<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 10, 1996
REGISTRATION NO. 333-09297
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
COMPUTER GENERATED SOLUTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
DELAWARE 7379 13-3208358
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION
INCORPORATION OR NUMBER)
ORGANIZATION)
1675 BROADWAY
NEW YORK, NEW YORK 10019
(212) 408-3800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
PHILIP FRIEDMAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COMPUTER GENERATED SOLUTIONS, INC.
1675 BROADWAY
NEW YORK, NEW YORK 10019
(212) 408-3800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
COPIES TO:
DENNIS J. FRIEDMAN, ESQ. GERALD S. TANENBAUM, ESQ.
CHADBOURNE & PARKE LLP CAHILL GORDON & REINDEL
30 ROCKEFELLER PLAZA 80 PINE STREET
NEW YORK, NEW YORK 10112 NEW YORK, NEW YORK 10005
(212) 408-5100 (212) 701-3000
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 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 of 1933, 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. [_]
--------------
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 THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS Subject to Completion
Dated September 10, 1996
Shares
[LOGO] COMPUTER GENERATED SOLUTIONS, INC.
Common Stock
(par value $0.001 per share)
Of the shares of Common Stock, par value $0.001 per share (the "Common
Stock"), offered hereby, shares are being sold by Computer Generated
Solutions, Inc., a Delaware corporation (the "Company"), and shares are
being sold by the existing stockholders of the Company (the "Selling
Stockholders"). See "Principal and Selling Stockholders." The Company will not
receive any proceeds from the sale of the shares by the Selling Stockholders.
Prior to this offering (the "Offering"), there has been no public market for
the Common Stock. It is currently anticipated that the initial public offering
price of the Common Stock will be between $ and $ per share. See
"Underwriting" for information relating to the factors to be considered in
determining the initial public offering price.
Immediately after the Offering, Philip Friedman, the Company's President and
Chief Executive Officer, will have the power to vote % of the outstanding
shares of Common Stock (assuming no exercise of the Underwriters' over-
allotment option). See "Description of Capital Stock."
Application has been made to have the Common Stock quoted on the Nasdaq
National Market under the symbol "CGSI."
SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share $ $ $ $
- ---------------------------------------------------------
Total (3) $ $ $ $
</TABLE>
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(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $ .
(3) The Company has granted the Underwriters an option to purchase up to an
additional shares of Common Stock, on the same terms as set forth above,
solely to cover over-allotments, if any. If such option is exercised in full,
the total Price to Public, Underwriting Discount and Proceeds to Company will
be $ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock being offered by this Prospectus are being offered
by the Underwriters, subject to prior sale, when, as and if delivered to and
accepted by the Underwriters, and subject to approval of certain legal matters
by Cahill Gordon & Reindel, counsel for the Underwriters. It is expected that
delivery of the shares of Common Stock will be made against payment therefor on
or about , 1996 at the offices of J.P. Morgan Securities Inc., 60 Wall
Street, New York, New York.
J.P. MORGAN & CO. OPPENHEIMER & CO., INC.
, 1996
<PAGE>
No person has been authorized to give any information or make any
representation other than those contained in this Prospectus and, if given or
made, such information or representation must not be relied upon as having been
authorized by the Company, the Selling Stockholders or any of the Underwriters.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, the Common Stock in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof.
No action has been or will be taken in any jurisdiction by the Company, the
Selling Stockholders or any Underwriter that would permit a public offering of
the Common Stock or possession or distribution of this Prospectus in any
jurisdiction where action for that purpose is required, other than in the
United States. Persons into whose possession this Prospectus comes are required
by the Company, the Selling Stockholders and the Underwriters to inform
themselves about and to observe any restrictions as to the Offering and the
distribution of this Prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary ................. 3
Risk Factors ....................... 6
The Company ........................ 10
Use of Proceeds .................... 11
Dividend Policy .................... 11
Capitalization ..................... 12
Dilution ........................... 13
Selected Financial Information ..... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations ..................... 15
Business ........................... 23
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Management ......................... 33
Certain Relationships and Related
Party Transactions ................ 37
Principal and Selling Stockholders
................................... 38
Description of Capital Stock ....... 39
Shares Eligible for Future Sale .... 42
Underwriting ....................... 43
Legal Matters ...................... 44
Experts ............................ 44
Change of Auditors.................. 44
Additional Information ............. 45
Index to Financial Statements....... F-1
</TABLE>
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
The Company intends to furnish its stockholders with annual reports containing
financial statements audited by its independent auditors and with quarterly
reports containing unaudited financial statements for each of the first three
quarters of each fiscal year.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, the information contained in this Prospectus (i) gives
effect to the amendment and restatement of the Company's certificate of
incorporation and by-laws and certain other related actions regarding the
conversion of the Company from S corporation to C corporation and the
restructuring of the Company's capital stock, all of which will take place
immediately prior to the consummation of the Offering and is more fully
described below under "The Company," and (ii) assumes the Underwriters' over-
allotment option is not exercised.
THE COMPANY
Computer Generated Solutions, Inc. offers its clients a Composite Solution for
their information technology ("IT") requirements. The Composite Solution is
based on a modular approach which allows the Company to utilize its products
and services to create customized solutions for its clients. Products and
services provided by the Company range from the ACS Optima Software (as
defined) bundled with IBM AS/400 hardware and related support services, to
professional services, technical training, full service on-site and remote help
desk support and call management services. The marketing of many of the
Company's products and services is enhanced through its strategic and other
relationships with recognized leaders in the IT industry, including
International Business Machines Corporation ("IBM") and AT&T Corp. ("AT&T").
The Company is a leading supplier of integrated business information systems to
the apparel industry. Its solution includes its proprietary ACS Optima software
and a number of fully integrated complementary products licensed to the Company
(the "ACS Optima Software"), a comprehensive, integrated business information
system specifically designed for the apparel industry. The Company provides the
ACS Optima Software to many leading United States apparel manufacturers,
including several divisions of Sara Lee Corporation ("Sara Lee"), Polo Ralph
Lauren Corporation ("Polo Ralph Lauren"), G-III Apparel Group Ltd. ("G-III
Apparel") and Marzotto (U.S.A.) Corporation ("Marzotto").
The Company also provides a variety of professional services, delivered on a
project basis or through staff augmentation, to address clients' systems
requirements, ranging from strategy and design through development and
implementation to maintenance and support. The Company provides these
professional services primarily to clients in the financial, entertainment and
communications industries, including Merrill Lynch & Co., Inc. ("Merrill
Lynch"), EMI Music Publishing ("EMI Music") and NYNEX Corporation ("NYNEX").
The Company maintains a national proprietary database consisting of technical
profiles and resumes of approximately 25,000 professionals. The Company
believes that this database, its existing technical staff and other software
tools enable it to offer its clients the technical resources necessary to meet
their IT requirements and address the challenges of creating "Year 2000"
compliant systems. Through its technical training services, the Company
provides approximately 350 comprehensive technical and end-user training
classes to its clients' personnel in many leading-edge technologies, including
Visual Basic, PowerBuilder, Visual C++ and Sybase.
The Company provides a complete range of IT outsourcing support services,
including on-site and remote help desks and integrated call management centers
staffed and managed by the Company's personnel. In providing these services,
the Company uses sophisticated tools that enable it to serve as the transparent
extension of its clients' technical support infrastructure. These services
provide the Company's clients with immediate access to skilled technical
personnel and a cost-effective solution to their IT outsourcing support needs.
The Company's IT outsourcing support clients include IBM, AT&T and Paine Webber
Group Inc. ("Paine Webber").
At June 30, 1996, the Company had over 900 employees operating through
facilities located in New York, Atlanta, Chicago, Dallas, Los Angeles, Tampa
and Rochester, MN. The Company's total revenue increased from $5.6 million in
1991 to $36.0 million in 1995.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
COMMON STOCK OFFERED:
By the Company.............................. shares
By the Selling Stockholders................. shares
TOTAL OFFERING................................. shares
COMMON STOCK OUTSTANDING AFTER THE OFFERING(1). total shares of Common Stock
USE OF PROCEEDS TO THE COMPANY................. Repayment of certain
indebtedness, including
approximately $2.5 million of
indebtedness owed to Philip
Friedman, the Company's
President and Chief Executive
Officer, fund distributions to
the Company's existing
stockholders of the cumulative
amount of the Company's
undistributed earnings for the
entire period it was an S
corporation (approximately
$3.3 million at June 30, 1996)
and for general corporate
purposes, including working
capital, potential
acquisitions, strategic
business partnerships and
future product enhancements.
See "Use of Proceeds."
DIVIDEND POLICY................................ The Company presently intends
to retain its earnings for
reinvestment in the Company
and, therefore, does not
anticipate paying dividends on
the Common Stock in the
foreseeable future, other than
the payment of the dividend to
the Company's existing
stockholders as described
above. See "The Company" and
"Dividend Policy."
PROPOSED NASDAQ NATIONAL MARKET SYMBOL......... "CGSI"
</TABLE>
- -------
(1)Excludes shares of Common Stock to be reserved for issuance under the
Company's 1996 Long-Term Incentive Plan. See "Management--1996 Long Term
Incentive Plan."
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------ ---------------------
Dollars in thousands, except 1991 1992 1993 1994 1995 1995 1996
per share data --------- --------- --------- --------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA(1)
Revenues................ $ 5,572 $12,189 $26,003 $24,710 $35,947 $15,494 $27,353
Direct costs............ 3,328 8,863 20,982 16,870 25,977 10,572 20,886
--------- --------- --------- --------- --------- --------- ---------
Income from direct
operations............. 2,244 3,326 5,021 7,840 9,970 4,922 6,467
Selling, general and
administrative
expenses............... 1,489 1,973 2,916 4,725 6,690 3,007 4,504
Compensation amounts to
S corporation
stockholders........... 592 1,232 1,950 3,041 1,502 201 380
Amortization of cost in
excess of fair value of
assets purchased....... -- -- -- 213 320 160 160
--------- --------- --------- --------- --------- --------- ---------
2,081 3,205 4,866 7,979 8,512 3,368 5,044
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss). 163 121 155 (139) 1,458 1,554 1,423
Interest expense........ -- -- -- 77 473 225 295
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before
income taxes........... 163 121 155 (216) 985 1,329 1,128
Income taxes............ 21 31 39 60 33 60 61
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)....... $ 142 $ 90 $ 116 $ (276) $ 952 $ 1,269 $ 1,067
========= ========= ========= ========= ========= ========= =========
PRO FORMA (UNAUDITED)
Historical income before income taxes................................... $ 985 $ 1,128
Pro forma adjustment to eliminate annual
compensation amounts to S corporation stockholders(2).................. 742 --
--------- ---------
Pro forma income before income taxes.................................... 1,727 1,128
Pro forma provision for income taxes(3)................................. 704 488
--------- ---------
Pro forma net income.................................................... $ 1,023 $ 640
========= =========
Pro forma net income per share(4)....................................... $ $
========= =========
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
DECEMBER 31, JUNE 30, 1996
----------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 HISTORICAL AS ADJUSTED(5)
--------- --------- --------- --------- --------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital......... $ 411 $ 549 $ 953 $ 1,296 $ 1,943 $ 2,793
Total assets............ 1,577 3,092 6,454 7,727 11,653 13,182
Short-term debt,
including current
portion of capital
lease obligations...... 465 608 -- 2,272 4,088 2,926
Long-term debt,
including capital lease
obligations............ 333 476 934 2,383 2,625 2,584
Stockholders' equity.... 283 364 480 456 1,408 2,475
</TABLE>
- -------
(1)For all periods shown, the Company was treated as an S corporation for
income tax purposes. Therefore, the Company's historical statements of
operations data do not include a provision for U.S. federal income taxes.
(2)In 1996, the Company, pursuant to certain employment arrangements, agreed to
provide the stockholder officers annual salaries in the aggregate amount of
$760,000. Such arrangements do not provide for any additional compensation,
including bonuses, for 1996. Accordingly, the adjustment eliminates the amount
of stockholder officers compensation which was paid in excess of $760,000 in
1995, the amount the Company expects to pay in 1996, which will be reflected in
selling, general and administrative expenses. Subsequent to 1996, compensation
for Philip Friedman and Victor Friedman, including bonuses, if any, will be
determined by the Company's compensation committee.
(3)Adjusted for all periods to record a provision for income taxes as if the
Company had been a C corporation. See "The Company."
(4)Computed by dividing pro forma net income by the weighted average number of
shares of Common Stock outstanding during the periods.
(5)Adjusted to reflect the Offering and the use of a portion of the net
proceeds therefrom to repay indebtedness and to pay a distribution to the
Company's existing stockholders. See "Use of Proceeds."
5
<PAGE>
RISK FACTORS
DEPENDENCE ON COMPUTER INDUSTRY TRENDS AND MOVEMENT TOWARDS OUTSOURCING
The Company's future success is dependent upon the continuation of a number of
trends in the computer industry, including the migration by IT end-users to
multivendor and multisystem computing environments, the overall increase in the
sophistication and interdependency of computing technology and a focus by IT
managers on cost-efficient solutions. The Company believes these trends have
resulted in an increased demand for support service providers that have the
ability to deliver a broad range of IT and support services and a movement by
many clients towards outsourcing. The Company's business and growth will depend
in large part on the movement toward outsourcing IT services continuing. There
can be no assurance that these trends will continue, as organizations may elect
to perform such services in-house or that the trends, should they continue,
will not serve as an inducement to other companies to enter the Company's
market. A significant reversal of these trends could have a material adverse
effect on the Company's financial condition and results of operations. See
"Business--Industry Background."
DEPENDENCE ON SIGNIFICANT RELATIONSHIPS; ABSENCE OF LONG-TERM CONTRACTS
The Company's largest client accounted for 33% and 37% of the Company's
revenues for 1995 and the six months ended June 30, 1996, respectively. Client
contract terms vary depending on the nature of the engagement, and there can be
no assurance that a client will renew a contract when it terminates. In
addition, the Company's contracts are generally cancellable by the client at
any time or, with respect to some of the Company's larger contracts, on 30 to
90 days' notice, and clients may unilaterally reduce their use of the Company's
services under such contracts without penalty. The termination or significant
reduction of its business relationship with any of its significant clients
would have a material adverse effect on the Company's financial condition and
results of operations. See "Business."
ABILITY TO ATTRACT AND RETAIN QUALIFIED PROJECT MANAGERS AND OTHER TECHNICAL
EXPERTS
The Company's future success will depend, in part, on its ability to hire and
retain adequately trained project and resource managers, systems analysts,
business analysts, programming staff and other technical experts who can
fulfill the increasingly sophisticated needs of its clients. The Company's on-
going need for technical expert resources arises from (i) increased demand for
the Company's services, (ii) turnover, which is generally high in the industry,
and (iii) client requests for programmers trained in the newest software
technologies. Competition for highly skilled employees in the information
systems and services and IT outsourcing support services industry is intense.
In particular, competition is intense for the limited number of qualified
project managers and professionals with certain specialized skills, such as a
working knowledge of certain leading software products. The Company generally
enters into non-competition agreements and does not enter into employee
contracts with its project managers and technical experts. There can be no
assurance that the Company will be successful in attracting and retaining the
qualified personnel it requires to continue its growth.
EXTREMELY COMPETITIVE INDUSTRY
The industry in which the Company operates is extremely competitive, highly
fragmented and subject to rapid changes. While many companies provide
information systems and services and IT outsourcing support services,
management believes that no one company is dominant. There are numerous and
varied providers of such services, including firms specializing in call center
operations, temporary staffing and personnel placement companies, general
management consulting firms, divisions of large hardware and software companies
and niche providers of IT services, many of which compete in only certain
markets. The Company competes with and faces potential competition from a
number of companies that have significantly greater financial, technical and
marketing resources, greater name recognition and a more established client
base than the Company. In addition, many of the services offered by the Company
historically have been provided, and could in the future be provided, by the
in-house personnel of its clients. The Company believes that its ability to
compete depends, in part, on a number of factors, including the ability of the
Company to hire, retain and motivate a significant number of highly skilled
employees and the development by others of products and services that are
competitive with the Company's products and services.
6
<PAGE>
Management believes that price is not the primary factor in a client's
determination to purchase ACS Optima Software and related services but that
product functionality and methodology for implementation are the principal
competitive considerations. The Company believes that the principal competitive
factors in its professional services business include the nature of the
services offered, quality of service, responsiveness to customer needs,
business experience and technical expertise. With respect to its IT outsourcing
support services, the Company competes primarily on the basis of quality of
service and price, and the Company could be adversely affected by the price at
which others offer comparable IT outsourcing support services. Many of the
Company's larger clients purchase IT outsourcing support services primarily
from a limited number of preferred vendors. The Company has experienced and
continues to anticipate significant pricing pressure from these clients in
order to remain competitive.
Although the Company believes that it can meet its client's demands for
information systems and services and IT outsourcing support services, there can
be no assurance that the Company will continue to compete successfully with its
existing competitors or will be able to compete successfully with any new
competitors.
INTERNAL EXPANSION AND ACQUISITION RISKS
The Company's continued growth through internal expansion is dependent on the
Company's ability to generate additional revenue from existing and new clients.
The Company believes that internal expansion also will depend on the Company's
ability to obtain and develop new products and services, including those
related to the "Year 2000" problem, and there can be no assurance that the
Company will be able to obtain or develop such products or services. Part of
the Company's strategy in enhancing its professional service revenues is to
provide solutions to its customers' "Year 2000" problems through products and
services, including professional resources. There can be no assurance that the
Company's products for "Year 2000" will be accepted by the Company's clients or
that the Company will recognize any revenues from such products or related
professional resources. See "Business--Information Systems and Services--
Professional Services."
As part of its business strategy, the Company intends to expand by acquiring IT
solutions, outsourcing support, consulting and systems integration businesses
in attractive markets or which have desirable client relationships. While the
Company from time to time evaluates acquisition opportunities, it has not
entered into any definitive agreement or understanding with respect to any
particular acquisition. The success of this strategy depends not only upon the
Company's ability to identify and acquire businesses on a cost-effective basis,
but also upon its ability to integrate acquired operations into its
organization effectively, to retain and motivate key personnel and to retain
clients of acquired firms. In addition, the Company expects to experience
competition for acquisitions, and there can be no assurance that suitable
acquisition candidates will be available, that acquisitions can be completed on
reasonable terms or that the Company will have access to adequate funds to
effect any desired acquisition.
In addition, as part of its business strategy, the Company intends to expand
internationally. The Company's success in expanding internationally will be
affected by, and any future international operations will be subject to,
certain additional risks, including general economic and political conditions
in each applicable country, the effect of any applicable foreign tax
structures, tariff and trade regulations, difficulties in obtaining local
licenses, the difficulty of managing an organization spread over various
jurisdictions and geographical regions and compliance with a variety of
changing local laws and regulations. In addition, legislation in foreign
countries may not always provide adequate protection for the Company's
proprietary intellectual property rights. International operations may also
subject the Company's operating results to the effects of fluctuations in
foreign currency exchange rates.
RISKS ASSOCIATED WITH MANAGEMENT OF A LARGE AND RAPIDLY CHANGING BUSINESS
The Company has experienced significant growth, which has placed and, if
sustained, will continue to place a substantial strain on its operational,
administrative and financial resources. The Company's ability to effectively
manage growth of its staff and facilities will require it to continue to
improve its operational, financial and other internal systems, and to train,
motivate and manage its project managers and other technical experts. If the
Company's management is unable to manage growth effectively or its employees
are unable to achieve anticipated performance levels, such occurrences could
have a material adverse effect on the Company's financial condition and results
of operations.
RELIANCE ON KEY EXECUTIVES
The Company's success depends to a significant extent upon the continued
services of its executive officers and other key management and sales
personnel, in particular Philip Friedman, the Company's President and Chief
Executive
7
<PAGE>
Officer. The Company has no employment contracts with any of its employees and
maintains key man insurance on Philip Friedman in the amount of only $500,000.
The unavailability of the continuing services of any of its executive officers
and other key management and sales personnel could have an adverse effect on
the Company's financial condition and results of operations. See "Management."
DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS
The Company's success is dependent, in part, upon its proprietary intellectual
property rights. The Company relies on contractual arrangements, such as trade
secrets and non-disclosure agreements, and copyright and trademark law to
protect its proprietary intellectual property. While the Company holds
registered copyrights with respect to certain modules of the ACS Optima
Software, generally enters into confidentiality agreements with its employees,
consultants, clients and potential clients and limits access to and
distribution of its confidential and proprietary data, there can be no
assurance that the steps taken by the Company in this regard will be adequate
to deter misappropriation of its proprietary information or that the Company
will be able to detect unauthorized use and take appropriate steps to enforce
its intellectual property rights.
