<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 14, 1997
REGISTRATION NO. 333-09297
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 3
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. [_]
--------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1)(2) REGISTRATION FEE(3)
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<S> <C> <C>
Common Stock, par value $0.001 per
share................................. $52,923,000 $5,582.72
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes $6,903,000 of shares of Common Stock the Underwriters have the
option to purchase to cover over-allotments, if any.
(3) In addition to the registration fee paid in connection with the initial
filing of the Registration Statement.
--------------
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.
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<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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 14, 1997
3,540,000 SHARES
[LOGO] COMPUTER GENERATED SOLUTIONS, INC.
COMMON STOCK
-----------
Of the 3,540,000 shares of Common Stock offered hereby, 2,900,000 shares are
being issued and sold by Computer Generated Solutions, Inc. (the "Company") and
640,000 shares are being sold by the Selling Stockholders. The Company will not
receive any of the proceeds from the sale of shares by the Selling
Stockholders. See "Principal and Selling Stockholders."
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently anticipated that the initial public offering
price of the Common Stock will be between $11.00 and $13.00 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The Common Stock has been approved for
quotation on the Nasdaq National Market under the symbol "CGSI."
Immediately after this offering, Philip Friedman, the Company's President and
Chief Executive Officer, will own approximately 66.0% of the outstanding shares
of Common Stock (assuming no exercise of the Underwriters' over-allotment
option). See "Principal and Selling Stockholders."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
-----------
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.
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<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share........................ $ $ $ $
Total (3) ....................... $ $ $ $
</TABLE>
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and for other information.
(2) Before deducting expenses of the offering payable by the Company estimated
at $850,000.
(3) The Company has granted an option to the Underwriters exercisable within 30
days of the date hereof, to purchase up to 531,000 additional shares of
Common Stock for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
-----------
The shares of Common Stock are offered severally by the Underwriters when, as
and if delivered to and accepted by them, subject to their right to withdraw,
cancel or reject orders in whole or in part and subject to certain other
conditions. It is expected that delivery of the certificates representing the
shares of Common Stock will be made against payment on or about , 1997 at
the office of Oppenheimer & Co., Inc., Oppenheimer Tower, World Financial
Center, New York, NY 10281.
-----------
OPPENHEIMER & CO., INC._________________________________________FURMAN SELZ
The date of this Prospectus is , 1997.
<PAGE>
[LOGO] COMPUTER GENERATED SOLUTIONS, INC.
ACS OPTIMA
PRODUCTS &
SERVICES
INFORMATION IT OUTSOURCING
SYSTEMS AND SUPPORT
SERVICES SERVICES
PROFESSIONAL HELP
SERVICES DESK
TRAINING CALL
MANAGEMENT
THE "COMPOSITE SOLUTION"
The "Composite Solution" allows the Company to utilize its products and services
to create customized solutions for its clients and to provide multiple entry
points into the client's organization.
PROFESSIONAL SERVICES
The Company 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 has been designated by IBM as one of six
current national "Business Partners" for its Year 2000 engagements.
TRAINING
The Company provides, through more than 3560 course offerings, comprehensive
technical and end user training to its clients' programmers, system
administrators, operations personnel and management.
ACS OPTIMA PRODUCTS & SERVICES
The Company provides comprehensive, integrated business information systems
specifically designed for the apparel industry. The Company's solution includes
its ACS Optima Software and a number of fully integrated complementary products
licensed to the Company that allow apparel manufacturers to manage all phases of
the production process, from planning and design to manufacturing, inventory
control, distribution and financial reporting.
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.
CALL MANAGEMENT
The Company provides call management services that facilitate the entire call
management process, including call receiving, inbound and outbound
telemarketing, data collection and overflow services.
IN CONNECTION WITH THIS 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.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. Unless otherwise indicated, or the context
otherwise requires, all information 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 this 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").
IBM and AT&T accounted for, in the aggregate, approximately 40% of the
Company's total revenues in 1996.
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. Representative examples of the Company's ACS Optima Software
clients include several divisions of Polo Ralph Lauren Corporation ("Polo Ralph
Lauren"), Quicksilver, Inc. ("Quicksilver") and Fritzi of California
("Fritzi"). These representative clients accounted for, in the aggregate,
approximately 14% of the Company's total revenues in 1996.
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. Representative examples of the Company's clients for
professional services include Morgan Stanley & Co. Incorporated ("Morgan
Stanley"), Merrill Lynch & Co., Inc. ("Merrill Lynch") and EMI Music Publishing
("EMI Music"). These representative clients accounted for, in the aggregate,
approximately 4% of the Company's total revenues in 1996. 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. To meet the Company's needs for technical resources, the Company
maintains a national proprietary database consisting of technical profiles and
resumes of approximately 30,000 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.
Pursuant to an agreement between IBM and the Company entered into in November
1996, the Company has been designated by IBM as one of six current national
"Business Partners" for its "Year 2000" engagements. IBM will utilize the
Company and its personnel to meet certain resource requirements for IBM and IBM
clients in connection with its "Year 2000" engagements. To date, the Company
has not recognized any revenues in connection with this agreement.
3
<PAGE>
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.
Representative examples of the Company's IT outsourcing support clients include
IBM and AT&T. The Company was advised by IBM that, effective January 1, 1997,
call management services previously provided by the Company to IBM would be
provided directly by IBM with IBM personnel as a part of its worldwide call
center strategy to support IBM's "core" business functions. The Company
recognized revenues of approximately $8.7 million for providing these services
to IBM in 1996, representing approximately 15% of the Company's total revenues.
In January 1997, the Company and IBM agreed to extend a separate agreement
whereby the Company will continue to provide help desk services to IBM and its
customers for an additional three-year term. All of the Company's contracts are
generally cancellable by the client at any time or, with respect to some of the
Company's larger contracts, including those with IBM, on 30 to 90 days notice.
At January 31, 1997, the Company had 690 employees operating through
facilities located in New York, Atlanta, Chicago, Dallas, Los Angeles, Tampa
and Rochester, MN. The Company's total revenue increased from $12.2 million in
1992 to $57.5 million in 1996.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company................ 2,900,000 shares
Common Stock offered by the Selling Stockholders... 640,000 shares
Common Stock to be outstanding after the offering.. 12,700,000 shares (1)
Use of proceeds.................................... 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
taxable earnings for the
entire period it was an S
corporation (approximately
$4.8 million at December
31, 1996) and for general
corporate purposes,
including working capital,
potential strategic
acquisitions, strategic
business partnerships and
future product
enhancements. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol............. CGSI
</TABLE>
- --------
(1) Excludes 1,270,000 shares of Common Stock to be reserved for issuance under
the Company's 1997 Long-Term Incentive Plan. See "Management--1997 Long
Term Incentive Plan."
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues:
Services, software license and
maintenance fees................... $ 6,270 $ 8,514 $19,962 $31,704 $47,846
Hardware............................ 5,919 17,489 4,748 4,243 9,641
------- ------- ------- ------- -------
Total revenues.................... 12,189 26,003 24,710 35,947 57,487
Direct costs:
Services, software license and
maintenance fees................... 3,751 5,186 12,988 22,970 35,734
Hardware............................ 5,112 15,796 3,882 3,007 8,123
------- ------- ------- ------- -------
Total direct costs................ 8,863 20,982 16,870 25,977 43,857
------- ------- ------- ------- -------
Gross profit......................... 3,326 5,021 7,840 9,970 13,630
Selling, general and administrative
expenses............................ 1,973 2,916 4,725 6,690 9,995
Compensation amounts to S corporation
stockholders........................ 1,232 1,950 3,041 1,502 760
Amortization of cost in excess of
fair value of assets purchased...... -- -- 213 320 320
------- ------- ------- ------- -------
3,205 4,866 7,979 8,512 11,075
------- ------- ------- ------- -------
Operating income (loss).............. 121 155 (139) 1,458 2,555
Interest expense..................... -- -- 77 473 540
------- ------- ------- ------- -------
Income (loss) before income taxes.... 121 155 (216) 985 2,015
Income taxes......................... 31 39 60 33 169
------- ------- ------- ------- -------
Net income (loss).................... $ 90 $ 116 $ (276) $ 952 $ 1,846
======= ======= ======= ======= =======
PRO FORMA (UNAUDITED)
Historical income before income taxes................................ $ 2,015
Pro forma provision for income taxes(2).............................. 829
-------
Pro forma net income................................................. $ 1,186
=======
Pro forma net income per share(3).................................... $ 0.12
=======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------
ACTUAL AS ADJUSTED(4)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital....................................... $ 3,023 $27,866
Total assets.......................................... 13,776 36,133
Short-term debt, including current portion of capital
lease obligations.................................... 2,670 164
Long-term debt, including capital lease obligations... 2,617 471
Stockholders' equity.................................. 3,254 30,263
</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) Adjusted for all periods to record a provision for income taxes as if the
Company had been a C corporation. See "The Company."
(3) Computed by dividing pro forma net income by the weighted average number of
shares of Common Stock outstanding during the periods. Pro forma net income
per share for the year ended December 31, 1996 is based on the weighted
average number of shares of Common Stock of the Company outstanding prior to
this offering, after giving effect to the stock split described in Note 12 of
Notes to Financial Statements and increased by the sale of approximately
441,700 shares of Common Stock assuming an offering price of $12.00 per share
($10.87, net of underwriting discount and expenses), the proceeds of which
would be necessary to pay the cumulative amount of undistributed taxable
earnings to the Company's existing stockholders. See "Use of Proceeds."
Supplemental pro forma net income per share is $0.14 for the year ended
December 31, 1996 and is based on the weighted average number of shares of
Common Stock of the Company outstanding prior to this offering after giving
effect to the stock split described in Note 12 of Notes to Financial
Statements and increased by the sale of approximately 869,800 shares of
Common Stock assuming an offering price of $12.00 per share ($10.87, net of
underwriting discount and expenses), the proceeds of which would be necessary
to repay bank and stockholder indebtedness and to pay the cumulative amount
of undistributed taxable earnings to the Company's existing stockholders. See
"Use of Proceeds."
(4) Adjusted to reflect this offering and the use of a portion of the net
proceeds therefrom to repay bank and stockholder indebtedness and to pay the
cumulative amount of undistributed taxable earnings to the Company's existing
stockholders (see "Use of Proceeds") and the recording of a deferred tax
asset of $295,000 as a result of becoming subject to Federal and additional
state and local income taxes.
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully by prospective investors in evaluating
the Company and its business before purchasing any of the shares of Common
Stock offered hereby. This Prospectus contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended.
Actual events or results may differ materially from those discussed in the
forward-looking statements as a result of various factors, including, without
limitation, the risk factors set forth below and the matters set forth in this
Prospectus generally.
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, IBM, accounted for 35% of the Company's
revenues for 1996. The Company was advised by IBM that, effective January 1,
1997, call management services previously provided by the Company to IBM would
be provided directly by IBM with IBM personnel as a part of its worldwide call
center strategy to support IBM's "core" business functions. The Company
recognized revenues of approximately $8.7 million for providing these services
to IBM in 1996, representing approximately 15% of the Company's revenues.
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, including those with IBM, 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 for the Company, was approximately 55% in 1996 (excluding
personnel associated with the call management contract with IBM which is no
longer in effect) 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
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.
6
<PAGE>
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.
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.
FLUCTUATIONS IN OPERATING RESULTS
The Company's revenue and operating results historically have varied from
quarter to quarter and may continue to vary in the future due to a combination
of factors, including (i) the timing and amount of significant orders from the
Company's clients, (ii) the Company's success in developing, introducing and
shipping ACS Optima Software enhancements and new versions of ACS Optima
Software, (iii) pricing actions by the Company or its competitors, (iv) the
requirements of the Company's business partners and (v) general economic
conditions. A high percentage of the Company's operating expenses,
particularly personnel and rent, are relatively fixed in advance of any
particular quarter. As a result, unanticipated variations in employee
utilization rates may cause significant variations in operating results in any
particular quarter. An unanticipated termination of a major project, a
client's decision not to pursue a new project or proceed to succeeding stages
of a current project, or the completion during a quarter of several major
client projects could require the Company to pay underutilized employees and
therefore have a material adverse effect on the Company's results of operation
and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Quarterly Results of
Operations."
In addition, ACS Optima Software and related systems integration sales,
which accounted for approximately 38% of the Company's revenues in 1996, are
specifically designed for the apparel industry, and the Company may experience
substantial period-to-period fluctuations or a downturn in future operating
results relating to ACS Optima Software due to general apparel industry
conditions and overall economic conditions.
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
7
<PAGE>
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 any 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 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
8
<PAGE>
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 this 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 66.0% and 6.2%, 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 will be able to elect all the directors. Furthermore,
the Company is subject to Section 203 of the Delaware General Corporation Law.
The existence of these provisions, 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
9
<PAGE>
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 this 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 this offering, there has been no public market for the Common
Stock. There can be no assurance that, following this 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
this 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 this
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 3,540,000 shares of Common Stock offered hereby, as of the date of this
Prospectus, there are 9,160,000 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 this offering, the Company intends to file a registration statement
under the Securities Act to register 1,270,000 shares of Common Stock reserved
for issuance upon the exercise of options or awards of restricted stock that
may be granted under the 1997 Long-Term Incentive Plan. See "Management--1997
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 this offering. See "Dilution." In addition, an aggregate of
1,270,000 shares of Common Stock are reserved for issuance under the Company's
1997 Long-Term Incentive Plan, which shares, when and if issued, may cause
additional dilution to the purchasers of Common Stock offered hereby.
