As filed with the United States Securities and Exchange Commission on
February 14, 2006
Registration No. 333-______________
==============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
Nevada Compliance Systems 20-4292198
Corporation
(State or Other Jurisdiction (Name of Registrant in (I.R.S. Employer Identification
of Incorporation Our Charter) No.)
or Organization)
90 Pratt Oval 4813 CorpDirect Agents, Inc.
Glen Cove, New York 11542 (Primary Standard 318 North Carson Street, #213
(516) 674-4545 Industrial Carson City, NV 89701
(Address and telephone number Classification Code (800) 388-2123
of Principal Number) (Name, address and telephone
Executive Offices and number of agent for service)
Principal Place of Business)
Copies to:
Kirkpatrick & Lockhart Nicholson Graham LLP Kirkpatrick & Lockhart Nicholson Graham LLP
201 S. Biscayne Boulevard, Suite 2000 201 S. Biscayne Boulevard, Suite 2000
Miami, Florida 33131 Miami, Florida 33131
Attention: Clayton E. Parker, Esq. Attention: Christopher J. DeLise, Esq.
(305) 539-3300 (305) 539-3300
Telecopier No.: (305) 358-7095 Telecopier No.: (305) 358-7095
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box. |X|
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act Registration Statement number of
the earlier effective Registration Statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act Registration Statement number of the earlier effective
Registration Statement for the same offering. |_|
If delivery of the Prospectus is expected to be made pursuant to
Rule 434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE
============================================================================================================================
Proposed Maximum
Proposed Maximum Aggregate Amount Of
Title Of Each Class Of Amount To Be Offering Price Offering Registration
Securities To Be Registered Registered Per Share (1) Price (1) Fee
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $0.001 per share 71,220,786 shares (2) $0.30 $21,366,238.80 $2,286.19
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL 71,220,786 shares (2) $0.30 $21,366,238.80 $2,286.19
============================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended.
For purposes of calculating this registration fee, Compliance Systems
Corporation has used $0.30, which is the last price at which the stock
was sold in an exempt offering in July 2005. On February 10, 2006,
Compliance Systems Corporation merged with and into GSA Publications,
Inc., a public shell, whereby GSA Publications, Inc. became the surviving
entity and on said date the surviving entity changed its name to
Compliance Systems Corporation and filed a Form 15c211 with the NASD.
Because there is no recent trading history nor quote on Pink Sheets for
the common stock of GSA Publications, Inc., there is no recent closing
price to use in calculating this fee
(2) Of these shares, 65,000,000 shares are being registered to be issued upon
the conversion of the November 2005 Secured Convertible Debentures issued
to Montgomery Equity Partners, Ltd. by Compliance Systems Corporation,
3,500,000 shares are being registered on behalf of other selling
stockholders who received such shares in 2005 in connection with a "Texas
504 Offering" conducted by GSA Publications, Inc. in 2005, and 2,720,786
shares are being registered on behalf of other selling shareholders which
shares are underlying warrants that were purchased by shareholders of
Compliance Systems Corporation in 2003.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
Subject to completion, dated February __, 2006
PROSPECTUS
COMPLIANCE SYSTEMS CORPORATION
71,220,786 Shares of Common Stock
This Prospectus relates to the sale of up to 71,220,786 shares of
common stock of Compliance Systems Corporation ("CSC") by certain persons who
are, or will become, stockholders of CSC. The selling stockholders consist
of:
o Montgomery Equity Partners, Ltd., which intends to sell up to an
aggregate amount of 65,000,000 shares of CSC common stock issuable upon
conversion of the November 2005 Debentures described herein;
o other selling stockholders, who intend to sell up to an aggregate
amount of 3,500,000 shares of CSC common received by them in 2005 in
connection with a "Texas 504 offering" conducted by GSA Publications, Inc. in
2005 (into which CSC recently merged); and
o other selling stockholders, who intend to sell up to an aggregate
amount of 2,720,786 shares of CSC common stock issuable upon exercise of
outstanding warrants to purchase shares of CSC common stock that were issued
to them by CSC in 2003.
Please refer to "Selling Stockholders" beginning on Page 15 of this
Prospectus.
CSC is not selling any shares of common stock in this offering and
therefore, will not receive any proceeds from this offering. All costs
associated with this registration will be borne by CSC.
The shares of common stock are being offered for sale by the selling
stockholders at prices established on the Pink Sheets during the term of this
offering. These prices will fluctuate based on the demand for the shares of
our common stock. On December 2, 2005, CSC conditionally acquired 85% of the
common stock of GSA Publications, Inc., a public shell ("GSA"), subject to
the fulfillment of certain conditions. These conditions were satisfied in
early-February 2006. On February 10, 2006, CSC merged with and into GSA
whereby GSA became the surviving entity (the "Surviving Entity"). On said
date, the Surviving Entity changed its name to Compliance Systems Corporation
and filed a Form 15c211 with the National Association of Securities Dealers.
Because there is no recent trading history for GSA or the Surviving Entity,
CSC does not have a recent or last reported sale price for its common stock,
but anticipates that a trading market for its common stock will be
established on or before February 17, 2005. For purposes of this prospectus
and the accompanying registration statement, CSC has used $0.30 as a recent
trading price for its common stock as this is the last price at which shares
of CSC were traded in an arm's-length transaction.
Montgomery Equity Partners, Ltd. is entitled, at its option, to convert
at any time a portion or all amounts of principal and interest due and
outstanding under the November 2005 Debentures into shares of CSC common
stock, $0.001 par value per share, at a price per share equal to the lower of
(i) the lowest closing bid price of CSC common stock during the 10 trading
days before the filing of this registration statement, or 80% of the lowest
closing price of CSC common stock on the Pink Sheets or other exchange on
which CSC common stock is then listed for the five trading days immediately
preceding the conversion date, as quoted by Bloomberg, LP., which conversion
price may be adjusted from time-to-time pursuant to certain other provisions
of the November 2005 Debentures. The November 2005 Debentures are secured by
all of the Company's assets which are not otherwise specifically pledged,
have two-year maturity dates, and accrue interest at 10% per annum.
CSC's common stock will be quoted on the Pink Sheets under the symbol
"GSAP.PK" by no later than February 17, 2006.
These securities are speculative and involve a high degree of risk.
Please refer to "Risk Factors" beginning on Page 6 of this Prospectus.
Neither the United States Securities and Exchange Commission nor any
state securities regulators have approved or disapproved of these securities,
or determined if this Prospectus is truthful or complete. Any representation
to the contrary is a criminal offense.
The date of this Prospectus is February __ , 2006
i
TABLE OF CONTENTS
PROSPECTUS SUMMARY..................................................................................1
THE OFFERING........................................................................................3
SUMMARY FINANCIAL INFORMATION.......................................................................4
RISK FACTORS........................................................................................6
FORWARD-LOOKING STATEMENTS.........................................................................14
SELLING STOCKHOLDERS...............................................................................15
USE OF PROCEEDS....................................................................................20
PLAN OF DISTRIBUTION...............................................................................21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............22
DESCRIPTION OF BUSINESS............................................................................28
MANAGEMENT.........................................................................................34
DESCRIPTION OF PROPERTY............................................................................38
LEGAL PROCEEDINGS..................................................................................39
PRINCIPAL STOCKHOLDERS.............................................................................40
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................................................41
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER SHAREHOLDER MATTERS.....42
DESCRIPTION OF SECURITIES..........................................................................44
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES DESCRIPTION OF SECURITIES.............................................................44
EXPERTS ...........................................................................................46
LEGAL MATTERS......................................................................................47
HOW TO GET MORE INFORMATION........................................................................47
FINANCIAL STATEMENTSDESCRIPTION OF SECURITIES......................................................48
PART II .........................................................................................II-1
i
PROSPECTUS SUMMARY
History
Compliance Systems Corporation was incorporated on November 17, 2003 in
the State of Nevada. GSA Publications, Inc. ("GSA"), was incorporated in
Delaware on November 7, 2002 pursuant to a corporate reorganization of several
closely related companies that had commenced operations in December of 2001. On
December 2, 2005, Compliance Systems Corporation conditionally acquired 85% of
the common stock of GSA subject to the fulfillment of certain conditions. These
conditions were satisfied in early-February 2006. On February 10, 2006,
Compliance Systems Corporation merged with and into GSA whereby GSA became the
surviving entity (the "Surviving Entity"). On said date, the Surviving Entity
changed its name to Compliance Systems Corporation ("CSC" or the "Company") and
filed a Form 15c211 with the National Association of Securities Dealers (the
"NASD"). CSC operates its business through its consolidated subsidiaries, with
headquarters in Glen Cove, New York.
Summary of Business
Through its subsidiaries, CSC provides its customers with Do-Not-Call
("DNC") risk management systems and services. CSC provides its clients with
patented DNC blocking technology, as well as up to date legislative initiatives
and supporting services. CSC's core service is an automatic DNC blocking service
known as TeleBlock(R), which is its patented process currently being sold by
telephone carriers nationwide. This service gives companies that use the
telephone to sell goods and services the ability to comply with federal and
state laws regarding DNC lists and related regulations. TeleBlock(R) is a
patented process that automatically screens and blocks outbound calls against
federal, state, and "in-house" DNC lists in real-time. TeleBlock(R)
automatically prevents companies from calling consumers that have registered for
any of the state or federal DNC lists, thereby protecting these companies from
potential government fines. From a telephone carrier's perspective, TeleBlock(R)
is an added "feature" which can be offered to customers, similar to Caller ID.
The TeleBlock(R) database (DNC information) platforms are hosted and managed by
our Alliance Partner, VeriSign, Inc. The deployment of TeleBlock(R) allows it to
be offered to end-users by distributors that utilize either Signal System 7
("SS7"), or via secure Virtual Private Network ("VPN") Internet protocols
("IPs"). In December 2001, the technology and process underlying TeleBlock(R)
was granted a patent from the United States Patent and Trademark Office. Since
that time, CSC's marketing efforts have been aimed at branding TeleBlock(R) as
the default DNC compliance system throughout the teleservices industry. Towards
that end, the Company has registered many of its trademarks, including "Call
Compliance" and "TeleBlock" and only allow use of such marks by CSC's
distributors upon executing a "Marks Agreement." CSC has also focused on
providing additional services to the teleservices community that serve to
augment the Company's marketing efforts with regard to TeleBlock(R). Since 2003,
CSC has been making available to the teleservices industry an online compilation
of state and federal telemarketing regulations. This compilation, which
management believes is the only one of its kind, has been adopted by hundreds of
regular subscribers. Another service CSC implemented to enhance the TeleBlock(R)
offering is "DialerID."SM This TeleBlock(R) add-on service enables a
telemarketer to send out Caller ID even when Caller ID is not available from its
equipment or telephone carrier. Alternatively, DialerIDSM allows a telemarketer
to send out a Caller ID return number that is different from the calling number
from which the call was made. CSC believes it is a leader in the field of
compliance services for the teleservices industry, and the Company plans to
continue its current activities and develop additional products to better serve
the needs of its client base. The Company anticipates introducing several new
products or services in 2006, which are described in other sections of this
prospectus.
Going Concern
The Company's financial statements are presented on a going concern basis,
which contemplates the realization of assets and satisfaction of liabilities in
the normal course of business. The Company's independent auditors added an
explanatory paragraph to their audit opinions issued on our financial statements
for the years ended December 31, 2004 and 2003, indicating conditions, including
losses from operations and working capital and stockholder deficits, which raise
substantial doubt about the Company's ability to continue as a going concern.
1
CSC's losses have resulted from a shortfall of sales revenues to cover
the Company's operating and marketing expenditures during the implementation
of CSC's operating plan, which targets significant sales growth and is
long-range in nature. For the year ended December 31, 2004, the Company
incurred a net loss of $1,293,769 and for the nine months ended September 30,
2005, the Company incurred a net loss of $917,441. At September 30, 2005,
the Company had a working capital deficit of $627,825 and stockholders'
deficit of $2,490,339. The Company's ability to continue as a going concern
is dependent upon its ability to secure adequate financing at acceptable
terms and attain profitable operations. In addition, the Company's ability
to continue as a going concern must be considered in light of the problems,
expenses and complications frequently encountered by entrance into
established markets and the competitive environment in which the Company
operates.
CSC's financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from
the possible inability of the Company to continue as a going concern.
Management is seeking additional financing and the restructuring of existing
debt as well as new business opportunities. In December 2005, the Company
obtained new secured debt. In addition, the Company has recently reduced
operating expenses.
About Us
CSC's principal office is located at 90 Pratt Oval, Glen Cove, New York
11542. The Company's telephone number is (516) 674-4545.
2
THE OFFERING
This offering relates to the sale of common stock by certain persons
who are CSC stockholders. The selling stockholders consist of:
o Montgomery Equity Partners, Ltd. ("Montgomery"), which intends to
sell up to an aggregate amount of 65,000,000 shares of CSC common stock
issuable upon conversion of the November 2005 Debentures described herein;
o other selling stockholders, who intend to sell up to an aggregate
amount of 3,500,000 shares of CSC common received by them in 2005 in
connection with a "Texas 504 Offering" conducted by GSA Publications, Inc. in
2005 (into which CSC recently merged); and
o other selling stockholders, who intend to sell up to an aggregate
amount of 2,720,786 shares of CSC common stock issuable upon exercise of
outstanding warrants to purchase shares of CSC common stock that were issued
to them by CSC in 2003.
Please refer to "Selling Stockholders" beginning on Page 15 of this
Prospectus.
Common Stock Offered 71,220,786 shares by selling
stockholders
Offering Price Market price
Common Stock Outstanding Before the 50,000,000 shares (as of February 14,)
Offering
Use of Proceeds We will not receive any proceeds of
the shares offered by the selling
stockholders. See "Use of Proceeds."
Risk Factors The securities offered hereby involve
a high degree of risk and immediate
substantial dilution. See "Risk
Factors" and "Dilution."
Trading Symbol "GSAP.PK"
3
SUMMARY FINANCIAL INFORMATION
The following is a summary of CSC's financial statements, which are
included elsewhere in this Prospectus. You should read the following data
together with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section of this Prospectus as well as
CSC's financial statements and the notes thereto.
CONSOLIDATED BALANCE SHEET DATA
COMPLIANCE SYSTEMS CORPORATION
Historical Pro forma(1)
------------------------------- -----------
December 31, September 30, September 30,
2004 2005 2005
----------- ----------- -----------
ASSETS:
Current Assets $ 537,535 $ 346,726 $ 702,726
Property, Equipment and Software, Net 441,054 371,367 372,367
Other Assets 42,078 159,910 349,910
----------- ----------- -----------
Total Assets 1,020,667 878,003 1,425,003
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT:
Current Liabilities 568,852 974,551 984,051
Long-term Liabilities 4,039,836 2,327,394 2,927,394
Total Liabilities 5,355,137 3,368,342 3,977,842
----------- ----------- -----------
Shareholders' Deficit (4,334,470) (2,490,339) (2,552,839)
----------- ----------- -----------
Total Liabilities and Shareholders'
Deficit 1,020,667 878,003 1,425,003
=========== =========== ===========
- ------------------------
(1) This pro forma balance sheet consolidates the balance sheets of
CSC and GSA as if the merger occurred on September 30, 2005. Also
reflected in this pro forma balance sheet is the receipt of secured
convertible debenture proceeds of $600,000 and the application of an
aggregate of $290,000 allocated to deferred costs and those costs
directly related to the merger.
4
CONSOLIDATED STATEMENTS OF OPERATION DATA
COMPLIANCE SYSTEMS CORPORATION
Historical Financial Statements Pro forma Financial Statements(1)
Nine Months
Years Ended Nine Months Ended Year Ended Ended
December 31, September 30, December 31, September 30,
2003 2004 2004 2005 2004 2005
----------- ----------- ----------- ----------- ----------- -----------
Revenues $ 1,348,176 $ 2,114,285 $ 1,548,578 $ 1,426,910 $ 2,114,285 $ 1,426,910
----------- ----------- ----------- ----------- ----------- -----------
Cost of Revenues 383,017 492,815 362,426 350,976 492,815 350,976
Selling, General, and
Administrative Expenses 2,845,667 2,915,239 2,094,946 1,993,375 2,982,239 2,049,375
----------- ----------- ----------- ----------- ----------- -----------
Net Loss ($1,880,508) ($1,293,769) ($ 908,794) ($ 917,441) ($1,360,769) ($ 973,441)
=========== =========== =========== =========== =========== ===========
Pro forma Loss Per Share(2) ($ 0.05) ($ 0.03) ($ 0.02) ($ 0.02) ($ 0.03) ($ 0.02)
=========== =========== =========== =========== =========== ===========
- ------------------------
(1) This pro forma statement of operations consolidates the
statements of operations of CSC and GSA as if the merger occurred on
the first day of each period presented. This pro forma statement of
operations also reflects interest expense on the $600,000 of
convertible debt as if that borrowing occurred on the first day of each
period.
(2) The conversion of shares of CSC common stock into shares of the
Surviving Entity resulting from the Company's merger in February 2006
has been given pro forma retroactive recognition for loss per share
purposes.
5
RISK FACTORS
CSC IS SUBJECT TO VARIOUS RISKS THAT MAY MATERIALLY HARM ITS BUSINESS,
FINANCIAL CONDITION, AND RESULTS OF OPERATIONS. AN INVESTMENT IN CSC COMMON
STOCK IS SPECULATIVE IN NATURE AND INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY CONSIDER EACH OF THE RISKS DESCRIBED BELOW, TOGETHER WITH
ALL OF THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE DECIDING TO
INVEST IN SHARES OF CSC COMMON STOCK. ADDITIONAL RISKS AND UNCERTAINTIES NOT
PRESENTLY KNOWN TO THE COMPANY MAY ALSO AFFECT ITS BUSINESS. IF ANY OF THE
FOLLOWING EVENTS ACTUALLY OCCUR, CSC'S BUSINESS COULD BE ADVERSELY AFFECTED
AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
We Have Historically Lost Money And Losses Are Expected To Continue In The
Future, Which Could Have A Significant Negative Impact On Our Financial
Condition.
We have historically lost money and have experienced losses from
operations and future losses are expected until such time, if any, that we
attain sufficient sales growth. For the nine months ended September 30,
2005, we incurred a net loss of $917,441. In the years ended December 31,
2004 and 2003, we had net losses from operations of $1,293,769 and
$1,880,508, respectively. We also have a history of negative cash flow from
operations and expect this to continue for the foreseeable future.
Accordingly, we may experience significant liquidity and cash flow problems.
If we are not successful in reaching and maintaining profitable operations,
we may not be able to attract sufficient capital to continue our operations.
Our inability to obtain adequate financing will result in the need to curtail
business operations and will likely result in a lower stock price.
Our Independent Auditors Have Added An Explanatory Paragraph To Their Audit
Report On Our Financial Statements, Indicating Various Factors That Raise
Substantial Doubt About Our Ability To Continue
Our independent auditors have added an explanatory paragraph to their
audit opinion issued on our financial statements for the year ended December
31, 2004, which indicate the various factors that raise substantial doubt
about our ability to continue as a going concern. Those conditions continued
through the third quarter of 2005 resulting in operating losses and liquidity
shortages.
The accompanying financial statements have been prepared assuming that
we will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business.
At September 30, 2005, the Company has a working capital deficit of $627,825,
and a stockholders' deficit of $2,490,339. Our management anticipates that
we will incur net losses for the immediate future, and expect our operating
expenses to increase significantly, and, as a result, we will need to
generate significantly increased monthly revenue if we are to continue as a
going concern. Our financial statements, which are included in this
Prospectus, do not include any adjustments that might result from the outcome
of this uncertainty.
We Will Need To Raise Additional Capital To Finance Operations, Which Will
Potentially Dilute The Value Of Our Shareholders' Shares
We have relied on significant external financing to fund our
operations. Such financing has historically come from a combination of
borrowings, including the November 2005 Debentures, sale of common stock to
third parties and funds provided by certain officers and directors. We
cannot assure you that new financing, whether from external sources or
related parties, will be available if needed or on favorable terms to us.
Our inability to obtain adequate financing will result in the need to curtail
business operations. Any of these events would be materially adverse to our
business and may result in a lower stock price or a total loss of your
investment. We will need to raise additional capital to fund our anticipated
future expansion. Any additional financing may involve dilution to our
then-existing shareholders, which could result in a decrease in the price of
our shares.
6
We Have A Working Capital Deficit, Which Means That Our Current Assets On
September 30, 2005 Were Not Sufficient To Satisfy Our Current Liabilities
We had a working capital deficit of $627,825 as of September 30, 2005,
which means that our current liabilities exceeded our current assets on
September 30, 2005 by that amount. Current assets are assets that are
expected to be converted to cash within one year and, therefore, may be used
to pay current liabilities as they become due. Our working capital deficit
means that our current assets on September 30, 2005, were not sufficient to
satisfy all of our current liabilities on that date.
Our Obligations Under The November 2005 Debentures Are Secured By Our Assets
Which Could Cause Our Operations To Cease If We Default
At February 1, 2006, we owed Montgomery a total of $609,333 in debt and
accrued interest thereon, consisting of the following: (i) our obligations
under the November 2005 Debentures issued to Montgomery secured by all of our
assets not otherwise specifically pledged and (ii) accrued interest thereon
of $9,333. Pursuant to the terms of the foregoing promissory notes and
debentures, all of our assets, other than the TeleBlock patent and equipment
specifically secured under capital lease obligations, have been pledged to
Montgomery as security for repayment of our obligations to Montgomery. We
are currently late on our obligation to initially file this registration
statement on Form SB-2 by January 14, 2006, which may result in the
imposition of a 2% penalty by Montgomery, calculated on the outstanding debt
principal, but such lateness in filing does not constitute a default under
the agreement.
Our Revenue To Date Has Been Derived From A Relatively Small Number Of
Distributor/Customers, And The Loss Of Any Of These Could Adversely Impact
Our Business And Operating Results.
We derive a significant portion of our revenues from a relatively small
number of distributor/customers. For the year ended December 31, 2004, and
the nine months ended September 30, 2005, two distributors in the aggregate
accounted for approximately 96% and 94% of our revenues, respectively.
Accordingly, the loss of either distributor could materially and adversely
affect our business, and the deferral or loss of business from these
distributors could materially and adversely affect our forecasted revenues
and operating results.
We May Be Unable To Adequately Protect Our Intellectual Property Rights.
Although we believe that we have the only patented DNC automated
process and we have trademarked the name Teleblock(R), we may not have the
financial ability to protect our intellectual property if it is infringed
upon. We also rely on a combination of trade secret laws, confidentiality
procedures, and contractual provisions to protect our intellectual property.
These protections may not be sufficient, and do not prevent independent
third-party development of competitive products or services.
Further, the laws of many foreign countries do not protect our
intellectual property rights to the same extent as the laws of the United
States. We enter into agreements with many of our employees giving us
proprietary rights to certain technology developed by such employees while
employed by us; however, we cannot be sure a court will enforce these
agreements. In addition, we may be inadequately protected against the use of
technology developed by employees who have not entered into such agreements.
A failure or inability to protect our intellectual property could have a
material adverse effect on our business, financial condition and results of
operations.
Our Teleblock(R) Product May Contain Unknown Defects That Could Harm Our
Operations.
The success of our business depends on our TeleBlock(R) product, which is
complex and may contain defects which we are not aware. Although TeleBlock(R)
is currently, and has been, deployed without defect, we may not discover
defects that affect any updated or new version of the TeleBlock(R) process
until after it has been deployed. These defects could cause service
interruptions to customers, which could damage our reputation or increase our
expenses, cause us to lose revenue, delay market acceptance or divert our
development resources. Also, because we offer a one product solution to our
customers, they are likely to hold us accountable for any problems associated
with our product, even if the problem results from circumstances beyond our
control. However, the Company has and maintains an insurance policy
providing the Company Failsafe Technology protection insurance.
7
Although We Have Established Prices For Our Products, If We Fail To Achieve
Positive Net Margins On Service Revenues In The Foreseeable Future, Our
Results Of Operations Could Suffer.
We have only established pricing models for our current products and
services and have not established a pricing model for any new or enhanced
products and services. We can provide you no assurance that we will be able
to sell and market our services at prices that will generate positive
margins. We cannot assure you that we will ever achieve positive margins on
our revenues, and failure to do so could cause our business to suffer.
Our Brand Identity Is Critical To Our Success.
Recognition and positive perception of the TeleBlock(R) brand name in the
telecommunications industry is critical to our success. We have only
recently begun to develop our brand name and we may not achieve our desired
goal of increasing the awareness of our brand name. Even if recognition of
our brand name increases, it may not lead to an increase in the number of
customers using our product.
We Depend On Key Personnel And Our Failure To Attract Or Retain Key Personnel
Could Harm Our Business.
Our success largely depends on the efforts and abilities of key
executives and consultants, including Dean Garfinkel, our President and
Chairman, Barry Brookstein, our Chief Financial Officer, and Stefan Dunigan,
our Vice President of Operations. The loss of the services of Messrs.
Garfinkel, Brookstein, or Dunigan could materially harm our business because
of the cost and time necessary to replace and train a replacement. Such a
loss would also divert management attention away from operational issues. We
presently maintain a key-man life insurance policy on Messrs. Garfinkel and
Dunigan, not on Mr. Brookstein.
We Depend On Montgomery As A Financing Source, Which Could Hamper Our Ability
To Obtain Or Renew Funding From Third Parties
At February 1 ,2006, we owed to Montgomery a total of $609,333 in debt
and accrued interest thereon, consisting of the following: (i) debt of
$600,000 and (ii) accrued interest thereon of $9,333. We are not currently
in default of any of our foregoing obligations to Montgomery. Pursuant to
the terms of the foregoing promissory notes and debentures, our non-cash
assets have been pledged to Montgomery as security for repayment of our
obligations to them.
