-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DCoRH/yUcROYykXuO/53IuGEujs4xh/bxP9TD5PkBJ8a+Aq+Egk9sVKSsAzt9UMu DRDyjYem1DU2PRGUUKBTYQ== 0001144204-04-004160.txt : 20040401 0001144204-04-004160.hdr.sgml : 20040401 20040331213813 ACCESSION NUMBER: 0001144204-04-004160 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040130 ITEM INFORMATION: Changes in control of registrant ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20040401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONVERSION SERVICES INTERNATIONAL INC CENTRAL INDEX KEY: 0000934306 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 113200338 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-27519 FILM NUMBER: 04707636 BUSINESS ADDRESS: STREET 1: 24 E 12TH STREET CITY: NEW YORK STATE: NY ZIP: 10003 MAIL ADDRESS: STREET 1: 24 E 12TH STREET CITY: NEW YORK STATE: NY ZIP: 10003 FORMER COMPANY: FORMER CONFORMED NAME: LCS GOLF INC DATE OF NAME CHANGE: 19990511 8-K/A 1 v02445_8ka.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) January 30, 2004 - -------------------------------------------------------------------- Conversion Services International, Inc. ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 0-30420 20-1010495 - --------------------------- ------------------------ -------------------- (State or other jurisdiction (Commission File Number) (IRS Employer of incorporation) Identification No.) 100 Eagle Rock Avenue East Hanover, New Jersey 07936 - ------------------------------------------------ ------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (973) 560-9400 ------------------------------ -------------------------------------------------------------------------- (Former name or former address, if changed since last report) This Current Report on Form 8-K/A amends the Registrant's Current Report on Form 8-K dated January 30, 2004, which was filed on February 17, 2004, to include, among other things, the financial statements and pro forma financial information required by Item 7 of Form 8-K: ITEM 1. CHANGES IN CONTROL OF THE REGISTRANT. On August 21, 2003, LCS Group, Inc. (the "Company") entered into an Agreement and Plan of Reorganization, as amended, with its wholly owned subsidiary LCS Acquisition Corp. ("LCSAC"), privately-held Conversion Services International, Inc. ("CSI") and certain affiliated stockholders of CSI. The agreement called for CSI merging with and into LCSAC, the Company changing its name to "Conversion Services International, Inc." and the former stockholders of CSI controlling the board of directors of the Company and approximately 84.3% of the outstanding shares of common stock of the Company (the "Common Stock"). At a special meeting of Company stockholders held on January 23, 2004, Company stockholders approved, among other things: (i) an increase in the Company's authorized shares of Common Stock from 50,000,000 to 1,000,000,000, (ii) the authorization of up to 20,000,000 shares of "blank check" preferred stock, (iii) the adoption of a stock incentive plan for the Company, and (iv) the election of Scott Newman and Glenn Peipert, the principals of CSI, and Lawrence K. Reisman to the Company's board of directors. At the closing of the merger on January 30, 2004, the stockholders of CSI received 500,000,000 newly-issued shares of Common Stock (approximately 84.3% of the then outstanding shares). As part of the restructuring, certain officers, directors and convertible note holders of the Company and certain other third parties received an aggregate of 43,779,824 shares of Common Stock, or approximately 9% of the outstanding shares. Included in such 43,779,824 shares were approximately 18,000,000 shares issued to Dr. Michael Mitchell, the former sole director, President and Chief Executive Officer of the Company. At the closing of the merger, Dr. Mitchell resigned as the sole director of the Company and all officers of the Company, including Dr. Mitchell, also resigned. The new Board of Directors of the Company appointed Mr. Newman as Chairman, President and Chief Executive Officer, Mr. Peipert as Executive Vice President and Chief Operating Officer and Mr. Mitchell Peipert, the brother of Glenn Peipert, as Vice President, Chief Financial Officer, Secretary and Treasurer. Also, as part of its merger with CSI, LCSAC changed its name to "CSI Sub Corp. (DE)". As part of merger, the Company also clarified that as a condition to the consummation of the merger transaction, 100% of the outstanding stock of the Company's wholly owned subsidiary, LCS Golf, Inc., was sold to a third party. The following table sets forth information concerning ownership of the Common Stock outstanding as of March 30, 2004, by: (i) each person known by us to be a beneficial owner of more than five percent (5%) of our Common Stock, (ii) each director, (iii) each of the executive officers named in the summary compensation table below and (iv) by all directors and executive officers as a group:
- ------------------------------------------------------------------------------------------- Name (1) (2) Shares Beneficially Owned (3) Percentage of Class - ------------------------------------------------------------------------------------------- Scott Newman 300,050,000 44.6% - ------------------------------------------------------------------------------------------- Glenn Peipert 150,000,000 22.3% - ------------------------------------------------------------------------------------------- Robert C. DeLeeuw 80,000,000 11.9% - ------------------------------------------------------------------------------------------- Lawrence K. Reisman 0 0% - ------------------------------------------------------------------------------------------- Mitchell Peipert 0 (4) 0% - ------------------------------------------------------------------------------------------- All officers and directors as 530,050,000 78.8% a group (5 persons) - -------------------------------------------------------------------------------------------
2 - ---------------------- (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) The address for all persons listed on this table is c/o Conversion Services International, Inc., 100 Eagle Rock Avenue, East Hanover, New Jersey 07936. (3) Based upon shares of Common Stock outstanding at March 30, 2004 of 673,000,000 shares. (4) Does not include 4,500,000 options to purchase Common Stock by our Board of Directors 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. BUSINESS General Conversion Services International, Inc. (CSI-The Center For Data Warehousing) is a data warehousing and business intelligence management consulting and integration firm that enables organizations to leverage their most important corporate assets, enterprise data, while providing a significant return on investment. 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. Overview We are in the business of supplying professional services relating to information technology management consulting, data warehousing, business intelligence and e-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. 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 management consulting perspective, providing integrated data warehousing and business intelligence strategy and technology implementation services to clients that are attempting to leverage their enterprise information and data. Our matrix of services includes strategy consulting, data warehousing architecture and implementation 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. During the fiscal year ended December 31, 2003, two of our customers collectively accounted for approximately 43% of total sales. During the fiscal year ended December 31, 2002, two of our customers collectively accounted for approximately 59% of total sales. 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. Our Services As a full service data warehousing and business intelligence consulting firm, we offer services in the following solution categories: Technology Consulting o Data Warehousing Design, Development and Implementation o Enterprise Reporting o Custom Analytics o Data Conversions and Migrations o Ad-Hoc Query and Enterprise Reporting Solutions o Outsourcing o Data Profiling o Data Transformation o Proof of Concept and Prototypes o Quality Assurance Testing o Training and Education 3 Management Consulting o Revenue Enhancement and Cost Justification Modeling o Business Technology Alignment o Business Impact and Needs Analysis o Sarbanes-Oxley Act of 2002, the Basel Capital Accord and USA Patriot Act compliance Process / Best Practices Consulting o Rapid Implementation Methodology o Tools Analysis, Benchmarking and Selection o Project Management o Process and Data Modeling o Data Warehouse Assessments Corporate Strategy We will also continue to pursue strategic acquisitions that strengthen our ability to compete and extend our ability to provide clients with a more comprehensive service 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 March 2004, we acquired DeLeeuw Associates, Inc. and integrated its Six Sigma and Lean processing knowledge into our business and technology offerings. This initiative will continue throughout 2004. The Six Sigma and Lean methodology has been introduced to our clients along with our innovative IPI Diagrams. The IPI diagram offering, launched in the first quarter of 2004, continues to receive favorable reaction from our clients. Additionally, our expanded Data Warehouse Assessment and Business Technology Alignment (BTA) offerings will be the focus of our marketing and communications programs for 2004. We believe that these offerings will drive greater understanding and demand for both data warehousing and business intelligence implementations. At the same time, our clients may receive cost and performance gains as results of these offerings. We will continue to enhance and expand our offerings which include best practice process flows, methodologies and implementations. Competition To our knowledge, there are no public competitors that focus solely on data warehousing and business intelligence consulting and strategy. Our competitors in the general market include data warehouse and business intelligence practices within large international, national and regional consulting and implementation firms and smaller boutique technology firms. We believe that as the economy continues to rebound and new opportunities are created, companies will spend more on high Return On Investment technology solutions, such as data warehousing, business intelligence and analytics. We believe that we can help our clients better than the competition due to our domain expertise, methodologies, processes and approach to data warehousing architecture and implementation. Our ability to apply best practices, Six Sigma and Lean to client processes and implementation strategies further strengthens our competitive standing. Marketing We currently market our services through a sales force comprised of 10 employees and also receive business through client referrals. We are planning to engage 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: >> WEB SITE PROMOTION: Our web site has recently been reformatted to reflect our vision and business plan. We will be currently promoting our website through various internet search engines. >> 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 are currently enrolled as a Gold Level Sponsor for the upcoming DCI CRM Conference and Technology Showcase in New York, May 25-27 and DCI's Business Intelligence and Data Warehouse Conference in Boston, September 28-30, 2004. 4 >> 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. >> VENDOR RELATIONS: We are identifying key vendor relationships. With the ability to leverage our fourteen-year history, we intend to continue to forge and maintain relationships with technical, service and industry vendors. >> EXPANDED DIRECT SALES ACTIVITIES: We are developing a campaign for our sales personnel that will include lead generation, cross selling and up-selling. Employees As of December 31, 2004, we had 42 outside consultants, 90 consultants on the payroll and 32 non-consultant employees. Outside consultants not on the payroll represent corporations with which we have long standing relationships. None of our employees is 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. Employment Agreements Mr. Scott Newman, 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 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. Mr. 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 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. Mr. Mitchell Peipert, Vice President and Chief Financial Officer, 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 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. Protection Against Disclosure of Customer Information We have implemented policies to prevent customer 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 customer information to third parties and further mandates that disciplinary action be taken against those who violate such policy, including possible termination. Our outside consultants sign non-disclosure agreements prohibiting disclose customer information to third parties, among other things, and we perform background checks on employees and outside consultants. 