The Company's business includes the development of custom software applications
in connection with specific client engagements. Ownership of such software is
generally assigned to the client. Although the Company believes that its
products and services do not infringe on the intellectual property rights of
others, there can be no assurance that such a claim will not be asserted
against the Company in the future.
RISK OF EMERGENCY INTERRUPTION OF HELP DESK AND CALL MANAGEMENT OPERATIONS
The Company's operations are dependent upon the ability to protect its help
desk and call management operations and its information databases against
damage that may be caused by fire, power failure, telecommunications failures,
unauthorized intrusion, computer viruses and other emergencies. At its
facilities, the Company has taken precautions to protect itself and its
customers from events that could interrupt delivery of the Company's services.
These precautions include off-site storage of backup data, fire protection and
physical security systems. Notwithstanding such precautions, there can be no
assurance that a fire, natural disaster, human error, equipment malfunction or
inadequacy or other event would not result in a prolonged interruption in the
Company's ability to provide services to its clients. Such an event could have
a material adverse effect on the Company's financial condition and results of
operations. In addition, at its clients' facilities, protecting help desk and
call management operations is the responsibility of its clients. While
management believes that its clients have taken precautions similar to those
taken by the Company at its facilities, there can be no assurance that this
will continue to be the case. To the extent such precautions are not taken,
this could have a material adverse effect on the Company's financial condition
and results of operations.
CONTROLLING STOCKHOLDER; ANTI-TAKEOVER PROVISIONS; PREFERRED STOCK
Upon consummation of the Offering, Philip Friedman, the Company's President and
Chief Executive Officer, and his brother Victor Friedman, the Company's
Executive Vice President (collectively, the "Principal Stockholders"), will
beneficially own % and %, respectively, of the outstanding shares of Common
Stock. As a result, Philip Friedman will be able to control the outcome of
matters requiring a stockholder vote, including electing directors, adopting or
amending certain provisions of the Company's Certificate of Incorporation (as
defined) and By-Laws (as defined) and approving or preventing certain mergers
or other similar transactions, such as a merger involving the Company or a sale
of substantially all of the Company's assets (including transactions that could
give holders of the Common Stock the opportunity to realize a premium over the
then-prevailing market price for their shares). Therefore, purchasers of Common
Stock offered hereby will become minority stockholders of the Company and will
be unable to control the management or business policies of the Company.
Moreover, subject to contractual restrictions and general fiduciary
obligations, the Company is not prohibited from engaging in transactions with
its management, the Principal Stockholders or entities in which such persons
are interested. The Certificate of Incorporation also provides for the Board of
Directors to be divided into three classes of directors serving staggered
three-year terms and certain super majority voting provisions. The Company's
Certificate of Incorporation does not provide for cumulative voting in the
election of directors and, as a result, Philip Friedman can elect all the
directors if he so chooses. Furthermore, the Company is subject to Section 203
of the Delaware General Corporation Law. The existence of these provisions,
8
<PAGE>
together with the stock ownership of the Principal Stockholders, would be
expected to have an anti-takeover effect, including possibly discouraging
takeover attempts that might result in a premium over the market price for the
shares of Common Stock. See "Description of Capital Stock" and "Principal and
Selling Stockholders."
The Company's Certificate of Incorporation authorizes the issuance of "blank
check" preferred stock ("Preferred Stock") with such designations, rights and
preferences as may be determined from time to time by the Board of Directors.
In the event of issuance, such Preferred Stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. In addition, the issuance of Preferred Stock may
adversely affect the voting and dividend rights, rights upon liquidation and
other rights of the holders of Common Stock (including the purchasers of Common
Stock in the Offering). Although the Company has no present intention to issue
any shares of such Preferred Stock, the Company retains the right to do so in
the future.
ABSENCE OF PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; POSSIBLE VOLATILITY
OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock.
There can be no assurance that, following the Offering, an active trading
market for the Common Stock will develop or be sustained or that the market
price of the Common Stock will not decline below the initial public offering
price. The initial public offering price will be determined by negotiations
among the Company and the Representatives (as defined) and will not necessarily
be indicative of the market price of the Common Stock after the Offering. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. In addition, the market price of the Common
Stock could be subject to significant fluctuations in response to variations in
quarterly operating results, changes in earnings estimates by securities
analysts, general trends in the technology and emerging growth company sectors
and other factors. The securities markets have experienced significant price
and volume fluctuations from time to time in recent years that often have been
unrelated or disproportionate to the operating performance of particular
companies and which have particularly affected the market price of equity
securities of technology companies. These broad fluctuations may adversely
affect the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial amounts of Common Stock in the public market after the
Offering could adversely affect the prevailing market price of the shares of
Common Stock offered hereby and the Company's ability to raise additional
capital through additional public offerings of equity securities. In addition
to the shares of Common Stock offered hereby, as of the date of this
Prospectus, there will be shares of Common Stock outstanding, all of which
are "restricted" shares (the "Restricted Shares") under the Securities Act of
1933, as amended (the "Securities Act"), and are held by the Principal
Stockholders. Beginning 180 days after the date of this Prospectus, upon the
expiration of certain lock-up agreements with the Underwriters, the Restricted
Shares will first become eligible for sale in the public market subject to
certain volume and other resale restrictions pursuant to Rule 144 under the
Securities Act. The Principal Stockholders are also entitled to certain rights
with respect to the registration under the Securities Act of shares held by
them. See "Certain Relationships and Related Party Transactions." In addition,
after the Offering, the Company intends to file a registration statement under
the Securities Act to register shares of Common Stock reserved for issuance
upon the exercise of options or awards of restricted stock that may be granted
under the 1996 Long-Term Incentive Plan. See "Management--1996 Long-Term
Incentive Plan," "Principal and Selling Stockholders" and "Shares Eligible for
Future Sale."
NO DIVIDENDS
The Company anticipates that, for the foreseeable future, all earnings, if any,
will be retained for the operation and expansion of its business and that it
will not pay dividends after the payment of the dividends to the Company's
Principal Stockholders as described under "The Company." See "Dividend Policy."
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of the shares of Common Stock will experience immediate dilution
after the Offering. See "Dilution." In addition, an aggregate of shares of
Common Stock are reserved for issuance under the Company's 1996 Long-Term
Incentive Plan, which shares, when and if issued, may cause additional dilution
to the purchasers of Common Stock offered hereby.
9
<PAGE>
THE COMPANY
The Company was founded in April 1984. Prior to the Offering, Philip Friedman
and his brother Victor Friedman owned 90% and 10%, respectively, of the common
stock.
Since its incorporation, the Company has been treated for federal income tax
purposes as an S corporation under Subchapter S of the Internal Revenue Code of
1986, as amended (the "Code"), and the Company's earnings have been taxed for
federal and certain state income tax purposes directly to its stockholders
rather than to the Company. See Note 13 to the financial statements of the
Company. The Company will terminate its S corporation status effective as of
the day preceding the consummation of the Offering (the "S Termination Date").
As a result, the Company will have a final S short year ending on and including
the day preceding the S Termination Date. On and after the S Termination Date,
the Company will no longer be treated as an S corporation and, accordingly,
will be fully subject to federal, state and local income taxes.
Upon consummation of the Offering, the Company plans to distribute to its
stockholders of record immediately prior to the Offering the cumulative amount
of its undistributed earnings for the entire period that it was an S
corporation (i.e., from inception through the day preceding the S Termination
Date), which earnings have been or will be taxed to such stockholders for
federal and certain state income tax purposes. As of June 30, 1996, the
cumulative balance of such undistributed S period earnings was approximately
$3.3 million. To this amount will be added, for purposes of calculating the
amount of the distribution, the earnings of the Company from June 30, 1996 to
the day prior to the S Termination Date (less any distributions made by the
Company during such period).
Should there be any adjustments to the Company's federal taxable income that
result in a shifting of income from taxable years in which the Company was an S
corporation to subsequent non-S corporation taxable years of the Company, or
vice versa, the stockholders of record immediately prior to the Offering shall
pay to the Company (in the former circumstance) or the Company shall pay to
such stockholders (in the latter circumstance), the amount of federal, state
and local income taxes, including penalties and interest, incurred by the
Company or the stockholders, as the case may be, as a result of such adjustment
to income (without regard to any tax benefit that the stockholders may realize
from an increase in the basis of their Common Stock that results from such
adjustment). To the extent that any such amount is paid to a stockholder after
the date which is one year from the S Termination Date, such amount will be
increased in an amount necessary to reimburse such stockholder for taxes
required to be paid by him as a result of his receipt of such amount (as so
increased). The cost to the Company of any such payment could exceed the amount
of the savings realized by the Company as a result of such adjustment to
income. The stockholders of record immediately prior to the Offering will also
indemnify and hold harmless the Company from any federal and New York state
income tax liabilities (including interest and penalties) that result from the
failure of the Company to qualify as an S corporation for any year or years
ending on or prior to December 31, 1995 or for the period from January 1, 1996
through the day prior to the S Termination Date.
Prior to the consummation of the Offering, the Company will also adopt an
amended and restated certificate of incorporation (the "Certificate of
Incorporation") and by-laws (the "By-Laws"). The Certificate of Incorporation
will provide for "blank check" Preferred Stock, a Board of Directors that will
be divided into three classes of directors serving staggered three-year terms
and certain super majority voting provisions. See "Description of Capital
Stock." Also immediately prior to the Offering, the Company will effect a
for one stock split of its existing common stock, following which the Company's
current stockholders, Philip Friedman and Victor Friedman, will exchange such
common stock on a one-for-one basis for Common Stock.
The Company is incorporated in the State of Delaware and maintains its
principal executive offices at 1675 Broadway, New York, New York 10019. The
Company's telephone number is (212) 408-3800.
10
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be approximately $ million (or approximately
$ million if the Underwriters' over-allotment option is exercised in full),
after deducting underwriting discounts and estimated Offering expenses and
assuming an initial offering price of $ per share.
The Company intends to use the net proceeds (i) to repay all outstanding
indebtedness (a) owed to Philip Friedman in the aggregate amount of
approximately $2.5 million, which indebtedness is payable upon demand and bears
interest at 10.0%, (b) under the Company's revolving credit facility ($2.2
million as of June 30, 1996), which indebtedness bears interest at the bank's
prime rate (8.25% at June 30, 1996) and matures in May 1997, and (c) under the
Company's term loan ($267,000 outstanding as of June 30, 1996), which
indebtedness bears interest at 1.25% per annum above such prime rate and
matures in June 1997, (ii) to distribute to its stockholders of record
immediately prior to the Offering the cumulative amount of the Company's
undistributed earnings for the entire period that it was an S corporation
(approximately $3.3 million at June 30, 1996) and (iii) for general corporate
purposes, including working capital, potential strategic acquisitions,
strategic business partnerships and future product enhancements. While the
Company from time to time evaluates acquisition opportunities, it has not
entered into any definitive agreement or understanding, and is currently not
participating in any negotiations, with respect to any particular acquisition.
The Company currently anticipates that any acquisition would be of a business
similar or complementary to the business currently conducted by the Company.
The Company will not receive any proceeds from the sale of the Common Stock by
the Selling Stockholders.
DIVIDEND POLICY
The Company has not paid any cash dividends on its common stock in the last two
years ended December 31, 1995 or in the six month period ended June 30, 1996.
The Company intends to retain its earnings for reinvestment in the Company and,
therefore, does not anticipate paying any dividends on the Common Stock in the
foreseeable future, other than the payment of the dividend to the Company's
Principal Stockholders as described under "The Company." Subject to any
restrictions in any future financing agreements, any future determination as to
the payment of dividends will be at the discretion of the Company's Board of
Directors and will depend on the Company's results of operations, financial
condition, capital requirements and other factors deemed relevant by the Board
of Directors.
11
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt, including current portion
of capital lease obligations, and capitalization of the Company as of June 30,
1996 and as adjusted to give effect to the sale by the Company of shares of
Common Stock offered hereby at an assumed initial public offering price of $
per share, the application of a portion of the estimated net proceeds therefrom
to repay indebtedness and the distribution of approximately $3.3 million of
undistributed S corporation earnings as described in "Use of Proceeds."
-------------
<TABLE>
AS OF JUNE 30, 1996
---------------------
ACTUAL(1) AS ADJUSTED
--------- -----------
<S> <C> <C>
Dollars in thousands, except share data
Short-term debt, including current portion of capital
lease obligations....................................... $2,926 $ 136
========= ===========
Long-term debt, less current portion of capital lease
obligations............................................. 438 438
--------- -----------
Subordinated debt-stockholder............................ 2,146 --
--------- -----------
Stockholders' equity:
Preferred Stock, $.001 par value, 1,000,000 shares
authorized, no shares issued and outstanding.......... -- --
Common Stock, $.001 par value, shares authorized,
shares issued and outstanding Actual and shares
issued and outstanding................................
As Adjusted(2)........................................ 1
Additional paid-in capital............................. 228
Retained earnings...................................... 2,388
Less shares held in treasury at cost............. (142)
--------- -----------
Total stockholders' equity........................... 2,475
========= ===========
Total capitalization................................. $5,059 $
========= ===========
</TABLE>
- -------
(1) After giving effect to the proposed stock split and subsequent exchange
discussed under "The Company."
(2) Issued and outstanding shares do not include shares of Common Stock re-
served for issuance under the Company's 1996 Long-Term Incentive Plan.
12
<PAGE>
DILUTION
At June 30, 1996, the net tangible adjusted book value of the Company was
approximately $ million, or $ per share of Common Stock. After giving
effect to the sale by the Company of shares of Common Stock offered
hereby (assuming an initial public offering price of $ per share and after
deducting underwriting discounts and estimated Offering expenses), the pro
forma net tangible adjusted book value of the Company at June 30, 1996 would
have been $ million, or $ per share of Common Stock. This represents an
immediate increase in net tangible book value of $ per share to existing
stockholders before the Offering, and an immediate dilution of $ per share
to the purchasers of such shares at the public offering price. The following
table illustrates the dilution in net tangible book value per share to new
investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share of the
Common Stock $
---------
Net tangible book value per share at June 30, 1996 $
---------
Increase in net tangible book value per share after
the Offering
---------
Pro forma net tangible book value per share after the
Offering
---------
Dilution per share to new investors $
=========
</TABLE>
The following table summarizes at June 30, 1996, after giving effect to the
sale by the Company of shares of Common Stock offered hereby: (i) the
number of shares of Common Stock purchased by existing stockholders from the
Company and the total consideration and average price per share paid to the
Company for such shares, (ii) the number of shares of Common Stock purchased by
new investors in the Offering from the Company and the total consideration and
the price per share paid by them for such shares and (iii) the percentage of
shares purchased from the Company by existing stockholders and the new
investors and the percentages of the consideration paid to the Company for such
shares by existing stockholders and new investors.
--------------------------------------------------
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders % $ % $
New investors
--------- --------- --------- --------- ---------
Total 100% $ 100%
========= ========= ========= =========
</TABLE>
13
<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected financial information of the Company as of and for the
year ended December 31, 1995 and as of and for the six months ended June 30,
1996 are derived from the financial statements of the Company which were
audited by Ernst & Young LLP, independent auditors. The report of such auditors
with respect to such financial statements appear elsewhere in this Prospectus.
The following selected financial information of the Company as of and for the
years ended December 31, 1991, 1992, 1993 and 1994 are derived from the
financial statements of the Company which were audited by BDO Seidman, LLP,
independent auditors. The report of such auditors with respect to the financial
statements as of December 31, 1994 and for each of the two years in the period
ended December 31, 1994 appears elsewhere in this Prospectus. The selected
financial information as of and for the six months ended June 30, 1995 is
derived from unaudited financial statements which have been prepared on the
same basis as the audited financial statements, and, in management's opinion,
includes all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information shown herein. Historical
results are not necessarily indicative of future results. The following
selected financial information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operation,"
"Capitalization" and the Company's financial statements and notes thereto
included elsewhere in this Prospectus.
--------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------- -------------------
Dollars in thousands, except 1991 1992 1993 1994 1995 1995 1996
per share data ------- ------- ------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DA-
TA(1)
Revenues.................... $ 5,572 $12,189 $26,003 $24,710 $35,947 $15,494 $27,353
Direct costs................ 3,328 8,863 20,982 16,870 25,977 10,572 20,886
------- ------- ------- ------- ------- ------- -------
Income from direct opera-
tions...................... 2,244 3,326 5,021 7,840 9,970 4,922 6,467
Selling, general and admin-
istrative expenses......... 1,489 1,973 2,916 4,725 6,690 3,007 4,504
Compensation amounts to S
corporation stockholders... 592 1,232 1,950 3,041 1,502 201 380
Amortization of cost in ex-
cess of fair value of as-
sets purchased............. -- -- -- 213 320 160 160
------- ------- ------- ------- ------- ------- -------
2,081 3,205 4,866 7,979 8,512 3,368 5,044
------- ------- ------- ------- ------- ------- -------
Operating income (loss)..... 163 121 155 (139) 1,458 1,554 1,423
Interest expense............ -- -- -- 77 473 225 295
------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes...................... 163 121 155 (216) 985 1,329 1,128
Income taxes................ 21 31 39 60 33 60 61
------- ------- ------- ------- ------- ------- -------
Net income (loss)........... $ 142 $ 90 $ 116 $ (276) $ 952 $ 1,269 $ 1,067
======= ======= ======= ======= ======= ======= =======
PRO FORMA (UNAUDITED)
Historical income before income taxes........................ $ 985 $ 1,128
Pro forma adjustment to eliminate annual
compensation amounts to S corporation stockholders(2)....... 742 --
------- -------
Pro forma income before income taxes......................... 1,727 1,128
Pro forma provision for income taxes(3)...................... 704 488
------- -------
Pro forma net income......................................... $ 1,023 $ 640
======= =======
$
Pro forma net income per share(4)............................ $
======= =======
</TABLE>
--------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1996
--------------------------------------- -------------------------
1991 1992 1993 1994 1995 HISTORICAL AS ADJUSTED(5)
------- ------- ------- ------- ------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital............. $ 411 $ 549 $ 953 $ 1,296 $ 1,943 $ 2,793
Total assets................ 1,577 3,092 6,454 7,727 11,653 13,182
Short-term debt, including
current portion of capital
lease obligations.......... 465 608 -- 2,272 4,088 2,926
Long-term debt, including
capital lease obligations.. 333 476 934 2,383 2,625 2,584
Stockholders' equity........ 283 364 480 456 1,408 2,475
</TABLE>
- -------
(1) For all periods shown, the Company was treated as an S corporation for
income tax purposes. Therefore, the Company's historical statements of
operations data do not include a provision for U.S. federal income taxes.
(2) In 1996, the Company, pursuant to certain employment arrangements, agreed
to provide the stockholder officers annual salaries in the aggregate amount
of $760,000. Such arrangements do not provide for any additional
compensation, including bonuses, for 1996. Accordingly, the adjustment
eliminates the amount of stockholder officers compensation which was paid in
excess of $760,000 in 1995, the amount the Company expects to pay in 1996,
which will be reflected in selling, general and administrative expenses.
Subsequent to 1996, compensation for Philip Friedman and Victor Friedman,
including bonuses, if any, will be determined by the Company's compensation
committee.
(3) Adjusted for all periods to record a provision for income taxes as if the
Company had been a C corporation. See "The Company."
(4) Computed by dividing pro forma net income by the weighted average number
of shares of Common Stock of the Company outstanding during the periods.
(5) Adjusted to reflect the Offering and the use of a portion of the net
proceeds therefrom to repay indebtedness and to pay a distribution to the
Company's stockholders. See "Use of Proceeds."
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements of the Company and related notes thereto and other
financial information included elsewhere in this Prospectus.
OVERVIEW
The Company derives its revenues by providing IT services. The Company's
information systems and services include the ACS Optima Software and IBM's
AS/400 hardware, as well as a complete range of professional services and
training. The Company's IT outsourcing support services consist of on-site and
remote help desk and integrated call management services.
Information systems and services revenues were 93.0%, 78.0%, 64.0% and 53.0% of
total revenue in 1993, 1994, 1995 and for the six months ended June 30, 1996,
respectively. Information systems and services revenues as a percentage of
total revenues decreased as a result of the growth in revenues from IT
outsourcing support services. Nevertheless, the Company achieved 19.0% growth
in information systems and services revenue dollars in 1995 principally as a
result of an acquisition consummated in 1994 and new business. In May 1994, the
Company purchased the business operations of ACS Software Products Group, which
included the ACS Optima Software package. Previously, the Company had been a
remarketer of ACS software and had received commission revenues from the sale
of ACS software. The excess of the total acquisition cost over the fair value
of net assets acquired of $959,000 is amortized on a straight-line basis over
three years. In October 1994, the Company enhanced its ability to provide
professional services to the financial community when it purchased the business
operations of Real-Time Technology, Inc. ("Real-Time"), an information
consulting company which provided professional services primarily to the
financial community. Real-Time was then owned by Victor Friedman. For the years
1993, 1994 and 1995 and the six months ended June 30, 1996, substantially all
of the Company's information systems and services revenues, other than revenues
from sales of hardware and software, were generated on a time plus materials
basis. Research and development costs associated with the ACS Optima Software
are expensed as incurred and are included in direct costs.