Our dependence on Montgomery for financing may hamper our ability to
raise, obtain or renew funding from third parties. Third parties may not
engage in financing arrangements with us because they would not want to be in
a junior position to Montgomery. Accordingly, we may be unable to obtain
financing from out sources than Montgomery, which in turn may affect our
ability to raise additional funds for growth.
RISKS RELATED TO OUR INDUSTRY
Because Our Business Is Highly Dependent On Regulations That Change, Our
Business Is Subject To A Variety Of Risks.
Our products are all based upon providing to the teleservices industry
the technologies, information, and services needed to properly respond to
state and federal regulations. The most important of these regulations is
DNC, the development of our TeleBlock service was based upon the concept of
giving teleservices companies the ability to comply with state DNC rules.
Our other products, including the Regulatory Guide, the Compliance Testing &
Solutions compliance review service, ongoing enhancements to the TeleBlock
service itself, and the planned Registration Guide, similarly rely upon
government regulations to create the need for our product. Since the
regulations are in fact a patchwork of state and federal rules, one risk the
Company faces comes from the potential for changes and/or reductions in the
number and/or complexity of the state and federal teleservices rules. In
addition, if we fail to comply with applicable regulations, or if the
regulations change in a manner adverse to us, our business and operating
results may suffer.
8
We Cannot Be Sure That We Will Compete Successfully With Our Present Or
Future Competitors Who May Have Greater Resources.
Although we believe there is no direct competitor to our TeleBlock
process, certain companies may provide services which indirectly compete with
TeleBlock. Competitors most likely include list brokers, scrubbing
companies, computer telephony providers, systems integrators, hardware and
software suppliers. Many of our competitors have substantially greater
financial, technical and marketing resources, larger customer bases, longer
operating histories, greater name recognition and more established
relationships in the industry than we do. As a result, certain of these
competitors may be able to develop and expand their product and service
offerings more rapidly, adapt to new or emerging technologies and changes in
customer requirements more quickly, take advantage of acquisitions and other
opportunities more readily, devote greater resources to the marketing and
sale of their services and adopt more aggressive pricing policies than we
can. We cannot be sure that we will compete successfully with our existing
competitors or with any new competitors.
If We Are Required To Reduce The Prices We Charge For Our Teleblock(R) Process,
Our Margins May Be Negatively Affected And Our Ability To Continue To
Generate Cash Flows From Operations May Be Diminished.
In the event we can not charge adequate prices for our TeleBlock(R)
process, our revenues may be negatively impacted and our ability to generate
cash flows from operations may be diminished.
If We Are Unable To Meet The Rapid Changes In Technology, Our Existing
Service Could Become Obsolete.
The telecommunications industry is marked by rapid technological
change, frequent new product introductions, Internet-related technology
enhancements, uncertain product life cycles, changes in client demands and
evolving industry standards. We cannot be certain that we will successfully
develop and market new products, new product enhancements or new products
compliant with present or emerging telecommunications technology standards.
New products based on new technologies or new industry standards can render
existing products obsolete and unmarketable. To succeed, we will need to
enhance our current products and services and develop new ones on a timely
basis to keep pace with developments related to the telecommunications
technology and to satisfy the increasingly sophisticated requirements of our
clients. Any delays in developing and releasing enhanced or new products and
services could harm our business.
If We Are Unable To Maintain Or Enhance Our Back Office Information Systems,
We May Not Be Able To Increase Our Revenue As Planned Or Compete Effectively.
Sophisticated back office information systems are vital to our revenue
growth and our ability to monitor costs, bill customers, initiate, implement
and track do not call databases and achieve operating efficiencies. To
increase revenue, we must select products and services offered by third-party
vendors and efficiently integrate those products and services into our
existing back office operations. We may not successfully implement these
products, services and systems on a timely basis, and our systems may fail to
perform as we expect. A failure or delay in the expected performance of our
back office systems could slow the pace of our revenue growth or harm our
competitiveness by adversely affecting our service quality.
9
RISKS RELATED TO THIS OFFERING
Our Common Stock Is Deemed To Be "Penny Stock," Which May Make It More
Difficult For Investors To Sell Their Shares Due To Suitability Requirements
Our common stock is deemed to be "penny stock" as that term is defined
in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). These requirements may reduce the potential
market for our common stock by reducing the number of potential investors.
This may make it more difficult for investors in our common stock to sell
shares to third parties or to otherwise dispose of them. This could cause
our stock price to decline. Penny stocks are stock:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the NASDAQ automated quotation system
(NASDAQ listed stock must still have a price of not less than $5.00
per share); or
o In issuers with net tangible assets less than $2 million (if the
issuer has been in continuous operation for at least three years) or
$5 million (if in continuous operation for less than three years), or
with average revenues of less than $6 million for the last three
years.
Broker/dealers dealing in penny stocks are required to provide
potential investors with a document disclosing the risks of penny stocks.
Moreover, broker/dealers are required to determine whether an investment in a
penny stock is a suitable investment for a prospective investor.
Our Common Stock May Be Affected By Limited Trading Volume And May Fluctuate
Significantly, Which May Affect Our Shareholders' Ability To Sell Shares Of
Our Common Stock
Prior to this filing, there has been a limited market for our common
stock and there can be no assurance that a more active trading market for our
common stock will develop. An absence of an active trading market could
adversely affect our shareholders' ability to sell our common stock in short
time periods, or possibly at all. Our common stock has experienced, and is
likely to experience in the future, significant price and volume
fluctuations, which could adversely affect the market price of our common
stock without regard to our operating performance. In addition, we believe
that factors such as quarterly fluctuations in our financial results and
changes in the overall economy or the condition of the financial markets
could cause the price of our common stock to fluctuate substantially. These
fluctuations may also cause short sellers to enter the market from time to
time in the belief that we will have poor results in the future. We cannot
predict the actions of market participants and, therefore, can offer no
assurances that the market for our stock will be stable or appreciate over
time. These factors may negatively impact our shareholders' ability to sell
shares of our common stock.
Future Sales By Our Stockholders May Adversely Affect Our Stock Price And Our
Ability To Raise Funds In New Stock Offerings
Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it
more difficult for us to sell equity securities or equity-related securities
in the future at a time and price that our management deems acceptable or at
all. Of the 50,000,000 shares of common stock outstanding as of February 10,
2006, 2,500,000 shares are freely tradable without restrictions.
Upon completion of this offering, and assuming all shares registered in
this offering are issued upon conversion of secured convertible debt and then
resold in the public market, there will be an additional 67,720,786 shares of
common stock outstanding. All of these shares of common stock may be
immediately resold in the public market upon effectiveness of the
accompanying Registration Statement.
10
Existing Shareholders Will Experience Significant Dilution From The
Conversion Of The 2005 Secured Convertible Debentures
Montgomery may convert the November 2005 Debentures described herein
into shares of the Company's common stock, at a conversion price which is
equal to the lower of the lowest closing bid price of our common stock at any
time during the 10 trading days before the filing the accompanying
registration statement, or 80% of the lowest price per share in the last
reported trade of our common stock on the Pink Sheets or on the exchange
which the common stock is then listed, as quoted by Bloomberg, LP, for the
five trading days immediately preceding the conversion date, which conversion
price may be adjusted from time-to-time pursuant to certain other terms of
the November 2005 Debentures. The subsequent sale of such shares by
Montgomery could cause significant downward pressure on the price of the
Company's common stock. This is especially the case if the shares being
placed into the market exceed the market's demand for the shares of the
Company's common stock. As the stock price of the Company's common stock
declines, Montgomery will be entitled to receive an increasing number of
shares under the convertible debentures. The sale of such increasing number
of shares by Montgomery could cause further downward pressure on the stock
price to the detriment and dilution of existing investors, as well as
investors in this offering. In addition, the lower our stock price, the more
shares of common stock we will have to issue upon conversion of the November
2005 Debentures. If our stock price is lower, then our existing stockholders
would experience greater dilution.
The Shares Available For Sale Immediately By The Selling Security Holders
Could Significantly Reduce The Market Price Of Our Common Stock.
The market price of our common stock could drop if substantial amounts
of shares are sold in the public market or if the market perceives that those
sales could occur. A drop in the market price could adversely affect holders
of our common stock and could also harm our ability to raise additional
capital by selling equity securities.
Control By Existing Stockholders May Limit Your Ability To Influence The
Outcome Of Director Elections And Other Matters Requiring Stockholder
Approval.
Our executive officers, directors and entities affiliated with them
will, in the aggregate, beneficially own 41.9% of our common stock following
this offering. If they were to act in unison, these stockholders could be
able to exercise control over matters requiring approval of our stockholders,
including the election of directors and approval of significant corporate
transactions. This concentration may also have the effect of delaying or
preventing a change in control of our company, which could have a material
adverse effect on the value of the common stock you purchase in this
offering. Our executive officers, directors and their affiliates may take
these actions as stockholders even if they are opposed by you or other
stockholders of our company, including those stockholders who purchase our
common stock in this offering.
New Investors In Our Common Stock Will Experience Immediate And Substantial
Dilution.
The offering price in that offering is substantially higher than the book
value per share of our common stock., which is currently negative. Investors
purchasing common stock in this offering will, therefore, incur immediate
dilution of $0.35 net tangible book value per share of common stock, based on
the anticipated offering price of $0.30 per share.
The Sale Of Material Amounts Of Common Stock Under The Accompanying
Registration Statement Could Encourage Short Sales By Third Parties
In many circumstances, similar provisions as those contained in the
November 2005 Debentures for companies that are traded on the Pink Sheets has
had the potential to cause a significant downward pressure on the price of
common stock. This is especially the case if the shares being placed into
the market exceed the market's ability to take up the increased stock or if
CSC has not performed in such a manner to show that the debt raised will be
used to grow CSC. Such an event could place further downward pressure on the
price of common stock.
11
The outstanding November 2005 Debentures are convertible at a discount
to the market price of our common stock. As a result, the opportunity exists
for short sellers and others to contribute to the future decline of CSC'
stock price. Persons engaging in short sales first sell shares that they do
not own, and thereafter, purchase shares to cover their previous sales. To
the extent the stock price declines between the time the person sells the
shares and subsequently purchases the shares, the person engaging in short
sales will profit from the transaction, and the greater the decline in the
stock, the greater the profit to the person engaging in such short-sales.
Because the November 2005 Debentures are convertible at a discount to market,
it is possible that the debentures could be converted if the market price of
our common stock declines, thus, supplying any short sellers with the
opportunity to cover their short positions. By contrast, a person owning a
long position in a stock, such as an investor purchasing shares in this
offering, first purchases the shares at the then market price, if the stock
price declines while the person owns the shares, then upon the sale of such
shares the person maintaining the long position will incur a loss, and the
greater the decline in the stock price, the greater the loss which is
incurred by the person owning a long position in the stock.
If there are significant short sales of our stock, the price decline
that would result from this activity will cause our share price to decline
more so which in turn may cause long holders of our stock to sell their
shares thereby contributing to sales of stock in the market. If there is an
imbalance on the sell side of the market for our stock the price will
decline. It is not possible to predict if the circumstances where by a short
sales could materialize or to what our share price could drop. In some
companies that have been subjected to short sales their stock price has
dropped to near zero. We cannot provide any assurances that this situation
will not happen to us.
We Have Certain Provisions In Our Charter Documents That Could Delay Or
Prevent An Acquisition Of Our Company, Even If Such An Acquisition Would Be
Beneficial To Our Stockholders.
Provisions of our Articles of Incorporation and bylaws allow the Board
of Directors to issues shares of authorized common stock without having to
obtain the approval of shareholders. Such provisions could make it more
difficult for a third party to acquire us, even if doing so might be
beneficial to our stockholders.
The Price You Pay In This Offering Will Fluctuate
The price in this offering will fluctuate based on the prevailing
market price of the common stock on the Pink Sheets. Accordingly, the price
you pay in this offering may be higher or lower than the prices paid by other
people participating in this offering.
We May Have To Sell Our Securities At A Lower Price Than The Arbitrary $0.30
Per Share Offering Price In This Offering.
The per share offering price in this offering has been arbitrarily
set. The per share offering price has no relationship to actual value of the
common stock offered in this offering. In order to execute our business
plan, we will have to raise substantial additional capital. Most likely, we
will attempt to sell our equity securities to raise additional capital. In
order to sell additional equity securities, we may have to offer such
securities at a price below the per share price you are being offered.
Furthermore, if we engage a placement agent or underwriter in the future, the
offering price in future financings will be determined, in large part, by
such placement agent or underwriter. The negotiations between us and a
placement agent or underwriter in future financings may dictate that we sell
equity securities at substantially lower prices than the offering price in
this offering.
The Issuance Of Shares Of Common Stock Under This Offering Could Result In A
Change Of Control
We are registering 71,220,786 shares of common stock in this offering,
2,720,786 of which are currently issued and outstanding. These 71,220,786
shares represent approximately 14% of our authorized capital stock and would
upon issuance represent approximately 59% of the then issued and outstanding
common stock and we anticipate all such shares will be sold in this
offering. The risk to investors stemming from a change of control is that
risk associated with the fact that the present management has a deep
understanding of businesses and has established good relationships with
critical employees, current customers and our potential customers, and
accordingly, a change in control may lead to a loss in critical employees
and/or customers and/or a period of time during which we are not operating at
maximum efficiency due to the disruption caused by a change of control.
12
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this Prospectus
may contain forward-looking statements. This information may involve known
and unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the
future results, performance or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words "may," "will," "should," "expect,"
"anticipate," "estimate," "believe," "intend" or "project" or the negative of
these words or other variations on these words or comparable terminology.
This Prospectus contains forward-looking statements, including
statements regarding, among other things, (a) our projected sales and
profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) our future financing plans and (e) our anticipated needs for
working capital. These statements may be found under "Management's
Discussion and Analysis or Plan of Operations" and "Business," as well as in
this Prospectus generally. Actual events or results may differ materially
from those discussed in forward-looking statements as a result of various
factors, including, without limitation, the risks outlined under "Risk
Factors" and matters described in this Prospectus generally. In light of
these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this Prospectus will in fact occur.
13
SELLING STOCKHOLDERS
The following table presents information regarding the selling
stockholders. A description of each selling stockholder's relationship to
CSC and how each selling stockholder acquired or will acquire the shares to
be sold in this offering is detailed in the information following this table.
Percentage Percentage of
Shares Outstanding Shares
Beneficially Shares Shares to be Beneficially
Selling Owned Before Beneficially Owned Sold in the Owned After
Stockholder Offering Before Offering (1) Offering Offering
----------- -------- ------------------- -------- --------
Montgomery Equity Partners,
Ltd. (2) 0 0% 65,000,000 (3) 0%
Dean Garfinkel (4) 10,780,708 65.660% 819,514 1.151%
Maddy Brestin (5) 1,212,879 7.387% 327,804 0.460%
Charles and Barbara
Baldassano (6) 163,903 0.998% 65,561 0.092%
Melissa Brestin (7) 1,147,318 6.987% 327,804 0.460%
Garrett and Janis Garrison
(8) 491,708 2.994% 196,683 0.277%
Robert Gordon (9) 163,903 0.998% 65,561 0.092%
Lisa Gordon-Loozis (10) 163,903 0.998% 65,561 0.092%
Melvin Ilberman (11) 163,903 0.998% 65,561 0.092%
Victor Jacobs (12) 327,806 1.998% 131,123 0.184%
Mark and Lisa Kirsch (13) 163,903 0.998% 32,781 0.046%
Martin Kirsch (14) 163,903 0.998% 32,781 0.046%
Neal Kirsch (15) 163,903 0.998% 32,781 0.046%
Barry and Rheba Kronberg (16) 163,903 0.998% 32,781 0.046%
Babak Nahavandi (17) 163,903 0.998% 65,561 0.092%
Constance Osattin (18) 163,903 0.998% 65,561 0.092%
Miriam B. Singer (19) 327,806 1.998% 131,123 0.184%
Ellen Thorn and Gerald
Stoner (20) 327,806 1.998% 131,123 0.184%
Iosif Uvaydov (21) 163,903 0.998% 65,561 0.092%
Robert Lippe (22) 0 0% 65,561 0.092%
Patrick D. Bernardi (23) 0 0% 50,000 0.070%
Cale Corporation (24) 0 0% 50,000 0.070%
Tangerine Communications
Ltd. (25) 0 0% 1,500,000 2.106%
Trident Venture Group (26) 0 0% 1,000,000 1.404%
Ramkrishna Singh (27) 0 0% 500,000 0.702%
Transnational Capital
Corporation (28) 0 0% 400,000 0.562%
TOTAL 16,418,964 100.000% 71,220,786 100.000%
(1) Applicable percentage of ownership is based on 50,000,000 shares of
common stock outstanding as of February 14, 2006, together with
securities exercisable or convertible into shares of common stock within
60 days of February 14, 2006. Beneficial ownership is determined in
accordance with the rules of the SEC and generally includes voting or
investment power with respect to securities. Shares of common stock
subject to securities exercisable or convertible into shares of common
stock that are currently exercisable or exercisable within 60 days of
February 14, 2006 are deemed to be beneficially owned by the person
holding such securities for the purpose of computing the percentage of
ownership of such person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
14
(2) Includes 65,000,000 under the November 2005 Debentures held by
Montgomery that are convertible into shares of common stock within 60
days of February 14, 2006.
(3) The total amount of shares to be sold in the offering by Montgomery is
comprised of 65,000,000 shares, which are being registered pursuant to
the November 2005 Debentures. Please note that the terms of the November
2005 Debentures held by Montgomery provide that, except upon an event of
default or at maturity (or if waived in writing upon 65 days written
notice), in no event shall Montgomery be entitled to convert the November
2005 Debentures for a number of shares which, upon giving effect to the
conversion, would cause the aggregate number of shares beneficially owned
by Montgomery and its affiliates to exceed 4.99% of the total outstanding
shares of CSC following such conversion. Please also note that for the
November 2005 Debentures conversion, we are assuming a market price of
$0.30 per share.
(4) Consisting of 9,834,170 beneficially owned by Mr. Garfinkel, an
additional 127,024 owned by his children for which Mr. Garfinkel is the
custodian, and 819,514 shares underlying warrants that were transferred
to Mr. Garfinkel pursuant to a legal separation agreement with his wife,
Alison Garfinkel, in 2005. The shares owned by Mr. Garfinkel include
founders' stock and shares issued as compensation during 2003-2005. Mr.
Garfinkel makes all his own investment decisions.
(5) Consists of shares underlying warrants that were issued when the
stockholder purchased a secured promissory note from CSC between June and
September 2003. This other selling stockholder makes its own investment
decisions.
(6) Consists of shares underlying warrants that were issued when the
stockholder purchased a secured promissory note from CSC between June and
September 2003. This other selling stockholder makes its own investment
decisions.
(7) Consists of shares underlying warrants that were issued when the
stockholder purchased a secured promissory note from CSC between June and
September 2003. This other selling stockholder makes its own investment
decisions.
(8) Consists of shares underlying warrants that were issued when the
stockholder purchased a secured promissory note from CSC between June and
September 2003. This other selling stockholder makes its own investment
decisions.
(9) Consists of shares underlying warrants that were issued when the
stockholder purchased a secured promissory note from CSC between June and
September 2003. This other selling stockholder makes its own investment
decisions.
(10) Consists of shares underlying warrants that were issued when the
stockholder purchased a secured promissory note from CSC between June and
September 2003. This other selling stockholder makes its own investment
decisions.
(11) Consists of shares underlying warrants that were issued when the
stockholder purchased a secured promissory note from CSC between June and
September 2003. This other selling stockholder makes its own investment
decisions.
(12) Consists of shares underlying warrants that were issued when the
stockholder purchased a secured promissory note from CSC between June and
September 2003. This other selling stockholder makes its own investment
decisions.
(13) Consists of shares underlying warrants that were issued when the
stockholder purchased a secured promissory note from CSC between June and
September 2003. This other selling stockholder makes its own investment
decisions.
(14) Consists of shares underlying warrants that were issued when the
stockholder purchased a secured promissory note from CSC between June and
September 2003. This other selling stockholder makes its own investment
decisions.
(15) Consists of shares underlying warrants that were issued when the
stockholder purchased a secured promissory note from CSC between June and
September 2003. This other selling stockholder makes its own investment
decisions.
(16) Consists of shares underlying warrants that were issued when the
stockholder purchased a secured promissory note from CSC between June and
September 2003. This other selling stockholder makes its own investment
decisions.
(17) Consists of shares underlying warrants that were issued when the
stockholder purchased a secured promissory note from CSC between June and
September 2003. This other selling stockholder makes its own investment
decisions.
(18) Consists of shares underlying warrants that were issued when the
stockholder purchased a secured promissory note from CSC between June and
September 2003. This other selling stockholder makes its own investment
decisions.
(19) Consists of shares underlying warrants that were issued when the
stockholder purchased a secured promissory note from CSC between June and
September 2003. This other selling stockholder makes its own investment
decisions.
(20) Consists of shares underlying warrants that were issued when the
stockholder purchased a secured promissory note from CSC between June and
September 2003. This other selling stockholder makes its own investment
decisions.
(21) Consists of shares underlying warrants that were issued when the
stockholder purchased a secured promissory note from CSC between June and
September 2003. This other selling stockholder makes its own investment
decisions.
(22) Consists of shares underlying warrants that were issued when the
stockholder purchased a secured promissory note from CSC between June and
September 2003. This other selling stockholder makes its own investment
decisions.
(23) Consists of shares purchased in a "Texas 504" offering conducted by
GSA in the Spring of 2005. All investment decisions are made by Mr.
Bernardi.
(24) Consists of shares purchased in a "Texas 504" offering conducted by
GSA in the Spring of 2005. All investment decisions are made by Ludwell
Strickler, its President.
15
(25) Consists of shares purchased in a "Texas 504" offering conducted by
GSA in the Spring of 2005. All investment decisions are made by Amar
Bahadoorsingh, its President.
(26) Consists of shares purchased in a "Texas 504" offering conducted by
GSA in the Spring of 2005. All investment decisions are made by Rod Jao,
its President.
(27) Consists of shares purchased in a "Texas 504" offering conducted by
GSA in the Spring of 2005. All investment decisions are made by Mr.
Singh.
(28) Consists of shares purchased in a "Texas 504" offering conducted by GSA
in the Spring of 2005. All investment decisions are made by Marco
Delgado, its President.
Shares Acquired In Financing Transactions With Montgomery
Montgomery is the holder of the November 2005 Debentures, all as
described below. All investment decisions of Montgomery are made by its
general partner, Yorkville Advisors, LLC ("Yorkville"). Mark Angelo, the
Managing Member of Montgomery, makes the investment decisions on behalf of
Yorkville. These shares are issuable upon Montgomery converting the November
2005 Debentures, which are described below.
The November 2005 Debentures
On November 30, 2005, CSC entered into a Securities Purchase Agreement
(the "SPA") with Montgomery whereby CSC could sell to Montgomery up to
$1,000,000 of secured convertible debentures pursuant to the terms contained
in the debentures and related financing agreement described below (the
"November 2005 Debentures"). Under the terms of the November 2005
Debentures, Montgomery is entitled, at its option, to convert at any time a
portion or all amounts of principal and interest due and outstanding under
the November 2005 Debentures into shares of CSC's common stock, $0.001 par
value per share, at a price per share equal to the lower of (i) the lowest
closing bid price of CSC's common stock at any time during the 10 trading
days before the filing of the accompanying registration statement, or (ii)
80% of the lowest price per share in the last reported trade of CSC's common
stock on the Pink Sheets or on the exchange which the common stock is then
listed, as quoted by Bloomberg, LP, for the five trading days immediately
preceding the conversion date, which conversion price may be adjusted from
time-to-time pursuant to certain other terms of the November 2005
Debentures. The November 2005 Debentures are secured by all of the Company's
assets not otherwise specifically pledged, have two-year maturity dates, and
accrue interest at 10% per annum. On December 2, 2005, the Company sold the
first $600,000 hundred thousand dollars of the November 2005 Debentures to
Montgomery. This debenture, which matures November 30, 2007, bears interest
at 10% per annum, calculated on a 360-day year basis. CSC paid, Yorkville,
an affiliate of Montgomery, commitment, structuring and due diligence fees
totaling $112,500, which fees were deducted from the proceeds of this
debenture, and also paid a $30,000 finder's fee to an unrelated third party,
which fee fees were paid Leonard Neuhaus. The Investor Registration Rights
Agreement (the "IRRA") related to the SPA that we also entered into with
Montgomery on November 30, 2005, require CSC to: (i) merge with and into a
public shell company, (ii) file the accompanying registration statement for
the Surviving Entity with the United States Securities and Exchange
Commission (the "SEC" or the "Commission") under the Securities Act of 1933,
as amended (the "Securities Act") with the provision that Montgomery purchase
the remaining $400,000 balance of the November 2005 Debentures two (2) days
before the accompanying registration statement is filed.
In the accompanying registration statement, 65,000,000 shares are being
registered under the November 2005 Debentures.
Shares Being Registered On Behalf of Other Selling Stockholders (the "Texas
504 Shares")
In the accompanying registration statement, 2,720,786 shares are being
registered on behalf of other selling stockholders, which shares are
underlying warrants to purchase shares of CSC common stock that were issued
to them by CSC in 2003. This group of selling shareholders consist of the
following persons:
Dean Garfinkel, who shares underlie warrants that were transferred to
Mr. Garfinkel pursuant to a legal separation agreement with his wife, Alison
Garfinkel, in 2005. He makes his own investment decisions.
