, 2003, the guidance in FIN No. 46 must
be applied in the first fiscal year or interim period beginning after June 15,
2003. The Company adopted FIN No. 46 as of January 1, 2003 and this adoption had
no material impact on the Company's consolidated financial statements for the
year ended December 31, 2003.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies the characteristics of
an obligation of the issuer. This standard is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company has determined that it did not have any financial instruments
that are impacted by SFAS No. 150.
F-11
NOTE 3: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
DECEMBER 31,
2003
-------------
Computer equipment $ 609,968
Furniture and fixtures 103,777
Automobiles 72,833
Leasehold improvements 87,546
-------------
874,124
Accumulated depreciation (603,428)
-------------
$ 270,696
=============
NOTE 4: RELATED PARTY TRANSACTIONS
Due from stockholders of $203,623 at December 31, 2003 consists of loans
receivable and accrued interest thereon from the majority stockholders /
officers of the Company. These loans bear interest at 3% per annum and are due
and payable by December 31, 2005.
NOTE 5: INTANGIBLES
Intangibles acquired have been assigned as follows:
DECEMBER 31,
2003
-------------
Customer lists and contracts $ 414,000
Proprietary rights and rights to the name of Scosys Inc. 20,000
-------------
434,000
Accumulated amortization (89,710)
-------------
$ 344,290
=============
NOTE 6: LINE OF CREDIT
The credit facility provides for a maximum borrowing of $2,250,000, based on
eligible accounts receivable. The interest rate is at the bank's prime rate plus
one (5.0% at December 31, 2003). The line is collateralized by all corporate
assets, guaranteed by the Company's shareholders, and expires on June 30, 2004.
As of December 31, 2003, the Company is in violation of certain financial
covenants in connection with the credit facility and notes payable to a bank.
(See Note 14).
On October 29, 2003, the Company obtained an additional $2,000,000 Unsecured
Convertible Line of Credit Note. The terms of the note provide for interest
accruing at 7% per annum with a maturity date of October 28, 2008, unless
converted into Common Stock at the Company or the Noteholder's option. (See Note
14)
F-12
NOTE 7: LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31,
2003
-------------
Note payable to a bank requiring monthly installments of
$8,333, plus interest at the bank's prime rate plus 1/4%
(4.25% at December 31, 2003), due November 2005. The
note is collateralized by all corporate assets and is
guaranteed by the Company's shareholders. $ 191,666
Note payable to a bank requiring monthly installments of
$11,667, plus interest at LIBOR plus 200 basis points,
due November 2005. The note is collateralized by all
corporate assets, pledged securities of one of the
shareholders, and is guaranteed by the Company's
shareholders. The LIBOR rate at December 31, 2002 was
1.46%. 268,333
An obligation due to a third party (See Note 1 -
Restatement of Financial Statements) in connection with
an acquisition of Scosys, payable through May 2004. The
obligation has been present valued at the Company's
implicit borrowing rate at the time of the acquisition
(5.25%) 213,533
Notes payable under capital lease obligations payable to
various finance companies for equipment at varying
rates of interest and maturity dates through 2006. 22,377
-------------
695,909
Less: Current portion of long-term debt, including
obligations under capital leases of $8,448. (461,981)
-------------
$ 233,928
=============
Future annual payments of long-term debt is as follows:
YEARS ENDING DECEMBER 31
------------------------
2004 $ 461,981
2005 227,706
2006 6,222
-------------
$ 695,909
=============
As a result of the Replacement Line of Credit described in Note 14, no long-term
portion of the Notes payable to the bank were reclassified to be reported as
currently due as a result of the Company's violation of existing covenants.
F-13
NOTE 8: OBLIGATIONS UNDER CAPITAL LEASES
The Company has entered into various capital leases that are collateralized by
computer equipment with an original cost of approximately $389,000.
The following is a schedule of future minimum payments required under the leases
together with their present value as of December 31, 2003:
YEARS ENDING DECEMBER 31
------------------------
2004 $ 11,012
2005 9,219
2006 6,593
-------------
$ 26,824
Less: Amount representing interest (4,447)
-------------
$ 22,377
=============
NOTE 9: STOCKHOLDERS' EQUITY
In July 2003, the Company issued $1,500,000 of 7% Convertible Promissory Notes
due January 1, 2006. On September 30, 2003, these notes were converted into
100,000 shares of CSI's common stock.
NOTE 10: INCOME TAXES
The Company provides for federal and state income taxes in accordance with
current rates applied to accounting income before taxes. The provision for
income taxes is as follows:
YEARS ENDED DECEMBER 31
-----------------------
2003 2002
---------- ----------
Current- Federal $ -- $ 63,300
Current - State
-- 37,800
Deferred - Federal (147,800) (63,500)
Deferred - State (43,000) (15,200)
---------- ----------
$ (190,800) $ 22,400
========== ==========
Deferred tax benefit in 2002 consisted of the temporary difference caused by the
conversion of cash-basis tax accounting to accrual-basis tax accounting pursuant
to Internal Revenue Code section 481(a) which allows up to a 4 year spreading of
the income and expenses caused by the change in accounting method that completed
during 2002.
F-14
The Company has net operating loss carry-forwards for both Federal and State
purposes totaling approximately $413,000 that expire in 2023.
Deferred tax assets (liabilites) consisted of the following temporary
differences:
DECEMBER 31,
2003
-------------
Net operating losses $ 164,900
Accounts receivable 36,700
Property and equipment 2,200
Goodwill (36,900)
Intangible assets 23,900
-------------
$ 190,800
=============
NOTE 11: MAJOR CUSTOMERS
During 2003 and 2002, the Company had sales to two major customers which totaled
approximately $6,126,000 and $9,540,000, respectively. Amounts due from these
customers included in accounts receivable were approximately $366,000 and
$726,000 at December 31, 2003 and 2002, respectively.