5 Properties Our headquarters are located at 100 Eagle Rock Avenue, East Havover, New Jersey 07936. Our lease for this space expires on December 31, 2005. Our wholly owned subsidiary, DeLeeuw Associates, LLC ("DeLeeuw"), 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. Legal Proceedings We are not currently a party to any material legal proceedings. Related Party Transactions As of March 30, 2004, Scott Newman and Glenn Peipert owed the Company an aggregate of approximately $204,000, including accrued interest. These loans bear at 3% per annum and are due and payable by December 31, 2005. Guarantees We currently have a line of credit with Trust Company Bank pursuant to which we may borrow up to $3,000,000 against eligible accounts receivable. This line is collateralized by all of our assets and guaranteed by Scott Newman and Glenn Peipert. As of March 30, 2004, approximately $2,397,000 was outstanding under this line. 6 RISK FACTORS The following risks and uncertainties may have a material and adverse effect on our business, financial condition and results of operations. Carefully consider these risks and uncertainties together with all of the other information included or incorporated by reference in this Current Report on Form 8-K/A. If any of the material risks or uncertainties we face were to occur, the value of our Common Stock may decline. Because we depend on a small number of key customers, non-recurring revenue and contracts terminable on short notice, our business could be adversely affected if we fail to retain these customers and/or obtain new customers at a level sufficient to support our operations and/or broaden our customer base. For the year ended December 31, 2003, two customers accounted for approximately $6,126,000 of our revenues, which equaled approximately 43% of our revenues. One of such customers accounted for approximately 29% of our revenues. For the year ended December 31, 2002, those customers accounted for approximately $9,540,000 of our revenues, which equaled approximately 59% of our revenues. 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 customers without adequate replacements would have a material and adverse effect upon our business. In addition, a large portion of our revenues are derived from consulting services that are generally non-recurring in nature. There can be no assurance that we will: o obtain additional contracts for projects similar in scope to those previously obtained from our principal customers or any other customer; o be able to retain existing customers or attract new customers; o provide services in a manner acceptable to customers; o offer pricing for services which is acceptable to customers; or o broaden our customer base so that we will not remain largely dependent upon a limited number of customers that will continue to account for a substantial portion of our revenues. We may be subject to additional risks relating to our customers that could adversely affect our business, such as delays in customer funding, lengthy customer review processes for awarding contracts, delay, termination, reduction or modification of contracts in the event of changes in customer 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. In 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 an net loss in the approximate amount of ($307,000). We have a significant amount of debt, which in the event of a default could have material adverse consequences upon us. On March 30, 2003, we entered into a loan agreement with the Trust Company of New Jersey, pursuant to which we borrowed $3,000,000 (the "Loan"). The Loan is collaterized by all of our corporate assets and guaranteed by our two principal stockholders. The degree to which we are leveraged could have important consequences to us, including the following: 7 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 o our failure to comply with covenants and 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. In addition, certain terms of the Loan require the prior consent of Trust Company on many corporate actions including, but not limited to, mergers and acquisitions. Our revenues are difficult to forecast. We may increase our corporate overhead expenses in the event that we increase our business and/or acquire other businesses, while our operating expenses for sales, marketing and technical personnel to sell, provide and support our services also increases. Additionally, although most of our customers are large, creditworthy entities, at any given point in time, we may have significant accounts receivable balances with customers that expose us to credit risks if such customers 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 and utilization rates and control our costs. A continuation of current pricing pressures could result in permanent changes in pricing policies and delivery capabilities. Our profit margin, and therefore our profitability, is largely a function of the rates we are able to recover for our services. Accordingly, if we are not able to maintain the pricing for our services or an appropriate utilization rate for our professionals without corresponding cost reductions, our profit margin and our profitability will suffer. The rates we are able to recover 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 profitability is also a function of our ability to control our costs and improve our efficiency. As the continuation of current pricing pressures could result in permanent changes in pricing policies and delivery capabilities, we must continuously improve our management of costs. 8 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. When making proposals for engagements, we estimate the costs and timing for completing the projects. These estimates reflect our best judgment regarding the efficiencies of our methodologies and professionals as we plan to deploy them on projects. 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 our profit margin. 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. Any significant decline in demand for programming and applications development and information technology consulting services could materially and adversely affect our business and prospects. Our ability to achieve growth targets is dependent in part on maintaining existing customers and continually attracting and retaining new customers to replace those who have not renewed their contracts. Our ability to achieve market acceptance 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 are successful in acquiring other companies, we will be required to manage multiple relationships with various customers, strategic partners and other third parties. Further growth 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 successfully 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 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 firms. These firms have substantially greater market presence, longer operating histories, more significant customer bases and 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 customer requirements. Our competitors may also devote greater resources than we can to the development, promotion and sale 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; o adopt more aggressive pricing policies; and o make more attractive offers to our existing and potential employees and strategic partners. 9 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 and telecommunications 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 customers, 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 operate, our business could be adversely affected. The market for information technology consulting services 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 customers' 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. 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, could adversely affect our business. We also depend upon the performance of our executive officers and key employees. In addition, we have not obtained "key man" life insurance on the lives of either Messrs. Newman or Peipert and, as such, the death of either of these individuals could have a material adverse effect upon us. We will need to attract, train and retain more employees for management, engineering, programming, sales and marketing, and customer 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 customers in a cost effective manner, if at all. If we fail to raise capital, we may need to support and increase our operations, our business could be adversely affected. 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. 10 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 customers 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 customers 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 customers' businesses. If we fail or are unable to satisfy a customer'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 customer information. Although we have implemented policies to prevent such customer 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 successfully 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 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 do 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 Loan and Security Agreement with Trust Company of New Jersey requires that we obtain their prior consent prior to paying any dividends. 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. 11 Scott Newman and Glenn Peipert, our principal stockholders and our executive officers and two of our directors, beneficially own approximately 44.6% and 22.3%, respectively, 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. 12 See "Principal Stockholders" and "Management." 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 are 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. 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 customers 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. We cannot assure you that any acquisitions we make will enhance our business. 13 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 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, property and equipment, and other tangible and intangible assets, which would adversely affect our financial statements. 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. 14 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. Although we have taken precautions against systems failure, interruptions could result from natural disasters as well as power losses, telecommunications failures and similar events. 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 infrastructure and the privacy of confidential information. Nonetheless, our 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. Management's Discussion and Analysis of Financial Condition and Results of Operations The following management's discussion and analysis should be read in conjunction with our combined audited financial statements for the fiscal years ended December 31, 2003 and 2002 and related Notes to those financial statements. The following information relates solely to the business of Conversion Services International, Inc. and not the business of LCS Group, Inc. Overview We are in the business of supplying professional services relating to information technology management consulting, data warehousing, business intelligence and e-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 and we are now poised to capture market share in the fast growing business intelligence/data warehousing space. The business essentially became a public company through our merger with a wholly owned subsidiary of LCS Group, Inc., effective as of January 30, 2004 (see Item 1). 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. Our services range from providing customers with a single consultant to multi-personnel full-scale projects. CSI's contracts provide that its services are terminable upon relatively short notice, typically not more than 30 days. There can be no assurance that CSI's customers will continue to enter into contracts with CSI or that existing contracts will not be terminated. CSI provides its services directly to end-user organizations, in most cases. During the fiscal year ended December 31, 2003, two of our customers accounted for approximately 43% of total revenues. During the fiscal year ended December 31, 2002, two customers accounted collectively for approximately 59% of total revenues. 15 Our most significant costs are personnel expenses, which consist of consultant fees, benefits and payroll-related expenses, and outside consultants. 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-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. Amortization We amortize deferred loan costs on a straight-line basis over the term of the related loan instrument. We amortize 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 our Company and in connection with the acquisition of Scosys, Inc. Additionally, as part of our acquisition of Scosys, Inc., executed in November 2002, we acquired 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 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. Our 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. 16 Concentrations of Credit Risk Financial instruments which potentially subject us to concentrations of credit risk are cash and accounts receivable arising from our normal business activities. We routinely assesses the financial strength of our customers, 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 customer 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 status 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%. Results of Operations Fiscal year ended December 31, 2003 compared to December 31, 2002 The following table sets forth for the periods indicated certain financial data expressed as a percentage of total revenue, for continuing operations: PERCENTAGE OF REVENUE YEAR ENDED ---------------------- December 31, 2003 2002 ---- ---- Revenue 100.0% 100.0% Cost of Sales 71.5 65.7 ------- ------- Gross Profit 28.5 34.3 ------- ------- Selling and marketing 10.8 6.7 General and administrative 18.8 21.8 Depreciation and amortization 1.5 0.9 ------- ------- Total operating expenses 31.1 29.5 ------- ------- Operating Income (loss) -2.6 4.8 Interest expense 0.9 0.8 ------- ------- Income/loss from continuing operations before income tax preparations -3.5 3.9 Income tax provision (Benefit) -1.3 0.1 ------- ------- Income/loss from operations -2.20% 3.80% ======= ======= 17 The following discussion compares the combined results from continuing operations for the fiscal year ended December 31, 2003 and the fiscal year ended December 31, 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. 