16
Maddy Brestin, whose shares underlie warrants that were issued when the
selling stockholder purchased a secured promissory note from CSC between June
and September 2003. This selling stockholder makes its own investment
decisions.
Charles and Barbara Baldassano, whose shares underlie warrants that
were issued when the selling stockholder purchased a secured promissory note
from CSC between June and September 2003. This selling stockholder makes its
own investment decisions.
Melissa Brestin, whose shares underlie warrants that were issued when
the selling stockholder purchased a secured promissory note from CSC between
June and September 2003. This other selling stockholder makes its own
investment decisions.
Garrett and Janis Garrison, whose shares underlie warrants that were
issued when the selling stockholder purchased a secured promissory note from
CSC between June and September 2003. This other selling stockholder makes
its own investment decisions.
Robert Gordon, whose shares underlie warrants that were issued when the
selling stockholder purchased a secured promissory note from CSC between June
and September 2003. This other selling stockholder makes its own investment
decisions.
Lisa Gordon-Loozis, whose shares underlie warrants that were issued
when the selling stockholder purchased a secured promissory note from CSC
between June and September 2003. This other selling stockholder makes its
own investment decisions.
Melvin Liberman, whose shares underlie warrants that were issued when
the selling stockholder purchased a secured promissory note from CSC between
June and September 2003. This other selling stockholder makes its own
investment decisions.
Victor Jacobs, whose shares underlie warrants that were issued when the
selling stockholder purchased a secured promissory note from CSC between June
and September 2003. This other selling stockholder makes its own investment
decisions.
Mark Kirsch, whose shares underlie warrants that were issued when the
selling stockholder purchased a secured promissory note from CSC between June
and September 2003. This other selling stockholder makes its own investment
decisions.
Martin Kirsch, whose shares underlie warrants that were issued when the
selling stockholder purchased a secured promissory note from CSC between June
and September 2003. This other selling stockholder makes its own investment
decisions.
Neal Kirsch, whose shares underlie warrants that were issued when the
selling stockholder purchased a secured promissory note from CSC between June
and September 2003. This other selling stockholder makes its own investment
decisions.
Barry and Rheba Kronberg, whose shares underlie warrants that were
issued when the selling stockholder purchased a secured promissory note from
CSC between June and September 2003. This other selling stockholder makes
its own investment decisions.
Babak Nagavandi, whose shares underlie warrants that were issued when
the selling stockholder purchased a secured promissory note from CSC between
June and September 2003. This other selling stockholder makes its own
investment decisions.
Constance Osattin, whose shares underlie warrants that were issued when
the selling stockholder purchased a secured promissory note from CSC between
June and September 2003. This other selling stockholder makes its own
investment decisions.
17
Miriam B. Singer, whose shares underlie warrants that were issued when
the selling stockholder purchased a secured promissory note from CSC between
June and September 2003. This other selling stockholder makes its own
investment decisions.
Ellen Thorn and Gerald Stoner, whose shares underlie warrants that were
issued when the selling stockholder purchased a secured promissory note from
CSC between June and September 2003. This other selling stockholder makes
its own investment decisions.
Losif Uvaydov, whose shares underlie warrants that were issued when the
selling stockholder purchased a secured promissory note from CSC between June
and September 2003. This other selling stockholder makes its own investment
decisions.
Robert Lippe, whose shares underlie warrants that were issued when the
selling stockholder purchased a secured promissory note from CSC between June
and September 2003. This other selling stockholder makes its own investment
decisions.
Shares Being Registered On Behalf of Other Selling Stockholders (the "Texas
504 Shares")
In the accompanying registration statement, 3,500,000 shares are being
registered on behalf of other selling stockholders who acquired such shares
in a "Texas 504" offering conducted by GSA in 2005. This group of selling
shareholders consist of the following persons and entities:
Patrick D. Bernardi , who purchased his shares in a "Texas 504"
offering conducted by GSA in the Spring of 2005. Mr. Bernardi makes his own
investment decisions.
Cale Corporation, a Texas corporation, which purchased its shares in a
"Texas 504" offering conducted by GSA in the Spring of 2005. Mr. Ludwell
Strickler makes investment decisions on behalf of this entity.
Tangerine Communications, Ltd., a British Columbia corporation, which
purchased its shares in a "Texas 504" offering conducted by GSA in the
Spring of 2005. Mr. Amar Bahadoorsingh makes investment decisions on
behalf of this entity.
Trident Ventures Group, a British Columbia corporation, which purchased
its shares in a "Texas 504" offering conducted by GSA in the Spring of 2005.
Mr. Rod Jao makes investment decisions on behalf of this entity.
Ramkrishna Singh, who purchased his shares in a "Texas 504" offering
conducted by GSA in the Spring of 2005. Mr. Singh makes his own investment
decisions.
Transnational Capital Corporation, a British Columbia corporation,
which purchased its shares in a "Texas 504" offering conducted by GSA in the
Spring of 2005. Mr. Marco Delgado makes investment decisions on behalf of
this entity.
18
USE OF PROCEEDS
This Prospectus relates to shares of our common stock that may be
offered and sold from time to time by certain selling stockholders. There
will be no proceeds to us from the sale of shares of common stock in this
offering.
For illustrative purposes, we have set forth below our intended use of
proceeds we may receive under the Secured Convertible Debentures. The table
assumes estimated offering expenses of $85,000.
Gross Proceeds: $1,000,000
Fees to Yorkville 127,500
Acquisition of GSA, including
fees to Knightsbridge 100,000
Finder's Fee 50,000
Offering Expenses* 172,500
Net Proceeds 550,000
USE OF PROCEEDS:
Corporate and Working Capital 550,000
Total 550,000
- ----------
* = estimated (described below)
CSC has represented to Montgomery that the net proceeds the Company
receives under the November 2005 Debentures will be used for general
corporate and working capital purposes only.
19
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution
of our common stock owned by the selling stockholders may be effected
directly to purchasers by the selling stockholders, and with the exception of
Montgomery as principal or through one or more underwriters, brokers, dealers
or agents from time-to-time in one or more transactions (which may involve
crosses or block transactions) (i) on the Pink Sheets or any other market on
which the price of our shares of common stock are quoted, or (ii) in
transactions otherwise than on the Pink Sheets or in any other market on
which the price of our shares of common stock are quoted. Any of such
transactions may be effected at market prices prevailing at the time of sale,
at prices related to such prevailing market prices, at varying prices
determined at the time of sale or at negotiated or fixed prices, in each case
as determined by the selling stockholders or by agreement between the selling
stockholders and underwriters, brokers, dealers or agents, or purchasers. If
the selling stockholders effect such transactions by selling their shares of
common stock to or through underwriters, brokers, dealers or agents, such
underwriters, brokers, dealers or agents may receive compensation in the form
of discounts, concessions or commissions from the selling stockholders or
commissions from purchasers of common stock for whom they may act as agent
(which discounts, concessions or commissions as to particular underwriters,
brokers, dealers or agents may be in excess of those customary in the types
of transactions involved). The selling stockholders and any brokers, dealers
or agents that participate in the distribution of the common stock may be
deemed to be underwriters, and any profit on the sale of common stock by them
and any discounts, concessions or commissions received by any such
underwriters, brokers, dealers or agents may be deemed to be underwriting
discounts and commissions under the Securities Act.
Montgomery was formed on September 27, 2004, as a Delaware limited
partnership. Montgomery is a domestic hedge fund in the business of
investing in and financing public companies. Montgomery does not intend to
make a market in our stock or to otherwise engage in stabilizing or other
transactions intended to help support our stock price. Prospective investors
should take these factors into consideration before purchasing our common
stock.
Under the securities laws of certain states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. The selling stockholders are advised to ensure that any
underwriters, brokers, dealers or agents effecting transactions on behalf of
the selling stockholders are registered to sell securities in all 50 states.
In addition, in certain states the shares of common stock in this offering
may not be sold unless the shares have been registered or qualified for sale
in such state or an exemption from registration or qualification is available
and is complied with.
We will pay all of the expenses incident to the registration, offering,
and sale of the shares of common stock to the public hereunder other than
commissions, fees, and discounts of underwriters, brokers, dealers and
agents. We have agreed to indemnify Montgomery and its controlling persons
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. We estimate that the expenses of the offering to be
borne by us will be approximately $172,500. These offering expenses consist
of an SEC registration fee of $2,286, printing and engraving fees and
expenses of $10,000, audit fees of $102,500, legal fees and expenses of
$50,000, and miscellaneous expenses of $7714. We will not receive any
proceeds from the sale of any of the shares of common stock by the selling
stockholders.
The selling stockholders should be aware that the anti-manipulation
provisions of Regulation M under the Exchange Act will apply to purchases and
sales of shares of common stock by the selling stockholders, and that there
are restrictions on market-making activities by persons engaged in the
distribution of the shares. Under Registration M, the selling stockholders
or their agents may not bid for, purchase, or attempt to induce any person to
bid for or purchase, shares of our common stock while such selling
stockholders are distributing shares covered by this Prospectus. The
selling stockholders are advised that if a particular offer of common stock
is to be made on terms constituting a material change from the information
set forth above with respect to the Plan of Distribution, then, to the extent
required, a post-effective amendment to the accompanying Registration
Statement must be filed with the Commission.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
The following information should be read in conjunction with the
consolidated financial statements of CSC and the notes thereto appearing
elsewhere in this filing. Statements in this Management's Discussion and
Analysis or Plan of Operation and elsewhere in this filing that are not
statements of historical or current fact constitute "forward-looking
statements."
Going Concern
Our financial statements are presented on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business.
Our independent auditors have added an explanatory paragraph to their
audit opinions issued on our financial statements for the year ended December
31, 2004, which states that the Company has had recurring losses from
operations, and has working capital and shareholder deficits, which factors
raise substantial doubt regarding the Company's ability to continue as a
going concern.
The Company's operations involve a number of risks and uncertainties.
Factors that could affect the Company's future operating results and cause
actual results to vary materially from expectations include, but are not
limited to, rapid technology change, uncertainty of market acceptance of the
Company's products and services, competition from substitute products and
larger companies, protection of proprietary technology, the ability to
generate sufficient capital to fund operations, strategic relationships and
dependence on key individuals.
As reported in the accompanying financial statements, the Company
incurred net losses of $917,441 for the nine months ended September 30, 2005,
and net losses of $1,880,508 and $1,293,769 for the years ended December 31,
2004 and 2003, respectively. At December 31, 2004 and September 30, 2005,
the Company had shareholders' deficits of $4,334,470 and $2,490,339, and had
working capital deficits of $31,317 and $627,825, respectively.
To address our going concern and liquidity issues, we are pursuing
additional financing, restructuring existing debt and new business
opportunities. The Company has obtained new secured debt financing. Upon
the effectiveness of this registration statement, of which there can be no
assurance, management of the Company believes its ability to obtain
additional debt and/or equity financing will be significantly increased.
The ability of the Company to continue as a going concern is dependent
on the amount and nature of available financing and the Company's future
ability to generate increased revenues and operate profitably. There is no
assurance that the Company will be successful in attaining these objectives.
The accompanying financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.
Critical Accounting Policies
CSC's consolidated financial statements and related public information
are based on the application of generally accepted accounting principles in
the United States ("GAAP"). GAAP requires the use of estimates, assumptions,
judgments and subjective interpretations of accounting principles that may
have an impact on the assets, liabilities, revenue and expense amounts
reported. These estimates can also affect supplemental information contained
in our external disclosures including information regarding contingencies,
risk and financial condition. We believe our use of estimates and underlying
accounting assumptions adhere to GAAP and are consistently and conservatively
applied. We base our estimates on historical experience and on various
assumptions that we believe are reasonable under the circumstances. Actual
results may differ materially from these estimates under different
assumptions or conditions. We continue to monitor significant estimates made
during the preparation of our financial statements.
21
Our significant accounting policies are summarized in Note 2 of our
consolidated financial statements. While all of these significant accounting
policies impact our financial condition and results of operations, we view
certain of these policies as critical. Policies determined to be critical
are those policies that have the most significant impact on our consolidated
financial statements. Our critical accounting policies are discussed below.
Revenue Recognition
We earn a fee for each telephone solicitor's call attempt (whether or
not the call is completed) which generates a query to one of two data bases
of DNC telephone numbers. These inquiries are first routed through telephone
carriers and then to the applicable data base distributor and the volume of
queries is tracked by the distributor and such data is available to the
Company for monitoring.
The distributors submit monthly remittances together with the related
monthly activity reports. We have a contractual right to audit such
reports. Revenue is recorded based upon the remittances and reports
submitted. We routinely audit the monthly call counts submitted to us. Any
adjustments to revenue resulting from these audits are recorded when billed.
Historically, these adjustments have not been significant. In the event that
such adjustments do become material in the future, it is possible that, at
times, we may have to correct previously reported interim results.
Deferred Registration Costs
We deferred the costs associated with our planned registration of our
common stock with the SEC. These costs will be charged directly to
additional paid-in capital against the value of the Company's shares that are
issued to convert the new secured convertible debenture. If the registration
statement is not effective within a year of incurring these costs, the costs
will be expensed.
Patents
CSC owns the TeleBlock DNC blocking patent, which is recorded at cost
and is being amortized over its 15-year life on a straight line basis. In
addition, we are in the process of registering patents in Europe. When the
registration process is completed, these patents costs will be amortizable
until September 2024, the 20th anniversary of the application date.
Impairment of Long-lived Assets
Long-lived assets, including our property, equipment, capitalized
software and patents are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets might not be
recoverable. Conditions that would necessitate an impairment assessment
include a significant decline in the observable market value of an asset, a
significant change in the extent or manner in which an asset is used, or any
other significant adverse change that would indicate that the carrying amount
of an asset or group of assets is not recoverable.
For long-lived assets used in operations, impairment losses are only
recorded if the asset's carrying amount is not recoverable through its
undiscounted, probability-weighted cash flows, including estimated net
proceeds if we were to sell a long-lived asset. When applicable, we measure
the impairment loss based on the difference between the carrying amount and
estimated fair value.
We periodically review our long-lived assets, in light of our history
of operating losses, but under the methodology described above, we have not
been required to record any impairment losses. Should applicable external
factors such as competition, governmental regulations or other market
conditions change in such a way as to be materially adverse to our business,
impairment losses might be required in the future.
22
Financing Alternatives
Management continues to meet operating deficits primarily through
short-term borrowings and is attempting to utilize other debt and equity
financing alternatives to sustain operations. Whether such financing will be
available as needed, and the ultimate form of such financing is uncertain,
the effects of this uncertainty could eventually lead to a significant
curtailment, or even a complete cessation of our operations.
Management's Plans
In the next 12, CSC plans to pursue sales of our products by:
o continuing to sell TeleBlock through our various sales channels;
o expanding TeleBlock sales through our launch of VoIP which will allow
TeleBlock usage anywhere in the world and in those areas where we lack
distributors locally;
o increasing Teleblock sales through our strategic alliance with
predictive dialer companies;
o establishing a sale force to market our products; and
o increasing our online sales by the addition of other online products.
Management will also continue to seek additional debt and/or equity
financing
Results of Operations
Results Of Operations For The Nine Months Ended September 30, 2005 Compared
To The Nine Months Ended September 30, 2004
Revenues for the nine months ended September 31, 2005 were $1,426,910
compared to revenues for the same period for 2004 of $1,548,578. This
decrease of $121,668, or 7.9%, was due to volume driven decreases of 10% and
6.7% for the Company's two principal distributors, the latter decrease
largely attributable to that distributor's bankruptcy filing, thereby causing
a loss of customer base, which, in turn, translated into less revenue for the
Company. The Company continues to do business with the buyer of that
distributor's business. However, the overall decrease in volume experienced
during the first nine months of 2005 is expected to continue for the near
term. See the "Liquidity and Capital Resources" section below.
Cost of revenues for the nine months ended September 31, 2005 totaled
$350,976 and decreased by $11,450, or 3.2%, when compared to cost of revenues
of $362,426 for the same period in 2004. This decrease was attributable to
the lower sales volume.
Interest expense was $368,206 for the nine months ended September 31,
2005 whereas interest expense for the same period of 2004 was $377,078. This
decrease of $8,872, or 2.4%, was attributable to the conversion of secured
notes to capital stock of the Company from June, 2005 through September
2005. In addition, interest expense in 2005 and 2004 included in-kind
payments of our common stock for interest expense of $71,130 and $113,554,
respectively.
Selling, general, and administrative expenses totaled $1,625,169 for
the nine months ended September 31, 2005 and were $92,699, or 5.4%, lower
than selling, general, and administrative expenses of $1,717,868 for the same
period of 2004. Salaries and benefits decreased by $13,849, mainly due to the
resignation of an officer of the Company. The resignation resulted in a
decrease of officer salaries of $60,000 that was partially offset by
increased salaries for salesmen as well as consulting expense of $10,000 for
the former officer. Advertising expense decreased by $13,849 and was due to
less use of print ads in trade magazines.
23
CSC had a net loss of $917,441 for the nine months ended September 30,
2005 compared to a net loss of $908,794 for the same period last year. The
increase in net loss of $8,647 or 1.0% was primarily attributable to the
offset of the decrease in net revenue of $110,218 by the reduction in other
selling, general and administrative expenses of $92,699.
Results of Operations for Year Ended December 31, 2004 Compared To The Year
Ended December 31, 2003
Revenues for the year ended December 31, 2004 were $2,114,285 compared
to revenues for the prior year of $1,348,176. This increase of $766,109, or
56.8%, was substantially due to a contractual change in the way one of our
major distributors was required to compensate us. Revenue was previously
earned based upon a percentage of billings. During 2004, revenue from this
customer was generated on a transaction basis instead of the previous
percentage of revenue basis. Accordingly, we received income based upon each
query of our database. This change resulted in a significant increase in
revenue. Revenue from a second major distributor increased by 11%, due to an
increased volume of call counts. Finally, online sales of our regulatory
guide increased by $39,126.
Cost of revenues for the year ended December 31, 2004 totaled $492,815
and increased by $109,798, or 28.7%, when compared to cost of revenues of
$383,017 for the same period in 2003. This increase was attributable to
three areas as follows: Higher fees were paid to host and track our database
due to the increase in call volume; online regulatory guide sales were higher
thereby creating higher corresponding costs; and lastly, the cost to maintain
the database increased during 2004.
Interest expense was $505,806 for the year ended December 31, 2004
whereas interest expense for the same period of 2003 was $374,568. This
increase of $131,238, or 35.0%, was primarily attributable to the interest on
the $1,500,000 of secured notes during 2004, issued during the latter part of
2003. Interest expense in 2004 included an in-kind payment of our common
stock for $149,570 of interest expense; in 2003, no in-kind payment was made.
Selling, general, and administrative expenses totaled $2,409,433 for
the year ended December 31, 2004 and were $61,666, or 2.5%, lower than
selling, general, and administrative expenses of $2,471,099 for the same
period of 2003. Salaries and benefits increased by $126,290, principally due
to the addition of sales personnel. This increase was offset by a decrease
in advertising of $121,261. As the Company redirected its selling efforts,
it decreased its use of print ads in trade magazines.
CSC had a net loss of $1,293,769 for the year ended December 31, 2004
compared to a net loss of $1,880,508 for the same period last year. The
reduction in net loss of $586,739, or 31%, was primarily attributable to
increased revenues of $766,109.
The Company and its subsidiaries have all been electing S-Corporations
filing status and accordingly have not been subject to federal or state
income taxes. Absent such elections, the Company's losses would not have
resulted in reported tax benefits, due to the uncertainty of future taxable
income. Upon the CSC-GSA merger on February 10, 2006, the Company and its
subsidiaries all became C-Corporations retroactive to January 1, 2006.
Future taxable losses will now be available to offset subsequent future
taxable income, if any.
Liquidity and Capital Resources
Cash used in operations was $934,523 and $1,274,330 for the years ended
December 31, 2004 and December 31, 2003, respectively. It is comprised of
the Company's net loss adjusted for non-cash items and is offset by changes
in assets and liabilities. The net loss adjusted for non-cash items was
$991,741 for the year ended December 31, 2004, compared to $1,422,952 for the
same period in 2003. The net loss for 2003 included $318,614 of charges for
revenue rights amortization. The revenue rights were amortized through
2003. The changes in assets and liabilities decreased the Company's net
cash used in operations by $57,218 and $148,622 for the years ended December
31, 2004 and December 31, 2003, respectively. Cash used in investing
activities for fiscal 2004 was $27,543, and for fiscal 2003 was $237,978.
The decrease in cash used in investing activities in 2004 was attributable to
significantly lower payments for capitalized software costs. For the year
ended December 31, 2004 cash provided from financing activities was
$1,001,595, as compared to $1,238,957 for the prior year. During 2004, the
Company sold $210,000 of secured notes, the balance of the $1,500,000 secured
note offering that began in 2003. In addition, two officers/shareholders
loaned Compliance Systems $1,000,000. There was a net increase in cash of
$39,529 to $134,345 for the year ended December 31, 2004, as compared to
$273,351 to $94,816 for 2003.
24
CSC's working capital deficit was $627,825 as of September 30, 2005,
compared to a deficit of $31,317 as of December 31, 2004. Approximately
$150,000 in principal payments on notes subsequently restructured to be paid
after 2005 or later converted to equity had the effect of decreasing the 2004
working capital deficit by that amount for the year ended December 31, 2004,
in accordance with Statement of Financial Accounting Standards No. 6, which
states that the current and long-term maturities of the Company's debt
obligations, whose repayment terms are substantially modified, either due to
partial in-kind payments, conversion to equity, voluntary agreement by
related party holder or by contractual requirement, are reclassified to
exclude those amounts from current liabilities. The September 30, 2005
working capital deficit includes $300,000 in short term notes that mature
within one year.
During the nine months ended September 30, 2005 and September 30, 2004,
cash used in operations was $434,548 and $644,675, respectively. The net
loss adjusted for non-cash items was $$639,436 for the nine months ended
September 30, 2005, compared to $647,936 for the same period in 2004. The
changes in assets and liabilities decreased the Company's net cash used in
operations by $204,888 and $3,261 for the nine months ended September 30,
2005 and September 30, 2004, respectively. Cash used in investing activities
for the period ended September 30, 2005 was $64,510, whereas for the same
period in 2004 $8,434 was provided. The increase in cash used in investing
activities in 2005 was due to an increase in payments for property, equipment
and capitalized software costs, in addition to increased deposits on a surety
bond and to our VoIP product provider. For the nine months ended September
30, 2005, cash provided from financing activities was $421,445, as compared
to $663,305 for the same period in 2004. This decrease of $241,860 was
primarily the result of payments made for the purchase of treasury stock
totaling $130,000, and payments of deferred loan costs, $23,273, and deferred
public offering costs, $66,533. There was a net decrease in cash of $77,613
for the period ended September 30, 2005, as compared to an increase of
$27,064 for the same period in 2004. Compliance Systems has cash on hand of
$56,732 as of September 30, 2005. Cash-on-hand, together with the collection
of receivables, reductions in expenses, and other financing transactions,
including the expected issuance of the $400,000 balance of secured
convertible debentures in February 2006, will be sufficient for the Company
to continue operations through March 31, 2006. Subsequent to that date the
Company will need additional financing.
CSC's primary need for cash during the next twelve months is to satisfy
current liabilities of $974,551. As of September 30, 2005, we had a working
capital deficit of $627,825, which means that our current liabilities
exceeded our current assets on September 30, 2005 by that amount. This
working capital deficit increased significantly from the working capital
deficit of $31,317 as of December 2004, and was due to several short term
notes that will mature within one year. The effect of the current maturities
is exacerbated due to the reclassification, in accordance with generally
accepted accounting principles, of short-term debt at December 31, 2004 that
was subsequently deferred and/or paid in-kind, whereas similar agreements
applicable to outstanding balances at September 30, 2005, although being
negotiated, have not been finalized.
CSC's current cash flow requirements are expected to be approximately
$245,000 per month, including payroll, rent, utilities, insurance, and
professional fees. We have most recently been receiving approximately
$90,000 a month from our current customer base. We hope to attain profitable
operations through increased sales of our products. However, until
profitable operations are obtained CSC will need to raise additional capital
to finance our current operations as well as any growth. The terms our new
secured convertible debentures are such that for the short-term, the source
of any additional financing will most likely be Montgomery. For the
long-term, the Company expects that it will seek equity financing from the
public market. CSC estimates that it will require $4,500,000 to fund its
operations for a twelve-month period commencing on the date on which the
Company anticipates the accompanying registration statement will become
effective, including approximately $2,500,000 for sales and marketing
expenditures.
