UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-QSB
-----------------------
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER 0-30420
-----------------------
CONVERSION SERVICES INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-----------------------
DELAWARE 20-1010495
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 EAGLE ROCK AVENUE, EAST HANOVER, NJ 07936
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 560-9400
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares outstanding of the registrant's common stock, par
value $0.001, as of May 15, 2004 was 689,275,000.
CONVERSION SERVICES INTERNATIONAL, INC. AND SUBSIDIARY
FORM 10-QSB
INDEX
PART I. -- FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 2004 (unaudited).................................................. 1
Consolidated Statements of Operations for the three months ended
March 31, 2004 and 2003 (unaudited)....................................................................... 2
Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 (unaudited)......... 3
Notes to Consolidated Financial Statements (unaudited)....................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 12
Item 3. Controls and Procedures................................................................................ 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................................... 17
Item 2. Changes in Securities.................................................................................. 17
Item 4. Submission of Matters to a Vote of Security Holders.................................................... 18
Item 5. Other Information...................................................................................... 19
Item 6. Exhibits and Reports on Form 8-K....................................................................... 19
Signatures
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONVERSION SERVICES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2004
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash $ 287,275
Restricted cash 83,375
Accounts receivable, net of allowance for doubtful accounts of $110,874 4,300,297
Prepaid expenses 76,213
Deferred tax asset 252,300
-----------
TOTAL CURRENT ASSETS 4,999,460
-----------
PROPERTY AND EQUIPMENT, at cost, net 316,920
-----------
OTHER ASSETS
Due from stockholders, including accrued interest of $22,905 204,988
Goodwill 1,547,081
Intangible assets, net of accumulated amortization of $110,400 2,642,600
Deferred loan costs 30,534
Deferred tax asset 191,000
Equity investment in limited liability company 54,174
Security deposits 2,070
-----------
4,672,447
-----------
Total Assets $ 9,988,827
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 2,548,201
Current portion of long-term debt 31,262
Cash overdraft 136,050
Accounts payable and accrued expenses 1,795,691
Deferred revenue 89,242
Other current liabilities 41,816
-----------
TOTAL CURRENT LIABILITIES 4,642,262
LONG-TERM DEBT, net of current portion 2,052,250
DEFERRED TAXES 336,900
-----------
Total Liabilities 7,031,412
-----------
COMMITMENTS --
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, 1,000,000,000 shares authorized;
673,000,000 issued and outstanding 673,000
Additional paid in capital 2,836,818
Accumulated deficit (552,403)
-----------
Total Stockholders' Equity 2,957,415
-----------
Total Liabilities and Stockholders' Equity $ 9,988,827
===========
See Notes to Consolidated Financial Statements.
1
CONVERSION SERVICES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
----------------------------------
2004 2003
------------- -------------
REVENUE $ 5,262,037 $ 3,437,483
COST OF SERVICES 3,839,300 2,583,518
------------- -------------
GROSS PROFIT 1,422,737 853,965
------------- -------------
OPERATING EXPENSES
Selling and marketing 581,425 315,820
General and administrative 1,317,274 502,626
Depreciation and amortization 36,774 44,700
------------- -------------
1,935,473 863,146
------------- -------------
LOSS FROM OPERATIONS (512,736) (9,181)
------------- -------------
OTHER INCOME (EXPENSE)
Equity in losses from investment
in limited liability company (1,602) --
Interest income 4,021 --
Interest expense (29,580) (30,166)
------------- -------------
(27,161) (30,166)
------------- -------------
LOSS BEFORE TAXES (539,897) (39,347)
INCOME TAXES (BENEFIT) (215,600) --
------------- -------------
NET LOSS $ (324,297) $ (39,347)
============= =============
UNAUDITED PRO FORMA DATA (Note 1):
Loss before income taxes (benefit) $ -- $ (39,347)
Income taxes (benefit) -- (15,715)
------------- ------------
Net Loss $ -- $ (23,632)
============= ============
Net Loss per share $ (0.00) $ (0.00)
============= ============
Weighted average number of common shares
used in the actual and pro forma net loss
per share calculations 619,373,626 593,000,000
See Notes to Consolidated Financial Statements.
