SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2003
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________
Commission File No. 0-30420
LCS GROUP, INC.
(Exact Name of Registrant as specified in its charter)
Delaware 20-1010-495
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Tennis Court Road
Mahopac, New York 10541
(Address of Principal Executive Offices) (Zip Code)
845-621-3945
Issuer's telephone number
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Applicable only to corporate issuers:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. 49,220,176 shares of Common Stock,
par value $0.001 as of January 14, 2004.
Transition small business disclosure format (check one) Yes [ ] No [X]
1
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
LCS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
November 30, 2003 February 28, 2003
----------------- -----------------
(Unudited)
ASSETS
$ - $ -
=============== ===============
LIABILITIES
Current liabilities:
Cash overdraft $ - $ 23,300
Accounts payable 596,208 618,135
Accrued Expenses 3,067,105 2,796,442
Liabilities to be paid with Common Stock 98,250 98,250
Debt in default 232,500 262,500
Debt not in compliance with terms 301,445 301,445
Notes payable 25,000 100,000
Convertible Debt 449,476 -
Loans from stockholder/president 910,497 930,707
Other current liabilities 52,879 53,902
--------------- ---------------
Total current liabilities 5,733,360 5,184,681
--------------- ---------------
CAPITAL DEFICIT
Common stock - $.001 par value, 50,000,000 shares authorized; 49,220,176 and
49,120,176 shares issued and outstanding, respectively.
49,220 49,120
Additional paid-in capital 15,323,681 15,311,781
Accumulated deficit (21,106,261) (20,545,582)
--------------- ---------------
Total capital deficit (5,733,360) (5,184,681)
--------------- ---------------
$ - $ -
=============== ===============
See notes to consolidated financial statements
2
LCS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, NINE MONTHS ENDED NOVEMBER 30,
------------------------------ ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
NET REVENUES $ -- $ -- $ -- $ 31,908
COST OF REVENUES -- -- -- --
------------ ------------ ----------- -----------
-- -- -- 31,908
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(Includes $0,$18,000, $0 and $75,000
respectively of expenses paid with
common stock) 125,334 123,327 486,975 394,625
------------ ------------ ----------- -----------
LOSS FROM OPERATIONS (125,334) (123,327) (486,975) (362,717)
Interest expense (23,840) (48,950) (73,704) (653,716)
------------ ------------ ----------- -----------
NET LOSS $ (149,174) $ (172,277) $ (560,679) $(1,016,433)
------------ ------------ ----------- -----------
NET LOSS PER SHARE - BASIC AND DILUTED $ -- $ -- $ (0.01) $ (.03)
------------ ------------ ----------- -----------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 49,124,343 46,120,176 49,124,343 39,313,700
------------ ------------ ----------- -----------
See notes to consolidated financial statements.
3
LCS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED NOVEMBER 30,
------------------------------
2003 2002
----------- -----------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(560,679) $(1,016,433)
Adjustments to reconcile net loss to
net cash used in operating activities:
Non Cash Impairment Charge 34,827
Depreciation and amortization 6,917
Issuance of common stock for services 57,000
Issuance of commons stock for litigation
settlement 12,000
Financing Charge - Non Cash 501,460
Changes in:
Accounts receivable 496
Security deposits and other assets 9,293
Accounts payable and accrued expenses 248,736 302,046
Other current liabilities (1,023) 2,999
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (300,966) (101,395)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets -- --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Overdraft (23,300) 6,968
Proceeds from note issued -- 75,000
Repayment of note (75,000) (10,000)
Repayment of Debt in Default (30,000) --
Proceeds from Convertible Debt 449,476 --
Proceeds from major stockholder/president loans -- 29,427
Repayment of major stockholder/president loans (20,210) --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 300,966 101,395
----------- -----------
NET INCREASE (DECREASE) IN CASH -- --
CASH - BEGINNING OF PERIOD -- --
----------- -----------
CASH - END OF PERIOD $ -- $ --
----------- -----------
NONCASH ACTIVITY:
Liabilities paid with common stock $ 12,000 $ 390,000
Debt converted into common stock $ -- $ 300,000
See notes to consolidated financial statements.
4
LCS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
November 30, 2003
NOTE A - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] The Company:
On October 28, 1997, LCS Golf, Inc. ("LCS Golf"), an inactive New York
corporation, was merged in a reverse merger transaction into an inactive
Delaware corporation with the same name ("LCS Delaware") in exchange for
980,904 shares of LCS Delaware's common stock. LCS Golf paid $50,000 as a
finder's fee in connection with the merger that was charged to expense. In
addition, 3,916,360 shares with a value of $25,000 were issued to certain
existing shareholders of LCS Golf for services rendered in connection with
the merger. For financial accounting purposes, the merger on October 28,
1997 has been treated as the acquisition of LCS Delaware by the Company in
the form of a recapitalization. Therefore, no value has been ascribed to
the common stock held by the LCS Delaware shareholders.
LCS Golf was formed under the laws of the State of New York on March 8,
1994. On October 26, 1994, LCS Golf commenced business operations with the
purchase of substantially all of the assets and the assumption of specific
liabilities of Bert Dargie Golf, Inc., a Tennessee corporation engaged in
the business of designing, assembling and marketing golf clubs and related
accessories.
In August 1996, LCS Golf conveyed, assigned, transferred and delivered
substantially all of its business assets to Dargie Golf Co. (the
"Purchaser") in exchange for the: i) cancellation of the remaining debt
owed to the Purchaser arising from the October 26, 1994 purchase, ii) sale
by Herbert A. Dargie III of his 5 percent ownership interest in LCS Golf
to LCS Golf and, iii) the assumption of certain liabilities of LCS Golf by
the Purchaser.
The Company was engaged in the acquisition and operation of companies that
provided products and services to the golf playing public and marketed the
database information obtained from its websites. These products and
services included discounted green fees and other services, and a golf
website (http://www.golfuniverse.com) which provided various golf-related
hyperlinks to other golf websites and golf course previews.
The Company formerly designed and manufactured consumer products, but
ceased its manufacturing operations in November of 1999.
During the fiscal year ended February 28, 2003, the Company had lost its
websites and domain names, and its database had become obsolete. Some of
these websites and domain names are being used by a company owned by the
Company's Chief Operating Officer. The Company will not recover any of
these websites and/or domain or update its database. The Company does not
intend to resume any of its prior activities (see Note I).
The Company generated minimal revenues in fiscal 2003 and currently has no
revenue generating operations.
On July 16, 2003, pursuant to the terms of Section 251(g) of the Delaware
General Corporation Law, LCS Golf became the wholly-owned subsidiary of
LCS Group, Inc., herein referred to as the "Company." Pursuant to this
transaction, the Company acquired all of the assets of LCS Golf at the
time, all former stockholders of LCS Golf became the stockholders of the
Company, which is the
5
LCS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
November 30, 2003
entity that is now publicly traded on the OTC Bulletin Board, and the
officers and sole director of LCS Golf became the officers and sole
director of the Company.
[2] Principles of consolidation:
The consolidated financial statements include the accounts of LCS GROUP,
INC., and its subsidiaries, including LCS Golf. All material intercompany
accounts and transactions have been eliminated in consolidation.
[3] Basis of presentation:
The accompanying financial statements have been prepared on a going
concern basis that contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
Through November 30, 2003, the Company has not generated any revenues from
its operation to cover its costs and operating expenses and has incurred
significant recurring losses. In addition, the Company has a significant
working capital deficiency and a capital deficit. Although the Company has
been able to issue its common stock for a significant portion of its
expenses and has had to rely on loans from its major stockholder/president
and others it is not known whether the Company will be able to continue
this practice. It is also not known if the Company will be able to meet
its operating expense requirements.