10
<PAGE>
THE COMPANY
The Company was founded in April 1984. Prior to this 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 this 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 this offering, the Company plans to distribute to its
stockholders of record immediately prior to this 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 December 31, 1996, the
cumulative balance of such undistributed S period taxable earnings was
approximately $4.8 million. To this amount will be added, for purposes of
calculating the amount of the distribution, the taxable earnings of the
Company from January 1, 1997 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 this 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); provided that the stockholders' obligation to the
Company cannot exceed the amount of the income that was shifted from an S
corporation year to a non-S corporation year less the federal, state and local
income taxes incurred by the stockholders with respect to such income. 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, if any, 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 this 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, 1996 or for the period from January 1, 1997 through the
day prior to the S Termination Date.
Prior to the consummation of this 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 this offering, the Company will effect a
1,300.42 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.
11
<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 $31.5 million (or
approximately $37.4 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 $12.00 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
($2.1 million as of December 31, 1996), which indebtedness bears interest at
the bank's prime rate (8.25% at December 31, 1996) and matures in May 1997,
and (c) under the Company's term loan ($133,000 outstanding as of December 31,
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 this offering the cumulative amount of the
Company's undistributed taxable earnings for the entire period that it was an
S corporation (approximately $4.8 million at December 31, 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
three years ended December 31, 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.
12
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of December 31, 1996 and (ii) the capitalization of the Company as adjusted
to give effect to the sale by the Company of the 2,900,000 shares of Common
Stock offered hereby after deducting the estimated underwriting discount and
estimated offering expenses payable by the Company and the anticipated
application by the Company of the estimated net proceeds therefrom. See "Use
of Proceeds."
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------
ACTUAL(1) AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt, including current portion of capital
lease obligations....................................... $2,670 $ 164
====== =======
Long-term debt, including capital lease obligations...... $ 471 $ 471
------ -------
Subordinated debt-stockholder............................ 2,146 --
------ -------
Stockholders' equity:
Preferred Stock, $.001 par value, 1,000,000 shares au-
thorized, no shares issued and outstanding............ -- --
Common Stock, $.001 par value, 25,000,000 shares autho-
rized, 9,800,000 shares issued and outstanding actual;
and 12,700,000 shares issued and outstanding as ad-
justed(2)............................................. 10 13
Additional paid-in capital............................. 77 27,083
Retained earnings...................................... 3,167 3,167
------ -------
Total stockholders' equity........................... 3,254 30,263
------ -------
Total capitalization................................. $5,871 $30,734
====== =======
</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 1,270,000 shares of Common
Stock reserved for issuance under the Company's 1997 Long-Term Incentive
Plan. See "Management--1997 Long-Term Incentive Plan."
13
<PAGE>
DILUTION
As of December 31, 1996, the net tangible book value of the Company was
approximately $2.8 million or $0.28 per share of Common Stock. "Net tangible
book value per share" represents the total amount of tangible assets of the
Company reduced by the amount of total liabilities and divided by the number
of shares of Common Stock outstanding after giving effect to the stock split
described in Note 12 of Notes to Financial Statements. After giving effect to
the sale by the Company of 2,900,000 shares of Common Stock in this offering,
at an assumed initial public offering price of $12.00 per share and after
deducting the estimated underwriting discount and offering expenses, the net
tangible book value of the Company at December 31, 1996 would have been
approximately $29.7 million or $2.34 per share of Common Stock. This
represents an immediate increase in net tangible book value of approximately
$2.06 per share of Common Stock to existing stockholders and an immediate
dilution of approximately $9.66 per share of Common Stock to new investors in
this offering. Dilution per share represents the difference between the price
per share paid by new investors and the net tangible book value per share
immediately after this offering. The following table illustrates the per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $12.00
Net tangible book value per share as of December 31, 1996....... $0.28
Increase in net tangible book value per share attributable to
new investors.................................................. 2.06
-----
Net tangible book value per share after this offering............. 2.34
------
Net tangible book value per share dilution to new investors....... $ 9.66
======
</TABLE>
The following table sets forth, as of December 31, 1996, the number of
shares of Common Stock purchased from the Company, the total consideration
paid to the Company and the average price per share of Common Stock paid by
existing stockholders and by new investors purchasing shares of Common Stock
in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED(1)(2) TOTAL CONSIDERATION
--------------------------------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- ---------------------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 9,800,000 77.2% $ 87,000 0.3% $ 0.01
New investors........... 2,900,000 22.8 34,800,000 99.7% $12.00
------------- -------- ----------- -----
Total................. 12,700,000 100.0% $34,887,000 100.0%
============= ======== =========== =====
</TABLE>
- --------
(1) The foregoing table does not reflect the sale of Common Stock by the
Selling Stockholders. Sales by the Selling Stockholders in this offering
will reduce the number of shares held by existing stockholders to 9,160,000
or approximately 72.1% of the total number of shares of Common Stock
outstanding after this offering (9,160,000 or approximately 69.2%, if the
Underwriters' over-allotment option is exercised in full), and will increase
the number of shares to be purchased by the new investors to 3,540,000.
After this offering, the new investors will own 27.9% of the total number of
shares of Common Stock outstanding after this offering (4,071,000 or
approximately 30.8%, if the Underwriters' over-allotment option is exercised
in full). See "Principal and Selling Stockholders."
(2) The foregoing table does not give effect to 1,270,000 shares of Common
Stock to be reserved for issuance under the Company's 1997 Long-Term
Incentive Plan, which shares, when and if issued, may cause additional
dilution to new investors. See "Management--1997 Long Term Incentive Plan"
and "Risk Factors--Immediate and Substantial Dilution."
14
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data of the Company as of and for the years
ended December 31, 1995 and 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, 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 for the year ended December 31, 1994 appears
elsewhere in this Prospectus. 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>
YEARS ENDED DECEMBER 31,
----------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues:
Services, software license and
maintenance fees................... $ 6,270 $ 8,514 $19,962 $31,704 $47,846
Hardware............................ 5,919 17,489 4,748 4,243 9,641
------- ------- ------- ------- -------
Total revenues.................... 12,189 26,003 24,710 35,947 57,487
Direct costs:
Services, software license and
maintenance fees................... 3,751 5,186 12,988 22,970 35,734
Hardware............................ 5,112 15,796 3,882 3,007 8,123
------- ------- ------- ------- -------
Total direct costs................ 8,863 20,982 16,870 25,977 43,857
Gross profit......................... 3,326 5,021 7,840 9,970 13,630
Selling, general and administrative
expenses............................ 1,973 2,916 4,725 6,690 9,995
Compensation amounts to S corporation
stockholders........................ 1,232 1,950 3,041 1,502 760
Amortization of cost in excess of
fair value of assets purchased...... -- -- 213 320 320
------- ------- ------- ------- -------
3,205 4,866 7,979 8,512 11,075
------- ------- ------- ------- -------
Operating income (loss).............. 121 155 (139) 1,458 2,555
Interest expense..................... -- -- 77 473 540
------- ------- ------- ------- -------
Income (loss) before income taxes.... 121 155 (216) 985 2,015
Income taxes......................... 31 39 60 33 169
------- ------- ------- ------- -------
Net income (loss).................... $ 90 $ 116 $ (276) $ 952 $ 1,846
======= ======= ======= ======= =======
PRO FORMA (UNAUDITED):
Historical income before income taxes................................ $ 2,015
Pro forma provision for income taxes(2).............................. 829
-------
Pro forma net income................................................. $ 1,186
=======
Pro forma net income per share(3).................................... $ 0.12
=======
<CAPTION>
DECEMBER 31,
----------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................... $ 549 $ 953 $ 1,296 $ 1,943 $ 3,023
Total assets......................... 3,092 6,454 7,727 11,653 13,776
Short-term debt, including current
portion of capital lease obliga-
tions............................... 608 -- 2,272 4,088 2,670
Long-term debt, including capital
lease obligations................... 476 934 2,383 2,625 2,617
Stockholders' equity................. 364 480 456 1,408 3,254
</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) ADJUSTED FOR ALL PERIODS TO RECORD A PROVISION FOR INCOME TAXES AS IF THE
COMPANY HAD BEEN A C CORPORATION. SEE "THE COMPANY."
(3) COMPUTED BY DIVIDING PRO FORMA NET INCOME BY THE WEIGHTED AVERAGE NUMBER
OF SHARES OF COMMON STOCK OF THE COMPANY OUTSTANDING DURING THE PERIODS.
PRO FORMA NET INCOME PER SHARE FOR THE YEAR ENDED DECEMBER 31, 1996 IS
BASED ON THE WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OF THE
COMPANY OUTSTANDING PRIOR TO THIS OFFERING, AFTER GIVING EFFECT TO THE
STOCK SPLIT DESCRIBED IN NOTE 12 OF NOTES TO FINANCIAL STATEMENTS AND
INCREASED BY THE SALE OF APPROXIMATELY 441,700 SHARES OF COMMON STOCK
ASSUMING AN OFFERING PRICE OF $12 PER SHARE ($10.87, NET OF UNDERWRITING
DISCOUNT AND EXPENSES), THE PROCEEDS OF WHICH WOULD BE NECESSARY TO PAY THE
CUMULATIVE AMOUNT OF UNDISTRIBUTED TAXABLE EARNINGS TO THE COMPANY'S
EXISTING STOCKHOLDERS. SEE "USE OF PROCEEDS."
SUPPLEMENTAL PRO FORMA NET INCOME PER SHARE IS $0.14 FOR THE YEAR ENDED
DECEMBER 31, 1996 AND IS BASED ON THE WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OF THE COMPANY OUTSTANDING PRIOR TO THIS OFFERING, AFTER
GIVING EFFECT TO THE STOCK SPLIT DESCRIBED IN NOTE 12 OF NOTES TO FINANCIAL
STATEMENTS AND INCREASED BY THE SALE OF APPROXIMATELY 869,800 SHARES OF
COMMON STOCK ASSUMING AN OFFERING PRICE OF $12 PER SHARE ($10.87, NET OF
UNDERWRITING DISCOUNT AND EXPENSES), THE PROCEEDS OF WHICH WOULD BE
NECESSARY TO REPAY BANK AND STOCKHOLDER INDEBTEDNESS AND TO PAY THE
CUMULATIVE AMOUNT OF UNDISTRIBUTED TAXABLE EARNINGS TO THE COMPANY'S
EXISTING STOCKHOLDERS. SEE "USE OF PROCEEDS."
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company derives its revenues principally 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 78.0%, 64.0% and 54.0% of
total revenue in 1994, 1995 and 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. The Company
achieved 19.1% and 33.6% growth in information systems and services revenue
dollars in 1995 and 1996, respectively, principally as a result of the growth
of the ACS Optima Software 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 1994, 1995 and
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 gross profit increased
56.1%. For 1995, revenues excluding hardware revenues, increased 59.0% from
1994 and hardware revenues decreased 11.0%. In 1996, revenues excluding
hardware revenues increased 50.9% from 1995 and hardware revenues increased
127.2%. The increase in hardware revenues was the result of increased ACS
software sales which usually have an AS/400 hardware component as part of the
sale.
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 46.0% for 1996. Revenues from the Company's IT
outsourcing support business increased 107.0% in 1996. 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. In 1996, the
Company was advised by IBM that, effective January 1, 1997, call management
services previously provided by the Company at facilities in Dallas and
Atlanta to IBM would be provided directly with IBM personnel by IBM as a part
of its worldwide call center strategy to support IBM's "core" business
functions. The Company recognized revenues of approximately $8.7 million for
providing these services to IBM in 1996, representing approximately 15% of the
Company's total revenues. Outsourcing support services revenues from remote
help desk and call management services were $5.2 million, $11.0 million and
$21.2 million for 1994, 1995 and 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 $5.4 million for 1996. During 1994 through
1996, IT outsourcing support services revenues were generated on a time plus
materials basis. Beginning January 1, 1997, remote help desk services will be
billed primarily on a per call 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 1994, 1995 and 1996 primarily
represent New York City corporate income taxes. The New York City income tax
rate is 8.85%.
16
<PAGE>
STATEMENT OF OPERATIONS
The following table sets forth certain items from the Company's statement of
operations as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Services, software license and maintenance
fees........................................ 80.8 % 88.2% 83.2%
Hardware..................................... 19.2 11.8 16.8
-------- -------- --------
Total revenues............................. 100.0 100.0 100.0
Direct costs:
Services, software license and maintenance
fees........................................ 52.6 63.9 62.2
Hardware..................................... 15.7 8.4 14.1
-------- -------- --------
Total direct costs......................... 68.3 72.3 76.3
-------- -------- --------
Gross profit................................... 31.7 27.7 23.7
Selling, general and administrative............ 19.1 18.6 17.4
Compensation amounts to S Corporation stock-
holders....................................... 12.3 4.2 1.3
Amortization of cost in excess of fair value of
assets purchased.............................. 0.9 0.9 0.6
-------- -------- --------
32.3 23.7 19.3
-------- -------- --------
Operating income (loss)........................ (0.6) 4.0 4.4
Interest expense............................... 0.3 1.3 0.9
-------- -------- --------
Income (loss) before income taxes.............. (0.9) 2.7 3.5
Income taxes................................... 0.2 0.1 0.3
-------- -------- --------
Net income (loss).............................. (1.1)% 2.6% 3.2%
======== ======== ========
</TABLE>
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. The Company's total revenues increased 59.9% to $57.5 million in
1996 from $35.9 million in 1995. Information systems and services revenues
increased 33.3% to $30.8 million in 1996 from $23.1 million in 1995. This was
primarily due to an increase in revenues from ACS Optima Software and related
systems integration sales of $9.8 million to $22.0 million in 1996 from $12.2
million in 1995. This increase was partially offset by a decrease in revenues
from professional services of $2.8 million to $5.9 million in 1996 from $8.7
million in 1995. The decrease in professional services revenues resulted
principally from a discontinuance in 1995 of the Company's sales and services
of certain financial and distribution software packages. IT outsourcing
support revenues increased 107.0% to $26.7 million for 1996 from $12.9 million
for 1995, in part due to the start of the Company's call management business
in October 1995. The Company recognized revenues of approximately $8.7 million
in 1996 for providing call management services to IBM, representing
approximately 15% of the Company's total revenues in 1996. Effective January
1, 1997, the Company no longer provides call management services to IBM. 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 68.8% to $43.9 million (76.3% of
revenues) for 1996 from $26.0 million (72.3% of revenues) for 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,
17
<PAGE>
which increased to $8.9 million for 1996 from $3.0 million for 1995. Gross
margins on hardware sales for 1996 were 15.8% as compared to 29.2% in 1995.
