S-1 1 ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on August 12, 2011

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

FUSIONSTORM GLOBAL INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   4813   75-2899198

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

8 Cedar Street, Suite 54A

Woburn, MA 01801

(781) 782-1900

(Address, including zip code, and telephone number, including

area code, of registrant’s principal executive offices)

 

 

James L. Monroe

FusionStorm Global Inc.

8 Cedar Street, Suite 54A

Woburn, MA 01801

(781) 782-1900

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Paul Bork, Esq.

Foley Hoag LLP

155 Seaport Boulevard #1600

Boston, MA 02210-2600

(617) 832-1000

 

Barbara L. Becker, Esq.

Gibson, Dunn & Crutcher LLP

200 Park Avenue

New York, NY 10166-0193

(212) 351-4000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 under the Securities Exchange Act of 1934. (Check one):

Large Accelerated Filer  ¨         Accelerated Filer  ¨         Non-accelerated Filer  x        Smaller Reporting Company  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Securities being Registered   Proposed
Maximum Aggregate
Offering Price(1)(2)
  Amount of
Registration
Fee

Common Stock, $0.01 par value per share

  $175,000,000   $20,318

 

(1) In accordance with Rule 457(o) under the Securities Act of 1933, as amended, the number of shares being registered and the proposed maximum offering price per share are not included in this table.
(2) Estimated solely for purposes of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act.

 

 

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 that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

 

SUBJECT TO COMPLETION, DATED AUGUST 12, 2011

PROSPECTUS

         Shares

LOGO

Common stock

 

 

This is the initial public offering of the common stock of FusionStorm Global Inc. We are offering          Shares of our common stock. No public market currently exists for our common stock.

We have applied to list our common stock on The NASDAQ Global Market under the symbol “FSTM.”

We anticipate that the initial public offering price will be between $         and $         per share.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 13 of this prospectus.

 

 

 
    Per share    Total  

 

 

Price to the public

  $                        $                        

Underwriting discount, and commissions

  $    $     

Proceeds to us (before expenses)

  $    $     

 

 

We have granted the underwriters the option to purchase          additional shares of common stock on the same terms and conditions set forth above if the underwriters sell more than              shares of common stock in this offering.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

Needham & Company, LLC, on behalf of the underwriters, expects to deliver the shares on or about                     , 2011.

 

 

Needham & Company, LLC

 

Janney Montgomery Scott  

Morgan Joseph TriArtisan

 

 

Prospectus dated                     , 2011


Table of Contents

TABLE OF CONTENTS

 

     Page  

Market and Industry Data

     ii   

Business Combination Information

     ii   

Prospectus Summary

     1   

Risk Factors

     13   

Special Note Regarding Forward-Looking Statements

     30   

The Business Combination

     31   

Use of Proceeds

     34   

Dividend Policy

     35   

Capitalization

     36   

Dilution

     37   

Selected Historical and Unaudited Pro Forma Combined Financial and Other Data

     38   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     43   

The IT Solutions Industry

     81   

Business

     84   

Management

     98   

Executive Compensation

     105   

Certain Relationships and Related Party Transactions

     117   

Principal Stockholders

     121   

Description of Capital Stock

     123   

Shares Eligible for Future Sale

     126   

Underwriting

     129   

Legal Matters

     135   

Experts

     136   

Where You Can Find Additional Information

     137   

Glossary of Terms

     138   

Index to Financial Statements

     F-1   

You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not authorized anyone to provide you with information that is different. We are offering to sell shares of our common stock, and seeking offers to buy shares of our common stock, only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock.

For investors outside the United States: neither we nor any of the underwriters have taken any action to permit a public offering of the shares of our common stock or the possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

 

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MARKET AND INDUSTRY DATA

The market and industry data and other statistical information used throughout this prospectus are based on independent industry publications. Although we believe that each of these publications is reliable, we have not independently verified market and industry data and other statistical information obtained from these third-party sources. By including such data and information, we do not undertake a duty to provide such data in the future or to update such data if updated. Some data in this prospectus are also based on our good faith estimates, which are derived from our review of internal surveys, independent industry publications, government publications, reports by market research firms or other published independent sources. Our estimates have not been verified by any independent source and involve risks and uncertainties and are subject to change based on various factors, including those discussed in the section entitled “Risk Factors.” None of the independent industry publications referred to in this prospectus were prepared on our behalf or at our expense. Some of the independent industry publications referred to in this prospectus are copyrighted and, in such circumstances, we have obtained permission from the copyright owners to refer to such information in this prospectus.

In particular, the reports issued by Gartner Inc., an independent information technology research and advisory firm (Gartner), and International Data Corporation, an information technology, telecommunications and technology research provider (IDC), described in this prospectus represent data, research, opinions or viewpoints published as part of syndicated subscription services available only to clients, by each of Gartner and IDC, and are not representations of fact. We have been advised by each of Gartner and IDC that its respective reports speak as of their original publication date (and not as of the date of this prospectus) and the opinions expressed in these reports are subject to change without notice.

The discussion above does not, in any manner, disclaim our responsibilities with respect to the disclosures contained in this prospectus.

In addition, we refer in this prospectus to various clients that are U.S. government entities. However, a reference by us to a U.S. government entity in this prospectus is not an endorsement of us or of this offering by any such U.S. government entity, and should not be construed or interpreted as such.

 

 

BUSINESS COMBINATION INFORMATION

Except as otherwise indicated or unless the context otherwise requires, references to “we,” “our,” “us” or the “Company” refer to FusionStorm Global Inc. and the entities that will be its consolidated subsidiaries following the merger and acquisitions described below. On May 14, 2011, we and our wholly owned subsidiary, FS Merger Sub, Inc. (Merger Sub), entered into an agreement and plan of merger with fusionstorm (FS) and John G. Varel, as representative of the FS shareholders, and on June 20, 2011, the parties entered into an amendment to that agreement and plan of merger (as amended, the merger agreement). Pursuant to the merger agreement, Merger Sub will merge with and into FS, with FS surviving the merger as our direct, wholly owned subsidiary. On May 31, 2011, we entered into a stock purchase agreement with Global Technology Resources, Inc. (GTRI), the shareholders of GTRI and Glenn Smith, as representative of the GTRI shareholders, pursuant to which we will acquire all of the issued and outstanding shares of GTRI. On June 2, 2011, we entered into a stock purchase agreement with Red River Computer Co., Inc. (Red River, and together with FS and GTRI, the Businesses), the shareholders of Red River and Richard Bolduc, as representative of the Red River shareholders, pursuant to which we will acquire all of the issued and outstanding shares of Red River. We will consummate the merger with FS contemporaneously with the closing of this offering, and acquire GTRI and Red River immediately thereafter. For a more detailed description of these transactions, see “The Business Combination,” beginning on page 31 of this prospectus.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider in making your investment decision. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed in the section entitled “Risk Factors” and the consolidated financial statements and accompanying notes included elsewhere in this prospectus, before making an investment decision. Unless otherwise noted, industry data is derived from publicly available sources, which we have not independently verified.

Overview

We are a provider of diversified information technology (IT) solutions to domestic and international commercial enterprises, as well as the public sector, including federal, state and local government entities, and educational institutions. We provide end-to-end IT solutions, including hardware and software, maintenance and support services, pre-sales and technical consulting, professional services and managed services, including hosting and cloud services, to address our clients’ business needs. We engage with our clients in all aspects of their IT infrastructure investment, providing services from the initial needs assessment and design to procurement and implementation to on-going support and hosting. We maintain relationships with many industry-leading technology original equipment manufacturers (OEMs), enabling us to recommend a wide range of solutions to our clients. Our consultative and technology agnostic approach allows us to deliver a seamless and integrated solution that best suits our clients’ requirements.

Our core competency is providing comprehensive, integrated IT solutions that align our clients’ technology needs with their business and strategic objectives. Our pre-sales engineers, specialized professional services engineers and subject matter experts work alongside our clients’ internal IT teams to analyze our clients’ existing IT architecture and determine the appropriate solution. We then design, procure and implement an integrated IT solution that combines hardware and software, including security and compliance tools, from leading technology vendors. Post-implementation, we provide our clients with support in the form of managed services and maintenance and support services. We also offer proprietary IT optimization tools and IT hosting and cloud services that help our clients cost-effectively transition to next generation technologies.

As technology and strategic business needs continue to evolve, our clients are increasingly challenged to modernize and upgrade their existing IT infrastructure. We help our clients keep pace with emerging technologies by offering a range of products and services, including: servers and storage; data center and network optimization; server, desktop and client virtualization; data protection; security and compliance tools; unified communications; and cloud-based services. We continue to specialize in a diverse range of vendor technologies and have achieved the highest certification levels with many leading OEMs. Some of our key OEM relationships include Adobe, BlueCoat, CA Technologies, Cisco, Citrix, Dell, Dell Compellent, EMC, F5, Hewlett Packard, Hitachi Data Systems, IBM, Juniper, McAfee, NetApp, Novell, Oracle, RedHat, Sonicwall, Symantec, VMware and Websense.

We offer a comprehensive suite of managed services, including hosting and cloud services and advanced technical resources to support our clients’ ongoing IT needs. Through our Network Operations Centers (NOCs) and data centers, we provide 24x7 remote monitoring services and network management tools, fully-managed and hosted IT solutions, and cloud-based infrastructure-as-a-service offerings. Our hosted and cloud-based offerings provide a secure and highly-scalable solution that affords our clients the flexibility to expand their IT spend as their businesses grow. Utilizing these services has allowed our clients to reduce their network and data center infrastructure and related operating and capital expenditures, and to focus on their core business activities while relying on us to keep their IT systems functional.

 

 

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Our engineers design, build, integrate and deliver business-driven technology solutions for our clients. As of March 31, 2011, we employed approximately 250 engineers, technicians and subject matter experts who collectively hold over 1,500 advanced certifications across more than 30 vendors and technologies. Our engineers generally average 12 years of experience. Our clients include commercial enterprises, from leading small businesses to large corporations, as well as the public sector. Representative clients we serve include Celera, Cost Plus, the Department of Veterans Affairs, eBay, Equinix, Facebook, the Food and Drug Administration, Fujitsu, Google, PNC Bank, Ross Stores, Safeway, Salesforce.com, Sony, Symantec, the U.S. Air Force, the U.S. Navy, Visa, VMware and Wal-Mart.com.

Our unaudited pro forma combined revenues and gross profit in 2010 were $727.3 million and $123.3 million, respectively. For the quarter ended March 31, 2011, our unaudited pro forma combined revenues and gross profit were $155.5 million and $29.4 million, respectively, representing growth of 25% and 23%, respectively, over the corresponding quarter in 2010. Our primary operations are based in the United States with offices and other facilities in 23 locations across the country, as well as leased and licensed space in six data center locations in the United States and two in Europe to support our hosting services.

The Business Combination

We were incorporated in 2009 to create and develop a leading, globally branded provider of diversified, end-to-end IT solutions. To date, we have conducted operations only in connection with our proposed acquisitions (which we refer to as the Business Combination) of FS, GTRI and Red River and with this offering. Contemporaneously with the closing of this offering, Merger Sub will merge with and into FS, with FS surviving the merger as our direct, wholly owned subsidiary, and immediately thereafter we will acquire GTRI and Red River.

We believe the Business Combination will enhance our competitive position and allow us to better serve our clients. Through broader geographical reach and expanded solutions offerings, such as managed services and hosting solutions, we will be able to provide a broader suite of solutions to our clients in the United States and internationally. We believe our increased scale will strengthen relationships with our OEM vendors and international clients. Finally, we believe that the Business Combination will allow us to leverage our 15-year history (on average) to implement best practices and drive operational improvements.

The IT Solutions Industry

Companies are increasingly reliant on IT to drive business growth and to facilitate faster, more responsive and lower-cost business operations. With the increasing complexity of various technologies and how they work together, we believe that there has been a fundamental shift in the industry whereby companies have moved from buying hardware, software and services from different vendors to buying an integrated solution from an IT solutions provider. This trend is largely driven by limited in-house capacity, higher costs and challenges related to internal development, deployment and maintenance of complex IT infrastructure. We offer technology products, maintenance and support services, professional services and managed services across six large and growing technology areas, which we believe meet the need for evolving IT solutions.