NOTE 12: EMPLOYEE BENEFIT PLAN
The Company has a defined contribution profit sharing plan under Section 401(k)
of the Internal Revenue Code that covers substantially all employees. Eligible
employees may contribute on a tax deferred basis a percentage of compensation up
to the maximum allowable amount. Although the plan does not require a matching
contribution by the Company, the Company may make a contribution. The Company"s
contributions to the plan for the years ended December 31, 2003 and 2002 was
approximately $24,000 and $20,000, respectively.
NOTE 13: COMMITMENTS
LEASE COMMITMENTS
The Company's corporate headquarters are located in East Hanover, New Jersey,
where it operates under an amended lease agreement expiring December 31, 2005.
In addition to minimum rentals, the Company is liable for its proportionate
share of real estate taxes and operating expenses, as defined.
Rent expense, including automobile rentals, totaled approximately $313,000 and
$416,000 in 2003 and 2002, respectively.
The Company is committed under several operating leases for automobiles that
expire during 2007.
Future minimum lease payments due under all operating lease agreements as of
December 31, 2003 are as follows:
F-15
YEARS ENDING DECEMBER 31 OFFICE AUTOMOBILES TOTAL
------------------------ ----------- ----------- ----------
2004 $ 310,615 $ 33,013 $ 343,628
2005 299,575 30,785 330,360
2006 -- 30,785 30,785
2007 -- 7,696 7,696
----------- ----------- ----------
$ 610,190 $ 102,279 $ 712,469
=========== =========== ==========
LETTER OF CREDIT
The Company is committed under an outstanding letter of credit with a bank to
secure the security deposit on the office space in the amount of $83,375 and
$191,356 as of December 31, 2003 and 2002, respectively.
AGREEMENTS
During 2002, the Company executed a twelve month employment agreement with one
of Scosys' senior management. This agreement expired in November 2003 and has
not been renewed.
NOTE 14: SUBSEQUENT EVENTS
Reverse Merger
On August 21, 2003, LCS Group, Inc., LCS Acquisition Corp., a wholly owned
subsidiary of LCS Group, Inc., CSI and CSI's executive officers and principal
stockholders, executed an Agreement and Plan of Reorganization to merge CSI into
LCS Acquisition Corp. This transaction was consummated on January 30, 2004, CSI
became the operating entity, LCS Group changed its name to CSl and the CSI
shareholders control approximately 84% of the shares of the Company.
In connection with this transaction, LCS Group, Inc. agreed to a.) increase the
number of common shares they were authorized to issue from 50,000,000 to
1,000,000,000; b.) authorized the right to issue up to 20,000,000 shares of
preferred stock; and c.) adopted the 2003 Stock Incentive Plan (the "2003 Stock
Option Plan").
The 2003 Stock Option Plan authorizes the issuance of up to 100,000,000 shares
of common stock for issuance upon exercise of options. It also authorizes the
issuance of stock appreciation rights. On March 29, 2004, the Company granted
19,200,000 options to purchase its common stock at an exercise price of $0.165.
Since the stockholders of CSI own a majority of the issued and outstanding
shares of LCS Group, Inc. (prior to the name change noted above) after the
merger, this transaction will be accounted for as a reverse merger whereby CSI
is deemed to be the accounting acquirer of LCS Group, Inc.. Because LCS Group,
Inc. did not have any assets or liabilities prior to the merger, there is no
goodwill or other intangibles that will arise from the merger. As a result,
historical stockholder's equity of CSI will be retroactively restated to reflect
the recapitalization.
Pro-forma information: For the nine months ended November 30, 2003, LCS Group
Inc. reported an unaudited loss from operations of approximately $561,000. The
loss from operations consisted of $487,000 of selling, general and
administrative expenses and $74,000 of interest expense. As part of the merger
with CSI, a condition precedent to closing the merger transaction, 100% of the
outstanding stock of LCS Golf, Inc. (a wholly-owned subsidiary of LCS Group,
F-16
Inc.) was required to be sold to a third-party. As the results noted above are
those of LCS Golf, Inc. which was sold prior to the merger, no pro-forma results
of operations are shown. As a result of the retroactive recapitalization, CSI
would have had 593,000,000 and 592,900,000 shares of common stock outstanding as
of December 31, 2003 and 2002, respectively.
Borrowings under the Unsecured Convertible Line of Credit Note
On October 29, 2003, the Company made arrangements to obtain a $2,000,000
Unsecured Convertible Line of Credit Note. The terms of this new note provide
for interest accruing on advances at 7% per annum with a maturity date of
October 28, 2008, unless converted into Common Stock at the Company's or the
Note holder's option. As of February 28, 2004, the Company has drawn down on the
facility and received advances totaling $2,000,000.
Replacement Line of Credit
On March 30, 2004, the Company executed a $3,000,000 revolving line of credit
secured by substantially all of the corporate assets with a new financial
institution. This credit facility was utilized to replace the existing Line of
Credit facility expiring in June 2004 and both Notes payable to a bank. The
terms of this new note provide for interest accruing on advances at seven
eighths of one percent (7/8%) over the institution's prime rate. This line of
credit contains certain financial covenants including but not limited to a.)
Debt Service Coverage ratios; b.) Minimum Tangible Capital Funds limits; and c.)
Current Ratio limits, as defined. The Company will be measured quarterly on
these covenants beginning June 30, 2004.
DeLeeuw Acquisition
In March 2004, the Company formed a wholly-owned acquisition subsidiary, DeLeeuw
Conversion LLC ("DCL"), for the purpose of consummating a merger with DeLeeuw
Associates, Inc. a privately-held New Jersey corporation ("DAI"). On March 4,
2004, DCL completed the merger with DAI. At the closing of the merger, DAI was
merged with and into DCL, and Mr. DeLeeuw received $2,000,000 and 80,000,000
outstanding shares of common stock of CSI (approximately 11.9% of the
outstanding shares). On March 5, 2004, DCL changed its name to Deleeuw
Associates, LLC.
Employment Agreements
On March 26, 2004, the Company entered into employment agreement with Scott
Newman , CSI's President and Chief Executive Officer, director and principal
stockholder. The agreement provides for an annual salary of $500,000 and an
annual bonus to be awarded by the Company's to-be-appointed Compensation
Committee. The agreement also provides for health, life and disability
insurance, as well as a monthly car allowance. In the event that Mr. Newman's
employment is terminated other than with good cause, he will receive a payment
of three year's base salary.