The decrease in gross margin is principally the result of network hardware
sales which generally have lower margins than AS/400 margins. Network hardware
sales increased to $3.3 million in 1996 from $1.3 million in 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 49.4% to $10.0 million (17.4% of revenues) for 1996
from $6.7 million (18.6% of revenues) for 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 ($1.8 million),
facility costs (approximately $500,000) depreciation (approximately $175,000),
full satisfaction of a dispute with the Pension Benefit Guaranty Corporation
(approximately $150,000) and advertising (approximately $100,000). SG&A
decreased as a percentage of revenues because certain SG&A costs are fixed and
for 1996 were absorbed over a larger revenue base.
Compensation Amounts to S Corporation Stockholders. Compensation amounts to
S corporation stockholders represent salaries and bonuses paid to
stockholders. Compensation amounts to S corporation stockholders decreased
approximately $742,000 to approximately $760,000, (1.3% of revenues) for 1996
from $1.5 million (4.2% of revenues) for 1995. For 1996, the Company recorded
compensation amounts to S corporation stockholders to reflect the aggregate
base salary in effect during 1996.
Amortization of Cost in Excess of Fair Value of Assets
Purchased. Amortization of cost 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, was approximately $320,000
for 1996 and 1995.
Interest Expense. Interest expense increased to approximately $540,000 (0.9%
of revenues) in 1996 from approximately $473,000 (1.3% of revenues) in 1995.
This increase was principally the result of increased working capital
borrowings used to finance the Company's growth.
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 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 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.
18
<PAGE>
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 approximately $300,000 in
1994 and 1995, respectively.
Amortization of Cost in Excess of Fair Value of Assets
Purchased. Amortization of cost in excess of fair value of assets purchased
increased 50.2% to approximately $320,000 (0.9% of revenues) for 1995 from
approximately $213,000 (0.9% of revenues) for 1994. The 1995 balance reflects
a full year of amortization.
Interest Expense. Interest expense increased to approximately $473,000 (1.3%
of revenues) in 1995 from approximately $77,000 (0.3% of revenues) in 1994.
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.
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 an
adjustment to record a provision for income taxes on income as if the Company
had been a C corporation.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
(IN THOUSANDS,
EXCEPT PER
SHARE DATA)
<S> <C>
Revenues:
Services, software license and maintenance fees....... $47,846
Hardware.............................................. 9,641
-------
Total revenues...................................... 57,487
Direct costs:
Services, software license and maintenance fees....... 35,734
Hardware.............................................. 8,123
-------
Total direct costs.................................. 43,857
-------
Gross profit............................................ 13,630
Selling, general and administrative expenses............ 9,995
Compensation amounts to S corporation stockholders...... 760
Amortization of cost in excess of fair value of assets
purchased.............................................. 320
-------
11,075
-------
Operating income........................................ 2,555
Interest expense........................................ 540
-------
Income before income taxes.............................. 2,015
Income taxes............................................ 829
-------
Pro forma net income.................................... $ 1,186
=======
Pro forma net income per share(1)....................... $ 0.12
=======
</TABLE>
- --------
(1) Computed by dividing pro forma net income by the weighted number of shares
of Common Stock outstanding during the period. Pro forma net income per
share for the year ended December 31, 1996 is based on the weighted average
number of shares of Common Stock of the Company outstanding prior to this
offering, after giving effect to the stock split described in Note 12 of
Notes to Financial Statements and increased by the sale of approximately
441,700 shares of Common Stock assuming an offering price of $12 per share
($10.87, net of underwriting discount and expenses), the proceeds of which
would be necessary to pay the cumulative amount of undistributed taxable
earnings to the Company's existing stockholders. See "Use of Proceeds."
Supplemental pro forma net income per share is $0.14 for the year ended
December 31, 1996 and is based on the weighted average number of shares of
Common Stock of the Company outstanding prior to this offering after giving
effect to the stock split described in Note 12 of Notes to Financial
Statements and increased by the sale of approximately 869,800 shares of
Common Stock assuming an offering price of $12.00 per share ($10.87, net of
underwriting discount and expenses), the proceeds of which would be
necessary to repay bank and stockholder indebtedness and to pay the
cumulative amount of undistributed taxable earnings to the Company's
existing stockholders. See "Use of Proceeds."
19
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited statements of operations
data for each of the past eight quarters, as well as the percentage of the
Company's total revenues represented by each item. The unaudited financial
statements have 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
------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995 1996 1996 1996 1996
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Services, software license and
maintenance fees.......................... $6,886 $7,289 $7,808 $9,721 $10,962 $11,944 $12,477 $12,463
Hardware................................... 256 1,063 1,564 1,360 1,474 2,973 2,884 2,310
------ ------ ------ ------ ------- ------- ------- -------
Total revenues............................ 7,142 8,352 9,372 11,081 12,436 14,917 15,361 14,773
Direct costs:
Services, software license and
maintenance fees.......................... 4,785 5,066 5,736 7,383 8,242 8,927 9,063 9,502
Hardware................................... 176 545 1,226 1,060 1,172 2,545 2,536 1,870
------ ------ ------ ------ ------- ------- ------- -------
Total direct costs........................ 4,961 5,611 6,962 8,443 9,414 11,472 11,599 11,372
------ ------ ------ ------ ------- ------- ------- -------
Gross profit................................ 2,181 2,741 2,410 2,638 3,022 3,445 3,762 3,401
Selling, general and administrative expenses.. 1,421 1,587 1,766 1,916 1,988 2,516 2,630 2,861
Compensation amounts to S corporation
stockholders............................... 100 100 100 1,202(/1/) 190 190 190 190
Amortization of cost in excess of fair value
of assets purchased........................ 80 80 80 80 80 80 80 80
------ ------ ------ ------ ------- ------- ------- -------
Operating expenses........................ 1,601 1,767 1,946 3,198 2,258 2,786 2,900 3,131
------ ------ ------ ------ ------- ------- ------- -------
Operating income (loss)..................... 580 974 464 (560) 764 659 862 270
Interest expense............................ 118 107 122 126 147 148 139 106
------ ------ ------ ------ ------- ------- ------- -------
Income (loss) before income taxes........... 462 867 342 (686) 617 511 723 164
Income taxes................................ 15 45 11 (38) 54 41 62 12
------ ------ ------ ------ ------- ------- ------- -------
Net income (loss)........................... $ 447 $ 822 $ 331 $ (648) $ 563 $ 470 $ 661 $ 152
====== ====== ====== ====== ======= ======= ======= =======
PRO FORMA (UNAUDITED):
Historical income before income taxes............................................ $ 617 $ 511 $ 723 $ 164
Pro forma provision for income taxes (2)......................................... 254 210 298 67
------- ------- ------- -------
Pro forma net income............................................................. $ 363 $ 301 $ 425 $ 97
======= ======= ======= =======
</TABLE>
- --------
(1) Compensation amounts to S corporation stockholders for the fourth quarter
of 1995 include discretionary annual bonuses which were expensed in the
fourth quarter. Such amounts were approximately $900,000.
(2) 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>
QUARTERS ENDED
--------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995 1996 1996 1996 1996
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Services, software
license and
maintenance fees...... 96.4% 87.3% 83.3% 87.7% 88.1% 80.1% 81.2% 84.4%
Hardware............... 3.6 12.7 16.7 12.3 11.9 19.9 18.8 15.6
----- ----- ----- ----- ----- ----- ----- -----
Total revenues...... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Direct costs:
Services, software
license and
maintenance fees...... 67.0 60.7 61.2 66.6 66.3 59.8 59.0 64.3
Hardware............... 2.5 6.5 13.1 9.6 9.4 17.1 16.5 12.7
----- ----- ----- ----- ----- ----- ----- -----
Total direct costs.. 69.5 67.2 74.3 76.2 75.7 76.9 75.5 77.0
Gross profit............ 30.5 32.8 25.7 23.8 24.3 23.1 24.5 23.0
Selling, general and
administrative
expenses............... 19.9 19.0 18.8 17.3 16.0 16.9 17.1 19.4
Compensation amounts to
S corporation
stockholders........... 1.4 1.2 1.1 10.9 1.5 1.3 1.2 1.3
Amortization of cost in
excess of fair value of
assets purchased....... 1.1 0.9 0.9 0.7 0.6 0.5 0.6 0.5
----- ----- ----- ----- ----- ----- ----- -----
22.4 21.1 20.8 28.9 18.1 18.7 18.9 21.2
----- ----- ----- ----- ----- ----- ----- -----
Operating income
(loss)................. 8.1 11.7 4.9 (5.1) 6.2 4.4 5.6 1.8
Interest expense........ 1.6 1.3 1.2 1.1 1.2 1.0 0.9 0.7
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before
income taxes........... 6.5 10.4 3.7 (6.2) 5.0 3.4 4.7 1.1
Income taxes............ 0.2 0.6 0.1 (0.3) 0.4 0.3 0.4 0.1
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....... 6.3% 9.8% 3.6% (5.9)% 4.6% 3.1% 4.3% 1.0%
===== ===== ===== ===== ===== ===== ===== =====
PRO FORMA (UNAUDITED):
Historical income before income taxes........................ 5.0% 3.4% 4.7% 1.1%
Pro forma provision for income taxes......................... 2.0 1.5 1.9 0.5
----- ----- ----- -----
Pro forma net income......................................... 3.0% 1.9% 2.8% 0.6%
===== ===== ===== =====
</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 ($4.7 million),
($1.3 million) and $2.5 million for 1994, 1995 and 1996, respectively.
Net cash used in investing activities for 1994, 1995 and 1996 was
approximately $874,000, $579,000 and $683,000, 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.
21
<PAGE>
Net cash provided by (used in) financing activities in 1994, 1995 and 1996
was $3.1 million, $1.5 million and ($2.0 million), respectively. During 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 a security interest in substantially all of the
assets of the Company. The line of credit bears interest at the bank's prime
rate (currently 8.25%). At December 31, 1996, the Company had $2.1 million
outstanding under the revolving credit facility. Outstanding amounts under the
revolving line of credit are also supported by a 10% compensating balance
arrangement. A portion of the net proceeds from this offering will be used to
repay amounts at such time outstanding under the revolving credit facility.
See "Use of Proceeds."
The Company also had an outstanding balance of $133,000 at December 31, 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 this 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
December 31, 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 this 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. IBM and AT&T accounted for, in the
aggregate, approximately 40% of the Company's total revenues in 1996.
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. Representative examples of the
Company's ACS Optima Software clients include several divisions of Polo Ralph
Lauren, Quicksilver and Fritzi. These representative clients accounted for, in
the aggregate, approximately 14% of the Company's total revenues in 1996.
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. Representative examples of the Company's clients
for professional services include Morgan Stanley, Merrill Lynch and EMI Music.
These representative clients accounted for, in the aggregate, approximately 4%
of the Company's total revenues in 1996. 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. To
meet the Company's needs for technical resources, the Company maintains a
national proprietary database consisting of technical profiles and resumes of
approximately 30,000 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.
Pursuant to an agreement between IBM and the Company entered into in
November 1996, the Company has been designated by IBM as one of six current
national "Business Partners" for its "Year 2000" engagements. IBM will utilize
the Company and its personnel to meet certain resource requirements for IBM
and IBM clients in connection with its "Year 2000" engagements. To date, the
Company has not recognized any revenues in connection with this agreement.
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 Representative examples of the Company's IT outsourcing support
clients include IBM and AT&T. The Company was advised by IBM that, effective
January 1, 1997, call management services previously provided by the Company
to IBM would be provided directly by IBM with IBM personnel as a part of its
"core" business functions. The Company recognized revenues of approximately
$8.7 million for providing these services to IBM in 1996, representing
approximately 15% of the Company's total revenues. In January 1997, the
Company and IBM agreed to extend a separate agreement whereby the Company will
continue to provide help desk services to IBM and its customers for an
additional three-year term. The Company's contracts are generally cancellable
by the client at any time or, with respect to some of the Company's larger
contracts, including those with IBM, on 30 to 90 days notice.
23
<PAGE>
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.
The IT services industry has grown significantly, and it is estimated that
industry revenue will reach approximately $170 billion by the year 2000 in the
areas in which the Company offers its services and products. 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,
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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 offering the Composite Solution enables it to implement
a leveraged marketing strategy that differentiates it from its competitors.
The Company's highly trained technical staff assesses a client's IT
requirements and recommends a customized Composite Solution comprised of
proprietary and customized products and services. The Company intends to
leverage its initial client relationships to develop multiple entry points
into the client's organization, giving the Company further opportunity to
provide additional services through cross-selling. Additionally, the Composite
Solution allows the Company to meet its clients IT requirements and develop
and expand its products and services to satisfy 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.
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 has been designated by IBM as one of six current national "Business
Partners" for IBM's "Year 2000" engagements. As part of an agreement between
IBM and the Company, IBM will utilize the Company and the Company's personnel
to meet certain resource requirements for IBM and IBM clients in connection
with its "Year 2000" engagements. The Company has also entered into agreements
to use and market specialized software tools and continually reviews and
evaluates additional software tools that are 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 30,000 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 that its
designation by IBM as one of six current national IBM "Business Partners"
for its "Year 2000" engagements will identify the Company as a provider of
"Year 2000" solutions to the Company's existing and future 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 its midrange and mainframe
hardware platforms 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.