In 1994, the Company undertook a focused effort to increase revenues from ACS
Optima Software and services and IT outsourcing support services and decrease
revenue from hardware sales, which generally have lower margins. As a result,
total revenues decreased 5.0% in 1994 but income from direct operations
increased 56.1%. For 1995, revenues excluding hardware revenues, increased
59.0% from 1994 and hardware revenues decreased 11.0%.
The Company's IT outsourcing support services have grown significantly since
1993. In 1993, IT outsourcing support services revenue represented only 7.0% of
total revenues, compared to 47.0% for the six month period ended June 30, 1996.
Revenues from the Company's IT outsourcing support business increased 141.0% in
1995. In October 1995, the Company was awarded a contract by IBM to provide its
customers with call management support at IBM's Atlanta and Dallas facilities.
Outsourcing support services revenues from remote help desk and call management
services were $5.2 million, $11.0 million and $10.6 million for 1994, 1995 and
for the six months ended June 30, 1996, respectively. The Company's on-site
help desk support services, which were started in mid-1994, provided $1.9
million in revenues for 1995 and $2.2 million for the six months ended June 30,
1996. IT outsourcing support services revenues are generated on a time plus
materials basis.
The Company, with the consent of its stockholders, has elected to be taxed as
an S corporation pursuant to the Code and certain state tax laws. As such, the
Company has not been subject to federal and certain state income taxes and the
stockholders have included the Company's taxable income or loss in their
individual income tax returns. Income taxes in 1993, 1994, 1995 and the six
months ended June 30, 1996 primarily represent New York City corporate income
taxes. The New York City income tax rate is 8.85%.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1996 as compared to Six Months Ended June 30, 1995
Revenues. The Company's total revenues increased 76.5% to $27.4 million for the
six months ended June 30, 1996 from $15.5 million for the six months ended June
30, 1995. Information systems and services revenues increased 26.1% to $14.5
million for the six months ended June 30, 1996 from $11.5 million for the six
months ended June 30, 1995, primarily due to an increase in revenues from ACS
Optima Software and related systems integration sales of
15
<PAGE>
$5.2 million, from $5.3 million in the six months ended June 30, 1995 to $10.5
million in the six months ended June 30, 1996, partially offset by a decrease
in revenues from professional services of $2.5 million, from $5.2 million in
the six months ended June 30, 1995 to $2.7 million in the six months ended June
30, 1996. IT outsourcing support revenues increased 220.0% to $12.9 million for
the six months ended June 30, 1996 from $4.0 million for the six months ended
June 30, 1995, principally due to the start of the Company's call management
business in October 1995. The balance of the increase in IT outsourcing support
revenues resulted from growth in existing remote help desk services and the
expansion of on-site help desk services.
Direct Costs. Direct costs, which are comprised primarily of direct salaries,
direct benefits and related costs and resale purchases of third party hardware
and software, increased 97.6% to $20.9 million (76.4% of revenues) for the six
months ended June 30, 1996 from $10.6 million (68.2% of revenues) for the six
months ended June 30, 1995. Direct costs increased as a percentage of revenues
primarily due to (i) the significant increase in the number of employees
associated with the Company's growth in IT outsourcing support revenues and
(ii) the resale purchase of third party hardware and software, which increased
to $3.7 million for the six months ended June 30, 1996 from $700,000 for the
six months ended June 30, 1995. Direct costs which are associated with sales of
third party hardware and software are larger as a percentage of revenues than
direct costs associated with professional services or IT outsourcing support
services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") consist primarily of indirect salaries and
facility costs for administrative, selling and executive personnel, as well as
insurance costs, advertising, professional fees and other non-direct costs.
SG&A expenses increased by 49.8% to $4.5 million (16.5% of revenues) for the
six months ended June 30, 1996 from $3.0 million (19.4% of revenues) for the
six months ended June 30, 1995. The overall increase in SG&A resulted from the
Company supporting its growing infrastructure. Some of the larger increases
were selling and administrative salaries ($800,000), facility costs ($400,000)
and advertising ($150,000). SG&A decreased as a percentage of revenues because
certain SG&A costs are fixed and for the six months ended June 30, 1996 were
absorbed over a larger revenue base.
Compensation Amounts to S Corporation Stockholders. Compensation amounts to S
corporation stockholders for the six months ended June 30, 1996 and 1995
represent base salaries paid to stockholders but do not include an accrual for
year end bonuses. Compensation amounts to S corporation stockholders increased
$179,000 to $380,000, (1.4% of revenues) for the six months ended June 30, 1996
from $201,000 (1.3% of revenues) for the six months ended June 30, 1995.
Amortization of Cost in Excess of Fair Value of Assets Purchased. Amortization
of cost in excess of fair value of assets purchased was $160,000 for the six
months ended June 30, 1995 and 1996.
Operating Income. Operating income decreased 8.4% to $1.4 million (5.2% of
revenues) for the six months ended June 30, 1996 from $1.6 million (10.0% of
revenues) for the six months ended June 30, 1995. This decrease in operating
income resulted from the increase in direct costs as a percentage of revenues,
partially offset by the increase in revenues and the decrease in SG&A as a
percentage of revenues.
Interest Expense. Interest expense increased to $295,000 (1.1% of revenues) for
the six months ended June 30, 1996 from $225,000 (1.5% of revenues) for the six
months ended June 30, 1995. This increase was principally the result of
increased working capital borrowings used to finance the Company's growth.
Net Income. For the reasons stated above, net income decreased 15.9% to $1.1
million (3.9% of revenues) for the six months ended June 30, 1996 from $1.3
million (8.2% of revenues) for the six months ended June 30, 1995.
Year Ended December 31, 1995 as compared to Year Ended December 31, 1994
Revenues. The Company's total revenues increased 45.5% to $35.9 million in 1995
from $24.7 million in 1994. Information systems and services revenues increased
19.1% to $23.1 million in 1995 from $19.4 million in 1994, principally because
of revenues associated with the full year effects of the ACS acquisition which
was consummated in
16
<PAGE>
May of 1994. IT outsourcing support revenues increased 143.3% to $12.9 million
in 1995 from $5.3 million in 1994, primarily due to increased revenues realized
from existing and additional remote help desk services and the start up of call
management and on-site help desk services.
Direct Costs. Direct costs increased 54.0% to $26.0 million (72.3% of revenues)
for 1995 from $16.9 million (68.3% of revenues) for 1994. Direct costs
increased as a percentage of revenues because of the addition of a number of
technical personnel in connection with the increase in ACS Optima and IT
outsourcing support services revenue, which technical personnel needed to be
properly trained, thereby resulting in lower than normal billable production.
In addition, the increase in IT outsourcing support services revenue, which
generally realize lower margins, also contributed to the increase in direct
costs as a percentage of revenues. Finally, during the early part of 1995, the
Company completed certain professional services contracts related to AS/400
programming, which generally have higher margins.
Selling, General and Administrative Expenses. SG&A expenses increased by 41.6%
to $6.7 million (18.6% of revenues) for 1995 from $4.7 million (19.1% of
revenues) for 1994. The Company incurred an increase of approximately $1.1
million in selling and administrative salaries to support its operational
growth and approximately $900,000 of additional SG&A expense related to the
Company's move into larger facilities in New York and Atlanta, the expansion of
its Los Angeles facility and the opening of its Dallas office. SG&A decreased
as a percentage of revenues because certain SG&A costs are fixed and in 1995
were absorbed over a larger revenue base.
Compensation Amounts to S Corporation Stockholders. Compensation amounts to S
corporation stockholders for annual periods represents annual salaries and
year-end bonuses. Such compensation decreased approximately $1.5 million in
1995 to $1.5 million (4.2% of revenues) from $3.0 million (12.3% of revenues)
in 1994. A portion of each year's compensation amounts to S corporation
stockholders was subsequently loaned to the Company in the form of subordinated
debt in the amounts of $1.2 million and $300,000 in 1994 and 1995,
respectively.
Amortization of Costs in Excess of Fair Value of Assets Purchased. Amortization
of costs in excess of fair value of assets purchased, which consists of cost in
excess of fair value of assets purchased related to the acquisition of the ACS
Software Products Group, increased 50.2% to $320,000 (0.9% of revenues) for
1995 from $213,000 (0.9% of revenues) for 1994. The 1995 balance reflects a
full year of amortization.
Operating Income (Loss). Operating income increased to $1.5 million (4.1% of
revenue) for 1995 from a loss of $139,000 for 1994. The improvement in
operating income is a result of the increase in revenues discussed above,
together with the decrease in compensation amounts to S corporation
stockholder, partially offset by an increase in direct costs as a percentage of
revenues.
Interest Expense. Interest expense increased from $77,000 (0.3% of revenues) in
1994 to $473,000 (1.3% of revenues) in 1995. This increase is a result of
increased working capital borrowings used to finance the Company's growth, as
well as interest expense associated with an increase in subordinated debt to
stockholders.
Net Income (Loss). For the reasons stated above, net income increased $1.2
million to $952,000 (2.6% of revenues) for 1995 from a loss of $276,000 for
1994.
Year Ended December 31, 1994 as compared to Year Ended December 31, 1993
Revenues. The Company's total revenues decreased 5.0% to $24.7 million in 1994
from $26.0 million in 1993. Information systems and services revenues decreased
19.8% to $19.4 million in 1994 from $24.2 million in 1993 because hardware
revenues decreased by $12.7 million while other IT services revenues increased
by $7.9 million. In 1994, the Company made a focused effort to increase
revenues from ACS Optima Software and related services and IT outsourcing
support services and decrease revenue from hardware sales, which generally have
lower margins. IT outsourcing support revenues increased 194.4% to $5.3 million
for 1994 from $1.8 million for 1993 due to additional remote help desk
contracts begun in 1994.
17
<PAGE>
Direct Costs. Direct costs declined 19.6% to $16.9 million (68.3% of revenues)
for 1994 from $21.0 million (80.7% of revenues) for 1993. Direct costs as a
percentage of revenues decreased because of the decreases in revenues from
hardware sales, which have larger direct costs as a percentage of revenues than
direct costs associated with professional services or IT outsourcing support
services.
Selling, General and Administrative Expenses. SG&A expenses increased by 62.0%
to $4.7 million (19.1% of revenues) for 1994 from $2.9 million (11.2% of
revenues) for 1993. This increase was attributable to the change in product mix
discussed above and the development of an infrastructure to support increases
in IT services revenue.
Compensation Amounts to S Corporation Stockholders. Compensation amounts to S
corporation stockholders increased $1.0 million to $3.0 million (12.3% of
revenues) for 1994 from $2.0 million (7.5% of revenues) for 1993. $1.2 million
of the compensation amounts to S corporation stockholders in 1994 was
subsequently loaned to the Company in the form of subordinated debt.
Amortization of Costs in Excess of Fair Value of Assets Purchased. Amortization
of costs in excess of fair value of assets purchased began in May 1994 upon
consummation of the acquisition of ACS Software Products Group and was
$213,000.
Operating Income (Loss). Operating income decreased by $294,000 to a loss of
$139,000 for 1994 from operating income of $155,000 (0.6% of revenues) for
1993, principally because of the increase in compensation amounts to
S corporation stockholders and SG&A as percentages of revenues, together with
the decrease in total revenues, partially offset by the decrease in direct
costs as a percentage of revenues.
Interest Expense. In 1994 the Company incurred interest expense of $77,000 due
to working capital borrowings used to finance the Company's growth. The Company
incurred no interest expense in 1993.
Net Income (Loss). For the reasons stated above, net income decreased $392,000
to a net loss of $276,000 for 1994 from net income of $116,000 (0.4% of
revenues) for 1993.
18
<PAGE>
PRO FORMA STATEMENTS OF OPERATIONS DATA (UNAUDITED)
Since 1984, the Company has elected to be taxed as an S corporation pursuant to
the Code and certain state tax laws. The pro forma statements of operations
differ from the historical statements of operations as a result of (i) an
adjustment to eliminate the amount of stockholders' compensation which was paid
in excess of $760,000 in 1995 and (ii) an adjustment to record a provision for
income taxes based on pro forma income as if the Company had been a C
corporation. In 1995, compensation amounts to S corporation stockholders
consisted of annual salaries and discretionary year-end bonuses which were
charged to expense. For the six months ended June 30, 1996, the Company has
recorded compensation amounts to S corporation stockholders based on an
aggregate annual base salary of $760,000. As a result, the historical
statements of operations for 1995 and the six months ended June 30, 1996 are
not directly comparable and such periods will not be comparable to future
periods.
-------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
Dollars in thousands, except per share data
Pro Forma Statements of Operations Data:
Revenues....................................... $35,947 $27,353
Direct costs................................... 25,977 20,886
--------- ---------
Income from direct operations.................. 9,970 6,467
Selling, general and administrative expenses... 6,690 4,504
Compensation amounts to S corporation stock-
holders....................................... 760 380
Amortization of costs in excess of fair value
of assets purchased........................... 320 160
--------- ---------
7,770 5,044
Operating income............................... 2,200 1,423
Interest expense............................... 473 295
--------- ---------
Income before income taxes..................... 1,727 1,128
Income taxes................................... 704 488
--------- ---------
Pro forma net income........................... $ 1,023 $ 640
========= =========
Pro forma net income per share................. $ $
========= =========
</TABLE>
19
<PAGE>
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth quarterly unaudited statements of operations
information of the Company for each of the ten quarters ended June 30, 1996 and
the percentage of the Company's revenues represented by each item. The
unaudited quarterly information has been prepared on the same basis as the
annual information presented elsewhere in this Prospectus and, in management's
opinion, includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the information for the
quarters presented. The operating results for any quarter are not necessarily
indicative of the results for any future period.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
QUARTERS ENDED
1994 1995 1996
-------------------------------- ----------------------------------- ---------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
Dollars in thousands ------- ------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenues................ $ 4,739 $ 7,267 $ 5,800 $ 6,904 $ 7,142 $ 8,352 $ 9,372 $11,081 $12,436 $14,917
Direct costs............ 3,248 5,087 3,734 4,801 4,961 5,611 6,962 8,443 9,414 11,472
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from direct
operations............. 1,491 2,180 2,066 2,103 2,181 2,741 2,410 2,638 3,022 3,445
Selling, general and
administrative
expenses............... 873 1,212 1,219 1,421 1,421 1,587 1,766 1,916 1,988 2,516
Compensation amounts to
S corporation
stockholders........... 38 190 38 2,775(1) 100 100 100 1,202(1) 190 190
Amortization of cost in
excess of fair value of
assets purchased....... -- 53 80 80 80 80 80 80 80 80
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
911 1,455 1,337 4,276 1,601 1,767 1,946 3,198 2,258 2,786
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss) 580 725 729 (2,173) 580 974 464 (560) 764 659
Interest expense........ -- 15 15 47 118 107 122 126 147 148
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 580 710 714 (2,220) 462 867 342 (686) 617 511
Income taxes............ 19 28 29 (16) 15 45 11 (38) 35 26
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ 561 $ 682 $ 685 $(2,204) $ 447 $ 822 $ 331 $ (648) $ 582 $ 485
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
PRO FORMA
Historical income before income taxes.................... $ 462 $ 867 $ 342 $ (686) $ 617 $ 511
Pro forma adjustment to eliminate annual compensation
amounts to S corporation stockholders (2)............... (90) (90) (90) 1,012 -- --
------- ------- ------- ------- ------- -------
Pro forma income before income taxes..................... 372 777 252 326 617 511
Pro forma provision for income taxes (3)................. 152 317 103 132 267 221
------- ------- ------- ------- ------- -------
Pro forma net income..................................... $ 220 $ 460 $ 149 $ 194 $ 350 $ 290
======= ======= ======= ======= ======= =======
</TABLE>
- -------
(1)Compensation amounts to S corporation stockholders for the fourth quarter
include discretionary annual bonuses which are expensed in the fourth quarter.
Such amounts were approximately $2.7 million and $900,000 for the 1994 and 1995
periods, respectively.
(2)In 1996, the Company, pursuant to certain employment arrangements, agreed to
provide the stockholder officers annual salaries in the aggregate amount of
$760,000. Such arrangements do not provide for any additional compensation,
including bonuses, for 1996. Accordingly, the adjustment eliminates the amount
of stockholder officers compensation which was paid in excess of $760,000 in
1995, the amount the Company expects to pay in 1996, which will be reflected in
selling, general and administrative expenses. Subsequent to 1996, compensation
for Philip Friedman and Victor Friedman, including bonuses, if any, will be
determined by the Company's compensation committee.
(3)Adjusted for all periods to record a provision for income taxes as if the
Company had been a C corporation. See "The Company."
20
<PAGE>
-------------------------------------------------------
<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUES
1994 1995 1996
----------------------------------- ----------------------------------- ----------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
------- ------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA
Revenues................ 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Direct costs............ 69 70 64 69 70 67 74 76 76 77
--- --- --- ---- --- --- --- --- --- ---
Income from direct
operations............. 31 30 36 31 30 33 26 24 24 23
Selling, general and
administrative
expenses............... 18 17 21 21 20 19 19 17 16 17
Compensation amounts to
S corporation
stockholders........... 1 2 1 40 1 1 1 11 1 1
Amortization of cost in
excess of fair value of
assets purchased....... -- 1 1 1 1 1 1 1 1 1
--- --- --- ---- --- --- --- --- --- ---
19 20 23 62 22 21 21 29 18 19
--- --- --- ---- --- --- --- --- --- ---
Operating income (loss). 12 10 13 (31) 8 12 5 (5) 6 4
Interest expense........ -- 0 0 1 2 2 1 1 1 1
--- --- --- ---- --- --- --- --- --- ---
Income (loss) before
income taxes........... 12 10 13 (32) 6 10 4 (6) 5 3
Income taxes............ 0 0 1 0 0 0 0 0 0 0
--- --- --- ---- --- --- --- --- --- ---
Net income (loss)....... 12% 10% 12% (32%) 6% 10% 4% (6%) 5% 3%
=== === === ==== === === === === === ===
PRO FORMA
Historical income before income taxes.................... 6% 10% 4% (6)% 5% 3%
Pro forma adjustment to eliminate annual compensation
amounts to
S corporation stockholders.............................. (1) (1) (1) 9 -- --
--- --- --- --- --- ---
Pro forma income before income taxes..................... 5 9 3 3 5 3
Pro forma provision for income taxes..................... 2 4 1 1 2 1
--- --- --- --- --- ---
Pro forma net income..................................... 3% 5% 2% 2% 3% 2%
=== === === === === ===
</TABLE>
The Company's quarterly operating results have varied and are expected to
continue to vary in the future. These fluctuations may be caused by many
factors, including, among others: the size and timing of ACS Optima Software
and hardware sales; customer order deferrals in anticipation of new ACS Optima
Software releases; variation of ACS Optima Software and hardware sales as a
percentage of total revenues; timing of introduction or enhancement of products
by the Company or its competitors; changes in the Company's operating expenses;
personnel changes and general industry and economic conditions.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has relied primarily upon cash flows from operations,
borrowings under its revolving credit facility and capital lease financings to
finance its operations and acquisitions.
Net cash provided by (used in) operating activities was $2.7 million, ($4.7
million), ($1.3 million) and $1.7 million for 1993, 1994, 1995 and the six
months ended June 30, 1996, respectively.
Net cash used in investing activities for 1993, 1994, 1995 and the six months
ended June 30, 1996 was $119,000, $874,000, $579,000 and $141,000,
respectively. Cash used in investing activities in 1994 is primarily related to
the ACS acquisition and for 1994 and all other periods includes capital
expenditures for computer equipment and furniture and fixtures.
Net cash provided by (used in) financing activities in 1993, 1994, 1995 and the
six months ended June 30, 1996 was ($124,000), $3.1 million, $1.5 million and
($1.4 million), respectively. During the six months ended June 30, 1996, the
Company repaid the balance of certain acquisition debt and a portion of its
notes payable to the bank.
