UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
TO
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) August 2, 2005 (July 29, 2005)
--------------------------------
Conversion Services International, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 0-30420 20-1010495
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
100 Eagle Rock Avenue, East Hanover,
New Jersey 07936
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 560-9400
-----------------------------
Not Applicable
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(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation to the registrant under any of the
following provisions:
|_| Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
PORTIONS AMENDED:
The Registrant hereby amends Item 9.01 contained in the Registrant's
Current Report on Form 8-K filed August 3, 2005 to provide the requisite
financial information required, including pro forma consolidated financial
information. Except as set forth in Item 9.01 below, no other changes are made
to the Registrant's Current Report on Form 8-K filed August 3, 2005.
Item 9.01 Financial Statements and Exhibits.
(a) Financial statements of businesses acquired. Audited Combined Financial
Statements for Integrated Strategies, Inc. and Affiliates for the year ended
December 31, 2004 and reviewed combined financial statements for the year ended
December 31, 2003.
(b) Pro forma financial information. Unaudited Financial Statements of
Conversion Services International, Inc. for the year ended December 31, 2004 and
the six month period ended June 30, 2005.
(d) Exhibits.
2 Agreement and Plan of Merger dated July 29, 2005 by and among Conversion
Services International Inc., a Delaware corporation, ISI Merger Corp., a
Delaware corporation, Integrated Strategies, Inc., a Delaware corporation,
ISI Consulting, LLC, a Delaware limited liability company, Adam Hock, and
Larry Hock (filed as Exhibit 2.1 on Form 8-K on August 3, 2005).
3.1 Certificate of Merger of Integrated Strategies, Inc. and ISI Consulting,
LLC with and into ISI Merger Corp. filed with the Secretary of State of
the State of Delaware on July 29, 2005 (filed as Exhibit 3.1 on Form 8-K
on August 3, 2005).
10.1 Promissory Note by ISI Merger Corp. dated July 29, 2005 in the amount of
$177,937 issued in favor of Adam Hock and Larry Hock (filed as Exhibit
10.1 on Form 8-K on August 3, 2005).
10.2 Subordinated Promissory Note by Conversion Services International Inc.
dated July 29, 2005 in the amount of $165,000 issued in favor of Adam Hock
and Larry Hock (filed as Exhibit 10.2 on Form 8-K on August 3, 2005).
99.1 Press Release of Conversion Services International Inc., dated August 1,
2005 (filed as Exhibit 99.1 on Form 8-K on August 3, 2005).
99.2 Audited Combined Financial Statements for Integrated Strategies, Inc. and
Affiliates for the year ended December 31, 2004 and reviewed combined
financial statements for the year ended December 31, 2003.*
99.3 Unaudited Financial Statements of Conversion Services International, Inc.
for the year ended December 31, 2004 and the six month period ended June
30, 2005.
* Filed herewith.
This Current Report on Form 8-K may contain, among other things, certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including, without limitation, (i) statements
with respect to the Company's plans, objectives, expectations and intentions;
and (ii) other statements identified by words such as "may", "could", "would",
"should", "believes", "expects", "anticipates", "estimates", "intends", "plans"
or similar expressions. These statements are based upon the current beliefs and
expectations of the Company's management and are subject to significant risks
and uncertainties. Actual results may differ from those set forth in the
forward-looking statements. These forward-looking statements involve certain
risks and uncertainties that are subject to change based on various factors
(many of which are beyond the Company's control).
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.
October 11, 2005 CONVERSION SERVICES INTERNATIONAL, INC.
By: /s/ Scott Newman
------------------------------------
Name: Scott Newman
Title: President and Chief Executive Officer
INTEGRATED STRATEGIES, INC. AND AFFILIATES
COMBINED FINANCIAL STATEMENTS
AND SUPPLEMENTARY INFORMATION
AS OF AND FOR THE YEARS ENDED
DECEMBER 31, 2004 AND 2003
INTEGRATED STRATEGIES, INC. AND AFFILIATES
CONTENTS
Page
----
INDEPENDENT AUDITORS' REPORT 1
COMBINED FINANCIAL STATEMENTS
Combined Balance Sheets 2-3
Combined Statements of Operations 4
Combined Statements of Equity 5
Combined Statements of Cash Flows 6
NOTES TO COMBINED FINANCIAL STATEMENTS 7-11
INDEPENDENT AUDITORS' REPORT ON
SUPPLEMENTARY INFORMATION 12
Schedules of Direct Costs and Expenses 13
Schedules of General and Administrative Expenses 13
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Members
Integrated Strategies, Inc. and Affiliates
We have audited the accompanying combined balance sheet of Integrated Strategies
Inc. (an S corporation) and Affiliates (ISI Consulting, LLC and Integrated
Realty, Inc.) as of December 31, 2004, and the related combined statements of
operations, of equity and of cash flows for the year then ended. These financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards
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 audit provides 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 Integrated Strategies, Inc. and
Affiliates as of December 31, 2004, and the results of their operation and their
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
The 2003 financial statements were reviewed by us, and our report thereon, dated
June 17, 2004, stated we were not aware of any material modifications that
should be made to those statements for them to be in conformity with generally
accepted accounting principles. However, a review is substantially less in scope
than an audit and does not provide a basis for the expression of an opinion on
the financial statements taken as a whole.