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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 and Help Desk 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. In addition, in October 1996, the Company
commenced operations at its new help desk facility located in Tampa. The
Company believes that its ability to leverage its call management and help
desk infrastructure across multiple clients will significantly reduce the cost
of processing a call and further enhance the Company's competitiveness.
Further Penetrate AS/400 Market. The Company believes that the AS/400 market
has traditionally been under serviced by other IT companies. 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.
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.
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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
---------------------- -----------
<C> <S>
Order Management and Distribution A complete order fulfillment function that
summarizes 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 Management/Production A function which facilitates the purchasing
and tracking 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 ("BOM")/Fabric
Actual Module A function which establishes requirements
and then compares standard costs to actual.
When goods are produced in multiple
locations, the BOM will identify the most
cost effective assembly method.
Material Requirements Planning A function which determines the earliest
date on which production can begin based on
a raw materials evaluation.
<CAPTION>
ADDITIONAL MODULES
TO THE ACS OPTIMA CORE SYSTEM DESCRIPTION
----------------------------- -----------
<C> <S>
FACTS A/P and G/L An accounts payable and general ledger
package that is integrated into the ACS
Optima Software.
Executive Information System An advanced client/server tool that
summarizes and 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.
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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 Morgan Stanley, Merrill Lynch and EMI Music. 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
entered into agreements to market and utilize various software tools in order
to provide "Year 2000" solutions to its clients and continually reviews and
evaluates additional software tools that can assist the Company's
professionals in creating "Year 2000" compliant systems for clients. In this
regard, the Company has a use and marketing agreement for an AS/400 specific
product that goes beyond diagnosis and is able to partially correct affected
software. The Company also has a separate agreement with another company which
permits the Company to use and market a suite of tools that are capable of
automatically analyzing and locating code that requires conversion and
determining the overall magnitude of the date conversion task. In addition,
the Company has been designated by IBM as one of six current national
"Business Partners" for its "Year 2000" engagements. As a part of an agreement
between IBM and the Company, IBM will utilize the Company and its personnel to
meet certain resource requirements for IBM and IBM clients in connection with
its "Year 2000" engagements. The agreement with IBM does not permit the
Company to form a similar subcontracting relationship with another "Year 2000"
service provider during its term, although the Company may enter into other
engagements and form other relationships in connection with its "Year 2000"
initiative. To date, the Company has not recognized any revenues in connection
with these agreements. See "Risk Factors--Internal Expansion and Acquisition
Risks."
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<PAGE>
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 30,000 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.
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
1996, the Company's 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
29
<PAGE>
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 and IBM clients 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 and the Company has
opened a new help desk facility in Tampa to meet such expansion. In January
1997, the Company and IBM agreed to extend their agreement under which the
Company provides help desk services to IBM and IBM customers for an additional
three-year term. This agreement provides that help desk services that were
previously billed on a time and material basis will now be billed primarily on
a per call basis.
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
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.
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's current call management
clients and strategic partners are described below.
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 December 1996, the Company entered into an agreement with MCI
Telecommunications Corporation ("MCI") to provide call management services to
certain of MCI's clients. To date, the Company has not recognized any revenues
in connection with this agreement.
The Company also 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.
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<PAGE>
SALES AND MARKETING
The Company markets its information systems and services and IT outsourcing
support services through the efforts of approximately 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.
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 30,000
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.
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<PAGE>
At January 31, 1997, the Company had 690 full time employees, comprised of
project and resource managers, systems analysts, business analysts,
programming staff and other technical professionals and approximately 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, 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
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 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
32
<PAGE>
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 34,500 square feet of additional space in Los Angeles,
Chicago, Dallas, Tampa and Atlanta under leases expiring at various times
throughout the next three years. In addition, pursuant to contracts with its
clients, the Company currently occupies additional space which is owned or
leased by its clients in Tampa, Rochester, MN, Chicago 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.
The Company received a letter on January 23, 1997 (the "January 23rd
Letter") from a law firm representing Orbit Industries, Inc., a debtor and
debtor-in-possession (the "Debtor") in a pending case under Chapter 11 of the
United States Bankruptcy Code (the "Chapter 11 Case") in the United States
Bankruptcy Court for the Southern District of New York (the "Bankruptcy
Court"). In connection with the Chapter 11 Case, the Company had (prior to the
receipt of the January 23rd Letter) filed a motion (the "Motion") with the
Bankruptcy Court requesting the payment of certain administrative expense
claims pursuant to the terms of a contract between the Company and the Debtor
relating to system design and integration of ACS Optima Software. The January
23rd Letter attached a draft and unfiled complaint (the "Draft Complaint") for
an action against the Company in the Superior Court of White County, Georgia.
The Draft Complaint alleges breach of contract, breach of warranty, fraud and
unjust enrichment and requests actual damages in the amount of approximately
$600,000 and punitive damages in the amount of $2 million against the Company.
The Company and the Debtor have orally agreed to extend the time in which the
Debtor must respond to the Motion until March 4, 1997. Similarly, the Debtor
has agreed not to file the Draft Complaint at any time prior to March 1, 1997.
If the Draft Complaint is filed, the Company intends to vigorously contest the
allegations contained therein, and the Company does not believe that the
outcome of this matter will have a material adverse effect on the Company's
financial condition or results of operations.
33
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following sets forth the names and ages, as of December 31, 1996, of the
Company's directors and executive officers and the positions they hold. Within
90 days following consummation of this offering, the Company will appoint Ira
Z. Kevelson and John J. Murphy as independent directors to the Board of
Directors and within one-year following consummation of this 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
---- --- --------
<S> <C> <C>
Philip Fried- 48 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..
Jay Hakami.... 38 Senior Vice President, Products and Services
Robert B. 60 Vice President, Remote Support Services
Stratton.....
Rhoda Cahan... 53 Vice President, Training
Steven J. 41 Vice President, Call Management
Carter.......
Robert G. Ma- 43 Vice President, Help Desk Services
rino.........
</TABLE>
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.
JAY HAKAMI has been Senior Vice President, Products and Services since
November 1996 and was a Vice President, Products and Services from 1991 until
1996. 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.
34
<PAGE>
STEVEN J. CARTER has been Vice President, Call Management since August 1995.
From December 1983 to August 1995 Mr. Carter was employed by IBM, where his
last position was Executive of the Strategic Business Unit of Call Management
Services.
ROBERT G. MARINO has been Vice President, Help Desk Services since 1994.
From October 1989 to July 1994, Mr. Marino was employed by Comdisco Computing
Services Corp., where his last position was Area Sales Manager. Mr. Marino
holds a Bachelor of Arts degree in Business Administration from Rutgers
University.
IRA Z. KEVELSON has been a member of the firm of Dlugash & Kevelson,
certified public accountants since 1980 and the owner of the law firm of Ira
Z. Kevelson, attorney-at-law since 1975. Mr. Kevelson is a Certified Public
Accountant in New York State and is an attorney admitted to the bar of New
York State. He holds a Bachelor of Science degree in Accounting from Brooklyn
College and a Juris Doctor degree and LLM in Taxation from New York University
School of Law. Mr. Kevelson served as a director from 1983 to 1993 and has
agreed to serve as a director after consummation of this offering.
JOHN J. MURPHY has been a Senior Vice President of Information Technology
for EMI Music Publishing, a division of EMI Music which is a division of
Thorn-EMI, a U.K. company. He holds a Bachelor of Science degree from Boston
University. Mr. Murphy has agreed to serve as a director after consummation of
this offering.
In connection with consummation of this offering, the Board of Directors
will be divided into three classes. The term of the Class I directors, to be
comprised initially of Fred Schlossberg and one of the independent directors,
expires in 1998, the term of the Class II directors, to be comprised initially
of Victor Friedman and one of the independent directors, expires in 1999, and
the term of the Class III directors, to be comprised initially of Philip
Friedman and one of the independent directors, expires in 2000. 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 1998.
Philip Friedman and Victor Friedman are brothers.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. Upon consummation of this 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 two of the
independent directors to be appointed after consummation of this offering and
Fred B. Schlossberg.
Compensation Committee. Upon consummation of this 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 1997 Long-Term Incentive Plan. The Compensation
Committee will consist of two of the independent directors to be appointed
after consummation of this offering and Philip Friedman.
DIRECTOR COMPENSATION
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 $1,000, as well as additional fees of $500 for
each meeting of the Board or of a Board committee attended by such director.
The Company's directors will be reimbursed for their out-of-pocket expenses
incurred in connection with their service as directors, including travel
expenses.
35
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth compensation paid by the Company during the
last three years to the Company's Chief Executive Officer and to the four most
highly compensated executive officers (collectively, the "Named Executive
Officers"). The Company did not grant any stock options or stock awards to any
of the Named Executive Officers during such years and the dollar value of
perquisite and other personal benefits, if any, received by each of the Named
Executive Officers in each year was less than established reporting
thresholds.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ANNUAL
NAME AND PRINCIPAL POSITION(S) YEAR SALARY ($) BONUS ($) COMPENSATION ($)(1)
- ------------------------------ ---- ---------- --------- -------------------
<S> <C> <C> <C> <C>
Philip Friedman
President and Chief Executive 1996 520,000 -- 5,000
Officer......................
1995 400,000 830,000 5,000
1994 316,000 2,600,000 5,000
Victor Friedman
Executive Vice President..... 1996 240,000 -- 5,000
1995 200,000 72,000 3,000
1994 50,000(/2/) 75,000 --
Fred B. Schlossberg
Vice President Finance & 1996 150,000 -- 5,000
Administration, Secretary.... 1995 135,000 25,000 5,000
1994 115,000 30,000 4,000
Jay Hakami
Senior Vice President, 1996 295,000 -- 5,000
Products and Services........ 1995 279,000 -- 5,000
1994 193,000 -- 5,000
Robert B. Stratton
Vice President, Remote 1996 251,000 -- 5,000
Support Services............. 1995 220,000 -- 1,000
1994 181,000 -- --
</TABLE>
- --------
(1) Consists of amounts contributed on behalf of such employees to the
Company's 401(k) plan.
(2) 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 this offering.
EMPLOYMENT AGREEMENTS
The Company does not have employment contracts with any of its executive
officers or other employees.
1997 LONG-TERM INCENTIVE PLAN
The 1997 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 this offering. The Company will reserve an amount of
Common Stock equal to 10 percent of the shares of Common Stock outstanding
upon consummation of this offering for issuance and/or use as the basis for
stock appreciation rights or other units of stock-based incentive compensation
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.
36
<PAGE>
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.
37
<PAGE>
CERTAIN 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 shares of 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 this 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 this offering.
Upon consummation of this offering, the Company plans to distribute to its
stockholders of record immediately prior to the consummation of this offering
the cumulative amount of its undistributed taxable earnings for the entire
period that it was an S corporation. As of December 31, 1996, the cumulative
balance of such undistributed taxable earnings was approximately $4.8 million.
The difference between the undistributed taxable earnings of $4.8 million and
retained earnings of approximately $3.2 million at December 31, 1996 is
principally the result of differences between income tax bases and financial
reporting. In addition, the Company's stockholders immediately prior to the
consummation of this 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 this 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.
The Company has agreed to indemnify each of the Selling Stockholders for any
liability arising out of their obligations to indemnify, or contribute to
losses incurred by, the Underwriters pursuant to the Underwriting Agreement to
be entered into among the Company, the Selling Stockholders and the
Underwriters in connection with this offering to the fullest extent permitted
by law.
Mr. Kevelson, who will be appointed to the Board of Directors following
consummation of this offering, has, from time to time, provided legal services
to the Company.
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<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 this
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,
(iii) all executive officers and directors as a group and (iv) each Selling
Stockholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) OFFERING(1)
---------------------- -----------------------
NUMBER OF
SHARES
NAME AND ADDRESS OF BEING
BENEFICIAL OWNER(2) NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------- ----------- ------------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Philip Friedman......... 8,820,780 90.0% 444,000 8,376,780 66.0%
Victor Friedman......... 979,220 10.0% 196,000 783,220 6.2%
All executive officers
and directors as a
group (5 Persons)...... 9,800,000 100.0% 640,000 9,160,000 72.1%
</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.
39
<PAGE>
DESCRIPTION OF CAPITAL STOCK
After this offering, the Company's authorized capital stock will consist of
25,000,000 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 this offering, 12,700,000 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 Transactions."
All of the outstanding shares of Common Stock are, and all of the shares of
Common Stock sold in this 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 this 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
40
<PAGE>
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 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 this offering, 72.1% 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 this
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 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
41
<PAGE>
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 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.
Supermajority 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 "Supermajority 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 The Bank of New
York.
42
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this 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 this offering, the Company will have outstanding
12,700,000 shares of Common Stock. See "Capitalization." Of these shares, the
3,540,000 shares (4,071,000 shares if the Underwriters' over-allotment option
is exercised in full) of Common Stock sold in this 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 9,160,000 (8,629,000 shares if the Underwriters' over-allotment
option is exercised in full) 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,
contract to sell, pledge or grant any option to purchase or otherwise dispose
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of Oppenheimer & Co., Inc., which
consent may not be unreasonably withheld, except, without such prior written
consent, the Company and the Principal Stockholders may sell shares of Common
Stock pursuant to this offering, and the Company may grant options, restricted
stock, stock appreciation rights or other units of stock-based incentive
compensation under the 1997 Long-Term Incentive Plan. See "Underwriting."
Following the Lock-up Period, any shares owned prior to this 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 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 this 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 this 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 1997 Long Term Incentive Plan. Shares issued upon
exercise of options granted pursuant to the 1997 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 Transactions."