The Company's revolving credit facility consists of a revolving line of credit
with Bank Leumi Trust Company of New York ("Bank Leumi") providing for
outstanding borrowings of up to 80% of eligible accounts receivable with
maximum borrowings of up to $7.0 million. The line of credit, which expires in
May 1997, is collateralized by substantially all of the assets of the Company
and bears interest at the bank's prime rate (currently 8.25%). At June 30,
1996, the Company had $2.2 million outstanding under the revolving credit
facility. A portion of the net proceeds from the Offering will be used to repay
amounts at such time outstanding under the revolving credit facility. See "Use
of Proceeds."
21
<PAGE>
The Company also had an outstanding balance of $267,000 at June 30, 1996 on an
$800,000 three year term loan with Bank Leumi. The term loan is payable in
equal monthly installments of approximately $22,000 and bears interest at 1.25%
per annum above the bank's prime rate. Net proceeds from the term loan were
used to fund the acquisition of ACS Software Products Group. The term loan
contains financial covenants relating to minimum tangible net worth, working
capital and a maximum debt-to-equity ratio. A portion of the net proceeds from
the Offering will be used to repay amounts outstanding under the term loan. See
"Use of Proceeds."
The Company had an outstanding balance of approximately $2.5 million at June
30, 1996, payable to Philip Friedman, the Company's President and Chief
Executive Officer, pursuant to a demand note that bears interest at 10% per
annum. A portion of the net proceeds from the Offering will be used to repay
all amounts outstanding under this demand note. See "Use of Proceeds."
Historically, cash flow from operations and borrowings under the revolving
credit facility have been sufficient to satisfy the Company's liquidity needs.
The Company believes that the net proceeds from the sale of Common Stock
offered hereby, together with anticipated cash flow from operations and
borrowings under the revolving credit facility, will be sufficient to finance
the Company's current operations through approximately the end of 1997;
however, as the Company's operations continue to expand, it may require
additional funds. In addition, while the Company presently anticipates that
capital expenditures for the foreseeable future will be consistent with those
incurred on an historical basis, as the Company's operations continue to
expand, there can be no assurance that this will be the case. To the extent
that additional funds are needed, whether to finance the Company's operations,
future acquisitions or capital expenditures, the Company may be required to
obtain additional financing through one or more offerings of equity or debt
securities, the amendment of the Company's existing revolving credit facility,
a new credit facility or any combination of the foregoing.
INFLATION
In the last three years, inflation has not had a significant impact on the
Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"). SFAS 123 is effective for fiscal years
beginning after December 31, 1995 and prescribes accounting and reporting
standards for all stock-based compensation plans, including employee stock
options, restricted stock, employee stock purchase plans and stock appreciation
rights. SFAS 123 requires compensation expense to be recorded (i) using the new
fair value method or (ii) using existing accounting rules prescribed by
Accounting Principles board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations with pro forma disclosure of
what net income and earnings per share would have been had the Company adopted
the new fair value method. It is the Company's intention to present such
information in accordance with APB 25 as described in (ii) above.
22
<PAGE>
BUSINESS
The Company offers its clients a Composite Solution for their IT requirements.
The Composite Solution is based on a modular approach which allows the Company
to utilize its products and services to create customized solutions for its
clients. Products and services provided by the Company range from the ACS
Optima Software bundled with IBM AS/400 hardware and related support services,
to professional services, technical training, full service on-site and remote
help desk support and call management services. The marketing of many of the
Company's products and services is enhanced through its strategic and other
relationships with recognized leaders in the IT industry, including IBM and
AT&T.
The Company is a leading supplier of integrated business information systems to
the apparel industry. Its solution includes the ACS Optima Software, a
comprehensive, integrated business information system specifically designed for
the apparel industry. The Company provides the ACS Optima Software to many
leading United States apparel manufacturers, including several divisions of
Sara Lee, Polo Ralph Lauren, G-III Apparel and Marzotto.
The Company also provides a variety of professional services, delivered on a
project basis or through staff augmentation, to address clients' systems
requirements, ranging from strategy and design through development and
implementation to maintenance and support. The Company provides these
professional services to clients primarily in the financial, entertainment and
communications industries, including Merrill Lynch, EMI Music and NYNEX. The
Company maintains a national proprietary database consisting of technical
profiles and resumes of approximately 25,000 professionals. The Company
believes that this database, its existing technical staff and other software
tools enable it to offer its clients the technical resources necessary to meet
their IT requirements and address the challenges of creating "Year 2000"
compliant systems. Through its technical training services, the Company
provides approximately 350 comprehensive technical and end-user training
classes to its clients' personnel in many leading-edge technologies, including
Visual Basic, PowerBuilder, Visual C++ and Sybase.
The Company provides a complete range of IT outsourcing support services,
including on-site and remote help desks and integrated call management centers
staffed and managed by the Company's personnel. In providing these services,
the Company uses sophisticated tools that enable it to serve as the transparent
extension of its clients' technical support infrastructure. These services
provide the Company's clients with immediate access to skilled technical
personnel and a cost-effective solution to their IT outsourcing support needs.
The Company's IT outsourcing support clients include IBM, AT&T and Paine
Webber.
INDUSTRY BACKGROUND
Historically, enterprise-wide computing was conducted on proprietary host-based
systems operating on mainframes and minicomputers typically supplied by a
single vendor. These host-based systems offered centralized data processing and
helped automate tasks such as manufacturing, distribution and financial
reporting. In the 1980s, the ease-of-use and low cost of personal computers,
combined with the increased availability of powerful application software, led
to rapid growth in the number of computer users throughout organizations.
Computing environments became increasingly varied and included personal
computers and workstations from different vendors, as well as traditional
minicomputers and mainframes. This transition to distributed computing
environments, including client/server architectures, required businesses to
seek methods of improving information processing across varying computer
hardware and software configurations and to find cost effective ways to ensure
that their employees have access to expert technical support.
Companies have found it increasingly difficult to service all of their IT needs
through in-house personnel. This is due, in part, to rapid technological change
that has resulted in information systems that are more complex and varied
requiring specialized technical expertise. In addition, as part of the trend
towards downsizing and improving return on investment in IT, many companies
have decided to outsource portions of their IT services. Additionally, many
management information systems ("MIS") departments lack the technical
management and support, training capabilities and personnel needed to address
the size and complexity of their own IT systems. As a result, in recent years,
businesses have relied increasingly on IT service firms to develop, support and
strengthen their MIS departments, to train their MIS employees and provide
technical support services, including help desks.
23
<PAGE>
The IT services industry has grown significantly, and it is estimated that
industry revenue will reach $196.0 billion by the year 2000. The Company
believes that a number of factors have caused and will continue to cause this
demand to increase, including: corporate efforts to improve operating
efficiencies by reducing costs; the acceleration of technological change; and
the rapid growth of both software applications and end-users. These factors
will require organizations to fully integrate their existing systems and
migrate to enterprise-wide systems. In addition, the Company believes that this
industry growth will further drive demand for technically trained personnel to
develop and operate such systems.
Many businesses have started to outsource IT and support services and are
turning over help desk, call management and other support services to third
parties. The Company believes that demand for the services provided by IT firms
is likely to increase due to the advantages outside consultants bring to their
clients, including an ability to train and supply personnel with the skill sets
required to utilize new and increasingly complex technology more economically
than maintaining the equivalent level of expertise in-house.
A specific challenge facing IT users is making their current systems "Year
2000" compliant. As the year 2000 approaches, businesses and governments are
beginning to recognize that their current computer systems are incapable of
accepting the millennium change and that modification will be necessary when
two-year date fields become "00" following the year 1999. Resolution of
problems relating to the "Year 2000" may require an analysis and adjustment of
millions of lines of affected software code. The systems, solutions and
personnel required to assess these problems and implement the proper changes
are expected to be a significant factor in driving the industry's high rate of
growth through the year 2000. It is estimated that the global cost of assessing
and correcting the "Year 2000" problem is in excess of $300 billion.
THE COMPOSITE SOLUTION
The Company offers its clients a Composite Solution for their IT requirements.
The Composite Solution is based on a modular approach which allows the Company
to utilize its products and services to create customized solutions for its
clients. Products and services provided by the Company range from the ACS
Optima Software bundled with IBM AS/400 hardware and related support services,
to professional services, technical training, full service on-site and remote
help desk support and call management services. The Company believes that its
Composite Solution, which enables the Company to offer its clients a single
source for an integrated IT solution, gives the Company a marketing advantage
since it provides the Company with numerous entry points to service a client's
IT requirements. The Company typically establishes its initial relationship
with a client by providing one or a limited number of its products and
services. As the relationship develops, the Company and the client often will
identify additional IT requirements which the Company is able to address with
other products and/or services from its portfolio.
STRATEGY
The Company's objective is to continue its growth and to become a leading
provider of a wide variety of information systems and services and IT
outsourcing support services. The Company's principal strategies for achieving
this objective are as follows:
Strengthen its Position as the Provider of the Composite Solution
The Company believes that its Composite Solution provides it with a go-to-
market approach that differentiates it from its competitors. The Company's
highly trained technical staff assess a client's IT requirements and recommend
a customized Composite Solution of one or more of the products and services
offered by the Company. The Company intends to leverage initial client
relationships by providing additional services through cross-selling its
portfolio of solutions and expand its products and services to meet the
changing needs of its clients.
Expand its Presence in the Apparel Industry
The Company intends to further penetrate the apparel industry by leveraging its
name recognition, substantial industry expertise and extensive client base. The
Company intends to maintain ACS Optima's position as the leading business
system for the apparel industry by (i) continuing to upgrade and improve the
system's features in response to the changing requirements of its apparel
clients and (ii) improving and enhancing systems consulting, integration and
outsourcing support services.
24
<PAGE>
Further Penetrate AS/400 Market
The Company believes that the AS/400 market has traditionally been under
serviced by other IT companies. It is estimated that more than 350,000 AS/400s
have been sold to date, making it the most widely used IBM midrange system. The
Company has developed substantial expertise servicing and developing
applications for the AS/400 platform, primarily as a result of its long-term
relationship with IBM, as well as through its development of the ACS Optima
Software. The Company intends to continue to market its IT services primarily
to Fortune 2000 companies, especially to users of the AS/400 platform.
Management believes that the Company's experience with the AS/400 enhances its
ability to develop new relationships with potential clients whose systems run
on AS/400s or other midrange platforms.
Become A Leading Provider of "Year 2000" Solutions
The Company believes that over the next five years it will have major
opportunities to provide the solutions to rectify the problems created by the
millennium change. The Company is licensed to use and market two specialized
software tools designed to address the challenges facing MIS professionals in
creating "Year 2000" compliant systems. The Company believes that its national,
proprietary database, consisting of technical profiles and resumes of
approximately 25,000 professionals and a personnel search engine, "Skills
Finders Plus," enable it to access the technical resources necessary to
implement "Year 2000" solutions.
Leverage Strategic Alliances and Other Business Relationships
The Company has formed several strategic alliances and other relationships with
recognized leaders in the IT industry.
IBM. The Company intends to leverage its successful historical relationship
with IBM to expand the products and services it currently provides to IBM
and other clients. The Company believes it can use its agreement with IBM
designating it as an IBM National Solution Provider to further enhance its
position in the apparel industry. Additionally, the Company believes that
its agreement with IBM designating it as an IBM Industry Remarketer for the
AS/400 and RS/6000 enhances its ability to provide a Composite Solution to
its clients.
AT&T. Pursuant to an agreement with AT&T, the Company currently provides
help desk services to AT&T's clients. The Company intends to introduce to
these clients and others the additional services that comprise the
Company's Composite Solution. In addition, it is the Company's strategy to
establish preferred vendor relationships with AT&T's spin-offs, Lucent
Technologies, Inc. and NCR Corp.
Others. The Company intends to use its business relationships and
agreements with Borland International, Inc. ("Borland"), Lotus Development
Corp. ("Lotus"), Microsoft Corporation ("Microsoft") and Oracle Corp.
("Oracle") to further develop core competencies in their computer products
and to use them when creating a customized Composite Solution for its
clients. In addition, the Company intends to continue to work with Siemens
Rolm Communications Inc. ("Siemens Rolm Communications"), a call center
switch technology provider, ProAmerica Systems Inc. ("ProAmerica Systems"),
a developer of call center software, and Haldeman-Powell Partners, an
architectural firm, to provide potential clients with one-stop shopping for
all services needed to set up and operate a call center.
Leverage Existing Call Management Infrastructure
In 1995, the Company opened a state-of-the-art call management/help desk
facility at the Dallas Infomart which will allow it to provide an end-to-end
solution to its clients' call management needs. The Company believes that its
ability to leverage its call management infrastructure across multiple clients
will significantly reduce the cost of processing a call and further enhance the
Company's competitiveness.
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<PAGE>
Expand Geographically
The Company intends to grow both domestically and internationally. Over the
past two years, the Company has made a substantial investment in developing its
sales and marketing infrastructure and has opened new offices in Chicago, Los
Angeles, Atlanta and Dallas. The Company plans to expand its presence in these
major markets to enable it to provide elements of the Composite Solution to a
larger client base. The Company intends to grow internationally by (i)
expanding its relationships with U.S. based clients to provide products and
services to their international divisions, particularly in Asia and Europe,
(ii) establishing direct relationships with companies overseas, particularly
through the marketing of the ACS Optima Software to apparel companies, and
(iii) working with certain of its strategic alliance partners outside the
United States to cross-sell or bundle their services.
INFORMATION SYSTEMS AND SERVICES
As part of its information systems and services business, the Company provides
integrated solutions to the apparel, financial, entertainment and
communications industries. As part of its solution to the apparel industry, the
Company markets the ACS Optima Software, which is installed in hundreds of
United States apparel companies as well as apparel companies in Mexico and
Canada. Additionally, the Company offers a wide range of public and private
technical and end user training services.
ACS Optima Products and Services
In order to better respond to changes in fashion trends and to remain
profitable in an increasingly competitive industry, apparel manufacturers are
under increasing pressure to shorten delivery time cycles and increase
efficiency in all areas of their business. The ACS Optima Software package is a
comprehensive, integrated business information system, specifically designed
for the apparel industry. With a graphical-user-interface ("GUI") that provides
"point-and-click" ease of use and an Executive Information System ("EIS")
designed for senior management, ACS Optima Software allows apparel
manufacturers and importers to manage all phases of the production process,
from planning and design to manufacturing, inventory control, distribution and
financial reporting. The ACS Optima Software emphasizes "Quick Response" and is
specifically designed to shorten delivery cycles. The Company believes the ACS
Optima Software provides apparel clients with a complete solution that enhances
their competitive position in the marketplace.
26
<PAGE>
Described below are selected modules of the ACS Optima Core System and
additional modules to the ACS Optima Core System.
<TABLE>
<CAPTION>
ACS OPTIMA CORE SYSTEM DESCRIPTION
---------------------- ---------------------------------------------------------
<S> <C>
ORDER MANAGEMENT AND A complete order fulfillment function that summarizes
DISTRIBUTION essential statistics and helps the apparel industry
executive pinpoint areas that need attention. It provides
instant access to reports that contain an overview of
current gross profit, order patterns, receivable
allowances and inventory, shipment and manufacturing
data.
IMPORT A function which facilitates the purchasing and tracking
MANAGEMENT/PRODUCTION of imported goods. Working with estimated costs, the
system creates a purchase order and letter of credit
documentation. It also tracks goods through the
purchasing and production process and identifies possible
delays. Once merchandise is shipped, Import Management
tracks and provides the delivery status and anticipated
arrival date of the merchandise.
RAW MATERIAL/MODULE A function which helps estimate the material and other
requirements for production and initiates a procedure to
ensure that such products are available.
BILL OF MATERIAL A function which establishes requirements and then
("BOM")/FABRIC compares standard costs to actual. When goods are
ACTUAL MODULE produced in multiple locations, the BOM will identify the
most cost effective assembly method.
MATERIAL REQUIREMENTS A function which determines the earliest date on which
PLANNING production can begin based on a raw materials evaluation.
<CAPTION>
ADDITIONAL MODULES
TO THE ACS OPTIMA CORE
SYSTEM DESCRIPTION
---------------------- ---------------------------------------------------------
<S> <C>
FACTS A/P AND G/L An accounts payable and general ledger package that is
integrated into the ACS Optima Software.
EXECUTIVE INFORMATION An advanced client/server tool that summarizes and
SYSTEM displays computer-based information in a concise,
meaningful format, statistically or graphically, for the
apparel industry executive, specifically in the key
business areas of sales, manufacturing, finance and
management.
EDI/400* Communication tool which allows manufacturers to receive
and send information directly to their customers.
PKMS* A distribution center management system that gives the
apparel industry executive complete control over all
warehouse operations, including receiving, stock
locating, picking, verifying, packing, manifesting and
shipping.
IMAGE INFO* A function which takes digital pictures of merchandise
and creates and produces custom catalogs, style libraries
and inventory reports with full color imaging.
QUICK IMAGE* A function which displays pictures of a garment at the
touch of a command key. Pictures are scanned, digitized,
indexed and displayed along with other ACS Optima
screens.
SALES AUTOMATION* A lap-top based order system that is used by field
representatives to place orders and determine inventory
availability. Orders are accurately written, sized,
printed for the customer and transmitted to the apparel
company in minutes.
</TABLE>
-------
* Licensed to the Company.
27
<PAGE>
As part of a turn-key system provided by the Company, the initial contract
typically includes a combination of hardware, software, systems integration and
maintenance. Upon expiration of the initial contract, most clients purchase an
extended maintenance contract which includes yearly product upgrades and access
to the Company's ACS Optima help desk. Extended maintenance contracts provide
the Company with a steady source of recurring annual revenue.
The Company has established the "Users Advisory Board," which is comprised of
the Company's 25 largest clients utilizing the ACS Optima Software. At meetings
held twice a year, the Users Advisory Board provides the Company with valuable
input and direction relative to future product enhancement and development.
These meetings, which are led by the Company's clients, allow the Company to
anticipate and develop solutions for its clients prior to actual need.
Professional Services
Recognizing the changing IT requirements of its clients, the Company provides a
wide range of professional services to a diverse client base focusing on
companies in the financial, entertainment and communications industries,
including Merrill Lynch, EMI Music and NYNEX. The Company's professional
services are delivered on a project basis or, more often, through staff
augmentation.
The Company's professional services staff provides services to support the full
life cycle of computer systems, from strategy and design to development and
implementation and finally to maintenance and support, across a wide range of
platforms, including mainframe, midrange (AS/400), client/server and personal
computers. In addition, the Company's professional services group provides
contract programming, consulting and other computer-related professional
services primarily to large corporate clients. The Company's technical staff
performs a wide variety of tasks to identify, analyze and solve a client's data
processing and computing problems. Generally, these services are provided on-
site to clients with personnel who do not have the requisite technical skills
or to clients with specific projects requiring additional staffing that do not
justify permanent personnel increases. The scope of the work performed by the
Company ranges from specific, minor tasks of short duration to large, complex
tasks that require a large number of consultants. Furthermore, the Company has
extensive experience in providing network solutions to its existing client base
by providing hardware, software and systems integration services. The Company
has developed expertise in document imaging and voice recognition technology
and employs certified Lotus, Microsoft and Novell engineers. The Company's
business relationships with Borland, Lotus, Microsoft and Oracle enhance the
marketability of the Composite Solution and strengthen the skills of its
technical staff.
In order to become a leading provider of "Year 2000" solutions, the Company has
created a "Year 2000" Competency Center to proactively address the issues that
its clients face in resolving these problems. The Competency Center is
comprised of a select group of the Company's technical professionals who
specialize in developing "Year 2000" solutions for organizations and assist
clients in making their current systems "Year 2000" compliant. The Company has
obtained the rights to two software tools that assist the Company's
professionals in creating "Year 2000" compliant systems for clients. The
Company has the exclusive right to market, sell and service a platform
independent diagnostic tool that identifies areas of a client's system that
require change in order to address the "Year 2000" issues. In addition, the
Company has an agreement to market and utilize an AS/400-specific product that
goes beyond diagnosis and is able to partially correct affected software. See
"Risk Factors--Growth Through Internal Expansion and Acquisitions."
Management believes that one of the most critical challenges facing
organizations attempting to make their current systems "Year 2000" compliant is
the hiring and retaining of technical personnel who are able to rewrite the
enormous amounts of computer code in various computer languages. Through its
extensive recruitment efforts of technical personnel, management believes it is
well positioned to supply clients with large numbers of trained personnel to
address their individual "Year 2000" challenges, either on a project or staff
augmentation basis. The Company employs a number of tools to meet its clients'
staffing needs, including dedicated recruiting personnel, a national
proprietary database consisting of technical profiles and resumes of
approximately 25,000 technology professionals, dedicated resources to conduct
Internet research for qualified personnel and in addition, the Company's world
wide web site which includes the "CGS Career Center" which lists and
continually updates available positions with the Company and receives thousands
of "hits" per month.