On March 26, 2004, the Company entered into employment agreement with Glenn
Peipert, CSI's Vice President and Chief Operating Officer, director and
principal stockholder. The agreement provides for an annual salary of $375,000
and an annual bonus to be awarded by the Company's to-be-appointed Compensation
Committee. The agreement also provides for health, life and disability
insurance, as well as a monthly car allowance. In the event that Mr. Peipert's
employment is terminated other than with good cause, he will receive a payment
of three year's base salary.
On March 26, 2004, the Company entered into employment agreement with Mitchell
Peipert, CSI's Vice President and Chief Financial Officer. The agreement
provides for an annual salary to of $200,000 and an annual bonus to be awarded
by the Company's to-be-appointed Compensation Committee. The agreement also
provides for health, life and disability insurance, as well as a monthly car
allowance. In the event that Mr. Peipert's employment is terminated other than
with good cause, he will receive a payment of three year's base salary.
F-17
NOTE 15: SUBSEQUENT EVENTS (UNAUDITED)
Acquisition of DeLeeuw Associates, Inc.
In March 2004, the Company formed a wholly owned acquisition subsidiary,
DeLeeuw Conversion, LLC ("DCL"), for the purpose of consummating a merger with
DeLeeuw Associates, Inc. a privately-held New Jersey corporation ("DAI"). On
March 4, 2004, DCL completed the merger with DAI, whereby DAI was merged with
and into DCL, and Robert C. DeLeeuw, the president and sole stockholder of DAI,
received $2,000,000 and 80,000,000 shares of common stock of CSI (at the time,
approximately 11.9% of the outstanding shares). On March 5, 2004, DCL changed
its name to DeLeeuw Associates, LLC. The Company's consolidated financial
statements include DeLeeuw Associates results of operations for the period
subsequent to its acquisition on March 4, 2004. Exclusive of future
consideration, the purchase price was allocated to the various assets of DeLeeuw
Associates as follows:
Approved vendor status $ 1,597,000
Accounts receivable 975,513
Tradename 722,000
Goodwill 452,875
Other assets 55,776
Current liabilities (285,651)
Deferred tax liability (300,000)
-------------
Total purchase price $ 3,217,513
=============
Acquisition of Evoke Software Corporation
On June 28, 2004, CSI, through its subsidiary Evoke Asset Purchase Corp.,
acquired substantially all of the assets and assumed substantially all of the
liabilities of Evoke, a privately-held California corporation. The acquisition
was completed pursuant to an Asset Purchase Agreement between CSI, Evoke Asset
Purchase Corp. and Evoke. In connection with the acquisition, CSI (i) issued
72,543,956 shares of its common stock to Evoke, 7,150,000 of which have been
deposited into an escrow account for a period of one-year and may be reduced
based upon claims for indemnification that may be made pursuant to the
agreement; (ii) issued 5% of the outstanding shares of the Evoke Asset Purchase
Corp. to Evoke; (iii) issued 3,919,093 shares of its common stock to certain
executives of Evoke as a severance payment and to certain employees as retention
shares; and (iv) agreed to pay $448,154 in deferred compensation to certain
employees of Evoke. For accounting purposes, this transaction was deemed to have
occurred on June 30, 2004. Transaction volumes between June 28 and June 30, 2004
were de-minimis.
Exclusive of future contingent consideration, the purchase price was
allocated to the various assets and liabilities of Evoke as follows:
Customer contracts $ 1,962,000
Computer software 1,381,000
Tradename 316,528
Accounts receivable 579,839
Furniture and equipment 183,717
Cash 497,492
Other assets 89,883
Deferred revenue (1,254,043)
Other liabilities (1,936,693)
F-18
The unaudited proforma consolidated statements of operations for the year
ended December 31, 2004 and the six months ended June 30, 2004, set forth below
gives effect to the acquisitions of the DeLeeuw Associates and Evoke Software
Corporation as if they occurred on January 1, 2003.
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
2004 2003
------------ ------------
Revenues $ 15,263,889 $ 25,422,859)
Net Loss $ (1,326,455) $ (3,301,174)
Net Loss per share $ (0.00) $ (0.01)
Line of credit
On March 30, 2004, the Company executed a $3,000,000 revolving line of
credit with North Fork Bank (formerly known as TrustCompany Bank) secured by
substantially all of the corporate assets. The terms of this note provide for
interest accruing on advances at seven eighths of one percent (7/8%) over the
institution's prime rate. Proceeds from this revolving line of credit were used
to repay all amounts previously outstanding under the prior revolving credit
facility.
On August 16, 2004, the Company replaced its $3,000,000 line of credit
with North Fork Bank with a revolving line of credit with Laurus Master Fund,
Ltd. ("Laurus"), whereby the Company will have access to borrow up to $6,000,000
based upon eligible accounts receivable. This revolving line, effectuated
through a $2,000,000 convertible minimum borrowing note and a $4,000,000
revolving note, provides for advances at an advance rate of 90% against eligible
accounts receivable, with an annual interest rate of prime rate (as reported in
the Wall Street Journal) plus 1%, and maturing in three years. These notes will
be decreased by 1.0% for every 25% increase above the fixed conversion price
prior to an effective registration statement and 2.0% thereafter up to a minimum
of 0.0%. This line of credit is secured by substantially all the corporate
assets. Both the $2,000,000 convertible minimum borrowing note and the
$4,000,000 revolving note provide for conversion at the option of the holder of
the amounts outstanding into the Company's common stock at a fixed conversion
price of $0.14 per share. In the event that the Company issues Company stock or
derivatives convertible into Company stock for a price less the aforementioned
fixed conversion price, then the fixed conversion price is reset using a
weighted average dilution calculation. Additionally, in exchange for a secured
convertible term note bearing interest at prime rate (as reported in the Wall
Street Journal) plus 1%, Laurus has made available to the Company an additional
$5,000,000 to be used for acquisitions. This note is convertible into Company
common stock at a fixed conversion price of $0.14 per share. In the event that
the Company issues Company stock or derivatives convertible into Company stock
for a price less the fixed conversion price, then the fixed conversion price is
reset to the lower price. This note matures in three years. This cash will be
restricted for use until approved acquisition targets identified by the Company
are approved by Laurus. A portion of Laurus's revolving line of credit will be
used to pay off all outstanding borrowings from North Fork Bank. The Company
issued Laurus a common stock purchase warrant that provides Laurus with the
right to purchase 12,000,000 shares of the Company's common stock. The exercise
price for the first 6,000,000 shares acquired under the warrant is $0.29 per
share, the exercise price for the next 3,000,000 shares acquired under the
warrant is $0.31 per share, and the exercise price for the final 3,000,000
shares acquired under the warrant is $0.35 per share. The common stock purchase
warrant expires on August 16, 2011. The Company paid $749,000 in brokerage and
transaction closing related costs. These costs will be deducted from the
$5,000,000 restricted cash balance being provided to the Company by Laurus.