18 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. Liquidity and Capital Resources Since our inception, and until this year, we have funded our operations primarily from cash generated by operations and, to a lesser extent, such cash has been augmented with funds from borrowings under our credit facilities and from investments by affiliates and other investors. We had cash of $412,000 at December 31, 2003. We had working capital (deficit) of ($639,000) and ($600,000) at December 31, 2003 and 2002, respectively. Net cash used in operating activities was ($541,000) and ($52,000) for the year ended December 31, 2003 and 2002, respectively. Net cash used in operations for the year ended December 31, 2003 is primarily attributable to the net loss from operations of approximately ($307,000) and an increase of approximately $268,000 in the amounts due from customers resulting from a change in payment policy from due on receipt to "net 30" day payment terms. Net cash used in operating activities for the fiscal year ended December 31, 2002 were primarily attributable to the counter balance of the net income from operations of approximately $617,000 and an increase of approximately $181,000 in the amounts due from customers and a decrease in accounts payable and accrued expenses of approximately $549,000. Net cash provided by (used in) investing activities were ($103,000) and $87,000 for the years ended December 31, 2003 and 2002, respectively. Net cash used in investing activities for the year ended December 31, 2003 was attributable to the acquisition of property and equipment of approximately $94,000. Net cash provided by investing activities for the fiscal year ended December 31, 2002 was attributable to the collection of the note receivable issued in 2001 for approximately $210,000 offset by the acquisition of property and equipment of approximately $41,000 and intangible assets acquired in the Scosys transactions of approximately $83,000. Net cash provided by (used in) financing activities for the years ended December 31, 2003 and 2002 were $1,056,000, and ($56,000), respectively. Net cash provided by financing activities for the year ended December 31, 2003 was predominately attributable to the issuance of $1,500,000 of convertible debt and additional borrowing on the Company's line of credit of $1,113,000 offset by $770,000 of distributions to stockholders and principal payment on long-term debt and obligations arising from the Scosys acquisition of $778,000. Net cash used in financing activities for the fiscal year ended December 31, 2002, were primarily attributable an increase in net borrowings under existing credit facilities of approximately $150,000 and approximately $180,000 in distributions to stockholders. We had a credit facility with Fleet Bank (the "Bank"), which provided for a maximum borrowing of $2,250,000, based upon eligible accounts receivable. The interest rate was at the Bank's prime rate plus one. The line was collateralized by all corporate assets, guaranteed by our two principal stockholders, and expired on June 30, 2004. As of December 31, 2003, the outstanding balance was approximately $1,800,000. We had two term loans with the Bank. One note was payable in monthly installments of $8,333, plus interest at the Bank's prime rate plus one-fourth and was due in November 2005. The note was collateralized by all corporate assets and was guaranteed by our two principal stockholders. As of December 31, 2003, the outstanding balance was $191,666. The other note was payable in monthly installments of $11,667, plus interest at LIBOR plus 200 basis points and was due in November 2005. The note was collateralized by all corporate assets, pledged securities and was guaranteed by our stockholders. As of December 31, 2003, the outstanding balance was $268,333. 19 Our new credit facility, which provides for a maximum borrowing of $3,000,000 with Trust Company, was funded on March 30, 2004 and, as a result, the credit facility and the two term loans with the Bank were cancelled, and all outstanding amounts were repaid, on March 30, 2004. The interest rate is at the bank's prime rate plus seven-eighths. The line is collateralized by all corporate assets, guaranteed by our two principal stockholders, and expires in March 2007. In connection with our acquisition of Scosys, Inc., an obligation as of December 31, 2003 of $213,533 is due a third-party and is payable through May 2004. Income Tax Status 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 accounted 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 status was revoked in connection with the conversion of convertible subordinated debt into common shares. On a prospective basis, we expect to have an effective income tax rate of approximately 40%. We currently believe that, together with available funds, existing credit facilities and cash flows expected to be generated from operations, if any, will be sufficient to fund our working capital and capital expenditure requirements for at least the next twelve months. We may decide to 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. We cannot assure you, however, that additional financing will be available when needed or desired on terms favorable to us or at all. Off-Balance Sheet Transactions We do not have any transactions, agreements or other contractual arrangements that constitute off-balance sheet arrangements. Contractual Obligations The following is a chart of our contractual obligations, which are all payable within the next three years: - -------------------------------------------------------------------------------- Contractual Obligations Total Less than 1 year 1-3 years - -------------------------------------------------------------------------------- Long-term Debt $ 673,532 $ 453,533 $ 219,999 - -------------------------------------------------------------------------------- Capital lease Obligations $ 22,377 $ 8,448 $ 13,929 - -------------------------------------------------------------------------------- Operating leases $ 712,469 $ 343,628 $ 368,841 - -------------------------------------------------------------------------------- Total $1,408,378 $ 805,609 $ 602,769 - -------------------------------------------------------------------------------- 20 The following table sets forth information concerning our executive officers and directors and their ages as of March 30, 2004: Name Age Position - ---- --- -------- Scott Newman 44 President, Chief Executive Officer and Chairman Glenn Peipert 42 Executive Vice President, Chief Operating Officer and Director Mitchell Peipert 45 Vice President, Chief Financial Officer, Secretary and Treasurer Lawrence K. Reisman 45 Director Robert C. DeLeeuw 47 President, DeLeeuw Associates, LLC SCOTT NEWMAN, 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 Company) ("Old CSI") and is the largest stockholder of the Company. 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 the Company's Fortune 1000 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, Executive Vice President, Chief Operating Officer and Director since January 2004. Mr. Peipert held the same positions with Old CSI since its inception in 1990, and now holds the same positions with the Company. 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 the Company's Fortune 500 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, the Company's Vice President, Chief Financial Officer, Secretary and Treasurer. Mr. Peipert received his B.S. from Brooklyn College in 1982. MITCHELL PEIPERT, Vice President, Chief Financial Officer, Secretary and Treasurer since January 2004. Mr. Peipert is a Certified Public Accountant who held the same positions with Old CSI 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, the Company's 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. 21 LAWRENCE K. REISMAN, Director 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. ROBERT C. DELEEUW, Senior Vice President since March 2004 and President of our wholly owned subsidiary, DeLeeuw Associates, LLC. 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. 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 $100,000 with respect to the fiscal year ended December 31, 2003 and who were employed at the end of fiscal year 2003. 22 SUMMARY COMPENSATION TABLE*
LONG TERM COMPENSATION --------------------------------------------------- ANNUAL COMPENSATION(1) AWARDS PAYOUTS ----------------------------- ------------------------ ------------------------ RESTRICTED SECURITIES OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION - --------------------------- ---- ------ ----- ------------ ---------- ------------- ---------- ----------- ($) ($) ($) ($) (#) ($) ($) Scott Newman 2003 244,452 -- -- -- -- -- 206,686(2) President, Chief Executive Officer and 2002 143,750 -- -- -- -- -- 259,418(2) Chairman 2001 250,000 -- -- -- -- -- 220,000(2) Glenn Peipert 2003 223,016 -- -- -- -- -- 171,309(2) Executive Vice President, Chief Operating 2002 143,750 -- -- -- -- -- 199,166(2) Officer and Director 2001 187,500 -- -- -- -- -- 165,633(2)
- ---------- * Salary reflects total compensation paid to these executives (both before and after the merger described in Item 1). (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 the Company. Directors do not receive compensation for their duties as directors. Option Grants as of March 29, 2004 The only executive officer or director to receive options as of March 29, 2004 was Mitchell Peipert, who was granted options 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. 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 expires on March 28, 2014. 2003 Incentive Plan 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. 23 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 our Company. 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. 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. 24 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. 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. 25 General 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. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (a) Financial Statements of Businesses Acquired. Audited consolidated financial statements of Conversion Services International, Inc. and Affiliate as of December 31, 2003 and 2002 filed as Exhibit 99.3 hereto. (c) Exhibits. 2.1 Agreement and Plan of Reorganization, dated August 21, 2003, among the Company, LCSAC, 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 Company, LCSAC, Conversion Services International, Inc. and certain affiliated stockholders of Conversion Services International, Inc. (filed as Appendix A on Schedule 14A on January 5, 2004). 26 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 Company, DeLeeuw Associates, Inc. and Robert C. DeLeeuw (filed as Exhibit 2.1 on Form 8-K on March 16, 2004). 2.5 Plan and Agreement of Merger and Reorganization, dated February 27, 2004, among the Company, DeLeeuw Associates, Inc. and DeLeeuw Conversion LLC (filed as Exhibit 2.2 on Form 8-K on March 16, 2004). 2.6 Certificate of Merger relating to the merger of DeLeeuw Associates, Inc. and DeLeeuw Conversion LLC in Delaware (filed as Exhibit 2.3 on Form 8-K on March 16, 2004). 2.7 Certificate of Merger relating to the merger of DeLeeuw Associates, Inc. and DeLeeuw Conversion LLC in New Jersey (filed as Exhibit 2.4 on Form 8-K on March 16, 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 Company's Certificate of Incorporation, dated January 27, 2004, amending, among other things, the authorized shares of common and preferred stock (filed as Exhibit 3.1 on Form 8-K on February 17, 2004). 3.3 Certificate of Amendment to the Company's Certificate of Incorporation, dated January 30, 2004, changing the name of the Company from LCS Group, Inc. to Conversion Services International, Inc. (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). 10.1* Employment Agreement among the Company and Scott Newman, dated March 26, 2004. 10.2* Employment Agreement among the Company and Glenn Peipert, dated March 26, 2004. 10.3* Employment Agreement among the Company and Mitchell Peipert, dated March 26, 2004. 99.1 Press Release of the Company, dated January 30, 2004, relating to the closing of the merger transaction (filed as Exhibit 99.1 on Form 8-K on February 17, 2004). 99.2 Press Release of the Company, dated February 2, 2004, relating to the Company's new stock symbol (filed as Exhibit 99.2 on Form 8-K on February 17, 2004). 99.3* Audited consolidated financial statements of Conversion Services International, Inc. and Affiliate as of December 31, 2003 and 2002 - ---------- * filed herewith Statements contained in this Current Report on Form 8-K, which are not historical facts, are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based largely on current expectations and are subject to a number of known and unknown risks, uncertainties and other factors beyond our control that could cause actual events and results to differ materially from these statements. These statements are not guarantees of future performance, and readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this release. We undertake no obligation to update publicly any forward-looking statements. 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned hereunto duly authorized. March 31, 2004 CONVERSION SERVICES INTERNATIONAL, INC. By: /s/ Scott Newman ---------------------------------- Name: Scott Newman Title: President and Chief Executive Officer 28 EX-10.1 3 v02445_ex10-1.txt Exhibit 10.1 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into effective as of March 26, 2004 by and between Scott Newman ("Employee") and Conversion Services International, Inc. (the "Company"). WHEREAS, the Company is engaged in the business of data warehousing and business intelligence consulting; and WHEREAS, the Company and Employee are willing to commence an employment relationship, on the terms, conditions and covenants set forth in this Agreement; NOW, THEREFORE, in consideration of Employee's commencement of employment with the Company, the mutual covenants contained herein and other good and valuable consideration, the receipt of which the Company and Employee hereby acknowledge, Employee and the Company agree, as follows: 1. Position. Employee agrees to employment with the Company, and the Company hereby employs Employee, in the position of President and Chief Executive Officer of the Company. Employee further agrees to perform the job duties and to carry out the responsibilities of that position, and such other duties and responsibilities traditionally associated with such position, as determined by the Board of Directors of the Company from time to time. 2. Employee's Effort. Employee shall perform his duties in the capacity as an employee and in such capacity shall spend his full working time and best efforts, skill and attention to his position and to the business and interests of the Company. Employee shall perform his duties principally at the offices of the Company in East Hanover, New Jersey. 