43
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among the Company, the Selling Stockholders and
Oppenheimer & Co., Inc. and Furman Selz LLC, as Representatives (the
"Representatives") of the Underwriters of this offering, the Company and the
Selling Stockholders have agreed to sell to the Underwriters, and the
Underwriters have severally agreed to purchase from the Company and the
Selling Stockholders, the number of shares of Common Stock set forth opposite
their names below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Oppenheimer & Co., Inc. ........................................
Furman Selz LLC.................................................
---------
Total ........................................................ 3,540,000
=========
</TABLE>
The Underwriters propose to offer the Common Stock directly to the public at
the public offering price set forth on the cover page of this Prospectus, and
at such price less a concession not in excess of $ per share of Common
Stock to certain securities dealers, of which a concession not in excess of
$ per share of Common Stock may be reallowed to certain other securities
dealers. After this offering, the offering price and other selling terms may
be changed by the Underwriters.
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase and pay for all of the
above shares of Common Stock if any are purchased.
The Company has granted an option to the Underwriters exercisable within 30
days after the date of this Prospectus, to purchase from the Company up to an
aggregate of 531,000 additional shares of Common Stock, to cover over-
allotments, if any, at the initial public offering price less the underwriting
discount set forth on the cover page of this Prospectus. If the Underwriters
exercise their over-allotment option to purchase any of the additional 531,000
shares of Common Stock, each of the Underwriters has severally agreed, subject
to certain conditions, to purchase approximately the same percentage as the
number of shares of Common Stock to be purchased by each of them bears to the
3,540,000 shares of Common Stock offered hereby. The Company will be
obligated, pursuant to the over-allotment option, to sell Common Stock to the
Underwriters to the extent such over-allotment option is exercised.
The Company and the Principal Stockholders have agreed not to offer, sell,
contract to sell, pledge or grant any option to purchase or otherwise dispose
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of Oppenheimer & Co., Inc., which
consent may not be unreasonably withheld, except, without such prior written
consent, the Company and the Principal Stockholders may sell shares of Common
Stock pursuant to this offering, and the Company may grant options, restricted
stock, stock appreciation rights or other units of stock-based incentive
compensation under the 1997 Long-Term Incentive Plan.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to certain payments that the Underwriters
may be required to make in respect thereof.
44
<PAGE>
The Representatives do not intend to confirm sales of the Common Stock to
any account over which they exercise discretionary authority.
Prior to this offering, there has been no public market for the Common
Stock. There can be no assurance that any active trading market will develop
for the Common Stock or as to the price at which the Common Stock may trade in
the public market from time to time subsequent to the offering made hereby.
The initial price to the public for the shares of Common Stock offered hereby
will be determined by negotiation among the Company and the Representatives.
Among the factors to be considered in determining the initial price to the
public are: (i) the history of and the prospects for the industry in which the
Company competes; (ii) the ability of the Company's management; (iii) the past
and present operations of the Company; (iv) the historical results of
operations of the Company; (v) the prospects for future earnings and business
potential of the Company; (vi) the general condition of the securities markets
at the time of this offering; (vii) the recent market prices of securities of
generally comparable companies; (viii) the market capitalizations and stages
of development of other companies which the Company and the Representatives
believe to be comparable to the company; and (ix) other factors deemed to be
relevant.
At the Company's request, the Underwriters have reserved up to 175,000
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 this 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 December 31, 1995 and 1996 and the years ended December 31, 1995 and 1996,
appearing in this Prospectus and Registration Statement, have been audited by
Ernst & Young LLP, independent auditors, and for the year 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.
45
<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).
46
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Auditors.......................................... F-2
Balance Sheets as of December 31, 1995 and 1996.......................... F-4
Statements of Operations for the years ended December 31, 1994, 1995 and
1996.................................................................... F-5
Statements of Stockholders' Equity for the years ended December 31, 1994,
1995 and 1996........................................................... F-6
Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996.................................................................... 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 December 31, 1996 and 1995, and the
related statements of operations, stockholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with 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, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
January 30, 1997, except for
paragraph 8 of
Note 12, as to which the date is
March , 1997
- -------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the restatement of capital accounts described in Note 12 to the financial
statements.
ERNST & YOUNG LLP
New York, New York
February 14, 1997
F-2
<PAGE>
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS
Computer Generated Solutions, Inc.
New York, New York
We have audited the accompanying statements of operations, stockholders'
equity and cash flows of Computer Generated Solutions, Inc. (the "Company")
for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Computer
Generated Solutions, Inc. for the year ended December 31, 1994 in conformity
with generally accepted accounting principles.
BDO Seidman, LLP
New York, New York
February 21, 1995, except for paragraph 8 of
Note 12, as to which the date is
March , 1997
- -------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the restatement of capital accounts described in Note 12 to the financial
statements.
BDO Seidman, LLP
New York, New York
February 14, 1997
F-3
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
---------------- DECEMBER 31,
1995 1996 1996
------- ------- ------------
(UNAUDITED)
(NOTE 12)
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents....................... $ 264 $ 57 $ 57
Accounts receivable, net of allowances of $60 in
1995 and $100 in 1996.......................... 9,177 10,691 10,691
Deferred income taxes........................... -- -- 45
Prepaid expenses and other current assets....... 122 180 180
------- ------- -------
Total current assets........................... 9,563 10,928 10,973
Fixed assets, net................................ 1,259 1,897 1,897
Cost in excess of fair value of assets purchased,
net of accumulated amortization of $533 in 1995
and $853 in 1996................................ 426 106 106
Deferred income taxes............................ -- -- 250
Deferred registration fees....................... -- 230 230
Other assets..................................... 405 615 615
------- ------- -------
Total assets................................... $11,653 $13,776 $14,071
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Note payable--bank.............................. $ 3,200 $ 2,050 $ 2,050
Note payable--stockholder....................... 323 323 --
Accounts payable and accrued expenses........... 1,995 3,173 3,173
Current portion of long-term debt............... 472 133 133
Current portion of obligations under capital
leases......................................... 93 164 164
Deferred maintenance............................ 542 422 422
Accrued payroll................................. 817 1,373 1,373
Sales tax payable............................... 178 267 267
Due to stockholders............................. -- -- 7,269
------- ------- -------
Total current liabilities...................... 7,620 7,905 14,851
Long-term debt................................... 133 -- --
Obligations under capital leases................. 346 471 471
Subordinated debt--stockholder................... 2,146 2,146 --
Commitments
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, no shares
authorized in 1995 and 1996; pro forma 1996,
1,000,000 shares authorized, no shares issued
and outstanding................................ -- -- --
Common stock, $.001 par value;
Voting--25,000,000 shares authorized,
13,004,246 shares issued and 9,800,000 shares
outstanding in 1995 and 9,800,000 shares
issued and outstanding in 1996................ 13 10 10
Additional paid-in capital...................... 216 77 77
Retained earnings (deficit)..................... 1,321 3,167 (1,338)
------- ------- -------
1,550 3,254 (1,251)
Less 3,204,246 shares held in treasury, at
cost........................................... (142) -- --
------- ------- -------
Total stockholders' equity..................... 1,408 3,254 (1,251)
------- ------- -------
Total liabilities and stockholders' equity.... $11,653 $13,776 $14,071
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C> <C>
Revenues:
Services, software license and maintenance
fees........................................... $ 19,962 $ 31,704 $ 47,846
Hardware........................................ 4,748 4,243 9,641
-------- -------- --------
Total revenues................................ 24,710 35,947 57,487
Direct costs:
Services, software license and maintenance
fees........................................... 12,988 22,970 35,734
Hardware........................................ 3,882 3,007 8,123
-------- -------- --------
Total direct costs............................ 16,870 25,977 43,857
-------- -------- --------
Gross profit...................................... 7,840 9,970 13,630
Selling, general and administrative expenses...... 4,725 6,690 9,995
Compensation amounts to S corporation stockhold-
ers.............................................. 3,041 1,502 760
Amortization of cost in excess of fair value of
assets purchased................................. 213 320 320
-------- -------- --------
7,979 8,512 11,075
-------- -------- --------
Operating income (loss)........................... (139) 1,458 2,555
Interest expense.................................. 77 473 540
-------- -------- --------
Income (loss) before income taxes................. (216) 985 2,015
Income taxes...................................... 60 33 169
-------- -------- --------
Net income (loss)................................. $ (276) $ 952 $ 1,846
======== ======== ========
PRO FORMA (UNAUDITED) (NOTE 12)
Historical income before income taxes............. $ 2,015
Pro forma provision for income taxes.............. $ 829
--------
Pro forma net income.............................. $ 1,186
========
Pro forma net income per share.................... $ .12
========
Weighted average number of shares outstanding................ 10,230,108
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
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
--------- ------ ---------- -------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993.................... 8,821 $ 9 $ 11 $ 645 $(185) $ 480
Net loss................ (276) -- (276)
Reissued treasury
stock.................. 4,183 4 205 -- 43 252
------ ---- ---- ------ ----- ------
Balance at December 31,
1994.................... 13,004 13 216 369 (142) 456
Net income.............. 952 -- 952
------ ---- ---- ------ ----- ------
Balance at December 31,
1995.................... 13,004 13 216 1,321 (142) 1,408
Net income.............. 1,846 -- 1,846
Retirement of treasury
stock.................. (3,204) (3) (139) -- 142 --
------ ---- ---- ------ ----- ------
Balance at December 31,
1996.................... 9,800 $ 10 $ 77 $3,167 -- $3,254
====== ==== ==== ====== ===== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1994 1995 1996
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).......................... $ (276) $ 952 $ 1,846
Adjustments to reconcile net income (loss)
to net cash provided by
(used in) operating activities:
Depreciation and amortization............. 288 530 704
Bad debt expense.......................... 54 110 302
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...................... (1,260) (3,835) (1,816)
Prepaid expenses and other current
assets.................................. (62) 4 (58)
Other assets............................. (173) 23 (210)
Accounts payable and accrued expenses.... (3,333) 702 1,178
Deferred maintenance..................... 115 67 (120)
Accrued payroll.......................... 313 114 556
Sales taxes payable...................... (360) 33 89
------- -------- -------
Net cash provided by (used in) operating
activities................................ (4,652) (1,300) 2,471
------- -------- -------
INVESTING ACTIVITIES:
Purchase of net assets of ACS Software
Products Group............................ (800) -- --
Capital expenditures....................... (74) (579) (683)
------- -------- -------
Net cash used in investing activities...... (874) (579) (683)
------- -------- -------
FINANCING ACTIVITIES:
Proceeds from term loan.................... 800 -- --
Repayment of term loan..................... (133) (267) (267)
Repayment of acquisition debt.............. -- (205) (205)
Deferred registration fees................. -- -- (230)
Proceeds (repayment) from note payable--
bank, net................................. 1,400 1,800 (1,150)
Proceeds of note payable and subordinated
debt--stockholder, net.................... 1,244 291 --
Principal payments under capitalized lease
obligations............................... -- (82) (143)
Repayments of loans payable--other......... (190) -- --
------- -------- -------
Net cash provided by (used in) financing
activities................................ 3,121 1,537 (1,995)
------- -------- -------
Decrease in cash and cash equivalents...... (2,405) (342) (207)
Cash and cash equivalents, beginning of
year...................................... 3,011 606 264
------- -------- -------
Cash and cash equivalents, end of year..... $ 606 $ 264 $ 57
======= ======== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
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.
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 December 31, 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, 1994 and 1995 financial statements have
been reclassified to conform to the December 31, 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.
F-8
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 and collection is probable.
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.
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.
Revenue recognition of completed units is sometimes delayed pending testing
and installation of software. In such instances, hardware revenues are
recognized when the customer has accepted the completed unit and authorizes
the related billing.
Compensation Amounts to S Corporation Stockholders
For the years 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. For the year ended December 31, 1996, the Company has recorded
compensation amounts to S corporation stockholders to reflect the aggregate
base salaries in effect during 1996.
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 and $892,000 for the years ended December 31, 1994, 1995
and 1996, respectively.
F-9
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 $1.2
million. 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 6). 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 1996.
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 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 year ended December 31, 1994 assuming consummation of the ACS and RTT
acquisitions as of January 1, 1994.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
----------------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C>
Total revenues ................................ $29,387
Net loss....................................... (715)
Pro forma net loss per share (see Note 12)..... 0.07
</TABLE>
3. FIXED ASSETS
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
ESTIMATED
1995 1996 USEFUL LIVES
------ ------ -------------
<S> <C> <C> <C>
(IN
THOUSANDS)
Furniture and fixtures........................... $ 308 $ 516 10 years
Leasehold improvements........................... 261 310 Life of lease
Computer equipment and software.................. 1,282 2,047 4-5 years
------ ------
1,851 2,873
Less accumulated depreciation and amortization... 592 976
------ ------
$1,259 $1,897
====== ======
</TABLE>
F-10
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Furniture and fixtures, leasehold improvements, computer equipment and
software include assets resulting from capitalized lease obligations totaling
$521,000 and $860,000 at December 31, 1995 and 1996, respectively (see Note
7). The accumulated depreciation attributable to assets under capital leases
is $52,000 and $190,000 at December 31, 1995 and 1996, respectively.
4. NOTE PAYABLE - BANK
In July 1996, the Company amended its revolving credit and term loan
agreement with a bank. The agreement provides for a $7.0 million revolving
line of credit expiring in May 1997. Outstanding borrowings bear interest at
the bank's prime rate (8.25% at December 31, 1996).
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 substantially 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. Outstanding amounts, ($2,050,000 at December
31, 1996), under the revolving line of credit are also supported by a 10%
compensating balance arrangement.
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,
---------------
1995 1996
------- -------
<S> <C> <C>
(IN THOUSANDS)
Note payable--bank (a)...................................... $ 400 $ 133
Note payable (acquisition debt) (Note 2).................... 205 --
------- -------
Total long-term debt........................................ 605 133
Less current maturities..................................... 472 133
------- -------
$ 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 December 31, 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.