These circumstances raise substantial doubt about the Company's ability to
continue as a going concern. The Company has entered into an agreement
with Conversion Services International, Inc. ("CSI"), pursuant to which it
will acquire CSI in the form of a reverse merger (see Note I). No
assurances can be given that this agreement will be consummated. In the
event that this transaction is not consummated, the Company will be forced
to cease all operations. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Certain accounts have been reclassified for comparative purposes.
[4] Interim Financial Data
These condensed consolidated financial statements have been prepared by
the Company, without audit by independent public accountants, pursuant to
the rules and regulations of the United States Securities and Exchange
Commission. In the opinion of management, the accompanying condensed
consolidated financial statements include all normal recurring adjustments
necessary for the information presented not to be misleading. Certain
information and note disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in
the United States of America have been condensed or omitted from these
statements pursuant to such rules and regulations and, accordingly, these
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements included in the Company's
fiscal year 2003 Annual Report on Form 10-KSB. Operating results for the
three and
6
LCS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
November 30, 2003
nine months ended November 30, 2003 and 2002 are not necessarily
indicative of the results that may be expected for the full year or any
other period.
There have been no significant changes in the accounting policies of the
Company. There were no significant changes in the Company's commitments
and contingencies as previously described in the fiscal year 2003 Annual
Report on Form 10-KSB.
[5] Deferred income taxes:
Deferred income taxes are reported using the asset and liability method.
Deferred tax assets are recognized for deductible temporary differences
and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
[6] Loss per share:
Loss per share has been computed by dividing the net loss by the weighted
average number of shares of common stock outstanding, including shares
with respect to liabilities to be paid with common stock, during each
period. The effect of outstanding potential shares of common stock,
including stock options, warrants and convertible debt is not included in
the per share calculations as it would be anti-dilutive.
[7] 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, which are subject to impairment considerations,
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
NOTE B - DEBT IN DEFAULT
On February 16, 2000, the Company borrowed from Traffix, Inc. (formerly Quintel
Communications, Inc.) ("Traffix"), an Internet marketing and development
company, $500,000 in the form of a convertible promissory note ("Note"). The
Note was due on demand at any time after August 16, 2000 and is convertible into
500,000 shares of common stock of the Company at any time prior to repayment.
Any shares issued by the Company will have registration and piggyback
registration rights and are subject to anti-dilution adjustments in certain
cases. If any additional shares are issued under the anti-dilution provisions,
the Company will have a one-time repurchase right at a $1.00 per share during
the twelve-month period following the date of conversion of the Note. The Note
was without interest until the earlier of August 17, 2000 or an event of default
under the Note. Interest is being charged at prime plus 4%, not to exceed 14%.
The Note may be prepaid at anytime after giving 15 days prior written notice.
7
LCS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
November 30, 2003
The Note is collateralized by the Company's database and all related records,
contract rights and intangibles, which have been delivered to the lender and
must be updated upon request, until the obligation has been paid.
The Company entered into a ten-year licensing agreement with Traffix for the use
of its database for a monthly payment of $5,000, which can be used to offset the
remaining balance owed to Traffix. No such payments have been made under this
agreement.
On the same date, the Company also entered into a two-year marketing agreement
with Traffix to develop programs to market products and services and send
promotional e-mails to the visitors and customers of the Company's websites.
Traffix was to pay the Company $.25 for each individual who "opts in" to be
registered with Traffix at its site. Revenues generated from these programs
(less direct "out-of-pocket" costs, including royalties, cost of producing the
marketing materials and other expense directly related to the programs) were to
be divided equally and distributed quarterly less any required reserves. There
have been no revenues recognized from these programs.
In connection with the marketing agreement, the Company issued two-year options
to purchase 100,000 shares of the Company's common stock at $1.00 a share and
100,000 shares at $2.00 per share. The value of these options at grant date,
utilizing the Black-Scholes option-pricing model, was $139,000. The assumptions
used in determining the value was an expected volatility of 155%, an average
interest rate of 6.68% per annum and an expected holding period of two years.
The estimated value of these options was expensed in the year ended February 28,
2001. These options are subject to certain anti-dilution provisions and provide
registration rights for the underlying shares. The agreement can be terminated
in the event of a default under the agreement by either party, which is not
corrected within 30 days after notice is given.
On August 8, 2000, following certain disagreements concerning Traffix's use of
the Company's database, the Company entered into a Forbearance Agreement and
amended the security agreement with Traffix. The Company made a $50,000 payment
against the $500,000 convertible note that was funded personally by its major
stockholder/president. The Note was amended to provide for payment on demand.
The amended security agreement requires the Company to remit to Traffix, 50% of
collections on the outstanding accounts receivable as of August 10, 2000 and 25%
of all subsequent accounts receivable collected, within five days. Payments are
to be credited, first to interest and then to principal. Traffix is also to
receive 50% of all other cash receipts, including additional loans, until the
Note is paid. The amended security agreement also includes all accounts of the
Company and all security, or guarantees held with respect to the accounts and
all account proceeds. In addition, the Company's major stockholder/president
personally guaranteed up to $250,000 of the Note of which $267,500, (including
the two payments of $50,000 each discussed below) has been paid against this
guaranty.
Due to the above amendment, Traffix agreed not to demand payment on the Note or
commence any action against the Company, as long as it received payments for
interest and principal of at least $10,000 per month or collection of the
Company's accounts receivable or money from the guarantor, the Company's major
stockholder/president, and the Company generates gross revenues of at least
$75,000 per month.
On August 8, 2000, the Company received $300,000 from American Warrant Partners,
LLC ("AWP") evidenced by an 8% convertible subordinated promissory note (see
below). The Company did not remit 50% of the cash proceeds of this note, as
required by the Forbearance Agreement, which put the Company into default under
its agreement with Traffix. The Company has not obtained a waiver of the
8
LCS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
November 30, 2003
default, however, the major stockholder/president personally made two payments
of $50,000 each towards the principal and interest on the Traffix Note. The
Company recorded these payments as a loan from its stockholder/president. In
addition, the Company agreed to remit 50% (formerly 25%) of cash received from
new accounts receivable.
On May 16, 2001, the Company entered into an agreement with Traffix, Inc. which
amended the aforementioned Forbearance Agreement dated August 8, 2000. The
Company agreed to pay $10,000 on signing. Upon the closing of the AWP financing,
Traffix was to be paid an additional $10,000. Commencing on June 1, 2001, the
Company agreed to a payment schedule of a minimum of $10,000 per month. Since
May 16, 2001 the Company has not made all of the required $10,000 monthly
payments to Traffix, as called for by the amended Forebearance Agreement. As a
result, as of November 30, 2003, the Company is in default of its amended
Forbearance Agreement with Traffix.
On November 6, 2003, Traffix filed a complaint in the New York State Supreme
Court in Rockland County, New York against LCS Golf and Michael Mitchell, the
Company's chief executive officer and sole director. The complaint alleged a
breach of agreement, a breach of guarantee by Dr. Mitchell and reliance by
Traffix on false statements, and sought aggregate damages of approximately
$1,500,000 plus interest, legal fees and expenses.