On December 10, 2005, CSC entered into the SPA whereby the November
2005 Debentures were issued. During the year ended December 31, 2005, the
Company received net proceeds of $310,000 after payment of various costs of
$290,000 from the sale of $600,000 of debentures. As of February 14, 2006,
the balance outstanding on the November 2005 Debentures was $600,000 and
accrued interest was approximately $13,000. The November 2005 Debentures are
25
convertible at the holder's option any time up to maturity at a conversion
price equal to the lower of: (i) the lowest closing bid price of CSC's
common stock at any time during the 10 trading days before the filing of the
accompanying registration statement, or (ii) 80% of the lowest price per
share in the last reported trade of CSC's common stock on the Pink Sheets or
on the exchange which the common stock is then listed, as quoted by
Bloomberg, LP, for the five trading days immediately preceding the conversion
date, which conversion price may be adjusted from time-to-time pursuant to
certain other terms of the November 2005 Debentures. At maturity, the
remaining unpaid principal and accrued interest under the November 2005
Debentures will be, at CSC's option, either paid or converted into shares of
the Company's common stock at a conversion price calculated pursuant to the
above-described formula. The November 2005 Debentures bear interest at 10%
per annum and are secured by a related security agreement covering all of the
Company's otherwise not specifically pledged assets.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for
Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in
the financial statements based on their fair values. SFAS 123R will be
effective for the Company in fiscal 2006. The pro forma disclosures
previously permitted will no longer be an alternative to financial statement
recognition. Under SFAS 123R, the company must determine the appropriate
fair value model, the amortization method for compensation cost and the
transition method to be used at date of adoption, either prospective or
retrospective; neither method is expected to apply as the Company has not
previously granted any stock options to its officers or employees.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Non-Monetary Assets-An Amendment of APB Opinion No. 29, Accounting for
Non-Monetary Transactions" ("SFAS 153"). SFAS 153 eliminates the exception
from fair value measurement for non-monetary exchanges of similar productive
assets and replaces it with an exception for exchanges that do not have
commercial substance. SFAS 153 specifies that a non-monetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS 153 is effective for
the fiscal periods beginning after June 15, 2005. Its adoption had no
effect on the Company's consolidated financial statements.
26
DESCRIPTION OF BUSINESS
Overview
Compliance Systems Corporation was incorporated on November 17, 2003 in
the State of Nevada. Its predecessor operating company was incorporated in
Delaware on November 7, 2002 pursuant to a corporate reorganization of several
closely related companies that had commenced operations in December of 2001. On
December 2, 2005, Compliance Systems Corporation conditionally acquired 85% of
the common stock of GSA subject to the fulfillment of certain conditions. These
conditions were satisfied in early-February 2006. On February 10, 2006,
Compliance Systems Corporation merged with and into GSA whereby GSA became the
Surviving Entity. On said date, the Surviving Entity changed its name to
Compliance Systems Corporation and filed a Form 15c211 with the NASD. The merger
had the same effect as what is commonly referred to as a reverse acquisition, in
that the operating company now has public shareholders. The business of our
predecessor operating company remains unchanged.
We operate its principal businesses through our subsidiary, Call
Compliance, Inc. ("CCI"), and we believe CCI is a leader in the development of
innovative, technological compliance services and solutions for the
telemarketing sector. We help telemarketing operations ensure compliance in
highly regulated, strictly enforced DNC and other telemarketing guidelines
environment. CCI designs, develops and deploys compliance products that we
believe are effective, reliable, cost efficient and help alleviate many of the
burdens placed upon telemarketers.
CCI's primary product is the patented, multi-award-winning TeleBlock(R)
DNC Blocking System, which has been deployed for over six years and has
processed over three billion calls. We believe that no telemarketing entity that
has deployed TeleBlock(R) across its outbound calling campaigns has ever been
fined for a DNC violation. Also included in CCI's suite of compliance services
is the Regulatory GuideSM, the only online and up-to-date compilation of state
and federal telemarketing laws; ongoing compliance auditing delivered by
Compliance Testing & Solutions ("CTS"), CCI's consulting division; and shortly
we anticipate launching the Registration GuideSM , CCI's automatic online system
for completing state telemarketing registration forms.
Our Business
Our business is to provide compliance technologies, methodologies and
services to the teleservices industry. We have developed a compliance technology
called the TeleBlock(R) Call Blocking System ("TeleBlock(R)") which is a product
that automatically screens and blocks outbound calls against federal, state, and
in-house DNC lists. A patent for TeleBlock(R) was granted by the United States
Patent and Trademark Office in December of 2001.
Telemarketing companies that subscribe to TeleBlock(R) access it via a
national SS7/IP platform managed by our alliance partner, VeriSign, Inc. SS7 is
a system that puts the information required to set up and manage routing of
telephone calls in a separate network rather than within the same network that
the voice portion of a telephone call is made on. Using SS7, telephone calls can
be set up more efficiently and with greater security. Special services such as
name display, , toll-free service, and number portability are easier to add and
manage with SS7.
Our SS7/IP based deployment enables TeleBlock(R) to be offered to
subscribers via standard telephone company offerings, including, but not limited
to, analog telephone lines, T1s and PRIs. TeleBlock(R) was first deployed
through VeriSign in November 2002; and since that time, we have been working
closely with VeriSign in an effort to enter into contracts with telephone
carriers to provide their customers with TeleBlock(R) on a commercial basis. To
date, more than 40 telephone carriers and resellers, including Qwest, MCI, XO,
and Paetec have licensed TeleBlock(R) and offer it to their customers who
telemarket. The TeleBlock(R) service is currently being utilized by many Fortune
500 companies, including Cendant, Marriott, and John Hancock.
TeleBlock(R) is also offered, via a VPN connection, by predictive dialer
companies such as Stratasoft, Marketel, and Data-Tel, as well as in partnership
with application service providers ("ASPs") such as Sales Lead Management and
VanillaSoft. We believe delivering TeleBlock(R) in this manner (via IPs)
provides two significant advantages. First, we believe it allows for
TeleBlock(R) to be easily implemented by any off-shore telemarketing
27
company that calls in to the United States. Such offshore entities can use their
predictive dialers or ASP services to directly query the TeleBlock(R) database,
as opposed to using their local telephone carrier which, based upon geography,
may not be able to obtain a direct TeleBlock(R) license. Second, the predictive
dialer/ASP mode of TeleBlock(R) delivery gives domestic companies that have
existing contracts with telephone carriers that do not license TeleBlock(R) the
ability to directly obtain the TeleBlock(R) service. We are in talks with many
other industry leaders to offer this IP version of TeleBlock(R).
We continue to seek out additional avenues for enhancing the value of
TeleBlock(R) in the teleservices arena. In 2002, in anticipation of changes to
federal telemarketing rules, we filed a provisional patent application entitled
"Caller Id Insertion Process." This TeleBlock(R) add-on service enables a
telemarketer to insert in the SS7 Caller ID packet a calling number when Caller
ID is not available from its equipment or telephone carrier. Alternatively, this
service allows a telemarketer to insert a return number different from the
calling number in the caller packet. The new federal rule requiring transmission
of Caller ID went into effect in January of 2004, and our new functionality was
available shortly thereafter. In 2005, we applied for patent protection in
Greece for a modified version of the TeleBlock(R) system; and we believe this
patent, if granted, will apply throughout the European Union. We anticipate that
having this patent protection in place will enable us to deploy TeleBlock(R)
technology world-wide, as the EU countries move to implement Do Not Call
programs similar to those in the United States as well as the number of
off-shore telemarketing companies that call into the USA continue to grow.
In 2003, we signed agreements with the American Teleservices Association
("ATA") and the American Resort and Development Association ("ARDA") to produce
and distribute a co-branded electronic newsletter and an online co-branded
Regulatory GuideSM to their members. These publications provide up-to-the-minute
information about developments in the continually changing legal landscape
regarding telemarketing. The Regulatory GuideSM includes hundreds of
subscribers, and we believe has become the industry "bible" for telemarketing
related laws and regulations. The Regulatory GuideSM has also been branded by
the Newspaper Association of America and TMCnet, a leading publisher serving the
teleservices industry. In 2005, we also entered into an agreement with the ATA
to provide to its members an online system designed to assist telemarketers to
easily fill out voluminous state commercial registration forms, and we call this
system the Registration Guide. This online service is currently in development,
and we believe will be ready for the teleservices market or about the end of the
first quarter of 2006.
In 2006 will expect to enter the emerging world of Voice-Over IP ("VoIP")
communications. In order to accomplish this, we formed a division called Citadel
Telephone Company. Citadel has entered into a wholesale reseller agreement by
which it will able to sell TeleBlock(R)-enabled dial tone, via VoIP, across the
United States. The launch date for this additional product offering is scheduled
for the spring of 2006. The Citadel TeleBlock(R) service provides us yet another
avenue by which TeleBlock(R) can be offered to the teleservices industry.
We have also partnered with TPG Telemanagement, Inc., the quality control
management industry leader for many Fortune 500 clients, including Discover and
Chase, to form an audit/consulting service called Compliance Testing &
Solutions, LLC. CTS offers a complete review and analysis of a company's calling
operations, incorporating all telemarketing regulations at the state and federal
levels. By leveraging the respective strengths of the Company and TPG, we
believe that CTS will be able to meet the growing needs of teleservices
companies to establish the efficacy of their compliance policies and procedures.
The Patented TeleBlock(R) Service
The Process
TeleBlock(R) is a DNC system that automatically blocks outbound calls to
state and federally mandated DNC lists, the end-user's (the telemarketer's) own
in-house proprietary DNC list, and other third party DNC lists. The system
blocks these calls centrally, allowing for multiple offices and/or outsourced
call centers to efficiently manage their DNC lists. The basic TeleBlock(R)
system blocks these calls in the appropriate telephone company's central office.
The system is a value-added feature treatment applied to the telemarketer's
telephone lines (whether they are POTS lines, T1's or T3's). The system
functions independently of the telemarketers' telephone equipment. TeleBlock(R)
is compatible with all key systems, PBXs, predictive dialers, voice-messaging
systems, fax broadcast equipment, etc.
28
Our TeleBlock process automatically blocks a call by interfacing with a
telemarketer who dials a number appearing on any of the applicable DNC lists,
and instantaneously providing a recorded "blocked number" message. Other
available features include standard or customized SIT tones for predictive
dialers, "telemarketer-specific" customized messages, and the ability of the
system to transfer a "blocked" caller to an IVR system or other department in
the telemarketing organization. TeleBlock's(R) capabilities regarding customized
SIT tones allows for the identifiable disposition of calls within a predictive
dialer environment. The TeleBlock system provides for the customization of CLID
messaging (via DialerIDSM), either in stand-alone mode or in conjunction with
Campaign List ManagerSM.
A web-based graphical user interface ("GUI") allows telemarketers to
manage and administer all of the lists against which they wish to block calls.
Available administrative features of TeleBlock include: number override (to
allow certain numbers on lists to be called); full editing capabilities
(additions/deletions/updates); searching capability; and a reporting module with
standard and customizable reports. The system also allows the administrator to
create and change passwords, display ANI/T1 authentication code tables, modify
CLID messaging (DialerIDSM) and to change lists in real time based upon ANI/T1's
utilizing Campaign List ManagerSM.
The TeleBlock(R) system reviews each outgoing call by a telemarketer and
compares it against state and federal DNC lists, the specific customer's
in-house DNC list, as well as an "override" (allow) list. Based upon this
comparison, the call is either blocked or processed like a normal call.
Sales Channels and Revenue Sources
By leveraging the VeriSign Alliance Agreement, which calls for VeriSign to
host and manage the TeleBlock(R) database and enable interconnection to and from
various distribution models, we believe we are best positioned to efficiently
sell licenses and connectivity. With VeriSign providing the backbone of this
process, we have accomplished the dissemination of TeleBlock(R) access without
having to build or adapt new infrastructure. Our TeleBlock(R) service is sold to
end-user telemarketers in a variety of ways, all of which produce revenue to us:
o Telephone carrier channel model -- supporting the sales efforts of
existing sales channels of telephone carriers, such as MCI, XO
Communications and Qwest. Telephone Carriers offer our TeleBlock(R)
product as a value-add for any of its customers which use a
telephone to solicit for goods or services. The telephone carrier
charges its customers a query (transaction) fee for each call
attempt made from any telephone line that has the TeleBlock(R)
feature enabled. We, in turn, charge the telephone carrier monthly
for all call attempts made by all of its customers. To date, more
than 40 telephone carriers and resellers, including Vartec,
Lightpath, Qwest, MCI, XO, and Paetec have licensed TeleBlock(R) and
offer it to their customers who telemarket. The TeleBlock(R) service
is currently being used by many Fortune 500 companies, including
Cendant, Marriott, and John Hancock.
o Direct sales targeting strategic prospects that rely upon the
telephone to sell their good and services. Typically, these efforts
are geared toward enterprise customers that have offices throughout
the country. Our direct sales efforts assist these companies
implement the TeleBlock(R) service by locating the right distributor
(telephone carrier) for their specific needs and geography. These
customers receive our service from their carrier and we receive
revenue from the carrier as described above.
o TeleBlock(R) is also offered by predictive dialer companies (i.e.,
companies that manufacture hardware and software systems that aid
telemarketing entities in efficiently and cost-effectively managing
their outbound calls) - examples include Datatel, Stratasoft,
Marketel, and Nobel. Predictive dialer access to TeleBlock(R) is
accomplished by connecting the predictive dialer to the VeriSign
platform using a secure VPN connection. We believe that delivering
TeleBlock(R) in this manner (via IP) provides two additional
29
advantages. First, we believe it allows for TeleBlock(R) to be
easily implemented by any offshore telemarketing company that calls
in to the United States. Each such offshore entity makes use of its
predictive dialer(s) to directly query the TeleBlock(R) database via
the internet, as opposed to having to rely on a local telephone
carrier that may not be able to obtain a TeleBlock(R) license.
Second, it gives domestic companies that have a contract with a
telephone carrier that does not currently license TeleBlock(R) the
ability to obtain the TeleBlock(R) service via its predictive
dialer(s). The dialer manufacturer charges its customers a query
(transaction) fee for each call attempt made from the it's equipment
that has the TeleBlock(R) feature enabled. We, in turn, charge the
manufacturer monthly for all call attempts made by all of its
customers.
o TeleBlock(R) is also offered by hosted "Sales Force Automation" and
"Customer Relationship Management" ASPs such as Sales Lead
Management and VanillaSoft. These web-based software services embed
access to the IP-based TeleBlock(R) service directly into their
online systems. Users of these ASP systems can then make telephone
calls directly from the web-based GUI interface and have each such
call screened and blocked, via IP, against all DNC lists via
TeleBlock(R). ). These companies charges their customers a query
(transaction) fee for each call attempt made from the their
equipment that has the TeleBlock(R) feature enabled. We, in turn,
charge the company/companies monthly for all call attempts made by
all of its customers
The Industry and Competition
We believe there is no direct competition to our company and TeleBlock(R)
;that is, our patent protection prevents any company from providing a service
that screens and blocks calls against DNC lists via the SS7/IP networks.
However, there is one company that provide a service that is in some ways
similar to TeleBlock(R), and there are other companies that provide what is
known in the industry as database "scrubbing" services.
Gryphon Networks of Norwood, Massachusetts, offers a product similar to
our DialBlock(R) technology. We believe our TeleBlock product is different from
the Gryphon DNC compliance product since we believe the Gryphon requires users
to dial an access code, followed by a PIN number, to make use of the system.
Once this is completed, the user completes a session of telemarketing, and the
numbers dialed during this session are screened and blocked against DNC numbers
via a system maintained by Gryphon. We believe the Gryphon system does not
reside, like TeleBlock(R), on the SS7/IP network, so the screening/blocking does
not take place via the user's telephone carrier. Instead, the screening/blocking
process is completed by an "off-network" system created and managed by Gryphon.
With the Gryphon system, each individual user must log in (via the access code
and PIN number) in order for the screening to take place; accordingly, there is
potential for individual callers to bypass the log in process.
There also are many companies that "scrub" lists for telemarketers.
Scrubbing is another word for database merging and purging, as applied to the
removal of DNC numbers from prospect lists. We view scrubbing as a way to
increase efficiency in a call center by allowing calls to go to users who are
more likely to have an interest in the product being offered; however, we
believe the enforcement actions taken against companies across the country for
DNC violations highlights the fact that we believe scrubbing does not achieve
the 100% compliance required under state and federal DNC laws.
TeleBlock(R) enables telemarketers to meet the compliance demands of the
agencies enforcing DNC rules. We believe TeleBlock(R) leverages the reliability
of existing telecommunications technology to create the only DNC compliance
system that screens and blocks outbound calls via a telemarketer's telephone
carrier. We believe traditional database scrubbing techniques lack the
centralization and standardization necessary to achieve 100% DNC compliance. It
has been reported that even the most sophisticated of scrubbing campaigns will
consistently have an error rate in the range of 0.5% to 3.0%. As an example,
assuming a company makes one million calls per month, and has a DNC scrubbing
error rate of even 0.1%, the company faces a potential annual exposure of over
$130 million in fines at the federal level alone. We anticipate, therefore, that
DNC compliance will be of paramount importance for any company that telemarkets.
Over the next two years, we believe our company needs to gain significant
market share by seeking out Fortune 500 clients, increasing our presence in the
call center industry, and expanding our product availability through additional
channels. We anticipate this will be accomplished through the development of a
strong sales team and marketing organization.
30
Although we believe there is no direct competitor to our TeleBlock
process, certain companies may have products and provide services which
indirectly compete with TeleBlock. Competitors most likely include list brokers,
scrubbing companies, computer telephony providers, systems integrators,,
hardware and software suppliers. Many of our competitors have substantially
greater financial, technical and marketing resources, larger customer bases,
longer operating histories, greater name recognition and more established
relationships in the industry than we do. As a result, certain of these
competitors may be able to develop and expand their product and service
offerings more rapidly, adapt to new or emerging technologies and changes in
customer requirements more quickly, take advantage of acquisitions and other
opportunities more readily, devote greater resources to the marketing and sale
of their services and adopt more aggressive pricing policies than we can. We
cannot be sure that we will compete successfully with our existing competitors
or with any new competitors.
Recent Developments and Our Strategy
In 2005, we entered into the emerging world of VoIP communications. In
order to accomplish this, we formed a division called Citadel Telephone Company.
Citadel has entered into a wholesale reseller agreement by which it will able to
sell TeleBlock(R)-enabled dial tone, via VoIP, across the United States and
throughout the world. The service is currently operating with customers in a
BETA environment. The commercial launch date for this additional product
offering is scheduled for late first quarter 2006. The Citadel TeleBlock(R)
service provides us yet another avenue by which TeleBlock(R) can be offered to
the teleservices industry.
In 2005, we also entered into an agreement with the ATA to provide to its
members an online system designed to assist telemarketers to easily fill out
voluminous state commercial registration forms, which we call the Registration
Guide. This online service is currently in development, and we believe will be
ready for the teleservices market before the end of the first quarter of 2006.
We anticipate this service will become a component of the regulatory guide web
site allowing for immediate cross-sell opportunities from existing subscribers.
We have also applied for patent protection in Greece for a modified
version of the TeleBlock(R) system; and we believe this patent, if granted, will
apply throughout the European Union. We believe that having this patent
protection in place will enable the Company to deploy TeleBlock(R) technology
world-wide, as the EU countries move to implement DNC programs similar to those
in the United States as well as the number of off-shore telemarketing companies
that call into the USA continue to grow.
Government Regulation
Teleservices companies are confronted with a patchwork of state and
federal statutes and regulations that govern virtually every element of their
operations. These rules are largely focused on outbound calls (i.e., calls
originating with the marketer being made to consumers), but increasingly,
inbound calls (i.e., originating with the consumer) are falling within the
regulatory purview as well.
At the federal level, the Federal Communications Commission (the "FCC")
has issued regulations in response to Congressional passage of the Telephone
Consumer Protection Act in 1991. The Federal Trade Commission has also issued
comprehensive regulations called the Telemarketing Sales Rule ("TSR"). These
rules govern virtually every aspect of the telemarketing process, including the
creation of a national DNC registry, the use of predictive dialers,
identification and payment disclosures, prohibitions against misrepresentations,
and many other areas.
Even though this comprehensive federal regulatory scheme is in place, all
states have additional and/or different rules and regulations that impact the
teleservices industry as well. Most importantly, there are 17 states that still
operate separate DNC lists. In addition, the majority of states have
requirements governing commercial registration of telemarketers, as well as
rules governing a multitude of areas that are more restrictive than comparable
federal rules.
There have been hundreds of enforcement actions regarding the state-run
DNC lists, and dozens of such enforcements at the federal level.
Employees
The Company currently has seven employees in Glen Cove, New York.
31
MANAGEMENT
The following table sets forth the names and positions of CSC's
executive officers and directors. The Company's directors are elected at our
annual meeting of stockholders and serve for one year or until successors are
elected and qualify. CSC's Board of Directors (the "Board") elects its
officers, and their terms of office are at the discretion of the Board,
except to the extent governed by an employment contract.
As of February 6, 2006, CSC's directors and executive officers, their age,
positions, the dates of their initial election or appointment as directors or
executive officers, and the expiration of their terms are as follows:
Name Age Position Period Served
---- --- -------- -------------
Dean Garfinkel 48 Chairman of the Board of Directors 2002 to present
Secretary June 2005 to present
President
Barry Brookstein 64 Chief Financial Officer, Treasurer,
and Director 2002 to present
Secretary June 2005 to present
The directors and executive officers of CSC are not directors or
executive officers of any other company that files reports with the
Commission, nor have they been involved in any bankruptcy proceedings,
criminal proceedings, any proceeding involving any possibility of enjoining
or suspending CSC's directors and officers from engaging in any business,
securities or banking activities, and have not been found to have violated,
nor been accused of having violated, any federal or state securities or
commodities laws.
The following is a brief description of the background of the directors
and executive officers of CSC.
Dean Garfinkel, Chairman of the Board of Directors and President
Mr. Garfinkel, 48, has served as Chairman of the Board of CSC and each
of its subsidiaries since each such entity was founded and has served as
CSC's President since June 2005. Mr. Garfinkel also served as Secretary
since CSC's founding through June 2005. Mr. Garfinkel served as Chief
Executive Officer and Director of ASN Voice & Data Corp. ("ASN"), a
telecommunications company he founded in 1991, which specialized in providing
telephone systems for security brokerage firms. Mr. Garfinkel has served as
a communications consultant to Fortune 500 companies and other businesses for
over 20 years. Mr. Garfinkel is on the Executive Board of Directors of the
ATA.
Barry Brookstein, Director, Chief Financial Officer, Corporate Secretary and
Treasurer
Mr. Brookstein, 64, has served as Chief Financial Officer, Treasurer
and Director of CSC and each of its subsidiaries since each such entity was
founded. Mr. Brookstein is a graduate of Pace University and has over 40
years of experience in public accounting. As Chief Financial Officer, his
duties include the management of all financial activities, including, but not
limited to, budgeting, short- and long-term planning and directing financial
operations.
As disclosed under "Alison Garfinkel Stock Buyout and Resignation,"
Mrs. Alison Garfinkel resigned as President and Director, effective as of
May 31, 2005. Since that date, she continues to serve the Company as a
consultant under a 22 month consulting agreement. Effective with Mrs.
Garfinkel's resignation, Mr. Garfinkel assumed the role of President and Mr.
Brookstein became our Company's Secretary.
Employment Agreements with Management
CSC entered into 5-year employment agreements, effective as of December
1, 2001, with each of Mr. Garfinkel, Mrs. Alison Garfinkel and Mr.
Brookstein, pursuant to which Mr. Garfinkel served as CSC's Chairman, Mrs.
Garfinkel served as President and Director, and Mr. Brookstein served as
CSC's Chief Financial Officer, Treasurer and Director. Messrs. Garfinkel
and Brookstein's employment contracts were extended for five years and expire
on November 30, 2011. Under the terms of the respective employment
32
agreements, Mr. Garfinkel and Mrs. Garfinkel each received a base salary of
$240,000 per year and Mr. Brookstein received a base salary of $120,000 per
year until July 1, 2003, at which time his base salary was increased to
$240,000 per year. Each officer is entitled to an annual bonus from the
bonus pool, the amount to be determined in the sole discretion of the Board,
and an allowance for an automobile of up to $1,000 per month, also to be
determined in the sole discretion of the Board. Each employment agreement
provides for health insurance and other standard benefits and contains
certain non-competition prohibitions which require that each officer not
engage in any business activities which directly compete with the business of
the Company while he or she is employed by us, or a principal stockholder of
CSC. Commencing in December 2001, each officer agreed to temporarily defer a
portion of his/her annual base salary until such date as shall be determined
by the Board, in its sole discretion, but in no event later than January 1,
2004. In January 2004, each officer agreed to continue to defer a portion of
his/her base salary, along with all past and future deferred amounts, until
such date as to be determined by the Board, in its sole discretion, but in no
event later than January 1, 2005. In January 2005, each officer agreed to
defer his salary on the same terms for another year. All deferred amounts
shall be paid to each executive in 12 equal monthly payments, commencing on a
date to be determined by the Board, in its sole discretion; however, all
deferred amounts shall become automatically due and be immediately paid by
CSC to each executive in one lump sum payment upon complete repayment of the
certain equity notes and the loan provided to CSC by Mr. Brookstein. Messrs.
Garfinkel and Brookstein and Mrs. Garfinkel agreed to waive all deferred
compensation through May 2005, that was unpaid as of September 21, 2005. As
described above, Messrs. Garfinkel's and Brookstein's respective employment
agreements provide for an annual bonus from a bonus pool, with the amount of
each bonus to be determined in the sole discretion of the Board. The bonus
pool shall be equal to a percentage of CSC's pre-tax profits after the
service of any debt on a calendar year basis, starting with 25% of the first
$10 million in pretax earnings, and 10% of any pretax earnings in excess of
$10 million.
At present, Messrs. Garfinkel and Brookstein's employment agreements are
guaranteed by the Company.
Section 16(a) Compliance of Officers and Directors
The Company did not have a class of securities registered under Section
12(b) or Section 12(g) of the Exchange Act in 2004 or 2005 and as such, CSC's
officers, directors and 10% shareholders were not subject to the reporting
requirements of Section 16(a).
Family Relationships
On September 20, 2005, Mr. and Mrs. Garfinkel executed a Separation and
Settlement agreement pursuant to which Alison Garfinkel resigned as President
and Director, effective as of May 31, 2005. Since that date, she continues
to serve the Company as a consultant under a 22-month consulting agreement.