F-11
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. CAPITAL LEASES
The Company has entered into capital lease agreements for computer and
telephone equipment, furniture and fixtures and leasehold improvements. The
agreements provide for monthly payments of approximately $19,000 through
October 2001, 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>
YEAR ENDING
DECEMBER 31,
--------------
(IN THOUSANDS)
<S> <C>
1997............................................................. $ 224
1998............................................................. 224
1999............................................................. 217
2000............................................................. 79
2001............................................................. 33
-----
Total minimum lease payments..................................... 777
Less amount representing interest................................ 142
-----
Present value of net minimum lease payments...................... $ 635
=====
</TABLE>
8. COMMITMENTS
Leases
Total rent expense on real estate charged to operations for the years ended
December 31, 1994, 1995 and 1996 aggregated $321,000, $421,000 and $877,000,
respectively.
The minimum annual rental commitments under noncancellable operating leases
as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
--------------
(IN THOUSANDS)
<S> <C>
1997............................................................. $ 1,122
1998............................................................. 966
1999............................................................. 968
2000............................................................. 886
2001............................................................. 840
Thereafter....................................................... 2,594
-------
Total............................................................ $ 7,376
=======
</TABLE>
9. STATEMENTS OF CASH FLOWS - SUPPLEMENTAL DISCLOSURES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the period:
Income taxes............................... $ 47 $ 61 $ 16
Interest................................... 79 488 540
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 $339,000 in 1996.
F-12
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. 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 $102,000, $181,000 and
$240,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
11. MAJOR CUSTOMER
One customer, with several contracts in various divisions, accounted for
21%, 33% and 35% of total revenues for the years ended December 31, 1994, 1995
and 1996, respectively. As of December 31, 1994, 1995 and 1996, 19%, 35% and
30%, respectively, of accounts receivable was due from this customer.
12. 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. The unaudited pro
forma adjustments on the statement of operations reflect an adjustment to
record a provision for income taxes on income as if the Company had not been
an S corporation.
PRO FORMA NET INCOME PER SHARE
Pro forma net income per share for the year ended December 31, 1996 has been
computed by dividing pro forma net income by the weighted average number of
common shares outstanding after giving effect to the stock split and the
number of shares that would be sold by the Company to fund the distribution of
S corporation taxable earnings to existing stockholders. There were no common
stock equivalents such as options, warrants, etc., outstanding during any of
the periods presented.
PRO FORMA BALANCE SHEET
Subsequent to December 31, 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
December 31, 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 December 31, 1996
gives effect to these items. Amount due to stockholders on the December 31,
1996 pro forma balance sheet consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
--------------
(IN THOUSANDS)
<S> <C>
S corporation distributions............. $4,800
Subordinated debt--stockholder.......... 2,146
Note payable--stockholder............... 323
------
$7,269
======
</TABLE>
The pro forma balance sheet at December 31, 1996 also gives effect to a
deferred tax asset in the amount of $295,000 (see Note 13).
F-13
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The estimated distribution of $4.8 million in the pro forma presentation
represents undistributed taxable S corporation earnings through December 31,
1996. The difference between the undistributed earnings of $4.8 million and
retained earnings of approximately $3.2 million at December 31, 1996 is
principally the result of 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
January 1, 1997 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
1997 Long-Term Incentive Plan (the "Plan"). The Company will reserve an amount
of common stock equal to 10% (1,270,000 shares) 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
On March , 1997, the Board of Directors of the Company approved an
increase in the number of authorized shares of Common Stock to 25,000,000 and
authorized a stock split pursuant to which each share of Common Stock, $.01
par value per share, will be exchanged for 1,300.42 shares of common stock,
par value of $.001 per share. The foregoing changes will be effected prior to
the completion of the IPO.
13. 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.
Deferred income taxes resulting from temporary differences are considered
immaterial and, therefore, are not provided for at December 31, 1994, 1995 and
1996.
The provision for pro forma income taxes (see Note 12) 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
--------------
YEAR ENDED
DECEMBER 31,
1996
--------------
<S> <C>
Federal statutory rate...................................... 34.0%
State and local taxes, net of federal tax benefit........... 7.3
Nondeductible expenses...................................... 3.4
Utilization of tax credit................................... (3.6)
----
41.1%
====
</TABLE>
F-14
<PAGE>
COMPUTER GENERATED SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 December 31, 1996, the
deferred tax asset that would have to be recognized would be approximately
$295,000.
14. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Premiums receivable (a)............................... $ 328 $ 365
Security deposits..................................... 77 120
Deferred rent......................................... -- 130
------ ------
$ 405 $ 615
====== ======
</TABLE>
- --------
(a) Amount represents premiums paid on a split-dollar life insurance policy on
the principal stockholder.
15. TREASURY STOCK
As of December 31, 1996, the Company retired and canceled the treasury stock
outstanding. Such cancellation has been given effect to in the accompanying
financial statements as of December 31, 1996.
16. CONTINGENT LIABILITIES
There are certain claims and pending actions against the Company arising in
the ordinary course of its business. Certain of these claims and actions seek
damages in significant amounts. The amount of liability, if any, with respect
to these claims and actions at December 31, 1996 is not presently
determinable. However, in the opinion of management, these claims are without
merit and the ultimate liability, if any, will not have a material adverse
effect on the Company's results of operations or financial position.
F-15
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT 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 ANY SECURITY OTHER THAN THE COMMON STOCK
REFERRED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION TO SUCH PERSON IN ANY JURISDICTION TO ANY PERSON TO WHOM SUCH
OFFER OR SOLICITATION MAY NOT LAWFULLY BE MADE. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary ...................................................... 3
Risk Factors ............................................................ 6
The Company ............................................................. 11
Use of Proceeds ......................................................... 12
Dividend Policy ......................................................... 12
Capitalization .......................................................... 13
Dilution ................................................................ 14
Selected Financial Data ................................................. 15
Management's Discussion and Analysis of Financial Condition and Results
of Operations .......................................................... 16
Business ................................................................ 23
Management .............................................................. 34
Certain Transactions .................................................... 38
Principal and Selling Stockholders ...................................... 39
Description of Capital Stock ............................................ 40
Shares Eligible for Future Sale ......................................... 43
Underwriting ............................................................ 44
Legal Matters ........................................................... 45
Experts ................................................................. 45
Change of Auditors....................................................... 45
Additional Information .................................................. 46
Index to Financial Statements............................................ F-1
</TABLE>
----------------
UNTIL , 1997 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,540,000 SHARES
[LOGO] COMPUTER GENERATED SOLUTIONS, INC.
COMMON STOCK
----------------
PROSPECTUS
----------------
OPPENHEIMER & CO., INC.
FURMAN SELZ
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 this offering of the Common
Stock registered under this Registration Statement:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........... $ 17,479.36
NASD filing fee............................................... 5,792.30
NASDAQ listing fee............................................ 44,250.00
Blue sky qualification fees and expenses...................... 30,000.00
Printing and engraving expenses............................... 120,000.00
Legal fees and expenses....................................... 320,000.00
Accounting fees and expenses.................................. 300,000.00
Transfer Agent and Registrar fees and expenses................ 5,000.00
Miscellaneous................................................. 7,478.34
-----------
Total....................................................... $850,000.00
===========
</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 and the
Selling Stockholders of the Underwriters, for certain liability arising under
the Securities Act of 1933, as amended the ("Securities Act"). The Company has
agreed to indemnify each of the Selling Stockholders for any liability arising
out of their obligations to indemnify, or contribute to losses incurred by,
the Underwriters pursuant to the Underwriting Agreement to be entered into by
the Company, the Selling Stockholders and the Underwriters in connection with
this offering to the fullest extent permitted by law.
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.
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 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.*
2.1 Asset Purchase Agreement, dated April 26, 1994, between ACS Software
Products Group and Computer Generated Solutions, Inc.**
2.2 Plan and Agreement of Reorganization, dated August 26, 1994, between
Computer Generated Solutions, Inc. and Real-Time Technology, Inc.**
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 1997 Long-Term Incentive Plan.*
5.1 Opinion of Chadbourne & Parke LLP, counsel to the Company.*
10.1 Service Agreement, dated October 4, 1995, between International
Business Machines Corporation and Computer Generated Solutions, Inc.**
10.2 Master Agreement for Professional Services, dated June 26, 1995,
between AT&T Corp. and Computer Generated Solutions, Inc.**
10.3 Outsourcing Agreement, dated as of March 30, 1996, between Teleservice
Resources, Inc. and Computer Generated Solutions, Inc.**
10.4 Agreement, dated September 15, 1995, between Borland International,
Inc. and Computer Generated Solutions, Inc.**
10.5 Agreement, dated November 9, 1995, between Borland International, Inc.
and Computer Generated Solutions, Inc.**
10.6 Authorized Education Center Agreement, dated May 23, 1995, between
Lotus Development Corporation and Computer Generated Solutions, Inc.**
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.7 1996 Business Partner Agreement, dated June 1, 1996, between
International Business Machines Corporation and Computer Generated
Solutions, Inc.**
10.8 Revolving Credit Facility, dated July 1, 1996, as amended, between
Computer Generated Solutions, Inc. and Bank Leumi Trust Company of
New York.**
10.9 Term Loan, dated June 29, 1994, as amended, between Computer Generated
Solutions, Inc. and Bank Leumi Trust Company of New York.*
10.10 S Termination Agreement.*
10.11 Indemnification Agreement.*
10.12 Agreement for Consulting Services, dated November 7, 1996, between
International Business Machines Corporation and Computer Generated
Solutions, Inc.
11.1 Statement regarding Computation of Per Share Earnings.
Letter from BDO Seidman, LLP regarding change in certifying
16.1 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 Ira Z. Kevelson.
23.5 Consent of John J. Murphy.
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.
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. 3 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 FEBRUARY 14, 1997.
COMPUTER GENERATED SOLUTIONS, INC.
/s/ Philip Friedman
By: _________________________________
NAME: PHILIP FRIEDMAN
TITLE: PRESIDENT AND CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 3 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 February 14,
PHILIP FRIEDMAN (Principal 1997
Executive Officer),
Director
* Executive Vice
- ------------------------------------- President, Director February 14,
VICTOR FRIEDMAN 1997
* Vice President
- ------------------------------------- Finance & February 14,
FRED B. SCHLOSSBERG Administration and 1997
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 December 31, 1996 and 1995, and for the years then ended, and have
issued our report thereon dated January 30, 1997 (except for paragraph 8 of
Note 12, as to which the date is March , 1997) (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
January 30, 1997
- -------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the restatement of capital accounts described in Note 12 to the financial
statements.
Ernst & Young LLP
New York, New York
February 14, 1997
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
accounts...................... 10 110 (60) 60
YEAR ENDED DECEMBER 31, 1996
Allowances deducted from assets
to
which they apply:
Allowance for doubtful
accounts...................... 60 302 (262) 100
</TABLE>
- --------
(a) Uncollectible receivables written off.
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
2.1 Asset Purchase Agreement, dated April 26, 1994, between ACS
Software Products Group and Computer Generated Solutions,
Inc.**
2.2 Plan and Agreement of Reorganization, dated August 26, 1994,
between Computer Generated Solutions, Inc. and Real-Time
Technology, Inc.**
Amended and Restated Certificate of Incorporation of the
3.1 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 1997 Long-Term Incentive Plan.*
5.1 Opinion of Chadbourne & Parke LLP, counsel to the Company.*
10.1 Service Agreement, dated October 4, 1995, between International
Business Machines Corporation and Computer Generated Solutions,
Inc.**
10.2 Master Agreement for Professional Services, dated June 26, 1995,
between AT&T Corp. and Computer Generated Solutions, Inc.**
10.3 Outsourcing Agreement, dated as of March 30, 1996, between
Teleservice Resources, Inc. and Computer Generated Solutions,
Inc.**
10.4 Agreement, dated as of September 15, 1995, between Borland
International, Inc. and Computer Generated Solutions, Inc.**
10.5 Agreement, dated November 9, 1995, between Borland
International, Inc. and Computer Generated Solutions, Inc.**
10.6 Authorized Education Center Agreement, dated May 23, 1995,
between Lotus Development Corporation and Computer Generated
Solutions, Inc.**
10.7 1996 Business Partner Agreement, dated June 1, 1996, between
International Business Machines Corporation and Computer
Generated Solutions, Inc.**
10.8 Revolving Credit Facility, dated July 1, 1996, as amended,
between Computer Generated Solutions, Inc. and Bank Leumi Trust
Company of New York.**
10.9 Term Loan, dated June 29, 1994, as amended, between Computer
Generated Solution, Inc. and Bank Leumi Trust Company of New
York.*
10.10 S Termination Agreement.*
10.11 Indemnification Agreement.*
10.12 Agreement for Consulting Services, dated November 7, 1996,
between International Business Machines Corporation and
Computer Generated Solutions, Inc.
11.1 Statement regarding Computation of Per Share Earnings.
Letter from BDO Seidman, LLP regarding change in certifying
16.1 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 Ira Z. Kevelson.
23.5 Consent of John J. Murphy.
24.1 Powers of Attorney (included in signature page hereto).**
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Previously Filed.
<PAGE>
[LOGO]
ISSC
Agreement for Consulting Services [GRAPH]
- --------------------------------------------------------------------------------
The Vendor Computer Generated Solutions("Vendor") and Integrated Systems
Solutions Corporation ("ISSC") agree that the terms and conditions in this
document ("Agreement") and any applicable Statement of Work will apply to the
services Vendor will render to ISSC as an independent consultant. For this
Agreement, ISSC shall mean ISSC, its subsidiaries, its parent International
Business Machines Corporation ("IBM") and IBM's subsidiaries.