On November 14, 2003, the parties entered into an agreement pursuant to which
the Company paid Traffix $30,000 and agreed to pay an additional $32,500 when
the closing of the proposed merger with CSI is consummated (see Note I). The
Company agreed to issue to Traffix 250,000 shares of its common stock within
five days after the closing. Traffix agreed to immediately withdraw the
complaint without prejudice. In the event that the merger is not consummated
within 150 days after November 14, 2003, the settlement agreement will be
terminated, Traffix will retain the $30,000 and will be able to reinstitute
litigation, and the Company will have no obligation to pay the additional
$32,500 or to issue the 250,000 shares to Traffix. As of November 30, 2003, the
Company owes Traffix $232,500 in principal and approximately $96,000 in accrued
interest, which is included in accrued expenses.
NOTE C - DEBT NOT IN COMPLIANCE WITH TERMS
[1] On August 8, 2000, AWP loaned the Company $300,000 evidenced by an 8%
convertible subordinated promissory note with a maturity date of August 8,
2002. The note is convertible, at the option of AWP, into common stock at
$.25 per share (market price of $.4375 per share), subject to adjustment,
which resulted in a discount of the note of approximately $201,000. This
discount was immediately recognized as interest expense due to the ability
of AWP to convert the note at any time. Interest is payable quarterly
commencing on September 30, 2000. The Company also issued a five-year
warrant expiring on August 8, 2005 to purchase 600,000 shares of common
stock, exercisable at $.40 per share, subject to adjustment, to be
exercised in whole or in part. The value of this warrant at grant date,
utilizing the Black-Scholes option-pricing model, was approximately
$260,000. The assumptions used in determining the value was an expected
volatility of 227%, an average interest rate of 6.06% per annum and an
expected holding period of five years. The allocated value of the warrant
is $99,000. This amount is to be amortized over the life of the two-year
note, or shorter if exercised earlier. Based upon the values ascribed to
the convertibility feature of the note and the warrant, the Company
recorded additional interest expense of approximately $228,000 during the
year ended February 28, 2001. The Company also entered into a registration
rights agreement whereby a Registration Statement for the shares was to be
filed as soon as reasonably practicable but not later than September 15,
2000. The Company did not file the Registration Statement by September 15,
9
LCS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
November 30, 2003
2000 and since a Registration Statement was not declared effective by
November 15, 2000, the terms of the agreement are that for each 30-day
period that the Registration Statement is not declared effective, the
conversion price of $0.25 of the convertible note and the warrant exercise
price of $0.40 will each be reduced by 2% per 30-day period, until the
exercise price reaches $0.05. Pursuant to this provision, at November 31,
2003, the reduced conversion price and the exercise prices were each
$0.05, respectively. In addition, the interest rate on the convertible
note will increase 2% for each 30-day period, not to exceed 15%. Pursuant
to this provision, the Company has recorded interest expense of $8,500 and
$25,500 for the three and nine months ended November 30, 2003,
respectively. Certain officers and directors agreed to a lock-up agreement
restricting their right to sell, transfer, pledge or hypothecate or
otherwise encumber their shares until the earlier of 1) the one year
anniversary of the agreement, 2) the effective date of the Registration
Statement or 3) until the Company raises $1,000,000 in equity or debt
financing. The Company agreed to recommend and use its best efforts to
elect a representative of AWP to the Board of Directors until one year
from the date of the agreement or until the Company raises $1,000,000 in
equity or debt financing.
On May 16, 2001, the Company entered into an amendment, waiver and consent
relating to the 8% convertible subordinated promissory note, warrant, and
registration rights agreement revising the conversion price of the
promissory note and the exercise price of the warrant to the lower of
$0.12 or 80% of the current market price on the date immediately preceding
the date of the exercise or conversion. The Company was required to
register the underlying common stock a registration statement to be filed
in connection with a proposed new investment no later than 60 days from
June 15, 2001, in consideration for which, AWP agreed to waive any penalty
provisions with respect to the filing of the registration statement and
consent to the issuance of common stock below the then applicable
conversion or exercise price of the promissory note and warrant relating
to the financing received on May 24, 2001.
Pursuant to this amendment of the Conversion and Exercise price, the
Company recorded a charge of approximately $239,000 during the quarter
ended May 31, 2001, which represents the beneficial conversion feature
resulting from the difference between the fair market value of the shares
at the effective date of the amendment and the effective conversion rate
of the note.
[2] On May 24, 2001, the Company entered into an agreement with Private
Capital Group, LLC ("PCG") (an entity related to AWP) for the sale of
$200,000 of 8% convertible debentures which can be converted at any time
by the holder or will automatically convert into common stock in five
years, at the lower of $0.12 per share or 80% of the market price as
defined. The $200,000 Note was personally guaranteed by the Company's
major stockholder/president with 800,000 of his shares of the Company's
stock being held in escrow. The Company also agreed to file a registration
statement for the shares but no later than sixty calendar days from June
15, 2001. The Company did not file the registration statement within the
sixty-day period. The lenders waived this noncompliance. At February 28,
2002, the Company had received $175,000 of proceeds from this note. The
Company has recorded a charge of $175,000 for the year ended February 28,
2002. The charge represents the beneficial conversion feature resulting
from the differences between the fair market value of the shares at the
date of issuance of the debt and the effective conversion rate for the
convertible debentures.
On January 31, 2002, the Company was notified that it was in default of
its convertible debentures agreements with PCG and its 8% convertible
subordinated promissory note to AWP.
10
LCS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
November 30, 2003
The Company has not paid the interest due on the promissory note, which
AWP considers to be an event of default under the note. This default was
not cured within twenty calendar days therefore, the principal and accrued
interest became payable immediately.
On June 28, 2002, the Company entered into an Agreement and Release with
AWP and PCG, the holders of the Company's 8% convertible promissory notes.
The Agreement and Release addresses the Company's noncompliance with the
terms of the 8% convertible promissory notes.
Pursuant to the Agreement and Release, AWP and PCG in the aggregate
converted $200,000 of the 8% convertible promissory notes at a price of
$0.04 per share, as adjusted, for an aggregate of 5,000,000 shares of the
Company's common stock. Should the price of the Company's stock not reach
and remain at $0.50 per share for a minimum period of thirty trading days
within 120 days of a merger with an operating company, at an average
volume of 150,000 shares per day, then the Company will issue a total of
an additional 6,000,000 shares of its common stock to AWP and PCG. Since a
merger with an operating company did not occur within thirty days of the
aforementioned agreement and release, AWP and PCG had the option to
receive immediate repayment of their notes or to receive the additional
6,000,000 shares of common stock. On November 26, 2002, the Company issued
the aforementioned 6,000,000 shares of common stock to AWP and PCG.
Also pursuant to the Agreement and Release described above, AWP exercised
the warrants that were issued in conjunction with the 8% convertible
promissory notes. These warrants were exercised on a cashless basis into
512,951 shares of the Company's common stock.
On June 5, 2002, the Company issued the 5,000,000 shares common stock in
conjunction with the conversion of the $200,000 of 8% convertible
promissory notes and issuance of the 512,951 shares in conjunction with
the exercise of the warrant by AWP. The 800,000 shares that had been held
in escrow as security for the promissory notes were released and returned
to the Company's president and chief executive officer.
On November 30, 2003, the Company entered into separate agreements with
two creditors to settle notes held by them in principal amounts of $66,000
and $37,000, respectively. Pursuant to these agreements, the creditors
were paid $33,000 and $15,000, respectively, on December 15, 2003. The
Company also agreed to pay $33,000 and $15,000 and issue 200,000 shares
and 125,000 shares of its common stock, respectively, to these creditors
if the merger with CSI is consummated and its authorization to issue
common stock is increased (see Notes I and J).