 

 

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Technologies

  

Description of Services and Market Size

Data Center / Virtualization

   We provide solutions for clients seeking alternative data center and IT strategies such as managed hosting, cloud computing and colocation, to affordably and reliably manage their core business processes. The global data center outsourcing market was estimated to be $105 billion in 2010, and is forecasted to grow to $127 billion by 2015 at a compound annual growth rate (CAGR) of 3.8% (Source: Gartner report G00213965, March 2011). The total market size for virtualization hardware, software and consulting services in 2009 was estimated to be $38 billion and is forecasted to grow to $62 billion by 2013 at a CAGR of 12.9% (Source: IDC report 227532, March 2011).

Enterprise Network

Infrastructure

   We design and implement solutions to meet our clients’ growing demands for network bandwidth and network infrastructure services that can ensure uninterrupted network availability. The worldwide enterprise networking market is expected to grow from $35 billion in 2010 to $55 billion by 2015 at a CAGR of 9.6% (Source: IDC report 227416, March 2011).

Unified Communications

   We provide solutions for clients seeking to integrate email, voice and video communication technologies for mobile access, employee connectivity to enterprise systems and collaboration with geographically dispersed teams. The U.S. unified communications market was estimated to be $7 billion in 2009, forecasted to grow to $13 billion by 2014 at a CAGR of 13.3% (Source: IDC Report 228281, May 2011).

Managed Services and Cloud

Computing

   We provide managed network services including managed voice, VPN, conferencing, security and router services, to help clients achieve the solid networking foundation needed for strategic business-focused IT initiatives and to reap the benefits of emerging IT delivery and cloud computing. The worldwide managed network services market is expected to grow from $50 billion in 2010 to $78 billion by 2014 at a CAGR of 11.5% (Source: IDC report 223320, May 2011). Worldwide cloud application infrastructure and cloud system infrastructure spending is expected to grow from $4 billion in 2010 to $22 billion in 2015 at a CAGR of 40.1% (Source: Gartner report G00213892, June 2011).

IT Security Services

   We help our clients design and implement security solutions that maintain regulatory compliance and proactively monitor networks for threats. The worldwide security services market was estimated to be $35 billion in 2010, and is expected to grow to $63 billion by 2015 at a CAGR of 12.5% (Source: IDC report 228206, May 2011).

Mobility

   We help our clients achieve uninterrupted access to corporate networks, data and applications by integrating their mobile devices with the broader IT infrastructure, and designing and managing remote operations services and other mobile device management functions. The market size for worldwide mobile device management was estimated to be $265 million in 2009 and is forecasted to grow to $383 million by 2014 at a CAGR of 7.6% (Source: IDC report 224437, August 2010).

 

 

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Our Strengths

The key competitive strengths of our business are:

Strong Value Proposition to Our Clients

We provide value-added IT solutions that align our clients’ technology needs with their business and strategic objectives. As the primary point of contact for meeting our clients’ IT needs, we help them reduce the time, cost and effort needed to implement comprehensive multi-vendor IT solutions, which allows our clients to focus on other critical aspects of their businesses.

End-to-end Integrated IT Solutions

We provide end-to-end integrated IT solutions, including hardware and software, maintenance and support services, professional services and managed hosting. Our pre-sales engineers rely on their experience and domain expertise to recommend the appropriate solutions from leading OEM vendors to our clients. Our professional services engineers provide a full spectrum of provisioning, configuration, testing and full implementation services to deliver a seamless, integrated solution. We also offer a complete managed services offering, including remote monitoring, cloud services, managed hosting, hosted applications, virtual desktop infrastructure (VDI), backup and recovery, data protection, managed voice over internet protocol (VoIP) and security testing and monitoring. We believe we are well positioned to help our clients proactively manage, support and upgrade their IT infrastructure as technology and business needs evolve.

Broad Vendor Relationships

We maintain strong relationships with multiple leading OEMs and distributors to ensure that our clients can leverage state-of-the-art hardware, software and other solutions across an array of vendors rather than from a single vendor. This technology agnostic approach enables us to provide our clients with an optimal IT solution that meets their needs. Our relationships with technology vendors and OEMs include storage providers such as Dell Compellent, EMC, Hitachi Data Systems and NetApp; virtualization providers such as RedHat and VMware; security providers such as BlueCoat, McAfee, Sonicwall, Symantec and Websense; diversified IT hardware and software providers such as Hewlett Packard, IBM and Oracle; networking providers such as Cisco, F5 and Juniper; and other software providers such as Adobe, CA Technologies and Novell.

Technical Expertise

To deliver our solutions, we employed approximately 250 engineers, technicians and subject matter experts as of March 31, 2011, who collectively hold over 1,500 advanced certifications across more than 30 vendors and technologies. Our engineers generally average 12 years of experience. Our pre-sales engineers work closely with our clients’ IT teams to identify the appropriate technologies to address their business needs. Our engineers develop and maintain expertise in the configuration, installation and operational support for multiple OEM solutions. Our subject matter experts possess expertise in a broad range of technologies, including compliance, computing, networking, storage, virtualization, cloud services and data center optimization. They continue to expand their technology skills, spending a significant portion of their time on acquiring new certifications and keeping up with emerging technologies.

 

 

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Client-centric Approach

Our consultative, technology agnostic strategy allows us to provide solutions that best serve the interests of our clients and earns us the role of a trusted advisor. Our flexible engagement model allows us to address our clients’ needs quickly and consistently. For example, we believe that once a need is identified, we typically are able to start servicing our clients faster than our larger competitors. While our scale allows us to serve our clients nationwide and internationally, our local offices enable us to maintain client relationships and ensure timely response to client needs. We believe our flexible, client-centric approach, record of excellent customer service, broad and deep technology expertise, proprietary tools and established processes and procedures are key differentiators that allow us to continue to effectively serve our clients.

National Coverage and Scale

We have a broad geographic reach and scale that allows us to serve our domestic and international clients throughout the United States and globally. Our three divisional hubs located in San Francisco, California, Claremont, New Hampshire and Denver, Colorado, and 28 offices and other facilities across the United States and Europe allow us to provide nationwide and international coverage to our clients, while maintaining a local relationship with our single-location clients. In order to ensure effective service for our government clients, as of March 31, 2011 we maintained office locations in Denver, Colorado, Reston, Virginia, Rockville, Maryland and San Diego, California. We believe our national coverage and scale appeals to large enterprises, mid-market businesses, smaller companies and the public sector seeking a long-term trusted partner that is able to deliver a broad array of integrated IT solutions.

Longstanding Relationships with Diverse Client Base

We served approximately 3,500 clients as of March 31, 2011, ranging from leading small businesses to large corporations, as well as the public sector. For the year ended December 31, 2010, we derived approximately 60% and 40% of our unaudited pro forma combined revenues from commercial clients and public sector clients, respectively. Our clients operate in a range of industries including financial services and insurance, healthcare, technology, software, electronics, Internet/Web 2.0, media, retail, federal, state and local governmental entities, and defense contractors. We believe that our record of historical performance, understanding of our clients’ technology infrastructures and experience delivering superior results enable us to strengthen relationships with existing clients, win new clients, and offer a significant advantage in continuing to be chosen for our clients’ new technology initiatives. As an illustration of this strength, all of our top 10 clients in 2010 purchased solutions from us in at least each of the previous three years.

Our Strategies

Our objective is to increase our market position as a leading comprehensive IT solutions provider on a global scale. To achieve that objective, we utilize the following strategies:

Grow Revenues from Existing Clients

We believe that our client base is currently underpenetrated. We intend to leverage our extensive understanding of our clients’ needs and existing technology infrastructures and best practices developed over years of successful implementation in order to strengthen our client relationships and expand the scope of the services we provide to our existing clients. We further aim to capitalize on expanded vendor relationships and certifications that will result from the Business Combination to offer existing clients a more comprehensive solutions set.

 

 

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Attract New Clients

We intend to capitalize on our scale, the scope of our domain expertise and our core capabilities, as well as our reputation as a trusted advisor to grow our client base in the United States and internationally. We believe we can capitalize on the growing demand for the types of solutions we provide to cultivate new relationships across commercial enterprises and the public sector. We also intend to leverage our technology expertise and industry knowledge to broaden our focus and expand our operations in various industries including healthcare and retail.

Expand Professional and Managed Services Offerings

We intend to strengthen our professional services capabilities by continuing to hire recognized domain and consulting experts and continuing to develop the skills and certifications of our professional services engineers. We also plan to enhance our managed and cloud services facilities and capabilities, and cross-sell these services to our existing broad client base, as well as to new clients. As companies begin to turn to cloud computing technologies and services, we intend to meet this demand by offering a full range of consulting, migration and hosting services to enable this transition.

Continue to Innovate and Deliver New Solutions

We intend to broaden our capabilities and solutions to help our clients keep pace with emerging technologies. We expect to continue to invest in our engineers to improve their technology skills, which will allow them to keep current with new technology initiatives, such as virtualization and cloud-related services, and acquire new certifications.

Capitalize on Opportunities Across Our Combined Business

We believe the Business Combination will allow us to pursue new business opportunities. We intend to leverage our vendor relationships and certifications, and the capabilities of each of the Businesses, to offer a more comprehensive solutions set to our combined client base. We expect that our increased scale will bring us more favorable volume-based vendor discounts and vendor services that were previously not available to us. We expect to utilize government contract vehicles across the Businesses to pursue a greater range of contract opportunities than were available to the Businesses prior to the Business Combination. We believe that the Business Combination will also enable us to leverage best practices and proprietary tools across the combined organization, as well as broader geographic and client bases, to deliver best-in-class customer service to our clients.

Pursue Strategic Acquisitions

The IT solutions market is a fragmented industry and we believe there may be a substantial number of IT firms that could be acquired and would be accretive to our financial results. We intend to expand our domestic coverage by acquiring IT solutions providers that allow us to strengthen our geographic reach, vendor relationships, solutions offerings and client base. We also intend to grow our business internationally by acquiring IT solutions providers that have strong vendor relationships, a broad client base and proven services capabilities.

 

 

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Risk Factors

Investing in our common stock involves substantial risk. While we have set forth our competitive strengths and growth strategies above, we are engaged in a very competitive industry and our business involves numerous risks and uncertainties. The factors that could adversely affect our results and performance are summarized below and discussed in the section entitled “Risk Factors” immediately following this summary. Before you invest in our common stock, you should carefully consider the risks described under “Risk Factors” and the other information contained in this prospectus, including our consolidated financial statements and the related notes.

 

   

We have no previous operating history as a combined company, and we may not be able to successfully manage our businesses on a combined basis.

 

   

We may be unable to achieve some or all of the benefits we expect to achieve from the integration of our businesses.

 

   

Our growth is dependent on increasing sales to existing clients and attracting new clients for our products and services.

 

   

Our results depend on the continued growth of the market for IT products and services.

 

   

Failure by us to anticipate and meet our clients’ technological needs could adversely affect our competitiveness and growth prospects.

 

   

We operate in a highly competitive market and may be required to reduce the prices for our products and services to remain competitive, which could adversely affect our profitability and financial condition.

 

   

We may be unable to integrate future acquisitions successfully and such acquisitions may fail to achieve the financial results we expect.

 

   

We may not be successful in implementing our growth strategy and if we are unable to manage our anticipated growth effectively, our business and prospects could be adversely affected.

 

   

We will have a large amount of intangible assets and goodwill as a result of the Business Combination, and if these assets and goodwill become impaired, our earnings would be adversely affected.

 

   

Our predecessor’s management and independent auditors have identified material weaknesses in our predecessor’s internal controls, and we may be unable to develop, implement and maintain appropriate controls in future periods, which may lead to errors or omissions in our consolidated financial statements.

Corporate Information

We were incorporated in Delaware in 2009 for the purpose of creating an IT solutions provider through the acquisitions of FS, GTRI and Red River. See the section entitled “The Business Combination.” Our principal executive office is located at 8 Cedar Street, Woburn, Massachusetts 01801, and our telephone number at this location is (781) 782-1900. Our website address will be www.fusionstormglobal.com. The information on, or that will be accessible through, our website is not part of this prospectus. Our business headquarters is located at 124 Grove Street, Franklin, Massachusetts 02038.