1.0 ASSOCIATED CONTRACT DOCUMENTS
A Statement of Work (SOW) will describe the scope of services ("Project") that
you will provide ISSC in response to ISSC's request for consulting services,
any other applicable terms and compensation for such services. A separate
Statement of Work will be required for each Project. The Statement of Work will
become subject to this Agreement when signed by Vendor and ISSC. The SOW
incorporates the terms and conditions of this Agreement until the SOW is termi-
nated.
The following order of precedence shall control in the event of any conflict in
terms and conditions:
1. the Statement of Work,
2. this Agreement.
2.0 SCOPE OF WORK
a. Vendor will provide the consulting services to ISSC set forth in the
Statement of Work. The consulting services may include collaboration with
and assistance to ISSC personnel or others employed or retained by ISSC.
b. Vendor will deliver to ISSC the deliverables described in the Statement of
Work, upon the terms and conditions set forth therein.
3.0 TRAVEL AND LIVING EXPENSES
ISSC shall reimburse Vendor only for actual and reasonable travel and living
expenses which are authorized in advance by ISSC and incurred in connection with
services furnished under this Agreement. Travel and living expenses shall be
billed at actual cost with supporting receipts consistent with ISSC travel
guidelines. Per diem rates may be used if mutually agreed to in an engagement
SOW.
4.0 INVOICES TO ISSC
Vendor will invoice ISSC for the services furnished and authorized travel and
living expenses incurred hereunder during the term of this Agreement. ISSC
shall make payments to Vendor for work performed within thirty (30) days after
acceptance of such invoice. The invoice must reference the appropriate ISSC
purchase order number.
5.0 COMPENSATION AND VENDOR SERVICES RATES
ISSC shall pay Vendor, as full compensation for the consulting services to be
provided by Vendor to ISSC, a fee in the amount set forth in the Statement of
Work. In no event will ISSC pay Vendor for services provided prior to or after
the term specified in this Agreement, unless such term has been amended by a
duly executed Change Authorization.
Rates that Vendor charges ISSC for services rendered under this Agreement are
set forth in Schedule A and will be reviewed on an annual basis and will not
increase more than 5% per year Vendor will be paid in accordance with rates
specified in Schedule A as may be amended from time to time as described herein.
6.0 Training and Resource Availability
ISSC will provide Transformation 2000 Methodology and Tools training to Vendor.
ISSC Transformation 2000 Services will maintain records of those Vendor
employees who have attended Transformation 2000 Methodology training (and will
be made available to Vendor on reasonable request).
Within 30 days of the signing of this Agreement, Vendor will identify to ISSC
the minimum number of employees who will be dedicated to ISSC Transformation
2000 engagements by role (i.e., Engagement Manager, Project Manager, I/T
Architect,, Tool Specialist, Team Leader, Sr. Systems Analyst, Systems Analyst,
Application Programmer, Programmer/Analyst, Programmer, etc.). Vendor must make
available, at a minimum, that number and skill level of employees throughout the
Agreement.
ISSC0006-1 October 01, 1996
Final Consulting Services Page 1 of 7
<PAGE>
7.0 EQUIPMENT PROVISIONS
Vendor is responsible for providing the equipment, as defined in SOWs, necessary
for its employees to successfully complete the SOWs.
8.0 CONFIDENTIALT OVERNMENT CLASSIFIED INFORMATION
a. "Confidential Information" shall mean that information:
1. disclosed to Vendor by ISSC or its clients in connection with and during
the term of this Agreement;
2. which relates to ISSC's or its client's past, present and future
research, development and business activities;
3. which has been identified to Vendor at the time of disclosure as
Confidential Information of ISSC or its clients; and
4. all Transformation 2000 materials.
It shall also mean the deliverable items specified in this Agreement,
including drafts and associated materials.
The term "Confidential Information" shall not mean any information which: is
previously known to Vendor without obligation of confidence; or
1. is previously known to Vendor without obligation of confidence;
2. without breach of this Agreement, is publicly disclosed prior to or
subsequent to your receipt of such information; or
3. which is rightfully received by Vendor from a third party without
obligation of confidence.
b. For three years from the date of disclosure, Vendor agrees to hold all such
Confidential Information in trust and confidence for ISSC and not to use
such Confidential Information other than for the benefit of ISSC. Except as
may be authorized by ISSC in writing, for such period of time, Vendor
agrees not to disclose any such Confidential Information, by publication or
otherwise, to any person other than those persons whose services Vendor
requires who have a need to know such Confidential Information for purposes
of carrying out the terms of this Agreement or SOW, who agree in writing
to be bound by, and comply with, the provisions of this Section, and who
ISSC or its client has approved in writing for receipt of such Confidential
Information.
c. Vendor may not copy any Confidential Information except as explicitly
approved by ISSC or its clients in writing.
d. Vendor agrees to secure all writings, documents and other media that embody
Confidential Information in locked files at all times when not in use to
prevent its loss or unauthorized disclosure, and to segregate Confidential
Information, at all times from the material of others.
e. Upon termination or expiration of this Agreement, Vendor will return to ISSC
all written or descriptive matter including, but not limited to, drawings,
blueprints, descriptions, or other papers, documents, tapes, or any other
media which contains any such Confidential Information. In the event of a
loss of any item containing such Confidential Information, Vendor shall
promptly notify ISSC in writing.
f. In providing services under this Agreement, Vendor understands that ISSC
does not wish to receive from Vendor and Vendor agree not to provide to ISSC
directly or through others any information which may be considered
confidential and/or proprietary to Vendor and/or to any third party.
g. In the event that this Agreement should pertain to any classified government
contracts, Vendor shall not remove from ISSC premises any written matter or
copies thereof pertaining to such classified government contracts without
ISSC's permission and express written authority from the contracting officer
or the agency which has cognizance of said contract. Unless specifically
otherwise agreed to in writing by ISSC, Vendor will do all consulting work
which involves access or use of government classified information at ISSC
facilities or government facilities provided for such work and Vendor shall
abide by all governmental and ISSC security regulations pertaining to
classified government information or contracts.
9.0 RIGHTS IN DATA
a. All of the deliverable items of this Agreement prepared for or submitted to
ISSC by Vendor under this Agreement, shall belong exclusively to ISSC and
shall be deemed to be "Works Made for Hire." To the extent that any of the
deliverable items may not, by operation of law, be Works Made for Hire,
Vendor hereby assigns to ISSC the ownership of copyright in the deliverable
items and ISSC shall have the right to obtain and hold in its own name
copyrights, registrations and similar protection which may be available in
the deliverable items. Vendor agrees to give ISSC or its designees all
assistance reasonably required to perfect such rights.
b. To the extent that any materials preexisting this Agreement are contained in
the deliverables Vendor provides or delivers under this Agreement, Vendor
grants to ISSC an irrevocable, nonexclusive, world-wide, royalty-free
license to:
1. use, execute, reproduce, display, perform, distribute (internally or
externally) copies of, and prepare derivative works based upon, such
preexisting materials and derivative works thereof; and
2. authorize others to do any, some or all of the foregoing.
ISSC0006-1 October 301, 1996
Final Consulting Services Page 2 of 7
<PAGE>
c. Vendor may include in the deliverables only preexisting materials that are
owned or licensable by Vendor, and shall identify such preexisting materials
at the time of delivery to ISSC.
d. Vendor warrants that all of the deliverable items prepared for or delivered
to ISSC by Vendor under this Agreement are Vendor's original works, and
that no part of them is protected by any right of any third party, except to
the extent that Vendor is licensed under such right to include such
part in the deliverable items.
10.0 RIGHTS IN INVENTION
a. "Invention" shall mean any idea, design, concept, technique, invention,
discovery or improvement, whether or not patentable, that is conceived
or reduced to practice in Vendor, performance of consulting services. Vendor
shall promptly apprise ISSC in writing of each Invention and why Vendor
believes it is new. Vendor shall own each Invention except:
1. Inventions made solely by ISSC personnel;
2. Inventions Vendor makes with any of ISSC's employees, which shall be
jointly owned by Vendor and ISSC.
b. With respect to Inventions that Vendor owns, Vendor shall promptly apprise
ISSC whether and in what countries Vendor will seek patent protection,
including utility model registrations. ISSC shall own and may through itself
or through, its designee seek patent protection for itself for, or may
publish, Inventions in any country in which Vendor does not seek patent
protection (whether Vendor apprises ISSC or fails to apprise ISSC of such
countries), and Vendor shall provide at its expense all reasonable
assistance to ISSC in seeking patent protection.
c. Vendor and ISSC each hereby grant to the other under all Inventions,
applications filed on such Inventions and patent issuing thereon
(including utility models by excluding those relating to appearance designs)
a worldwide, irrevocable, nonexclusive, non-transferable, and royalty-
free license to make, have made, use, have used, lease, sell and other-
wise transfer any product and to practice and have practiced any method.
The licensee may grant revocable or irrevocable sublicenses to its
Affiliates, and such Affiliates may grant such sublicenses to their
Affiliates.
d. "Affiliate" shall mean a corporation or other entity now or hereafter
controlling, controlled by or under common control with, a party hereto, but
such corporation or other entity shall be deemed to be an Affiliate only so
long as such control exists. The term "control", as used herein, shall
mean the legal, beneficial or equitable ownership, directly or indirectly,
of more than 50% of the aggregate of all voting equity interests in
such corporation or other entity.
e. With respect to jointly-owned Inventions, Vendor and ISSC shall share
equally in the expenses of seeking and maintaining patent protection,
except that either party at its own expense may seek and maintain patent
protection for both parties if the other party declines to share the
expenses. Vendor and ISSC may each license others without accounting under
such Inventions and patents issuing thereon.
f. With respect to Inventions relating to an appearance design and design
layouts for mask works, Vendor shall provide, at ISSC's expense, whatever
assistance ISSC requests in seeking and maintaining patent protection.
g. Nothing in this Agreement provides Vendor or ISSC any rights under any other
Invention. In performing consulting services, Vendor shall not knowingly
design or develop anything that infringes a patent or copyright of another
person, and Vendor shall promptly apprise ISSC in writing of any such
patent or copyright of which Vendor become aware.
11.0 WARRANTIES, REPRESENTATIONS AND CERTIFICATIONS
a. Vendor represents and warrants that Vendor is under no obligation or
restriction nor will Vendor assume any such obligation or restriction which
would in any way interfere or be inconsistent with, or present a conflict of
interest concerning, the services to be furnished by Vendor under this
Agreement.
b. Vendor warrants that Vendor and its employees will not use the ISSC
Transformation 2000 Methodology in any non-ISSC Year 2000 engagements.
Vendor warrants that it will use the ISSC Transformation 2000 Methodology
and tools in all ISSC Year 2000 engagements unless otherwise agreed to, in
writing, with ISSC.
c. Vendor warrants that it will not form any similar subcontracting
relationship with any other Year 2000 compliance or conversion services
provider while performing services under this Agreement or SOWs. Vendor
warrants that it will not further engage with an ISSC Transformation 2000
client for any services for a period of 12 months following its completion
of any ISSC Transformation 2000 engagement without the written approval of
ISSC.
12.0 GENERAL PROVISIONS
a. Any terms of this Agreement which by their nature extend beyond its
expiration or termination remain in effect until fulfilled. Vendor agrees to
comply, and do all things necessary for ISSC to comply, with all applicable
federal, state and local laws, regulations and ordinances, including, but
not limited to, the Foreign Corrupt Practices Act, the regula tions of the
United States Department of Commerce relating to the Export of Technical
Data and Federal Government security requirements for safeguarding
classified information, in so far as they relate to the services to be
performed under this Agreement. Vendor agrees to obtain the required
government approvals and related documents prior to export of any technical
data disclosed to Vendor or the direct product related thereto.
ISSC0006-1 October 301,1996
Final Consulting Services Page 3 of 7
<PAGE>
b. Vendor agrees that neither Vendor nor any of your agents or employees will
export or re-export any Confidential In information of ISSC or its clients,
nor any process, product or service that is produced as a result of the use
of such Confidential Information, to any country specified in such
regulations as a prohibited destination, without first obtaining U.S.
Government approval, by application through ISSC. Upon request, ISSC will
advise Vendor of the countries then specified as prohibited destinations.
c. Vendor shall not subcontract services under this Agreement unless
specifically identified and approved by ISSC in an SOW.
d. Vendor shall not place former IBM or ISSC employees on IBM or ISSC premises
without the written concurrence of ISSC.
e. Vendor shall comply with ISSC's practice prohibiting the receipt of payments
or gifts, for any purpose, by an employee or others associated with ISSC.
f. The relationship between Vendor and ISSC shall be that of an independent
contractor, and neither Vendor nor any person employed by Vendor shall be
deemed to be an employee of ISSC for any purpose whatsoever.
g. This Agreement does not obligate ISSC to issue any SOWs or Purchase Order(s)
to Vendor.
13.0 VENDOR EMPLOYEES
Vendor confirms the existence of agreements (for example, nondisclosure
agreements) with each of Vendor's employees or others whose services Vendor
require to enable compliance with all the terms of this Agreement, and Vendor:
a. shall provide ISSC with information identifying all employees or others whom
Vendor will utilize to perform services under this Agreement; and
b. upon ISSC's request, shall provide ISSC a copy of any such agreements.
c. If through actions of Vendor, any Vendor employee is removed from an
engagement for any reason within the first 30 days of placement on a
particular engagement, ISSC will have no obligation to pay Vendor for work
performed by that Vendor employee.