2
CONVERSION SERVICES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended March 31,
------------------------------
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (324,297) $ (39,347)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 16,623 24,000
Amortizaton of intangible assets and deferred loan
costs 20,690 20,700
Deferred tax benefit (215,600) --
Allowance for doubtful accounts 18,874 18,000
Write-off deferred loan costs 24,862 --
Loss on disposal of equipment 35,496 --
Equity loss in investment in limited liability
company 1,602 --
Changes in operating assets and liabilities:
Increase in accounts receivable (1,291,315) (693,285)
Decrease in prepaid expenses 37,587 (71,307)
Increase in due from stockholders (1,365)
Decrease in security deposits 14,721
Increase in accounts payable and accrued expenses 543,104 5,630
Increase in deferred revenue 89,242 --
Increase (decrease) in other current liabilities 41,816 (2,097)
----------- -----------
Net cash used in operating activities (987,960) (737,706)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (33,594) (11,975)
Investment in DeLeeuw Associates, net of cash acquired (1,059,266) --
----------- -----------
Net cash used in investing activities (1,092,860) (11,975)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft 84,150 28,733
Net advances under line of credit 2,548,201 999,863
Line of credit repayment (1,789,110) --
Issuance of convertible line of credit note 2,000,000 --
Deferred loan costs in connection with long-term debt (30,534) --
Principal payments on long-term debt (673,818) (103,673)
Principal payments on capital lease obligations (3,327) --
Distributions to stockholders -- (175,242)
Restricted cash (83,375) --
Costs incurred in connection with LCS merger (95,678) --
----------- -----------
Net cash provided by financing activities 1,956,509 749,681
----------- -----------
NET DECREASE IN CASH (124,311) --
CASH, beginning of period 411,586 --
----------- -----------
CASH, end of period $ 287,275 $ --
=========== ===========
See Notes to Consolidated Financial Statements.
3
CONVERSION SERVICES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31,
---------------------------------------------
2004 2003
--------------------- ---------------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
During the 3 months ended March 31, 2004 and 2003, the Company entered
into various capital lease arrangements for computer equipment in the
amount of $64,749 and $0, respectively.
On March 4, 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) --
See Notes to Consolidated Financial Statements.
4
CONVERSION SERVICES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Conversion Services International, Inc. ("CSI" or "Company") was
incorporated in the State of Delaware and has been conducting business since
1990. CSI and Doorways, Inc., a wholly-owned subsidiary of CSI, 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 the northeastern
United States. In November 2002, the Company acquired the operations of Scosys,
Inc. On January 30, 2004, CSI became a public company through our merger with a
wholly-owned subsidiary of the Registrant, LCS Group, Inc. In March 2004, the
Company acquired DeLeeuw Associates, Inc. Both Scosys and DeLeeuw Associates are
engaged in the information technology services industry.
BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated balance sheet
and related interim consolidated statements of operations and cash flows include
all adjustments necessary for their fair presentation in conformity with
accounting principles generally accepted in the United States of America.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses. Actual results and outcomes may differ from management's estimates and
assumptions.
Interim results are not necessarily indicative of results for a full year.
The information included in this Form 10-QSB should be read in conjunction with
Management's Discussion and Analysis and financial statements and notes thereto
included in the Conversion Services International, Inc. Form 8-K/A filed with
the Securities and Exchange Commission on April 1, 2004.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
CSI and its wholly-owned subsidiaries, Doorways, Inc. and DeLeeuw Associates,
LLC. 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. Revenues
recognized in excess of billings are recorded as accrued revenues. 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.
5
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and includes equipment held
under capital lease arrangements. Depreciation, which includes amortization of
leasehold improvements, 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.
AMORTIZATION
The Company amortizes deferred loan costs on a straight-line basis over
the term of the related loan instrument. Acquired customer lists and contracts
are amortized over an estimated useful life of five 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 both Scosys,
Inc. and DeLeeuw Associates, Inc. Additionally, as part of both the Scosys and
DeLeeuw 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.
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 three months ended March 31, 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 March 31, 2004, two customers exceeded 25% of the Company's accounts
receivable balance.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising costs
amounted to $12,650 and $1,677 for the three month periods ended March 31, 2004
and 2003, 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.
6
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, 2003, as a result of
the revocation, the Company's tax status reverted to a "C" Corporation and on a
prospective basis, the Company would expect to have an effective income tax rate
of approximately 40%.
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.