 

 

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The Offering

 

Common stock offered by us

        shares

 

Common stock to be outstanding immediately after this offering

        shares

 

Over-allotment option

        shares

 

Use of proceeds

We estimate that our net proceeds from the sale of the common stock in this offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses, will be approximately $         million, assuming an initial public offering price of $         per share, which is the midpoint of the range listed on the cover page of this prospectus. We intend to use $         million of these proceeds to pay the cash portion of the purchase price for our acquisitions of FS, GTRI and Red River, and an additional $         million to repay certain indebtedness of FS, GTRI and Red River. We intend to use the remaining $         million of net proceeds for working capital and other general corporate purposes. Please see the section entitled “Use of Proceeds.”

 

Risk factors

Please see the “Risk Factors” section of this prospectus for a discussion of factors that you should consider carefully before deciding to invest in shares of our common stock.

 

Proposed NASDAQ Global Market symbol

FSTM

The number of shares of our common stock to be outstanding after this offering is based on             shares of common stock issued and outstanding as of                     , 2011. This calculation:

 

   

excludes          shares of our common stock reserved as of                     , 2011 for future issuance under our stock-based compensation plans, none of which have been granted;

 

   

assumes no exercise by the underwriters of their option to purchase additional shares of our common stock to cover over-allotments, if any; and

 

   

includes the shares of our common stock issuable to the shareholders of FS, GTRI and Red River pursuant to the Business Combination.

Unless otherwise indicated, the information we present in this prospectus assumes and reflects the following:

 

   

the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws to be effective upon the closing of this offering;

 

   

no exercise by the underwriters of their option to purchase additional shares of our common stock to cover over-allotments, if any;

 

   

a    -for-1 split of our common stock to be effected in connection with this offering; and

 

   

the completion of the Company’s proposed acquisitions of FS, GTRI and Red River.

 

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Summary Historical and Unaudited Pro Forma Combined Financial Data

FusionStorm Global Inc. was incorporated in 2009 for the purpose of creating an IT solutions provider through the acquisition of companies in the IT industry. The Company has no material assets and has conducted no operations to date, other than those in connection with this offering and the Business Combination in which we will acquire FS pursuant to a merger between FS and our subsidiary, FS Merger Sub, Inc., contemporaneously with the closing of this offering, and will acquire GTRI and Red River immediately thereafter.

We have identified FS as our predecessor company (Predecessor) for accounting purposes, and the Predecessor is considered the acquiror of both GTRI and Red River for accounting purposes. The following table presents both Predecessor summary historical information as well as summary unaudited pro forma combined information which reflects the summary historical financial data for the Predecessor, reflecting: (i) certain pro forma adjustments to the historical financial statements of the Company, FS, GTRI and Red River; (ii) completion of the Business Combination; and (iii) the closing of this offering and the application of the net proceeds of this offering. The summary financial data for the Predecessor is set forth below for the years ended December 31, 2008, 2009 and 2010, and is derived from the Predecessor’s audited consolidated financial statements included elsewhere in this prospectus. The summary Predecessor balance sheet data as of March 31, 2011 and the summary statement of operations data for each of the three-month periods ended March 31, 2010 and 2011 is derived from the Predecessor’s unaudited financial statements that are included elsewhere in this prospectus.

The summary unaudited pro forma combined statement of operations data presented for the year ended December 31, 2010 and, for each of the three-month periods ended March 31, 2010 and 2011, combine the results of our Predecessor’s operations with those of the Company, GTRI and Red River, assuming the Business Combination and the closing of this offering occurred on January 1, 2010. The unaudited pro forma combined balance sheet data as of March 31, 2011 combines our Predecessor’s balance sheet with those of the Company, GTRI and Red River as of March 31, 2011, assuming the Business Combination and the closing of this offering occurred on March 31, 2011. The assumptions used and pro forma adjustments derived from such assumptions are based on currently available information and we believe such assumptions are reasonable under the circumstances. For a description of all such assumptions and adjustments used in preparing the unaudited pro forma combined financial statements, see “Unaudited Pro Forma Combined Financial Statements” included elsewhere in this prospectus. The summary unaudited pro forma combined financial statements are presented for informational purposes only, do not purport to represent what our results of operations or financial condition actually would have been had the relevant transactions been consummated on the dates indicated and are not necessarily indicative of our results of operations for any future period or our financial condition as of any future date.

 

 

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You should read this summary financial data together with “Unaudited Pro Forma Combined Financial Statements,” “Capitalization,” “Selected Historical and Unaudited Pro Forma Combined Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes of the Company, FS, GTRI and Red River included elsewhere in this prospectus.

 

    Predecessor     Pro Forma  
    Year ended December 31,     Three months
ended March 31,
    Year ended
December 31,
2010
    Three months ended
March 31,
 
    2008     2009     2010     2010     2011       2010     2011  
    ($ in thousands)  

Revenues(1)

  $ 249,396      $ 237,469      $ 376,308      $ 67,313      $ 94,339      $ 727,283      $ 123,941      $ 155,489   

Cost of revenue(1)

    192,105        182,746        304,958        51,390        74,398        603,944        100,001        126,122   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    57,291        54,723        71,350        15,923        19,941        123,339        23,940        29,367   

Operating expenses(2)

    51,473        68,771        76,049        19,909        17,465        117,667        28,609        26,905   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    5,818        (14,048     (4,699     (3,986     2,476        5,672        (4,669     2,462   

Interest expense(1)

    (4,853     (3,584     (3,063     (1,492     (2,550     (3,542     (1,574     (2,651

Other (expense) income(1)

    (73     294        (517     (13     (245     (405     89        (201
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    892        (17,338     (8,279     (5,491     (319     1,725        (6,154     (390

Income tax (expense) benefit(3)

    (1,061     6,197        2,127        1,411        99        (1,683     1,606        185   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

    (169     (11,141     (6,152  

 

(4,080

    (220     42        (4,548     (205

Income (loss) from discontinued operations

    1,376        (1,314     (10,205     (988     (61     (10,205     (988     (61
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 1,207      $ (12,455   $ (16,357   $ (5,068   $ (281   $ (10,163   $ (5,536   $ (266
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other

Financial Data (unaudited):

               

EBITDA(4)

            $ 5,929      $ (3,451   $ 5,240   

Adjusted EBITDA(5)

            $ 33,140      $ 5,558      $ 7,507   

 

     Predecessor     Pro Forma(6)  
     March 31,  
     2011     2011  
     ($ in thousands)  

Consolidated Balance Sheet Data:

    

Cash and cash equivalents

   $ 4,063      $ 27,524   

Total current assets

     135,612        225,269   

Total assets

     182,148        349,392   

Current portion of long-term debt

     26,872        -   

Total current liabilities

     168,847        199,863   

Long-term debt, net of current portion

     1,797        -   

Total liabilities

     184,540        229,306   

Total shareholders’ (deficit) equity

     (2,392     120,086   

 

(1) Pro forma reflects the disposition of Relevant Security Corporation (RSC) by GTRI and the termination of the status of RRCC Realty, LLC (RR Realty) as a variable interest entity consolidated with Red River for accounting purposes.
(2)

Pro forma adjustments include the elimination of certain operating costs of the Businesses, including (i) the elimination of certain salary and related expenses attributable to the prior owners of the Businesses, duplicative executives and other personnel, (ii) the contractual termination of a consulting agreement between us and Monroe & Company, LLC, (iii) the elimination of expenses related to a charitable foundation associated with FS

 

 

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  that will be terminated upon the closing of the Business Combination, (iv) the disposition by GTRI of RSC and (v) the elimination of certain expenses related to RR Realty. These eliminations are partially offset by incremental amortization expense resulting from the intangible assets to be acquired in the acquisitions of GTRI and Red River.
(3) Pro forma adjustment represents the additional income tax expense resulting from GTRI and Red River’s loss of their status as Subchapter S Corporations in the Business Combination.
(4) We present EBITDA in this prospectus to provide investors with a supplemental measure of our operating performance. EBITDA is a non-GAAP financial measure. We define EBITDA as net income (loss) before interest expense, income tax benefit (expense) and depreciation and amortization. The Company believes that EBITDA may be useful to investors for measuring the Company’s ability to make new investments and to meet working capital requirements. EBITDA as calculated by the Company may not be consistent with calculations of EBITDA by other companies. EBITDA should not be considered in isolation from or as a substitute for net income (loss), cash flows from operating activities or other statements of operations or cash flows prepared in accordance with generally accepted accounting principles or as a measure of profitability or liquidity.
(5) We define Adjusted EBITDA as net income (loss) before interest expense, income tax benefit (expense), depreciation and amortization, loss from discontinued operations, commission expense, share-based compensation and legal fees. We believe that Adjusted EBITDA is an important measure of our operating performance because it allows management, lenders, investors and analysts to evaluate and assess our core operating results from period to period after removing the impact of changes to our capitalization structure, income tax status and other non-operational items that affect comparability. Adjusted EBITDA is not intended to represent cash flow from operations as defined by U.S. GAAP and should not be used as an alternative to net income (loss) as an indicator of operating performance or to cash flow as a measure of liquidity. Because not all companies use identical calculations, these presentations of Adjusted EBITDA may not be comparable to other similarly-titled measures used by other companies. Adjusted EBITDA is calculated as follows:

 

     Pro Forma  
     Year ended
December 31,
2010
    Three Months
ended March 31,
2010
    Three Months
ended March 31,
2011
 
     ($ in thousands)  

Reconciliation of Adjusted EBITDA:

      

Net (loss) income

   $ (10,163   $ (5,536   $ (266

Interest expense

     3,542        1,574        2,651   

Income tax expense (benefit)

     1,683        (1,606     (185

Depreciation and amortization

     10,867        2,117        3,040   
  

 

 

   

 

 

   

 

 

 

EBITDA

     5,929        (3,451     5,240   

Loss from discontinued operations(a)

     10,205        988        61   

Share-based compensation(b)

     8,014        4,763        909   

Commission expense(c)

     5,000        926        961   

Legal fees(d)

     3,992        2,332        336   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (unaudited)

   $ 33,140      $  5,558      $  7,507   
  

 

 

   

 

 

   

 

 

 

 

  (a) Reflects the elimination of income (loss) from discontinued operations in an amount of $10,205 for the year ended December 31, 2010, $988 for the three months ended March 31, 2010, and $61 for the three months ended March 31, 2011 relating to the October 2010 disposition of assets and liabilities of two subsidiaries of the Predecessor.
  (b) Reflects the elimination of expenses of $8,014 for the year ended December 31, 2010, $4,763 for the three months ended March 31, 2010, and $909 for the three months ended March 31, 2011 attributable to share-based compensation of the Predecessor and GTRI. The stock-based compensation of the Predecessor comprises options to acquire shares of Predecessor’s common stock pursuant to its 2008 Restated Stock Option Plan and a phantom stock plan for the benefit of Daniel Serpico. Pursuant to the merger agreement, by which the Company will acquire the Predecessor, all outstanding options to acquires shares of the Predecessor’s common stock will be exercised or terminated prior to completion of the Business Combination.

 

 

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  (c) Reflects the elimination of certain cash commission expenses of $5,000 for the year ended December 31, 2010, $926 for the three months ended March 31, 2010, and $961 for the three months ended March 31, 2011 for which stock-based compensation will be substituted as contemplated by the merger agreement pursuant to which the Company will acquire the Predecessor.
  (d) Reflects the elimination of expenses of $3,992 for the year ended December 31, 2010, $2,332 for the three months ended March 31, 2010, and $336 for the three months ended March 31, 2011 attributable to legal fees and settlement payments incurred in connection with certain legal proceedings in which the Predecessor or Red River was a party.
(6) Reflects an assumed offering of $175,000 after deducting (i) estimated underwriting discounts and commissions, (ii) estimated offering expenses, (iii) the cash portion of the purchase price for FS, GTRI and Red River, (iv) the repayment of certain indebtedness of FS, GTRI and Red River and (v) for accrued expense obligations. Also reflects purchase accounting adjustments to record GTRI and Red River’s assets acquired and liabilities assumed at fair value.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. Before investing in our common stock, you should carefully consider each of the following risk factors and all of the other information set forth in this prospectus (including our financial statements and the related notes appearing at the end of this prospectus). If any of the events contemplated by the following discussion of risks should occur, our business, financial condition, results of operations and future prospects would likely be materially and adversely affected. As a result, the market price of our common stock could decline, and you could lose all or part of your investment.