/s/ Tanton and Company LLP
--------------------------
Certified Public Accountants
March 22, 2005
New York, NY
1
INTEGRATED STRATEGIES, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003 (UNAUDITED)
ASSETS
------
(Unaudited)
2004 2003
---------- ----------
CURRENT ASSETS
--------------
Cash and cash equivalents $ 208,687 $ --
Accounts receivable 1,274,007 1,405,837
Loans receivable - officer 405,000 224,312
Prepaid expenses 8,241 --
Deferred income taxes asset -- 82,658
---------- ----------
TOTAL CURRENT ASSETS 1,895,935 1,712,807
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET 16,423 37,186
OTHER ASSETS
------------
Deposits 12,987 12,987
---------- ----------
TOTAL OTHER ASSETS 12,987 12,987
---------- ----------
TOTAL ASSETS $1,925,345 $1,762,980
---------- ----------
The accompanying notes are an integral part of these financial statements
2
INTEGRATED STRATEGIES, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003 (UNAUDITED)
LIABILITIES AND COMBINED EQUITY
-------------------------------
(Unaudited)
2004 2003
----------- -----------
CURRENT LIABILITIES
-------------------
Cash overdraft $ -- $ 3,080
Note payable - line of credit 985,217 1,300,000
Accounts payable and accrued expenses 33,687 25,604
Accrued payroll and payroll taxes 36,665 126,955
Loans payable - officers 583,827 --
Income taxes payable 6,098 139,447
Deferred income taxes 47,000 --
----------- -----------
TOTAL LIABILITIES 1,692,494 1,595,086
----------- -----------
COMMITMENT AND CONTINGENCIES
COMBINED EQUITY
---------------
Common stock, no par value; 100 shares authorized
issued and outstanding, Integrated Strategies, Inc. 21 21
Common stock, no par value; 100 shares authorized
issued and outstanding, Integrated Realty, Inc. 2,100 2,100
Members' distributions, ISI Consulting, LLC (1,200,000) (1,200,000)
Retained earnings 1,430,730 1,365,773
----------- -----------
TOTAL COMBINED EQUITY 232,851 167,894
----------- -----------
TOTAL LIABILITIES AND COMBINED EQUITY $ 1,925,345 $ 1,762,980
=========== ===========
The accompanying notes are an integral part of these financial statements
3
INTEGRATED STRATEGIES, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 (UNAUDITED)
(Unaudited)
2004 2003
----------- -----------
REVENUE $ 5,203,123 $ 5,473,825
DIRECT COSTS AND EXPENSES 3,513,919 3,284,622
----------- -----------
GROSS PROFIT 1,689,204 2,189,203
OPERATING EXPENSES
------------------
General and administrative expenses 1,544,703 2,268,283
Depreciation expense 13,517 18,202
----------- -----------
TOTAL OPERATING EXPENSES 1,558,220 2,286,485
----------- -----------
OPERATING INCOME (LOSS) 130,984 (97,282)
OTHER INCOME (EXPENSES)
-----------------------
Dividend income 29 1,159
Interest expense (69,247) (62,030)
----------- -----------
TOTAL OTHER EXPENSES (69,218) (60,871)
----------- -----------
INCOME (LOSS) BEFORE TAX EXPENSE 61,766 (158,153)
TAXES BENEFIT 3,191 149,564
----------- -----------
NET INCOME (LOSS) $ 64,957 $ (8,589)
=========== ===========
The accompanying notes are an integral part of these financial statements
4
INTEGRATED STRATEGIES, INC. AND AFFILIATES
COMBINED STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 (UNAUDITED)
Common Stock and Members' Distributions
-----------------------------------------
Integrated
Strategies, Integrated ISI Consulting, Retained
Inc. Realty, Inc. LLC Earnings Total
----------- ----------- ----------- ----------- -----------
Balance, January 1, 2003 $ 21 $ -- $(1,200,000) $ 1,374,362 $ 174,383
Capital contributions -- 2,100 -- -- 2,100
Net loss -- -- -- (8,589) (8,589)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2003 21 2,100 (1,200,000) 1,365,773 167,894
Net income -- -- -- 64,957 64,957
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2004 $ 21 $ 2,100 $(1,200,000) $ 1,430,730 $ 232,851
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements
5
INTEGRATED STRATEGIES, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 (UNAUDITED)
(Unaudited)
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 64,957 $ (8,589)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization 13,517 18,202
Changes in operating assets and liabilities:
Accounts receivable 131,830 663,142
Income taxes prepaid and payable (133,349) 155,094
Prepaid expenses (8,241) 3,016