3. Salary. (a) The Company shall pay Employee (i) base compensation (the "Salary") for services rendered in the amount of Five Hundred Thousand Dollars ($500,000) per annum payable on a semi-monthly basis (which base compensation may be increased by the Board of Directors of the Company, in its sole discretion), and (ii) annual bonus, if any, as may be determined by the Board of Directors of the Company, in its sole discretion. (b) Employee will be entitled to participate in any bonus plan, incentive compensation program or incentive stock option plan or other employee benefits of the Company and which are available to the five highest paid executives of the Company, on the same terms and at the same level of participation as the five highest paid executives of the Company. 4. Benefits. (a) Employee will be entitled to at least nine (9) paid holidays and two (2) personal days each calendar year. The Company will notify Employee on or about the beginning of each calendar year with respect to the holiday schedule for the coming year. Personal holidays, if any, will be scheduled in advance subject to requirements of the Company. Such holidays must be taken during the calendar year and cannot be carried forward into the next year. (b) Employee shall be entitled to twenty five (25) paid vacation days each year, and if unused due to the requirements of the Company's business may be carried forward into subsequent years. (c) Employee shall be entitled to sick leave and emergency leave according to the regular policies and procedures of the Company. Additional sick leave or emergency leave over and above paid leave provided by the Company, if any, shall be unpaid and shall be granted at the discretion of the Board of Directors or any committee thereof. (d) The Company agrees to include Employee in the group medical and hospital plan of the Company and provide group life insurance for Employee at no charge to Employee in the amount of the Salary during this Agreement. Employee shall be responsible for payment of any federal or state income tax imposed upon these benefits. (e) Employee shall be entitled to participate in any pension or profit sharing plan, incentive stock option plan or any other type of plan adopted by the Company for the benefit of its officers and/or regular employees. (f) The Company will provide to Employee the use of an automobile of Employee's choice at a monthly leased price not to exceed $2,000. The Company agrees to replace the automobile with a new one at Employee's request no more often than once every two (2) years. The Company will pay all automobile operating expenses incurred by Employee in the performance of Employee's Company duties. The Company will procure and maintain in force an automobile liability policy for the automobile with coverage, including Employee, in the minimum amount of $1,000,000 combined single limit on bodily injury and property damage. (g) Employee shall be entitled to reimbursement for all reasonable expenses, including travel and entertainment, incurred by Employee in the performance of Employee's duties. Employee will maintain records and written receipt as required by the Company policy and reasonably requested by the Board of Directors of the Company to substantiate such expenses. 5. Term; Termination. This Agreement and the status and obligations of Employee thereunder as an employee of the Company (except as provided for below) shall cease and terminate effective upon the close of business on March 25, 2009 (the "Expiration Date") unless earlier terminated pursuant to this Section 5 or further extended by the parties hereto in writing in a separate instrument; provided, however, that upon such date said termination shall not affect any rights that may have been specifically granted to Employee by the Board of Directors of the Company or a designated committee thereof pursuant to any of the Company's retirement plans, supplementary retirement plans, profit sharing and savings plans, healthcare, 401(k) or any other employee benefit plans 2 sponsored by the Company, it being understood that no such rights are granted hereunder. In addition, notwithstanding the expiry or termination of this Agreement pursuant to this Section 5 or otherwise, Employee's rights and obligations under Sections 7 through 12 inclusive of this Agreement shall survive such termination or expiration of this Agreement in accordance with the terms of such Sections. (a) Death or Disability. This Agreement shall automatically termiante upon the death or disability of Employee and all his rights hereunder, including the rights to receive compensation and benefits, except as otherwise required by law. (b) Termination with Notice by Either Party. The Company or Employee may terminate this Agreement for any reason or no reason upon thirty (30) days prior written notice to the other. In case of termination by the Company, with the exception of Good Cause (as herein defined), the Company shall pay Employee severance compensation, in a lump sum payable on the date of termination, calculated at the rate of Salary in effect as of the date immediately preceding the date of termination and the cost of premiums for any Company sponsored insurance policy (or the cash equivalent) for the longer of (i) thirty-six months (36) months or (ii) the period from the date of termination through the Expiration Date. (c) Termination for Good Cause. "Good Cause" means any one or more of the following: (1) a continuing material breach or continuing material default by Employee of the material terms of this Agreement (except any such breach or default which is caused by the physical disability or death of Employee) which remains uncured after twenty (20) days following Employee's receipt from the Company of written notice specifying such breach or default; (2) gross negligence or willful misfeasance by Employee or the breach of fiduciary duty by Employee (if affirmatively determined by the Board of Directors of the Company) in the performance of his duties as an employee hereunder; (3) the commission by Employee of an act of fraud, embezzlement or any other crime in connection with Employee's duties; or (4) conviction of Employee of a felony or any other crime that would materially interfere with the performance of Employee's duties hereunder. In the event of a termination for Good Cause, the Company will pay Employee the Base Salary earned and expenses reimbursable under this Agreement incurred through the date of Employee's termination, or twenty-four (24) months from the effective date of this Agreement, whichever is longer, in one lump sum. Employee shall continue to receive the same health benefits that he was receiving prior to such termination for twenty-four (24) months following such termination. 3 6. Change in Control and Other Grounds Entitling Employee to Terminate. "Change in Control" shall mean (a) any sale, lease, exchange or other transfer (in one transaction or a series of transactions) of all or substantially all of the assets of the Company; (b) individuals who, as of the date hereof, consitute the entire Board of Directors of the Company (the "Incumbant Directors") cease for any reason to constitute at least a majority of the Board of Directors of such company, provided that any individual becoming a director subsequent to the date hereof whose election was approved by a vote of at least a majority of the then Incumbant Directors shall be, for the purposes of this provision, considered as though such individual were an incumbant director; (c) any consolidation or merger or other business combination of the Company with any other entity where the stockholders of the Company immediately prior to the consolidation or merger or other business combination would not, immediately after the consolidation or merger or other business combination, beneficially own, directly or indirectly, shares representing fifty percent (50%) of the combined voting power of all of the outstanding securities of the entity issuing cash or securities in the consolidation or merger or other business combination (or its ultimate parent corporation, if any); (d) a third person, including a person defined in Section (13)(d)(3) of the Securites Exchange Act of 1934, as amended (the "Exchange Act"), becomes the benefical owner (as defined in Section (13)(d)(3) of the Exchange Act) directly or indirectly of securites of the Company representing fifty percent (50%) or more of the total number of votes that may be cast for the election of the directors of the Company; or (e) the Board of Directors of the Company by vote of a majority of all the directors, adopts a resolution to the effect that a "Change in Control" has occurred for purposes of this Agreement. (a) A Change in Control in the Company resulting in a material adverse change in duties, responsibilities or role, or reporting relationships of Employee will be treated as a termination by the Company without Good Cause. If such termination without Good Cause occurs following a Change in Control, Employee will be entitled to elect to terminate his employment hereunder and to receive his severance compensation and other rights and benefits pursuant to Section 5(a) as if he were terminated by the Company without Good Cause and expenses reimbursable under this Agreement incurred through the date of Employee's termination, in one lump sum. (b) Upon a Change in Control, 100% of all unvested stock options and/or restricted shares held by Employee shall immediately vest. (c) Further, any of the following shall constitute a termination by the Company without Good Cause entitling Employee to elect to terminate his employment hereunder and to receive his severance compensation and other rights and benefits pursuant to Section 5(a) as if he were terminated by the Company without Good Cause: (i) the relocation of Employee by the Company more than 50 miles from East Hanover, New Jersey; (ii) there shall be a continuing material breach or continuing material default by the Company of the material terms of this Agreement which remains uncured after twenty (20) days following the Company's receipt from Employee of written notice specifying such breach or default; or (iii) if Employee shall no longer hold the position of President and Chief Executive Officer of the Company unless there is Good Cause for the removal of Employee from such position. 4 7. Confidentiality. Employee shall keep confidential, except as the Company may otherwise consent in writing, and not disclose or make any use of except for the benefit of the Company, at any time either during the term of this Agreement or therafter, any trade secrets, knowledge, data or other information of the Company relating to the products, processes, know how, technical data, designs, formulas, test data, customer lists, business plans, marketing plans and strategies, and product pricing strategies or other subject matter pertaining to any business of the Company or any of its clients, customers, consultants, licensees or affiliates which Employee may produce, obtain or otherwise learn of during the course of Employee's performance of services (collectively "Confidential Information"). Employee shall not deliver, reproduce, or in any way allow any such Confidential Information to be delivered to or used by any third parties without the specific direction or consent of a duly authorized representative of the Company, except in connection with the dischage of his duties thereunder. The terms of this paragraph shall survive termination of this Agreement. Notwithstanding anything to the contrary herein, Employee shall not have any obligation to keep confidential any information (and the term "Confidential Information" shall not be deemed to include any information) that (a) is generally available to the public through no fault or wrongful act of Employee in breach of the terms hereof, (b) is disseminated by the Company or any of its affiliates publicly without requiring confidentiality, (c) is required by law or regulation to be disclosed by Employee, or (d) is required to be disclosed by Employee to any government agency or person to whom disclosure is required by judicial or administrative process. 8. Return of Confidential Material. Upon the completion or other termination of Employee's services for the Company, Employee shall promptly surrender and deliver to the Company all records, materials, equipment, drawings, documents, notes and books and data of any nature pertaining to any invention, trade secret or Confidential Information of the Company or to Employee's services, and Employee will not take with him any description containing or pertaining to any Confidential Information, knowledge or data of the Company which Employee may produce or obtain during the course of his services. The terms of this paragraph shall survive termination of this Agreement. 