Risks Related to our Business and Competition

We have no previous operating history as a combined company, and we may not be able to successfully manage our businesses on a combined basis.

We were formed in November 2009 and, to date, we have generated no revenues and have conducted operations only in connection with this offering and our proposed acquisitions of FS, GTRI and Red River. FS, GTRI and Red River have never been operated as a combined company and we will acquire FS, GTRI and Red River using proceeds of this offering.

We currently do not have a centralized financial reporting system and initially will rely on the existing reporting systems of each of FS, GTRI and Red River. If we do not develop effective systems and procedures, including accounting and financial reporting systems, to manage our combined operations, this could result in inconsistent operating and financial practices and our profitability could be adversely affected. In addition, the unaudited pro forma combined financial statements of the Company, FS, GTRI and Red River cover periods during which these businesses were not under common control or management and, therefore, may not be indicative of our future financial condition or operating results.

We may be unable to achieve some or all of the benefits we expect to achieve from the integration of our businesses.

To date, FS, GTRI and Red River have operated independently of one another. Following this offering, we intend to operate FS, GTRI and Red River (and any subsequently acquired business) as our wholly owned subsidiaries. The integration of FS, GTRI and Red River may involve unforeseen difficulties and may require a disproportionate amount of our management’s attention and of our financial and other resources. We expect to incur substantial expenses in connection with the integration process. In addition, each of FS, GTRI and Red River offer different services, have different capabilities, target different clients and have different management styles.

Although we believe that there are substantial opportunities to cross-market and integrate the businesses of FS, GTRI and Red River, the differences identified above increase the risk inherent in the integration of the three companies. There can be no assurance that we will be able to integrate the operations of FS, GTRI and Red River successfully or that we will be able to implement the necessary Company-wide systems and procedures to manage the operations of the combined enterprise successfully on a profitable basis or to implement our business and growth strategies. Our failure to integrate the operations of FS, GTRI and Red River successfully could have a material adverse effect on our business, financial condition and results of operations.

Our integration plans include certain programs intended to reduce our costs. If these cost reduction efforts are ineffective or our estimates of cost savings are inaccurate, our profitability could be negatively impacted. We may not be successful in achieving the operating efficiencies and operating cost reductions expected from these efforts, and may experience business disruptions associated with the restructuring and cost reduction activities. These efforts may not produce the full efficiency and cost reduction benefits that we expect. Further, such benefits may be realized later than expected, and the costs of implementing these measures may be greater than anticipated.

 

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Our growth is dependent on increasing sales to existing clients and attracting new clients for our products and services.

We plan to significantly expand the number of clients we serve in order to diversify our client base and increase our revenues. We also plan to increase revenues from our existing clients by identifying and selling additional products and services to them. Our ability to attract new clients, as well as our ability to increase revenues from existing clients, depends on a number of factors, including our ability to offer high quality services at competitive prices, the strength of our competitors and the capabilities of our sales and marketing teams. If we are not able to continue to attract new clients or to expand business from our existing clients in the future, we may not be able to increase our revenues as quickly as we anticipate or at all.

Our results depend on the continued growth of the market for IT products and services.

Our IT solutions are designed to address the growing markets for off-premises services (including migrations, consolidations, cloud computing and disaster recovery), technology integration services (including storage and data protection services and the implementation of virtualization solutions) and managed services (including operational support and client support). These markets are still evolving. Competing technologies and services or reductions in corporate spending may reduce the demand for our products and services.

Our competitiveness depends significantly on our ability to keep pace with the rapid changes in IT. Failure by us to anticipate and meet our clients’ technological needs could adversely affect our competitiveness and growth prospects.

We operate in an industry characterized by rapid technological innovation, changing client needs, evolving industry standards and frequent introductions of new products, product enhancements, services and distribution methods. Our success depends on our ability to develop expertise with these new products, product enhancements, services and distribution methods and to implement IT consulting and professional services, technology integration and managed services that anticipate and respond to rapid and continuing changes in technology, industry dynamics and client needs. The introduction of new products, product enhancements and distribution methods could decrease demand for current products or render them obsolete. Sales of products and services can be dependent on demand for specific product categories, and any change in demand for or supply of such products could have a material adverse effect on our net sales and/or cause us to record write-downs of obsolete inventory, if we fail to adapt to such changes in a timely manner.

As we encounter new client requirements and increasing competitive pressures, we will likely be required to modify, enhance, reposition or introduce new IT solutions and service offerings. We may experience difficulties that could delay or prevent the successful development, introduction and marketing of services and solutions that respond to technological changes or evolving industry standards, or fail to develop services and solutions that adequately meet the requirements of the marketplace or achieve market acceptance. We may not be successful in doing so in a timely, cost-effective and appropriately responsive manner, or at all, which could adversely affect our competitive position and our financial condition. All of these factors make it difficult to predict our future operating results, which may impair our ability to manage our business and our investors’ ability to assess our prospects.

For example, there has been a growing trend in recent years for the off-premises delivery of products and services, whereas our business has historically been one in which our products and services were delivered to our clients at their business premises. Many of our clients have adopted or are adopting cloud computing, and the technologies and services for cloud computing are generally provided remotely. The growing trend toward the adoption of applications provided by cloud computing could adversely affect our business, financial condition and results of operations, if we fail to sell our cloud services offerings or they do not meet the demands of our clients.

 

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We operate in a highly competitive market and may be required to reduce the prices for our products and services to remain competitive, which could adversely affect our profitability and financial condition.

Our industry is developing rapidly and related technology trends are constantly evolving. In this environment, we face significant price competition from our competitors. We may be unable to offset the effect of declining average sales prices through increased sales volumes and/or reductions in our costs. Furthermore, we may be forced to reduce the prices of the products and services we sell in response to offerings made by our competitors. Finally, we may not be able to maintain the level of bargaining power that we have enjoyed in the past when negotiating the prices of our services.

We face substantial competition from other national, multi-regional, regional and local value-added resellers and IT service providers, some of which may have greater financial and other resources than we do or that may have more fully developed business relationships with clients or prospective clients than we do. Many of our competitors compete principally on the basis of price and may have lower costs or accept lower selling prices than we do and, therefore, we may need to reduce our prices. In addition, manufacturers may choose to market their products directly to end-users, rather than through IT solutions providers such as us, and this could adversely affect our business, financial condition and results of operations.

Our profitability is dependent on the rates we are able to charge for our products and services. The rates we are able to charge for our products and services are affected by a number of factors, including:

 

   

our clients’ perceptions of our ability to add value through our services;

 

   

introduction of new services or products by us or our competitors;

 

   

our competitors’ pricing policies;

 

   

our ability to charge higher prices where market demand or the value of our services justifies it;

 

   

our ability to accurately estimate, attain and sustain contract revenues, margins and cash flows over long contract periods;

 

   

procurement practices of our clients; and

 

   

general economic and political conditions.

If we are not able to maintain favorable pricing for our products and services, our profit margin and our profitability could suffer.

We may be unable to integrate future acquisitions successfully and such acquisitions may fail to achieve the financial results we expect.

One of our strategies is to increase our revenues and to expand the markets we serve through the acquisition of additional companies or assets which may provide new manufacturer or distributor relationships, extend our geographic coverage or enhance our core competencies or our ability to provide services. We expect to spend significant time and effort identifying, completing and integrating acquisitions. Moreover, we expect to face competition for acquisition candidates which may limit the number of acquisition opportunities available to us and may result in higher acquisition costs. There can be no assurance that we will be able to identify, acquire or profitably manage additional companies or successfully integrate such additional companies into our business without substantial costs, delays or other problems. In addition, there can be no assurance that any acquired company will achieve sales and profitability that will justify the investment in that company. Our inability to identify appropriate acquisition candidates, to acquire such candidates at prices acceptable to us or to manage such acquired businesses profitably could have a material adverse effect on our business, financial condition and results of operations. In addition, acquisitions may involve a number of special risks, including adverse short-term effects on our reported operating results, diversion of management’s attention, dependence on retention, hiring and training of key personnel, risks associated with unanticipated problems or legal liabilities and amortization of acquired intangible assets, some or all of which could have a material adverse effect on our business, financial condition or results of operations.

 

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There can be no assurance that our growth strategy will be successful or that we will be able to generate cash flow sufficient to fund our operations and to support internal growth. Our inability to achieve internal earnings growth or otherwise execute our growth strategy could have a material adverse effect on our business, financial condition and results of operations.

We may not be successful in implementing our growth strategy and if we are unable to manage our anticipated growth effectively, our business and prospects could be adversely affected.

FS, GTRI and Red River have recently experienced rapid growth and significantly expanded their businesses. In addition to organic growth, FS and GTRI have also grown through strategic acquisitions. As of March 31, 2011, we had 29 facilities in 14 states across the United States and two facilities in Europe. As of March 31, 2011, FS, GTRI and Red River collectively had 658 employees. We intend to continue expanding in the foreseeable future to pursue existing and potential market opportunities. This rapid growth has placed, and will continue to place, significant demands on our management and our administrative, operational and financial infrastructure. Continued expansion increases the challenges we face in:

 

   

recruiting, training, developing and retaining sufficiently skilled technical, sales and management personnel;

 

   

creating and capitalizing upon economies of scale;

 

   

managing a larger number of clients in a greater number of industries and locations;

 

   

maintaining effective oversight of personnel and offices;

 

   

coordinating work among offices and project teams and maintaining high resource utilization rates;

 

   

integrating new management personnel and expanded operations while preserving our culture and values;

 

   

developing and improving our internal administrative infrastructure, particularly our financial, operational, human resources, communications and other internal systems, procedures and controls; and

 

   

adhering to and further improving our high quality and process execution standards and maintaining high levels of client satisfaction.

Our growth strategy includes broadening our service and product offerings, implementing an aggressive marketing plan and deploying leading technologies. There can be no assurance that our systems, procedures and controls will be adequate to support our operations as they expand. As we introduce new services or enter into new markets, we may face new market, technological and operational risks and challenges with which we are unfamiliar, and it may require substantial management efforts and skills to mitigate these risks and challenges. The significant added responsibilities imposed on members of senior management as a result of future growth may also include the need to identify, recruit and integrate senior level managers and executives. There can be no assurance that we will be able to identify and retain such additional management. If we experience any of these problems, our business, results of operations and financial condition could be materially and adversely affected.

We will have a large amount of intangible assets and goodwill as a result of the Business Combination, and if these assets and goodwill become impaired, our earnings would be adversely affected.

As of March 31, 2011, we had unaudited pro forma combined intangible assets and goodwill of $105.2 million, which represented 30% of our assets on a pro forma combined basis. Goodwill represents the excess of the amount we pay for our acquisitions over the fair value of the acquired assets. FS has goodwill related to previous acquisitions, and will have additional goodwill related to our acquisitions of GTRI and Red River. As we implement our business acquisition strategy, we may be required to account for similar premiums paid on future acquisitions in the same manner. We do not amortize acquired goodwill but instead we test it for impairment on an annual basis based upon a fair value approach. Testing for impairment of goodwill involves an estimation of the fair value of our net assets and involves a high degree of judgment and subjectivity. In addition,

 

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while we amortize our intangible assets, they may also be subject to impairment testing. If we have any significant impairment to our intangible assets or goodwill, it would have a material adverse effect on our reported financial results for the period in which the charge is taken and could result in a decrease in the market price of our common stock.

Our Predecessor’s management and independent auditors have identified material weaknesses in our Predecessor’s internal controls, and we may be unable to develop, implement and maintain appropriate controls in future periods, which may lead to errors or omissions in our consolidated financial statements.