NOTE D - BRIDGE NOTE
On May 28, 2002, the Company entered into a loan agreement with a third party
for $75,000. In conjunction with this loan the Company also granted the third
party 200,000 shares of the Company's common stock. The Company's president,
chief executive officer and principal stockholder had personally pledged
2,000,000 shares of the Company's common stock as collateral for the loan. The
Company defaulted on the aforementioned loan when it was not able to make the
required repayment of $75,000 on June 11, 2002. Pursuant to the loan agreement,
the Company is required to issue 10,000 shares of the Company's Common Stock to
the third party for each day the loan is past due.
11
LCS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
November 30, 2003
On May 1, 2003 the Company repaid the $75,000 loan from the third party. In
addition the Company has agreed to issue 1 million shares of its common stock in
full settlement of the default provisions under the note. In order to issue the
shares, the Company must amend its certificate of incorporation to increase the
number of shares it is authorized to issue (see Note J). The Company has also
agreed to issue an additional 100,000 shares of common stock to the third party
if the certificate of incorporation was not amended by November 1, 2003. The
third party also received piggyback registration rights with respect to the
aforementioned shares. Concurrent with the repayment of the loan, the third
party has also released 2 million shares of the Company's stock to Company's
major stockholder/ president that the third had been holding as collateral for
the loan.
The Company did not amend its certificate of incorporation by November 1, 2003
as required by the abovementioned agreement and, accordingly, it is obligated to
issue the additional 100,000 shares of common stock when it acquires the
necessary authorization to do so.
NOTE E - CONVERTIBLE DEBT
During April 2003, the Company entered into an agreement to borrow funds,
payable on demand, with no interest, and will be convertible into common stock
of the Company at $0.03 per share. The Company has borrowed $449,476 under these
agreements as of November 30, 2003. Since the current loan agreement provides
that the authorized number of shares required to convert the loan is subject to
shareholder approval, a commitment date has not occurred. Upon approval for an
increase in the authorized number of shares, a substantial charge may be
incurred representing the beneficial conversion feature on the difference
between the stated conversion of $0.03 per share and the market price. At
November 30, 2003, such charge could amount to the full loan proceeds under this
agreement. As of January 20, 2004, shareholder approval for the increase in
authorized shares had not been obtained (see Note J). As of January 20, 2004,
approximately $582,500 has been borrowed under this agreement.
NOTE F - SETTLEMENT OF LITIGATION
On May 1, 2003 a complaint naming LCS Golf, the Company's two officers and two
other individuals was filed by a third party in Palm Beach County, Florida. The
Complaint alleged a breach of contract and contained allegations of losses of
$1,625,000 plus securities and other compensation. The Company settled this
litigation by entering into an agreement on September 25, 2003. The agreement
called for the issuance of 100,000 shares of the Company's common stock and a
payment of $10,000. The Company paid this amount on October 22, 2003 and issued
the 100,000 shares to a designee of the third party on November 24, 2003.
NOTE G - PROPOSED SETTLEMENT OF ACCRUED EXPENSES
On November 30, 2003, the Company entered into an agreement with a service
provider to settle $48,226 of fees owed to it. Pursuant to this agreement, the
Company agreed to pay $15,000 and issue 100,000 shares of its common stock to
the service provider if the proposed merger with CSI is consummated and the
increase in the number of shares of common stock the Company is authorized to
issue is approved (see Notes I and J).
NOTE H - PROPOSED SETTLEMENTS WITH MICHAEL MITCHELL, THE COMPANY'S SOLE DIRECTOR
AND ALEX BRUNI, THE COMPANY'S CHIEF OPERATING OFFICER.
12
LCS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
November 30, 2003
Through to November 30, 2003, Dr. Mitchell had advanced approximately $910,000,
net of repayments, to the Company and was owed approximately $1,345,000 for
accrued salary. On November 30, 2003, the Company entered into an agreement with
Dr. Mitchell pursuant to which he agreed to convert the $910,000 debt owed to
him into an aggregate 18,238,157 shares of the Company's common stock as soon as
the Company amends its certificate of incorporation to increase the number of
shares it is authorized to issue (see Note J). Dr. Mitchell also agreed to
release the Company from its obligation to pay him amounts due to him for
accrued salary upon consummation of the merger with CSI (see Note I).
On the same date, the Company entered into an agreement with Mr. Bruni pursuant
to which Mr. Bruni agreed to convert approximately $275,000 in accrued salary
and approximately $36,500 of accrued interest into 1,000,000 shares of the
Company's common stock as soon as the Company amends its certificate of
incorporation to increase its authorized common stock (see Note J).
NOTE I - PROPOSED MERGER WITH CONVERSION SERVICES INTERNATIONAL
On August 21, 2003, as amended on November 28, 2003, the Company, together with
its subsidiary, LCS Acquisition Corp., and CSI, Scott Newman and Glenn Peipert,
CSI's executive officers and principal stockholders, executed an Agreement and
Plan of Reorganization to merge CSI into LCS Acquisition Corp in exchange for
LCS Group, Inc., common stock which will be treated as a reverse merger. If the
transaction is consummated, CSI will become the Company's only operating
business, the Company will change its name to Conversion Services International,
Inc., and the CSI stockholders will control the Company's board of directors and
own approximately 84.3% of the Company's common stock.
CSI, a privately held Delaware corporation formed in 1990 by Messrs. Newman and
Peipert, is in the business of providing professional services relating to
information technology, management consulting, data warehousing, business
intelligence and e-business.
NOTE J - SUBSEQUENT EVENTS
On or about January 5, 2004, the Company mailed a proxy statement to its
stockholders seeking, at a special meeting to be held on January 19, 2004, (i)
approval to amend its Certificate of Incorporation to (A) change its name to
Conversion Services International, Inc., (B) increase the number of shares of
common stock it is authorized to issue to 1,000,000,000, (C) authorize it to
issue up to 20,000,000 shares of "blank check" preferred stock, and (D) provide
for certain limitations of liability and indemnification for the Company's
officers and directors; (ii) to elect Messrs. Newman and Peipert and their
nominee to its board; and (iii) adopt its 2003 Stock Incentive Plan. The meeting
was adjourned to January 23, 2003, because the Company did not have a quorum.
13
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
On July 16, 2003, pursuant to the terms of Section 251(g) of the Delaware
General Corporation Law, LCS Golf, Inc. hereafter referred to as "Golf," became
the wholly-owned subsidiary of LCS Group, Inc., hereinafter referred to as
"Group," "LCS" or "we." Pursuant to this transaction, Group acquired all of the
assets of Golf, all former stockholders of Golf became the stockholders of
Group, which is the entity that is now publicly traded on the OTC Bulletin
Board, and the officers and sole director of Golf became the officers and sole
director of Group. The historical and financial information that we have set
forth in this Report relate to Golf except were the context indicates that such
information refers to Group.
We were a holding company that until December 31, 2001 operated as a provider of
out sourcing of permission e-mail marketing technologies and services. We
provided permission email direct marketing services through Golfpromo.net and
Targetmails.com, Internet and direct marketing services through Ifusionco.com.
and PlayGolfNow.com, Golf ecommerce news and information through a vertical golf
portal and discounts on golf services.
We have terminated all of our revenue generating operations and released all but
two of our employees, our two executive officers. As of November 30, 2003, we
had lost all of our websites and domain names, and our database had become
obsolete. Some of these websites and domain names are being used by a company
owned by our Chief Financial Officer. We do not intend to recover any of these
websites and/or domain names, update our database, or resume our prior
operations.