On May 18, 2005, CSC entered into an agreement in principal with Alison
Garfinkel pursuant to which she would sell the Company, at a purchase price
of $0.18 per share ($225,000 in the aggregate), 1,250,000 shares of Class A
Common owned by her, and in connection therewith resign as an officer and
director of the Company. The first $33,333 of the purchase price was paid
on May 18, 2005 and an additional $66,667 was paid by June 30, 2005. The
balance of $125,000 is payable in the amount of $7,500 per month through June
2006 and then in the amount of $2,500 per month from July 2006 through May
2007. Ms. Garfinkel also received five-year warrants to purchase an
aggregate of 250,000 shares of our Class B Common Stock, exercisable at $1.00
per share, and was retained as a consultant to us for a 22-month period
commencing as of June 1, 2005 at a rate of $2,500 per month. Mrs. Garfinkel
waived all deferred salary and bonus, agree to the termination of her
employment agreement, provided the Company with a general release and agreed
to certain non-compete and confidentiality provisions.
Committees
The Board serves as the audit committee. The Board does not have a
financial expert due to the lack of capital needed to attract a qualified
expert.
33
Compensation Committee Interlocks And Insider Participation
The Board does not have a compensation committee, but none of our
executive officers has served as a director or member of the compensation
committee of any other entity whose executive officers served on the Board or
compensation committee.
Code of Ethics
On February 10, 2006, the Board adopted a written Code of Ethics
designed to deter wrongdoing and promote honest and ethical conduct, full,
fair and accurate disclosure, compliance with laws, prompt internal reporting
and accountability to adherence to the Code of Ethics. This Code of Ethics
is filed as Exhibit 14.1 to the accompanying registration statement.
Executive Compensation
The following table shows all the cash compensation paid by CSC, as
well as certain other compensation paid or accrued, during the fiscal years
ended December 31, 2004, 2003 and 2002 to CSC's three highest paid executive
officers. No restricted stock awards, long-term incentive plan payouts or
other types of compensation, other than the compensation identified in the
chart below, were paid to these executive officers during these fiscal
years. Except as indicated below, no executive officer earned a total annual
salary and bonus for any of these years in excess of $100,000.
Annual Compensation Long-Term Compensation
---------------------------------------------- ---------------------------------
Awards Payouts
--------------------- ----------
Other Restricted
Annual Stock Options/ LTIP All Other
Name and Salary* Bonus Compensation Award(s) SARs Payouts Compensation
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
- ----------------- ---- ------- ----- ------------ -------- ---- ------- ------------
Dean Garfinkel, 2004 $208,000(1) -- -- -- -- -- --
President and Chairman
of the Board of Directors 2003 $180,000(2) -- -- -- -- -- --
2002 $120,000(3) -- -- -- -- -- --
Allison Garfinkel , 2004 $207,000(4) -- -- -- -- -- --
Former President and
Director 2003 $180,000(5) -- -- -- -- -- --
2002 $120,000(6) -- -- -- -- -- --
Barry Brookstein, 2004 $135,000(7) -- -- -- -- -- --
Chief Financial Officer,
Treasurer , Secretary
and Director 2003 $90,000(8) -- -- -- -- -- --
2002 $60,000(9) -- -- -- -- -- --
- ---------------------
* The above table does not include the following deferred amounts, all
of which were waived in accordance with an agreement signed in September
2005:
(1) $32,000 was deferred by Mr. Garfinkel in 2004.
(2) $60,000 was deferred by Mr. Garfinkel in 2003.
(3) $120,000 was deferred by Mr. Garfinkel in 2002.
(4) $33,000 was deferred by Mrs. Garfinkel in 2004.
(5) $60,000 was deferred by Mrs. Garfinkel in 2003.
(6) $120,000 was deferred by Mrs. Garfinkel in 2002.
(7) $105,000 was deferred by Mr. Brookstein in 2004.
(8) $90,000 was deferred by Mr. Brookstein l in 2003.
(9) $60,000 was deferred by Mr. Brookstein l in 2002.
34
Director Compensation
Directors do not receive any cash compensation for their service as
members of the Board, but they are reimbursed for reasonable out-of-pocket
expenses incurred in connection with their attendance at meetings of the
Board. Upon establishing a stock option plan, which we have not done as of
February 14, 2006, CSC anticipates that directors will be eligible to receive
options to purchase common stock.
Securities Authorized for Issuance Under Equity Compensation Plan
No securities that have been authorized under equity compensation plans as
of December 31, 2004 or thereafter thru February 14, 2006.
No compensation options have been granted to the named officers and
directors.
35
DESCRIPTION OF PROPERTY
In January 2005, the lease for CSC's executive offices at 90 Pratt
Oval, Glen Cove, New York 11542 was assigned to the Company. This space was
originally leased to Automated Systems National Network, Inc., a company
owned by Dean Garfinkel. The lease expires on August 1, 2006. This lease
for CSC's executive offices requires a monthly basic lease payment of
$5,875. The Company believes that its leased property is adequate for CSC's
current and immediately foreseeable operating needs. The Company occupies
9,100 square feet. CSC has the option to extend its lease for an additional
five years and expects to do so shortly.
36
LEGAL PROCEEDINGS
The Company is not presently a party to any litigation and CSC has no
knowledge of any threatened litigation.
37
PRINCIPAL STOCKHOLDERS
Voting Securities And Principal Holders Thereof
The following table sets forth, as of February 14, 2006, information
with respect to the beneficial ownership of the Company's common stock by
(i) persons known by CSC to beneficially own more than 5% of the outstanding
shares, (ii) each director, (iii) each executive officer, and (iv) all
directors and executive officers as a group.
Common Stock
Beneficially Owned
Name/Address Number Percent (1)
- --------------------------------------------------------------------------- -------- -----------
Dean Garfinkel 9,951,194(2) 19.90%
90 Pratt Oval
Glen Cove, New York 11542
Barry Brookstein 10,995,831(4) 21.99%
90 Pratt Oval
Glen Cove, New York 11542
ALL OFFICERS AND DIRECTORS AS A GROUP (2 ABOVE PERSONS) 20,947,025 41.89%
Alison Garfinkel 4,816,702(3) 9.63%
90 Pratt Oval
Glen Cove, New York 11542
Knightsbridge Capital Corp. 2,500,000 5.00%
2999 NE 191 Street
Ventura, Florida 33180
- --------------------
(1) Applicable percentage of ownership is based on 50,000,000 shares of
common stock outstanding as of February 14, 2006, together with
applicable warrants and intra-stockholder options for each
shareholder. Beneficial ownership is determined in accordance with the
rules of the Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to
warrants that are currently exercisable or exercisable within 60 days
of February 14, 2006 are deemed to be beneficially owned by the person
holding such options for the purpose of computing the percentage of
ownership of such person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person. The
common stock is the only outstanding class of equity securities of CSC
(2) Consists of: (i) 9,834170 shares of common stock; (ii) 127,024 shares
of common stock held jointly by Mr. and Mrs. Garfinkel as custodian for
their minor children and owned directly by one of their children. Does
not include (i) shares of Class A common stock owned by Mr. Garfinkel's
wife, Alison Garfinkel (see footnote 2 below), as to which Mr.
Garfinkel disclaims beneficial ownership; (iii) (a) up to 1,639,028
shares of common stock underlying the First Repurchase Option that Mr.
Garfinkel has the option to purchase (b) up to 327,806 shares of common
stock underlying the Offering Repurchase Option that Mr. Garfinkel has
the option to purchase; or (iv) 65,561 shares of common stock owned by
Mr. Garfinkel's mother.
(3) Consists of: (i) 4,753,184 shares of common stock; and (ii) 127,024
shares of common stock held jointly by Mr. and Mrs. Garfinkel as
custodian for their minor children and owned directly by one of their
children. Does not include: (a) shares of common stock owned by Mrs.
Garfinkel's husband, Dean Garfinkel, (see footnote 1 above), as to
which Mrs. Garfinkel disclaims beneficial ownership, or (b) up to
327,806 shares of common stock underlying the Offering Repurchase
Option that Mrs. Garfinkel has the option to purchase. Gives effect to
Alison Garfinkel's buyout described above.
(4) Consists of: (i) 10,932,319 shares of common stock beneficially owned
by Mr. Brookstein; and (ii) 63,512 shares of common stock owned by Mr.
Brookstein as custodian for his minor children. Does not include: (i)
Up to 1,229,271 shares of common stock underlying the First Repurchase
Option that Mr. Brookstein has the option to purchase; (ii) up to
327,806 shares of common stock that Mr. Brookstein has the option to
purchase underlying the Offering Repurchase Option; or (iii) 97,314
shares of Class B common stock held by Mr. Brookstein's adult children.
38
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Relationships And Related Transactions
CSC's Chairman, Dean Garfinkel, and the Company's former President,
Alison Garfinkel, each have loaned the Company $125,000. In addition, Barry
Brookstein, CSC's Chief Financial Officer, has loaned the Company $750,000,
and Mr. Brookstein's wholly-owned company, Spirits Management, Inc., has
loaned CSC $125,000. In addition, funds totaling $500,000 were borrowed from
Amanuensis, Ltd., an independent third party, with Barry M. Brookstein,
acting as an intermediary. Although Mr. Brookstein was previously President
of three other companies that CSC is indebted to, Tele-Serv, Inc., Telmax
Co., Inc., and Phone-Tel New Corp., he has not been a shareholder in any of
these companies and is no longer an officer in any of them.
In April 2005, CSC entered into a short-term line of credit agreement
for $350,000 collateralized by liquid assets of Mr. Brookstein. The interest
rate was 0.9% for the first six months and prime thereafter due monthly
through the remainder of the loan term expiring on April 26, 2006. This
interest rate was materially below the market interest rate as well as our
incremental borrowing rate for other debt. The interest actually incurred
through September 30, 2005 was $994. The estimated value in terms of the
additional interest expense that otherwise would have been incurred in
absence of Mr. Brookstein pledging liquid assets as collateral, $10,050, has
been recognized as imputed interest cost with an equivalent offset to
additional paid-in capital. Outstanding borrowings under the line were
reduced to $100,000 on September 15, 2005.
At September 30, 2005, CSC was indebted on two unsecured demand loans
totaling $200,000 to a minor stockholder. The notes bear interest at 14% per
annum. Subsequent to September 30, 2005, the Company borrowed an additional
$37,500 from said stockholder and later repaid a total of $100,000 of these
demand notes.
As of September 30, 2005, CSC was indebted to four affiliated
companies, Tele-Serv, Inc., Telmax Co., Inc., Phone Tel New Corp., Spirits
Management, Inc., for an aggregate amount of $737,092 (originally
$1,000,000), related to us by virtue of certain similar ownership and/or
management. All of the notes were originally issued in 2001. Three of these
notes, totaling $700,000, were in consideration of the release by the related
companies of their contract rights to receive all revenues generated by CSC
from the use of the Company's patented technology; one note was for cash in
the amount of $300,000. (See Notes 2F and 6A to the accompanying
Consolidated Financial Statements).
The loans payable balance consists of various advances made by the
officers and stockholders of the Company with interest accruing at 12% with
various repayment terms. Principal payments on $1,625,000 of the outstanding
notes at December 31, 2004 have been deferred until January 2007 by the
lenders. A condition of the Company's new convertible secured debenture was
the required deferral of debt service on approximately $1,668,000 of debt to
these related parties until ninety days after this registration statement is
declared effective, except that current accrued interest may be paid on
$500,000 of such debt, borrowed on a pass-thru basis from Amanuensis, Ltd.
In May 2005, CSC purchased 1,250,000 Class B shares from Alison
Garfinkel for $263,053 consisting of $219,628 in cash and notes and five-year
warrants to purchase 250,000 shares of common stock at $1.00 per share. Mrs.
Garfinkel resigned from the Company and waived her rights to accrued salary
totaling $223,000 as of December 31, 2004 and an additional $25,000 for the
five months ended May 31, 2005. The 250,000 warrants were subsequently
assigned to Dean Garfinkel by Mrs. Garfinkel pursuant to their legal
separation agreement.
39
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS
On February 10, 2006, Compliance Systems Corporation merged with and
into GSA, a public shell, whereby GSA became the Surviving Entity and on said
date the Surviving Entity filed a Form 15c211 with the NASD. Prior to said
merger, there was no trading history nor quotes on Pink Sheets for GSA's
common stock.
CSC's common stock will be quoted on the Pink Sheets under the symbol
"GSAP.PK" no later than February 17, 2006.
As of February 10, 2006, CSC believes there were approximately 55
holders of record of the Company's common stock.
CSC has not paid dividends in the past on any class of stock and it
does not anticipate paying dividends in the foreseeable future.
Recent Sales of Unregistered Securities
During the last three years, CSC has issued the following unregistered
securities:
On November 30, 2005, the Company entered into the SPA with
Montgomery. The SPA calls for the purchase by Montgomery of up to $1,000,000
of secured convertible debentures. Montgomery is entitled, at its option, to
convert at any time a portion or all amounts of principal and interest due
and outstanding under the November 2005 Debentures into shares of CSC's
common stock, $0.001 par value per share, at a price per share equal to the
lower of: (i) the lowest closing bid price of CSC's common stock at any time
during the 10 trading days before the filing of the accompanying registration
statement, or (ii) 80% of the lowest price per share in the last reported
trade of CSC's common stock on the Over-the-Counter Bulletin Board or on the
exchange which the common stock is then listed, as quoted by Bloomberg, LP,
for the five trading days immediately preceding the conversion date, which
conversion price may be adjusted from time-to-time pursuant to certain other
terms of the November 2005 Debentures. The November 2005 Debentures are
secured by all CSC's assets not otherwise specifically pledged, have two-year
maturity dates, and accrue interest at 10% per annum. On December 2, 2005,
CSC sold the first $600,000 of the November 2005 Debentures to Montgomery.
The debenture, which matures November 30, 2007, bears interest at 10% per
annum, calculated on a 360-day year basis. CSC paid Yorkville Advisors
Management, an affiliate of Montgomery, commitment, structuring and due
diligence fees totaling $112,500 and also paid a $30,000 finder's fee to an
unrelated third party. The SPA and related IRRA requires us to (a) merge with
and into a public shell company, (b) file the accompanying registration
statement for the Surviving Entity with the Commission under the Securities
Act with the provision that Montgomery purchase the remaining $400,000
balance of the November 2005 Debentures two days before the accompanying
registration statement is filed.
The Company effectuated a private offering of 600,000 shares of
non-voting Class B common stock, $0.001 par value per share, pursuant to that
certain Confidential Term Sheet dated November 13, 2002, raising aggregate
gross proceeds of $750,000. Three hundred thousand of the shares of Class B
common stock sold in such offering are subject to a purchase option granted
to Dean Garfinkel, Alison Garfinkel, and Barry M. Brookstein. Each of such
options is exercisable at a purchase price of $2.50 per share, subject to
adjustment in certain events. Such options are exercisable through December
31, 2007, but only in the event certain of our debt had previously been
repaid. The Class B shares have been converted into CSC common stock upon
the consummation of the merger with GSA.
The Company effectuated a private offering of 50 Units pursuant to that
certain Confidential Term Sheet dated June 10, 2003, raising aggregate gross
proceeds of $1,500,000. Each Unit consists of $30,000 principal amount of 9%
secured notes due September 30, 2008 and warrants to purchase an aggregate of
20,000 shares of Class B common stock, each exercisable at a purchase price
of $1.50 per share, subject to adjustment. In June 2005, the Company offered
its $1,500,000 secured note holders the right to convert such debt to equity
and also reduced the exercise price of the related 1,000,000 warrants from
$1.50 to $1 per share. A total of $1,470,000 of secured notes was converted
and 420,000 warrants were exercised between June and September of 2005.
Following these transactions, $30,000 of non-convertible debt and 580,000
warrants exercisable at $1.50 per share through September 30, 2008 remained
outstanding. The Class B shares have been converted into shares of CSC's
common stock upon the consummation of the merger with GSA.
40
In connection with $1,000,000 in loans provided to the Company by four
affiliated companies of CSC's Chief Financial Officer, the Company issued
200,000 of its Class B shares, valued at $1.50 per share, in payment of
$150,430 of principal and $149,570 of interest. As the Company later issued
shares valued at $1.00 per share, anti-dilution rights in the 2004 in-kind
payment agreement required CSC to issue an additional 100,000 common shares
to those holders. During the nine months ended September 30, 2005, the
Company issued 300,000 of its Class B shares in payment of $228,870 of
principal and $71,130 of interest. The Class B shares have been converted
into shares of CSC's common stock upon the consummation of the merger with
GSA.
With respect to the sale of the unregistered securities referenced
above, all transactions were exempt from registration pursuant to Section
4(2) of the Securities Act and Regulation D promulgated thereunder. In each
instance, the purchaser had access to sufficient information regarding CSC so
as to make an informed investment decision. More specifically, CSC had a
reasonable basis to believe that each purchaser was either an accredited
investor as defined in Regulation D or otherwise had the requisite
sophistication to make an investment in CSC's common stock.
41
DESCRIPTION OF SECURITIES
Capital Stock
The authorized capital stock of CSC consists of 500,000,000 shares of
common stock, par value $0.001 per share. No shares of preferred stock are
authorized. As of February 14, 2006, we have 50,000,000 shares of common
stock outstanding. In addition, as of February 14, 2006, there are 2,720,786
outstanding warrants to purchase shares of CSC common stock, excluding
4,261,472 intra-stockholder warrants to purchase shares of CSC common stock.
The following description is a summary of the capital stock of CSC and
contains the material terms of the capital stock. Additional information can
be found in CSC's Articles of Incorporation and Bylaws.
Common Stock
Each share of common stock entitles the holder to one vote on each
matter submitted to a vote of CSC's stockholders, including the election of
directors. There is no cumulative voting. Subject to preferences that may
be applicable to any outstanding preferred stock, stockholders are entitled
to receive ratably such dividends, if any, as may be declared from time to
time by the Board. Stockholders have no preemptive, conversion or other
subscription rights. There are no redemption or sinking fund provisions
related to the common stock. In the event of liquidation, dissolution or
winding up of CSC, stockholders are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior distribution rights
of preferred stock, if any, then outstanding.
Debentures
On November 30, 2005, the Company entered into the SPA with
Montgomery. The SPA calls for the purchase by Montgomery of up to $1,000,000
of secured convertible debentures. Montgomery is entitled, at its option, to
convert at any time a portion or all amounts of principal and interest due
and outstanding under the November 2005 Debentures into shares of CSC's
common stock, $0.001 par value per share, at a price per share equal to the
lower of: (i) the lowest closing bid price of CSC's common stock at any time
during the 10 trading days before the filing of the accompanying registration
statement, or (ii) 80% of the lowest price per share in the last reported
trade of CSC's common stock on the Over-the-Counter Bulletin Board or on the
exchange which the common stock is then listed, as quoted by Bloomberg, LP,
for the five trading days immediately preceding the conversion date, which
conversion price may be adjusted from time-to-time pursuant to certain other
terms of the November 2005 Debentures. The November 2005 Debentures are
secured by all CSC's assets not otherwise specifically pledged, have two-year
maturity dates, and accrue interest at 10% per annum. On December 2, 2005,
CSC sold the first $600,000 of the November 2005 Debentures to Montgomery.
The debenture, which matures November 30, 2007, bears interest at 10% per
annum, calculated on a 360-day year basis. CSC paid Yorkville Advisors
Management, an affiliate of Montgomery, commitment, structuring and due
diligence fees totaling $112,500 and also paid a $30,000 finder's fee to an
unrelated third party. The SPA and related IRRA requires us to (a) merge with
and into a public shell company, (b) file the accompanying registration
statement for the Surviving Entity with the Commission under the Securities
Act with the provision that Montgomery purchase the remaining $400,000
balance of the November 2005 Debentures two days before the accompanying
registration statement is filed.
Shares Eligible for Future Sales
50,000,000 shares of common stock are outstanding on the date of this
Prospectus and an additional 67,720,786 shares will be issued if all of the
outstanding debentures are converted to, and all the outstanding warrants are
exercised to purchase, CSC common stock. All of the shares that may be sold
pursuant to this Prospectus will be freely tradable without restriction or
further registration under the Securities Act, except that any shares issued
to our affiliates, as that term is defined in Rule 144 under the Securities
Act, may generally only be sold in compliance with the provisions of Rule 144
described below. In general, CSC's affiliates are any persons that directly,
or indirectly, through one or more intermediaries, control, or are controlled
by, or are under common control with, CSC.
42
Of the 50,000,000 shares of common stock outstanding as of the date of
this Prospectus, 20,766,489 shares are held by the Company's affiliates and
will be restricted securities as that term is defined in Rule 144. These
restricted shares may only be sold if they are registered under the
Securities Act, or are exempt from such registration requirements.
65,000,000 shares of common stock are being registered in this offering
for resale by Montgomery pursuant to the November 2005 Debentures.
2,720,786 shares of common stock, underlying warrants held by them, are
being registered in this offering for resale by other selling stockholders of
CSC.
3,500,000 shares of common stock, owned by non-affiliated stockholders
are also being registered.
Rule 144
In general, under Rule 144 of the Securities Act, a shareholder who
owns restricted shares that have been outstanding for at least one year is
entitled to sell, within any 3-month period, a number of these restricted
shares that does not exceed the greater of 1% of the then outstanding shares
of common stock immediately on the date of this Prospectus, or, subject to
certain restrictions, the average weekly reported trading volume in the
common stock during the four calendar weeks preceding filing of a notice on
Form 144 with respect to the sale.
In addition, affiliates must comply with the restrictions and
requirements of Rule 144, other than the one-year holding period requirement,
to sell shares of common stock that are not restricted securities. Sales
under Rule 144 are also governed by manner of sale provisions and notice
requirements, and current public information about us must be available.
Under Rule 144(k), a shareholder who is not currently and who has not been
for at least three months before the sale an affiliate and who owns
restricted shares that have been outstanding for at least two years may
resell these restricted shares without compliance with the above requirements.
Transfer Agent & Registrar
The transfer agent and registrar for CSC's common stock is West Coast
Transfer, Inc. Their address is Suite 311, 850 West Hastings St., Vancouver,
British Columbia, Canada, V6C1E1. Their telephone number is 604.682.2556.
Limitation Of Liability: Indemnification
CSC's Bylaws include an indemnification provision under which the
Company has agreed to indemnify directors and officers of CSC to fullest
extent possible from and against any and all claims of any type arising from
or related to future acts or omissions as a director or officer of the
Company.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of CSC
pursuant to the foregoing, or otherwise, the Company has been advised that in
the opinion of the Commission such indemnification is against public policy
as expressed in the Securities and is, therefore, unenforceable.
Anti-Takeover Effects Of Provisions in Charter Documents
Pursuant to the terms of CSC's Bylaws, the authorized but unissued
shares of CSC common are available for future issuance without having to
obtain shareholders' approval. These additional shares may be utilized for a
variety of corporate purposes including but not limited to future public or
direct offerings to raise additional capital, corporate acquisitions and
employee incentive plans. The issuance of such shares may also be used to
deter a potential takeover of CSC that may otherwise be beneficial to
shareholders by diluting the shares held by a potential suitor or issuing
shares to a shareholder that will vote in accordance with the Board's
desires. A takeover may be beneficial to shareholders because, among other
reasons, a potential suitor may offer shareholders a premium for their shares
of stock compared to the then-existing market price.
43
Changes In and Disagreements With Accountants On Accounting and Financial
Disclosure
On May 4, 2005, the Company's Board of Directors was notified by its
auditors, Israeloff, Trattner & Co., P.C., that the firm had discontinued its
audit practice with respect to SEC registrants and accordingly would not be
able to continue as the Company's independent auditor in connection with its
planned registration of securities. The Company's Board of Directors
accepted the audit firm's resignation accordingly.
The audit reports of Israeloff, Trattner & Co., P.C. on the
consolidated financial statements of the Company as of and for the years
ended December 31, 2004 and 2003, did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles, except that the audit firm's audit
report, dated March 30, 2005, on the Company's December 31, 2004 consolidated
financial statements was modified as to an uncertainty regarding the
Company's ability to continue as a going concern.
During the two most recent calendar years ended December 31, 2004 and
2003 and from December 31, 2004 until the effective date of Israeloff,
Trattner & Co., P.C.'s resignation as the Company's independent auditors,
there were no disagreements between the Company and Israeloff, Trattner &
Co., P.C., whether or not resolved, on matters of accounting principles or
practices, financial statement disclosure or auditing scope or procedure,
which disagreements, if not resolved to their satisfaction, would have caused
Israeloff, Trattner & Co., P.C. to make reference to the subject matter of
such disagreements in connection with its reports. During the period
described in the preceding sentence, there were no "reportable events" as
defined in Item 304(a)(1)(iv) of Regulation S-B of the SEC rules and
regulations
On May 13, 2005, the Board of Directors of the Company engaged BP Audit
Group, PLLC as the Company's registered independent public accounting firm to
re-audit the fiscal years ended December 31, 2004 and 2003.
During the two calendar years ended December 31, 2004 and 2003, and
from December 31, 2004 through the engagement of BP Audit Group, PLLC as the
Company's registered independent accounting firm, the Company had not
consulted BP Audit Group, PLLC with respect to any accounting or auditing
issues involving the Company, including without limitation, the application
of accounting principles to a specified transaction, the type of audit
opinion that might be rendered on the Company's financial statements or any
matter that was either the subject of a prior disagreement within the meaning
of Section 304 of Regulation S-B or a "reportable event" as therein defined.
The Company furnished Israeloff, Trattner & Co., P.C. with a copy of
these disclosures prior to filing this registration statement on Form SB-2.