In connection with the preparation of financial statements, FS’s management team and independent registered public accounting firm identified certain weaknesses in FS’s internal controls that were considered to be material weaknesses. Specifically, the identified issues relate to controls over the financial reporting process and the timely identification and resolution of accounting issues in the areas of revenue recognition, valuation of equity instruments, impairment of goodwill, acquisition accounting, classification of and accounting for warrants, and income and sales taxes.

FS has implemented and continues to implement remedial measures designed to address these material weaknesses. We can give no assurance that the measures that FS has taken and that we plan to take in the future will remediate the material weaknesses identified, or that any additional material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal controls over financial reporting or circumvention of these controls. If these remedial measures are insufficient to address these material weaknesses, or if additional material weaknesses or significant deficiencies in FS’s or our internal controls are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results. Following completion of the Business Combination, and while remediating the material weaknesses in the FS control environment noted above, we will also be integrating the control environments at GTRI and Red River. The combination of the control environments of FS, GTRI and Red River will add a level of complexity and cost to our efforts to improve our internal controls.

We may be unable to make, on a timely basis, the changes necessary to operate as a consolidated, publicly-owned company.

Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, require annual assessment of our internal controls over financial reporting, and attestation of our assessment by our independent registered public accounting firm. The standards that must be met for management to assess the internal controls over financial reporting as effective are evolving and complex, and require significant documentation, testing and possible remediation to meet the detailed standards. We expect to incur significant expenses and to devote resources to Section 404 compliance on an ongoing basis. It is difficult for us to predict how long it will take or how costly it will be to complete the assessment of the effectiveness of our internal controls over financial reporting for each year and to remediate any deficiencies in our internal controls over financial reporting. As a result, we may not be able to complete the assessment and remediation process on a timely basis.

In addition, the attestation process by our independent registered public accounting firm is new and we may encounter problems or delays in completing the implementation of any requested improvements and receiving an attestation of our assessment by our independent registered public accounting firm. In the event that our Chief Executive Officer, Chief Financial Officer or independent registered public accounting firm determines that our internal controls over financial reporting are not effective as defined under Section 404, we cannot predict how regulators will react or how the market price of our common stock will be affected; as such, we believe that there is a risk that investor confidence and share value may be negatively impacted. We estimate the costs of completing the implementation of compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and the assessment of internal controls, the costs associated with our ongoing compliance with Section 404 of the Sarbanes-Oxley Act of 2002, and the audit fees related to the attestation of internal controls to be substantial.

 

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Our sales are subject to quarterly and seasonal variations that may cause significant fluctuations in our operating results.

The timing of our revenues can be difficult to predict. Our sales efforts involve educating our clients about the use and benefit of the products we sell and our services and solutions, including their technical capabilities and potential cost savings to an organization. Clients typically undertake a significant evaluation process that has in the past resulted in a lengthy sales cycle, which typically lasts several months, and may last a year or longer. We spend substantial time, effort and money on our sales efforts without any assurance that our efforts will produce any sales during a given period.

In addition, there are certain cyclical trends in the capital spending patterns of some of our clients. Many of our U.S. federal government agency clients tend to spend a substantial portion of their IT budgets in the second half of the year following the U.S. federal budget process, and many of our commercial clients also spend a substantial portion of their IT budgets in the second half of the year. Other factors that may cause our quarterly operating results to fluctuate include changes in general economic conditions and the impact of unforeseen events. We believe that our revenues will continue to be affected in the future by cyclical trends. As a result, you may not be able to rely on period to period comparisons of our operating results as an indication of our future performance.

A delay in the completion of our clients’ budget processes could delay purchases of our products and services and have an adverse effect on our future revenues.

We rely on our clients to purchase products and services from us to maintain and increase our earnings, and client purchases are frequently subject to budget constraints, multiple approvals and unplanned administrative, processing and other delays. If sales expected from a specific client are not realized when anticipated or at all, our results could fall short of public expectations and our business, operating results and financial condition could be materially adversely affected.

In years when the U.S. federal government does not complete its budget process before the end of its fiscal year on September 30, government operations are typically funded pursuant to a “continuing resolution” that authorizes agencies to continue to operate, but does not authorize new spending initiatives. When the U.S. federal government operates under a continuing resolution, delays can occur in the procurement of our products and services. In addition, many state and local governments who are our clients may experience financial difficulties which may cause budget shortfalls and result in decreased demand for our products and services, which could cause our revenues to decrease.

Our profit margins depend, in part, on the volume of products and services sold, and we may be unable to achieve increases in our profit margins in the future.

FS, GTRI and Red River have had low gross profit margins historically, and their past growth in net income has been fueled primarily by increased sales volume rather than increased gross profit margins. Given the significant levels of competition that characterize the IT reseller market, it is unlikely that we will be able to increase gross profit margins through increases in our sales of IT products alone. Any increases in our gross profit margins in the future will depend, in part, on the growth of our higher margin businesses such as IT consulting and professional services. In addition, low margins increase the sensitivity of our results of operations to increases in costs of financing. Any failure by us to maintain or increase our gross profit margins could have a material adverse effect on our financial condition and results of operations.

If we fail to offer high quality client support and services, our ability to attract and retain clients could be adversely affected.

Once our solutions and methodologies are deployed within our clients’ IT infrastructure environments, our clients rely on our support services to resolve any related issues. A high level of client support and service is

 

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important for the successful marketing and sale of our services and solutions. If we do not help our clients quickly resolve post-deployment issues and provide effective ongoing support, our ability to sell our IT solutions to existing clients would suffer and our reputation with prospective clients could be harmed. As we expand our sales, we will be required to hire and train additional support personnel. In addition, as we expand our operations internationally, our support organization will face additional challenges, including those associated with delivering support, training and documentation outside the United States.

If we fail to meet our service level obligations under our service level agreements, we may be subject to certain penalties and could lose clients.

We have service level agreements with many of our managed services clients under which we guarantee specified levels of service availability. These arrangements require us to estimate the level of service we will in fact be able to provide. If we fail to meet our service level obligations under these agreements, we may be subject to penalties, which could result in higher than expected costs, decreased revenues and decreased gross and operating margins. We could also lose clients by failing to meet our service level obligations under these agreements and our reputation may suffer as a result.

Any failures or interruptions in our services or systems could damage our reputation and substantially harm our business and results of operations.

Our success depends in part on our ability to provide reliable data center, technology integration and managed services to our clients. We currently have a data center and a NOC located in Sacramento, California, and data centers located in Denver, Colorado, Las Vegas, Nevada, El Segundo and San Francisco, California, Reston, Virginia, Frankfurt, Germany and Amsterdam, The Netherlands, all of which are susceptible to damage or interruption from human error, fire, flood, power loss, telecommunications failure, terrorist attacks and similar events. We could also experience failures or interruptions of our systems and services, or other problems in connection with our operations, as a result of:

 

   

damage to or failure of our computer software or hardware or our connections;

 

   

errors in the processing of data by our systems;

 

   

computer viruses or software defects;

 

   

physical or electronic break-ins, sabotage, intentional acts of vandalism and similar events;

 

   

increased capacity demands or changes in systems requirements of our clients; and

 

   

errors by our employees or third-party service providers.

Any interruptions in our systems or services could damage our reputation and substantially harm our business and results of operations. While we maintain disaster recovery plans and insurance with coverage we believe to be adequate, claims may exceed insurance coverage limits, may not be covered by insurance or insurance may not continue to be available on commercially reasonable terms. In addition, our clients may experience a loss in connectivity by our hosted solution as a result of a power loss at our data center, internet interruption or defects in our software. This could result in lost revenues, delays in client acceptance or unforeseen liabilities that would be detrimental to our reputation and to our business.

Our computer networks could experience security breaches that may disrupt our services and adversely affect our results of operations.

Our computer networks may be vulnerable to unauthorized access, computer hackers, computer viruses and other security problems caused by unauthorized access to, or improper use of, systems by third parties or employees. A hacker who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in our operations. Although we intend to continue to implement security measures,

 

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computer attacks or disruptions may jeopardize the security of information stored in and transmitted through our computer systems. Actual or perceived concerns that our systems may be vulnerable to such attacks or disruptions may deter our clients from using our solutions or services. As a result, we may be required to expend significant resources to protect against the threat of these security breaches or to alleviate problems caused by these breaches.

Data networks are also vulnerable to attacks, unauthorized access and disruptions. For example, in a number of public networks, hackers have bypassed firewalls and misappropriated confidential information. It is possible that, despite existing safeguards, an employee could misappropriate our clients’ proprietary information or data, exposing us to a risk of loss or litigation and possible liability. Losses or liabilities that are incurred as a result of any of the foregoing could have a material adverse effect on our business.

Our services and solutions involve storing and replicating mission-critical data for our clients and are highly technical in nature. If client data is lost or corrupted, our reputation and business could be harmed.

Our data center and technology integration services include storing and replicating mission-critical data for our clients. The process of storing and replicating that data within their data centers or at our facilities is highly technical and complex. If any data is lost or corrupted in connection with the use of our products and services, our reputation could be seriously harmed and market acceptance of our IT solutions could suffer. In addition, our solutions have contained, and may in the future contain, undetected errors, defects or security vulnerabilities. Some errors in our solutions may only be discovered after a solution has been in use by clients. Any errors, defects or security vulnerabilities discovered in our solutions after use by clients could result in loss of revenues, loss of clients, increased service and warranty cost and diversion of attention of our management and technical personnel, any of which could significantly harm our business. In addition, we could face claims for product liability, tort or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention and adversely affect the market’s perception of us and our service offerings and solutions.

We do not have long-term commitments from our clients, and our clients may terminate their relationships with us or reduce the amount of purchases they make from us.

Our operations depend upon our relationships with our clients. We do not have formal written agreements with many of our clients and to the extent we do, such agreements do not generally restrict our clients from terminating or deciding not to renew our contracts or from cancelling or rescheduling purchases. If clients attempt to introduce unfavorable terms or limit the services and products we provide to them, our revenues could be negatively impacted. In addition, the termination of business by any of our significant clients could have a material adverse effect on our operations. There is no guaranty that we will be able to retain our existing clients or develop relationships with new clients.

There is a risk that we could lose a large client without being able to find a ready replacement.

In fiscal year 2010, no single client accounted for 10% or more of our unaudited pro forma combined revenues, although several of our clients represented 5% or more of our pro forma combined revenues in that period. The loss of any large client, the failure of any large client to pay its accounts receivable on a timely basis or a material reduction in the amount of purchases made by any large client could have a material adverse effect on our business, financial position, results of operations and cash flows.

Our clients’ and our ability to accurately forecast demand for and sales of our products is limited, which may result in excess or insufficient inventory.

Our clients’ purchases may vary significantly from period to period, and it is difficult to forecast future order quantities. Therefore, to ensure availability of products for our clients, we sometimes order products from

 

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our vendors based on forecasts provided by our clients in advance of receiving purchase orders. However, these forecasts are not binding purchase commitments. Accordingly, we incur inventory costs in advance of anticipated sales. We cannot assure you that any of our clients will continue to purchase products from us in the future at the same level as in prior periods or that the volume of our clients’ purchases will be consistent with our expectations when we plan our expenditures in advance of sales. Our anticipated demand for our products may not materialize. If we overestimate demand for our products, or if purchases are cancelled or shipments are delayed, we may be left with excess inventory that we cannot sell. Conversely, if we underestimate demand, we may not have sufficient inventory and may lose market share and damage our client relationships. Obtaining additional supply in the face of product shortages may be costly or impossible, particularly in the short term, which could prevent us from fulfilling orders. As a result, our results of operations may fluctuate significantly from period to period in the future.

Consolidation in the industries that we serve or from which we purchase could adversely affect our business.

Clients that we serve may seek to achieve economies of scale by combining with or acquiring other companies. If two or more of our current clients combine their operations, it may decrease the amount of work that we perform for these clients. If one of our current clients merges or consolidates with a company that relies on another provider for its consulting, systems integration and technology, or outsourcing services, we may lose work from that client or lose the opportunity to gain additional work. If two or more of our suppliers merge or consolidate operations, the increased market power of the larger company could also increase our product costs and place competitive pressures on us. Any of these possible results of industry consolidation could adversely affect our business.