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<PAGE>
In addition, the Company maintains a personnel search engine, "Skills Finder
Plus," which includes search capabilities to match potential candidates with
specific project and Company requirements.
Training
The Company provides, through more than 350 course offerings, comprehensive
technical and end user training to its clients' personnel, including
programmers, system administrators, operations personnel and management. In
1995, the Company's 30 full-time and 240 adjunct instructors provided over 600
computer technology-related classes. The Company emphasizes courses covering
advanced technical skills focused on a broad range of software applications and
IT and help desk management skills rather than basic introductory skills. Among
others, the Company offers courses in Visual Basic, PowerBuilder, Visual C++
and Sybase. The Company is a certified training provider for Borland's Delphi
and Lotus Notes.
Management believes that its clients are attracted by the Company's broad range
of course offerings and highly qualified training professionals as well as its
ability to maintain and develop customized courses in leading-edge
technologies. The Company believes that because of rapid technological change
which has resulted in information systems that are more complex, companies are
increasingly relying on third-party providers of IT training.
By offering computer technology-related classes, the Company gains access to
MIS professionals and is able to introduce other components of the Composite
Solution to such professionals.
Although client courses are generally provided on-site at a client's facilities
using the client's hardware and software, the Company also makes available to
clients its New York City training facility. In order to accommodate clients
who may be interested in training only a few of their employees, the Company
also offers public classes which are prescheduled at selected times at the New
York City training facility. These classes are also available to the general
public. In addition, computer users can browse the Internet for course
offerings and make reservations for classes.
IT OUTSOURCING SUPPORT SERVICES
To capitalize on the trend towards outsourcing IT services, the Company
provides on-site and remote help desk services. In addition, the Company
provides services that facilitate the entire call management process, including
generic call receiving, inbound and outbound telemarketing, data collection and
call overflow services. In providing these services, the Company uses
sophisticated tools that enable it to act as the transparent extension of its
clients' technical support infrastructures.
Help Desk
The Company provides on-site and remote help desk services, primarily through
IBM and AT&T, to major companies that have outsourced technical support for
their internal IT systems. The Company's certified technical specialists
provide shrink-wrapped software product support for over 300 products, as well
as process engineering which includes systems design and operating system,
LAN/WAN and custom software application support.
The Company has established a strategic alliance with AT&T to be a preferred
provider of help desk support functions to its clients. The Company also
provides help desk services to IBM through facilities located in Tampa,
Chicago, Atlanta and Rochester, MN. The Company provides technical and product
remote support services directly to IBM employees and to IBM customers 24 hours
a day, seven days a week. As part of the ACS Optima solution, the Company also
provides help desk support to approximately 90 ACS Optima clients from the
Company's Atlanta facility. The Company intends to establish additional vendor
relationships, such as those with AT&T and IBM, to enable it to continue the
expansion of its client base.
The help desk facilities operated by the Company employ current technology in
PBX switches, call tracking software, telephone-computer integration,
interactive voice response and relational database management systems that are
29
<PAGE>
integrated into centrally managed LAN/WANs. The Company utilizes sophisticated
call tracking software and systems to provide efficient scheduling of personnel
to accommodate fluctuations in call volume.
The Company's help desk systems capture and download to permanent databases a
variety of information concerning each call for reporting on a daily basis to
clients, including number and duration of calls (which are important for
billing purposes), response time and results of the call. Summary data and
complete databases are made available to the client to enable it to monitor the
level of service provided by the Company, as well as to determine whether end-
users of its products are encountering recurring problems that require
modification.
Help desk services are billed primarily on a time and material basis.
Call Management
In October 1995, the Company began providing call management services in order
to capitalize on this significant market opportunity and simultaneously provide
additional services to its client base as part of its Composite Solution. The
Company provides call management services directly to its clients and through a
strategic partner.
The Company operates advanced call management facilities providing fully
integrated call management services to IBM's customers and IBM from facilities
in Dallas and Atlanta. The Company's call management staff provides first level
call management support by screening incoming calls, resolving common and less
technical queries and routing all other calls to the appropriate destination,
which in some instances may be one of the Company's remote help desks.
Teleservices Resources ("TSR"), a division of AMR Corp., and the Company have
partnered to provide and operate an extensive call management system for Ryder
Truck Rental, Inc. ("Ryder"). TSR is responsible for providing basic call
management services to Ryder customers, while the Company, from its facilities
in the Dallas Infomart, provides the technical support necessary for over 5,000
Ryder dealerships to be fully integrated into Ryder's call management and
reservation system. These services include hardware and software installation
and technical support, which allow TSR to efficiently operate the call
management system and to enhance the services provided to the Ryder
dealerships.
In addition, the Company has recently entered into an alliance with telephone
switchmaker Siemens Rolm Communications, a call-center switch technology
provider, ProAmerica Systems and the Dallas architectural firm of Haldeman-
Powell Partners, which specializes in the design of call-center space. This
alliance will allow the Company to provide its clients, as well as its
partners' clients, one-stop shopping for all the services needed to set up and
operate a call center. In 1996, the Company established a state-of-the-art call
management facility at the Dallas Infomart which has the technology to support
over 200 call technicians and process over 4.0 million calls per year for
multiple clients.
SALES AND MARKETING
The Company markets its information systems and services and IT outsourcing
support services through the efforts of 30 sales and marketing representatives
operating out of its New York, Los Angeles, Dallas, Atlanta and Chicago
offices. Sales and marketing representatives are highly experienced in specific
areas and are knowledgeable in other areas in which the Company offers its
information systems and services and IT outsourcing support services. Sales and
marketing efforts utilize an overall team-oriented approach with routine
interaction between representatives to effectively market all of the Company's
products and services. As part of their compensation, sales and marketing
representatives are paid commissions on sales in their area of expertise and
additional amounts for introductions that lead to sales of other products and
services that comprise the Composite Solution. Management believes that being
able to offer multiple services provides the Company with a marketing advantage
since it gives the Company numerous entry points to service a customer's
information systems and services and IT outsourcing support needs.
The Company's sales force utilizes a variety of business development and
marketing techniques, including field sales, referrals, telemarketing, the
Company's on-line newsletter, presentations, exhibitions, trade shows and
meetings with potential clients to market the Composite Solution. The Company's
sales and marketing representatives emphasize the Company's ability to offer
clients a comprehensive and cost-effective solution to their IT needs.
30
<PAGE>
The Company markets the ACS Optima Software to leading apparel manufacturers as
a comprehensive, integrated business information system specifically designed
for the apparel industry. The Company strategically markets the ACS Optima
Software to apparel companies with revenues of $20 million and higher, and the
Company uses sales of this product as an entree to provide ongoing support
services as well as AS/400 sales and services. The Company markets professional
services to a diverse client base, focusing on companies in the financial,
entertainment and communications industries with a primary focus in New York
and Los Angeles, where a large portion of such industries is located. The
Company's marketing efforts for professional services target both the decision
makers who are ultimately responsible for appropriating funds for a project and
the systems staffs that will be responsible for the project after
implementation. The Company's sales and marketing representatives promote the
Company's relationships with, among others, IBM, AT&T, Borland, Lotus,
Microsoft, Oracle and Siemens Rolm Communications and ProAmerica Systems, and
representatives of such companies sometimes join the Company's sales
representatives in making joint sales calls. In addition, the Company attempts
to use its training services to provide it with insight as to potential clients
who are likely to be in need of other IT products or services offered by the
Company.
RECRUITMENT; HUMAN RESOURCES
The Company's future success will depend, in part, on its ability to hire and
retain adequately trained project managers, resource managers, systems
analysts, business analysts, programming staff and other technical experts who
can fulfill the increasingly sophisticated needs of its clients. The Company's
on-going need for technical expert resources arise from (i) increased demand
for the Company's services, (ii) turnover, which is generally high in the
industry, and (iii) client requests for programmers trained in the newest
software technologies. The recruitment of skilled project managers and other
technical experts is a critical element in the Company's success. The Company
devotes significant resources to meeting its personnel requirements. The
Company employs recruiters based in its New York, Chicago, Atlanta, Tampa and
Los Angeles offices. The Company also maintains a national proprietary database
consisting of technical profiles and resumes of approximately 25,000 technology
professionals and uses a personnel search engine, "Skills Finder Plus." This
database includes search capabilities which match potential candidates with
specific project and Company requirements. In addition, the Company has
dedicated resources to conduct Internet research for qualified personnel. The
Company's world wide web site includes the "CGS Career Center," which lists and
continually updates available positions with the Company.
At June 30, 1996, the Company had over 900 full time employees, comprised of
project and resource managers, systems analysts, business analysts, programming
staff and other technical professionals and 30 sales and marketing personnel.
The Company's professional personnel have a variety of educational backgrounds,
including degrees in computer science, business administration, education and
engineering.
The Company's personnel keep abreast of technological advances and developments
through a combination of on-the-job exposure to relevant technology, selected
training programs, peer review and discussions and supervision by senior
personnel. The Company also keeps abreast of developments by hiring
professionals with expertise in technologies that are needed or can be utilized
by the Company and its clients.
None of the Company's employees is subject to a collective bargaining
agreement. The Company believes that its relations with its employees are good.
COMPETITION
The industry in which the Company operates is extremely competitive, highly
fragmented and subject to rapid changes. While many companies provide
information systems and services and IT outsourcing support services,
management believes that no one company is dominant. There are numerous and
varied providers of such services, including firms specializing in call center
operations, temporary staffing and personnel placement companies, general
management consulting firms, divisions of large hardware and software companies
and niche providers of IT services, many of which compete in only certain
markets. Although the Company believes that the Company's strategic alliances
and other relationships provide it with a competitive advantage, the Company
competes with and faces potential competition from a number of companies that
have significantly greater financial, technical and marketing resources,
greater name recognition and a more established client base than the Company.
In addition, many of the services offered by the Company historically have been
provided, and could in the future be provided, by the in-house personnel of its
clients. The Company believes that its ability to compete depends, in part, on
a number of factors,
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<PAGE>
including the ability of the Company to hire, retain and motivate a significant
number of highly skilled employees and the development by others of products
and services that are competitive with the Company's products and services. The
Company competes with larger organizations and smaller competitors for highly
skilled professionals to fill full-time and project specific positions.
Management believes that price is not the primary factor in a client's
determination to purchase the ACS Optima Software and related services but that
product functionality and methodology for implementation are the principle
competitive considerations. The Company believes that the principal competitive
factors in its professional services business include the nature of the
services offered, quality of service, responsiveness to customer needs,
business experience and technical expertise.
With respect to its IT outsourcing support services, the Company competes
primarily on the basis of quality of service and price, and the Company could
be adversely affected by the price at which others offer comparable IT
outsourcing support services. Many of the Company's larger clients purchase IT
outsourcing support services primarily from a limited number of preferred
vendors. The Company has experienced and continues to anticipate significant
pricing pressure from these clients in order to remain competitive.
Although the Company believes that it can meet its clients' demands for
information systems and services and IT outsourcing support services, there can
be no assurance that the Company will continue to compete successfully with its
existing competitors or will be able to compete successfully with any new
competitors.
INTELLECTUAL PROPERTY RIGHTS
The Company's success is dependent, in part, upon its proprietary intellectual
property rights. The Company relies on contractual arrangements, such as trade
secret and non-disclosure agreements, and copyright and trademark law to
protect its proprietary intellectual property rights. While the Company holds
registered copyrights with respect to certain modules of the ACS Optima
Software, generally enters into confidentiality agreements with its employees,
consultants, clients and potential clients and limits access to and
distribution of its confidential and proprietary data, there can be no
assurance that the steps taken by the Company in this regard will be adequate
to deter misappropriation of its proprietary information or that the Company
will be able to detect unauthorized use and take appropriate steps to enforce
its intellectual property rights.
The Company's business includes the development of custom software applications
in connection with specific engagements. Ownership of such software is
generally assigned to the client. Although the Company believes that its
products and services do not infringe on the intellectual property rights of
others, there can be no assurance that such a claim will not be asserted
against the Company in the future.
FACILITIES
The Company's headquarters and principal administrative, sales and marketing
operations are located in approximately 21,000 square feet of leased space in
New York City under leases expiring in 2005. The Company occupies an aggregate
of approximately 15,000 square feet of additional space in Los Angeles,
Chicago, Dallas and Atlanta under leases expiring at various times throughout
the next three years. In addition, pursuant to contracts with its clients, the
Company occupies additional space which is owned or leased by its clients in
Tampa, Rochester, MN, Chicago, Dallas and Atlanta.
The Company leases three IBM midrange computers from IBM Credit Corp. These
leases are considered operating leases and, therefore, are not capitalized on
the Company's balance sheet. The remainder of the Company's computers and
peripheral equipment are owned or leased and treated as owned for accounting
purposes because the Company may acquire ownership at the end of the lease
agreement upon exercise of a purchase option for a nominal amount.
The Company believes that its facilities and equipment are adequate for its
current needs.
LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings that are
expected, individually or in the aggregate, to have a material adverse effect
on the Company's financial condition or results of operations.
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MANAGEMENT
Directors and Executive Officers
The following sets forth the names and ages, as of July 30, 1996, of the
Company's directors and executive officers and the positions they hold. Within
90 days following consummation of the Offering, the Company will appoint two
independent directors to the Board of Directors and within one-year following
consummation of the Offering, the Company will appoint one additional
independent director to the Board of Directors. Such independent directors will
not be employees of the Company.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NAME AGE POSITION AND OFFICE WITH THE COMPANY
- --------------------------------------------------------------------------------
<S> <C> <C>
Philip Fried- 47 President, Chief Executive Officer and Director
man
Victor Fried- 41 Executive Vice President and Director
man
Fred B. 39 Vice President Finance & Administration, Secretary and Director
Schlossberg
Edward 47 Senior Vice President
Schroeder(1)
Jay Hakami 38 Vice President, Products and Services
Robert B. 60 Vice President, Remote Support Services
Stratton
Rhoda Cahan 53 Vice President, Training
</TABLE>
- -------
(1) Mr. Schroeder has agreed to serve as a director of the Company upon
completion of the Offering.
PHILIP FRIEDMAN has been President, Chief Executive Officer and a director of
the Company since April 1984. In 1995, Mr. Friedman was named New York City
Entrepreneur of the Year in the area of Technology Services by the Entrepreneur
of the Year Institute sponsored by Ernst & Young LLP, Inc. Magazine and Merrill
Lynch. He holds a Bachelor of Science degree in Finance and Economics from the
State University of Uzgorod and a Master's degree in Electronic Engineering
from Lvov Polytechnical Institute, both in the Ukraine.
VICTOR FRIEDMAN has been Executive Vice President and a director of the Company
since October 1994. From 1981 until October 1994, Mr. Friedman was the
President/CEO of Real-Time Technology, Inc., a company which he founded and
which specialized in providing professional services to the financial
community. He holds degrees in Liberal Arts and Education from the State
University of Uzgorod in the Ukraine.
FRED B. SCHLOSSBERG has been Vice President Finance & Administration, Secretary
and a director of the Company since April 1992. From June 1978 to April 1992,
he was employed by BDO Seidman, LLP where his last position was Senior Audit
Manager. Mr. Schlossberg is a Certified Public Accountant in New York State. He
holds a Bachelor of Business Administration in accounting from Bernard Baruch
College where he graduated magna cum laude.
EDWARD SCHROEDER has been Senior Vice President of the Company since June 1996.
From 1970 to June 1996, Mr. Schroeder was employed by IBM, where his last
position was Vice President, Direct Marketing. He holds a Bachelor of Science
degree in Economics from Rutgers University.
JAY HAKAMI has been Vice President, Products and Services since 1991. Mr.
Hakami began his career with the Company in 1989 as a Manager of Sales of
Products and Services. He holds a Bachelor of Arts degree in Business
Administration from the New York Institute of Technology.
ROBERT B. STRATTON has been Vice President, Remote Support Services since 1995.
Mr. Stratton has been employed by the Company since 1991 and from 1992 until
1995 was a General Manager of Remote Support Services. He holds an Associates
Degree in Liberal Arts from Pace University.
RHODA CAHAN has been Vice President, Training since 1995. Ms. Cahan began her
career with the Company in 1991 as a Director of Training. She holds a Bachelor
of Arts degree in Mathematics from Brown University, a Master of Science degree
in Operations Research and Statistics from The Wharton School, University of
Pennsylvania and a APC degree in Computer Applications and Information Systems
from New York University.
In connection with consummation of the Offering, the Board of Directors will be
divided into three classes. The term of the Class I directors, to be comprised
initially of , expires in 1997, the term of the Class II directors, to be
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comprised initially of , expires in 1998, and the term of the Class III
directors, to be comprised initially of , expires in 1999. Directors hold
office until the annual meeting of the stockholders of the Company in the year
in which the term of their class expires and until their successors have been
duly elected and qualified. At each meeting of stockholders of the Company, the
successors to the class of directors whose term expires will be elected for a
three-year term. The next annual meeting of the stockholders of the Company is
expected to be held in 1997.
Philip Friedman and Victor Friedman are brothers.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. Upon consummation of the Offering, the Board of Directors will
create an Audit Committee that, among other things, will make recommendations
concerning the engagement of independent auditors, review the results and scope
of the annual audit and other services provided by the Company's independent
auditors and will review the adequacy of the Company's internal accounting
controls. The Audit Committee will consist of the two independent directors to
be appointed after consummation of the Offering and .
Compensation Committee. Upon consummation of the Offering, the Board of
Directors will create a Compensation Committee that, among other things, will
make recommendations to the full Board of Directors concerning salary and bonus
compensation and benefits for executive officers of the Company and will
administer the Company's 1996 Long-Term Incentive Plan. The Compensation
Committee will consist of one of the independent directors to be appointed
after consummation of the Offering and .
COMPENSATION OF THE BOARD OF DIRECTORS
Directors who are employees of the Company will receive no additional
compensation for their services as members of the Board of Directors or as
members of Board committees. Directors who are not employees of the Company
will be paid a quarterly fee of $ , as well as additional fees of $ for
each meeting of the Board or of a Board committee attended by such director.
The Company's directors will be reimbursed for their out-of-pocket expenses
incurred in connection with their service as directors, including travel
expenses.
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COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth compensation paid by the Company during the last
three years to the Company's Chief Executive Officer and to the four most
highly compensated executive officers (collectively, the "Named Executive
Officers"). The Company did not grant any stock options or stock awards to any
of the Named Executive Officers during such years and the dollar value of
perquisite and other personal benefits, if any, received by each of the Named
Executive Officers in each year was less than established reporting thresholds.
SUMMARY COMPENSATION TABLE
----------------------------------------------
<TABLE>
<CAPTION>
OTHER ANNUAL
YEAR SALARY ($) BONUS ($) COMPENSATION ($)(1)
NAME AND PRINCIPAL POSITION ---- ---------- --------- -------------------
<S> <C> <C> <C> <C>
Philip Friedman(2)
President and Chief Executive 1995 400,000 830,000 5,000
Officer
1994 310,000 2,600,000 5,000
1993 150,000 1,800,000 5,000
Victor Friedman(2)
Executive Vice President 1995 200,000 70,000 3,000
1994 50,000(3) 75,000 --
1993 -- -- --
Fred B. Schlossberg
Vice President Finance & 1995 135,000 25,000 5,000
Administration, Secretary 1994 115,000 30,000 4,000
1993 100,000 15,000 3,000
Jay Hakami
Vice President, Products and 1995 279,000 -- 5,000
Services 1994 193,000 -- 5,000
1993 314,000 -- 5,000
Robert B. Stratton
Vice President, Remote Support 1995 220,000 -- 1,000
Services 1994 181,000 -- --
1993 113,000 -- --
</TABLE>
- -------
(1) Consists of amounts contributed on behalf of such employees to the
Company's 401(k) plan.
(2) In 1996, the Company, pursuant to certain employment arrangements, agreed
to provide Philip Friedman and Victor Friedman annual salaries for 1996 in
the aggregate amount of $760,000. Such arrangements do not provide for any
additional compensation, including bonuses, for 1996. Subsequent to 1996,
compensation for Philip Friedman and Victor Friedman, including bonuses, if
any, will be determined by the Company's compensation committee.
(3) Victor Friedman was employed by the Company beginning in October 1994.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has never had a Compensation Committee or other committee of the
Board of Directors performing similar functions and all matters concerning
executive compensation have been addressed by the entire Board of Directors.
Decisions concerning compensation of executive officers of the Company were
made by the Company's Board of Directors. The Board of Directors will establish
a Compensation Committee upon the consummation of the Offering.