Security deposit receivable -- 26,505
Accounts payable and accrued expenses 8,084 (209,191)
Accrued payroll and payroll taxes (90,290) (108,267)
Deferred income taxes asset and liability 129,658 (304,658)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 116,166 235,254
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (3,898) --
Disposal of property and equipment 11,143 --
----------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 7,245 --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on note payable - line of credit (1,300,000) (3,573,160)
Proceeds from line of credit 985,217 3,116,160
Payments on note payable - vehicle -- (23,820)
Loans from/to officers 403,139 (21,206)
Decrease in cash overdraft (3,080) 3,080
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 85,276 (498,946)
----------- -----------
NET INCREASE (DECREASE) IN CASH 208,687 (263,692)
CASH AND CASH EQUIVALENTS, BEGINNING -- 263,692
----------- -----------
CASH AND CASH EQUIVALENTS, ENDING $ 208,687 $ --
=========== ===========
Supplemental disclosure of cash flows information:
Interest paid $ 68,648 $ 57,388
=========== ===========
The accompanying notes are an integral part of these financial statements
6
INTEGRATED STRATEGIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 (UNAUDITED)
NOTE 1 - Organization and Summary of Significant Accounting Policies
Organization
The accompanying combined financial statements include the accounts of
Integrated Strategies, Inc. (an S Corporation) and its affiliates, ISI
Consulting, LLC and Integrated Realty, Inc. These companies are related
through common ownership and are collectively referred to herein as the
"Company." All significant inter-company balances and transactions have
been eliminated in combination. Integrated Strategies, Inc. ("Strategies")
was formed in 1999 to provide management consultants to financial service
organizations. ISI Consulting, LLC ("Consulting") was formed in 2001 to
provide payroll administration services. Integrated Realty, Inc.
("Realty") was formed in 2002 to provide rental of office space.
Income Recognition
The Company recognizes revenue when services are provided.
Property and Equipment
Property and Equipment are recorded at cost. Depreciation is provided
using accelerated methods over the estimated useful lives of the assets (5
to 7 years), starting from the date the equipment is placed in service.
Long-lived Assets
When indicators of impairment are present, the Company evaluates the
carrying value of long-lived assets in relation to expected future
undiscounted cash flows and will reduce the net book value to the fair
value of the related assets, if appropriate. Impairment losses on
long-lived assets are recognized when expected future cash flows are less
than the asset's carrying value. There was no impairment as of December
31, 2004 and 2003.
Income Taxes
Integrated Strategies, Inc. has elected to be treated as a Subchapter S of
the Internal Revenue Service whereby net income is taxed to the
stockholders. New York also approved Strategies' election to be treated as
a Subchapter S effective January 1, 2003. Strategies remains liable for
local corporation tax. Integrated Consulting, LLC is a limited liability
corporation. Consulting's federal and state taxable income is reported by
its members. Consulting is liable for local corporation tax. Integrated
Realty, Inc. is liable for federal, state and local corporation taxes.
Deferred taxes are recognized for temporary differences between the basis
of assets and liabilities for financial statement and income tax purposes.
The differences relate primarily to different methods of accounting for
income tax and financial statement reporting purposes. The Company uses
the cash method for income tax reporting. The deferred taxes represent the
future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or
settled.
7
INTEGRATED STRATEGIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 (UNAUDITED)
Cash and Cash Equivalents
The Company considers all highly-liquid instruments with original
maturities when purchased of less than three months to be cash
equivalents.
Advertising
The Company expenses advertising costs as incurred. Advertising expense
for the years ended December 31, 2004 and 2003 was $2,283, and $26,376,
respectively.