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 or on the subsequent reporting periods.
EQUITY INVESTMENT IN LIMITED LIABILITY COMPANY
In August 2003, DeLeeuw Associates acquired a non-controlling interest in
DeLeeuw International Ltd. (a limited liability company). The Company is
accounting for its share of the income (losses) of this investment under the
equity method.
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.
NOTE 2 - ACQUISITION OF DELEEUW ASSOCIATES, INC.
In February 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. During
this period, the operations of DeLeeuw Associates contributed approximately
$372,000 and $16,000 of revenue and net income, respectively. Exclusive of
future contingent 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
===========
7
The following unaudited statements of income and financial position
reflect the pro-forma consolidated results as of March 31, 2004 and 2003 and for
the three month periods then ended. These statements present the consolidated
results of Conversion Services International, Inc. and DeLeeuw Associates, LLC
for the aforementioned periods as if the entities had been consolidated for the
entire three month periods in both years presented.
Three Months Ended March 31,
------------------------------
2004 2003
----------- -----------
Revenues $ 6,356,816 $ 4,464,807
Net Loss $ (355,251) $ (69,111)
Net Loss per share $ (0.00) $ (0.00)
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
March 31,
2004
---------
Computer equipment $ 672,276
Furniture and fixtures 103,777
Automobiles 72,833
Leasehold improvements 87,546
---------
936,432
Accumulated depreciation (619,512)
---------
$ 316,920
=========
NOTE 4 - INTANGIBLE ASSETS
Intangibles acquired have been assigned as follows:
March 31,
2004
-----------
Approved vendor status $ 1,597,000
Proprietary rights and rights to the name
of DeLeeuw Associates, Inc. 722,000
Customer lists and contracts 414,000
Proprietary rights and rights to
the name of Scosys Inc. 20,000
-----------
2,753,000
Accumulated amortization (110,400)
-----------
$ 2,642,600
===========
NOTE 5 - LINE OF CREDIT
The Company maintained a line of credit facility with a bank which
provided for maximum borrowings of $2,250,000, based on eligible accounts
receivable. The interest rate was at the bank's prime rate plus one percent. The
line was collateralized by all corporate assets, guaranteed by the Company's
shareholders, and had an expiration date of June 30, 2004. This line of credit
facility was terminated and all outstanding amounts were repaid on March 30,
2004. Funds obtained from the revolving line of credit executed on March 30,
2004 (see below) were utilized to repay the outstanding amounts under this line
of credit.
8
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 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.
NOTE 6 - LONG TERM DEBT
Long-term debt consisted of the following:
March 31,
2004
-----------
Convertible line of credit note with a maturity date of October 28, 2008 unless
converted into common stock at the Company or the note holder's option. Interest
accrues at 7% per annum. The conversion price of the shares of common stock is
equal to 75% of the average bid price for the prior ten trading days. 2,000,000
Notes payable under capital lease obligations payable to various finance
companies for equipment at varying rates of interest and maturity dates through 2006 83,512
-----------
2,083,512
Less: Current portion of long-term debt, including obligations under capital leases of $31,262 (31,262)
-----------
$ 2,052,250
===========
Future annual payments of long-term debt is as follows:
YEARS ENDING MARCH 31,
----------------------
2004 $ 31,262
2005 35,230
2006 17,020
2007 -
2008 2,000,000
-----------
$ 2,083,512
===========
NOTE 7 - OBLIGATIONS UNDER CAPITAL LEASES
The Company has entered into various capital leases that are collateralized
by computer equipment with an original cost of approximately $114,306.
The following schedule lists future minimum lease payments under the capital
leases with their present value as of March 31, 2004:
9
YEARS ENDING MARCH 31,
----------------------
2004 $ 44,558
2005 42,343
2006 18,853
--------------
105,754
Less: Amount representing interest (22,242)
--------------
$ 83,512
==============
NOTE 8 - 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, the Company
granted 19,200,000 options to purchase its common stock at an exercise price of
$0.165. 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. As of March 31, 2004, no options had vested.
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 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.
10
Three months ended
March 31, 2004
-----------
Reported net loss $ (324,297)
Pro-forma stock compensation, net of tax --
-----------
Pro-forma net loss $ (324,297)
===========
Basic EPS:
As reported $ --
Pro-forma $ --
Diluted EPS:
As reported $ --
Pro-forma $ --
Weighted average fair value per option share granted $ 0.12
Weighted average assumptions used to value options granted:
Risk free interest rate 1.33%
Expected volatility 196%
Expected life (years) 3.00
NOTE 9 - 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.