On August 21, 2003, we, together with our subsidiary, LCS Acquisition Corp., and
Conversion Services International, Inc. and Scott Newman and Glenn Peipert,
CSI's executive officers and principal stockholders, executed an Agreement and
Plan of Reorganization to merge CSI into LCS Acquisition Corp. On November 28,
2003, the parties amended this agreement. If the transaction is consummated, CSI
will become our only operating business, we will change our name to Conversion
Services International, Inc. and the CSI stockholders will control our board of
directors and own approximately 84.3% of our common stock.
CSI, a privately held Delaware corporation formed in 1990 by Messrs. Newman and
Peipert, is in the business of providing professional services relating to
information technology, management consulting, data warehousing, business
intelligence and e-business. Its offices are located at 100 Eagle Rock Avenue,
East Hanover, N.J. 07936, and its telephone number is (973) 560-9400.
On or about January 5, 2004, we mailed a proxy statement to our stockholders
seeking, at a special meeting to be held on January 19, 2004, (i) approval to
amend our Certificate of Incorporation to (A) change our name to Conversion
Services International, Inc., (B) increase the number of shares of common stock
we are authorized to issue to 1,000,000,000, (C) authorize us to issue up to
20,000,000 shares of "blank check" preferred stock, and (D) provide for certain
limitations of liability and indemnification for our officers and directors;
(ii) to elect Messrs. Newman and Peipert and their nominee to our board; and
(iii) adopt our 2003 Stock Incentive Plan. The meeting was adjourned to January
23, 2003, because we did not have a quorum.
The closing of the merger with CSI is subject to a number of conditions,
including, among others, approving the name change and the common stock
authorization increase, electing Messrs. Newman and Peipert and their nominee to
our board and adopting our 2003 Stock Incentive Plan. Approval of the name
change and the election of Messrs. Newman and Peipert and their nominee to our
board is contingent upon consummation of the merger with CSI within seven
business days after the special meeting of our stockholders and the satisfaction
14
of all other conditions precedent to the closing of the merger. In the event
that the merger is not consummated within this period, which can be extended by
our agreement with CSI, our name will not change and Michael Mitchell will
remain our sole director, President and Chief Executive Officer.
We are currently authorized to issue 50,000,000 shares of common stock of which
49,220,176 are outstanding. If we acquire CSI, we will be required, pursuant to
our reorganization agreement, to issue an aggregate of 500 million shares of our
common stock to CSI's stockholders. In addition, we are contractually obligated
to issue up to an additional 43,779,824 shares when we increase the number of
shares we are authorized to issue to an amount sufficient to permit this
issuance as a result of conversion of certain debt, settlement of litigation and
for services rendered. As a result of conversion of debt, 18,238,157 of these
shares, except as may be adjusted as described herein, will be issued to Dr.
Mitchell and 1,000,000 of these shares will be issued to Alex Bruni, our Chief
Financial Officer.
Results of Operations
Three Months Ended November 30, 2003, Compared to Three Months Ended November
30, 2002
Revenues
We had no revenues for the three months ended November 30, 2003 or for the three
months ended November 30, 2002. This resulted from our termination of revenue
generating operations.
Cost of Revenue
We had no cost of revenues for the three months ended November 30, 2003 or the
three months ended November 30, 2002.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $125,334 for the three months
ended November 30, 2003 compared to $123,327 for the three months ended November
30, 2002.
Interest Expense
Interest expense consists of interest on debt obligations and common stock
issued or issuable in connection with debt obligations. Interest expense was
$23,840 for the three months ending November 30, 2003 compared to $48,950 for
the three months ending November 30, 2002.
Income Taxes
No provision for federal or state income taxes was recorded as we have incurred
net operating losses since inception through November 30, 2003. The tax benefit
of the net operating losses has been reduced by a 100% valuation allowance.
Loss
Our net loss for the three-month period ended November 30, 2003 was ($149,174),
compared with a net loss of ($172,277) for the three-month period ended November
30, 2002. For the three-month period ended November 30, 2003, net loss per
common share, basic and diluted, was rounded to ($0.00) per share. For the
three-month period ended November 30, 2002, net loss per common share, basic and
15
diluted, was rounded to ($0.00) per share.
Nine Months Ended November 30, 2003, Compared to Nine Months Ended November 30,
2002
Revenues
We had no revenues for the nine months ended November 30, 2003 as compared to
$31,908 for the nine months ended November 30, 2002. This decrease resulted from
our termination of revenue generating operations.
Cost of Revenue
We had no cost of revenues for the nine months ended November 30, 2003 or the
nine months ended November 30, 2002.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $486,975 for the nine months
ended November 30, 2003 compared to $394,625 for the nine months ended November
30, 2002.
Interest Expense
Interest expense consists of interest on debt obligations and common stock
issued or issuable in connection with debt obligations. Interest expense was
$73,704 for the nine months ending November 30, 2003 compared to $653,716 for
the nine months ending November 30, 2002.
Income Taxes
No provision for federal or state income taxes was recorded as we have incurred
net operating losses since inception through November 30, 2003. The tax benefit
of the net operating losses has been reduced by a 100% valuation allowance.
Loss
Our net loss for the nine-month period ended November 30, 2003 was ($560,679),
compared with a net loss of ($1,016,433) for the nine-month period ended
November 30, 2002. For the nine-month period ended November 30, 2003, net loss
per common share, basic and diluted, was $0.01) per share. For the nine-month
period ended November 30, 2002, net loss per common share, basic and diluted,
was ($0.03) per share.
Liquidity and Capital Resources
Cash Balance, Working Capital and Cash Flows from Operating Activities
We had negative cash flow from operations of ($300,966) during the nine-month
period ended November 30, 2003 because we had no revenue generating operations.
Over the 24-month period ending March 31, 2002, we continuously reduced our
operations so that as of that date we had suspended almost all of our revenue
generating operations because the income generated by our business was not
sufficient to sustain these operations. Since that date we terminated all of our
revenue generating operations.
16
Through November 30, 2003, Dr. Mitchell had advanced an aggregate of
approximately $910,000, net of repayments, to Golf, our wholly-owned subsidiary
and was owed by Golf approximately $1,345,000 in accrued salary. He has agreed,
pursuant to an agreement dated November 30, 2003, to convert the $910,000 debt
owed to him into an aggregate of 18,238,157 shares of our common stock as soon
as we amend our certificate of incorporation to increase the number of shares we
are authorized to issue, which will then permit us to issue these shares. This
number may decrease as described in the next succeeding paragraph. We also have
granted him certain demand and "piggy-back" registration rights with respect to
all of his shares, which include the shares to be issued to him if the
authorization increase is effected. Dr. Mitchell also agreed to release Golf
from its obligation to pay him his accrued salary upon consummation of the
merger with CSI.
Commencing on or about April 17, 2003, independent parties who are also owners
of our common stock and CSI's common stock, have advanced funds on our behalf
that, as of January 20, 2004, approximated $582,500. These advances bear no
interest and are repayable on demand. They will be converted into our common
stock at the rate of $0.03 per share after we have amended our certificate of
incorporation to increase the number of shares of common stock we are authorized
to issue upon the closing of the merger with CSI. We have used these funds to
repay certain indebtedness and for professional fees and filing and related
expenses. We anticipate that prior to the consummation of our acquisition of
CSI, up to an additional $67,500 may be advanced to us by these lenders, on the
same terms and conditions, to pay for certain of our outstanding indebtedness
and for professional fees and other expenses related to corporate matters. If
the lenders advance $650,000 to us, they will receive an aggregate of 21,666,667
shares of our common stock after we have increased the number of shares of
common stock we are authorized to issue. To the extent that the lenders advance
less than $650,000 to us, the number of shares they will receive will be reduced
at a rate of $0.03 per share. To the extent that the lenders advance more than
$650,000, the number of shares that Dr. Mitchell will receive when the
authorization increase is effected will be reduced at the rate of $0.03 per
share. We have granted these lenders demand and "piggy-back" registration
rights.