Financial Statement Reclassification
Certain reclassifications were made to the financial statements for the
year ended December 31, 2003 in order for them to be in conformity with
year 2004 financial statements presentation. These reclassifications had
no effect on the Company's net income or net worth for the year.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
NOTE 2 - Comprehensive Income/Loss
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130")
establishes the standards for reporting and display of comprehensive
income (loss) and its components in the financial statements.
Comprehensive income is defined to include all changes in combined equity
except those resulting from investments from stockholders and members and
distributions to stockholders and members. For the years ended December
31, 2004 and 2003, there was no material other comprehensive income/loss.
Accordingly, comprehensive income/loss approximates the net income/loss.
NOTE 3 - Fair Value of Financial Instruments
8
INTEGRATED STRATEGIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 (UNAUDITED)
The carrying value of the cash and cash equivalents, loans
receivable/payable -officers, and note payable - line of credit
approximates fair value because of the short maturity of those
instruments.
NOTE 4 - Loans Receivable - Officers and Loans Payable - Officers
Loans receivable - officers are non-interest bearing and payable on
demand. Loans payable - officers are non-interest bearing and receivable
on demand.
NOTE 5 - Property and Equipment
Property and equipment at December 31, 2004 and 2003 consist of the
following:
2004 2003
------- -------
Office equipment $33,149 $71,234
Furniture and fixtures -- 20,534
------- -------
33,149 91,768
Less: accumulated depreciation 16,726 54,582
------- -------
Property and equipment, net $16,423 $37,186
======= =======
NOTE 6 - Income Taxes
Deferred income taxes asset and (liability), net for the years ended
December 31, 2004 and 2003 consist of the following:
2004 2003
-------- --------
Federal $ -- $ 97,433
State and local (47,000) (14,775)
-------- --------
Total $(47,000) $ 82,658
======== ========
Provision for taxes benefit (expense) for the years ended December 31,
2004 and 2003 consists of the following:
9
INTEGRATED STRATEGIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 (UNAUDITED)
2004 2003
--------- ---------
Federal: current $ 97,433 $ --
State and local:
Current 35,416 (436)
Deferred (129,658) 150,000
--------- ---------
Total $ 3,191 $ 149,564
========= =========
NOTE 7 - Notes Payable - Line of Credit
On August 31, 2004, the Company entered into a line of credit agreement
with Commerce Bank which will mature on September 5, 2005, with a maximum
credit line of $1,000,000 with an interest rate of prime plus 1%. The
credit line is subject to several affirmative and negative covenants
requirement as defined in the agreement. Commerce Bank has a contractual
possessory security interest in all of the Company's deposits in Commerce
Bank in accordance with the agreement. In addition, the credit line is
guaranteed by an officer of the Company and the Company's affiliates. This
line of credit paid off the Company's prior line of credit with First
Union Bank which beared interest at the bank's prime rate. As of December
31, 2004 and 2003, the Company had outstanding balance of $985,217 and
$1,300,000, respectively.
NOTE 8 - Concentration Risks
Credit Risks
Financial instruments, which potentially expose the Company to
concentrations of credit risk, consist primarily of cash and cash
equivalents and trade accounts receivable.The Company maintains its cash
in accounts, which exceed federally insured limits. The Company limits its
credit risk by selecting financial institutions considered to be highly
credit worthy. Accounts receivable are due from financial institutions.
The Company does not require collateral; however, management performs
ongoing credit evaluations of customer accounts.
NOTE 9 - Related Party Transactions
Officer's Loan
During the years ended December 31, 2004 and 2003, the Company had several
loan transactions with two of the Company's officers. Loans receivable
from officer was non-interesting bearing and had no set repayment terms.
Loans payable to officers had no set repayment terms, but is subject to
the covenants requirement defined in the line of credit agreement with
Commerce Bank (See Note 7) which subordinates the loans payable to
officers to the line of credit payable.
10
INTEGRATED STRATEGIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 (UNAUDITED)
Professional Fees
During the years ended December 31, 2004 and 2003, the Company paid
professional fees to two companies owned by Strategies' officers, which
amounted to $160,098 and $413,907, respectively.
NOTE 10 - Customers
The Company's customer base consists of major financial institutions.
Approximately 95% and 92% of the Company's sales for the years ended
December 31, 2004 and 2003, respectively, were to a single customer.