The Company also requested Israeloff, Trattner & Co., P.C. to furnish a
letter addressed to the SEC stating whether it agrees with the statements
made herein insofar as they relate to their firm's audit services and
engagement with the Company. A copy of Israeloff, Trattner & Co., P.C.'s
letter to the SEC dated February 13, 2006, agreeing with the Company's
disclosures related to their firm, is filed as Exhibit 16.1 to this Form
SB-2.
44
EXPERTS
The Consolidated Financial Statements of CSC and its subsidiaries as of
December 31, 2004 and for each of the years in the two-year period then
ended, which accompany this Prospectus, have been audited by BP Audit Group,
PLLC, independent registered certified public accountants, to the extent and
for the periods set forth in their report (which report contains an
explanatory paragraph regarding the Company's ability to continue as a going
concern) accompanying this Prospectus and are included in reliance upon such
report given upon the authority of said firm as experts in auditing and
accounting.
The Consolidated Financial Statements of GSA as of December 31, 2004
and September 30, 2005 and for the periods then ended, which accompany this
Prospectus, have been audited by Shelley International CPA, independent
registered certified public accountants, to the extent and for the periods
set forth in their report (which report contains an explanatory paragraph
regarding GSA's ability to continue as a going concern) accompanying this
Prospectus and are included in reliance upon such report given upon the
authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for CSC by the law firm of Burton, Bartlett & Googovac, located in Reno,
Nevada. A copy of the legal opinion will be filed by amendment.
HOW TO GET MORE INFORMATION
The Company has filed with the Commission the accompanying Registration
Statement on Form SB-2 under the Securities Act with respect to the
securities offered by this Prospectus. This Prospectus, which forms a part
of said Registration Statement, does not contain all the information set
forth in the Registration Statement, as permitted by the rules and
regulations of the Commission. For further information with respect to CSC
and the securities offered by this Prospectus, reference is made to the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other document that we have filed as an exhibit
to the Registration Statement are qualified in their entirety by reference to
the exhibits for a complete statement of their terms and conditions. The
Registration Statement and other information may be read and copied at the
Commission's Public Reference Room at 100 F. Street, N.E., Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the Commission at 1-800-SEC-0330. The Commission
maintains a website at www.sec.gov that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the Commission.
45
FINANCIAL STATEMENTS
Page
----
Index to Financial Statements
Historical Financial Statements:
Compliance Systems Corporation and Subsidiaries:
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheet as of December 31, 2004 and September 30, 2005 (Unaudited) F-2
Consolidated Statements of Operations for each of the years in the two-year period ended
December 31, 2004 and for the nine-month periods ended September 30, 2004 and 2005 (Unaudited) F-3
Consolidated Statements of Changes in Shareholders' Deficit for each of the years in the two-year period
ended December 31, 2004 and for the nine-month period ended September 30, 2005 (Unaudited) F-4
Consolidated Statements of Cash Flows for each of the years in the two-year period ended December 31,
2004 and for the nine-month periods ended September 30, 2004 and 2005 (Unaudited) F-5
Notes to Consolidated Financial Statements F-6 to F-18
GSA Publications, Inc.:
Report of Independent Registered Public Accounting Firm F-19
Balance Sheet as of September 30, 2005 F-20
Statements of Operations for the nine-month period ended September 30, 2005, the year ended
December 31, 2004, the initial period from inception to December 31, 2003 and for the period
from inception to September 30, 2005 F-21
Statements of Stockholders' Equity for the nine-month period ended September 30, 2005, the year
ended December 31, 2004 and the initial period from inception to December 31, 2003 F-22
Statements of Cash Flows for the nine-month period ended September 30, 2005, the year ended
December 31, 2004, the initial period from inception to December 31, 2003 and for the period
from inception to September 30, 2005 F-23
Notes to Financial Statements F-24 to F-26
Pro forma Financial Information - (Unaudited):
Introductory Note F-27
Pro forma Consolidated Balance Sheet as of September 30, 2005 F-28
Pro forma Consolidated Statement of Operations for the year ended December 31, 2004 F-29
Pro forma Consolidated Statement of Operations for the nine months ended September 30, 2005 F-30
Notes to Pro forma Consolidated Financial Statements F-31
46
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Compliance Systems Corporation
Glen Cove, New York
We have audited the accompanying consolidated balance sheet of Compliance
Systems Corporation and Subsidiaries as of December 31, 2004 and the related
consolidated statements of operations, changes in shareholders' deficit and
cash flows for each of the years in the two-year period then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Compliance Systems Corporation and Subsidiaries as of December 31, 2004
and the consolidated results of their operations and their cash flows for
each of the years in the two-year period then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1C to the consolidated financial statements, the Company has suffered
losses from operations in its last two fiscal years of $1,880,508 and
$1,293,769, respectively. Also, as of December 31, 2004, the Company has a
shareholders' deficit of $4,334,470, and a working capital deficit of
$31,317. These factors raise substantial doubt about the Company's ability
to continue as a going concern. The continuation of the Company as a going
concern is dependent upon its ability to obtain sufficient financing for its
business, generate increased revenues and operate profitably. Management's
plans to achieve these objectives are also described in Note 1C. There is no
assurance that the Company will be successful in these endeavors. The
accompanying consolidated financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going
concern.
/s/ BP Audit Group, PLLC
Farmingdale, NY
August 24, 2005 (except as to Note 10 for which the date is December 16, 2005)
F-1
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
2004 2005
----------- -----------
(Unaudited)
ASSETS:
Current Assets:
Cash $ 134,345 $ 56,732
Accounts receivable 338,513 226,985
Prepaid expenses and other current assets 64,677 63,009
----------- -----------
Total Current Assets 537,535 346,726
----------- -----------
Property, equipment and capitalized
software costs, net 441,054 371,367
----------- -----------
Other Assets:
Patents, registered and in process, net 25,130 24,806
Deferred loan costs -- 23,273
Deferred registration costs -- 66,533
Deposits and other 16,948 45,298
----------- -----------
Total Other Assets 42,078 159,910
----------- -----------
Total Assets $ 1,020,667 $ 878,003
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT:
Current Liabilities:
Notes payable $ -- $ 316,056
Accounts payable and accrued expenses 213,827 231,703
Current maturities of long-term debt 355,025 426,792
----------- -----------
Total Current Liabilities 568,852 974,551
Long-term debt, principally to related
parties, less current maturities 4,039,836 2,327,394
Accrued officers' compensation 705,000 15,000
Deferred income 41,449 51,397
----------- -----------
Total Liabilities 5,355,137 3,368,342
----------- -----------
Commitments and Contingencies
Shareholders' Deficit:
Common stock, $.001 par:
Class A, 15,000,000 voting shares authorized,
8,125,003 issued and outstanding 8,125 8,125
Class B, 25,000,000 non-voting shares authorized,
3,800,000 and 6,090,000 issued at December 31,
2004 and September 30, 2005, respectively 3,800 6,090
Additional paid-in capital 1,050,590 4,072,925
Accumulated deficit (5,396,985) (6,314,426)
Treasury stock, 1,250,000 Class B shares at cost -- (263,053)
----------- -----------
Total Shareholders' Deficit (4,334,470) (2,490,339)
----------- -----------
Total Liabilities and Shareholders' Deficit $ 1,020,667 $ 878,003
=========== ===========
See accompanying notes to consolidated financial statements.
F-2
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, Nine Months Ended September 30,
2003 2004 2004 2005
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
Revenues $ 1,348,176 $ 2,114,285 $ 1,548,578 $ 1,426,910
Cost of revenues 383,017 492,815 362,426 350,976
------------ ------------ ------------ ------------
Gross margin 965,159 1,621,470 1,186,152 1,075,934
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and
administrative expenses 2,471,099 2,409,433 1,717,868 1,625,169
Interest expense 374,568 505,806 377,078 368,206
------------ ------------ ------------ ------------
Total operating expenses 2,845,667 2,915,239 2,094,946 1,993,375
------------ ------------ ------------ ------------
Net loss $ (1,880,508) $ (1,293,769) $ (908,794) $ (917,441)
============ ============ ============ ============
Per Share Data (Historical):
Basic and diluted loss per share $ (.16) $ (.11) $ (.08) $ (.07)
============ ============ ============ ============
Basic and diluted weighted average
Common shares outstanding 11,725,003 11,796,178 11,764,054 12,589,215
============ ============ ============ ============
Pro forma Per Share Data (Unaudited):
Basic and diluted loss per share $ (.05) $ (.03) $ (.02) $ (.02)
============ ============ ============ ============
Basic and diluted weighted average
common shares outstanding, after
giving retroactive effect to the
increase in outstanding shares
resulting from the downstream
merger and related effective stock
split of 3.278055546 for one in
February 2006 - (See Note 11B) 38,435,211 38,668,527 38,563,222 41,268,146
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-3
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
Common Stock
Shares ------------------------------ Paid-in
Issued Class A Class B Capital
----------- ----------- ----------- -----------
Balance at January 1, 2003 11,725,003 8,125 3,600 750,790
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 2003 11,725,003 8,125 3,600 750,790
Class B shares issued in payment
of note principal and interest 200,000 -- 200 299,800
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 2004 11,925,003 8,125 3,800 1,050,590
Class B shares issued in payment
of note principal and interest 300,000 -- 300 299,700
Issuance of Class B contractually
required anti-dilution shares 100,000 -- 100 (100)
Class B shares issued to repay debt of
$1,470,000 and interest of $66,150 and
and on exercise of 420,000 warrants,
net of related legal costs of $15,000 1,890,000 -- 1,890 1,939,260
Treasury stock purchased -- -- -- 43,425
Contribution by officer-stockholders
of accrued compensation -- -- -- 730,000
Stockholder's collateral pledge value -- -- -- 10,050
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance at September 30, 2005 14,215,003 $ 8,125 $ 6,090 $ 4,072,925
=========== =========== =========== ===========
Accumulated Treasury Shareholders'
Deficit Stock Deficit
----------- ----------- -----------
Balance at January 1, 2003 (2,222,708) (1,460,193)
Net loss (1,880,508) -- (1,880,508)
----------- ----------- -----------
Balance at December 31, 2003 (4,103,216) -- (3,340,701)
Class B shares issued in payment
of note principal and interest -- -- 300,000
Net loss (1,293,769) -- (1,293,769)
----------- ----------- -----------
Balance at December 31, 2004 (5,396,985) -- (4,334,470)
Class B shares issued in payment
of note principal and interest -- -- 300,000
Issuance of Class B contractually
required anti-dilution shares -- -- --
Class B shares issued to repay debt of
$1,470,000 and interest of $66,150 and
and on exercise of 420,000 warrants,
net of related legal costs of $15,000 -- -- 1,941,150
Treasury stock purchased -- (263,053) (219,628)
Contribution by officer-stockholders
of accrued compensation -- -- 730,000
Stockholder's collateral pledge value -- -- 10,050
Net loss (917,441) -- (917,441)
----------- ----------- -----------
Balance at September 30, 2005 $(6,314,426) $ (263,053) $(2,490,339)
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-4
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, Nine Months Ended September 30,
2003 2004 2004 2005
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,880,508) $(1,293,769) $ (908,794) $ (917,441)
----------- ----------- ----------- -----------
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation of property and equipment 88,834 148,409 110,490 105,847
Amortization of intangibles 318,614 432 324 324
Interest accrued and not paid, imputed or paid
in kind on related party debt obligations 50,108 149,570 146,427 171,834
Loss on disposal of equipment -- 3,617 3,617 --
Changes in assets and liabilities:
Accounts receivable (165,823) (108,126) (93,373) 111,528
Prepaid expenses (48,411) 9,693 8,738 25,536
Accounts payable and accrued expenses 109,599 (12,541) (78,796) 17,876
Accrued officers' compensation 210,000 170,000 161,157 40,000
Deferred income 43,257 (1,808) 5,535 9,948
----------- ----------- ----------- -----------
Total adjustments 606,178 359,246 264,119
----------- ----------- ----------- -----------
482,893
Net cash used by operating activities (1,274,330) (934,523) (644,675) (434,548)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits and other (18,527) (18,384) 12,579 (28,350)
Payments for property, equipment, including
capitalized software costs (219,451) (9,159) (4,145) (36,160)
----------- ----------- ----------- -----------
Net cash provided (used) by investing activities (237,978) (27,543) 8,434 (64,510)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred loan costs -- -- -- (23,273)
Deferred registration costs -- -- -- (66,533)
Purchase of treasury stock -- -- -- (130,000)
Demand loan proceeds, net -- -- -- 300,000
Proceeds from exercise of warrants, net of costs -- -- -- 405,000
Proceeds from issuance of long-term debt 1,367,962 1,140,601 774,348 58,986
Repayments of long-term debt (129,005) (139,006) (111,043) (122,735)
----------- ----------- ----------- -----------
Net cash provided by financing activities 1,238,957 1,001,595 663,305 421,445
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (273,351) 39,529 27,064 (77,613)
CASH - beginning of period 368,167 94,816 94,816 134,345
----------- ----------- ----------- -----------
CASH - end of period $ 94,816 $ 134,345 $ 121,880 $ 56,732
=========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 218,371 $ 286,548 $ 168,853 $ 123,381
=========== =========== =========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital leases $ 49,905 $ 118,933 $ 114,190 $ --
----------- ----------- ----------- -----------
Cost of disposed equipment $ -- $ 7,484 $ 7,484 $ --
----------- ----------- ----------- -----------
Debt and interest converted to equity $ -- $ 300,000 $ 225,000 $ 1,836,150
----------- ----------- ----------- -----------
Stockholders contribution of accrued salary $ -- $ -- $ -- $ 730,000
----------- ----------- ----------- -----------
Insurance premiums financed $ -- $ -- $ -- $ 23,868
----------- ----------- ----------- -----------
Treasury stock purchase financed $ -- $ -- $ -- $ 89,628
----------- ----------- ----------- -----------
Stockholder collateral pledge value $ -- $ -- $ -- $ 10,050
----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements.
F-5
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization, Basis of Presentation and Going Concern:
A. Organization and Description of Business:
Compliance Systems Corporation (the "Company") was incorporated on
November 7, 2002 in the State of Delaware. The Company and its
consolidated subsidiaries, with headquarters in Glen Cove, New York are
in the business of providing the necessary tools for telemarketing
companies to comply with regulatory and statutory "Do Not Call"
guidelines. The Company's patented TeleBlock technology allows
tele-marketers to automatically screen and block outbound calls in
real-time against federal, state, third-party and in-house do not call
lists.
In early 2003, the Company began marketing an on-line regulatory guide.
The on-line regulatory guide provides up-to-the-minute e-mail alerts of
new bills and regulations which affect the teleservices industry and
access to regularly updated information regarding TeleBlock regulations
governing the teleservices industry throughout the United States.
In recent years, the Company has expanded its operations to include
related services. Currently, the Company is providing voice-over
internet protocol ("VoIP") services through one subsidiary, doing
business as Citadel Telephone Company ("Citadel"). Citadel plans to
offer US dial-tone world-wide to companies calling into the United
States, and is presently the only broadband company licensed to offer
TeleBlock.
Also in late 2004, the Company formed a joint venture, Compliance
Testing & Solutions, LLC, ("CTS") with a company in the teleservices
industry. The joint venture is seeking to provide operational audit and
review services to telemarketing companies focusing on their
technologies, procedures and policies in order to determine whether the
telemarketer is in compliance with the many state and federal
telemarketing rules.
In December 2005, the Company obtained new secured convertible
financing. A requirement of the related agreements was that the Company
merge with a public shell company and file an initial registration
statement with the Securities and Exchange Commission. The required
merger, with a Nevada corporation, closed in escrow in December 2005.
(See Note 10).
In February 2006, the Company effectuated a statutory downstream merger
with the Nevada corporation, which then changed its name to that of the
Company. (See Notes 11A and 11B).
Under generally accepted accounting principles, the Company operates in
a single business segment. Also for financial reporting purposes, the
Company will be treated as the accounting acquirer in the downstream
merger.
B. Basis of Consolidation and Presentation:
The consolidated financial statements include the accounts of Compliance
Systems Corporation and its subsidiaries. All material inter-company
accounts and transactions have been eliminated.
In January 2003, several related companies with the same ownership
structure of Compliance Systems Corporation became wholly-owned
subsidiaries of the Company through an exchange of corporate stock. The
exchange qualified as a tax-free reorganization of related companies;
for financial reporting purposes there was no change in accounting
bases. The recapitalization is given effect as of January 1, 2003 in the
accompanying financial statements.
F-6
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Consolidation and Presentation-(continued):
C. Going Concern:
The Company's operations involve a number of risks and uncertainties.
Factors that could affect the Company's future operating results and
cause actual results to vary materially from expectations include, but
are not limited to, rapid technology change, uncertainty of market
acceptance of the Company's products and services, competition from
substitute products and larger companies, protection of proprietary
technology, the ability to generate sufficient capital to fund
operations, strategic relationships and dependence on key individuals.
As reported in the accompanying financial statements, the Company
incurred net losses of $917,441 for the nine months ended September 30,
2005, and $1,880,508 and $1,293,769 for the years 2003 and 2004,
respectively. At December 31, 2004 and September 30, 2005, the Company
had shareholders' deficits of $4,334,470 and $2,490,339, respectively,
and had working capital deficits of $31,317 and $627,825, respectively.
The Company has obtained new secured debt financing and management is
planning a related initial registration of its shares with the
Securities and Exchange Commission in order to facilitate the financing
of the Company's business and the expansion of its operations. The
ability of the Company to continue as a going concern is dependent on
the amount and nature of available financing and the Company's future
ability to generate increased revenues and operate profitably. There is
no assurance that the Company will be successful in attaining these
objectives. The accompanying financial statements do not include any
adjustments that might be necessary if the Company is unable to continue
as a going concern. (See Notes 10 and 11).
2. Summary of Significant Accounting Policies:
A Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
B Cash:
At certain times, bank balances may exceed coverage provided by the
Federal Deposit Insurance Corporation, however, such exposure to loss is
considered minimal.
C. Accounts Receivable:
Accounts receivable historically have not required any write-offs for
credit losses and are stated at the amount management expects to collect
from outstanding balances. Based on management's evaluation of
collectibility, an allowance for doubtful accounts is not required.
Concentration of credit risk: Telemarketers, who are the Company's
principal end-users, are a diversified group both as to geographic
concentration and types of products and services marketed. As such, the
Company does not have any significant concentration of credit risk,
other than its customer base being exclusive to the telemarketing
industry.
F-7
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies-(continued):
D. Property, Equipment, Capitalized Software Cost, Depreciation and
Amortization:
Fixed assets are stated at cost less accumulated depreciation. These
assets, including assets acquired under capital leases, are depreciated
on a straight-line basis over their estimated useful lives (generally
two to five years). Leasehold improvements are amortized over 55
months. Depreciation and amortization expense is classified according
to its applicable operating expense categories on the consolidated
statements of operations.
Repairs and maintenance are expensed as incurred. Renewals and
betterments are capitalized. When fixed assets are retired or disposed
of, the related cost and accumulated depreciation or amortization are
removed from the accounts and any gain or loss is recognized in
operations.
Included in fixed assets is the capitalized cost of internal-use
software, including software used to upgrade and enhance processes
supporting the Company's business. In accordance with SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," the Company capitalizes costs incurred during the
application development stage related to the development of internal-use
software and amortizes these costs over the estimated useful life of
five years. Costs incurred related to design or maintenance of
internal-use software are expensed as incurred.
E. Patents:
The Company owns the TeleBlock do-not-call blocking patent, which is
recorded at cost and is being amortized over its 15 year life on a
straight-line basis. In addition, the Company is in the process of
registering patents in Europe. Once the registration process is
complete, such patent costs would be amortizable prospectively to
September 2024, the 20th anniversary of the application date. At
December 31, 2004 and September 30, 2005, the weighted average expected
life of the patents is approximately 18 and 17 years respectively.
F. Amortization of Contract Revenue Rights:
Contract rights representing the right to receive revenue from use of
the patented TeleBlock technology were amortized over their contractual
life of 22 months through October 2003.
G. Deferred Loan Costs:
Costs incurred in obtaining the Company's secured convertible financing
are capitalized and amortized over the two-year life of the debenture.
(See Note 10).
H. Deferred Registration Costs:
Accounting and legal fees related to the Company's planned registration
of its common stock with the Securities and Exchange Commission are
capitalized. Such costs will be charged directly to additional paid-in
capital against the value of the Company's shares that are issued to
convert its new secured convertible debenture. If the registration
statement should not be declared effective within twelve months of the
Company's initially incurring the related costs, all such costs will be
charged to expense. (See Note 10D).
F-8
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies-(continued):
I. Equity Method of Accounting:
The investment in the joint venture is accounted for using the equity
method of accounting since the Company has the ability to exercise
significant influence, but not control. This investment is included with
other assets on the consolidated balance sheet. The loss on this equity
method investment has not been significant through September 30, 2005.
J. Long-lived Assets:
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets might
not be recoverable. Conditions that would necessitate an impairment
assessment include a significant decline in the observable market value
of an asset, a significant change in the extent or manner in which an
asset is used, or any other significant adverse change that would
indicate that the carrying amount of an asset or group of assets is not
recoverable.
For long-lived assets used in operations, impairment losses are only
recorded if the asset's carrying amount is not recoverable through its
undiscounted, probability-weighted cash flows. The Company measures the
impairment loss based on the difference between the carrying amount and
estimated fair value.
Long-lived assets are considered held for sale when certain criteria are
met. The Company had no assets held for sale at and December 31, 2004
and September 30, 2005.
No impairment charges have been recorded in the accompanying financial
statements.
K. Income Taxes:
The shareholders have elected to treat the Companies as small business
corporations ("S Corporations") for income tax purposes as provided in
the Internal Revenue Code and the applicable state statutes. As such,
the Companies' taxable losses have been passed through to the
shareholders for inclusion on their individual tax returns.
Accordingly, no provision is made for any federal or state income taxes
in the accompanying financial statements.
L. Classification of Liabilities with Subsequently Modified Repayment Terms:
In accordance with Statement of Financial Accounting Standards No.6, the
current and long-term maturities of the Company's debt obligations whose
repayment terms are subsequently modified, either due to partial in-kind
payments, conversion to equity, voluntary agreement by related party
holder or contractual requirement are reclassified to exclude from the
current classification amounts then due more than one year from the
applicable balance sheet date or which are converted to equity, except
that equity classification is not recognized until actual conversion.
Accordingly at December 31, 2004, the conversion to equity of the
$1,470,000 of secured debt in June and July of 2005 is recognized at
December 31, 2004, in that such amount is classified as long-term.
Substantially all other related party debt had previously been
voluntarily deferred until January 2007. (See Note 6).
M. Deferred Revenue:
Deferred revenue applicable to annual regulatory guide service contracts
is recorded when payments are received, generally by credit card, and is
amortized ratably to income over the service period, generally 12
months.
F-9
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies-(continued):
N. Imputation of Capital Related to Below Market Interest Rate on Secured
Loan:
In April 2005 the Company obtained a bank loan secured by liquid assets
personally owned by an officer/stockholder of the Company. The rate on
such loan was materially below the market rate of interest as well as
the Company's incremental borrowing rate for other debt obligations.
The estimated value in terms of the interest expense that otherwise
would have been incurred in absence of the officer/stockholder pledging
such liquid assets as collateral has been recognized as imputed interest
cost with an equivalent offset to additional paid-in capital. (See Note
5A).
O. Revenues:
The Company earns a fee for each telephone solicitor's call attempt
which generates a query to one of two data bases of "Do Not Call"
telephone numbers. These inquiries are first routed through telephone
carriers and then to the applicable data base distributor and the volume
of queries is tracked by the distributor and such data is available to
the Company for monitoring. The distributors submit monthly remittances
together with the related monthly activity reports. The Company has the
contractual right to audit such reports. The Company records its
revenues based on the remittances and reports submitted. Any applicable
adjustments, which historically have not been significant, are recorded
when billed.
P. Cost of Revenues:
The Company's cost of revenues is comprised of fees paid to distributors
of its patented technology and depreciation of capitalized software
costs used to maintain the databases.
Q. Advertising:
All advertising costs are expensed as incurred. Advertising expenses
totaled $286,474, $165,213, $113,145 and $99,296 for fiscal 2003 and
2004 and the nine-month periods ended September 30, 2004 and 2005,
respectively.
R. Loss Per Share:
Basic and diluted loss per common share is computed on a historical
basis by dividing net loss by the weighted average number of common
shares actually outstanding. Due to losses, stock issuable upon
exercise of warrants is anti-dilutive as is the effect of stock issuable
upon conversion of convertible secured notes. The stock-split effect of
the Company's downstream merger in February 2006 has been given pro
forma retroactive recognition on the accompanying statement of
operations for loss per share purposes. All other share and share price
references are to pre-split shares. (See Notes 11A and 11B).
S. Fair Value of Financial Instruments:
The carrying amounts of cash, accounts receivable, current
liabilities and long-term debt reported on the balance sheets
approximate their fair value. The fair value of accounts receivable and
current liabilities approximate their book value due to the short
maturity of those items. With respect to long-term debt, the Company
believes the fair value approximates book value based on the level of
credit risk assumed by the applicable lender.
F-10
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies-(continued):
T. Unaudited Financial Statements:
The unaudited consolidated financial statements as of September 30, 2005
and for the nine months ended September 30, 2005 and 2004 and the
footnotes related thereto have been prepared by the Company, without
audit, and reflect all adjustments which are of a normal recurring
nature and which, in the opinion of management, are necessary for a fair
presentation of such statements and related disclosures.