The components of basic and diluted earnings per share are as follows:
Three Months Ended March 31,
--------------------------------
2004 2003
----------- -------------
Net income available for common shareholders (A) $ (324,297) $ (39,347)
Weighted average outstanding shares of common stock (B) 619,373,626 593,000,000
Common stock and common stock equivalents (C) 619,373,626 593,000,000
Earnings per share:
Basic (A/B) $ (0.00) $ (0.00)
=========== =============
Diluted (A/C) $ (0.00) $ (0.00)
=========== =============
For the three months ended March 31, 2004, 19,200,000 million 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.
NOTE 10 - INCOME TAXES
Our provision for income taxes is based on estimated effective annual
income tax rates. The provision differs 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 current quarter, our effective tax rate was estimated to be
approximately 40%, which is consistent with the rates in effect during the prior
year.
11
NOTE 11 - SUBSEQUENT EVENTS
On April 29, 2004, the Company obtained a $2,000,000 equity investment
from a private investor in exchange for 16,275,000 shares of CSI common stock.
Subsequent to this transaction, the Company has 689,275,000 shares outstanding.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Management's Discussion and Analysis (MD&A) contains statements that are
forward-looking. These statements are based on current expectations and
assumptions that are subject to risks and uncertainties. Actual results could
differ materially because of factors discussed in "Issues and Uncertainties" and
elsewhere in this report. We undertake no duty to update any forward-looking
statement to conform the statement to actual results or changes in our
expectations.
We are in the business of supplying professional services relating to
information technology management consulting, data warehousing, business
intelligence and c-business. Our clients are primarily in the financial
services, pharmaceutical and telecommunications industries, although we have
clients in other industries as well. Our clients are primarily located in the
northeastern United States. We enable organizations to leverage their corporate
information assets by providing strategy, process and methodology, best
practices data warehousing, business intelligence, enterprise reporting and
analytic solutions.
Conversion Services International, Inc. began operations in 1990. Our
services were originally focused on e-business solutions and data warehousing.
In the late 1990s, we strategically repositioned ourselves to capitalize on our
data warehousing expertise in the fast growing business intelligence/data
warehousing space. We became a public company through our merger with a wholly
owned subsidiary of LCS Group, Inc., effective as of January 30, 2004.
Our core strategy includes capitalizing on the already established
in-house Business Intelligence/Data Warehousing (BI/DW) technical expertise and
our seasoned sales force. This is expected to result in organic growth through
the acquisition of new customers. In addition, this foundation will be leveraged
as we pursue targeted strategic acquisitions. The BI/DW industry as a whole is
an extremely fragmented marketplace which we believe is ready for consolidation.
One of our objectives is to make acquisitions of companies in the BI/DW
industry that will enable us to accelerate our business plan at lower costs than
we would generate internally and also improve our competitive positioning and
expand our offerings in a larger geographic area. We intend to seek acquisitions
of other consulting firms that have expertise and clients in strategic locations
or industries.
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 our ability to collect is reasonably assured. Our
services range from providing clients with a single consultant to
multi-personnel full-scale projects. Our contracts provide that its services are
terminable upon relatively short notice, typically not more than 30 days. There
can be no assurance that our clients will continue to enter into contracts with
us or that existing contracts will not be terminated. We provide our services
directly to end-user organizations, in most cases.
During the three month period ended March 31, 2004, two of our clients
accounted for approximately 31% of total revenues. During the three month period
ended March 31, 2003, two clients accounted collectively for approximately 45%
of total revenues.
Our most significant costs are personnel expenses, which consist of
consultant fees, benefits and payroll-related expenses, and outside consultants.
12
RESULTS OF OPERATIONS
REVENUE
Our revenues are primarily comprised of billings to clients for consulting
hours worked on client projects. Revenue for the first quarter of 2004 was $5.3
million, an increase of 53.1% over the first quarter of 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 and the DeLeeuw Associates business during
the March 2004 quarter, and a general increase in consulting business as the
overall economy improves.