NOTE 11 - Leasing Arrangements
The company has entered into an operating lease for an office facility
which will expire on October 31, 2005. Rent expense under such lease
approximated $29,408 and $28,202 for the years ended December 31, 2004 and
2003, respectively. Future annual minimum lease payments for the year
ended December 31, 2005 was $23,302.
11
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION
Our report on our audit of the basic combined financial statements of
Integrated Strategies, Inc and Affiliates as of and for the year ended
December 31, 2004 appears on page 1. The audit was made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
accompanying supplementary information contained in the schedules of
direct costs and expenses and general and administrative expenses for the
year ended December 31, 2004 is presented only for additional analysis and
is not a required part of the basic financial statements. Such information
has been subjected to the auditing procedures applied in the audit of the
basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
The accompanying supplementary information contained in the schedules of
direct costs and expenses and general and administrative expenses for the
year ended December 31, 2003 was reviewed by us, and is presented only for
analysis purposes and has been subject to the inquiry and analytical
procedures applied in the review of the basic financial statements. All
information included in these schedules is the representation of the
management of Integrated Strategies, Inc. and Affiliates. We did not
become aware of any material modifications that should be made to this
supplementary information.
/s/ Tanton and Company LLP
--------------------------
Certified Public Accountants
March 22, 2005
New York, NY
12
INTEGRATED STRATEGIES, INC. AND AFFILIATES
SCHEDULES OF DIRECT COSTS AND EXPENSES AND GENERAL AND ADMINISTRATIVE EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 2004 and 2003 (UNAUDITED)
(Unaudited)
2004 2003
---------- ----------
DIRECT COSTS AND EXPENSES
Salaries $2,125,969 $2,420,948
Payroll taxes 141,400 150,032
Consulting fee 1,202,578 713,642
Commission 43,972 --
---------- ----------
TOTAL DIRECT COSTS AND EXPENSES $3,513,919 $3,284,622
========== ==========
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries $ 743,195 $ 782,847
Payroll taxes 57,368 84,251
Rent 137,672 208,051
Professional fees 227,809 554,313
Advertising 2,283 26,376
Promotion -- 1,133
Office expenses 59,413 65,665
Postage and delivery 7,417 7,631
Telephone 14,612 29,861
Travel and entertainment 218,048 417,844
Officer life insurance 33,398 34,635
Insurance 28,587 44,378
Dues and subscriptions 2,494 2,837
Equipment rental 1,164 8,461
Contributions 11,243 --
---------- ----------
TOTAL GENERAL AND ADMINISTRATIVE
EXPENSES $1,544,703 $2,268,283
========== ==========
See auditors' report on supplementary information
13
CONVERSION SERVICES INTERNATIONAL, INC.
Notes to Pro Forma Condensed Financial Statements
PRO FORMA FINANCIAL INFORMATION
The following Pro Forma Financial Statements are based on the historical
financial statements of Conversion Services International, Inc. (the "Company"),
McKnight Associates, Inc. ("McKnight"), and Integrated Strategies, Inc. and
Affiliates ("ISI"), adjusted to give effect to the acquisitions of both McKnight
and ISI by the Company. The Balance Sheet assumes the acquisitions occurred as
of June 30, 2005. The Pro Forma Income Statements, for the year ended December
31, 2004 and the six months ended June 30, 2005, assume the acquisitions
occurred as of the first day of the applicable period.
The pro forma financial information does not reflect certain anticipated cost
savings resulting from the operation of McKnight and ISI by the Company. There
can be no assurance that the Company will be able to realize any anticipated
cost savings. The pro forma statements should be read in conjunction with the
audited consolidated financial statements of the Company and the related notes
thereto which are included in the Company's Form 10-KSB/A which was filed with
the Securities and Exchange Commission on July 26, 2005.
CONVERSION SERVICES INTERNATIONAL, INC.
PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 2005
(IN THOUSANDS)
(Unaudited)
Integrated Pro forma
Conversion McKnight Strategies, Inc. Adjustments
Services Int'l Associates and Subs Conversion Services
--------------- ---------------- --------------- ------------------
ASSETS
CURRENT ASSETS
Cash $ 646 $ 118 $ 79 $ --
Accounts receivable 4,306 386 755 --
Accounts receivable from related parties 1,060 -- -- --
Prepaid expenses 377 -- 3 --
--------------- ---------------- --------------- ------------------
TOTAL CURRENT ASSETS 6,389 504 837 --
PROPERTY AND EQUIPMENT, at cost, net 540 3 2 --
OTHER ASSETS
Restricted cash 4,327 -- -- (2,785)(7)
Goodwill 4,691 -- -- --
Deferred financing costs 575 -- -- --
Intangible assets, net of
accumulated amortization 2,996 -- -- --
Discount on debt 5,681 -- -- --
Due from affiliates -- -- 405 --
Equity investments 192 -- -- --
CSI investment in McKnight -- -- -- 2,445 (7)
CSI investment in ISI -- -- -- 2,113 (7)
Other assets 115 -- 13 --
--------------- ---------------- --------------- ------------------
18,577 -- 418 1,773
$ 25,506 $ 507 $ 1,257 $ 1,773
=============== ================ =============== ==================
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Line of credit $ 3,414 $ -- $ 580 $ --
Current portion of long-term debt 134 -- -- --
Deferred revenue 1,759 -- -- --
Note payable 864 -- -- --
Related party note payable 1,632 -- -- --
Deferred taxes -- -- 34 --
Accounts payable and accrued expenses 3,189 130 164 --
--------------- ---------------- --------------- ------------------
TOTAL CURRENT LIABILITIES 10,992 130 778 --
--------------- ---------------- --------------- ------------------
LONG-TERM DEBT, net of current portion 5,225 30 586 --
--------------- ---------------- --------------- ------------------
Total Liabilities 16,217 160 1,364 --
--------------- ---------------- --------------- ------------------
MINORITY INTEREST 80 -- -- --
--------------- ---------------- --------------- ------------------
COMMITMENTS AND CONTINGENCIES -- -- -- --
STOCKHOLDER'S EQUITY
Common stock, $.001 par value,
1,000,000 shares authorized,
issued and outstanding 788 1 -- --
CSI investment in McKnight -- -- -- --
CSI investment in ISI -- -- -- --
Additional paid in capital 47,911 21 -- 1,773 (7)
Accumulated other comprehensive income 4 -- -- --
Retained earnings / Accumulated deficit (39,494) 325 (107) --
--------------- ---------------- --------------- ------------------
9,209 347 (107) 1,773
--------------- ---------------- --------------- ------------------
$ 25,506 $ 507 $ 1,257 $ 1,773
============== ================ =============== ==================
Pro forma Pro forma
Adjustments Adjustments Pro forma
McKnight Associates Integrated Strategies Eliminations Consolidated
----------------- -------------------- ------------- ---------------
ASSETS
CURRENT ASSETS
Cash $ -- $ -- -- $ 843
Accounts receivable -- -- -- 5,447
Accounts receivable from
related parties -- -- -- 1,060
Prepaid expenses -- 1 (2) -- 381
----------------- -------------------- ------------- ---------------
TOTAL CURRENT ASSETS -- 1 -- 7,731
PROPERTY AND EQUIPMENT, at cost, net (3) (2) -- -- 542
OTHER ASSETS
Restricted cash -- -- -- 1,542
Goodwill 1,163 (2) 1,764 (2) -- 7,618
Deferred financing costs -- -- -- 575
Intangible assets, net of
accumulated amortization 908 (2) -- -- 3,904
Discount on debt -- -- -- 5,681
Due from affiliates -- (405) (2) -- --
Equity investments -- -- -- 192
CSI investment in McKnight -- -- (2,445) --
CSI investment in ISI -- -- (2,113) --
Other assets -- -- 128
----------------- -------------------- ------------- ---------------
2,071 1,359 (4,558) 19,640
$ 2,068 $ 1,360 $ (4,558) $ 27,913
================= ==================== ============= ===============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Line of credit $ -- $ (580) (2) -- $ 3,414
Current portion of long-term debt -- -- -- 134
Deferred revenue -- -- -- 1,759
Note payable -- 178 (2) -- 1,042
Related party note payable -- -- -- 1,632
Deferred taxes -- (34) (2) -- --
Accounts payable and accrued expenses -- (3) (2) -- 3,480
----------------- -------------------- ------------- ---------------
TOTAL CURRENT LIABILITIES -- (439) -- 11,461
----------------- -------------------- ------------- ---------------
LONG-TERM DEBT, net of current portion (30) (2) (421) (2) -- 5,390
----------------- -------------------- ------------- ---------------
Total Liabilities (30) (860) -- 16,851
----------------- -------------------- ------------- ---------------
MINORITY INTEREST -- -- -- 80
----------------- -------------------- ------------- ---------------
COMMITMENTS AND CONTINGENCIES -- -- -- --
STOCKHOLDER'S EQUITY
Common stock, $.001 par value,
1,000,000 shares authorized,
issued and outstanding (1) (2) -- -- 788
CSI investment in McKnight 2,445 (2) -- (2,445) --
CSI investment in ISI -- 2,113 (2) (2,113) --
Additional paid in capital (21) (2) -- -- 49,684
Accumulated other comprehensive income -- -- -- 4
Retained earnings / Accumulated deficit (325) (2) 107 (2) -- (39,494)
----------------- -------------------- ------------- ---------------
2,098 2,220 (4,558) 10,982
----------------- -------------------- ------------- ---------------
$ 2,068 $ 1,360 $ (4,558) $ 27,913
================= ==================== ============= ===============
See Accompanying Notes to Pro Forma Financial Statements
CONVERSION SERVICES INTERNATIONAL, INC.