EMPLOYMENT AGREEMENTS
The Company does not have employment contracts with any of its executive
officers or other employees.
1996 LONG-TERM INCENTIVE PLAN
The 1996 Long-Term Incentive Plan (the "Plan") will be adopted by the Company's
Board of Directors and approved by the Company's stockholders prior to the
consummation of the Offering. The Company will reserve an amount of Common
Stock equal to 10 percent of the shares of Common Stock outstanding upon
consummation of the Offering for issuance and/or use as the basis for stock
appreciation rights or other units of stock-based incentive compensation
35
<PAGE>
under the Plan. Unless sooner terminated by the Board of Directors, the Plan
will terminate on the date which is 10 years from the date of its adoption.
The Plan will be administered by the Compensation Committee of the Board of
Directors. The Committee will have the authority and discretion, subject to the
provisions of the Plan, to select persons to whom options and other awards
under the Plan will be granted, to designate the number of shares to be covered
by awards, to specify the type of consideration to be paid to the Company and
to establish all of the terms and conditions of each award.
The Plan will provide for the grant of stock options and other awards to
officers and other key employees of the Company and to its directors. Options
granted under the Plan may be incentive stock options or nonqualified stock
options. The exercise price for an incentive stock option may not be less than
the fair market value of the Company's Common Stock on the date of grant and
such options may not be exercisable by the employee (except in the event of
death or disability or certain changes in control of the Company) prior to the
completion of at least one year of employment subsequent to the grant of the
award. Options granted under the Plan shall vest on certain changes in control
of the Company (as defined in the Plan) unless the Compensation Committee
otherwise determines prior to such change in control, and in such case, the
participant will receive cash equal to the value of the option in lieu of
exercise thereof. Nonqualified stock options shall have such terms as the
Compensation Committee shall determine and that shall not be inconsistent with
the Plan. Stock options granted under the Plan may not be transferred other
than by will or the laws of descent and distribution or, in the case of
nonqualified stock options, by gift.
All awards under the Plan may be subject to substantial employment requirements
and/or performance measurements and goals. The Compensation Committee shall
establish, with respect to each performance-based award, the length of the
applicable performance period (which shall be at least two years), performance
objectives (which shall be based on revenues, operating income, net income,
return on equity or a variation or combination of the foregoing and may vary
from participant to participant) and the range of dollar values or number of
shares of Common Stock (which shall be subject to maximum limitations) that may
be earned by the participant.
401(K) SAVINGS PLAN
The Company has adopted a 401(k) savings plan (the "401(k) Plan"). All
employees of the Company are eligible to participate in the 401(k) Plan. Under
the 401(k) Plan, eligible employees are permitted to defer up to 10% of their
compensation, subject to certain limitations. Currently, the Company matches a
discretionary amount between 0% and 50% of an employee's contribution, subject
to a maximum contribution equal to 3% of such employee's annual compensation.
Salary deferral contributions are fully vested. Matching contributions are
fully vested after seven years of service; partial vesting begins after three
years of service. Participants or their beneficiaries are entitled to payment
of benefits (i) upon retirement at age 65 or early retirement at age 55, (ii)
upon death or disability or (iii) upon termination of employment, if the
participant elects to receive a distribution of his account balance prior to
one of the events listed in (i) or (ii) above. In addition, withdrawals are
available upon the participant attaining age 59.5, or for reasons of financial
hardship if certain conditions are met.
36
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In October 1994, the Company acquired substantially all of the assets and
assumed certain liabilities of Real-Time, a computer consulting firm which was
owned by Victor Friedman. The purchase price of $252,478 was paid by the
issuance of 753 shares of Company common stock to Victor Friedman.
Philip Friedman has loaned the Company in the aggregate approximately $2.5
million. This loan is payable on demand and bears interest at 10.0%. The loan
will be repaid with a portion of the net proceeds of the Offering. See "Use of
Proceeds." In addition, Philip Friedman has guaranteed certain of the Company's
obligations under the Company's revolving credit facility and term loan. These
guarantees will terminate upon consummation of the Offering.
Upon consummation of the Offering, the Company plans to distribute to its
stockholders of record immediately prior to the consummation of the Offering
the cumulative amount of its undistributed earnings for the entire period that
it was an S corporation. As of June 30, 1996, the cumulative balance of such
undistributed earnings was approximately $3.3 million. The difference between
the undistributed earnings of $3.3 million and retained earnings of
approximately $2.4 million at June 30, 1996 is principally the result of
temporary timing differences between income tax bases and financial reporting.
In addition, the Company's stockholders immediately prior to the consummation
of the Offering will be entitled to receive from the Company, in the event of
certain adjustments to the Company's federal taxable income, the amount of
federal, state and local income taxes, including penalties and interest,
incurred by them as a result of such adjustment. See "The Company."
Pursuant to a Registration Rights Agreement to be entered into immediately
prior to the consummation of the Offering, among the Company, Philip Friedman
and Victor Friedman (the "Registration Rights Agreement"), the Company will, at
the request of either Philip Friedman or Victor Friedman (the "Rights
Holders"), prepare and file, and use its best efforts to make effective,
registration statements under the Securities Act for resales of Common Stock,
including underwritten offerings. In addition, pursuant to the Registration
Rights Agreement, if the Company proposes to register its securities under the
Securities Act, then the Rights Holders have a right (subject to quantity
limitations determined by underwriters if the offering involves an
underwriting) to request that the Company register such Rights Holders' Common
Stock. All fees and expenses incurred in connection with any such registration
will be borne by the Company, except for all underwriting discounts and
commissions relating to Common Stock sold by the Rights Holders in any such
offering, which will be borne by such Rights Holders. The Company has agreed to
indemnify the Rights Holders against certain liabilities in connection with any
registration effected pursuant to the Registration Rights Agreement, including
liabilities under the Securities Act.
37
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information, regarding the beneficial
ownership of the Common Stock, prior to and after giving effect to the
Offering, by (i) the directors and four most highly compensated executive
officers of the Company, (ii) each person known by the Company to own
beneficially more than five percent of the outstanding shares of Common Stock
and (iii) all executive officers and directors as a group.
<TABLE>
<CAPTION>
--------------------------------------------------------------
SHARES SHARES TO BE
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING(1) AFTER OFFERING(1)
----------------------- ----------------------
NUMBER OF
SHARES BEING
NUMBER PERCENT OFFERED NUMBER PERCENT
NAME(2) --------- ---------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Philip Friedman......... 90%
Victor Friedman......... 10%
Fred B. Schlossberg..... 0% *
Edward Schroeder........ 0% *
Jay Hakami.............. 0% *
Robert B. Stratton...... 0% *
All executive officers
and directors as a
group (7 Persons)...... 100%
</TABLE>
- -------
* Less than 1%
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock beneficially owned by them.
(2) Unless otherwise indicated, the business address of each director and
executive officer is c/o Computer Generated Solutions, Inc., 1675 Broadway,
New York, New York 10019.
38
<PAGE>
DESCRIPTION OF CAPITAL STOCK
After the Offering, the Company's authorized capital stock will consist of
shares of Common Stock and 1,000,000 shares of Preferred Stock, the terms and
provisions of which may be designated by the Board of Directors in the future.
The following summary of the Company's capital stock is qualified in its
entirety by reference to the Company's Certificate of Incorporation and By-
Laws, each of which is filed as an exhibit to the registration statement of
which this Prospectus is a part.
COMMON STOCK
Following the Offering, shares of Common Stock will be issued and
outstanding. See "Capitalization." Each holder of Common Stock is entitled to
one vote for each share held of record on each matter submitted to a vote of
the Company's stockholders. The Company's Principal Stockholders are entitled
to certain rights with respect to registration under the Securities Act of
shares held by them. See "Certain Relationships and Related Party
Transactions."
All of the outstanding shares of Common Stock are, and all of the shares of
Common Stock sold in the Offering will be, when issued and paid for, fully paid
and nonassessable. In the event of the liquidation or dissolution of the
Company, following any required distribution to the holders of outstanding
shares of Preferred Stock, if any, the holders of Common Stock are entitled to
share pro rata in any balance of the corporate assets available for
distribution to them. The Company may pay dividends if, when and as declared by
the Board of Directors from funds legally available therefor. Subject to the
preferential rights of the holders of any class of Preferred Stock, holders of
shares of Common Stock are entitled to receive such dividends as may be
declared by the Company's Board of Directors out of funds legally available for
such purpose. See "Dividend Policy."
Holders of Common Stock have no preemptive rights.
PREFERRED STOCK
Following the Offering, no shares of Preferred Stock will be issued and
outstanding. Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of the Company's Certificate of Incorporation and limitations prescribed by
law, the Board of Directors is expressly authorized to adopt resolutions to
issue the shares, to fix the number of shares and to change the number of
shares constituting any series, and to provide for or change the voting powers,
designations, preferences and relative participating, optional or other special
rights, qualifications, limitations or restrictions thereof, including dividend
rights, sinking fund provisions, redemption prices, conversion rights and
liquidation preferences of the shares constituting any class or series of
Preferred Stock, in each case without any further action or vote by the
stockholders. The Company has no current plans to issue any shares of Preferred
Stock of any class or series.
One of the effects of undesignated Preferred Stock may be to enable the Board
of Directors to render more difficult or to discourage an attempt to obtain
control of the Company by means of a tender offer, proxy contest, merger or
otherwise, and thereby to protect the continuity of the Company's management.
In addition, the issuance of shares of Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of Common Stock. The issuance of shares of Preferred Stock may discourage bids
for the Common Stock or may otherwise adversely affect the market price of the
Common Stock.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BY-LAWS AND DELAWARE
LAW
Certain provisions of the Company's Certificate of Incorporation and By-Laws,
as well as certain provisions of Delaware law, may have an anti-takeover effect
or may delay, defer or prevent a tender offer or takeover attempt that a
stockholder might consider in such stockholder's best interest, including those
attempts that might result in a premium over the market price for the shares of
Common Stock held by a stockholder. These provisions are in addition to the
anti-takeover effect of the substantial ownership and voting power of the
Principal Stockholders of the
39
<PAGE>
Company. In addition, the Certificate of Incorporation and By-Laws contain
certain provisions that may reduce the likelihood of a change in management or
voting control of the Company without the consent of the Board of Directors.
Delaware Anti-Takeover Law. Section 203 of the Delaware General Corporation
Law, as amended ("Section 203"), provides that, subject to certain exceptions
specified therein, a Delaware corporation shall not engage in any business
combination, including any merger or consolidation with, or any transaction
which results in the acquisition of additional shares of the corporation by, an
"interested stockholder" for a three-year period following the time at which
the stockholder became an "interested stockholder" unless (i) prior to such
time, the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
"interested stockholder," (ii) upon consummation of the transaction which
resulted in the stockholder becoming an "interested stockholder," the
"interested stockholder" owned at least 85% of the voting stock of the
corporation outstanding at the time that the transaction commenced (excluding
certain shares) or (iii) at or subsequent to such time, the business
combination is approved by the board of directors of the corporation and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the "interested stockholder." Except as otherwise
specified in Section 203, an "interested stockholder" is defined to include any
person that (i) is the owner of 15% or more of the outstanding voting stock of
the corporation, (ii) is an affiliate or associate of the corporation and was
the owner of 15% or more of the outstanding voting stock of the corporation at
any time within three years immediately prior to the date on which it is sought
to be determined whether such person is an "interested stockholder" or (iii) is
an affiliate or associate of any person of the type identified in clause (ii)
above. Section 203 defines the term "business combination" to encompass a wide
variety of transactions with or caused by an "interested stockholder",
including mergers, asset sales and other transactions in which the "interested
stockholder" receives or could receive a benefit on other than a pro rata basis
with other stockholders.
The provisions of Section 203, coupled with the Board of Directors authority to
issue Preferred Stock without further stockholder action and the fact that,
after giving effect to the Offering, % of the outstanding shares of Common
Stock will be held by the Principal Stockholders, could delay or frustrate the
removal of incumbent directors or a change in control of the Company. The
provisions also could discourage, impede or prevent a merger, tender offer or
proxy contest, even if such event would be favorable to the interests of
stockholders. The Company's stockholders, by adopting an amendment to the
Certificate of Incorporation, may elect not to be governed by Section 203,
which election would be effective twelve months after such adoption. Such a
change in the Certificate of Incorporation could not be made without the
affirmative vote of shares held by Philip Friedman. Neither the Certificate of
Incorporation nor the By-Laws exclude the Company from the restrictions imposed
by Section 203. These restrictions will not apply to stockholders who were
interested stockholders prior to the date of the Offering.
Classified Board of Directors. The Certificate of Incorporation provides for
the Board of Directors to be divided into three classes of directors serving
staggered three-year terms. Each class will consist, as nearly as practical, of
one-third of the Board of Directors constituting the entire Board of Directors.
As a result, approximately one-third of the Board of Directors will be elected
each year. Holders of a majority of the outstanding shares of capital stock of
the Company entitled to vote with respect to election of directors may remove
directors only for cause. Vacancies on the Board of Directors may be filled
only the by the remaining directors and not by the stockholders.
Stockholder Meetings. The Certificate of Incorporation provides that any action
required or permitted to be taken by the stockholders of the Company may be
effected only at an annual or special meeting of stockholders and prohibits
stockholder action by written consent in lieu of a meeting. The By-Laws provide
that special meetings of stockholders may be called only by the president of
the Company and must be called by such officer at the request in writing of a
majority of the Board of Directors. Stockholders are not permitted to call a
special meeting of stockholders, to require that the president call such a
special meeting or to require that the Board of Directors request the calling
of a special meeting of stockholders.
Advance Notice Provisions. The By-Laws establish an advance notice procedure
for stockholders to make nominations of candidates for elections as directors,
or to bring other business before an annual meeting of stockholders of the
Company. The By-Laws provide that only persons who are nominated by, or at the
direction of, the president of the Company or by a stockholder who has given
timely written notice to the Secretary of the
40
<PAGE>
Company prior to the meeting at which directors are to be elected, will be
eligible for election as directors of the Company. The By-Laws also provide
that at an annual meeting only such business may be conducted as has been
brought before the meeting by, or at the direction of, the president of the
Company, the Board of Directors or by a stockholder who has given timely
written notice to the Secretary of the Company of such stockholder's intention
to bring such business before such meeting. Generally, for notice of
stockholder nominations to be made at an annual meeting to be timely under the
By-Laws, such notice must be received by the Company not less than 70 days nor
more than 90 days prior to the first anniversary of the previous year's annual
meeting (or, in the case of a special meeting at which directors are to be
elected, not earlier than the 90th day before such meeting and not later than
the later of (x) the 70th day prior to such meeting and (y) the 10th day after
public announcement of the date of such meeting is first made). Under the By-
Laws, a stockholder's notice must also contain certain information specified in
the By-Laws.
Super majority Voting Provisions. The Certificate of Incorporation provides
that certain extraordinary transactions require the approval of holders of 75%
of the voting power of the outstanding capital stock of the Company entitled to
vote thereon.
Amendment of Certificate of Incorporation. The stockholders of the Company may
not amend or repeal any of the provisions summarized above under "Classified
Board of Directors," "Stockholder Meetings," "Advance Notice Provisions" or
"Super majority Voting Provisions" except upon the affirmative vote of holders
of not less than 75% of the outstanding shares of capital stock of the Company
entitled to vote thereon.
Exculpation and Indemnification. The Certificate of Incorporation provides that
no director of the Company shall be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit. The
effect of these provisions is to eliminate the rights of the Company and its
stockholders (through stockholders' derivative suits on behalf of the Company)
to recover monetary damages against a director for breach of fiduciary duty as
a director (including breaches resulting from grossly negligent behavior),
except in the situations described above. The Commission has taken the position
that the foregoing provisions will have no effect on claims arising under
federal securities laws.
The Company's By-Laws provide that the Company will indemnify its directors and
officers to the fullest extent permissible under Delaware law. These
indemnification provisions require the Company to indemnify such persons
against certain liabilities and expenses to which they may become subject by
reason of their service as a director or officer of the Company. The provisions
also set forth certain procedures, including the advancement of expenses, that
apply in the event of a claim for indemnification.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is .
41
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common Stock. No
prediction can be made as to the effect, if any, that sales of shares of Common
Stock or the availability of shares of Common Stock for sale will have on the
market price prevailing from time to time. Nevertheless, sales of substantial
amounts of Common Stock in the public market after the restrictions described
below lapse could adversely affect the prevailing market price of the Common
Stock and the ability of the Company to raise equity capital in the future.
Upon completion of the Offering, the Company will have outstanding shares of
Common Stock. See "Capitalization." Of these shares, the shares ( shares
if the Underwriters' over-allotment option is exercised in full) of Common
Stock sold in the Offering will be freely tradable without restriction under
the Securities Act except for any shares purchased by "affiliates" (as defined
in the Securities Act) of the Company. The remaining shares are "restricted
securities" within the meaning of Rule 144 adopted under the Securities Act
(the "Restricted Shares"). The Restricted Shares generally may not be sold
unless they are registered under the Securities Act or are sold pursuant to an
exemption from registration, such as the exemption provided by Rule 144.
The Company and the Principal Stockholders have agreed not to offer, sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into Common Stock, or register for sale under the Securities Act or request
registration of, as the case may be, any Common Stock, for a period of 180 days
after the date of this Prospectus (the "Lock-up Period") without the prior
written consent of J.P. Morgan Securities Inc. on behalf of the Underwriters.
See "Underwriting." Following the Lock-up Period, any shares owned prior to the
Offering will not be eligible for sale in the public market without
registration unless such sales meet the conditions and restrictions of Rule 144
as described below.
In general, under Rule 144, as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate of the Company, who has
beneficially owned shares for a period of at least two years (as computed under
Rule 144) is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of (i) 1% of the then-outstanding
shares of Common Stock (approximately shares after giving effect to the
Offering) or (ii) the average weekly trading volume in the Common Stock during
the four calendar weeks immediately preceding the date on which the notice of
such sale on Form 144 is filed with the Commission. Sales under Rule 144 are
also subject to certain provisions relating to notice and manner of sale and
the availability of current public information about the Company. In addition,
a person (or persons whose shares are aggregated) who has not been an affiliate
of the Company at any time during the 90 days immediately preceding a sale, and
who has beneficially owned the shares for at least three years (as computed
under Rule 144), would be entitled to sell such shares under Rule 144(k)
without regard to the volume limitation, manner of sale, public information or
notice provisions of Rule 144. The foregoing summary of Rule 144 is not
intended to be a complete description thereof. In addition, the Commission has
proposed reducing the two-year and three-year periods referred to above to one
and two years, respectively.
Prior to the Offering, no Common Stock was subject to outstanding options or
warrants to purchase, or securities convertible into, Common Stock. As soon as
practicable following the consummation of the Offering, the Company intends to
file a registration statement under the Securities Act to register the shares
of Common Stock available for issuance upon exercise of options granted
pursuant to the 1996 Long Term Incentive Plan. Shares issued upon exercise of
options granted pursuant to the 1996 Long-Term Incentive Plan after the
effective date of such registration statement will be available for sale in the
open market, subject to the Lock-up Period and, for affiliates of the Company,
subject to the conditions and restrictions of Rule 144. In addition, the
Company has granted certain registration rights to Philip Friedman and Victor
Friedman. See "Certain Relationships and Related Party Transactions."
42
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom J.P. Morgan
Securities Inc. and Oppenheimer & Co., Inc. are acting as representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
set forth in the underwriting agreement among the Company, the Selling
Stockholders and the Representatives (the "Underwriting Agreement"), to
purchase from the Company and the Selling Stockholders, and the Company and the
Selling Stockholders have agreed to sell to the Underwriters, the respective
number of shares of Common Stock set forth opposite their names below:
----------------
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS ----------------
<S> <C>
J.P. Morgan Securities Inc. ...................................
Oppenheimer & Co., Inc. .......................................
---------
Total .......................................................
=========
</TABLE>
The nature of the Underwriters' obligations under the Underwriting Agreement is
such that all of the Common Stock being offered, excluding shares covered by
the over-allotment option granted to the Underwriters, must be purchased if any
are purchased.
The Representatives have advised the Company and the Selling Stockholders that
the several Underwriters propose to offer the Common Stock to the public
initially at the public offering price set forth on the cover page of this
Prospectus and may offer the Common Stock to selected dealers at such price
less a concession not to exceed $ per share. The Underwriters may allow, and
such dealers may reallow, a concession to other dealers not in excess of $
per share. After the public offering of the Common Stock, the public offering
price and other selling terms may be changed by the Representatives.