9. Competition. Employee will not do any of the following, either directly or indirectly, during Employee's employment with the Company and during the period of one (1) year after Employee's cessation of employment with the Company, anywhere in the world. In the event that Employee improperly competes with the Company in violation of this Section, the period during which he engages in such competition shall not be counted in determining the duration of the one (1) year non-compete restriction: (a) For purposes of this Agreement, "Competitive Activity" shall mean any activity relating to, in respect of or in connection with, directly or indirectly, the data warehousing and business intelligence consulting business. (b) Employee shall not own, manage, operate, control, consult for, be an officer or director of, work for, or be employed in any capacity by any company or any other business, entity, agency or organization which engages in Competitive Activity; provided, however, that during his employment by the Company and during his non-compete period following departure from the Company, 5 Employee may serve as a director or consultant of an entity that is either a Company licensee, or, for non-licensees, in such capacity as the Board of Directors of the Company has granted him written permission. (c) Employee shall not solicit or perform services in connection with any Competitive Activity for any prior or current customers of the Company; or (d) Employee shall not solicit for employment or employ any then current employees employed by the Company without the Company's consent. Employee and the Company agree that the phrase "Employee's cessation of employment with the Company" as used in this Agreement, refers to any separation from his employment at the Company either voluntarily or involuntarily, either with cause or without cause, or whether the separation is at the behest of the Company or Employee. Nothing in this Agreement shall preclude Employee from employment at a not-for-profit or governmental institution, provided that no for-profit business involved data warehousing and business intelligence consulting, directly or indirectly, derives a benefit from Employee's employment. 10. Other Obligations. (a) Employee acknowledges that the Company from time to time may have agreements with other persons which impose obligations or restrictions on the Company made during the course of work thereunder or regarding the confidential nature of such work. Employee will be bound by all such obligations and restrictions and will take all action necessary to discharge the obligations of the Company thereunder. (b) All of Employee's obligations under this Agreement shall be subject to any applicable agreements with, and policies issued by the Company to which Employee is subject, that are generally applicable to the five highest paid executives of the Company. 11. Trade Secrets of Others. Employee represents that his performance of all the terms of this Agreement as employee to the Company does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by Employee in confidence or in trust, and Employee will not disclose to the Company, or allow the Company to use, any confidential or proprietary information or material belonging to any other person or entity. Employee will not enter into any agreement, either written or oral, which is in conflict with this Agreement. 12. Injunctive Relief. Employee acknowledges that any breach or attempted breach by Employee of paragraphs 7 through 12 of this Agreement shall cause the Company irreparable harm for which any adequate monetary remedy does not exist. Accordingly, in the event of any such breach or threatened breach, the Company shall be entitled to obtain injunctive relief, without the necessity of posting a bond or other surety, restraining such breach or threatened breach. 13. Modification. This Agreement may not be changed, modified, released, discharged, abandoned, or otherwise amended, in whole or in part, except by an instrument in writing, signed by Employee and by the Company. Any 6 subsequent change or changes in Employee's relationship with the Company or Employee's compensation shall not affect the validity or scope of this Agreement. 14. Entire Agreement. Employee acknowledges receipt of this Agreement, and agrees that with respect to the subject matter thereof, it is Employee's entire agreement with the Company, superseding any previous oral or written communications, representations, understandings with the Company or any office or representative thereof. Each party to the Agreement acknowledges that, in executing this Agreement, such party has had the opportunity to seek the advice of independent legal counsel, and has read and understood all of the terms and provisions of the Agreement. 15. Severability. In the event that any paragraph or provision of this Agreement shall be held to be illegal or unenforceable, the entire Agreement shall not fall on account thereof, but shall otherwise remain in full force and effect, and such paragraph or provision shall be enforced to the maximum extent permissible. 16. Successors and Assigns. This Agreement shall be binding upon Employee's heirs, executors, administrators or other legal representatives and is for the benefit of the Company, its successors and assigns. 17. Governing Law. This Agreement shall be governed by the laws of the State of Delaware except for any conflicts of law rules thereof that might direct the application of the substantive law of another state. 18. Counterparts. This Agreement may be signed in counterparts and by facsimile transmission, each of which shall be deemed an original and both of which shall together constitute one agreement. 19. No Waiver. No waiver by either party hereto of any breach of this Agreement by the other party hereto shall constitute a waiver of any subsequent breach. 20. Notice. Any notice hereby required or permitted to be given shall be sufficiently given if in writing and upon mailing by registered or certified mail, postage prepaid, to either party at the address of such party or such other address as shall have been designated by written notice by such party to the other party. [Signature Page Follows] 7 The undersigned have executed this Agreement as of the date first forth above. CONVERSION SERVICES INTERNATIONAL, INC. By: /s/ Glenn Peipert ----------------------------------- Name: Glenn Peipert Title: Executive Vice President and Chief Operating Officer /s/ Scott Newman ----------------------------------- Scott Newman President and Chief Executive Officer 8 EX-10.2 4 v02445_ex10-2.txt Exhibit 10.2 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into effective as of March 26, 2004 by and between Glenn Peipert ("Employee") and Conversion Services International, Inc. (the "Company"). WHEREAS, the Company is engaged in the business of data warehousing and business intelligence consulting; and WHEREAS, the Company and Employee are willing to commence an employment relationship, on the terms, conditions and covenants set forth in this Agreement; NOW, THEREFORE, in consideration of Employee's commencement of employment with the Company, the mutual covenants contained herein and other good and valuable consideration, the receipt of which the Company and Employee hereby acknowledge, Employee and the Company agree, as follows: 1. Position. Employee agrees to employment with the Company, and the Company hereby employs Employee, in the position of Executive Vice President and Chief Operating Officer of the Company. Employee further agrees to perform the job duties and to carry out the responsibilities of that position, and such other duties and responsibilities traditionally associated with such position, as determined by the Board of Directors of the Company from time to time. 2. Employee's Effort. Employee shall perform his duties in the capacity as an employee and in such capacity shall spend his full working time and best efforts, skill and attention to his position and to the business and interests of the Company. Employee shall perform his duties principally at the offices of the Company in East Hanover, New Jersey. 3. Salary. (a) The Company shall pay Employee (i) base compensation (the "Salary") for services rendered in the amount of Three Hundred Seventy Five Thousand Dollars ($375,000) per annum payable on a semi-monthly basis (which base compensation may be increased by the Board of Directors of the Company, in its sole discretion), and (ii) annual bonus, if any, as may be determined by the Board of Directors of the Company, in its sole discretion. (b) Employee will be entitled to participate in any bonus plan, incentive compensation program or incentive stock option plan or other employee benefits of the Company and which are available to the five highest paid executives of the Company, on the same terms and at the same level of participation as the five highest paid executives of the Company. 4. Benefits. (a) Employee will be entitled to at least nine (9) paid holidays and two (2) personal days each calendar year. The Company will notify Employee on or about the beginning of each calendar year with respect to the holiday schedule for the coming year. Personal holidays, if any, will be scheduled in advance subject to requirements of the Company. Such holidays must be taken during the calendar year and cannot be carried forward into the next year. (b) Employee shall be entitled to twenty five (25) paid vacation days each year, and if unused due to the requirements of the Company's business may be carried forward into subsequent years. (c) Employee shall be entitled to sick leave and emergency leave according to the regular policies and procedures of the Company. Additional sick leave or emergency leave over and above paid leave provided by the Company, if any, shall be unpaid and shall be granted at the discretion of the Board of Directors or any committee thereof. (d) The Company agrees to include Employee in the group medical and hospital plan of the Company and provide group life insurance for Employee at no charge to Employee in the amount of the Salary during this Agreement. Employee shall be responsible for payment of any federal or state income tax imposed upon these benefits. (e) Employee shall be entitled to participate in any pension or profit sharing plan, incentive stock option plan or any other type of plan adopted by the Company for the benefit of its officers and/or regular employees. (f) The Company will provide to Employee the use of an automobile of Employee's choice at a monthly leased price not to exceed $2,000. The Company agrees to replace the automobile with a new one at Employee's request no more often than once every two (2) years. The Company will pay all automobile operating expenses incurred by Employee in the performance of Employee's Company duties. The Company will procure and maintain in force an automobile liability policy for the automobile with coverage, including Employee, in the minimum amount of $1,000,000 combined single limit on bodily injury and property damage. (g) Employee shall be entitled to reimbursement for all reasonable expenses, including travel and entertainment, incurred by Employee in the performance of Employee's duties. Employee will maintain records and written receipt as required by the Company policy and reasonably requested by the Board of Directors of the Company to substantiate such expenses. 5. Term; Termination. This Agreement and the status and obligations of Employee thereunder as an employee of the Company (except as provided for below) shall cease and terminate effective upon the close of business on March 25, 2009 (the "Expiration Date") unless earlier terminated pursuant to this Section 5 or further extended by the parties hereto in writing in a separate instrument; provided, however, that upon such date said termination shall not affect any rights that may have been specifically granted to Employee by the Board of Directors of the Company or a designated committee thereof pursuant to any of the Company's retirement plans, supplementary retirement plans, profit sharing 2 and savings plans, healthcare, 401(k) or any other employee benefit plans sponsored by the Company, it being understood that no such rights are granted hereunder. In addition, notwithstanding the expiry or termination of this Agreement pursuant to this Section 5 or otherwise, Employee's rights and obligations under Sections 7 through 12 inclusive of this Agreement shall survive such termination or expiration of this Agreement in accordance with the terms of such Sections. (a) Death or Disability. This Agreement shall automatically termiante upon the death or disability of Employee and all his rights hereunder, including the rights to receive compensation and benefits, except as otherwise required by law. (b) Termination with Notice by Either Party. The Company or Employee may terminate this Agreement for any reason or no reason upon thirty (30) days prior written notice to the other. In case of termination by the Company, with the exception of Good Cause (as herein defined), the Company shall pay Employee severance compensation, in a lump sum payable on the date of termination, calculated at the rate of Salary in effect as of the date immediately preceding the date of termination and the cost of premiums for any Company sponsored insurance policy (or the cash equivalent) for the longer of (i) thirty-six months (36) months or (ii) the period from the date of termination through the Expiration Date. (c) Termination for Good Cause. "Good Cause" means any one or more of the following: (1) a continuing material breach or continuing material default by Employee of the material terms of this Agreement (except any such breach or default which is caused by the physical disability or death of Employee) which remains uncured after twenty (20) days following Employee's receipt from the Company of written notice specifying such breach or default; (2) gross negligence or willful misfeasance by Employee or the breach of fiduciary duty by Employee (if affirmatively determined by the Board of Directors of the Company) in the performance of his duties as an employee hereunder; (3) the commission by Employee of an act of fraud, embezzlement or any other crime in connection with Employee's duties; or (4) conviction of Employee of a felony or any other crime that would materially interfere with the performance of Employee's duties hereunder. In the event of a termination for Good Cause, the Company will pay Employee the Base Salary earned and expenses reimbursable under this Agreement incurred through the date of Employee's termination, or twenty-four (24) months from the effective date of this Agreement, whichever is longer, in one lump sum. Employee shall continue to receive the same health benefits that he was receiving prior to such termination for twenty-four (24) months following such termination. 