The loss of any key manufacturer or distributor relationships, or related industry certifications, could have an adverse effect on our business.

As part of our end-to-end IT solutions, we are authorized resellers of the products and services of leading IT manufacturers and distributors. In many cases, we have achieved the highest level of relationship the manufacturer or distributor offers. In addition, our employees hold certifications issued by these manufacturers and by industry associations relating to the configuration, installation and servicing of these products. We differentiate ourselves from our competitors by the range of manufacturers and distributors we represent, the relationship level we have achieved with these manufacturers and distributors and the scope of the manufacturer and industry certifications our employees hold. There can be no assurance that we will be able to retain these relationships with our manufacturers and distributors, that we will be able to retain the employees holding these manufacturer and industry certifications, or that our employees will maintain their manufacturer or industry certifications. The loss of any of these relationships or certifications could have a material adverse effect on our business.

We may experience a reduction in the incentive programs offered to us by our vendors.

We receive payments and credits from vendors, including consideration pursuant to volume sales incentive programs and marketing development funding programs. These programs are usually of finite terms and may not be renewed or may be changed in a way that has an adverse effect on us. Vendor funding is used to offset, among other things, inventory costs, costs of goods sold, marketing costs and other operating expenses. Certain of these funds are based on our volume of net sales or purchases, growth rate of net sales or purchases and marketing programs. If we do not grow our net sales over prior periods or if we are not in compliance with the terms of these programs, there could be a material negative effect on the amount of incentives offered or paid to us by vendors. No assurance can be given that we will continue to receive such incentives or that we will be able to collect outstanding amounts relating to these incentives in a timely manner, or at all. Any sizeable reduction in, the discontinuance of, or a significant delay in receiving or the inability to collect such incentives, particularly related to incentive programs with our largest partner, Cisco, could have a material adverse effect on our business, results of operations and financial condition. If we are unable to react timely to any fundamental

 

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changes in the programs of vendors, including the elimination of funding for some of the activities for which we have been compensated in the past, such changes would have a material adverse effect on our business, results of operations and financial condition.

Our U.S. government contracts may be terminated by the government at any time and may contain other provisions permitting the government to discontinue contract performance. If lost contracts are not replaced, our operating results may differ materially and adversely from those anticipated.

U.S. government contracts contain provisions and are subject to laws and regulations that provide government clients with rights and remedies not typically found in commercial contracts. These rights and remedies allow government clients, among other things, to:

 

   

terminate existing contracts, with short notice, for convenience as well as for default;

 

   

reduce orders under or otherwise modify contracts;

 

   

for contracts subject to the Truth in Negotiations Act, reduce the contract price or cost where it was increased because a contractor or subcontractor furnished cost or pricing data during negotiations that was not complete, accurate and current;

 

   

cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable;

 

   

for some contracts, demand a refund, make a forward price adjustment or terminate a contract for default if a contractor provided inaccurate or incomplete data during the contract negotiation process, and reduce the contract price under certain triggering circumstances, including the revision of price lists or other documents upon which the contract award was predicated;

 

   

terminate our facility security clearances and thereby prevent us from receiving classified contracts;

 

   

decline to exercise an option to renew a multi-year contract or issue task orders in connection with ID/IQ contracts;

 

   

claim rights in solutions, systems and technology produced by us, appropriate such work-product for their continued use without continuing to contract for our services and disclose such work-product to third parties, including other U.S. government agencies and our competitors, which could harm our competitive position;

 

   

prohibit future procurement awards with a particular agency due to a finding of organizational conflicts of interest based upon prior related work performed for the agency that would give a contractor an unfair advantage over competing contractors, or the existence of conflicting roles that might bias a contractor’s judgment;

 

   

subject the award of contracts to protest by competitors, which may require the contracting federal agency or department to suspend our performance pending the outcome of the protest and may also result in a requirement to resubmit offers for the contract or in the termination, reduction or modification of the awarded contract; and

 

   

suspend or debar us from doing business with the U.S. government.

If a U.S. government client were to unexpectedly terminate, cancel or decline to exercise an option to renew with respect to one or more of our significant contracts, or suspend or debar us from doing business with the U.S. government, our revenue and operating results would be materially harmed.

The termination of any contracts awarded to us based on the prior “Small Business” status of GTRI or Red River could have a material adverse effect on us.

GTRI and Red River competed for and were awarded certain contracts with U.S. federal, state or local governmental agencies on the basis of their status as a “small business” under regulations promulgated by the

 

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U.S. Small Business Administration (SBA) or on the status of GTRI, prior to May 13, 2010, as a “minority-owned” business under SBA regulations. GTRI no longer qualifies as a “minority-owned” business, and following the Business Combination, we will not qualify as a “small business” under the SBA regulations. Although a company’s participation in such a contract generally continues, or is “grandfathered,” the termination of any of these contracts as a result of our failure to qualify as a “small business” could have an adverse effect on our business, financial condition or results of operations.

The U.S. government may prefer minority-owned, small and small disadvantaged businesses, and we therefore may not win the U.S. government contracts for which we bid.

As a result of the SBA set-aside program, the U.S. government may decide to restrict certain procurements only to bidders that qualify as minority-owned, small or small disadvantaged businesses. As a result, we would not be eligible to perform as a prime contractor on those programs and would be restricted to a maximum of 49% of the work as a subcontractor on those programs. An increase in the amount of procurements under the SBA set-aside program may impact our ability to bid on new procurements as a prime contractor or restrict our ability to recompete on incumbent work that is placed in the set-aside program.

Our failure to maintain GTRI’s and Red River’s Top Secret clearances with the U.S. government could have a material adverse effect on us.

Certain employees of each of GTRI and Red River have a Top Secret clearance with the U.S. government, which makes GTRI and Red River eligible to bid on and perform classified U.S. government contracts. Maintaining these clearances following the completion of the Business Combination is contingent upon providing appropriate notice to and obtaining consent from the U.S. government. The notice and consent process requires the Company and our key management personnel to obtain a clearance at the same level as the Top Secret clearances held by certain GTRI and Red River employees, and includes providing the U.S. Defense Security Service with certain background information about the Company and our key management personnel. Any failure by the Company to obtain this Top Secret clearance would prevent us from being awarded classified U.S. government contracts, which could have an adverse effect on our business, financial condition or results of operations.

Our contracts, performance and administrative processes and systems are subject to audits, reviews, investigations and cost adjustments by the U.S. government, which could reduce our revenue, disrupt our business or otherwise materially adversely affect our results of operations.

U.S. government agencies routinely audit, review and investigate government contracts and government contractors’ administrative processes and systems. These agencies review our performance on contracts, pricing practices, cost structure and compliance with applicable laws, regulations and standards, including applicable government cost accounting standards. These agencies also review our compliance with government regulations and policies, and the U.S. Defense Contract Audit Agency (DCAA) audits, among other areas, the adequacy of our internal control systems and policies, including our purchasing, property, estimating, compensation and management information systems. In particular, over time the DCAA has increased and may continue to increase the proportion of employee compensation that it deems unallowable and the size of the employee population whose compensation is disallowed, which will continue to materially and adversely affect our results of operations or financial condition. Any costs found to be unallowable under a contract will not be reimbursed, and any such costs already reimbursed must be refunded. Moreover, if any of the administrative processes and systems are found not to comply with government imposed requirements, we may be subjected to increased government scrutiny and approval that could delay or otherwise adversely affect our ability to compete for or fulfill contracts.

Unfavorable U.S. government audit, review or investigation results could subject us to civil or criminal penalties or administrative sanctions, and could harm our reputation and relationships with our clients and impair our ability to be awarded new contracts. For example, if our invoicing system were found to be inadequate

 

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following an audit by the DCAA, our ability to directly invoice U.S. government payment offices could be eliminated. As a result, we would be required to submit each invoice to the DCAA for approval prior to payment, which could materially increase our accounts receivable days sales outstanding and adversely affect our cash flow. An unfavorable outcome to an audit, review or investigation by any U.S. government agency could also materially and adversely affect our relationship with the U.S. government. If a government investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeitures of profits, suspension of payments, fines and suspension or debarment from doing business with the U.S. government. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us. Provisions that we have recorded in our financial statements as a compliance reserve may not cover actual losses. Furthermore, the disallowance of any costs previously charged could directly and negatively affect our current results of operations for the relevant prior fiscal periods, and we could be required to repay any such disallowed amounts. Each of these results could materially and adversely affect our results of operations or financial condition.

We may need additional capital and any failure by us to raise additional capital on terms favorable to us, or at all, could limit our ability to grow our business and develop or enhance our service offerings to respond to market demand or competitive challenges.

We believe that our current cash, cash flow from operations and the proceeds from this offering should be sufficient to meet our anticipated cash needs for at least the next 12 months. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in additional leverage, increased debt service obligations and could require us to agree to operating and financing covenants that would restrict our operations.

There can be no assurance that we will be able to obtain such financing if and when it is needed or that, if available, such financing will be on terms acceptable to us. If we are unable to obtain such financing on acceptable terms or at all, or if potential acquisition candidates are unwilling to accept shares of our common stock as consideration, we may be unable to implement our acquisition strategy. Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:

 

   

investors’ perception of, and demand for, securities of technology services outsourcing companies;

 

   

conditions of the U.S. capital markets in which we may seek to raise funds; and

 

   

our future results of operations and financial condition.

We rely on inventory financing and vendor credit arrangements for our daily working capital and certain operational functions.

We rely on our inventory financing and vendor financing arrangements for daily working capital and to fund equipment purchases for our technology sales business. The loss of any of our inventory financing or vendor credit financing arrangements, a reduction in the amount of credit granted to us by our vendors, or a change in any of the material terms of these arrangements could increase our need for and the cost of working capital and have a material adverse effect on our future results. These credit arrangements are discretionary on the part of our creditors and require the performance of certain operational covenants. There can be no assurance that we will continue to meet those covenants and failure to do so may limit availability of, or cause us to lose, such financing. There can be no assurance that such financing will continue to be available to us in the future on acceptable terms.

 

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If we cannot collect our receivables or if payment is delayed, our business may be adversely affected by our inability to generate cash flow, provide working capital or continue our business operations.

Our business depends on our ability to successfully obtain payment from our clients of the amounts they owe us for work performed. The timely collection of our receivables allows us to generate cash flow, provide working capital and continue our business operations. Our clients may fail to pay or delay the payment of invoices for a number of reasons, including financial difficulties resulting from macroeconomic conditions, lack of an approved budget or, in the case of prime contractors for whom we are a subcontractor, as a result of audit findings by government regulatory agencies. An extended delay or default in payment relating to a significant account will have a material and adverse effect on the aging schedule and turnover days of our accounts receivable. If we are unable to timely collect our receivables from our clients for any reason, our business and financial condition could be adversely affected.

Our Board of Directors is a newly-formed group, and some members of our senior management team have not worked together previously.

Upon completion of the Business Combination, we will have a newly-constituted, seven-member Board of Directors, and some members of our senior management have not worked together previously. Daniel Serpico, currently the president of FS, will be our Chief Executive Officer and a member of the Board of Directors. Mr. Serpico has not previously led a public company. We believe that, in light of our business and structure and based on the experience, qualifications, attributes and skills of each of the members of our Board of Directors, our Chief Executive Officer and the other members of senior management will make a successful transition as our new management and will quickly become familiar with our operations. However, in the event that the members of senior management fail to transition effectively, we may not be able to execute our business strategy effectively, and as a result our stock price may decline.

Our success depends substantially on the continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if we lose their services.

Our future success depends heavily upon the continued services of our senior executives and other key employees. We currently do not maintain key man life insurance for any of the senior members of our management team or other key personnel. If one or more of our senior executives or key employees are unable or unwilling to continue in their present positions, it could disrupt our business operations, and we may not be able to replace them easily or at all. In addition, competition for senior executives and key personnel in our industry is intense, and we may be unable to retain our senior executives and key personnel or attract and retain new senior executive and key personnel in the future, in which case our business may be severely disrupted, and our financial condition and results of operations may be materially and adversely affected.