COST OF SERVICES
Cost of services primarily includes payroll and benefits costs for our
consultants. Cost of services was $3.8 million, or 73.0% of revenue, in the
first quarter, compared to $2.6 million, or 73.4% of revenue, in the first
quarter of the prior year. 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.
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 $0.6 million in the first quarter 2004, or 11.0% of
revenue, compared to $0.3 million in the first quarter 2003, or 9.2% of revenue.
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 $1.3
million, or 25.0% of revenue, in the first quarter 2004 compared to $0.5
million, or 16.3% of revenue, in the first quarter 2003. General and
administrative costs increased in the first quarter 2004 primarily from
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. Financing costs are amortized over the life of the related
loans. Depreciation and amortization expenses were $37,000 in the first quarter
of 2004 compared to $44,700 in the first quarter 2003.
OTHER INCOME (EXPENSE)
We incur interest expense on loans from financial institutions and from
capital lease obligations related to the acquisition of equipment used in our
business. Interest expense was $30,000 during the first quarter 2004 compared to
$30,000 in the first quarter 2003. We earn interest income on deposits with our
financial institution. Interest income in the first quarter was $4,000 compared
to zero in the comparable quarter of the prior year. We also recorded a charge
of $1,602 in the first quarter of 2004 related to our equity in the loss of our
investment in a limited liability company.
13
INCOME TAXES
An income tax benefit of $215,600 was recorded in the first quarter of
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. Pro forma income taxes for the
prior year would have been an income tax benefit of $15,715, using the effective
tax rate of 40%.
LIQUIDITY AND CAPITAL RESOURCES
Cash totaled $0.3 million as of March 31, 2004 compared to $0.4 million as
of December 31, 2003. Our cash balance is primarily derived from customer
remittances and bank borrowings 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 the accompanying
consolidated balance sheet. On April 29, 2004, we obtained an additional
$2,000,000 cash investment in return for 16,275,000 shares of our common stock.
Cash used by operations during the three months ended March 31, 2004 was
$1.0 million, an increase of $0.3 million from the three months ended March 31,
2003. This increase in cash used by operations is primarily due to a $1.3
million increase in accounts receivable during the three month period and the
net loss of $0.3 million, which was partially offset by an increase in accounts
payable and accrued expenses of $0.5 million. The increase in accounts
receivable is due to billings to new clients and to slower payment by several
established clients. Non-cash expenses included depreciation, amortization, and
the allowance for doubtful accounts.
Cash used by investing activities was $1.1 million during the first
quarter 2004. This was due to payments of $1.1 million made for acquisition of
DeLeeuw Associates, Inc. during this quarter, and for the purchases of equipment
for the Company.
Cash provided by financing activities was $2.0 million during the first
quarter 2004. During the first quarter of 2004, $2.0 million was raised from the
issuance of a convertible line of credit note, 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 our new line of
credit with TrustCompany Bank. The line of credit agreement with TrustCompany
Bank contains both financial and non-financial covenants that we are not
required to report on, or comply with, until the second quarter of 2004. We do
not expect to be in compliance with all of the covenants by June 30, 2004 and,
as a result, we are actively working with our financial institution to establish
new covenants. We believe that we will be successful in negotiating covenants
acceptable to both the Company and our financial institution. However, there can
be no assurance that we will be successful in these efforts. In the event that
we are unsuccessful in these negotiations and our financial institution demands
repayment in full by the Company, we believe that we have alternative financing
options available to us in order to satisfy these obligations.
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 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.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any transactions, agreements or other contractual
arrangements that constitute off-balance sheet arrangements.
14
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the FASB issued Interpretation 46R (FIN 46R), a revision
to Interpretation 46 (FIN 46), Consolidation of Variable Interest Entities. FIN
46R clarifies some of the provisions of FIN 46 and exempts certain entities from
its requirements. FIN 46R is effective at the end of the first interim period
ending after March 15, 2004. Entities that have adopted FIN 46 prior to this
effective date can continue to apply the provisions of FIN 46 until the
effective date of FIN 46R. The Company adopted FIN 46 on January 1, 2004 and it
did not have a material impact on our financial statements.
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.
ACCOUNTS RECEIVABLE
We carry our accounts receivable at cost less an allowance for doubtful
accounts. On a periodic basis, we evaluate our accounts receivable and change
the allowance for doubtful accounts, when deemed necessary, based on our history
of past write-of fee 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 lose is included in operations.