3 6. Change in Control and Other Grounds Entitling Employee to Terminate. "Change in Control" shall mean (a) any sale, lease, exchange or other transfer (in one transaction or a series of transactions) of all or substantially all of the assets of the Company; (b) individuals who, as of the date hereof, consitute the entire Board of Directors of the Company (the "Incumbant Directors") cease for any reason to constitute at least a majority of the Board of Directors of such company, provided that any individual becoming a director subsequent to the date hereof whose election was approved by a vote of at least a majority of the then Incumbant Directors shall be, for the purposes of this provision, considered as though such individual were an incumbant director; (c) any consolidation or merger or other business combination of the Company with any other entity where the stockholders of the Company immediately prior to the consolidation or merger or other business combination would not, immediately after the consolidation or merger or other business combination, beneficially own, directly or indirectly, shares representing fifty percent (50%) of the combined voting power of all of the outstanding securities of the entity issuing cash or securities in the consolidation or merger or other business combination (or its ultimate parent corporation, if any); (d) a third person, including a person defined in Section (13)(d)(3) of the Securites Exchange Act of 1934, as amended (the "Exchange Act"), becomes the benefical owner (as defined in Section (13)(d)(3) of the Exchange Act) directly or indirectly of securites of the Company representing fifty percent (50%) or more of the total number of votes that may be cast for the election of the directors of the Company; or (e) the Board of Directors of the Company by vote of a majority of all the directors, adopts a resolution to the effect that a "Change in Control" has occurred for purposes of this Agreement. (a) A Change in Control in the Company resulting in a material adverse change in duties, responsibilities or role, or reporting relationships of Employee will be treated as a termination by the Company without Good Cause. If such termination without Good Cause occurs following a Change in Control, Employee will be entitled to elect to terminate his employment hereunder and to receive his severance compensation and other rights and benefits pursuant to Section 5(a) as if he were terminated by the Company without Good Cause and expenses reimbursable under this Agreement incurred through the date of Employee's termination, in one lump sum. (b) Upon a Change in Control, 100% of all unvested stock options and/or restricted shares held by Employee shall immediately vest. (c) Further, any of the following shall constitute a termination by the Company without Good Cause entitling Employee to elect to terminate his employment hereunder and to receive his severance compensation and other rights and benefits pursuant to Section 5(a) as if he were terminated by the Company without Good Cause: (i) the relocation of Employee by the Company more than 50 miles from East Hanover, New Jersey; (ii) there shall be a continuing material breach or continuing material default by the Company of the material terms of this Agreement which remains uncured after twenty (20) days following the Company's receipt from Employee of written notice specifying such breach or default; or (iii) if Employee shall no longer hold the position of Executive Vice President and Chief Operating Officer of the Company unless there is Good Cause for the removal of Employee from such position. 4 7. Confidentiality. Employee shall keep confidential, except as the Company may otherwise consent in writing, and not disclose or make any use of except for the benefit of the Company, at any time either during the term of this Agreement or therafter, any trade secrets, knowledge, data or other information of the Company relating to the products, processes, know how, technical data, designs, formulas, test data, customer lists, business plans, marketing plans and strategies, and product pricing strategies or other subject matter pertaining to any business of the Company or any of its clients, customers, consultants, licensees or affiliates which Employee may produce, obtain or otherwise learn of during the course of Employee's performance of services (collectively "Confidential Information"). Employee shall not deliver, reproduce, or in any way allow any such Confidential Information to be delivered to or used by any third parties without the specific direction or consent of a duly authorized representative of the Company, except in connection with the dischage of his duties thereunder. The terms of this paragraph shall survive termination of this Agreement. Notwithstanding anything to the contrary herein, Employee shall not have any obligation to keep confidential any information (and the term "Confidential Information" shall not be deemed to include any information) that (a) is generally available to the public through no fault or wrongful act of Employee in breach of the terms hereof, (b) is disseminated by the Company or any of its affiliates publicly without requiring confidentiality, (c) is required by law or regulation to be disclosed by Employee, or (d) is required to be disclosed by Employee to any government agency or person to whom disclosure is required by judicial or administrative process. 8. Return of Confidential Material. Upon the completion or other termination of Employee's services for the Company, Employee shall promptly surrender and deliver to the Company all records, materials, equipment, drawings, documents, notes and books and data of any nature pertaining to any invention, trade secret or Confidential Information of the Company or to Employee's services, and Employee will not take with him any description containing or pertaining to any Confidential Information, knowledge or data of the Company which Employee may produce or obtain during the course of his services. The terms of this paragraph shall survive termination of this Agreement. 9. Competition. Employee will not do any of the following, either directly or indirectly, during Employee's employment with the Company and during the period of one (1) year after Employee's cessation of employment with the Company, anywhere in the world. In the event that Employee improperly competes with the Company in violation of this Section, the period during which he engages in such competition shall not be counted in determining the duration of the one (1) year non-compete restriction: (a) For purposes of this Agreement, "Competitive Activity" shall mean any activity relating to, in respect of or in connection with, directly or indirectly, the data warehousing and business intelligence consulting business. (b) Employee shall not own, manage, operate, control, consult for, be an officer or director of, work for, or be employed in any capacity by any company or any other business, entity, agency or organization which engages in Competitive Activity; provided, however, that during his employment by the Company and during his non-compete period following departure from the Company, 5 Employee may serve as a director or consultant of an entity that is either a Company licensee, or, for non-licensees, in such capacity as the Board of Directors of the Company has granted him written permission. (c) Employee shall not solicit or perform services in connection with any Competitive Activity for any prior or current customers of the Company; or (d) Employee shall not solicit for employment or employ any then current employees employed by the Company without the Company's consent. Employee and the Company agree that the phrase "Employee's cessation of employment with the Company" as used in this Agreement, refers to any separation from his employment at the Company either voluntarily or involuntarily, either with cause or without cause, or whether the separation is at the behest of the Company or Employee. Nothing in this Agreement shall preclude Employee from employment at a not-for-profit or governmental institution, provided that no for-profit business involved data warehousing and business intelligence consulting, directly or indirectly, derives a benefit from Employee's employment. 10. Other Obligations. (a) Employee acknowledges that the Company from time to time may have agreements with other persons which impose obligations or restrictions on the Company made during the course of work thereunder or regarding the confidential nature of such work. Employee will be bound by all such obligations and restrictions and will take all action necessary to discharge the obligations of the Company thereunder. (b) All of Employee's obligations under this Agreement shall be subject to any applicable agreements with, and policies issued by the Company to which Employee is subject, that are generally applicable to the five highest paid executives of the Company. 11. Trade Secrets of Others. Employee represents that his performance of all the terms of this Agreement as employee to the Company does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by Employee in confidence or in trust, and Employee will not disclose to the Company, or allow the Company to use, any confidential or proprietary information or material belonging to any other person or entity. Employee will not enter into any agreement, either written or oral, which is in conflict with this Agreement. 12. Injunctive Relief. Employee acknowledges that any breach or attempted breach by Employee of paragraphs 7 through 12 of this Agreement shall cause the Company irreparable harm for which any adequate monetary remedy does not exist. Accordingly, in the event of any such breach or threatened breach, the Company shall be entitled to obtain injunctive relief, without the necessity of posting a bond or other surety, restraining such breach or threatened breach. 6 13. Modification. This Agreement may not be changed, modified, released, discharged, abandoned, or otherwise amended, in whole or in part, except by an instrument in writing, signed by Employee and by the Company. Any subsequent change or changes in Employee's relationship with the Company or Employee's compensation shall not affect the validity or scope of this Agreement. 14. Entire Agreement. Employee acknowledges receipt of this Agreement, and agrees that with respect to the subject matter thereof, it is Employee's entire agreement with the Company, superseding any previous oral or written communications, representations, understandings with the Company or any office or representative thereof. Each party to the Agreement acknowledges that, in executing this Agreement, such party has had the opportunity to seek the advice of independent legal counsel, and has read and understood all of the terms and provisions of the Agreement. 15. Severability. In the event that any paragraph or provision of this Agreement shall be held to be illegal or unenforceable, the entire Agreement shall not fall on account thereof, but shall otherwise remain in full force and effect, and such paragraph or provision shall be enforced to the maximum extent permissible. 16. Successors and Assigns. This Agreement shall be binding upon Employee's heirs, executors, administrators or other legal representatives and is for the benefit of the Company, its successors and assigns. 17. Governing Law. This Agreement shall be governed by the laws of the State of Delaware except for any conflicts of law rules thereof that might direct the application of the substantive law of another state. 18. Counterparts. This Agreement may be signed in counterparts and by facsimile transmission, each of which shall be deemed an original and both of which shall together constitute one agreement. 19. No Waiver. No waiver by either party hereto of any breach of this Agreement by the other party hereto shall constitute a waiver of any subsequent breach. 20. Notice. Any notice hereby required or permitted to be given shall be sufficiently given if in writing and upon mailing by registered or certified mail, postage prepaid, to either party at the address of such party or such other address as shall have been designated by written notice by such party to the other party. [Signature Page Follows] 7 The undersigned have executed this Agreement as of the date first forth above. CONVERSION SERVICES INTERNATIONAL, INC. By: /s/ Scott Newman ----------------------------------- Name: Scott Newman Title: President and Chief Executive Officer /s/ Glenn Peipert ------------------------------- Glenn Peipert 8 EX-10.3 5 v02445_ex10-3.txt Exhibit 10.3 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into effective as of March 26, 2004 by and between Mitchell Peipert ("Employee") and Conversion Services International, Inc. (the "Company"). WHEREAS, the Company is engaged in the business of data warehousing and business intelligence consulting; and WHEREAS, the Company and Employee are willing to commence an employment relationship, on the terms, conditions and covenants set forth in this Agreement; NOW, THEREFORE, in consideration of Employee's commencement of employment with the Company, the mutual covenants contained herein and other good and valuable consideration, the receipt of which the Company and Employee hereby acknowledge, Employee and the Company agree, as follows: 1. Position. Employee agrees to employment with the Company, and the Company hereby employs Employee, in the position of Vice President and Chief Financial Officer of the Company. Employee further agrees to perform the job duties and to carry out the responsibilities of that position, and such other duties and responsibilities traditionally associated with such position, as determined by the Board of Directors of the Company from time to time. 2. Employee's Effort. Employee shall perform his duties in the capacity as an employee and in such capacity shall spend his full working time and best efforts, skill and attention to his position and to the business and interests of the Company. Employee shall perform his duties principally at the offices of the Company in East Hanover, New Jersey. 