The Company has granted the Underwriters an option, exercisable within 30 days
after the date of this Prospectus, to purchase up to additional shares of
Common Stock from the Company at the same price per share to be paid by the
Underwriters for the other shares offered hereby. If the Underwriters purchase
any such additional shares pursuant to the option, each of the Underwriters
will be committed to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may exercise the
option only to cover over-allotments, if any, made in connection with the
distribution of Common Stock offered hereby.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined by negotiations between
the Company and the Representatives. Among the factors to be considered in
determining the initial offering price will be prevailing market conditions,
the market valuations of certain publicly traded companies, revenue and
earnings of the Company and comparable companies in recent periods, estimates
of the business potential and prospects of the Company, the experience of the
Company's management and the position of the Company in its industry.
The Representatives have informed the Company and the Selling Stockholders that
the Underwriters will not confirm, without customer authorization, sales to
their customer accounts as to which they have discretionary trading power.
The Company and the Principal Stockholders have agreed not to offer, sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into Common Stock, or register for sale under the Securities Act or request
registration of, as the case may be, any Common Stock, for a period of 180 days
after the date of this Prospectus without the prior written consent of
J.P. Morgan Securities Inc. on behalf of the Underwriters.
43
<PAGE>
The Underwriters have represented and agreed that (i) they have not offered or
sold and, prior to the expiry of the period of six months from the closing of
the Offering, will not offer or sell, any shares of Common Stock to persons in
the United Kingdom, except persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances which
have not resulted and will not result in an offer to the public within the
meaning of the Public Offers of Securities Regulations 1995, (ii) they have
complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by them in relation to the
Offering in, from or otherwise involving the United Kingdom and (iii) they have
only issued or passed on, and will only issue and pass on, in the United
Kingdom any document received by them in connection with the Offering to a
person who is of a kind described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisement) (Exemptions) Order 1995 or is a person to
whom such document may otherwise lawfully be issued or passed on.
Application has been made to approve the shares of Common Stock for quotation
on the Nasdaq National Market under the symbol "CGSI."
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required
to make in respect thereof.
At the Company's request, the Underwriters have reserved up to shares of
Common Stock for sale at the initial public offering price to the Company's
employees and other persons having business relationships with the Company. The
number of shares of Common Stock available for sale to other members of the
public will be reduced to the extent that these persons purchase such reserved
shares. Any reserved shares not purchased will be offered by the Underwriters
on the same basis as the other shares offered hereby.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
Common Stock offered hereby will be passed upon for the Company and the Selling
Stockholders by Chadbourne & Parke LLP, New York, New York. Certain legal
matters in connection with the Offering will be passed upon for the
Underwriters by Cahill Gordon & Reindel (a partnership including a professional
corporation), New York, New York.
EXPERTS
The financial statements (including Schedule 16(b), which is included in the
Registration Statement of which this Prospectus forms a part) of the Company at
June 30, 1996 and December 31, 1995 and for the six months ended June 30, 1996
and the year ended December 31, 1995, appearing in this Prospectus and
Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, and at December 31, 1994, and for each of the two years in the period
ended December 31, 1994, by BDO Seidman, LLP, independent auditors, as set
forth in their respective reports thereon appearing elsewhere herein, and are
included in reliance upon such reports given upon the authority of such firms
as experts in accounting and auditing.
CHANGE OF AUDITORS
In November 1995, the Company, with the approval of the Board of Directors,
dismissed BDO Seidman, LLP as its independent auditors. During the period
between January 1, 1993 and the date on which BDO Seidman, LLP was dismissed,
there was no (i) disagreement between the Company and BDO Seidman, LLP on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of BDO Seidman, LLP, would have caused BDO Seidman, LLP to make
reference to the subject matter of such disagreement in connection with its
report on the Company's financial statements or (ii) adverse opinion or a
disclaimer of opinion, or qualification or modification as to uncertainty,
audit scope or accounting principles in connection with its report on the
Company's financial statements. The Company engaged Ernst & Young LLP as its
new independent auditors in November 1995.
44
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under the
Securities Act (the "Registration Statement") with respect to the Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Common Stock, reference
is made to the Registration Statement and the exhibits and schedules thereto.
The statements contained in this Prospectus as to the contents of any document
filed as an exhibit are of necessity brief descriptions thereof and are not
necessarily complete; each such statement is qualified in its entirety by
reference to such document. The Registration Statement, including exhibits and
schedules thereto, may be inspected without charge at the office of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and the Commission's Regional Offices at Seven World Trade Center, 13th Fl.,
New York, New York 10048 and Northwest Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60621-2511, and copies may be obtained at
prescribed rates from the public reference section of the Commission,
Washington, D.C. 20549. Such reports and other information can be reviewed
through the Commission's Electronic Data Gathering Analysis and Retrieval
System, which is publicly available through the Commission's web site
(http://www.sec.gov).
45
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Reports of Independent Auditors.......................................... F-2
Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996........ F-4
Statements of Operations for Each of the Three Years in the Period Ended
December 31, 1995 and the Six Month Period Ended June 30, 1996 and the
Unaudited Six Month Period Ended June 30, 1995.......................... F-5
Statements of Stockholders' Equity for Each of the Three Years in the Pe-
riod Ended December 31, 1995 and the Six Month Period Ended June 30,
1996.................................................................... F-6
Statements of Cash Flows for Each of the Three Years in the Period Ended
December 31, 1995 and the Six Month Period Ended June 30, 1996 and the
Unaudited Six Month Period Ended June 30, 1995.......................... F-7
Notes to Financial Statements............................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors Computer Generated Solutions, Inc.
We have audited the accompanying balance sheets of Computer Generated
Solutions, Inc. (the "Company") as of June 30, 1996 and December 31, 1995, and
the related statements of operations, stockholders' equity and cash flows for
the six months ended June 30, 1996 and the year ended December 31, 1995. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Computer Generated Solutions,
Inc. at June 30, 1996 and December 31, 1995, and the results of its operations
and its cash flows for the six months ended June 30, 1996 and the year ended
December 31, 1995 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
July 12, 1996
F-2
<PAGE>
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS
Computer Generated Solutions, Inc.
New York, New York
We have audited the accompanying balance sheet of Computer Generated Solutions,
Inc. (the "Company") as of December 31, 1994, and the related statements of
income, stockholders' equity and cash flows for each of the two years in the
period ended December 31, 1994. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Computer Generated Solutions,
Inc. at December 31, 1994, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles.
BDO Seidman, LLP
New York, New York
February 21, 1995
F-3
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
BALANCE SHEETS
----------------------------------
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, JUNE 30, JUNE 30,
1994 1995 1996 1996
--------- --------- --------- ----------
(NOTE 13)
(UNAUDITED)
<S> <C> <C> <C> <C>
(In Thousands, Except Share
Data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 606 $ 264 $ 432 $ 432
Accounts receivable, net of
allowances of $10 in 1994,
$60 in 1995 and $65 in 1996 5,452 9,177 10,338 10,338
Deferred income taxes -- -- -- 159
Prepaid expenses and other
current assets 126 122 146 146
--------- --------- --------- ----------
Total current assets 6,184 9,563 10,916 11,075
Fixed assets, net 369 1,259 1,431 1,431
Cost in excess of fair value
of assets purchased, net of
accumulated amortization of
$213 in 1994, $533 in 1995
and $693 in 1996 746 426 266 266
Deferred income taxes -- -- -- 192
Other assets 428 405 569 569
--------- --------- --------- ----------
Total assets $ 7,727 $ 11,653 $ 13,182 $ 13,533
========= ========= ========= ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES:
Note payable--bank $ 1,400 $ 3,200 $ 2,200 $ 2,200
Note payable--stockholder 400 323 323 --
Accounts payable and accrued
expenses 1,293 1,995 3,271 3,271
Current portion of long-term
debt 472 472 267 267
Current portion of obligations
under capital leases -- 93 136 136
Deferred maintenance 475 542 357 357
Accrued payroll 703 817 1,178 1,178
Sales tax payable 145 178 391 391
Due to stockholders -- -- -- 5,769
--------- --------- --------- ----------
Total current liabilities 4,888 7,620 8,123 13,569
Long-term debt 605 133 -- --
Obligations under capital
leases -- 346 438 438
Subordinated debt--stockholder 1,778 2,146 2,146 --
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par
value, no shares authorized
in 1994, 1995 and June 30,
1996, pro forma June 30,
1996, 1,000,000 shares
authorized, no shares issued
and outstanding -- -- -- --
Common stock, $.01 par value;
Voting--10,000 shares
authorized; 10,000 shares
issued 1 1 1 1
Nonvoting--5,000 shares
authorized; no shares issued -- -- -- --
Additional paid-in capital 228 228 228 228
Retained earnings (deficit) 369 1,321 2,388 (561)
--------- --------- --------- ----------
598 1,550 2,617 (332)
Less 2,464 shares held in
treasury, at cost (142) (142) (142) (142)
--------- --------- --------- ----------
Total stockholders' equity
(deficit) 456 1,408 2,475 (474)
--------- --------- --------- ----------
Total liabilities and
stockholders' equity $ 7,727 $ 11,653 $ 13,182 $ 13,533
========= ========= ========= ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
-------------------------------------------------------
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
1993 1994 1995 1995 1996
--------- --------- --------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(In Thousands, Except
Per Share Data)
Revenues $ 26,003 $ 24,710 $ 35,947 $ 15,494 $ 27,353
Direct costs 20,982 16,870 25,977 10,572 20,886
--------- --------- --------- --------- ---------
Income from direct
operations 5,021 7,840 9,970 4,922 6,467
Selling, general and
administrative expenses 2,916 4,725 6,690 3,007 4,504
Compensation amounts to
S Corporation
stockholders 1,950 3,041 1,502 201 380
Amortization of cost in
excess of fair value of
assets purchased -- 213 320 160 160
--------- --------- --------- --------- ---------
4,866 7,979 8,512 3,368 5,044
--------- --------- --------- --------- ---------
Operating income (loss) 155 (139) 1,458 1,554 1,423
Interest expense -- 77 473 225 295
--------- --------- --------- --------- ---------
Income (loss) before
income taxes 155 (216) 985 1,329 1,128
Income taxes 39 60 33 60 61
--------- --------- --------- --------- ---------
Net income (loss) $ 116 $ (276) $ 952 $ 1,269 $ 1,067
========= ========= ========= ========= =========
PRO FORMA (UNAUDITED)
(NOTE 13)
Historical income before
income taxes $ 985 $ 1,128
Pro forma adjustment to
eliminate annual
compensation amounts to
S Corporation
stockholders in excess
of $760 in 1995 742 --
--------- ---------
Pro forma income before
income taxes 1,727 1,128
Pro forma provision for
income taxes 704 488
--------- ---------
Pro forma net income $ 1,023 $ 640
========= =========
Pro forma net income per
share $ 135.75 $ 84.93
========= =========
Weighted average shares
outstanding 7,536 7,536
========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
------------------------------------------------------------------
ADDITIONAL
NUMBER PAID-IN RETAINED TREASURY
OF SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
--------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(In Thousands)
Balance at December 31,
1992 7 $ 1 $ 19 $ 529 $ (185) $ 364
Net income 116 -- 116
--------- --------- --------- --------- --------- ---------
Balance at December 31,
1993 7 1 19 645 (185) 480
Net loss (276) -- (276)
Reissued treasury stock 3 209 -- 43 252
--------- --------- --------- --------- --------- ---------
Balance at December 31,
1994 10 1 228 369 (142) 456
Net income 952 -- 952
--------- --------- --------- --------- --------- ---------
Balance at December 31,
1995 10 1 228 1,321 (142) 1,408
Net income 1,067 -- 1,067
--------- --------- --------- --------- --------- ---------
Balance at June 30, 1996 10 $ 1 $ 228 $ 2,388 $ (142) $ 2,475
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
----------------------------------------------------------
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
1993 1994 1995 1995 1996
--------- --------- --------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(In Thousands)
OPERATING ACTIVITIES
Net income (loss) $ 116 $ (276) $ 952 $ 1,269 $ 1,067
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization 54 288 530 208 310
Bad debt expense 87 54 110 59 84
Write-off of leasehold
improvements -- 42 -- -- --
Changes in operating
assets and liabilities
(net of effects in
1994 from purchase of
ACS Software Products
Group and Real-Time
Technology Inc.):
Accounts receivable (831) (1,260) (3,835) (793) (1,245)
Prepaid expenses and
other current assets 6 (62) 4 49 (24)
Other assets (104) (173) 23 -- (164)
Accounts payable and
accrued expenses 3,185 (3,333) 702 (452) 1,276
Deferred maintenance -- 115 67 (60) (185)
Accrued payroll 126 313 114 (91) 361
Sales taxes payable 59 (360) 33 57 214
--------- --------- --------- --------- ---------
Net cash provided by
(used in) operating
activities 2,698 (4,652) (1,300) 246 1,694
INVESTING ACTIVITIES
Purchase of net assets
of ACS Software
Products Group -- (800) -- -- --
Capital expenditures (119) (74) (579) (406) (141)
--------- --------- --------- --------- ---------
Net cash used in
investing activities (119) (874) (579) (406) (141)
FINANCING ACTIVITIES
Proceeds from term loan -- 800 -- -- --
Repayment of term loan -- (133) (267) (133) (133)
Repayment of acquisition
debt -- -- (205) (205) (205)
Proceeds (repayment)
from note payable -
bank, net (300) 1,400 1,800 400 (1,000)
Proceeds of note payable
and subordinated
debt - stockholder, net 213 1,244 291 -- --
Principal payments under
capitalized lease
obligations -- -- (82) (37) (47)
Repayments of loans
payable - other (37) (190) -- (33) --
--------- --------- --------- --------- ---------
Net cash provided by
(used in) financing
activities (124) 3,121 1,537 (8) (1,385)
--------- --------- --------- --------- ---------
Increase (decrease) in
cash and cash
equivalents 2,455 (2,405) (342) (168) 168
Cash and cash
equivalents, beginning
of year 556 3,011 606 606 264
--------- --------- --------- --------- ---------
Cash and cash
equivalents, end of
year $ 3,011 $ 606 $ 264 $ 438 $ 432
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-7
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
Unaudited with respect to June 30, 1995
1. SUMMARY OF ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Computer Generated Solutions, Inc. (the "Company" or "CGS") provides a
composite solution to the information processing needs of its clients through a
wide range of information technology and outsourcing support services. Using a
custom designed approach to satisfy each customer's particular need, the
Company provides a complete range of solutions, including its proprietary ACS
Optima software for the apparel industry, professional services ranging from
strategic consulting to system integration, technical training classes and full
service on-site and remote help desk and call management support services. The
Company's customers are in various industries located throughout the United
States.
The interim financial statements at June 30, 1995 and for the six months then
ended are unaudited; however, in the opinion of management, all adjustments,
consisting only of normal recurring accruals necessary for a fair presentation,
have been included. Results of interim periods are not necessarily indicative
of results to be expected for the entire fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. At June 30, 1996, the
Company has substantially all its cash in two financial institutions.
CONCENTRATION OF CREDIT RISK
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Accounts receivable are
generally due within 60 days from the date of service. Credit losses have
historically been consistent with management's expectations.
FIXED ASSETS
Fixed assets are stated at cost and depreciation is computed over the estimated
useful lives of the assets by the straight-line method for financial reporting
and by accelerated methods for income tax purposes. Amortization on leasehold
improvements is computed by the straight-line method over the shorter of the
estimated useful lives of the assets or the term of the lease.
RECLASSIFICATIONS
Certain items in the December 31, 1993, 1994 and 1995 and June 30, 1995
financial statements have been reclassified to conform to the June 30, 1996
presentation.
DEFERRED RENT
Deferred rent represents payments made at the beginning of the lease term for
office space which is being amortized over the life of the respective lease.
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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Software License and Service Fees
The Company recognizes revenue from sales of software licenses upon delivery of
the software product to the customer because future obligations associated with
such revenue are insignificant.
Revenue from software installation, modifications and training services are
recognized on a percentage-of-completion method with progress-to-completion
measured based upon labor costs incurred or achievement of contract milestones.
F-8
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Services and Maintenance
Fees related to professional services are recognized as revenue as time and
material costs are incurred.
Maintenance fees are recognized as revenues ratably over the term of the
maintenance contract.
Hardware and Other
Computer hardware revenues are recognized when the units are shipped. Shipments
of completed units are sometimes delayed pending testing, customer request and
installation of software. In such instances, hardware revenues are recognized
when the customer authorizes the related billing.
COMPENSATION AMOUNTS TO S CORPORATION STOCKHOLDERS (see Note 13)
For the years 1993, 1994 and 1995, compensation amounts to S Corporation
stockholders consisted of annual salaries and discretionary year-end bonuses
which were charged to expense. The bonuses are determined and paid at year-end
and, accordingly, the interim six month period ended June 30, 1995 did not
include a charge for such year-end bonuses. For the six months ended June 30,
1996, the Company has recorded compensation amounts to S Corporation
stockholders to reflect the aggregate base salaries in effect during 1996 (see
Note 13.)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Notes payable - bank: The carrying amounts of the Company's borrowings under
its credit and term loan agreement approximates their fair values.
Notes payable - stockholder: The carrying amounts of the Company's borrowings
under its subordinated debt agreements approximates their fair values.
Long-term debt: The carrying amounts of the Company's borrowings under its
long-term debt arrangements approximates their fair values.
RESEARCH AND SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," the Company capitalizes costs incurred to develop new software
products upon determination that technological feasibility has been established
for the product, whereas costs incurred prior to the establishment of
technological feasibility are charged to expense. All research and software
development costs incurred to date have been expensed by the Company and are
included in direct costs. Research and software development costs amounted to
$423,000, $740,000, $322,000 and $408,000 for the years ended December 31, 1994
and 1995 and for the six months ended June 30, 1995 and 1996, respectively.
Research and software development costs were not material for the year ended
December 31, 1993.
2. ACQUISITIONS
ACS SOFTWARE PRODUCTS GROUP
Effective May 5, 1994, the Company acquired substantially all of the assets and
assumed certain liabilities of ACS Software Products Group ("ACS"), an apparel
manufacturing and distribution software product company, for $1,210,000. The
acquisition has been accounted for as a purchase and the assets of ACS have
been recorded at their fair value at the date of acquisition. The excess of the
total acquisition cost over the fair value of net assets acquired of $959,000
is being amortized on a straight-line basis over three years. ACS' results of
operations have been included in the statements of operations since the date of
acquisition. The purchase price consisted of $800,000 in cash and a promissory
note in the principal amount of $410,000 (see Note 5). The note bears interest
at 6.75% and provides for the payment of principal in two equal installments of
$205,000 together with accrued interest. The Company paid the last installment
on the note during the six months ended June 30, 1996.
F-9
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
REAL-TIME TECHNOLOGY INC.
Effective October 1, 1994, the Company acquired substantially all of the assets
and assumed certain liabilities of Real-Time Technology Inc. ("RTT"), a
computer consulting firm, for $252,000 (approximating the fair value of net
asset acquired, which approximated book value). Funding was provided through
the issuance of 753 shares of CGS treasury stock with treasury stock credited
for $43,000 and the balance of $209,000 credited to additional paid-in capital.
The acquisition has been accounted for as a purchase and the assets of RTT have
been recorded at their fair value at the date of acquisition which approximated
cost. RTT's results of operations have been included in the statements of
operations since the date of acquisition.
The table below sets forth the pro forma (unaudited) results of operations for
the years ended December 31, 1993 and 1994 assuming consummation of the ACS and
RTT acquisitions as of January 1, 1993. The 1993 pro forma results of
operations include RTT's operations for the twelve months ended October 31,
1993 and the 1994 pro forma results of operations include RTT's operations for
the eleven months ended September 30, 1994.
<TABLE>
<CAPTION>
--------------------------
YEARS ENDED DECEMBER 31,
1993 1994
------------ ------------
<S> <C> <C>
(dollars in thousands, except per share
data)
Total revenues $ 37,390 $ 30,269
Net loss (1,061) (705)
Pro forma net loss per share (see Note
13) $ (140.79) $ (93.55)
</TABLE>
3. FIXED ASSETS
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
--------------------------------------------
DECEMBER 31, JUNE 30, ESTIMATED
1994 1995 1996 USEFUL LIVES
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
(dollars in thousands)
Furniture and fixtures $ 118 $ 308 $ 486 10 years
Leasehold improvements 3 261 309 Life of
lease
Computer equipment and software 630 1,282 1,378 3-5 years
--------- --------- ---------
751 1,851 2,173
Less accumulated depreciation
and amortization 382 592 742
--------- --------- ---------
$ 369 $ 1,259 $ 1,431
========= ========= =========
</TABLE>
Furniture and fixtures, leasehold improvements, computer equipment and software
include assets resulting from capitalized lease obligations totaling $521,000
and $703,000 at December 31, 1995 and June 30, 1996, respectively (see Note 7).