Expenditures for maintenance and repairs have been charged to operations. Major
renewals and betterments have been capitalized.
AMORTIZATION
We amortize deferred loan coats on a straight-line basis over the term of
the related loan instrument. We amortize acquired client 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 in connection with the
re-acquisition of the ownership rights to CSI in 1998 and in connection with
CSI's acquisition of Scosys, Inc. in November 2002. Additionally, as part of our
acquisition of Scosys, Inc., we acquired certain intangible assets. We adopted
FASB Statement 142 as of January 1, 2002 for all goodwill recognized in our
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. We assess
the recoverability of our assets, in accordance with FASB 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. Our goodwill and intangible assets were not impaired at December 31,
2003. There have been no events or circumstances that would indicate that there
has been any impairment during the three months ended March 31, 2004.
15
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 us to concentration of
credit risk are cash and accounts receivable arising from our normal business
activities. We routinely assesses the financial strength of our clients, based
upon factors surrounding their credit risk, establishes an allowance for
doubtful accounts, and as a consequence believes that our accounts receivable
credit risk exposure beyond such allowances is limited. At December 31, 2003,
one client approximated 25% of our accounts receivable balance.
We maintain our cash with a high credit quality financial institution.
Each account is secured by the Federal Deposit Insurance Corporation up to $100,
000
INCOME TAXES
We account 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 our financial
statements or tax returns. In estimating future tax consequences, we generally
consider all expected future events other than enactments of changes in the tax
laws or rates.
On January 1, 2001, we elected to be an "S" Corporation, whereby the
stockholders account for their share of our earnings, losses, deductions and
credits on their federal and various state income tax returns. We are subject to
New York City and various state income taxes. On September 30, 2003, our "S"
Corporation statue was revoked in connection with the conversion of convertible
subordinated debt into common shares. As a result of the revocation of our "S"
Corporation status, we converted into a "C" Corporation and we expect to have an
effective income tax rate of approximately 40%.
16
ISSUES AND UNCERTAINTIES
This Quarterly Report on Form 10-Q contains statements that are
forward-looking. These statements are based on current expectations and
assumptions that are subject to risks and uncertainties. Actual results could
differ materially because of issues and uncertainties such as those referenced
below and elsewhere in this report, which, among others, should be considered in
evaluating our financial outlook.
For further information, refer to the business description and risk
factors sections included in our Form SB-2 filed with the SEC on May 6, 2004.
ITEM 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including the Chief Executive Officer and the Chief Financial Officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Securities Exchange Act of 1934 Rule
13a-14(c) as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and the Chief Financial Officer have
concluded that subject to the limitations noted below, our Disclosure Controls
are effective in timely alerting them to material information required to be
included in our periodic SEC filings. There were no changes in our internal
control over financial reporting during the quarter ended March 31, 2004 that
have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
Our management, including our Chief Executive Officer and the Chief
Financial Officer, does not expect that our Disclosure Controls and internal
controls will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently involved in any legal proceedings.
We have no knowledge of any material litigation to which we may become a
party or to which any of our property is subject.
ITEM 2. CHANGES IN SECURITIES.
On August 21, 2003, the Registrant entered into an agreement to reorganize
with and into privately-held Conversion Services International, Inc. (Old CSI)
and certain affiliated stockholders of Old CSI. The closing of this transaction
occurred on January 30, 2004, and at that time, LCS changed its name to
"Conversion Services International, Inc." and the former stockholders of Old CSI
gained control of our Board of Directors and were issued approximately 84.3% of
the outstanding shares of our common stock at that time. Approximately
500,000,000 unregistered shares were issued in connection with the merger.
On March 4, 2004, the Company through its wholly owned subsidiary acquired
DeLeeuw Associates, Inc., in which 80,000,000 unregistered shares were issued in
connection with the transaction. See Note 2 to Financial Statements.
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) A special meeting of the stockholders was held on January 23, 2004.
(b) All of the Company's director nominees, as set forth below, were elected.
There was no solicitation in opposition to the Company's nominees.