3. Salary. (a) The Company shall pay Employee (i) base compensation (the "Salary") for services rendered in the amount of Two Hundred Thousand Dollars ($200,000) per annum payable on a semi-monthly basis (which base compensation may be increased by the Board of Directors of the Company, in its sole discretion), and (ii) annual bonus, if any, as may be determined by the Board of Directors of the Company, in its sole discretion. (b) Employee will be entitled to participate in any bonus plan, incentive compensation program or incentive stock option plan or other employee benefits of the Company and which are available to the five highest paid executives of the Company, on the same terms and at the same level of participation as the five highest paid executives of the Company. 4. Benefits. (a) Employee will be entitled to at least nine (9) paid holidays and two (2) personal days each calendar year. The Company will notify Employee on or about the beginning of each calendar year with respect to the holiday schedule for the coming year. Personal holidays, if any, will be scheduled in advance subject to requirements of the Company. Such holidays must be taken during the calendar year and cannot be carried forward into the next year. (b) Employee shall be entitled to twenty (20) paid vacation days each year, and if unused due to the requirements of the Company's business may be carried forward into subsequent years. (c) Employee shall be entitled to sick leave and emergency leave according to the regular policies and procedures of the Company. Additional sick leave or emergency leave over and above paid leave provided by the Company, if any, shall be unpaid and shall be granted at the discretion of the Board of Directors or any committee thereof. (d) The Company agrees to include Employee in the group medical and hospital plan of the Company and provide group life insurance for Employee at no charge to Employee in the amount of the Salary during this Agreement. Employee shall be responsible for payment of any federal or state income tax imposed upon these benefits. (e) Employee shall be entitled to participate in any pension or profit sharing plan, incentive stock option plan or any other type of plan adopted by the Company for the benefit of its officers and/or regular employees. (f) The Company will provide to Employee the use of an automobile of Employee's choice at a monthly leased price not to exceed $750. The Company agrees to replace the automobile with a new one at Employee's request no more often than once every two (2) years. The Company will pay all automobile operating expenses incurred by Employee in the performance of Employee's Company duties. The Company will procure and maintain in force an automobile liability policy for the automobile with coverage, including Employee, in the minimum amount of $1,000,000 combined single limit on bodily injury and property damage. (g) Employee shall be entitled to reimbursement for all reasonable expenses, including travel and entertainment, incurred by Employee in the performance of Employee's duties. Employee will maintain records and written receipt as required by the Company policy and reasonably requested by the Board of Directors of the Company to substantiate such expenses. 5. Term; Termination. This Agreement and the status and obligations of Employee thereunder as an employee of the Company (except as provided for below) shall cease and terminate effective upon the close of business on March 25, 2007 (the "Expiration Date") unless earlier terminated pursuant to this Section 5 or further extended by the parties hereto in writing in a separate instrument; provided, however, that upon such date said termination shall not affect any rights that may have been specifically granted to Employee by the Board of Directors of the Company or a designated committee thereof pursuant to any of the Company's retirement plans, supplementary retirement plans, profit sharing and savings plans, healthcare, 401(k) or any other employee benefit plans 2 sponsored by the Company, it being understood that no such rights are granted hereunder. In addition, notwithstanding the expiry or termination of this Agreement pursuant to this Section 5 or otherwise, Employee's rights and obligations under Sections 7 through 12 inclusive of this Agreement shall survive such termination or expiration of this Agreement in accordance with the terms of such Sections. (a) Death or Disability. This Agreement shall automatically termiante upon the death or disability of Employee and all his rights hereunder, including the rights to receive compensation and benefits, except as otherwise required by law. (b) Termination with Notice by Either Party. The Company or Employee may terminate this Agreement for any reason or no reason upon thirty (30) days prior written notice to the other. In case of termination by the Company, with the exception of Good Cause (as herein defined), the Company shall pay Employee severance compensation, in a lump sum payable on the date of termination, calculated at the rate of Salary in effect as of the date immediately preceding the date of termination and the cost of premiums for any Company sponsored insurance policy (or the cash equivalent) for the longer of (i) thirty six (36) months or (ii) the period from the date of termination through the Expiration Date. (c) Termination for Good Cause. "Good Cause" means any one or more of the following: (1) a continuing material breach or continuing material default by Employee of the material terms of this Agreement (except any such breach or default which is caused by the physical disability or death of Employee) which remains uncured after twenty (20) days following Employee's receipt from the Company of written notice specifying such breach or default; (2) gross negligence or willful misfeasance by Employee or the breach of fiduciary duty by Employee (if affirmatively determined by the Board of Directors of the Company) in the performance of his duties as an employee hereunder; (3) the commission by Employee of an act of fraud, embezzlement or any other crime in connection with Employee's duties; or (4) conviction of Employee of a felony or any other crime that would materially interfere with the performance of Employee's duties hereunder. In the event of a termination for Good Cause, the Company will pay Employee the Base Salary earned and expenses reimbursable under this Agreement incurred through the date of Employee's termination, or four (4) months from the effective date of this Agreement, whichever is longer, in one lump sum. Employee shall continue to receive the same health benefits that he was receiving prior to such termination for twelve (12) months following such termination. 3 6. Change in Control and Other Grounds Entitling Employee to Terminate. "Change in Control" shall mean (a) any sale, lease, exchange or other transfer (in one transaction or a series of transactions) of all or substantially all of the assets of the Company; (b) individuals who, as of the date hereof, consitute the entire Board of Directors of the Company (the "Incumbant Directors") cease for any reason to constitute at least a majority of the Board of Directors of such company, provided that any individual becoming a director subsequent to the date hereof whose election was approved by a vote of at least a majority of the then Incumbant Directors shall be, for the purposes of this provision, considered as though such individual were an incumbant director; (c) any consolidation or merger or other business combination of the Company with any other entity where the stockholders of the Company immediately prior to the consolidation or merger or other business combination would not, immediately after the consolidation or merger or other business combination, beneficially own, directly or indirectly, shares representing fifty percent (50%) of the combined voting power of all of the outstanding securities of the entity issuing cash or securities in the consolidation or merger or other business combination (or its ultimate parent corporation, if any); (d) a third person, including a person defined in Section (13)(d)(3) of the Securites Exchange Act of 1934, as amended (the "Exchange Act"), becomes the benefical owner (as defined in Section (13)(d)(3) of the Exchange Act) directly or indirectly of securites of the Company representing fifty percent (50%) or more of the total number of votes that may be cast for the election of the directors of the Company; or (e) the Board of Directors of the Company by vote of a majority of all the directors, adopts a resolution to the effect that a "Change in Control" has occurred for purposes of this Agreement. (a) A Change in Control in the Company resulting in a material adverse change in duties, responsibilities or role, or reporting relationships of Employee will be treated as a termination by the Company without Good Cause. If such termination without Good Cause occurs following a Change in Control, Employee will be entitled to elect to terminate his employment hereunder and to receive his severance compensation and other rights and benefits pursuant to Section 5(a) as if he were terminated by the Company without Good Cause and expenses reimbursable under this Agreement incurred through the date of Employee's termination, in one lump sum. (b) Upon a Change in Control, 100% of all unvested stock options and/or restricted shares held by Employee shall immediately vest. (c) Further, any of the following shall constitute a termination by the Company without Good Cause entitling Employee to elect to terminate his employment hereunder and to receive his severance compensation and other rights and benefits pursuant to Section 5(a) as if he were terminated by the Company without Good Cause: (i) the relocation of Employee by the Company more than 50 miles from East Hanover, New Jersey; (ii) there shall be a continuing material breach or continuing material default by the Company of the material terms of this Agreement which remains uncured after twenty (20) days following the Company's receipt from Employee of written notice specifying such breach or default; or (iii) if Employee shall no longer hold the position of Vice President and Chief Financial Officer of the Company unless there is Good Cause for the removal of Employee from such position. 4 7. Confidentiality. Employee shall keep confidential, except as the Company may otherwise consent in writing, and not disclose or make any use of except for the benefit of the Company, at any time either during the term of this Agreement or therafter, any trade secrets, knowledge, data or other information of the Company relating to the products, processes, know how, technical data, designs, formulas, test data, customer lists, business plans, marketing plans and strategies, and product pricing strategies or other subject matter pertaining to any business of the Company or any of its clients, customers, consultants, licensees or affiliates which Employee may produce, obtain or otherwise learn of during the course of Employee's performance of services (collectively "Confidential Information"). Employee shall not deliver, reproduce, or in any way allow any such Confidential Information to be delivered to or used by any third parties without the specific direction or consent of a duly authorized representative of the Company, except in connection with the dischage of his duties thereunder. The terms of this paragraph shall survive termination of this Agreement. Notwithstanding anything to the contrary herein, Employee shall not have any obligation to keep confidential any information (and the term "Confidential Information" shall not be deemed to include any information) that (a) is generally available to the public through no fault or wrongful act of Employee in breach of the terms hereof, (b) is disseminated by the Company or any of its affiliates publicly without requiring confidentiality, (c) is required by law or regulation to be disclosed by Employee, or (d) is required to be disclosed by Employee to any government agency or person to whom disclosure is required by judicial or administrative process. 8. Return of Confidential Material. Upon the completion or other termination of Employee's services for the Company, Employee shall promptly surrender and deliver to the Company all records, materials, equipment, drawings, documents, notes and books and data of any nature pertaining to any invention, trade secret or Confidential Information of the Company or to Employee's services, and Employee will not take with him any description containing or pertaining to any Confidential Information, knowledge or data of the Company which Employee may produce or obtain during the course of his services. The terms of this paragraph shall survive termination of this Agreement. 9. Competition. Employee will not do any of the following, either directly or indirectly, during Employee's employment with the Company and during the period of one (1) year after Employee's cessation of employment with the Company, anywhere in the world. In the event that Employee improperly competes with the Company in violation of this Section, the period during which he engages in such competition shall not be counted in determining the duration of the one (1) year non-compete restriction: (a) For purposes of this Agreement, "Competitive Activity" shall mean any activity relating to, in respect of or in connection with, directly or indirectly, the data warehousing and business intelligence consulting business. (b) Employee shall not own, manage, operate, control, consult for, be an officer or director of, work for, or be employed in any capacity by any company or any other business, entity, agency or organization which engages in Competitive Activity; provided, however, that during his employment by the Company and during his non-compete period following departure from the Company, Employee may serve as a director or consultant of an entity that is either a 5 Company licensee, or, for non-licensees, in such capacity as the Board of Directors of the Company has granted him written permission. (c) Employee shall not solicit or perform services in connection with any Competitive Activity for any prior or current customers of the Company; or (d) Employee shall not solicit for employment or employ any then current employees employed by the Company without the Company's consent. Employee and the Company agree that the phrase "Employee's cessation of employment with the Company" as used in this Agreement, refers to any separation from his employment at the Company either voluntarily or involuntarily, either with cause or without cause, or whether the separation is at the behest of the Company or Employee. Nothing in this Agreement shall preclude Employee from employment at a not-for-profit or governmental institution, provided that no for-profit business involved data warehousing and business intelligence consulting, directly or indirectly, derives a benefit from Employee's employment. 