Long-term debt
In February 2004, we obtained $2.0 million in financing pursuant to an
October 2003 unsecured convertible line of credit note. In May 2004, pursuant to
the complete conversion of this unsecured convertible line of credit note, the
participating investor received 16,666,666 shares of our common stock, plus
F-19
interest. Further in May 2004, we raised an additional $2.0 million pursuant to
a new five-year unsecured promissory note with the same investor. In June 2004,
we replaced the May 2004 note by issuing a five-year $2.0 million unsecured
convertible line of credit note with the same investor. The note accrues at an
annual interest rate of 7%, and the conversion price of the shares of common
stock issuable under the note is equal to $0.105 per share. In addition, such
investor received a warrant to purchase 4,166,666 shares of our common stock at
an exercise price of $0.105 per share. This warrant expires in June 2009.
Short term notes payable
In September 2004, we issued to Sands Brothers Venture Capital LLC, Sands
Brothers Venture Capital III LLC and Sands Brothers Venture Capital IV LLC
(collectively, "Sands") three subordinated secured convertible promissory notes
equaling $1,000,000 (the "Notes"), each with an annual interest rate of 8%
expiring September 22, 2005. The Notes are secured by substantially all
corporate assets, subordinate to Laurus. The Notes are convertible into shares
of our common stock at the election of Sands at any time following the
consummation of a convertible debt or equity financing with gross proceeds of $5
million or greater to us (a "Qualified Financing"). The conversion price of the
shares of our common stock issuable upon conversion of the Notes shall be equal
to a price per share of common stock equal to forty percent (40%) of the price
of the securities issued pursuant to a Qualified Financing. If no Qualified
Offering has been consummated by September 8, 2005, then Sands may elect to
convert the Notes at a fixed conversion price of $0.14 per share. In the event
that we issue stock or derivatives convertible into our stock for a price less
the aforementioned fixed conversion price, then the fixed conversion price is
reset using a weighted average dilution calculation. We also issued Sands three
common stock purchase warrants (the "Warrants") providing Sands with the right
to purchase 6,000,000 shares of our common stock. The exercise price of the
shares of our common stock issuable upon exercise of the Warrants shall be equal
to a price per share of common stock equal to forty percent (40%) of the price
of the securities issued pursuant to a Qualified Financing. If no Qualified
Offering has been consummated by September 8, 2005, then Sands may elect to
exercise the Warrants at a fixed conversion price of $0.14 per share. The latest
that the Warrants may expire is September 8, 2008. Finally, we engaged Sands
Brothers International Limited as our non-exclusive financial advisor at $6,000
per month for a period of one year.
Related party transactions
In November 2003, the Company executed an Independent Contractor Agreement
with Leading Edge Communications Corporation ("LEC"), whereby CSI agreed to be a
subcontractor for LEC, and to provide consultants as required to LEC. In return
for these services, CSI receives a fee from LEC based upon the hourly rates
established for consultants subcontracted to LEC.
CSI acquired 49% of all issued and outstanding shares of common stock of
LEC as of May 1, 2004. The Company accounts for its investment in LEC under the
equity method and does not exercise significant control over the investee nor
have control of LEC's Board of Directors. The acquisition was completed through
a Stock Purchase Agreement between CSI and Mary Ferrara, the sole stockholder of
LEC. In connection with the acquisition, CSI (i) repaid a bank loan on behalf of
the seller in the amount of $35,000; (ii) repaid an LEC bank loan in the amount
of $38,000; and (iii) satisfied an LEC obligation for $10,000 of prior
compensation to an employee.
For the year ended December 31, 2003 and the six months ended June 30,
2004, CSI invoiced LEC $392,958 and $1,841,000, respectively, for the services
of consultants subcontracted to LEC by CSI. As of December 31, 2003 and June 30,
2004, CSI had accounts receivable due from LEC of approximately $392,958 and
$786,000, respectively.
F-20
Stock options
The 2003 Incentive Plan authorizes the issuance of up to 100,000,000
shares of common stock for issuance upon exercise of options. It also authorizes
the issuance of stock appreciation rights. On March 29, 2004 and April 12, 2004,
the Company granted a total of 19,950,000 options to purchase its common stock
at an exercise price of $0.165 per share. The options granted are a combination
of both incentive and nonqualified options, vest over a three year period from
the date of grant, and expire ten years from the date of grant. Between May and
June 2004, the Company granted 11,905,000 options to purchase its common stock
at an exercise price of $0.20 per share. The options granted are all incentive
options, vest over a three year period from the date of grant, and expire ten
years from the date of grant.
The Company follows Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") in accounting for its
employee stock options. Under APB25, because the exercise of the Company's
employee stock option equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized in the Company's
consolidated statements of operations. The Company is required under Statement
of Financial Accounting Standards (SFAS) 123, "Accounting for Stock-Based
Compensation", which established a fair value based method of accounting for
stock compensation plans with employees and others to disclose pro-forma
financial information regarding option grants made to its employees.