If any of our senior executives or key personnel joins a competitor or forms a competing company, we may lose clients, suppliers, know-how and key professionals and staff members to them. Also, if any of our business development managers, who generally keep a close relationship with our clients, joins a competitor or forms a competing company, we may lose clients, and our revenues may be materially and adversely affected. Additionally, there could be unauthorized disclosure or use of our technical knowledge, practices or procedures by such personnel. In connection with completion of the Business Combination, certain of our executives will enter into employment agreements with us that contain non-competition provisions, non-solicitation and nondisclosure covenants. However, if any dispute arises between our executive officers and us, such non-competition, non-solicitation and nondisclosure provisions might not provide effective protection to us.

Our future success depends on our ability to attract and retain IT professionals who are able to meet the needs of current and future clients.

Our business is labor intensive and our success depends on our ability to attract, retain, train and motivate highly skilled employees, including employees who may become part of our organization in connection with our acquisitions. The increase in demand for consulting, technology integration and managed services has further

 

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increased the need for employees with specialized skills or significant experience in these areas. Our ability to expand our operations will be highly dependent on our ability to attract a sufficient number of highly skilled employees and to retain our employees and the employees of companies that we have acquired. We may not be successful in attracting and retaining enough employees to achieve our desired expansion or staffing plans. Furthermore, the industry turnover rates for these types of employees are high and we may not be successful in retaining, training or motivating our employees. Any inability to attract, retain, train and motivate employees could impair our ability to adequately manage and complete existing projects and to accept new client engagements. Such inability may also force us to increase our hiring of independent contractors, which may increase our costs and reduce our profitability on client engagements. We must also devote substantial managerial and financial resources to monitoring and managing our workforce. Our future success will depend on our ability to manage the levels and related costs of our workforce.

We are subject to various claims and litigation that could ultimately be resolved against us, which could materially impair our financial position.

As a company that does business with many clients, employees and suppliers, we are subject to a variety of legal and regulatory actions, including, but not limited to, claims made by or against us relating to taxes, health and safety, employee benefit plans, employment discrimination, contract compliance, intellectual property rights and intellectual property licenses. The results of such legal and regulatory actions are difficult to predict.

For example, one of the Businesses was named as a defendant in an action initiated in 2007 by a competitor alleging unfair business practices, including the misappropriation of trade secrets. After trial in 2010, the parties entered into a settlement agreement under which the Business agreed to pay a substantial amount in settlement of these claims. In addition, the Business also incurred significant legal fees and expenses in defending against these claims.

Although we are not presently a party to any pending litigation or other legal proceedings that are likely to have a material adverse effect on our business, financial condition or results of operations, we may incur significant legal expenses if a legal claim were filed. If we are unsuccessful in defending a claim or elect to settle a claim, it could have a material adverse effect on our business, financial condition or results of operations.

Risks Related to Our Capital Structure and this Offering

Future sales of our common stock may negatively affect the market price of our shares.

Sales of substantial numbers of shares of our common stock in the public market following this offering, or the perception that these sales may occur, could cause the market price of our common stock to decline. Upon the closing of this offering, we will have             outstanding shares of common stock. All shares of our common stock sold in this offering will be freely transferable without restriction or additional registration under the Securities Act of 1933, as amended (Securities Act). The remaining shares outstanding after this offering will be available for sale in the public market upon the expiration of the lock-up period under lock-up agreements pertaining to this offering, subject to legal restrictions on transfer. As soon as practicable following the closing of this offering, we also intend to file a registration statement covering shares of our common stock issued or reserved for issuance under our 2011 Equity Incentive Plan. We may also sell additional shares of common stock in subsequent public offerings. To the extent any of these shares are sold into the public market, the market price of our common stock could decline. See “Shares Eligible for Future Sale” for a more detailed description of sales of our common stock that may occur in the future.

A small number of stockholders own a significant amount of our common stock and may be able to exert a significant influence over corporate matters.

We anticipate that our officers, directors and 5% or greater stockholders will beneficially own, in the aggregate, approximately     % of our outstanding common stock upon the closing of this offering. As a result, these stockholders acting together will be able to exert considerable influence over the election of our directors

 

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and the outcome of most corporate actions requiring stockholder approval. Such concentration of ownership may have the effect of delaying, deferring or preventing a change of control of the Company and consequently could affect the market price of our common stock.

We do not anticipate paying cash dividends, and, accordingly, you must rely on stock appreciation for any return on your investment.

We have never declared or paid any cash dividend on our stock and do not currently intend to do so for the foreseeable future. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business. Therefore, the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price you paid for shares of our common stock in this offering.

There has been no prior public market for our common stock, and an active trading market for our common stock may never develop following this offering.

Before this offering, there has been no public market for shares of our common stock. We cannot predict the extent to which investor interest in our Company will lead to the development of a trading market for our common stock or how liquid that market might become. The initial public offering price for the shares of our common stock will be determined by negotiations between the underwriters and us, and may not be indicative of the price that will prevail in the trading market following this offering. In addition, the trading price of our common stock following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, including, but not limited to, those described in this “Risk Factors” section, some of which are beyond our control. Factors affecting the trading price of our common stock will include:

 

   

variations in our operating results or in expectations regarding our operating results;

 

   

variations in operating results of similar companies;

 

   

announcements of technological innovations, new solutions or enhancements, strategic alliances or agreements by us, by our competitors or by OEMs;

 

   

announcements by competitors regarding their entry into new markets, and new product, service and pricing strategies;

 

   

marketing and advertising initiatives by us or our competitors;

 

   

the gain or loss of clients;

 

   

threatened or actual litigation;

 

   

major changes in our Board of Directors or management;

 

   

recruitment or departure of key personnel;

 

   

changes in the estimates of our operating results or changes in recommendations by any research analyst that follows our common stock;

 

   

market conditions in our industry and the economy as a whole;

 

   

the overall performance of the equity markets;

 

   

sales of our shares of common stock by existing stockholders;

 

   

volatility in our stock price; and

 

   

adoption or modification of laws and regulations applicable to our business.

The price of our common stock could be volatile.

The stock market in general, and the market for technology and communications companies, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the

 

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operating performance of those companies. Broad market and industry factors may harm the market price of our common stock regardless of our actual operating performance. These fluctuations may be even more pronounced in the trading market for our stock shortly following this offering. Moreover, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and our resources, whether or not we are successful in such litigation.

We can experience short-term increases and declines in the price of our common stock and such fluctuations may be due to factors other than those specific to our business, such as economic news or other events generally affecting the trading markets. These fluctuations could favorably or unfavorably impact our business, financial condition or results of operations. Our ownership base has been and may continue to be concentrated in a few stockholders, which could increase the volatility of our common share price over time.

Investors in this offering will suffer immediate and substantial dilution in the net tangible book value of the shares purchased in this offering.

The initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of our outstanding common stock. Accordingly, if you purchase shares of our common stock at the assumed initial public offering price (the midpoint of the range set forth on the cover page of this prospectus), you will incur immediate and substantial dilution of $         per share. If the underwriters exercise their over-allotment option you will suffer further dilution.

If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our stock, the price of our stock could decline.

We expect that the trading price for our common stock may be affected by research or reports that industry or financial analysts publish about us or our business. If one or more of the analysts who cover us downgrade their evaluations of our stock, the price of our stock could decline. If one or more of these analysts cease coverage of our company, we could lose visibility in the market for our stock, which in turn could cause our stock price to decline.

Anti-takeover provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as well as in Delaware law, could prevent or delay a change in control of our company.

We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. For more information, see “Description of Capital Stock—Anti-Takeover Effects of Our Certificate of Incorporation, Bylaws and Delaware Law.” In addition, our amended and restated certificate of incorporation and bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our amended and restated certificate of incorporation and bylaws, which will be in effect as of the closing of this offering:

 

   

authorize the issuance of “blank check” preferred stock that could be issued by our Board of Directors to thwart a takeover attempt;

 

   

do not provide for cumulative voting in the election of directors, which would allow holders of less than a majority of the stock to elect some directors;

 

   

establish a classified Board of Directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election;

 

   

require that directors only be removed from office for cause;

 

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provide that vacancies on the Board of Directors, including newly-created directorships, may be filled only by a majority vote of directors then in office;

 

   

limit who may call special meetings of stockholders;

 

   

prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders; and

 

   

establish advance notice requirements for nominating candidates for election to the Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

For information regarding these and other provisions, see “Description of Capital Stock.”

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements other than statements of historical fact contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, we identify forward-looking statements by terms such as “may,” “will,” “likely,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “would,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this prospectus are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this prospectus and are subject to a number of risks, uncertainties and assumptions described in the “Risk Factors” section and elsewhere in this prospectus. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not occur and actual results could differ materially from those projected in our forward-looking statements. We undertake no obligation, and specifically decline any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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THE BUSINESS COMBINATION

We will use the proceeds of this offering to merge with FS and to acquire GTRI and Red River pursuant to an agreement and plan of merger and stock purchase agreements, as described below.

Merger with FS

We and Merger Sub are parties to the merger agreement with FS and John G. Varel, as representative of the FS shareholders. Pursuant to the merger agreement, Merger Sub will merge with FS, which will be the surviving entity. The merger consideration consists of (i) a cash payment equal to $100 million minus the sum of (a) the long-term debt of FS and the current portion of the long-term debt of FS debt (which was $28.7 million in the aggregate as of March 31, 2011), (b) certain payments to be made under a phantom stock plan and (c) certain contingent bonus payments, plus a payment for certain capital expenditure amounts; and (ii) a number of shares of our common stock equal to $95 million (subject to an increase of up to $100 million upon the completion of certain adjustments to FS’s sales commission arrangements) divided by the price of our shares in this offering (or          shares, assuming an initial public offering price of $          per share, which is the midpoint of the range listed on the cover page of this prospectus). As support for FS shareholder indemnity obligations, we will place in escrow $7 million of the cash consideration, plus a portion of the stock consideration that is the number of shares equal to $7 million divided by the price of our shares in this offering (or          shares, assuming an initial public offering price of $         per share, which is the midpoint of the range listed on the cover page of this prospectus). Such amount will remain in escrow until the termination of the indemnification by FS shareholders, fifteen months from the closing date of the merger under the merger agreement.

The merger agreement contains various provisions customary for transactions of this size and type, including representations and warranties with respect to capitalization and title and covenants with respect to the conduct of the businesses. Additionally, FS covenants to cause the exercise or termination of all outstanding options or warrants, to participate and assist in this offering and to adjust certain compensation arrangements.

The representations and warranties are subject to certain customary limitations, and the maximum amount of indemnification payable by us under the merger agreement is $1 million with respect to the FS shareholders, with certain exceptions. We are indemnified by the FS shareholders for losses greater than $1 million in the aggregate, up to a cap of the escrow amount, except for fraud, intentional misrepresentation, breach of warranties related to capitalization, tax matters, authorization, environmental matters, financial advisory fees or covenants related to board approval, confidentiality and exclusivity or certain matters related to ownership of shares, which are not subject to a cap.

Pursuant to the merger agreement, we agreed to enter into employment agreements with Daniel Serpico and Michael Soja, the chief executive officer and chief financial officer of FS, respectively. See “Executive Compensation—Compensation Discussion and Analysis—Compensation Components—Employment Contracts.”

Completion of the merger with FS depends upon customary closing conditions being satisfied or waived and the successful completion of this offering. The merger is also contingent upon our shares received by FS representing at least 28% of our outstanding stock, following this offering, without giving effect to the underwriters’ overallotment option or the number of shares reserved for stock options granted on or after the closing of this offering. The merger agreement may be terminated by mutual consent of the parties, or by 60 days written notice from any party, provided that such notice may not be delivered prior to November 14, 2011.

Acquisition of GTRI

On May 31, 2011, we entered into a stock purchase agreement with GTRI, the shareholders of GTRI and Glenn Smith, as representative of the GTRI shareholders, to acquire 100% of the issued and outstanding shares of GTRI for (i) cash consideration equal to $12.5 million, to be adjusted for certain working capital amounts and less the aggregate amount of certain outstanding indebtedness of GTRI ($0.4 million as of March 31, 2011) and

 

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any change in control payments owed by GTRI as a consequence of the acquisition, and (ii) a number of shares of our common stock equal to $12.5 million divided by the price of our shares in this offering (or          shares, assuming an initial public offering price of $         per share, which is the midpoint of the range listed on the cover page of this prospectus). As support for GTRI shareholder obligations and indemnity obligations, we will place in escrow that portion of the stock consideration for the acquisition that is the number of shares equal to $3 million divided by the price of our shares in this offering (or          shares, assuming an initial public offering price of $         per share, which is the midpoint of the range listed on the cover page of this prospectus). Such amount will remain in escrow until the termination of the indemnification by GTRI shareholders, fifteen months from the closing date of the transaction contemplated by the stock purchase agreement.