10. Other Obligations. (a) Employee acknowledges that the Company from time to time may have agreements with other persons which impose obligations or restrictions on the Company made during the course of work thereunder or regarding the confidential nature of such work. Employee will be bound by all such obligations and restrictions and will take all action necessary to discharge the obligations of the Company thereunder. (b) All of Employee's obligations under this Agreement shall be subject to any applicable agreements with, and policies issued by the Company to which Employee is subject, that are generally applicable to the five highest paid executives of the Company. 11. Trade Secrets of Others. Employee represents that his performance of all the terms of this Agreement as employee to the Company does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by Employee in confidence or in trust, and Employee will not disclose to the Company, or allow the Company to use, any confidential or proprietary information or material belonging to any other person or entity. Employee will not enter into any agreement, either written or oral, which is in conflict with this Agreement. 12. Injunctive Relief. Employee acknowledges that any breach or attempted breach by Employee of paragraphs 7 through 12 of this Agreement shall cause the Company irreparable harm for which any adequate monetary remedy does not exist. Accordingly, in the event of any such breach or threatened breach, the Company shall be entitled to obtain injunctive relief, without the necessity of posting a bond or other surety, restraining such breach or threatened breach. 6 13. Modification. This Agreement may not be changed, modified, released, discharged, abandoned, or otherwise amended, in whole or in part, except by an instrument in writing, signed by Employee and by the Company. Any subsequent change or changes in Employee's relationship with the Company or Employee's compensation shall not affect the validity or scope of this Agreement. 14. Entire Agreement. Employee acknowledges receipt of this Agreement, and agrees that with respect to the subject matter thereof, it is Employee's entire agreement with the Company, superseding any previous oral or written communications, representations, understandings with the Company or any office or representative thereof. Each party to the Agreement acknowledges that, in executing this Agreement, such party has had the opportunity to seek the advice of independent legal counsel, and has read and understood all of the terms and provisions of the Agreement. 15. Severability. In the event that any paragraph or provision of this Agreement shall be held to be illegal or unenforceable, the entire Agreement shall not fall on account thereof, but shall otherwise remain in full force and effect, and such paragraph or provision shall be enforced to the maximum extent permissible. 16. Successors and Assigns. This Agreement shall be binding upon Employee's heirs, executors, administrators or other legal representatives and is for the benefit of the Company, its successors and assigns. 17. Governing Law. This Agreement shall be governed by the laws of the State of Delaware except for any conflicts of law rules thereof that might direct the application of the substantive law of another state. 18. Counterparts. This Agreement may be signed in counterparts and by facsimile transmission, each of which shall be deemed an original and both of which shall together constitute one agreement. 19. No Waiver. No waiver by either party hereto of any breach of this Agreement by the other party hereto shall constitute a waiver of any subsequent breach. 20. Notice. Any notice hereby required or permitted to be given shall be sufficiently given if in writing and upon mailing by registered or certified mail, postage prepaid, to either party at the address of such party or such other address as shall have been designated by written notice by such party to the other party. [Signature Page Follows] 7 The undersigned have executed this Agreement as of the date first forth above. CONVERSION SERVICES INTERNATIONAL, INC. By:/s/Scott Newman --------------------------------- Name: Scott Newman Title: President and Chief Executive Officer /s/Mitchell Peipert ------------------------------- Mitchell Peipert 8 EX-99.1 6 v02445_ex99-1.txt Exhibit 99.3 CONVERSION SERVICES INTERNATIONAL, INC. AND AFFILIATE TABLE OF CONTENTS Page Independent Auditor's Report F-1 Combined Balance Sheet F-2 Combined Statements of Operations F-3 Combined Statements of Changes in Stockholders' Equity F-4 Combined Statements of Cash Flows F-5 Notes to Combined Financial Statements F-7 INDEPENDENT AUDITOR'S REPORT The Board of Directors and Stockholders Conversion Services International, Inc. and Affiliate East Hanover, New Jersey We have audited the accompanying combined balance sheet of Conversion Services International, Inc. and affiliate as of December 31, 2003, and the related combined statements of operations, changes in stockholders' equity and cash flows for the years ended December 31, 2003 and 2002. These 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 financial statements referred to above present fairly, in all material respects, the financial position of Conversion Services International, Inc. and affiliate as of December 31, 2003 and the 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/ Ehrenkrantz Sterling & Co. LLC Livingston, New Jersey March 30, 2004 F-1
CONVERSION SERVICES INTERNATIONAL, INC. AND AFFILIATE COMBINED BALANCE SHEET DECEMBER 31, 2003 ASSETS CURRENT ASSETS Cash $ 411,586 Accounts receivable, net of allowance for doubtful accounts of $92,000 2,052,343 Prepaid expenses 113,803 Deferred tax asset 36,700 -------------- TOTAL CURRENT ASSETS 2,614,432 -------------- PROPERTY AND EQUIPMENT, at cost, net 270,696 -------------- OTHER ASSETS Due from stockholders, including accrued interest of $21,600 203,623 Goodwill 1,094,206 Deferred loan costs, net of accumulated amortization of $77,484 24,862 Intangible assets, net of accumulated amortization of $89,710 344,290 Deferred tax asset 191,000 Security deposits 16,791 -------------- 1,874,772 -------------- $ 4,759,900 ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Line of credit $ 1,782,699 Current portion of long-term debt 461,981 Accounts payable and accrued expenses 1,025,248 -------------- TOTAL CURRENT LIABILITIES 3,269,928 -------------- LONG-TERM DEBT, net of current portion 233,928 -------------- DEFERRED TAXES 36,900 -------------- COMMITMENTS - STOCKHOLDERS' EQUITY Capital Stock 2,000 Additional paid in capital 1,445,250 Accumulated deficit (228,106) -------------- 1,219,144 -------------- $ 4,759,900 ============== See Notes to Combined Financial Statements.
F-2 CONVERSION SERVICES INTERNATIONAL, INC. AND AFFILIATE COMBINED STATEMENTS OF OPERATIONS Years ended December 31 ------------------------------ 2003 2002 ------------ ------------ (Restated) REVENUE $ 14,366,456 $ 16,244,790 COST OF SERVICES 10,265,808 10,677,527 ------------ ------------ GROSS PROFIT 4,100,648 5,567,263 ------------ ------------ OPERATING EXPENSES Selling and marketing 1,552,766 1,095,072 General and administrative 2,701,934 3,549,423 Depreciation and amortization 213,158 149,463 ------------ ------------ 4,467,858 4,793,958 ------------ ------------ INCOME (LOSS) FROM OPERATIONS (367,210) 773,305 ------------ ------------ OTHER INCOME (EXPENSE) Interest income 5,400 5,400 Interest expense (135,753) (139,152) ------------ ------------ (130,353) (133,752) ------------ ------------ INCOME (LOSS) BEFORE TAXES (497,563) 639,553 ------------ ------------ INCOME TAXES (BENEFIT) Current -- 101,100 Deferred (190,800) (78,700) ------------ ------------ (190,800) 22,400 ------------ ------------ NET INCOME (LOSS) $ (306,763) $ 617,153 ============ ============ See Notes to Combined Financial Statements. F-3
CONVERSION SERVICES INTERNATIONAL, INC. AND AFFILIATE COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Additional Retained Total Capital Paid-in Earnings Stockholders' Stock Capital (Deficit) Equity ----------- ----------- ----------- ----------- Balance, January 1, 2002, as restated $ 1,900 $ 139,800 $ 190,424 $ 332,124 Net income - - 617,153 617,153 Distributions to stockholders - - (178,340) (178,340) ----------- ----------- ----------- ----------- Balance, December 31, 2002, as restated 1,900 139,800 629,237 770,937 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 $ 2,000 $ 1,445,250 $ (228,106) $ 1,219,144 =========== =========== =========== ===========
See Notes to Combined Financial Statements F-4
CONVERSION SERVICES INTERNATIONAL, INC. AND AFFILIATE COMBINED STATEMENTS OF CASH FLOWS Years ended December 31 ---------------------------- 2003 2002 ------------ ------------ (Restated) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (306,763) $ 617,153 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation 95,837 108,890 Amortizaton of intangible assets and deferred loan costs 117,321 40,573 Deferred tax benefit (190,800) (78,700) Allowance for doubtful accounts 42,000 (75,000) Conversion of accrued interest to additional paid-in capital 22,438 - Changes in operating assets and liabilities: Decrease in accounts receivable (268,325) (180,980) (Increase) decrease in prepaid expense (50,611) 73,139 (Increase) decrease in security deposits (2,070) 1,250 Decrease in accounts payable and accrued expenses (327) (548,661) Decrease in deferred revenue - (10,000) ------------ ------------ Net cash used in operating activities (541,300) (52,336) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment (93,640) (41,050) Collection (issuance) of note receivable 2,100 210,000 Acquisition of intangible assets and goodwill (11,951) (82,277) ------------ ------------ Net cash provided by (used in) investing activities (103,491) 86,673 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Cash overdraft (5,661) 5,661 Net advances under line of credit 1,112,863 454,137 Principal payments on long-term debt (777,957) (308,828) Deferred loan costs in connection with long-term debt - (23,241) Issuance of convertible debt 1,500,000 - Due from stockholders (5,400) (5,400) Distributions to stockholders (767,468) (178,340) ------------ ------------ Net cash provided by (used in) financing activities 1,056,377 (56,011) ------------ ------------ NET INCREASE (DECREASE) IN CASH 411,586 (21,674) CASH, beginning of year - 21,674 ------------ ------------ CASH, end of year $ 411,586 $ - ============ ============
F-5 CONVERSION SERVICES INTERNATIONAL, INC. AND AFFILIATE COMBINED STATEMENTS OF CASH FLOWS Years ended December 31 ----------------------- 2003 2002 -------- --------- (Restated) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 89,630 $ 135,066 Cash paid for income taxes 28,258 229,007 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: During 2003 and 2002, the Company entered into various capital lease arrangements for computer 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. See Notes to Combined Financial Statements. F-6 CONVERSION SERVICES INTERNATIONAL, INC. AND AFFILIATES NOTES TO COMBINED 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. (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 The accompanying combined financial statements include the accounts of CSI and Doorways, Inc. which is owned by the two principal shareholders of CSI. All intercompany transactions and balances have been eliminated. 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) 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 F-9 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 combined 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 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 combined 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 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. F-10 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 combined 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. 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' EQUIT Capital stock consisted of the following:
December 31, 2003 --------- CSI: Common stock, $.001 par value, 1,000,000 shares authorized, 1,000,000 shares issued and outstanding in 2003 and 900,000 shares issued and outstanding in 2002 $ 1,000 Doorways, Inc.: Common stock, no par value, 3,000 shares authorized, 1,000 shares issued and outstanding in 2003 and 2002 1,000 -- --------- $ 2,000 =========
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: F-14 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. 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 (liabilities) 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. F-15 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: 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 combined company. As part of this transaction, the Company's affiliate, Doorways, Inc. was merged into CSI. 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"). F-16 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, 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. F-17 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-18 -----END PRIVACY-ENHANCED MESSAGE-----