The Company follows EITF No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" ("EITF 96-18") in accounting for stock options
issued to non-employees. Under EITF 96-18, the equity instruments should be
measured at the fair value of the equity instrument issued. During the three
months ended June 30, 2004, the Company granted 450,000 stock options to
non-employee recipients. In compliance with EITF 96-18, the fair value of these
options was determined using the Black-Scholes option pricing model. The Company
is recording the fair value of these options as expense over the three year
vesting period of the options.
The following pro-forma net income and earnings per share (EPS) reflects
the difference between stock compensation costs charged to operations under the
APB 25 intrinsic value method and pro-forma stock compensation cost that would
have been recorded if the SFAS 123 fair value method had been applied. The
Black-Scholes option pricing model used in this valuation was developed for use
in estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. Option valuation models require the
input of highly subjective assumptions. CSI's stock-based compensation has
characteristics significantly different from those of traded options, and
changes in the assumptions used can materially affect the fair value estimate.
F-21
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
2003 2004
------------ ----------
(UNAUDITED) (UNAUDITED)
Reported net loss $ (306,763) $ (691,546)
Pro-forma stock compensation, net of tax -- (139,238)
------------ ----------
Pro-forma net loss $ (306,763) $ (830,784)
============ ==========
Basic EPS:
As reported $ (0.00) $ (0.00)
Pro-forma $ (0.00) $ (0.00)
Diluted EPS:
As reported $ (0.00) $ (0.00)
Pro-forma $ (0.00) $ (0.00)
Weighted average fair value per option
share granted N/A $ 0.13
Weighted average assumptions used to value
options granted:
Risk-free interest rate N/A 1.33%
Expected volatility N/A 139%
Expected life (years) N/A 3.00
There were no options granted during the year ended December 31, 2003. As a
result, the assumptions pertaining to the option grants during 2003 were noted
as N/A in the above table.
Earnings per share
Basic earnings per share is computed on the basis of the weighted average
number of common shares outstanding. Diluted earnings per share is computed on
the basis of the weighted average number of common shares outstanding plus the
effect of outstanding stock options using the "treasury stock" method.
F-22
The components of basic and diluted earnings per share are as follows:
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
2003 2004
------------ --------------
(UNAUDITED) (UNAUDITED)
Net income (loss) available for common
stockholders (A) $ (306,763) $ (1,358,213)
Weighted average outstanding shares of
common stock (B) 593,000,000 650,075,398
Common stock and common stock equivalents (C) 593,000,000 650,075,398
Earnings (loss) per share:
Basic (A/B) $ (0.00) $ (0.00)
Diluted (A/C) $ (0.00) $ (0.00)
For the six months ended June 30, 2004, 32,305,000 shares attributable to
outstanding stock options were excluded from the calculation of diluted earnings
per share because the effect was antidilutive. There were no stock options
outstanding during 2003. Additionally, the effect of 4,166,666 warrants which
were issued on June 7, 2004 were excluded from the calculation of diluted
earnings per share for the six months ended June 30, 2004 because the effect was
antidilutive.
Income taxes
Our provision for income taxes is based on estimated effective annual
income tax rates. The provision may differ from income taxes currently payable
because certain items of income and expense are recognized in different periods
for financial statement purposes than for tax return purposes.
During the first six months of 2004, our effective tax rate was estimated
to be approximately 40%.
Commitments and contingencies
On June 29, 2004, Viant Capital LLC commenced legal action against us in
the United States District Court for the Southern District of New York. Through
an agreement with Viant, Viant had the exclusive right to obtain private equity
transactions on behalf of the company from February 18 to May 17, 2004. Viant
alleges that it is owed a fee of approximately $450,000 relating to our loan
from a private investor in May 2004. Management believes that this loan does not
qualify as a private equity transaction and we intend to vigorously defend the
company. As of August 20, 2004, there have been no material developments in the
suit. The Company has estimated the probable loss related to this suit to be the
agreed upon contract signing fee of $75,000 and has recorded a liability for
this amount.
Lease commitments
In July 2004, the Company's lease agreement for its corporate headquarters
facility in East Hanover, NJ was amended. The lease term was extended to
December 31, 2010 from December 31, 2005 and an additional 3,500 square feet of
space was obtained.
F-23
--------------------------------------------------------------------------------
--------------------------------- ---------------------------------------
YOU SHOULD RELY ONLY ON THE
INFORMATION CONTAINED IN THIS CONVERSION SERVICES INTERNATIONAL, INC.
DOCUMENT. WE HAVE NOT AUTHORIZED
ANYONE TO PROVIDE YOU WITH 565,657,157 SHARES OF COMMON STOCK
INFORMATION THAT IS DIFFERENT.
THIS DOCUMENT MAY ONLY BE USED
WHERE IT IS LEGAL TO SELL THE
SECURITIES. THE INFORMATION IN
THIS DOCUMENT MAY ONLY BE
ACCURATE ON THE DATE OF THIS
DOCUMENT. ----------
PROSPECTUS
ADDITIONAL RISKS AND ----------
UNCERTAINTIES NOT PRESENTLY
KNOWN OR THAT IS CURRENTLY
DEEMED IMMATERIAL MAY ALSO
IMPAIR OUR BUSINESS OPERATIONS.
THE RISKS AND UNCERTAINTIES
DESCRIBED IN THIS DOCUMENT AND
OTHER RISKS AND UNCERTAINTIES
WHICH WE MAY FACE IN THE FUTURE
WILL HAVE A GREATER IMPACT UPON
THOSE WHO PURCHASE OUR COMMON
STOCK. THESE PURCHASERS WILL
PURCHASE OUR COMMON STOCK AT THE
MARKET PRICE OR AT A PRIVATELY
NEGOTIATED PRICE AND WILL RUN
THE RISK OF LOSING THEIR ENTIRE
INVESTMENT.