14.0 TERMINATION
a. ISSC may terminate for convenience this Agreement with 30 days prior written
notice. ISSC may terminate any Statement(s) of Work and/or Purchase Order(s),
or any portions thereof, by written notice. Upon receipt of such notice,
Vendor must immediately stop all activities associated with the terminated
Agreement and/or Statement(s) of Work and/or Purchase Order(s). Vendor will
be paid for the work performed through the date of termination when ISSC
receives the Services and Materials specified in the notice. Such payment
shall constitute ISSC's entire liability.
b. In the event of a default by Vendor, ISSC will provide Vendor written notice
thereof. If the default is not remedied within ten days or within the time
stated in the notice, which ISSC may revise in writing pursuant to discussion
with Vendor, ISSC may terminate this Agreement, the applicable Statement(s)
of Work, the Purchase Order(s), or any portion thereof. In such event ISSC
may require payment from Vendor for any replacement of services fees incurred
c. In the event of any termination of this Agreement, a Statement of Work or
Purchase Order, Vendor agrees to promptly provide ISSC with all Materials,
Inventions, Program Products and other items associated with the Statement of
Work and/or Purchase Order and otherwise comply with the terms and conditions
of this Agreement and the Statement of Work and/or Purchase Order with
respect to intellectual property rights.
d. Vendor may terminate this Agreement without cause with 120 days prior written
notice.
e. Vendor may terminate this Agreement with cause upon 30 days prior written
notice. ISSC shall have 30 days to cure the default.
f. If the Agreement is terminated by Vendor for cause, any SOWs not the cause of
the termination shall survive the termination of the Agreement, until they
are completed or otherwise terminated as set forth in this Agreement.
g. If the Agreement is terminated by Vendor not for cause, all SOWs shall
survive the termination of the Agreement until they are completed or
otherwise terminated as set forth in this Agreement.
h. If Vendor provides notice of termination of the Agreement as described
herein, ISSC may still add additional SOWs to the Agreement during the
notice period.
i. Vendor can terminate an SOW for cause upon 30 days prior written notice. ISSC
shall have 30 days to cure the default.
j. Vendor cannot otherwise terminate an SOW.
15.0 DEFAULT
In the event of default, either party shall have all remedies which may
be available to it in law or equity.
ISSC0006-1 October 301, 1996
Final Consulting Services Page 4 of 7
<PAGE>
16.0 CONFLICT OF INTEREST
a. In performing the required services under this Agreement, it is your
responsibility to avoid:
1. any actual or apparent conflict between your duties or obligations to
other parties, including the Federal Government, and such duties and
obligations assumed under this Agreement; and
2. disclosure of information which would, or would appear to, violate such
duties and obligations to third parties.
b. In the performance of this Agreement, Vendor shall not make or participate in
any marketing calls or contacts with the Federal Government or others which
might create the possibility or appearance of a conflict of interest.
c. It is understood that Vendor are not now consulting with matters which
conflict or appear to conflict with the subject matter of this Agreement. It
is agreed that, if subsequent to the execution of this Agreement, Vendor find
that a conflict, or what may appear to be a conflict, develops because of a
relationship created or intended to be created between Vendor and any third
party, Vendor shall immediately notify ISSC who shall have the right, at its
sole discretion, to terminate this Agreement on twenty-four hours notice.
Upon exercise of such right of termination, ISSC's only obligation to Vendor
shall be to reimburse Vendor for services rendered to the date of
termination.
17.0 SOLE AGREEMENT
This Agreement shall supersede all prior agreements and understandings between
the parties respecting the subject matter hereof. This Agreement may not be
changed or terminated orally by or on behalf of either party. In the event of
conflict between the body of this Agreement and the Statement of Work, the
Statement of Work shall prevail.
18.0 TRADEMARK
Notwithstanding any other provisions of this Agreement, Vendor shall have no
right to use the trademark of ISSC or IBM, or trade name, or to refer to this
Agreement or the services performed hereunder directly or indirectly, in
connection with any product, promotion or publication without the prior written
approval of ISSC or IBM, as applicable.
19.0 APPLICABLE LAWS
Each party shall, at its own expense, comply with all laws and regulations of
federal, state, and local government authorities relating to its obligations
under this Agreement.
The laws of New York govern this Agreement and any disputes hereunder shall be
heard by the Federal District Court for the Southern District of NY.
20.0 NOTICES
Any notice required or permitted under this Agreement will be sent to the
Contract Coordinators named below, and shall be effective upon receipt as
demonstrated by reliable written confirmation (for example, certified mail
receipt, courier receipt or facsimile receipt confirmation sheet).
Contract Coordinators:
ISSC0006-1 October 301,1996
Final Consulting Services Page 5 of 7
<PAGE>
For ISSC:
Integrated Systems Solutions Corporation
Route 100
------------------------------
Address
Somers, NY 10859
------------------------
City, State, Zip code
Attention: Marlene Uris
-----------------
Facsimile: - 914-766-8440
---------------
For Vendor:
Computer Generated Solutions, Inc.
- --------------------------------------
Address
1675 Broadway, 31st Floor, New York, N.Y. 10019
- -----------------------------------------------
Attention: Victor Friedman
-------------------------------------
Facsimile: (212) 408-3938
-------------------------------------
With copy to:
Integrated Systems Solutions Corporation
Rte 100
Address
Somers, NY 10589
City, State, Zip code
Attention: ISSC General Counsel
Facsimile: 914-766-8444
21.0 INSURANCE AND INDEMNITY
a. Vendor shall secure and maintain adequate Workmen's Compensation Insurance in
accordance with the law of the state wherein the services are to be
performed. Vendor further agree to maintain comprehensive general and
vehicular liability insurance for claims for damages because of bodily injury
(including death) and property damage, caused by or arising out of acts or
omissions of your employees. The minimum limits of such insurance shall be
$1,000,000 for each person, $1,000,000 for each accident because of
bodily injury and $1,000,000 because of property damage for each accident.
b. The insurance required by this provision shall be effected prior to
commencement of effort and/or services by Vendor on ISSC premises and
notification of its placement furnished to ISSC by Vendor no later than five
days prior to such commencement. Should ISSC request, Vendor shall furnish or
cause to be furnished to ISSC, certificates of such insurance prior to the
commencement of effort and/or services on ISSC premises. In no event, shall
any such Insurance be canceled prior to completion of effort without prior
written notice to ISSC by your insurance carrier.
c. Vendor assumes full and complete responsibility for any and all risks in
connection with the services furnished by Vendor under this Agreement. Vendor
shall indemnify, defend and hold harmless ISSC, its officers, agents and em-
ployees, from and against any and all claims, actions, suits, expenses,
losses, liabilities, and damages (including attorneys' fees and expenses)
arising out of or in connection with services provided under this Agreement,
including, without limitation, any of the foregoing arising out of or in
connection with the obligations and representations by Vendor pursuant to
Rights in Data and Rights in Invention Sections and all such damages arising
from or related to its breach or threatened breach of the provisions of
Warranties, Representations and Certifications Section b-e. Ven dor agrees
that for the purpose of compliance with the requirements of the Occupational
Safety and Health Act of 1970, services performed for ISSC shall be deemed
entirely within your responsibility. Vendor will notify ISSC promptly, in
writing, if a charge of noncompliance with such act has been filed against
Vendor in connection with services being performed by Vendor in ISSC owned
or leased premises. Under no circumstances is either party liable for
economic consequential damages, (including lost savings or profits) or
incidental damages even if advised of their possibility.
22.0 ASSIGNMENT
ISSC may assign this Agreement to its parent, IBM, without the consent of
Vendor.
ISSC0006-1 October 301,1996
Final Consulting Services Page 6 of 7
<PAGE>
THE PARTIES ACKNOWLEDGE THAT THEY HAVE READ THIS AGREEMENT, UNDERSTAND IT, AND
AGREE TO BE BOUND BY ITS TERMS AND CONDITIONS. FURTHER, THE PARTIES AGREE THAT
THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES
RELATING TO THE SERVICES DESCRIBED HEREIN CONSISTS OF 1) THS AGREEMENT, 2) ANY
STATEMENT(S) OF WORK, 3) ANY CHANGE AUTHORIATION(S), AND 4) ANY OTHER AGREEMENTS
REFERENCED HEREIN. THIS STATEMENT OF THE AGREEMENT SUPERSEDES ALL PROPOSALS OR
OTHER PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN
THE PARTIES RELATING TO THIS SUBJECT.
Accepted by:
Integrated Systems Solutions Corporation
{d/b/a ISSC, Inc,}
By: /s/ B.D. Clendenin
--------------------------------------
Authorized Signature
B.D. Clendenin 11/7/96
---------------------------
Name DAte
Director, External Relations
Address:
Rte 100
Somers, NY 10589
Accepted by:
Vendor
By: /s/ Victor Friedman
------------------------------------
Authorized Signature
Victor Friedman 11/01/96
- ---------------------------------------
Name (Type or Print) Date
Computer Generated Solutions, Inc.
Address: 1675 Broadway, 31st Fl.
New York, N.Y. 10019
ISSC0006-1 October 31, 1996
Final Consulting Services Page 7 of 7
<PAGE>
EXHIBIT 11.1
COMPUTER GENERATED SOLUTIONS, INC.
COMPUTATION OF PRO FORMA NET INCOME PER SHARE
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES SHARES
---------- -----------
<S> <C> <C>
Common stock.......................................... 9,800,000 9,800,000
Additional shares required to be sold to pay
distribution to stockholders:
IPO price per share................................. $ 12.00
Underwriters' commission (7%)....................... (0.84)
Offering expenses................................... (0.29)
----------
Net proceeds per share.............................. $ 10.87
----------
Additional shares required to raise proceeds of $4.8
million to pay distribution to stockholders.......... 441,708
-----------
Weighted average shares--1996......................... 10,241,708
-----------
Pro forma net income.................................. $ 1,186,000
-----------
Pro forma net income per share........................ $ 0.12
===========
COMPUTATION OF SUPPLEMENTAL PRO FORMA NET INCOME PER SHARE
Weighted average shares--1996......................... 10,241,708
Notes payable--bank................................... $2,183,000
Notes payable--stockholder............................ 2,469,000
----------
Notes payable repaid from proceeds offering........... $4,652,000
----------
Additional shares required to raise proceeds to pay
notes payable (at a net price of $10.87 per share)... 428,089
-----------
10,669,798
-----------
Pro forma net income.................................. $ 1,186,000
Interest paid on notes payable, net of income taxes... 318,000
-----------
Supplemental pro forma net income..................... $ 1,504,000
-----------
Supplemental pro forma net income per share........... $ 0.14
===========
</TABLE>
<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 the year then ended. 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
February 14, 1997
<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 January
30, 1997 (except for paragraph 8 of Note 12, as to which the date is March ,
1997), in Amendment No. 3 to the Registration Statement (Form S-1 No. 333-
09297) and related Prospectus of Computer Generated Solutions, Inc. for the
registration of shares of its common stock.
ERNST & YOUNG LLP
New York, New York
- -------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the completion
of the restatement of capital accounts described in Note 12 to the financial
statements.
Ernst & Young LLP
New York, New York
February 14, 1997
<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.
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
- -------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the completion
of the restatement of capital accounts described in Note 12 to the financial
statements.
BDO Seidman, LLP
New York, New York
February 14, 1997
<PAGE>
EXHIBIT 23.4
February 14, 1997
Computer Generated Solutions, Inc.
1675 Broadway
New York, New York 10019
Attn.: Mr. Philip Friedman
Re: Consent of Ira Z. Kevelson
Dear Sirs:
I hereby consent to being named as a director of Computer Generated
Solutions, Inc. (the "Company") upon consummation of the Company's proposed
initial public offering of shares of common stock (the "Offering") and the
inclusion of my name and related biographical information contained under the
caption "Management" in Amendment No. 3 to the Form S-1 Registration Statement
of the Company as filed with the Securities and Exchange Commission on February
14, 1997, and any subsequent amendments or supplements thereto in connection
with the Offering.
Very truly yours,
/s/ Ira Z. Kevelson
Ira Z. Kevelson
<PAGE>
EXHIBIT 23.5
February 14, 1997
Computer Generated Solutions, Inc.
1675 Broadway
New York, New York 10019
Attn.: Mr. Philip Friedman
Re: Consent of John J. Murphy
Dear Sirs:
I hereby consent to being named as a director of Computer Generated
Solutions, Inc. (the "Company") upon consummation of the Company's proposed
initial public offering of shares of common stock (the "Offering") and the
inclusion of my name and related biographical information contained under the
caption "Management" in Amendment No. 3 to the Form S-1 Registration Statement
of the Company as filed with the Securities and Exchange Commission on February
14, 1997, and any subsequent amendments or supplements thereto in connection
with the Offering.
Very truly yours,
/s/ John J. Murphy
John J. Murphy
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS OF COMPUTER GENERATED SOLUTIONS, INC. AS OF DECEMBER 31, 1996 AND 1995
AND THE RELATED STATEMENTS OF OPERATIONS FOR THE YEARS THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 264 57
<SECURITIES> 0 0
<RECEIVABLES> 9,237 10,791
<ALLOWANCES> 60 100
<INVENTORY> 0 0
<CURRENT-ASSETS> 9,563 10,928
<PP&E> 1,851 2,873
<DEPRECIATION> 592 976
<TOTAL-ASSETS> 11,653 13,776
<CURRENT-LIABILITIES> 7,620 7,905
<BONDS> 0 0
0 0
0 0
<COMMON> 1 1
<OTHER-SE> 1,407 3,254
<TOTAL-LIABILITY-AND-EQUITY> 11,653 13,776
<SALES> 35,947 57,487
<TOTAL-REVENUES> 35,947 57,487
<CGS> 3,007 8,123
<TOTAL-COSTS> 25,977 43,857
<OTHER-EXPENSES> 8,512 11,075
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 473 540
<INCOME-PRETAX> 985 2,015
<INCOME-TAX> 33 169
<INCOME-CONTINUING> 952 1,846
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 952 1,846
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