PRO FORMA STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2005
(IN THOUSANDS, except per share data)
(Unaudited)
Integrated Pro forma Pro forma
Conversion Strategies, Adjustments Adjustments
Services Int'l McKnight Inc. and Subs McKnight Integrated Pro forma
(Consolidated) Associates (combined) Associates Strategies Consolidated
-------------- ---------- ------------- ----------- ----------- ------------
REVENUE $ 14,279 $ 1,403 $ 2,986 $ -- $ 18,668
COST OF REVENUE 9,447 880 2,086 -- -- 12,413
-------------- ---------- ------------- ----------- ----------- ------------
GROSS PROFIT 4,832 523 900 -- -- 6,255
-------------- ---------- ------------- ----------- ----------- ------------
OPERATING EXPENSES:
Selling and Marketing 3,094 3 -- -- -- 3,097
General and administrative 3,563 224 1,192 -- (287)(5) 4,692
Research and development 476 -- -- -- -- 476
Depreciation & amortization 935 -- -- 216 (3) -- 1,151
-------------- ---------- ------------- ----------- ----------- ------------
OPERATING EXPENSES 8,068 227 1,192 216 (287) 9,416
-------------- ---------- ------------- ----------- ----------- ------------
INCOME FROM OPERATIONS (3,236) 296 (292) (216) 287 (3,161)
-------------- ---------- ------------- ----------- ----------- ------------
OTHER INCOME (EXPENSE), net (3,221) (1) (37) -- -- (3,259)
-------------- ---------- ------------- ----------- ----------- ------------
INCOME (LOSS) BEFORE TAXES AND
MINORITY INTEREST (6,457) 295 (329) (216) 287 (6,420)
-------------- ---------- ------------- ----------- ----------- ------------
INCOME TAXES (BENEFIT) -- -- 8 31 (4) (17)(4) 22
INCOME TAXES VALUATION ALLOWANCE -- -- -- (31)(4) 17 (4) (14)
-------------- ---------- ------------- ----------- ----------- ------------
INCOME (LOSS) BEFORE MINORITY
INTEREST $ (6,457) $ 295 $ (337) $ (216) $ 287 $ (6,428)
-------------- ---------- ------------- ----------- ----------- ------------
MINORITY INTEREST 52 -- -- -- -- 52
-------------- ---------- ------------- ----------- ----------- ------------
PRO FORMA NET LOSS $ (6,405) $ 295 $ (337) $ (216) $ 287 $ (6,376)
-------------- ---------- ------------- ----------- ----------- ------------
PRO FORMA NET LOSS PER SHARE $ (0.12) $ 0.32 $ -- $ -- $ -- $ (0.12)
============== ========== ============= =========== =========== ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES USED IN THE PRO
FORMA NET LOSS PER SHARE
CALCULATION 51,937,351(6) 909,091(6) -- -- -- 52,846,442
============== ========== ============= =========== =========== ============
See Accompanying Notes to Pro Forma Financial Statements
CONVERSION SERVICES INTERNATIONAL, INC.