--------------------------------- ---------------------------------------
_______ __, 2004
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM. 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The registrant's certificate of incorporation, as amended, currently
states that a director of the registrant shall have no personal liability to the
registrant or its stockholders for monetary damages for breach of fiduciary duty
as a director except to the extent that Section 102(b)(7) (or any successor
provision) of the Delaware General Corporation Law, as amended from time to
time, expressly provides that the liability of a director may not be eliminated
or limited. No amendment or repeal of this provision shall apply to or have any
effect on the liability or alleged liability of any director of the registrant
for or with respect to any acts or omissions of such director occurring prior to
such amendment or repeal.
The registrant's bylaws require the registrant to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that such person is or was a director or
officer of the registrant, or is or was serving while a director or officer of
the registrant at its request as a director, officer, employee, agent, fiduciary
or other representative of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against expenses (including
attorneys' fees), judgments, fines, excise taxes and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding to the full extent permissible under Delaware law. Any person
claiming indemnification as provided in the bylaws shall be entitled to advances
from the registrant for payment of the expenses of defending actions against
such person in the manner and to the full extent permissible under Delaware law.
On the request of any person requesting indemnification under such provisions,
the Board of Directors of the registrant or a committee thereof shall determine
whether such indemnification is permissible or such determination shall be made
by independent legal counsel if the board or committee so directs or if the
board or committee is not empowered by statute to make such determination.
The indemnification and advancement of expenses provided by the bylaws
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any insurance
or other agreement, vote of stockholders or disinterested directors or
otherwise, both as to actions in their official capacity and as to actions in
another capacity while holding an office, and shall continue as to a person who
has ceased to be a director or officer and shall inure to the benefit of the
heirs, executors and administrators of such person. The registrant shall have
the power to purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of the registrant or is or was
serving at its request as a director, officer, employee, agent, fiduciary or
other representative of another corporation, partnership, joint venture, trust
or other enterprise, against any liability asserted against him and incurred by
him in any such capacity, or arising out of his status as such, whether or not
the registrant would have the power to indemnify him against such liability
under the provisions of the bylaws.
The duties of the registrant to indemnify and to advance expenses to a
director or officer provided in the bylaws shall be in the nature of a contract
between the registrant and each such director or officer, and no amendment or
repeal of any such provision of the bylaws shall alter, to the detriment of such
director or officer, the right of such person to the advancement of expenses or
indemnification related to a claim based on an act or failure to act which took
place prior to such amendment, repeal or termination.
50
Delaware law also permits indemnification in connection with a proceeding
brought by or in the right of the registrant to procure a judgment in its favor.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling the registrant
pursuant to the foregoing provisions, the registrant has been informed that in
the opinion of the SEC such indemnification is against public policy as
expressed in that Securities Act and is therefore unenforceable. The registrant
has directors and officers liability insurance.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an estimate of the expenses that we expect to incur in
connection with this registration. We will pay all of these expenses, and the
selling stockholders will not pay any of them.
AMOUNT
TO BE PAID
------------
SEC registration fee $ [_______]
Printing and engraving expenses $ 2,500.00*
Legal fees and expenses $ 40,000.00*
Accounting fees and expenses $ 20,000.00*
Transfer Agent and Registrar fees $ 2,000.00*
Miscellaneous fees and expenses $ 3,482.81*
------------
Total $ 70,000.00*
============
* Estimate, and subject to future contingencies.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is information regarding the issuance and sales of our
securities without registration during the last three years. Other than as set
forth below, no such sales involved the use of an underwriter and no commissions
were paid in connection with the sale of any securities. All sales below were
made in reliance on Section 4(2) of the Securities Act.
In September 2004, we issued to Sands Brothers Venture Capital LLC, Sands
Brothers Venture Capital III LLC and Sands Brothers Venture Capital IV LLC
(collectively, "Sands") three subordinated secured convertible promissory notes
equaling $1,000,000 (the "Notes"), each with an annual interest rate of 8%
expiring September 22, 2005. The Notes are secured by substantially all
corporate assets, subordinate to Laurus. The Notes are convertible into shares
of our common stock at the election of Sands at any time following the
consummation of a convertible debt or equity financing with gross proceeds of $5
million or greater to us (a "Qualified Financing"). The conversion price of the
shares of our common stock issuable upon conversion of the Notes shall be equal
to a price per share of common stock equal to forty percent (40%) of the price
of the securities issued pursuant to a Qualified Financing. If no Qualified
Offering has been consummated by September 8, 2005, then Sands may elect to
convert the Notes at a fixed conversion price of $0.14 per share. In the event
that we issue stock or derivatives convertible into our stock for a price less
the aforementioned fixed conversion price, then the fixed conversion price is
reset using a weighted average dilution calculation. We also issued Sands three
common stock purchase warrants (the "Warrants") providing Sands with the right
to purchase 6,000,000 shares of our common stock. The exercise price of the
shares of our common stock issuable upon exercise of the Warrants shall be equal
to a price per share of common stock equal to forty percent (40%) of the price
of the securities issued pursuant to a Qualified Financing. If no Qualified
Offering has been consummated by September 8, 2005, then Sands may elect to
exercise the Warrants at a fixed conversion price of $0.14 per share. The latest
that the Warrants may expire is September 8, 2008.
51
In August 2004, we replaced our $3,000,000 line of credit with North Fork
Bank with a revolving line of credit with Laurus Master Fund, Ltd. ("Laurus"),
effectuated through a $2,000,000 convertible minimum borrowing note and a
$4,000,000 revolving note, with an annual interest rate of prime rate (as
reported in the Wall Street Journal) plus 1%, and maturing in three years. The
interest rate on these notes will be decreased by 1.0% for every 25% increase in
our stock price above the fixed conversion price prior to an effective
registration statement and 2.0% thereafter up to a minimum of 0.0%. Both the
$2,000,000 convertible minimum borrowing note and the $4,000,000 revolving note
provide for conversion at the option of the holder of the amounts outstanding
into our common stock at a fixed conversion price of $0.14 per share.
Additionally, in exchange for a secured convertible term note bearing interest
at prime rate (as reported in the Wall Street Journal) plus 1%, Laurus has made
available to us an additional $5,000,000 to be used for acquisitions. This note
is convertible into our common stock at a fixed conversion price of $0.14 per
share. In the event that we issue our stock or derivatives convertible into our
stock for a price less than the fixed conversion price, then the fixed
conversion price is reset to the lower price. This note matures in three years.