Alex Bruni, our Chief Operating Officer, has agreed, pursuant to an agreement
dated November 30, 2003, to convert approximately $275,000 in accrued salary and
$36,500 of outstanding debt into an aggregate of 1,000,000 as soon as we amend
our certificate of incorporation to increase the number of shares we are
authorized to issue, which will then permit us to issue these shares. We also
have granted him certain "piggy-back" registration rights with respect to all of
his shares, which include the shares to be issued to him when the authorization
increase is effected.
On May 28, 2002, LCS Golf entered into a loan agreement with an unaffiliated
party pursuant to which Golf borrowed $75,000. The loan bore no interest and was
repayable by July 23, 2002. We issued 200,000 shares of our common stock to the
lender. The loan agreement provided that if the loan was not repaid by the due
date, we would be obligated to issue 10,000 shares of our common stock to the
lender for each day that the loan remained unpaid.
On or about May 1, 2003, we repaid the $75,000 loan to the lender and agreed to
issue him one million shares of our common stock as soon as we amend our
certificate of incorporation to increase the number of shares we are authorized
to issue, which will then permit us to issue these shares. We also agreed to
issue him an additional 100,000 shares because we were unable to file a proxy
statement with the Commission requesting stockholder approval for this amendment
prior to six months after the repayment of the loan, and granted him certain
"piggy-back" registration rights with respect to his shares. The lender released
to Dr. Mitchell the two million shares of our common stock owned by Dr. Mitchell
that the lender was holding as collateral for the repayment of the loan. In
addition, the lender, Dr. Mitchell and Golf exchanged general releases.
17
On November 30, 2003, we entered into an agreement with a creditor of Golf to
settle a note held by the creditor in the principal amount of $66,000, which was
then in default. Pursuant to this agreement Golf paid the creditor $33,000 and
agreed to pay the creditor an additional $33,000 and we agreed to issue 200,000
shares of our common stock to the creditor if the merger of CSI is consummated
and the common stock authorization increase is effected. On the same date, we
entered into an agreement with another creditor of Golf to settle a note held by
the creditor in the principal amount of $37,000, which was also then in default.
Pursuant to this agreement Golf paid the creditor $15,000 and agreed to pay the
creditor an additional $15,000 and we agreed to issue 125,000 shares of our
common stock to the creditor if the merger of CSI is consummated and the common
stock authorization increase is effected. In addition, on the same date, we
entered into an agreement with an accounting firm that had provided non auditing
services to Golf to settle a claim by the firm in the amount of approximately
$67,000. Pursuant to this agreement Golf agreed to pay the firm $15,000 and we
agreed to issue 100,000 shares of our common stock to the firm if the merger of
CSI is consummated and the common stock authorization increase is effected. We
also granted certain "piggy-back" registration rights to the recipients of the
shares to be issued as set forth in this paragraph.
We continue to have a significant working capital deficiency and to generate
substantial losses.
Off-Balance Sheet Transactions
We do not have any transactions, agreements or other contractual arrangements
that constitute off-balance sheet arrangements.
Issues and Uncertainties
Forward Looking Statements
Certain statements in this Report, and any documents incorporated by reference
herein, constitute "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of
1934 and the Private Litigation Reform Act of 1995. These forward-looking
statements include, among others words such as "expects," "anticipates,"
"intends," "believes" and other similar language. Our actual results could
differ materially from those discussed herein. You should not place undue
reliance on these forward-looking statements, which apply only as of the date of
this Report. Factors that could cause or contribute to such differences include,
but are not limited to, the risks discussed in the risk factors set forth below,
which are not meant to be all-inclusive.
Risks Associated with our Company
We currently have no revenue generating operations. The following discussion
highlights certain material risks we currently face.
Because CSI is not obligated to close the merger unless we satisfy a number of
conditions, we cannot assure you that we will consummate the merger with CSI.
Pursuant to our agreement with CSI, in order to effect the merger, we are
required to satisfy a number of conditions. Accordingly, we cannot assure you
that we will consummate the merger with CSI.
Our financial condition is extremely weak and we may be unable to continue as a
going concern.
Our operations have been dependent upon short-term borrowings and other funding
resources. From March 1, 1999 through November 30, 2003, our president made
18
advances of approximately $910,000, net of repayments, of which $41,144 was
advanced during our fiscal year ended February 28,2003, $260,024 was advanced
during our fiscal year ended February 28,2002 and $359,566 was advanced during
our fiscal year ended February 28,2001. Our independent auditors' report on our
consolidated financial statements for the year ended February 28, 2003 and the
notes to our unaudited financial statements for the nine months ended November
30, 2003 include language reflecting that substantial doubt exists as to our
ability to continue as a going concern. Our financial statements show an
accumulated deficit of approximately $21,106,261. We expect to continue to incur
net losses and negative cash flow for the foreseeable future and, unless we are
able to consummate our merger with CSI, we will most likely be forced to cease
all activities. Accordingly, any purchaser of our securities should be prepared
to lose his entire investment.
The loss of our chief executive officer without an adequate replacement would
require us to terminate all activities.
Dr. Michael Mitchell, our president and chief executive officer, is one of only
two remaining employees and the only one who devotes any material time to our
matters. If we are unable to consummate the merger with CSI and Dr. Mitchell
leaves the Company or is otherwise unable to act as our Chief Executive Officer,
we will be required to terminate all activities unless we are able to find an
adequate replacement, which we believe is most unlikely.
The authorization and issuance of "blank check" preferred stock could have an
anti-takeover effect detrimental to the interests of our stockholders.
The amendment to our certificate of incorporation proposed in our proxy
statement includes a proposal to allow our 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. Upon approval, our board of directors will have 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.
If we consummate the merger with CSI, the following are certain risk factors
that may affect CSI's future performance.
Because CSI depends on a small number of key customers, non-recurring revenue
and contracts terminable on short notice, its business could be adversely
affected if it fails to retain these customers and/or obtain new customers at a
level sufficient to support its operations and/or broaden its customer base.
For the year ended December 31, 2002, two customers accounted for approximately
$9,540,000 of CSI's revenues, which equaled 59% of these revenues. For the year
ended December 31, 2001, two customers accounted for approximately $15,900,000
of CSI's revenues, which equaled approximately 65% of these revenues. In
addition, CSI's contracts provide that CSI's services are terminable upon
relatively short notice, typically not more than 30 days. Non-renewal or
termination of contracts with these customers without adequate replacements
could have a material and adverse effect on CSI. In addition, a large portion of
CSI's revenues is derived from consulting services that are generally
non-recurring in nature. We cannot assure you that CSI will
19
o obtain additional contracts for projects similar in scope to those
previously obtained from its principal customers or any other
customer,
o be able to retain existing customers or attract new customers, or
o broaden its customer base so that it will not remain largely
dependent on a limited number of customers that will continue to
account for a substantial portion of its revenues.
CSI may be subject to additional risks relating to its customers that could
adversely affect its business.
CSI may be subject to
o delays in customer funding;
o lengthy customer review processes for awarding contracts;
o delay, termination, reduction or modification of contracts in the
event of changes in customer policies or as a result of budgetary
constraints; and/or
o increased or unexpected costs resulting in losses under fixed-fee
contracts,
which factors could also adversely affect its business.
CSI's revenues are difficult to forecast.