The accumulated depreciation attributable to assets under capital leases is
$52,000 and $84,000 at December 31, 1995 and June 30, 1996, respectively.
4. NOTE PAYABLE - BANK
In June 1996, the Company amended its revolving credit and term loan agreement
with a bank. The agreement provides for a $5,500,000 revolving line of credit
expiring in May 1997. Outstanding borrowings bear interest at the bank's prime
rate (8.25% at June 30, 1996). Subsequent to June 30, 1996, the revolving line
of credit was increased to $7,000,000.
Borrowings on the revolving line of credit, which are based on eligible
accounts receivable, and the term loan are collateralized by a security
interest in all accounts receivable, fixed assets and general intangibles and
an assignment of key man insurance on the life of one of the stockholders in
the amount of $500,000. In addition, one of the stockholders has guaranteed the
obligation. Borrowings under the revolving line of credit are also supported by
a 10% compensating balance arrangement.
F-10
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Subordinated debt - stockholder represents funds advanced to the Company by its
principal stockholder. Effective January 1, 1995, the subordinated debt bears
interest at 10% per annum and is payable on demand. In connection with the
revolving line of credit, subordinated debt - stockholder is subordinated to
the bank.
5. NOTE PAYABLE - STOCKHOLDER
Note payable - stockholder, which is payable on demand, represents advances
made to the Company by its principal stockholder, bearing interest at 10% per
annum.
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
-------------------------------
DECEMBER 31, JUNE 30,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(dollars in thousands)
Note payable--bank (a)...................... $ 668 $ 400 $ 267
Note payable (acquisition debt) (Note 2).... 409 205 --
--------- --------- ---------
Total long-term debt........................ 1,077 605 267
Less current maturities..................... 472 472 267
--------- --------- ---------
$ 605 $ 133 $ --
========= ========= =========
</TABLE>
- -------
(a) Note payable to a bank consists of a term loan of $800,000 which is payable
in 36 equal monthly installments of $22,000 with interest at 1.25% per annum
above the bank's prime rate (8.25% at June 30, 1996). The term loan contains
financial covenants relating to minimum tangible net worth, working capital and
a maximum debt-to-equity ratio. In addition, one of the stockholders has
guaranteed the obligation.
7. CAPITAL LEASES
In 1995 and 1996, the Company entered into capital lease agreements for
computer and telephone equipment, furniture and fixtures and leasehold
improvements. The agreements provide for monthly payments of approximately
$15,000 through October 2000, which include interest at rates ranging from 10%
to 10.35%.
The following is a schedule of future minimum lease payments under capital
leases, together with the present value of the net minimum lease payments:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
TWELVE MONTHS ENDING JUNE 30:
1997 $ 184
1998 184
1999 184
2000 127
2001 10
---------
Total minimum lease payments................................ 689
Less amount representing interest........................... 115
---------
Present value of net minimum lease payments................. $ 574
=========
</TABLE>
F-11
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. COMMITMENTS
LEASES
Total rent expense on real estate charged to operations for the years ended
December 31, 1993, 1994 and 1995 and for the six months ended June 30, 1995 and
1996 aggregated $274,000, $321,000, $421,000, $171,000 and $373,000,
respectively.
The minimum annual rental commitments under noncancellable operating leases as
of June 30, 1996 are as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
TWELVE MONTHS ENDING JUNE 30:
1997 $ 838
1998 795
1999 729
2000 682
2001 566
Thereafter 2,352
---------
Total $ 5,962
=========
</TABLE>
9. STATEMENTS OF OPERATIONS - SUPPLEMENTAL DISCLOSURES
<TABLE>
<CAPTION>
-----------------------------------------------------
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(dollars in thousands)
REVENUES:
Services, software
license
and maintenance fees $ 8,514 $19,962 $31,704 $14,175 $22,906
Hardware 17,489 4,748 4,243 1,319 4,447
--------- --------- --------- --------- ---------
$26,003 $24,710 $35,947 $15,494 $27,353
========= ========= ========= ========= =========
DIRECT COSTS:
Services, software
license
and maintenance fees $ 5,186 $12,988 $22,970 $ 9,850 $17,169
Hardware 15,796 3,882 3,007 722 3,717
--------- --------- --------- --------- ---------
$20,982 $16,870 $25,977 $10,572 $20,886
========= ========= ========= ========= =========
</TABLE>
F-12
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. STATEMENTS OF CASH FLOWS - SUPPLEMENTAL DISCLOSURES
<TABLE>
<CAPTION>
-----------------------------------------------------
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(dollars in thousands)
CASH PAID DURING THE
PERIOD:
Income taxes $ 34 $ 47 $ 61 $ 7 $ --
Interest 16 79 488 110 175
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Notes payable on
purchase of net assets
of ACS (Note 2) -- 410 -- -- --
Treasury stock issued on
purchase of net assets
of RTT (Note 2) -- 252 -- -- --
</TABLE>
The Company entered into capitalized leases for approximately $521,000 in 1995
and $182,000 in 1996.
11. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan in which all eligible employees can contribute a
portion of their compensation up to the maximum amount allowable pursuant to
the Internal Revenue Code. The Company contributes an amount equal to 50% of
each employee's contribution limited to 3% of an eligible employee's
compensation. The Company contributed to the plan $53,000, $102,000, $181,000,
$86,000 and $149,000 for the years ended December 31, 1993, 1994 and 1995 and
the six months ended June 30, 1995 and 1996, respectively.
12. MAJOR CUSTOMER
One customer, with several contracts in various divisions, accounted for 21%,
33% and 37% of total revenues for the years ended December 31, 1994 and 1995
and the six months ended June 30, 1996, respectively. As of December 31, 1994
and 1995 and June 30, 1996, 19%, 35% and 27%, respectively, of accounts
receivable was due from this customer. No single customer accounted for more
than 10% of revenues in 1993.
13. PRO FORMA INFORMATION AND EVENTS CONCURRENT WITH THE IPO (UNAUDITED)
PRO FORMA ADJUSTMENTS: STATEMENTS OF OPERATIONS
The Company intends to enter into an underwriting agreement for an initial
public offering ("IPO") of its common stock. If the IPO is successful, the
Company will no longer be treated as an S Corporation and, accordingly, will be
subjected to federal and additional state income taxes. In 1996, the Company,
pursuant to certain employment arrangements, agreed to provide the stockholder
officers annual salaries of $760,000. Such arrangements do not provide for any
additional compensation, including bonuses, for fiscal year 1996. Subsequent to
1996, compensation for stockholder officers, including bonuses, if any, will be
determined by the Company's compensation committee. The unaudited pro forma
adjustments on the statement of operations reflect (i) an adjustment to
eliminate compensation amounts to S Corporation stockholders in excess of
aggregate base salaries which the Company expects to pay after the IPO and (ii)
a provision for income taxes based upon pro forma income as if the Company had
not been an S Corporation.
PRO FORMA NET INCOME (LOSS) PER SHARE
Pro forma net income per share has been computed by dividing pro forma net
income by the weighted average number of common shares outstanding during the
periods. There were no common stock equivalents such as options, warrants,
etc., outstanding during any of the periods presented.
F-13
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PRO FORMA BALANCE SHEET
Subsequent to June 30, 1996, the Company intends to declare an S Corporation
distribution to its then existing stockholders representing all of its
previously earned and undistributed S Corporation taxable earnings through
June 30, 1996. If the IPO is successful, the Company expects that the net
proceeds from the IPO will be used to pay this S Corporation distribution and
repay indebtedness owed to a stockholder under a promissory note and a
subordinated debt agreement. The pro forma balance sheet at June 30, 1996 gives
effect to these items. Amount due to stockholders on the June 30, 1996 pro
forma balance sheet consists of the following:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
S Corporation distributions $ 3,300
Subordinated debt--stockholder 2,146
Note payable--stockholder 323
---------
$ 5,769
=========
</TABLE>
The pro forma balance sheet at June 30, 1996 also gives effect to a deferred
tax asset in the amount of $351,000 (see Note 14).
The estimated distribution of $3,300,000 in the pro forma presentation
represents undistributed taxable S Corporation earnings through June 30, 1996.
The difference between the undistributed earnings of $3.3 million and retained
earnings of approximately $2.4 million at June 30, 1996 is principally the
result of temporary timing differences between income tax bases and financial
reporting. In addition, the Company plans to distribute to its existing
stockholders an amount equal to the taxable earnings of the Company from June
30, 1996 to the day prior to the S termination date.
LONG-TERM INCENTIVE PLAN
Immediately prior to the consummation of the IPO, the Company will adopt the
1996 Long-Term Incentive Plan (the "Plan"). The Company will reserve an amount
of common stock equal to 10% of the outstanding shares of common stock
outstanding upon consummation of the IPO for issuance and/or use as the basis
for stock appreciation rights or other units of stock-based incentive
compensation under the Plan.
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123. "Accounting for Stock-
Based Compensation" ("SFAS 123"). SFAS 123 is effective for fiscal years
beginning after December 15, 1995 and prescribes accounting and reporting
standards for all stock-based compensation plans, including employee stock
options, restricted stock, employee stock purchase plans and stock appreciation
rights. SFAS 123 requires compensation expense to be recorded (i) using the new
fair value method or (ii) using existing accounting rules prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations with pro forma disclosure of
what net income and earnings per share would have been had the Company adopted
the new fair value method. It is the Company's intention to present such
information in accordance with APB 25 as described in (ii) above.
STOCK SPLIT
Immediately prior to the consummation of the IPO, the Company will effect a
stock split of its common stock. The Company has not yet determined the stock
split conversion and, accordingly, the financial statements do not give effect
to such intended stock split.
14. INCOME TAXES
The Company, with the consent of its stockholders, has elected to be taxed as
an S Corporation pursuant to the Internal Revenue Code and certain state tax
laws. As such, the Company has not been subject to federal and certain state
income taxes and the stockholders have included the corporation's taxable
income or loss in their individual income tax returns. Income taxes in 1994,
1995 and 1996 primarily represent New York City corporate income taxes. The New
York City income tax rate is approximately 9%. Deferred income taxes resulting
from temporary differences are considered immaterial and, therefore, are not
provided for at December 31, 1994 and 1995 and June 30, 1996.
F-14
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The provision for pro forma income taxes (see Note 13) on pro forma income
differs from the amounts computed by applying the applicable federal statutory
rates due to the following:
<TABLE>
<CAPTION>
-------------------------
% OF PRO FORMA PROFIT
BEFORE INCOME TAXES
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
<S> <C> <C>
Federal statutory rate 34.0 % 34.0%
State and local taxes, net of federal tax
benefit 7.4 7.9
Nondeductible expenses 2.0 1.4
Utilization of tax credit (2.6) --
--------- ---------
40.8 % 43.3%
========= =========
</TABLE>
If the IPO is successful, the Company will no longer be an S Corporation. Upon
the change in status of the Company, under FASB Statement No. 109 "Accounting
for Income Taxes", there will be a deferred income tax asset which is
principally due to book amortization in excess of tax amortization related to
goodwill and the timing of the deduction for certain payments to stockholders.
Had the change in status occurred on June 30, 1996, the deferred tax asset that
would have to be recognized would be approximately $351,000.
15. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
-------------------------------
DECEMBER 31, JUNE 30,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(dollars in thousands)
Premiums receivable (a)..................... $ 310 $ 328 $ 328
Security deposits........................... 118 77 103
Deferred rent............................... -- -- 138
--------- --------- ---------
$ 428 $ 405 $ 569
========= ========= =========
</TABLE>
- -------
(a) Amount represents premiums paid on a split-dollar life insurance policy on
the principal stockholder.
F-15
<PAGE>
[LOGO] COMPUTER GENERATED SOLUTIONS, INC.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Following are the estimated expenses, other than the underwriting discounts
and commissions, to be incurred in connection with the Offering of the Common
Stock registered under this Registration Statement:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $11,896.64
NASD filing fee................................................ 3,950.00
NASDAQ listing fee............................................. 5,000.00
Blue sky qualification fees and expenses....................... 30,000.00
Printing and engraving expenses................................
Legal fees and expenses........................................
Accounting fees and expenses...................................
Transfer Agent and Registrar fees and expenses.................
Miscellaneous..................................................
----------
Total........................................................ $
==========
</TABLE>
All of the above figures, except the Securities and Exchange Commission
registration fee, NASD filing fee and the NASDAQ listing fee, are estimates.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is a Delaware corporation. Reference is made to Section
102(b)(7) of the Delaware General Corporation Law (the "DGCL"), which enables
a corporation in its original certificate of incorporation or an amendment
thereto to eliminate or limit the personal liability of a director for
violations of the director's fiduciary duty, except (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) pursuant to Section 174 of the DGCL
(providing for liability of directors for unlawful payment of dividends or
unlawful stock purchase or redemptions) or (iv) for any transactions from
which a director derived an improper personal benefit.
Reference also is made to Section 145 of the DGCL, which provides that a
corporation may indemnify any persons, including officers and directors, who
are parties to, or who are threatened to be made parties to, any threatened,
pending or completed legal action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of such corporation), by reason of the fact that such person was an
officer, director, employee or agent of such corporation or is or was serving
at the request of such corporation as director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such
action, suit or proceeding, provided such officer, director, employee or agent
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interest and, for criminal proceedings, had
no reasonable cause to believe that his conduct was unlawful. A Delaware
corporation may indemnify officers and directors in an action by or in the
right of the corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses
that such officer or director actually and reasonably incurred.
Article of the Certificate of Incorporation of the Company (filed as
Exhibit 3.1) provides that except under certain circumstances as described
above and as set forth in Section 102(b)(7) of the DGCL, directors of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach
II-1
<PAGE>
of fiduciary duties as directors. Article of the By-Laws of the Company
(filed as Exhibit 3.2) provides for indemnification of the officers and
directors of the Company to the full extent permitted by applicable law. The
Underwriting Agreement, exhibit 1.1 to this Registration Statement, which will
be filed by amendment, provides for indemnification by the Underwriters of the
Company and its directors and certain officers, and by the Company of the
Underwriters, for certain liability arising under the Securities Act of 1933,
as amended.
The Company intends to enter into a director and officer insurance policy
that will provide for reimbursement or payments for losses arising from claims
against covered directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of all securities of the Company sold within the
past three years, which were not registered under the Securities Act of 1933,
as amended (the "Securities Act").
In October 1994, the Company acquired substantially all of the assets and
assumed certain liabilities of Real-Time Technology, Inc. ("Real-Time"), a
computer consulting firm which was owned by Victor Friedman, the Company's
Executive Vice President. The purchase price of $252,478 was paid by the
issuance of 753 shares of Company common stock to Real Time which were then
transferred to Victor Friedman in a simultaneous transaction.
The above described issuance of securities was made in reliance upon Section
4(2) of the Securities Act as a transaction not involving any public offering.
The Company has reason to believe that the foregoing purchaser was familiar
with or had access to information concerning the operations and financial
conditions of the Company, and such individual acquired the securities for
investment and not with a view to the distribution thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS:
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Amended and Restated Certificate of Incorporation of the Company.*
3.2 Bylaws of the Company, as amended.*
4.1 Specimen certificate for the shares of Common Stock.*
4.2 Registration Rights Agreement.*
4.3 1996 Long-Term Incentive Plan.*
5.1 Opinion of Chadbourne & Parke LLP, counsel to the Company.*
10.1 Material Contracts.*
11.1 Statement regarding Computation of Per Share Earnings.*
16.1 Letter from BDO Seidman, LLP regarding change in certifying
accountants.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of BDO Seidman, LLP.
23.3 Consent of Chadbourne & Parke LLP.*
23.4 Consent of Edward Schroeder.**
24.1 Powers of Attorney (included in signature page hereto).**
27.1 Financial Data Schedule.**
</TABLE>
- --------
* To be filed by amendment.
** Previously Filed.
(b) FINANCIAL STATEMENT SCHEDULE:
II--Valuation and Qualifying Accounts
All other schedules are omitted either because they are not applicable or
are not material, or the information presented therein is contained in the
Financial Statements or notes thereto.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the underwriting agreement
certificates in such denomination and registered in such names as
required by the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or controlling persons of the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Securities and Exchange 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 payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant 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 Registrant 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.
(c) The undersigned Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Company pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this Registration Statement as of the time it was
declared effective.
(ii) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at the time shall be deemed to be the initial bona fide
offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF NEW YORK, STATE OF NEW YORK, ON SEPTEMBER 10, 1996.
COMPUTER GENERATED SOLUTIONS, INC.
By: /s/ PHILIP FRIEDMAN
_________________________________
NAME: PHILIP FRIEDMAN
TITLE: PRESIDENT AND CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
AND BY PHILIP FRIEDMAN AS ATTORNEY-IN-FACT FOR THE SPECIFIC PERSONS IN THE
CAPACITIES WITH COMPUTER GENERATED SOLUTIONS, INC. ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Philip Friedman President and Chief
- ------------------------------------- Executive Officer September 10,
PHILIP FRIEDMAN (Principal 1996
Executive Officer),
Director
Executive Vice
* President, Director September 10,
- ------------------------------------- 1996
VICTOR FRIEDMAN
Vice President
* Finance & September 10,
- ------------------------------------- Administration and 1996
FRED B. SCHLOSSBERG Secretary
(Principal
Financial and
Accounting
Officer), Director
/s/ Philip Friedman
*By:____________________________
PHILIP FRIEDMAN
ATTORNEY-IN-FACT
II-4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Computer Generated Solutions, Inc.
We have audited the financial statements of Computer Generated Solutions, Inc.
as of June 30, 1996 and December 31, 1995, and for the six months ended June
30, 1996 and the year ended December 31, 1995, and have issued our report
thereon dated July 12, 1996 (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedule listed in
Item 16(b) of this Registration Statement. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein for
the periods stated above.
ERNST & YOUNG LLP
New York, New York
July 12, 1996
S-1
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------------------------------------------------------
ADDITIONS BALANCE
BALANCE CHARGED AT
AT BEGINNING TO COSTS AND (a) END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Allowances deducted from assets
to
which they apply:
Allowance for doubtful accounts.. $ 5 $ 54 $(49) $10
YEAR ENDED DECEMBER 31, 1995
Allowances deducted from assets
to
which they apply:
Allowance for doubtful ac-
counts........................ 10 110 (60) 60
SIX MONTHS ENDED JUNE 30, 1996
Allowances deducted from assets
to
which they apply:
Allowance for doubtful ac-
counts........................ 60 84 (79) 65
</TABLE>
- --------
(a) Uncollectible receivables written off.
Note: Valuation and qualifying accounts for the year ended December 31, 1993
were not material.
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Amended and Restated Certificate of Incorporation of the
Company.*
3.2 Bylaws of the Company, as amended.*
4.1 Specimen certificate for the shares of Common Stock.*
4.2 Registration Rights Agreement.*
4.3 1996 Long-Term Incentive Plan.*
5.1 Opinion of Chadbourne & Parke LLP, counsel to the Company.*
10.1 Material Contracts.*
11.1 Statement regarding Computation of Per Share Earnings.*
16.1 Letter from BDO Seidman, LLP regarding change in certifying
accountants.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of BDO Seidman, LLP.
23.3 Consent of Chadbourne & Parke LLP.*
23.4 Consent of Edward Schroeder.**
24.1 Powers of Attorney (included in signature page hereto).**
27.1 Financial Data Schedule.**
</TABLE>
- --------
* To be filed by amendment.
** Previously Filed.
<PAGE>
EXHIBIT 16.1
To: Securities and Exchange Commission
We audited the financial statements of Computer Generated Solutions, Inc.
(the "Company") at December 31, 1994, and for each of the two years in the
period ended December 31, 1994. In this regard, we agree with the statements
made by the Company in the Company's Registration Statement on Form S-1 dated
the date hereof under the caption "Change of Auditors."
BDO Seidman, LLP
New York, NY
September 10, 1996
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
Computer Generated Solutions, Inc.
New York, New York
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Information" and to the use of our reports dated July 12,
1996, in Amendment No. 1 to the Registration Statement (Form S-1) and related
Prospectus of Computer Generated Solutions, Inc. for the registration of
shares of its common stock.
ERNST & YOUNG LLP
New York, New York
September 10, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Computer Generated Solutions, Inc.
New York, New York
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated February 21, 1995, relating to the
financial statements of Computer Generated Solutions, Inc. which is contained
in that Prospectus, and our report dated February 21, 1995, relating to the
schedule which is contained in Part II of the Registration Statement.
We also consent to the reference to us under the captions "Selected
Financial Information" and "Experts" in the Prospectus.
BDO Seidman, LLP
New York, New York
September 10, 1996