U. Recent Accounting Pronouncements:
In December 2004, the FASB issued SFAS No. 123 (Revised),
"Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123,
"Accounting for Stock-Based Compensation" and supersedes APB Opinion
No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires
all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on
their fair values. SFAS 123R will be effective for the Company in
fiscal 2006. The pro forma disclosures previously permitted will no
longer be an alternative to financial statement recognition. Under
SFAS 123R, a company must determine the appropriate fair value model,
the amortization method for compensation cost and the transition method
to be used at date of adoption, either prospective or retrospective;
neither method is expected to apply as the Company has not previously
granted any stock options to its officers or employees.
Pursuant to prior stock issuances by the Company to various investors,
the Company's two principal officer/stockholders hold certain restricted
call options, which expire December 31, 2007. Due to the various
restrictions on their exercise, the Company believes that such call
options are outside the scope of SFAS 123R and its predecessor
opinions. If the Company subsequently issues stock options or other
instruments within the scope of SFAS 123R, the Company will report share
based compensation accordingly. (See Note 8).
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Non-Monetary Assets--An Amendment of APB Opinion No. 29, Accounting for
Non-Monetary Transactions" ("SFAS 153"). SFAS 153 eliminates the
exception from fair value measurement for non-monetary exchanges of
similar productive assets and replaces it with an exception for
exchanges that do not have commercial substance. SFAS 153 specifies that
a non-monetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of
the exchange. SFAS 153 is effective for the fiscal periods beginning
after June 15, 2005. Its adoption had no effect on the Company's
consolidated financial statements.
3. Property, Equipment and Capitalized Software Cost:
Major categories of property, equipment and capitalized software cost
consist of the following:
Estimated December 31, September 30,
useful life 2004 2005
----------- -------- -------
Furniture and fixtures 5 years $313,179 $325,767
Leasehold improvements 55 months 11,348 11,348
Capitalized software cost 2-5 years 384,107 407,679
-------- --------
Total at cost 708,634 744,794
Less: Accumulated depreciation and amortization 267,580 373,427
-------- --------
Net property, equipment and capitalized
software cost $441,054 $371,367
======== ========
F-11
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Property, Equipment and Capitalized Software Cost-(continued):
Depreciation and amortization expense of property and equipment was
$148,408 and $89,133 for the years ended December 31, 2004 and 2003,
respectively and $105,847 and $110,488 for the nine months ended
September 30, 2005 and 2004, respectively.
4. Patents:
Patents consist of the following:
December 31, September 30,
2004 2005
------- -------
US patent, at cost $ 6,500 $ 6,500
Less accumulated amortization 1,333 1,657
------- -------
US patent, net 5,167 4,843
European patent - registration in process, at cost 19,963 19,963
------- -------
Total patents, net $25,130 $24,806
======= =======
Projected amortization for the US patent is $432 per year through 2015.
Beginning in 2006 estimated annual amortization for the European patent
is $1,070 through September 2024.
5. Notes Payable:
A Secured Bank Line of Credit:
In April 2005, the Company entered into a short-term line of credit
agreement for $350,000 collateralized by liquid assets of one of the
Company's two principal officer/stockholders. The interest rate is 0.9%
for the first six months and prime thereafter due monthly through the
remainder of the loan term expiring on April 26, 2006. This interest
rate was materially below the market interest rate as well as the
Company's incremental borrowing rate for other debt. The interest
actually incurred through September 30, 2005 was $994. The estimated
value in terms of the additional interest expense that otherwise would
have been incurred in absence of the officer/stockholder pledging liquid
assets as collateral, $10,050, has been recognized as imputed interest
cost with an equivalent offset to additional paid-in capital.
Outstanding borrowings under the line were reduced to $100,000 on
September 15, 2005.
B Unsecured Demand Notes Payable Stockholder:
The Company is indebted on two unsecured demand loans totaling $200,000
to a stockholder. The notes bear interest at 14% per annum. Subsequent
to September 30, 2005 the Company borrowed an additional $37,500 and
later repaid a total of $100,000 of these demand notes.
C Short-term Insurance Premium Financing:
At September 30, 2005, the Company had an outstanding balance of $16,056
on certain financed insurance premiums, payable monthly over a
nine-month term through May 2006.
F-12
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Long-Term Debt:
Long-term debt consists of the following:
December 31, September 30,
2004 2005
---------- ----------
Notes payable and accrued interest to related companies (A) $ 988,708 $ 737,092
Notes payable and accrued interest to officers and
stockholders (B) 1,658,671 1,757,285
Secured notes payable and accrued interest thereon (C) 1,500,000 30,000
Capital lease obligations (D) 247,482 179,809
Term note, due June 30, 2007 -- 50,000
---------- ----------
Totals 4,394,861 2,754,186
Less: Current maturities 355,025 426,792
---------- ----------
Long-term maturities $4,039,836 $2,327,394
========== ==========
At December 31, 2004, after giving effect to the subsequent conversion
in June and July of 2005 to equity of $1,470,000 of the secured notes,
the long-term maturities are payable as follows - 2006: $2,036,173;
2007: $367,020; and 2008: $166,643.
(A) Notes payable to related companies and accrued interest thereon:
The Company is indebted to four companies, related to the Company by
virtue of certain similar ownership and/or management. All of the notes
were originally issued in 2001. Three, totaling $700,000, were in
consideration of the release by the related companies of their contract
rights to receive all revenues generated by the Company from the use of
its patented technology; one was for cash in the amount of $300,000.
(See Note 2F).
All notes accrued interest at 21% through May 31, 2003 and at 18%
thereafter. At times, the Company has deferred debt service on the
notes, making in-kind payments in common stock as well as adjusting
payments made subsequently. Whenever an in-kind payment has been made
or principal and interest payments deferred, the subsequent payment of
principal and related deferred interest is conformed to coincide with
the original amortization schedule through maturity in May 2008. All
applicable interest continues to accrue monthly. Unpaid accrued
interest was $215,250 and $168,000 as of December 31, 2004 and September
30, 2005, respectively, and is being paid monthly through May 2008.
During 2004, the Company issued 200,000 of its Class B shares, valued at
$1.50 per share, in payment of $150,430 of principal and $149,570 of
interest. As the Company later issued shares valued at $1.00 per share,
anti-dilution rights in the 2004 in-kind payment agreement required the
Company to issue an additional 100,000 common shares to those holders.
During the nine months ended September 30, 2005 the Company issued
300,000 of its Class B shares in payment of $228,870 of principal and
$71,130 of interest. No principal payments in cash were required during
that period; rather adjustments to the amortization schedule were made.
Monthly payments of principal and interest according to the original
amortization schedule were due to resume commencing January 2006 through
May 2008.
A subsequent deferral of payments on one of the loans, required by the
Company's new secured lender, suspends debt service payments until 90
days after the Company's registration statement becomes effective. This
deferral does not affect the current and long-term portions of this loan
as the deferred amounts are expected to be made up within twelve months
of the applicable balance sheets. Further, the Company may seek to make
an in-kind payment in 2006. (See Notes 2L and 10A).
F-13
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Long-Term Debt-(continued):
(B) Notes payable to officers and stockholders and accrued interest
thereon:
The loans payable balance consists of various advances made by the
officers and stockholders of the Company with interest accruing at 12%
with various repayment terms. Principal payments on $1,625,000 of the
outstanding notes at December 31, 2004 had been deferred until January
2007 by the lenders. A condition of the Company's new convertible
secured debenture was the required deferral of debt service on
approximately $1,668,000 of debt to these related parties until ninety
days after the Company's registration statement is declared effective,
except that current accrued interest may be paid on $500,000 of such
debt, borrowed on a pass-thru basis. (See Note 10D).
(C) Secured notes payable and accrued interest thereon:
During 2003, the Company offered 50 units of 9% secured promissory notes
and warrants to purchase non-voting Class B Common shares. Each unit
consisted of $30,000 of debt principal and warrants to purchase 20,000
shares, par value 0.001. The notes have a maturity date of September
30, 2008 and are secured by a security interest in the patent and patent
applications and any divisions and continuations with respect to certain
intellectual property relating to the TeleBlock system. Each warrant is
exercisable at a purchase price of $1.50 per share. As of December 31,
2004, all 50 units were sold for a total of $1,500,000. Interest of 9%
per annum was due on a quarterly basis commencing October 1, 2003. The
total amount of interest paid in fiscal 2004 and 2003 was approximately
$133,000 and $44,000, respectively. Principal payments were due October
2005 through September 2008.
During the second quarter of 2005, the Company offered the secured note
holders the right to convert their $1,500,000 of notes into Class B
non-voting stock at a per share conversion price of $1.00. During the
term of such offer the Company also reduced the exercise price of the
unit warrants to purchase an aggregate of 1,000,000 shares of Class B
shares from $1.50 to $1.00.
During June and July 2005, $1,470,000 of secured notes and related
accrued interest of $66,150 were converted and $420,000 of warrants was
exercised. The exercise price of the remaining 580,000 warrants
reverted to $1.50 per share at the conclusion of the offering. (See
Note 11D).
(D) Capital lease obligations:
The Company acquired furniture, fixtures and equipment from third
parties and certain related entities on a strictly pass-through basis
under various capital lease arrangements with various due dates through
the year 2008. The amounts are presented net of imputed interest of
$62,883 as of December 31, 2004 and $30,740 as of September 30, 2005,
respectively.
The following schedule shows the future minimum payments due on the
leases at December 31, 2004 through maturity, as well as the amounts
representing principal and interest.
Year Ending Minimum Amounts Representing
December 31 Payments Interest Principal
----------- -------- -------- ---------
2005 $132,911 $ 40,214 $ 92,697
2006 125,806 18,413 107,393
2007 40,068 3,356 36,712
2008 11,448 768 10,680
-------- -------- --------
Totals $310,233 $ 62,751 $247,482
======== ======== ========
F-14
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Commitments and Contingencies:
A. Minimum Operating Lease Commitments:
The Company leases office space in Glen Cove, New York. The lease
requires minimum annual rentals plus operating expenses through July 31,
2006. In addition, the Company subleases part of its space to a
subtenant on a month-to-month basis. Rent expense, net of sublease
income was:
Gross Sublease Net
Rent Rental Rent
Expense Income Expense
------- ------ -------
Calendar year ended December 31, 2003 $ 55,811 $ (26,372) $29,439
Calendar year ended December 31, 2004 73,645 (41,155) 32,490
Nine months ended September 30, 2004 56,583 (31,339) 25,244
Nine months ended September 30, 2005 57,269 (34,696) 22,573
Minimum annual rental commitments through the lease term at December 31,
2004 are: 2005: $69,191 and 2006: $41,125.
B. Employment Agreements and Waiver of Accrued Salary:
The Company had entered into employment agreements with three of its
officer/stockholders, each for five-years through December 1, 2006.
Accrued unpaid salaries at September 30, 2005 and December 31, 2004 were
$15,000 and $705,000, respectively. Effective May 31, 2005, the Company
terminated the employment agreement of one officer. (See Note 7D).
The total balance owed at May 31, 2005 to the three officers of $730,000
was reclassified to additional paid-in capital as the officers agreed to
waive their rights to such compensation. In addition, the Company
entered into a five-year extension of the employment agreement with the
two remaining officers until November 30, 2011. Minimum annual
aggregate amounts due under these agreements are $480,000 per year.
(See Notes 8 and 9).
C. Major Customer/Distributors:
For the years ended December 31, 2003 and 2004, two distributors
comprised 95% (48% and 47%) and 95% (61% and 34%) of the Company's
revenues. At December 31, 2004 these two distributors comprised 96%
(78% and 18%) of the Company's trade receivables.
For the nine months ended September 30, 2004 and 2005, two distributors
comprised 94% (59% and 35%) and 94% (60% and 34%) of the Company's
revenues. At September 30, 2005 these two distributors comprised 100%
(69% and 31%) of the Company's trade receivables. In 2005 the larger of
these distributors filed for bankruptcy. The Company continues to do
business with this distributor and its successor in interest.
D. Consulting Agreement:
Upon terminating the employment agreement of one of its officers, the
Company entered into a consulting agreement with the former officer for
a term of 22 months through March 31, 2007 at a monthly fee of $2,500.
F-15
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Commitments and Contingencies-(continued):
E. Related Party Transactions:
The waiver of accrued salary by the Company's three officer/stockholders
is described in Note 7B. Employment contracts with the two remaining
principal officer/stockholders are described in Note 7B. A consulting
agreement with a former officer is described in Note 7D.
The Company is indebted to various related parties, including its
officers and stockholders on several secured and unsecured notes
payable. These obligations are described in Notes 5B, 6A, 6B and 6C.
Also, a secured note described in Note 5A is collateralized by personal
assets of one of the Company's two remaining principal
officer/stockholders.
Common stock purchase warrants held by related parties are described in
Notes 8 and 9.
8. Common Stock Transactions:
During 2004, the Company issued 200,000 Class B shares in payment of
principal and interest due on notes payable. The agreement gave the
lenders anti-dilution rights if the Company subsequently issued shares
at a lower price. In June 2005, an in-kind share payment and other debt
conversions were effected at $1.00 share and the exercise price of
outstanding warrants was reduced to $1.00 per share, thus triggering the
anti-dilution provision; 100,000 more shares were issued to those who
received the 2004 in-kind payment. (See Note 6A).
In June 2005, the Company offered its $1,500,000 secured note holders
the right to convert such debt to equity and also reduced the exercise
price of the related 1,000,000 warrants from $1.50 to $1.00 per share.
A total of $1,470,000 of secured notes were converted and 420,000
warrants were exercised in June and July of 2005. Following these
transactions, $30,000 of non-convertible debt and 580,000 warrants
exercisable at $1.50 per share through September 30, 2008 remained
outstanding. (See Notes 6C and 11D).
Certain Class B common shares previously sold to investors in private
placements presently provide an option to the three principal
shareholders of the Company to repurchase from such investors, as
applicable, up to an aggregate of 1,000,000 and 300,000 shares at prices
of $0.67 and $2.50, respectively, all exercisable through December 31,
2007, but contingent on the repayment in full of the notes described in
Note 6A. (See Notes 11A and 11B).
9. Treasury Stock:
In May 2005, the Company purchased 1,250,000 Class B shares from an
officer/shareholder for $263,053 consisting of $219,628 in cash and
notes and five-year warrants to purchase 250,000 shares of common stock
at $1.00 per share. (See Note 11B).
In addition, the officer/shareholder resigned from the Company, waived
her rights to accrued salary totaling $223,000 as of December 31, 2004
and an additional $25,000 for the five months ended May 31, 2005 and
also entered into a consulting agreement with the Company.
The 250,000 warrants were subsequently assigned to one of the Company's
two remaining officer/stockholders pursuant to a judicial process
settlement of an unrelated matter.
F-16
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Subsequent Secured Convertible Borrowing and Related Agreements:
A. Convertible Note and Securities Purchase Agreement:
On November 30, 2005, the Company entered into a securities purchase
agreement with Montgomery Equity Partners Ltd. ("Montgomery"). The
agreement calls for the purchase by Montgomery of up to $1,000,000 of
secured debentures, convertible into shares of the Company's $0.001 par
value common stock. On December 2, 2005, the Company sold the first
$600,000 of the debenture to Montgomery. The note, due November 30,
2007 and bearing interest at 10 percent, is secured by all assets of the
Company not otherwise pledged. The Company paid affiliates of
Montgomery loan commitment, structuring and due diligence fees totaling
$112,500 and also paid a $30,000 finder's fee to a third party. (See
Note 11E).
The agreements require the Company to (i) merge with and into a public
shell company, (ii) file an initial registration statement for the
merged company with the Securities and Exchange Commission under the
Securities Act of 1933 with the provision that the lender purchase the
$400,000 balance of the notes two days before the registration statement
is filed.
The agreements prohibit the Company from: (i) selling capital stock at
a price less than the closing bid price of its common stock immediately
before such sale; (ii) granting other security interests other than for
business equipment not in excess of $50,000 per year; (iii) filing a
registration statement on Form S-8; and (iv) repaying any debt to the
Company's two officer/stockholders until 90 days after the registration
statement is effective. The lender also has a refusal right to match
the terms of any proposed equity capital raise by the Company.
On December 2, 2005 the Company conditionally acquired the public shell
company. (See Note 11A).
B. Conversion and Redemption Terms:
The note principal and accrued interest thereon is convertible into the
Company's common stock at a price equal to the lesser of: (a) the lowest
closing bid price of the Company's common stock during the ten trading
days preceding the initial filing of the registration statement, (the
"Fixed Conversion Price") or eighty percent of the lowest closing bid
price of the Company's common stock, as quoted by Bloomberg, LP, for the
five trading days immediately preceding the conversion, (the "Variable
Conversion Price"). The fixed price is subject to standard as well as
specific anti-dilution provisions, if during the term of the note, the
Company issues common stock or stock purchase rights of any kind at a
lower price.
The lender has imposed a restriction on its right to convert the
debenture, such that at no time is the lender to own more than 4.9% of
the outstanding shares of the Company. The lender may waive this
restriction upon 65 days written notice to the Company. The Company
may redeem the outstanding balance of the note, in whole or in part, on
three days notice, if the closing bid price of its common stock is less
than the fixed conversion price.
C. Investor Registration Rights Agreement:
As a condition of the note and related agreements, the Company granted
the lender certain investor registration rights, requiring the Company
to file an initial registration statement, which includes at least
65,000,000 shares underlying the convertible debenture, with the
Securities and Exchange Commission under the Securities Act of 1933 no
later than January 14, 2006 and to have it declared effective within 120
days of filing. Non-compliance with the latter requirement is an act of
default under the agreement. These provisions impose a penalty of two
percent of the outstanding note balance for every 30 day period the
applicable deadline is not met. (See Note 11C).
F-17
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Subsequent Secured Convertible Borrowing and Related
Agreements-(continued):
D. Initial Public Offering:
As required by the terms of its convertible note and related agreements
with Montgomery, the Company is preparing an initial registration
statement on Form SB-2, to be filed with the Securities and Exchange
Commission to register 65 million shares underlying the convertible
debenture. The Company will not be registering any shares for its own
account.
E. Lock-Up:
As a condition to the secured convertible debenture, Montgomery required
the two principal stockholders of the Company to agree not to sell,
assign, hypothecate, distribute or otherwise dispose of any securities
of the Company of any kind without the lender's consent, except for
sales made in accordance with Rule 144(e) under the Securities act of
1933.
11. Other Subsequent Events-(Unaudited):
A. Merger:
On December 2, 2005, pursuant to a merger which initially closed in
escrow, the Company conditionally acquired GSA Publications Inc.
("GSA"), a Nevada corporation, whose shares are quoted on the Pink
Sheets News Service. In February 2006, the applicable conditions were
satisfied and, in addition, the Company effectuated a statutory
downstream merger into GSA, which then changed its name to that of the
Company. Such merger terminated the S Corporation election of the
Company and its subsidiaries, retroactive to January 1, 2006.
B. Changes Applicable to Common, Treasury and Authorized Shares:
Pursuant to the merger, each of the Company's outstanding 12,965,003
Class A and Class B common shares were split 3.278055546 for one. The
resulting post-split 42,500,000 shares are all voting. Prior to the
merger recapitalization, GSA effectively had 7,500,000 shares
outstanding. The Company has 50,000,000 shares outstanding on a
post-split basis.
In February 2006, in connection with the downstream merger into GSA, the
Company permanently retired its treasury stock, consisting of 1,250,000
pre-split shares. The Company also increased its authorized shares from
75 million shares to 500 million shares.
C. Filing Deadline Penalty:
The Company did not file the registration statement by January 14, 2006
as required by the loan agreements and is accordingly subject to a
penalty of two percent of the outstanding note balance for every thirty
days until the statement is filed. Montgomery has verbally informed the
Company that it will waive this penalty for the first thirty-day period.
D: Modification of Securities Purchase Agreement:
In February 2006, Montgomery modified the securities purchase agreement
to allow the Company to register 2,720,786 post-split shares underlying
an equivalent number of outstanding post-split common stock purchase
warrants as well as 3,500,000 common shares held by non-affiliated
stockholders.
E. Sale and Purchase of Remaining Balance of Debenture:
On February 13, 2006, in anticipation of the Company filing its
registration statement with the Securities and Exchange Commission, the
Company requested that Montgomery purchase the remaining $400,000 of the
convertible debenture. Upon receipt thereof, related commitment and
finder's fees of $40,000 and $20,000, respectively, will be payable.
F-18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
GSA Publications, Inc
We have audited the accompanying balance sheet of GSA Publications, Inc. (a
Nevada corporation in the development stage) as of September 30, 2005 and
December 31, 2004 and the related statements of operations, statement of
stockholders' equity and cash flows for the period from November 17, 2003
(inception) to September 30, 2005, and for the periods ended September 30,
2005, December 31, 2004 and 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The
Company has determined that it is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as
a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects. the financial position of GSA Publications, Inc., as
of September 30, 2005 and December 31, 2004, and the related statements of
operations, statement of stockholders' equity and cash flows for the period
from November 17, 2003 (inception) to September 30, 2005, and for the periods
ended September 30, 2005, December 31, 2004 and 2003 in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company is in the development stage and has not commenced
operations. Its ability to continue as a going concern is dependent upon its
ability to develop additional sources of capital, and/or achieve profitable
operations. These conditions raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Mark Shelley
Shelley International CPA
Mesa, Arizona
February 8, 2006
F-19
GSA PUBLICATIONS, INC.
BALANCE SHEET
December 31, September 30,
2004 2005
-------- --------
ASSETS:
Current Assets:
Cash $ 41,000 $ 46,000
-------- --------
Total Current Assets 41,000 46,000
Equipment, net -- 1,000
-------- --------
Total Assets $ 41,000 $ 47,000
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts payable $ -- $ 9,500
-------- --------
Total Current Liabilities -- 9,500
-------- --------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.001 par value: Authorized 75,000,000
shares; issued and outstanding: 45,000,000 shares
and 50,000,000 shares at December 31, 2004 and
September 30, 2005, respectively 45,000 50,000
Additional paid-in capital 7,000 9,500
Deficit accumulated during the development stage (11,000) (22,000)
-------- --------
Total Shareholders' Equity 41,000 37,500
-------- --------
Total Liabilities and Shareholders' Equity $ 41,000 $ 47,000
======== ========
See accompanying notes to financial statements.
F-20
GSA PUBLICATIONS, INC.
STATEMENT OF OPERATIONS
Form Inception (November 17, 2003) to September 30, 2005
Period From Year Nine Months Period From
Inception To Ended Ended Inception to
December 31, December 31, September 30, September 30,
2003 2004 2005 2005
------------ ------------ ------------ ------------
Revenue $ -- $ -- $ -- $ --
------------ ------------ ------------ ------------
Expenses
General and administrative 3,000 1,000 8,500 12,500
Officers contributed services 1,000 6,000 2,500 9,500
------------ ------------ ------------ ------------
Total expenses 4,000 7,000 11,000 22,000
------------ ------------ ------------ ------------
Provision for income taxes -- -- -- --
Net loss $ (4,000) $ (7,000) $ (11,000) $ (22,000)
============ ============ ============ ============
Basic and diluted earnings
per common share (1) $ -- $ -- $ --
============ ============ ============
Weighted average number of
shares 42,500,000 45,000,000 47,500,000
============ ============ ============
- ---------------------------
(1) = less than $0.01 per share
See accompanying notes to financial statements.
F-21
GSA PUBLICATIONS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
From Inception (November 17, 2003) to September 30, 2005
Deficit
Common Stock Addi- Accumulated Total
$.001 Par Value tional During Stock-
---------------------------- Paid-in Development holders'
Shares Amount Capital Stage Equity
----------- -------- -------- --------- --------
Shares issued to founders
at $0.001 per share 40,000,000 $ 40,000 $ $ $ 40,000
Shares issued for cash
at $0.001 per share 5,000,000 5,000 5,000
Officers contributed services 1,000 1,000
Net loss (4,000) (4,000)
----------- -------- -------- --------- --------
Balance, December 31, 2003 45,000,000 45,000 1,000 (4,000) 42,000
Officers contributed services 6,000 6,000
Net loss -- -- -- (7,000) (7,000)
----------- -------- -------- --------- --------
Balance, December 31, 2004 45,000,000 45,000 7,000 (11,000) 41,000
Shares issued for cash at
$0.001 per share 5,000,000 5,000 5,000
Officers contributed services 2,500 2,500
Net loss $ (11,000) $(11,000)
----------- -------- -------- --------- --------
Balance, September 30, 2005 50,000,000 $ 50,000 $ 9,500 $ (22,000) $ 37,500
=========== ======== ======== ========= ========
See accompanying notes to financial statements.
F-22
GSA PUBLICATIONS, INC.
STATEMENT OF CASH FLOWS
Form Inception (November 17, 2003) to September 30, 2005
Period From Year Nine Months Period From
Inception To Ended Ended Inception to
December 31, December 31, September 30, September 30,
2003 2004 2005 2005
-------- -------- -------- --------
Operations Activity:
Net loss $ (4,000) $ (7,000) $(11,000) $(22,000)
Adjustments to net loss
Officer contributed services 1,000 6,000 2,500 9,500
Change in accounts payable -- -- 8,500 8,500
-------- -------- -------- --------
Cash flow required by operations (3,000) (1,000) -- (4,000)
-------- -------- -------- --------
Financing Activities:
Common shares sold 45,000 -- 5,000 50,000
Cash flow provided by financing 45,000 -- 5,000 50,000
-------- -------- -------- --------
Net Change in Cash Flow 42,000 (1,000) 5,000 46,000
Beginning cash balance -- 42,000 41,000 --
-------- -------- -------- --------
Ending cash balance $ 42,000 $ 41,000 $ 46,000 $ 46,000
======== ======== ======== ========
Non-cash investing and financing activities:
Cost of equipment included in payables $ -- $ -- $ 1,000 $ 1,000
======== ======== ======== ========
No interest or income taxes have been
paid since inception
See accompanying notes to financial statements.