CSI may increase its corporate overhead expenses in the event that it increases
its business and/or acquires other businesses, while its operating expenses for
sales, marketing and technical personnel to sell, provide and support its
services also increases. Additionally, although most of CSI's customers are
large, creditworthy entities, at any given point in time, CSI may have
significant accounts receivable balances with customers that expose it to credit
risks if such customers are unable to pay such obligations. If CSI has an
unexpected shortfall in revenues in relation to its expenses, or significant bad
debt experience, its business could be materially and adversely affected.
CSI's business could be adversely affected if CSI fails to adapt to emerging and
evolving markets.
The markets for CSI's services are changing rapidly and evolving and, therefore,
the ultimate level of demand for CSI's 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 CSI's business and prospects.
CSI's success in meeting growth targets is dependent on its ability to maintain
existing customers and to continually attract and retain new customers to
replace those who have not renewed their contracts. CSI's ability to achieve
significant market acceptance will require substantial efforts and expenditures
on CSI's part to create awareness of CSI's services.
If CSI should experience rapid growth, such growth could strain its managerial
and operational resources, which could adversely affect its business.
Any rapid growth that CSI may experience would most likely place a significant
strain on its managerial and operational resources. If CSI is successful in
acquiring other companies, it 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 CSI's
ability to achieve the rapid execution necessary to successfully implement CSI's
growth strategy without incurring additional corporate expenses.
20
CSI faces intense competition and its failure to meet this competition could
adversely affect its business.
Competition for CSI's information technology consulting services is significant
and CSI expects that this competition will continue to intensify due to the low
barriers to entry. CSI may not have the financial resources, technical
expertise, sales and marketing or support capabilities to successfully meet this
competition. CSI competes against numerous large companies, including, among
others, multi-national and other major accounting 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 CSI has. If CSI is unable to compete against
such competitors, its business will be adversely affected.
CSI's competitors may respond more quickly than CSI to new or emerging
technologies and changes in customer requirements. Its competitors may also
devote greater resources than CSI can to the development, promotion and sale of
their services. They may develop services that are superior to or have greater
market acceptance than CSI's. 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 CSI's existing and potential
employees and strategic partners.
In addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties that could be
detrimental to CSI's business.
New competitors, including large computer hardware, software, professional
services and other technology and telecommunications companies, may enter CSI's
markets and rapidly acquire significant market share. As a result of increased
competition and vertical and horizontal integration in the industry, CSI could
encounter significant pricing pressures. These pricing pressures could result in
substantially lower average selling prices for its services. CSI 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 CSI fails to adapt to the rapid technological change constantly occurring in
the areas in which it operates, its business could be adversely affected.
The market for information technology consulting services is rapidly evolving.
Significant technological changes could render CSI's existing services obsolete.
CSI must adapt to this rapidly changing market by continually improving the
responsiveness, functionality and features of its services to meet customers'
needs. If CSI is unable to respond to technological advances and conform to
emerging industry standards in a cost-effective and timely manner, its business
could be materially and adversely affected.
CSI could be subject to systems failures that could adversely affect its
business.
CSI's business depends on the efficient and uninterrupted operation of CSI's
computer and communications hardware systems and infrastructure. CSI currently
maintains its computer systems in its facilities at its offices in New Jersey.
Although CSI has taken precautions against systems failure, interruptions could
result from natural disasters as well as power losses, telecommunications
failures and similar events. CSI also leases 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 CSI's business.
21
CSI's business could be adversely affected if CSI fails to adequately address
security issues.
CSI has taken measures to protect the integrity of its infrastructure and the
privacy of confidential information. Nonetheless, its 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 CSI's systems,
misappropriate proprietary information or cause interruptions in its operations.
CSI 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 CSI's reputation and expose it
to a risk of loss or liability.
CSI faces 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 CSI may
target for acquisition. CSI is and following the merger is 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 CSI may find to be desirable
acquisition candidates. Many of these investment-oriented entities have
significantly greater financial resources, technical expertise and managerial
capabilities than CSI does. Consequently, CSI 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 CSI can provide. Even if CSI is able to compete with
these venture capital entities, this competition may affect the terms and
conditions of potential acquisitions and, as a result, CSI may pay more than
expected for targeted acquisitions. If CSI cannot acquire interests in
attractive companies on reasonable terms, its strategy to build its business on
acquisitions may not succeed.
CSI will encounter difficulties in identifying suitable acquisition candidates
and integrating new acquisitions.
A key element of CSI's expansion strategy is to grow through acquisitions. If
CSI identifies suitable candidates, it may not be able to make investments or
acquisitions on commercially acceptable terms. Acquisitions may cause a
disruption in CSI's ongoing business, distract management, require other
resources and make it difficult to maintain CSI's standards, controls and
procedures. CSI 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 CSI will make will enhance its
business.
We cannot assure you that any completed acquisition will enhance CSI's business.
Since we anticipate that acquisitions will be made with both cash and our common
stock, if CSI consummates one or more significant acquisitions, the potential
impacts are:
(a) 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
(b) our stockholders could suffer significant dilution of their interest
in our common stock.
22
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.
If CSI fails to retain key personnel, its business could be adversely affected.
There is intense competition for qualified personnel in the areas in which CSI
operates. 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 its
business. CSI also depends on the performance of its executive officers and key
employees, none of whom, including Messrs. Newman and Peipert, have entered into
employment agreements with CSI. In addition, the Company has not obtained "key
man" life insurance on the lives of either Mr. Newman or Mr. Peipert and, as
such, the death of either of these individuals could have a material adverse
effect on CSI.
CSI 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,
CSI may not be successful in attracting, training and retaining the personnel it
needs to continue to offer solutions and services to current and future
customers in a cost effective manner, if at all.
If, following the merger, we fail to raise the capital CSI may need to support
and increase its operations, its business could be adversely affected.
CSI's future capital uses and requirements will depend on numerous factors,
including:
o the extent to which CSI's solutions and services gain market
acceptance;
o the level of revenues from current and future solutions and
services;
o the expansion of operations;
o the costs and timing of product and service developments and sales
and marketing activities;
o the costs related to acquisitions of technology or businesses; and
o competitive developments.
We may require additional capital in order to continue to support and increase
CSI's sales and marketing efforts, continue to expand and enhance the solutions
and services CSI is 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, CSI may be required to spend
greater-than-anticipated funds if unforeseen difficulties arise in the course of
these or other aspects of its 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 CSI to delay, scale back or eliminate some or all of its
expansion programs or to limit the marketing of its services. This could have a
material and adverse effect on its business.
CSI could have potential liability to its customers that could adversely affect
its business.
23
CSI's services involve development, implementation and maintenance of computer
systems and computer software that are critical to the operations of CSI's
customers' businesses. If CSI fails or is unable to satisfy a customer's
expectations in the performance of its services, its business reputation could
be harmed or it could be subject to a claim for substantial damages, regardless
of its responsibility for such failure or inability. In addition, in the course
of performing services, CSI's personnel often gain access to technologies and
content that include confidential or proprietary customer information. Although
CSI has 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. CSI's
business could be adversely affected if one or more large claims are
successfully asserted against CSI that are uninsured, exceed available insurance
coverage or result in changes to its insurance policies, including premium
increases or the imposition of a large deductible or co-insurance requirements.
Although CSI maintains 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.
CSI has never paid cash dividends on its common stock other than distributions
resulting from CSI's status as a Subchapter S corporation for tax purposes.
Following the merger, the principals of CSI do not anticipate that LCS will pay
cash dividends in the foreseeable future. Instead, we intend to retain future
earnings for reinvestment in CSI's business and/or to fund future acquisitions.