The proceeds of this loan will be restricted for use for approved acquisition
targets identified by us that are approved by Laurus. We issued Laurus a common
stock purchase warrant that provides Laurus with the right to purchase
12,000,000 shares of our common stock. The exercise price for the first
6,000,000 shares acquired under the warrant is $0.29 per share, the exercise
price for the next 3,000,000 shares acquired under the warrant is $0.31 per
share, and the exercise price for the final 3,000,000 shares acquired under the
warrant is $0.35 per share. The common stock purchase warrant expires on August
15, 2011.
Pursuant to the conversion of an unsecured convertible line of credit note
in May 2004, participating investors received 16,666,666 shares of our common
stock. Due to an adjustment in the conversion price in September 2004,
participating investors received an additional 2,380,953 shares of common stock.
In June 2004, through our subsidiary Evoke Asset Purchase Corp., we
acquired substantially all of the assets and assumed substantially all of the
liabilities of Evoke Software Corporation, a privately-held California
corporation ("Evoke"). In connection with the acquisition, we issued 72,543,956
shares of our common stock to Evoke (7,150,000 of which have been deposited into
an escrow account for a period of one-year and may be reduced based upon claims
for indemnification that may be made pursuant to the Asset Purchase Agreement
among Evoke, Evoke Asset Purchase Corp. and us), and issued 3,919,093 shares of
our common stock to certain executives of Evoke as a severance payment and to
certain employees as retention shares.
In March 2004, Robert C. DeLeeuw was issued 80,000,000 shares of common
stock pursuant to our acquisition of DeLeeuw Associates, Inc. (7,200,000 of
which have been deposited into an escrow account for a period of one-year and
may be reduced based upon claims for indemnification that may be made pursuant
to the Plan and Agreement of Merger and Reorganization, dated February 27, 2004,
among DeLeeuw Associates, Inc., DeLeeuw Conversion LLC and us).
In January 2004, loans by Dr. Michael Mitchell, the former President,
Chief Executive Officer and sole director of LCS, and by Alex Bruni, the former
Vice President and Secretary of LCS, were converted into 18,313,157 and
1,000,000 shares of our common stock, respectively, at the closing of the merger
of privately-held Conversion Services International, Inc. ("Old CSI") with and
into LCS Acquisition Corp., whereby the former stockholders of Old CSI assumed
control of our company (the "Merger").
52
In January 2004, 500,000,000 shares of common stock were issued Scott
Newman, Glenn Peipert and certain investors at the closing of the Merger.
In December 2003, Gene R. Kazlow, Esq. was issued 500,000 shares of common
stock in consideration for performed legal services.
In December 2003, Barry Feiner, Esq. was issued 500,000 shares of common
stock in consideration for performed legal services.
In December 2003, Susan Erwin was issued 200,000 shares of common stock in
consideration for a loan made to a former subsidiary of the Company.
In December 2003, Lawrence Slavin was issued 100,000 shares of common
stock in consideration for performed consulting services.
In December 2003, Roger Jones was issued 125,000 shares of common stock in
consideration for a loan made to a former subsidiary of the Company.
In November 2003, J.T. Shulman & Company, P.C. was issued 125,000 shares
of common stock in consideration for performed accounting services.
In May 2003, Robert E. Morris was issued 1,100,000 shares of common stock
in consideration for a loan made to a former subsidiary of the Company.
On March 22, 2002, we issued 500,000 shares of our common stock to two of
our former directors.
ITEM 27. EXHIBITS
The following is a list of exhibits filed as a part of this registration
statement. Where so indicated by footnote, exhibits which were previously filed
are incorporated herein by reference. For exhibits incorporated by reference,
the location of the exhibit in the previous filing is indicated parenthetically
except for those situations where the exhibit number was the same as set forth
below.
2.1 Agreement and Plan of Reorganization, dated August 21, 2003, among the
Registrant, LCS Acquisition Corp., Conversion Services International, Inc.
and certain affiliated stockholders of Conversion Services International,
Inc. (filed as Appendix A on Schedule 14A on January 5, 2004).
2.2 First Amendment to Agreement and Plan of Reorganization, dated November
28, 2003, among the Registrant, LCS Acquisition Corp., Conversion Services
International, Inc. and certain affiliated stockholders of Conversion
Services International, Inc. (filed as Appendix A on Schedule 14A on
January 5, 2004).
2.3 Certificate of Merger, dated January 30, 2004, relating to the merger of
LCS Acquisition Corp. and Conversion Services International, Inc. (filed
as Exhibit 2.3 on Form 8-K on February 17, 2004).
2.4 Acquisition Agreement, dated February 27, 2004, among the Registrant,
DeLeeuw Associates, Inc. and Robert C. DeLeeuw (filed as Exhibit 2.1 on
Form 8-K on March 16, 2004).
53
2.5 Plan and Agreement of Merger and Reorganization, dated February 27, 2004,
among the Registrant, DeLeeuw Associates, Inc. and DeLeeuw Conversion LLC
(filed as Exhibit 2.1 on Form 8-K on March 16, 2004).
2.6 Asset Purchase Agreement, dated May 26, 2004, among the Registrant, Evoke
Asset Purchase Corp. and Evoke Software Corporation (filed as Exhibit 2.1
on Form 8-K on July 13, 2004).
3.1 Certificate of Incorporation, as amended (filed as Exhibit 3.1 on Form
10-SB on December 9, 1999).
3.2 Certificate of Amendment to the Registrant's Certificate of Incorporation,
dated January 27, 2004 (filed as Exhibit 3.1 on Form 8-K on February 17,
2004).
3.3 Certificate of Amendment to the Registrant's Certificate of Incorporation,
dated January 30, 2004 (filed as Exhibit 3.2 on Form 8-K on February 17,
2004).
3.4 Amended and Restated Bylaws (filed as Exhibit 3.3 on Form 8-K on February
17, 2004).