F-23
GSA PUBLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. GENERAL ORGANIZATION AND BUSINESS
The Company was organized in the state of Nevada on November 17, 2003. The
Company is in its development stage and currently has no operations and no
segments.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES
The relevant accounting policies and procedures are listed below.
(A) Accounting Basis
The statements were prepared following generally accepted accounting
principles of the United States of America consistently applied.
(B) Earnings per Share
Basic earnings (loss) per share are calculated by dividing the Company's net
income available to common shareholders by the weighted average number of
common shares during the year. Diluted earnings (loss) per share are
calculated by dividing the Company's net income (loss) available to common
shareholders by the diluted weighted average number of shares outstanding
during the year. The diluted weighted average number of shares outstanding is
the basic weighted number of shares adjusted as of the first of the year for
any potentially dilutive debt or equity.
The Company has not issued any options, warrants or similar securities since
inception.
(C) Dividends
The Company has not yet adopted any policy regarding payment of dividends. No
dividends have been paid during the periods shown.
(D) 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 revenue
and expenses during the reporting period. Actual results could differ from
those estimates.
(E) Revenue Recognition
The Company has no revenue and no operations.
(F) Advertising
Advertising is expensed when incurred. There has been no advertising since
inception.
(G) Income Taxes
The provision for income taxes is the total of the current taxes payable and
the net of the change in the deferred income taxes. Provision is made for the
deferred income taxes where differences exist between the period in which
transactions affect current taxable income and the period in which they enter
into the determination of net income in the financial statements.
F-24
GSA PUBLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3. GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization
of assets and the liquidation of liabilities in the normal course of
business. However, the Company has accumulated a loss and is new. This
raises substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from this uncertainty.
NOTE 4. PROVISION FOR INCOME TAXES
The Company provides for income taxes under Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes. SFAS No. 109 requires the use
of an asset and liability approach in accounting for income taxes. Deferred
tax assets and liabilities are recorded based on the differences between the
financial statement and tax bases of assets and liabilities and the tax rates
in effect when these differences are expected to reverse.
SFAS No. 109 requires the reduction of deferred tax assets by a valuation
allowance if, based on the weight of available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized.
In the Company's opinion, it is uncertain whether they will generate
sufficient taxable income in the future to fully utilize the net deferred tax
asset. Currently the Company's deferred assets equals the valuation allowance
No income tax reports have been filed with the federal government.
NOTE 5. OPERATING LEASES AND OTHER COMMITMENTS:
The Company also has no lease obligations.
NOTE 6. RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS 148 - Accounting for Stock-Based Compensation-Transition and
Disclosure: This statement amends FASB 123 to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based
method of accounting for stock-based employee compensation.
SFAS 149 - Amendment of Statement 133 on Derivative Instruments and Hedging
Activities: This statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement NO. 133,
Accounting for Derivative Instruments and Hedging Activities.
SFAS 150 - Financial Instruments with Characteristics of both Liabilities
and Equity: This statement requires that such instruments be classified as
liabilities in the balance sheet. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003.
Interpretation No. 46 (FIN 46): Effective January 31, 2003, The Financial
Accounting Standards Board requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors
in the entity do not have the characteristics of a continuing financial
interest or do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other
parties. The Company has not invested in any such entities, and does not
expect to do so in the foreseeable future.
The adoption of these new Statements is not expected to have a material
effect on the Company's financial position, results or operations, or cash
flows.
F-25
GSA PUBLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7. RELIANCE ON OFFICERS AND CONTRIBUTED SERVICES
The president and vice-president of the Company are the persons who have the
experience to promote this new publication. If they were to no longer be
able or willing to function in that capacity the Company would be negatively
affected. These officers have contributed their services on a part time
basis to the Company. The value of these services has been estimated and
included in the financial statements.
NOTE 8. LONG TERM DEBT
The Company has no long term debt or similar contingencies.
NOTE 9. STOCKHOLDERS' EQUITY
At inception the Company's founders invested $40,000 into the Company and
received 40,000,000 shares of restricted common stock valued at $0.001 per
share. During this same year (2003) the Company also completed an offering
and raised $5,000 cash selling 5,000,000 shares of stock at $0.001 per share.
During the first five months of the year 2005 the Company completed a second
offering of 5,000,000 shares of common stock at $0.001 per share.
Total authorized shares are 75,000,000. Total outstanding shares issued are
50,000,000.
NOTE 10. SUBSEQUENT EVENTS - (Unaudited)
On December 2, 2005, 90% of the Company's outstanding shares were acquired in
a forward merger, subject to the fulfillment of certain conditions, by
Compliance Systems Corporation, a Delaware corporation that provides services
to the tele-marketing industry.
In February 2006, the required conditions were satisfied and, in addition,
the Delaware corporation was statutorily merged into the Company pursuant to
a downstream merger. The Company then changed its name to Compliance Systems
Corporation.
In connection with the downstream merger, the Company increased its
authorization of common shares to 500,000,000.
F-26
Pro Forma Financial Data - (Unaudited)
Introductory Note
The following unaudited pro forma balance sheet as of September 30, 2005
consolidates the September 30, 2005 balance sheet of Compliance Systems
Corporation with the September 30, 2005 balance sheet of GSA Publications,
Inc. as if the downstream merger occurred on that date, and also gives effect
to the receipt by the Company of gross secured convertible debenture proceeds
of $600,000 and the application of $290,000 of such gross proceeds to various
deferred costs as well as the costs directly associated with the merger.
The following unaudited pro forma statements of operations for the year ended
December 31, 2004 and for the nine months ended September 30, 2005
consolidates the respective statements of operations of the two companies for
those periods as if the downstream merger occurred on the first day of each
period presented, and also reflects interest expense on the $600,000 of
convertible debt as if that borrowing had occurred on January 1, 2004 and
January 1, 2005, respectively.
The pro forma financial data is not necessarily indicative of the actual
operating results that would have occurred or the future operating results
that will occur as a consequence of such transactions. The results of
operations for the nine months ended September 30, 2005 are not necessarily
indicative of the Company's results of operations to be expected for the full
year.
F-27
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET - (Unaudited)
September 30, 2005
Adjustments
Compliance GSA Increase
Systems Publications (Decrease) Pro forma
------- ------------ ---------- ---------
ASSETS:
Current Assets: $ 410,000 (1)
Cash $ 56,732 $ 46,000 (100,000 (2) $ 412,732
Accounts receivable 226,985 -- -- 226,985
Prepaid expenses and other 63,009 -- -- 63,009
----------- ----------- ----------- -----------
Total Current Assets 346,726 46,000 310,000 702,726
----------- ----------- ----------- -----------
Property, equipment and capitalized
software costs, net 371,367 1,000 -- 372,367
----------- ----------- ----------- -----------
Other Assets:
Patents, net 24,806 -- -- 24,806
Deferred loan costs 23,273 -- 150,000 (1) 173,273
Deferred registration costs 66,533 -- 40,000 (1) 106,533
Deposits and other 45,298 -- -- 45,298
----------- ----------- ----------- -----------
Total Other Assets 159,910 -- 190,000 349,910
----------- ----------- ----------- -----------
Total Assets $ 878,003 $ 47,000 $ 500,000 $ 1,425,003
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT):
Current Liabilities:
Notes payable $ 316,056 $ -- $ -- $ 316,056
Accounts payable and accrued expenses 231,703 9,500 -- 241,203
Current maturities of long-term debt 426,792 -- -- 426,792
----------- ----------- ----------- -----------
Total Current Liabilities 974,551 9,500 -- 984,051
Long-term debt, principally to related
parties, less current maturities 2,327,394 -- -- 2,327,394
Secured convertible debenture 600,000 (1) 600,000
Accrued officers' compensation 15,000 -- -- 15,000
Deferred income 51,397 -- -- 51,397
----------- ----------- ----------- -----------
Total Liabilities 3,368,342 9,500 600,000 3,977,842
----------- ----------- ----------- -----------
Commitments and Contingencies
Shareholders' Equity (Deficit):
Common stock, $.001 par: 14,215 50,000 (1,250)(3) 50,000
(12,965)(4)
Additional paid-in capital 4,072,925 9,500 (261,803)(3) 3,711,587
(100,000)(2)
12,965 (4)
(22,000)(5)
Accumulated (deficit ) (6,314,426) (22,000) 22,000 (5) (6,314,426)
Treasury stock, at cost (263,053) -- 263,053 (3) --
----------- ----------- ----------- -----------
Total Shareholders' Equity (Deficit) (2,490,339) 37,500 (100,000) (2,552,839)
----------- ----------- ----------- -----------
Total Liabilities and Shareholders' Equity (Deficit) $ 878,003 $ 47,000 $ 500,000 $ 1,425,003
=========== =========== =========== ===========
See accompanying notes to pro forma consolidated financial statements.
F-28
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS - (Unaudited)
YEAR ENDED DECEMBER 31, 2004
Adjustments
Compliance GSA Increase
Systems Publications (Decrease) Pro Forma
------------ ------------ ------------ ------------
Revenues $ 2,114,285 $ -- $ -- $ 2,114,285
Cost of revenues 492,815 -- -- 492,815
------------ ------------ ------------ ------------
Gross margin 1,621,470 -- -- 1,621,470
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and
administrative expenses 2,471,099 7,000 -- 2,478,099
Interest expense 505,806 -- 60,000 (A) 565,806
------------ ------------ ------------ ------------
Total operating expenses 2,976,905 7,000 60,000 3,043,905
------------ ------------ ------------ ------------
Net loss $ (1,293,769) $ (7,000) (60,000) $ (1,360,769)
============ ============ ============ ============
Per share data:
Basic and diluted loss per share $ (.03)
============
Basic and diluted weighted average
common shares outstanding 41,168,527
============
See accompanying notes to pro forma consolidated financial statements.
F-29
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS - (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2005
Adjustments
Compliance GSA Increase
Systems Publications (Decrease) Pro Forma
------------ ------------ ------------ ------------
Revenues $ 1,426,910 $ -- $ -- $ 1,426,910
Cost of revenues 350,976 -- -- 350,976
------------ ------------ ------------ ------------
Gross margin 1,075,934 -- -- 1,075,934
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and
administrative expenses 1,625,169 11,000 -- 1,636,669
Interest expense 368,206 -- 45,000 (B) 413,206
------------ ------------ ------------ ------------
Total costs and expenses 2,344,351 11,000 45,000 2,049,875
------------ ------------ ------------ ------------
Net loss $ (917,441) $ (11,000) $ (45,000) $ (973,441)
============ ============ ============ ============
Per Share Data:
Basic and diluted loss per share $ (.02)
============
Basic and diluted weighted average
common shares outstanding 47,797,450
============
See accompanying notes to pro forma consolidated financial statements.
F-30
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(1) To record issuance of $600,000 of convertible debentures, loan
origination, diligence, structuring and finder's fees aggregating
$150,000, deferred registration costs of $40,000 and net proceeds
received of $410,000.
(2) To record the $100,000 cost of acquiring GSA Publications, Inc.
(3) To record the retirement of Compliance Systems Corporation treasury
stock.
(4) To adjust the par value of $.001 common stock to the number of
post-merger shares, and to add the excess to additional paid-in
capital.
(5) To eliminate GSA Publications, Inc. accumulated deficit and offset
it against additional paid-in capital.
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(A) To record one year of interest expense at 10% on the convertible
secured debentures.
(B) To record nine months of interest expense at 10% on the convertible
secured debentures.
F-31
We have not authorized any dealer,
salesperson or other person to provide
any information or make any
representations about Compliance Systems
Corporation except the information or
representations contained in this
Prospectus. You should not rely on any
additional information or representations
if made.
-------------------------
This Prospectus does not constitute an ----------------------
offer to sell, or a solicitation of an
offer to buy any securities: PROSPECTUS
|_| except the common stock offered by ---------------------
this Prospectus;
|_| in any jurisdiction in which the
offer or solicitation is not Shares of Common Stock
authorized;
|_| in any jurisdiction where the
dealer or other salesperson is not COMPLIANCE SYSTEMS CORPORATION
qualified to make the offer or
solicitation;
|_| to any person to whom it is
unlawful to make the offer or
solicitation; or
_____________, 2006
|_| to any person who is not a United
States resident or who is outside
the jurisdiction of the United
States.
The delivery of this Prospectus or any
accompanying sale does not imply that:
|_| there have been no changes in the
affairs of Compliance Systems
Corporation after the date of this
Prospectus; or
|_| the information contained in this
Prospectus is correct after the
date of this Prospectus.
-----------------------
Until __________, 2006, all dealers
effecting transactions in the registered
securities, whether or not participating
in this distribution, may be required to
deliver a Prospectus. This is in
addition to the obligation of dealers to
deliver a Prospectus when acting as
underwriters.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification Of Directors And Officers
CSC's Bylaws provide that the Company has the power to indemnify any
officer or director against damages if such person acted in good faith and in
a manner the person reasonably believed to be in our best interest. No
indemnification may be made (i) if a person is adjudged liable unless a Court
determines that such person is entitled to such indemnification, (ii) with
respect to amounts paid in settlement without court approval or
(iii) expenses incurred in defending any action without court approval.
Item 25. Other Expenses Of Issuance And Distribution
The following table sets forth estimated expenses expected to be incurred
in connection with the issuance and distribution of the securities being
registered. All expenses will be paid by CSC.
United States Securities and Exchange Commission $ 2,286
registration fee
Printing and engraving fees* $ 10,000
Accounting fees and expenses* $ 102,500
Legal fees and expenses $ 50,000
Miscellaneous (including Blue Sky fees, transfer
agent fees and registrar fees)* $ 7,714
----------
Total Estimated Expenses $ 172,500
==========
------------------
* Estimated.
Item 26. Recent Sales of Unregistered Securities
During the last three years, CSC has issued the following unregistered
securities:
On November 30, 2005, the Company entered into the SPA with
Montgomery. The SPA calls for the purchase by Montgomery of up to $1,000,000
of secured convertible debentures. Montgomery is entitled, at its option, to
convert at any time a portion or all amounts of principal and interest due
and outstanding under the November 2005 Debentures into shares of CSC's
common stock, $0.001 par value per share, at a price per share equal to the
lower of: (i) the lowest closing bid price of CSC's common stock at any time
during the 10 trading days before the filing of the accompanying registration
statement, or (ii) 80% of the lowest price per share in the last reported
trade of CSC's common stock on the Over-the-Counter Bulletin Board or on the
exchange which the common stock is then listed, as quoted by Bloomberg, LP,
for the five trading days immediately preceding the conversion date, which
conversion price may be adjusted from time-to-time pursuant to certain other
terms of the November 2005 Debentures. The November 2005 Debentures are
secured by all CSC's assets not otherwise specifically pledged, have two-year
maturity dates, and accrue interest at 10% per annum. On December 2, 2005,
CSC sold the first $600,000 of the November 2005 Debentures to Montgomery.
The debenture, which matures November 30, 2007, bears interest at 10% per
annum, calculated on a 360-day year basis. CSC paid Yorkville Advisors
Management, an affiliate of Montgomery, commitment, structuring and due
diligence fees totaling $112,500 and also paid a $30,000 finder's fee to an
unrelated third party. The SPA and related IRRA requires us to (a) merge with
and into a public shell company, (b) file the accompanying registration
statement for the Surviving Entity with the Commission under the Securities
Act with the provision that Montgomery purchase the remaining $400,000
balance of the November 2005 Debentures two days before the accompanying
registration statement is filed.
The Company effectuate a private offering of 600,000 shares of
non-voting Class B common stock, $0.001 par value per share, pursuant to that
certain Confidential Term Sheet dated November 13, 2002, raising aggregate
gross proceeds of $750,000. Three hundred thousand of the shares of Class B
common stock sold in such offering are subject to a purchase option granted
to Dean Garfinkel, Alison Garfinkel, and Barry M. Brookstein. Each of such
options is exercisable at a purchase price of $2.50 per share, subject to
adjustment in certain events. Such options are exercisable through December
31, 2007, but only in the event certain of our debt had previously been
repaid. The Class B shares have been converted into CSC common stock upon
the consummation of the merger with GSA.
II-1
The Company effectuated a private offering of 50 Units pursuant to that
certain Confidential Term Sheet dated June 10, 2003, raising aggregate gross
proceeds of $1,500,000. Each Unit consists of $30,000 principal amount of 9%
secured notes due September 30, 2008 and warrants to purchase an aggregate of
20,000 shares of Class B common stock, each exercisable at a purchase price
of $1.50 per share, subject to adjustment. In June 2005, the Company offered
its $1,500,000 secured note holders the right to convert such debt to equity
and also reduced the exercise price of the related 1,000,000 warrants from
$1.50 to $1 per share. A total of $1,470,000 of secured notes was converted
and 420,000 warrants were exercised between June and September of 2005.
Following these transactions, $30,000 of non-convertible debt and 580,000
warrants exercisable at $1.50 per share through September 30, 2008 remained
outstanding. The Class B shares have been converted into shares of CSC's
common stock upon the consummation of the merger with GSA.
In connection with $1,000,000 in loans provided to the Company by four
affiliated companies of CSC's Chief Financial Officer, the Company issued
200,000 of its Class B shares, valued at $1.50 per share, in payment of
$150,430 of principal and $149,570 of interest. As the Company later issued
shares valued at $1.00 per share, anti-dilution rights in the 2004 in-kind
payment agreement required CSC to issue an additional 100,000 common shares
to those holders. During the nine months ended September 30, 2005, the
Company issued 300,000 of its Class B shares in payment of $228,870 of
principal and $71,130 of interest. The Class B shares have been converted
into shares of CSC's common stock upon the consummation of the merger with
GSA.
With respect to the sale of the unregistered securities referenced
above, all transactions were exempt from registration pursuant to Section
4(2) of the Securities Act and Regulation D promulgated thereunder. In each
instance, the purchaser had access to sufficient information regarding CSC so
as to make an informed investment decision. More specifically, CSC had a
reasonable basis to believe that each purchaser was either an accredited
investor as defined in Regulation D or otherwise had the requisite
sophistication to make an investment in CSC's common stock.
II-2
Exhibits Required by Item 601 of Regulation S-B
(a) The following exhibits are filed as part of this Registration
Statement:
Exhibit No. Description Location (# on file name)
- ----------- ----------- ------------------------
2.1 Agreement and Plan of Merger, dated Provided herewith
February 10, 2006 by and between
Compliance Systems Corp. and GSA
Publications, Inc.
3.1 (i) Articles of Incorporation of Provided herewith
Compliance Systems Corp.
3.1 (ii) By-Laws of Compliance Systems Corp. Provided herewith
3.2 (i) Articles of Incorporation of GSA Provided herewith
Publications, Inc.
3.2 (ii) Amendment to Articles of Provided herewith
Incorporation of GSA Publications, Inc
3.2 (iii) By-Laws of GSA Publications, Inc Provided herewith
5.1 Legal Opinion re: legality To be filed by amendment
10.1 United States Patent, dated December Provided herewith
11, 2001
10.2 Assignment Agreement, dated April 17, Provided herewith
2002 between Call Compliance, Inc.
and Spirits Management
10.3 Assignment Agreement, dated April 11, Provided herewith
2002 between Call Compliance, Inc.
and Spirits Management
10.4 Patent License Agreement, dated April Provided herewith
11, 2002 between Call Compliance,
Inc. and illuminet, Inc.
10.5 CCI Alliance Agreement, dated April Provided herewith
11, 2002 between Call Compliance,
Inc. and
10.6 Addendum to Promissory Note Provided herewith
10.7 Non-Negotiable Promissory Note Provided herewith
10.8 Non-Negotiable Promissory Note Provided herewith
10.9 Non-Negotiable Promissory Note Provided herewith
10.10 Non-Negotiable Promissory Note Provided herewith
10.11 Non-Negotiable Promissory Note Provided herewith
10.12 Guaranty Provided herewith
10.13 Guaranty Provided herewith
10.14 Guaranty Provided herewith
10.15 Termination and Release Agreement Provided herewith
10.16 Promissory Note Provided herewith
II-3
Exhibit No. Description Location (# on file name)
- ----------- ----------- ------------------------
10.17 Contribution Agreement Provided herewith
10.18 Assignment Agreement between Provided herewith
10.19 Assignment Agreement between Provided herewith
10.20 Assignment Agreement between Provided herewith
10.21 Patent Security Agreement Provided herewith
10.22 Letter Agreement Provided herewith
10.23 Promissory Agreement Provided herewith
10.24 Promissory Agreement Provided herewith
10.25 Promissory Agreement Provided herewith
10.26 Promissory Agreement Provided herewith
10.27 Addendum to Promissory Agreement Provided herewith
10.28 Addendum to Promissory Agreement Provided herewith
10.29 Non-Negotiable Promissory Note Provided herewith
10.30 Non-Negotiable Promissory Note Provided herewith
10.31 Promissory Note Provided herewith
10.32 Promissory Note Provided herewith
10.33 Promissory Note Provided herewith
10.34 Promissory Note Provided herewith
10.35 First Amendment to Employment Provided herewith
Agreement
10.36 Secured Convertible Debenture issued Provided herewith
to
10.37 Securities Purchase Agreement, dated Provided herewith
November 30, 2005 by and between
Compliance Systems Corp. and Cornell
10.38 Investor Registration Rights Provided herewith
Agreement, dated November 30, 2005 by
and between Compliance Systems Corp.
and Cornell
10.39 Debenture, November 30, 2005, issued Provided herewith
to Montgomery Equity Partners, LTD
10.40 Pledge and Escrow Agreement, dated Provided herewith
November 30, 2005 by and between
Compliance Systems Corp. and Cornell
10.41 Security Agreement, dated November Provided herewith
30, 2005 by and between Compliance
Systems Corp. and Cornell
10.42 Lock-up Agreement, dated November 30, Provided herewith
2005 by and between Compliance
Systems Corp. and Cornell
II-4
Exhibit No. Description Location (# on file name)
- ----------- ----------- ------------------------
10.43 Addendum to Stock Purchase Agreement, Provided herewith
dated November 30, 2005 by and among
Compliance Systems Corp. and
Shareholders
10.44 Stock Purchase Agreement, dated Provided herewith
November 30, 2005 by and among
Compliance Systems Corp. and
Shareholders
10.45 Stock Purchase Agreement, dated Provided herewith
November 30, 2005 by and among
Compliance Systems Corp. and
Shareholders
14.1 Code of Ethics Provided herewith
20.1 First Dissenters Notice Letter to GSA Provided herewith
Publications, Inc. Stockholders
(CSC), dated February 10, 2006
20.2 Confidential Term Sheet Provided herewith
20.3 Confidential Term Sheet Provided herewith
20.4 Confidential Term Sheet Provided herewith
23.1 Consent of experts and counsel Provided herewith
23.2 Consent of experts and counsel Provided herewith
99.1 Lease Agreement Provided herewith
99.2 Lease Agreement Provided herewith
99.3 Assignment of Lease with Consent of Provided herewith
Landlord
99.4 Sublease Modification Agreement Provided herewith
99.5 Separation, Mutual Release and Stock Provided herewith
Purchase Agreement, dated September
20, 2005 by and among Alison
Garfinkel, Compliance Systems Corp
and its wholly-owned subsidiary Call
Compliance, Inc.
99.6 Information and Disclosure Statement Provided herewith
of Compliance Systems Corp.
II-5
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information
set forth in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was registered) and
any deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the effective
Registration Statement;
(iii) Include any additional or changed information on the
plan of distribution.
(2) For determining liability under the Securities Act, the Company
will treat each such post-effective amendment as a new registration statement
of the securities offered, and the offering of such securities at that time
to be the initial bona fide offering.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) For determining liability of the undersigned small business
issuer under the Securities Act to any purchaser in the initial distribution
of the securities, the undersigned small business issuer undertakes that in a
primary offering of securities of the undersigned small business issuer
pursuant to this Registration Statement, regardless of the underwriting
method used to sell the securities to the purchaser, if the securities are
offered or sold to such purchaser by means of any of the following
communications, the undersigned small business issuer will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned
small business issuer relating to the offering required to be filed pursuant
to Rule 424;
(ii) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned small business issuer or used or
referred to by the undersigned small business issuer;
(iii) The portion of any other free writing prospectus
relating to the offering containing material information about the
undersigned small business issuer or its securities provided by or on behalf
of the undersigned small business issuer; and
(iv) Any other communication that is an offer in the offering
made by the undersigned small business issuer to the purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer of expenses
incurred or paid by a director, officer or controlling person of the small
business issuer in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the small business issuer will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act, and will be governed by the final adjudication of such issue.
II-6
SIGNATURES
In accordance with the requirements of the Securities Act, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on our behalf by the undersigned, in Glen
Cove, New York, on February 14, 2006.
COMPLIANCE SYSTEMS CORPORATION
By: /s/Dean Garfinkel
-------------------------------------
February 14, 2006
Dean Garfinkel
President and Principal
Executive Officer
By: /s/ Barry Brookstein
-------------------------------------
February 14, 2006
Barry Brookstein
Chief Financial Officer and
Principal Accounting
Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on
the dates stated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Dean Garfinkel Chairman of the Board of Directors February 14, 2006
- ------------------------
Dean Garfinkel
/s/ Barry Brookstein Director February 14, 2006
- ------------------------
Barry Brookstein
II-7