PRO FORMA STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
(IN THOUSANDS, except per share data)
(Unaudited)
Integrated Pro forma Pro forma
Conversion Strategies, Adjustments Adjustments
Services Int'l McKnight Inc. and Subs McKnight Integrated Pro forma
(Consolidated) Associates (combined) Associates Strategies Consolidated
-------------- ---------- ------------- ----------- ----------- ------------
REVENUE $ 25,167 $ 2,987 $ 5,203 -- $ -- $ 33,357
COST OF REVENUE 19,014 1,794 3,514 -- -- 24,322
-------------- ---------- ------------- ----------- ----------- ------------
GROSS PROFIT 6,153 1,193 1,689 -- -- 9,035
-------------- ---------- ------------- ----------- ----------- ------------
OPERATING EXPENSES:
Selling and Marketing 4,088 16 -- -- -- 4,104
General and administrative 6,819 991 1,544 -- (239)(5) 9,115
Research and development 516 -- -- -- -- 516
Goodwill and intangibles
impairment 23,299 -- -- -- -- 23,299
Depreciation & amortization 1,117 -- 14 382 (3) -- 1,513
-------------- ---------- ------------- ----------- ----------- ------------
OPERATING EXPENSES 35,839 1,007 1,558 382 (239) 38,547
-------------- ---------- ------------- ----------- ----------- ------------
INCOME FROM OPERATIONS (29,686) 186 131 (382) 239 (29,512)
-------------- ---------- ------------- ----------- ----------- ------------
OTHER INCOME (EXPENSE), net (3,052) (3) (69) -- -- (3,124)
-------------- ---------- ------------- ----------- ----------- ------------
INCOME (LOSS) BEFORE TAXES AND
MINORITY INTEREST (32,738) 183 62 (382) 239 (32,636)
-------------- ---------- ------------- ----------- ----------- ------------
INCOME TAXES (BENEFIT) 191 (3) (80)(4) 120 (4) 228
INCOME TAXES VALUATION ALLOWANCE -- -- -- 80 (4) (120)(4) (40)
-------------- ---------- ------------- ----------- ----------- ------------
NET INCOME (LOSS) BEFORE
MINORITY INTEREST $ (32,929) $ 183 $ 65 $ (382) $ 239 $ (32,824)
MINORITY INTEREST 68 -- -- -- -- 68
-------------- ---------- ------------- ----------- ----------- ------------
PRO FORMA NET INCOME (LOSS) $ (32,861) $ 183 $ 65 $ (382) $ 239 $ (32,756)
============== ========== ============= =========== =========== ============
PRO FORMA NET INCOME (LOSS) PER
SHARE $ (0.71) $ 0.20 $ -- $ -- $ -- $ (0.69)
============== ========== ============= =========== =========== ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES USED IN THE PRO
FORMA NET INCOME (LOSS) PER
SHARE CALCULATION 46,548,065(6) 909,091(6) -- -- -- 47,457,156
============== ========== ============= =========== =========== ============
See Accompanying Notes to Pro Forma Financial Statements
The Company has determined that McKnight Associates, which was acquired by the
Company on July 22, 2005, is not a significant subsidiary, and, as a result, has
not filed the financial statements of the subsidiary in a separate Form 8-K
filing.
1) The pro forma balance sheet reflects the assets and liabilities of
McKnight and ISI as of June 30, 2005, adjusted to record acquired
Goodwill and Intangible assets.
The following assets and liabilities were acquired by the Company as the
result of the McKnight acquisition (in thousands):
Components of consideration:
Common stock of the Company $1,773
Cash 672
Total consideration $2,445
Assets and liabilities acquired:
Cash $ 118
Accounts receivable 386
Intangible asset - customer relationship (2.5 year life) 685
Intangible asset - order backlog (5 month life) 50
Intangible asset - proprietary presentation format (3 year life) 173
Accounts payable and accrued expenses (130)
Goodwill 1,163
The following assets and liabilities were acquired by the Company as the
result of the ISI acquisition (in thousands):
Components of consideration:
Cash paid at closing $ 2,113
Subordinated promissory note 165
Promissory note 178
Total consideration $ 2,456
Assets and liabilities acquired:
Cash $ 79
Accounts receivable 755
Prepaid expenses 4
Property and equipment, net 2
Security deposits 13
Accounts payable and accrued expenses (161)
Goodwill 1,764
2) The pro forma balance sheet reflects adjustments to reflect the fair
value of the assets and liabilities acquired from McKnight and ISI.
3) Adjustment to reflect the impact of pro forma amortization of
acquired intangible assets.
4) Record pro forma income taxes at the Company's pro forma income tax
rate of 40%. A valuation allowance was then applied against the pro
forma income taxes for both 2004 and 2005 in accordance with the
Company's practice during those periods.
5) Adjustment to pro forma general and administrative expenses of ISI
in 2004 and 2005 to exclude the impact of the former owners/officers
compensation expense. These individuals were not employed by the
Company subsequent to the acquisition.
6) Issued and outstanding shares reflected on a post reverse-split
basis. The Company effected a 1:15 reverse stock split in August
2005.
7) Pro forma adjustment to reflect consideration given up by Conversion
Services International in order to acquire McKnight and ISI.