4.1 Securities Purchase Agreement, dated August 16, 2004, among the Registrant
and Laurus (filed as Exhibit 4.2 on Form 10-QSB on August 23, 2004).
4.3 Registration Rights Agreement, dated August 16, 2004, among the Registrant
and Laurus (filed as Exhibit 4.3 on Form 10-QSB on August 23, 2004).
4.4 Common Stock Purchase Warrant, dated August 16, 2004, in favor of Laurus
Master Fund, Ltd. (filed as Exhibit 4.7 on Form 10-QSB on August 23,
2004).
4.5 Common Stock Purchase Warrant, dated September 22, 2004, in favor of Sands
Brothers Venture Capital LLC (filed as Exhibit 4.1 on Form 8-K on
September 27, 2004).
4.6 Common Stock Purchase Warrant, dated September 22, 2004, in favor of Sands
Brothers Venture Capital III LLC (filed as Exhibit 4.2 on Form 8-K on
September 27, 2004).
4.7 Common Stock Purchase Warrant, dated September 22, 2004, in favor of Sands
Brothers Venture Capital IV LLC (filed as Exhibit 4.3 on Form 8-K on
September 27, 2004).
4.8 Registration Rights Agreement, dated September 22, 2004, among the
Company, Sands Brothers Venture Capital LLC, Sands Brothers Venture
Capital III LLC and Sands Brothers Venture Capital IV LLC (filed as
Exhibit 4.4 on Form 8-K on September 27, 2004).
5.1 Opinion of Ellenoff Grossman & Schole LLP.*
10.1 Employment Agreement among the Company and Scott Newman, dated March 26,
2004 (filed as Exhibit 10.1 on Form 8-K/A on April 1, 2004).
10.2 Employment Agreement among the Company and Glenn Peipert, dated March 26,
2004 (filed as Exhibit 10.2 on Form 8-K/A on April 1, 2004).
10.3 Employment Agreement among the Company and Mitchell Peipert, dated March
26, 2004 (filed as Exhibit 10.3 on Form 8-K/A on April 1, 2004).
54
10.4 Employment Agreement among DeLeeuw Associates, LLC (formerly known as
DeLeeuw Conversion LLC) and Robert C. DeLeeuw, dated February 27, 2004.**
10.5 2003 Incentive Plan (filed as Schedule B on Schedule 14A on January 5,
2004).
10.6 Security Agreement, dated August 16, 2004, among the Registrant, DeLeeuw
Associates, LLC, CSI Sub Corp. (DE), Evoke Software Corporation and Laurus
Master Fund, Ltd. ("Laurus") (filed as Exhibit 4.1 on Form 10-QSB on
August 23, 2004).
10.7 Secured Convertible Minimum Borrowing Note, dated August 16, 2004 (filed
as Exhibit 4.4 on Form 10-QSB on August 23, 2004).
10.8 Secured Revolving Note, dated August 16, 2004 (filed as Exhibit 4.5 on
Form 10-QSB on August 23, 2004).
10.9 Secured Convertible Term Note, dated August 16, 2004 (filed as Exhibit 4.6
on Form 10-QSB on August 23, 2004).
10.10 Stock Pledge Agreement, dated August 16, 2004, among the Registrant and
Laurus (filed as Exhibit 4.8 on Form 10-QSB on August 23, 2004).
10.11 Senior Subordinated Secured Convertible Promissory Note, dated September
22, 2004, in favor of Sands Brothers Venture Capital LLC (filed as Exhibit
10.1 on Form 8-K on September 27, 2004).
10.12 Senior Subordinated Secured Convertible Promissory Note, dated September
22, 2004, in favor of Sands Brothers Venture Capital III LLC (filed as
Exhibit 10.2 on Form 8-K on September 27, 2004).
10.13 Senior Subordinated Secured Convertible Promissory Note, dated September
22, 2004, in favor of Sands Brothers Venture Capital IV LLC (filed as
Exhibit 10.3 on Form 8-K on September 27, 2004).
10.14 Security Agreement, dated September 22, 2004, among the Registrant, Sands
Brothers Venture Capital LLC, Sands Brothers Venture Capital III LLC and
Sands Brothers Venture Capital IV LLC (filed as Exhibit 10.4 on Form 8-K
on September 27, 2004).
10.15 Subordination Agreement, dated September 22, 2004, among the Registrant,
Sands Brothers Venture Capital LLC, Sands Brothers Venture Capital III
LLC, Sands Brothers Venture Capital IV LLC and Laurus Master Fund, Ltd.
(filed as Exhibit 10.5 on Form 8-K on September 27, 2004).
10.17 Advisory Agreement, dated September 22, 2004, among the Registrant and
Sands Brothers International Limited (filed as Exhibit 10.6 on Form 8-K on
September 27, 2004).
21 Subsidiaries of the Company.**
23.1 Consent of Friedman LLP.**
----------
* To be filed by amendment.
** Filed herewith.
55
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 ("Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement; and notwithstanding the forgoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in the volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement,
and
(iii) To include any additional or changed material information on
the plan of distribution.
(2) For purposes of determining liability under the Securities Act, to
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.
(3) To file a post-effective amendment to remove from registration any
of the securities that remains unsold at the end of the offering.
56
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned in the city of East
Hanover, State of New Jersey, on September 30, 2004.
CONVERSION SERVICES INTERNATIONAL, INC.
By: /s/ Scott Newman
-------------------------------------
Name: Scott Newman
Title: President and Chief Executive
Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated:
PERSON CAPACITY DATE
---------------------------- ----------------------------------------- ------------------
/s/ Scott Newman
---------------------------- President, Chief Executive Officer,
Scott Newman Chairman and Principal Executive Officer September 30, 2004
*
---------------------------- Executive Vice President, Chief Operating September 30, 2004
Glenn Peipert Officer and Director
* Vice President, Chief Financial Officer,
---------------------------- Secretary, Treasurer and Principal September 30, 2004
Mitchell Peipert Accounting Officer
*
---------------------------- Director September 30, 2004
Lawrence K. Reisman
* By: /s/ Scott Newman
as attorney-in-fact
September 30, 2004
57