(c) Matters voted on at the meeting and the number of votes cast:
1. To approve amending the Company's Certificate of Incorporation to
change its name to "Conversion Services International, Inc.":
--------------------- ---------------- -------------------
Voted For Voted Against Abstentions
--------------------- ---------------- -------------------
26,392,922 387,074 2,000
--------------------- ---------------- -------------------
2. To increase the number of authorized shares of common stock from
50,000,000 to 1,000,000,000:
--------------------- ---------------- -------------------
Voted For Voted Against Abstentions
--------------------- ---------------- -------------------
26,348,558 418,434 4
--------------------- ---------------- -------------------
3. To authorize the issuance of up to 20,000,000 shares of preferred
stock in such series, each with different rights, preferences and
designations and qualifications, limitations and restrictions as may
be determined by the board of directors without the approval of
stockholders:
--------------------- ---------------- -------------------
Voted For Voted Against Abstentions
--------------------- ---------------- -------------------
26,319,361 2,004 197
--------------------- ---------------- -------------------
4. Limitation of directors' liability and indemnification of officers
and directors:
--------------------- ---------------- -------------------
Voted For Voted Against Abstentions
--------------------- ---------------- -------------------
26,312,214 2,008 0
--------------------- ---------------- -------------------
5. Elect to the board of directors Scott Newman, Glenn Peipert and
Lawrence K. Reisman to serve until their respective successors are
elected and qualified:
--------------------------- ------------------ ---------------
Voted For Withheld
--------------------------- ------------------ ---------------
Scott Newman 26,396,392 385,064
--------------------------- ------------------ ---------------
Glenn Peipert 26,396,392 385,064
--------------------------- ------------------ ---------------
Lawrence K. Reisman 26,396,392 385,064
--------------------------- ------------------ ---------------
6. Adopt the 2003 Incentive Plan:
--------------------- ------------------ -----------------
Voted For Voted Against Abstentions
--------------------- ------------------ -----------------
26,317,958 464,034 4
--------------------- ------------------ -----------------
18
ITEM 5. OTHER INFORMATION.
CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANTS
In connection with the merger of Conversion Services International, Inc.
with and into the Company's wholly owned subsidiary, LCS Acquisition Corp. (now
known as CSI Sub Corp. (DE)) on January 30, 2004, the Company on January 30,
2004 dismissed Eisner LLP ("Eisner"), its independent certified public
accountants for the fiscal years ended February 28, 2003 and 2002. The reports
by Eisner on the financial statements of the Company during the fiscal years
ended February 28, 2003 and 2002 contained a going concern opinion. During the
Company's two most recent fiscal years and subsequent period up to January 30,
2004, there were no disagreements with the former accountant on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to their satisfaction
would have caused them to make reference in connection with their opinion to the
subject matter of the disagreement.
On January 30, 2004, upon receipt of approval of its Board of Directors,
the Company engaged Ehrenkrantz Sterling & Co. LLC ("Ehrenkrantz") to serve as
the Company's independent certified public accountants. During the Company's two
most recent fiscal years, and during any subsequent period through January 30,
2004, the Company did not consult with Ehrenkrantz on any accounting or auditing
issues; however, Ehrenkrantz has previously audited the financial statements of
our wholly owned subsidiary CSI Sub Corp. (DE) (formerly known as LCS
Acquisition Corp.), for the periods December 31, 2003 and 2002.
CHANGE IN FISCAL YEAR
On January 30, 2004, the Company's Board of Directors signed a resolution
changing the fiscal year end of the Company to December 31 from February 28. No
transition period report will be filed in connection with the change in the
fiscal year since the Company is adopting the fiscal year end of its wholly
owned subsidiary CSI Sub Corp. (DE) (formerly known as LCS Acquisition Corp.),
which comprises all of the Company's operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following is a list of exhibits to this Form 10-QSB:
31.1 Certification of the Company's Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Company's Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification of the Company's Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
Two reports on Form 8-K were filed during the reporting period, as follows:
Form 8-K filed by the Company on February 17, 2004, pertaining to Item Nos. 1, 5
and 7 regarding a change in control of the registrant.
Form 8-K filed by the Company on March 16, 2004, pertaining to Item Nos. 2 and 7
regarding the acquisition by the registrant of DeLeeuw Associates, Inc.
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONVERSION SERVICES INTERNATIONAL, INC.
By: /S/ SCOTT NEWMAN
---------------------------
Name: Scott Newman
Title: President and Chief Executive Officer
(Principal Executive Officer and Duly
Authorized Officer)
20