Ownership of LCS common stock will be concentrated following consummation of the
merger.
Following consummation of the merger, Scott Newman and Glenn Peipert, the
principal stockholders of CSI who will become our executive officers and two of
our directors, will beneficially own approximately 50.6% and 25.3%,
respectively, of our outstanding common stock. As a result, each of them will
possess significant influence over LCS' decision making on business matters,
including the election of directors. This concentration of ownership of our
common stock may:
o delay or prevent a change in the control of LCS;
o impede a merger, consolidation, takeover, or other transaction
involving LCS; or
o discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of LCS.
Future growth is dependent on producing revenue sufficient to cover increasing
expenses.
CSI's expenses will increase in order for CSI to build an infrastructure to
implement its acquisition strategy. In support thereof, CSI expects that it will
be required to hire additional employees and expand its information technology
systems. CSI also may increase its operating expenses to:
o broaden its support capabilities for any companies it may acquire;
o explore acquisition opportunities and alliances with other
companies; and
o facilitate business arrangements among companies it may acquire.
CSI's earnings will be adversely affected if higher expenses are not accompanied
by increased revenue.
CSI has until now been a private company, and we will incur expenses and face
potential regulatory scrutiny following the merger in attempting to comply with
new corporate governance regulations.
CSI is currently a private company and the transition to being a public company
will impose new burdens
24
on CSI. Beginning with the enactment of the Sarbanes-Oxley Act of 2002 in July
2002, a significant number of new corporate governance requirements have been
adopted or proposed by the Securities and Exchange Commission. Complying with
such requirements will be costly. Although CSI will attempt to comply with all
current and future requirements, it may not be successful in complying with
these requirements at all times in the future and therefore may become subject
to regulatory scrutiny. In addition, these requirements will require CSI to make
changes to our corporate governance practices.
ITEM 3 - Controls and Procedures
Our management, which is comprised of our Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based
on that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures are effective in ensuring
that all material information required to be filed in this quarterly report has
been made known to them in a timely fashion since they are our only employees
and we are inactive. There have been no significant changes in internal
controls, or in other factors that could significantly affect internal controls,
subsequent to the date our Chief Executive Officer and Chief Financial Officer
completed their evaluation.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
On May 1, 2002, Daniel W. Gorman filed a complaint in the Circuit Court for the
Fifteenth Judicial Circuit, Palm Beach County, Florida naming LCS Golf, Inc.,
Dr. Mitchell, Alex Bruni and two other individuals as defendants. The title of
the action is Daniel W. Gorman v LCS Golf Inc., Michael D. Mitchell, Alex Bruni,
Scott Eurich, and Michele Haas. The complaint alleges breach of a contract. It
also claims entitlement to relief under theories of quantum meruit for work
done, tortious interference with contract, misrepresentation and conspiracy.
Although the ad damnum clause in the complaint contains no specific amount as a
damage demand, the body of the complaint contains allegations of losses of
$1,625,000 plus securities and other compensation in amounts not susceptible of
conversion to dollar figures.
This litigation was settled on September 25, 2003, when we agreed to pay Mr.
Gorman's designee $10,000.00 and issue to his designee 100,000 shares of our
common stock and he executed general releases to all defendants and agreed to
refrain from certain actions relating to LCS and Dr. Mitchell. We paid the
$10,000 on October 22, 2003 and issued the shares on November 24, 2003. The
shares were issued pursuant to the exemption from the registration provisions of
the Securities Act provided by Section 4(2) thereof.
On or about August 28, 2002, Fairway One, L.L.C. the lessor of the premises
formerly occupied by our subsidiary, Golf, in Palm Beach Florida, commenced
litigation in the Circuit Court of the Fifteenth Judicial Circuit in and for
Palm Beach County, Florida against Golf for damages resulting from Golf's breach
of the lease on these premises. On December 16, 2002, the plaintiff entered a
default judgment against Golf for $169,370.62. The name of the case is Fairway
One, L.L.C. v. LCS Golf, Inc., Case No. CA `02 - 10450AD.
On November 6, 2003, Traffix, Inc. filed a complaint in the New York State
Supreme Court in Rockland County, New York, Index No. 7499/03 against Dr.
Mitchell and Golf. The title of the action is Traffix, Inc. against LCS Golf,
Inc. and Michael Mitchell. The complaint alleges a breach of agreement, a breach
of guarantee by Dr. Mitchell and reliance by Traffix on false statements, and
seeks aggregate damages of approximately $1,500,000 plus interest, legal fees
and expenses.
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On November 14, 2003, the parties signed a settlement agreement pursuant to
which Golf paid Traffix $30,000 and agreed to pay an additional $32,500 when the
closing of the merger with CSI is consummated. We agreed to issue Traffix
250,000 shares of our common stock within five days after the closing. Traffix
agreed to immediately withdraw the complaint without prejudice. In the event
that the closing is not consummated within 150 days after November 14, 2003, the
settlement agreement will be terminated, Traffix will retain the $30,000 and be
permitted to reinstitute the litigation, Golf will have no obligation to pay the
additional $32,500, we will have no obligation to issue the 250,000 shares to
Traffix, and Dr. Mitchell and Golf will retain all defenses and counterclaims
they may have against Traffix.
On November 4, 2002, Littman Krooks & Roth P.C. filed a complaint in the New
York State Supreme Court in New York County, New York, Index No. 604014/02
against Golf, Dr. Mitchell and Mr. Bruni. The title of the action is Littman
Krooks & Roth P.C. pro se against LCS Golf, Inc., Alex Bruni and Michael
Mitchell. The complaint alleges a breach of contract to pay legal fees, legal
fees due for quantum meruit for services rendered, account stated for legal fees
due for services rendered, and reliance by the plaintiff on false statements,
and seeks aggregate damages of approximately $54,772.06 plus interest, legal
fees and expenses. On November 25, 2003, Dr. Mitchell and Golf were served with
a Notice of Application of Default Judgment against all defendants returnable,
as adjourned, on March 13, 2004 in the New York State Supreme Court in New York
County, New York, which seeks a default judgment against the defendants for
failure to respond timely to the complaint. We plan to oppose the motion and
defend against the action.
ITEM 2. Change in Securities
See Part II Item 1 Legal Proceedings above for information relating to the
issuance of 100,000 shares of our common stock to a designee of Daniel Gorman in
settlement of a litigation with Mr. Gorman.
ITEM 3. Defaults Upon Senior Securities
See Notes B through E to our unaudited consolidated financial statements for the
nine-month period ending November 30, 2003.
ITEM 4. Submission of Matters to a Vote of Securities Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit No. Description
2.2(a) Amendment to Agreement and Plan of Reorganization among LCS
Group, Inc., LCS Acquisition Corp. (a wholly owned subsidiary
of LCS Group, Inc.), Conversion Services International, Inc.,
Scott Newman and Glenn Peipert dated as of November 28, 2003
(without Exhibits and Schedules).
31.1 Certification of Chief Executive Officer pursuant to Rule
13A-14 of the Securities Exchange Act of 1934.
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31.2 Certification of Chief Financial Officer pursuant to Rule
13A-14 of the Securities Exchange Act of 1934.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Reports of Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LCS GROUP, INC.
By: /s/ MICHAEL D. MITCHELL
---------------------------------
Michael D. Mitchell Sole Director
and Principal Executive Officer
By: /s/ ALEX BRUNI
--------------------------
Alex Bruni
Principal Accounting and
Financial Officer
Date: JANUARY 20, 2004