The stock purchase agreement contains various provisions customary for transactions of this size and type, including representations and warranties with respect to capitalization and title and covenants with respect to the conduct of the businesses.

The representations and warranties are subject to certain customary limitations, and the maximum amount of indemnification payable by us under the stock purchase agreement is $1 million with respect to the GTRI shareholders, with certain exceptions. We are indemnified by the GTRI shareholders for losses greater than $250,000 in the aggregate, up to a cap of $3 million, except for breach of warranties related to capitalization, tax matters, authorization, employee benefits, financial advisory fees or covenants related to board approval, confidentiality and exclusivity or certain matters related to ownership of shares, which are subject to an aggregate cap of up to $23.35 million. There is no cap on the GTRI shareholder indemnity for losses due to fraud.

Pursuant to the stock purchase agreement, we agreed to enter into employment agreements with Greg Byles and Glenn Smith, the Chief Executive Officer and Chief Operating Officer of GTRI, respectively. See “Executive Compensation—Compensation Discussion and Analysis—Compensation Components—Employment Contracts.”

Completion of our acquisition of GTRI depends upon customary closing conditions being satisfied or waived, GTRI’s disposal of its investment in its majority-owned (85%) subsidiary, Relevant Security Corporation (RSC), prior to completion of the acquisition, the successful completion of this offering, and the substantially contemporaneous completion of the merger with FS and the acquisition of Red River. See the section entitled “Certain Relationships and Related Party Transactions” for additional information regarding RSC. The stock purchase agreement may be terminated by mutual consent of the parties, or by 60 days written notice from any party, provided that such notice may not be delivered prior to November 30, 2011.

Acquisition of Red River

On June 2, 2011, we entered into a stock purchase agreement with Red River, the shareholders of Red River and Richard Bolduc, as representative of the Red River shareholders, to acquire 100% of the issued and outstanding shares of Red River for (i) cash consideration equal to $26 million less the amount of certain outstanding Red River indebtedness ($0.5 million as of March 31, 2011) and certain other obligations of Red River and (ii) a number of shares of our common stock equal to $16 million divided by the price of our shares in this offering (or          shares, assuming an initial public offering price of $          per share, which is the midpoint of the range listed on the cover page of this prospectus), in each case subject to certain EBITDA and working capital adjustments. As support for Red River shareholder indemnity obligations, we will place in escrow that portion of the stock consideration for the acquisition that is the number of shares equal to $4.5 million divided by the price of our shares in this offering (or          shares, assuming an initial public offering price of $          per share, which is the midpoint of the range listed on the cover page of this prospectus). Such amount will remain in escrow until the termination of the indemnification by Red River shareholders, fifteen months from the closing date of the transaction contemplated by the stock purchase agreement.

The stock purchase agreement contains various provisions customary for transactions of this size and type, including representations and warranties with respect to capitalization and title and covenants with respect to the conduct of the businesses. Additionally, Red River covenants to participate and assist in this offering.

 

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The representations and warranties are subject to certain customary limitations, and the maximum amount of indemnification payable by us under the stock purchase agreement is $1 million with respect to the Red River shareholders, with certain exceptions. We are indemnified by the Red River shareholders for losses greater than $420,000 in the aggregate, up to a cap of $4.5 million, except for fraud, intentional misrepresentation, breach of warranties related to capitalization, tax matters, authorization, environmental matters, financial advisory fees, the agreement to pay any working capital deficiency or covenants related to exclusivity, confidentiality and non-circumvention or certain matters related to ownership of shares, which are subject to a cap equal to the aggregate consideration payable under the stock purchase agreement.

Pursuant to the stock purchase agreement, we agreed to enter into an employment agreement with Richard Bolduc, the president of Red River. See “Executive Compensation.”

Completion of our acquisition of Red River depends upon customary closing conditions being satisfied or waived, the successful completion of this offering, and completion of the merger with FS and the contemporaneous acquisition of GTRI. Our acquisition of Red River does not include RRCC Realty, LLC (RR Realty), a variable interest entity of which Red River is currently deemed to be the primary beneficiary, and which is therefore consolidated by Red River. Completion of the acquisition also depends on Red River having been released from its guarantee of $0.5 million of RR Realty’s debt. Following this release and our acquisition of Red River, Red River will no longer be the primary beneficiary of RR Realty, and RR Realty will no longer be consolidated in our results. See the section entitled “Certain Relationships and Related Party Transactions” for additional information regarding RR Realty. The stock purchase agreement may be terminated by mutual consent of the parties, or by 60 days written notice from any party, provided that such notice may not be delivered prior to December 2, 2011.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us of the sale of the common stock that we are offering will be approximately $         million, assuming an initial public offering price of $         per share, which is the midpoint of the range listed on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses that we must pay. We intend to use $         million to pay the cash portion of the purchase price for FS, GTRI and Red River. We also intend to use $         million of these proceeds to repay certain indebtedness of FS, GTRI and Red River. The remaining net proceeds of $         million will be used for working capital and other general corporate purposes, including the expansion of our current business through the enhancement of our existing services and solutions, the hiring of additional personnel to increase our development, sales and marketing activities and acquisitions of complementary or strategic businesses.

FS has a working capital facility with a bank, under which the outstanding balance ($18.8 million at March 31, 2011) will be repaid in connection with completion of the Business Combination and the closing of this offering, and the interest rate under this line of credit is equal to LIBOR plus 5.75% per annum (or 6.01% as of March 31, 2011). GTRI has a line of credit with a bank, under which the outstanding balance ($12.8 million at March 31, 2011) will be repaid in connection with completion of the Business Combination and the closing of this offering, and the interest rate under this line of credit is equal to the one month LIBOR plus 4.75% per annum (or 4.99% at March 31, 2011), payable monthly on advances outstanding for greater than 60 days; no interest is payable on advances outstanding for 60 days or less. Red River has a line of credit with a bank, under which the outstanding balance ($10.1 million at March 31, 2011) will be repaid in connection with completion of the Business Combination and the closing of this offering, and the interest rate under Red River’s line of credit is equal to LIBOR plus 3.25% per annum (or 3.51% as of March 31, 2011).

The foregoing represents our current intentions with respect of the use and allocation of net proceeds from this offering based on our present plans and business conditions. The amounts and timing of any expenditure will vary depending on the amount of cash generated by our operations, competitive developments and the rate of growth, if any, of our business. Accordingly, our management will have significant flexibility and discretion in applying the net proceeds from this offering. Unforeseen events or changed business conditions may result in application of the proceeds from this offering in a manner other than described in this prospectus.

Pending use of the proceeds from this offering, we intend to invest the proceeds in short-term, interest-bearing investment grade securities.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on capital stock. We currently intend to retain all available funds and any future earnings for use in financing the growth of our business and do not anticipate paying any cash dividends after this offering or for the foreseeable future. Any future determination relating to dividend policy will be made at the discretion of our Board of Directors, subject to compliance with certain covenants under our loans, which restrict or limit our ability to declare or pay dividends, and will depend on our future earnings, financial condition, results of operations, capital requirements, general business conditions, future prospects, applicable Delaware law, which provides that dividends are only payable out of surplus or current net profits, and other factors that our Board of Directors may deem relevant.

 

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CAPITALIZATION

The following table presents our Predecessor’s historical capitalization at March 31, 2011, and our pro forma capitalization at that date reflecting (i) certain pro forma adjustments to the historical financial statements of the Company, FS, GTRI and Red River, (ii) completion of the Business Combination and (iii) the closing of this offering and the application of the net proceeds of this offering, as if the Business Combination and the closing of this offering had each occurred on March 31, 2011. The capitalization table below should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the historical consolidated financial statements of the Company, FS, GTRI and Red River and our unaudited pro forma condensed financial statements and the notes thereto included elsewhere in this prospectus.

We are providing the capitalization table below for informational purposes only. It should not be construed to be indicative of our capitalization or financial condition had the Business Combination and the related transactions and events been completed on the date assumed. The capitalization table below may not reflect the capitalization or financial condition that would have resulted had we been operated as a separate, independent entity at that date and is not necessarily indicative of our future capitalization or financial condition.

 

     As of March 31, 2011     
     Predecessor     Pro Forma     
     ($ in thousands)     

Cash and cash equivalents

   $ 4,063        
  

 

 

      

Debt, including current and long-term:

       

Current portion of long-term debt

   $ 26,872        

Long-term debt, net of current portion

     1,797        
  

 

 

      

Total debt

     28,669       
  

 

 

      

Stockholders equity:

       

Preferred stock, $0.001 par value, 3,000 shares authorized and none outstanding, actual;              shares authorized and none outstanding, pro forma

            

Common stock, $0.0001 par value, 50,000,000 shares authorized, 13,726,000 shares issued and 13,603,000 shares outstanding, actual;              shares authorized, no shares issued and outstanding, pro forma

     1        

Additional paid-in capital

     31,169        

Treasury stock

     (123     

Accumulated deficit

     (33,439     
  

 

 

      

Total stockholders equity

     (2,392     
  

 

 

      

Total capitalization

   $ 26,277        
  

 

 

      

 

The above table:

 

   

excludes          shares of our common stock reserved as of                     , 2011 for future issuance under our stock-based compensation plans, none of which have been granted;

 

   

assumes no exercise by the underwriters of their option to purchase additional shares of our common stock to cover over-allotments, if any; and

 

   

includes the shares of our common stock issuable to the shareholders of FS, GTRI and Red River pursuant to the Business Combination.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the pro forma net tangible book value per share of our common stock after this offering. Our pro forma net tangible book value as of March 31, 2011, was approximately $         million, or approximately $         per share. Pro forma net tangible book value per share represents the amount of total tangible assets minus our total liabilities, divided by          shares of common stock outstanding upon the closing of this offering.

Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the net tangible book value per share of common stock immediately after the closing of this offering. After giving effect to our sale of         shares of common stock in this offering at an assumed initial public offering price of $         per share, and after deducting the underwriting discounts and commissions and estimated offering expenses, the pro forma net tangible book value as of March 31, 2011, would have been approximately $         million or approximately $         per share. This represents an immediate increase in net tangible book value of $         per share to existing stockholders and an immediate dilution in net tangible book value of $         per share to purchasers of common stock in this offering, as illustrated in the following table:

 

Assumed initial public offering price per share

      $            

Net tangible book value per share before this offering

   $               

Increase per share attributable to new investors

     
  

 

 

    

Pro forma net tangible book value per share after this offering

     
     

 

 

 

Dilution per share to new investors

      $            
     

 

 

 

If the underwriters exercise their option to purchase additional shares of our common stock in full in this offering, the pro forma net tangible book value per share after this offering would be approximately $         per share, the increase in pro forma net tangible book value per share to existing stockholders would be approximately $         per share and the dilution to new investors purchasing shares in this offering would be approximately $         per share.

The table below presents on a pro forma basis as of March 31, 2011, the differences between the existing stockholders and the purchasers of shares in this offering with respect to the number of shares purchased from us, the total consideration paid and the average price paid per share:

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number    Percent     Amount      Percent    

Existing stockholders

             %   $                         $            

New stockholders

             $            
  

 

  

 

 

   

 

 

    

 

 

   

Totals

        100.0 %   $                   100.0  
  

 

  

 

 

   

 

 

    

 

 

   

Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information.

 

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SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL AND OTHER DATA

The following tables present the selected historical condensed consolidated financial data for each of our Predecessor, GTRI and Red River, as well as our selected unaudited condensed pro forma financial data. We have identified FS as our Predecessor for accounting purposes, and the Predecessor is considered the acquiror of both GTRI and Red River for accounting purposes. The consolidated statement of operations data for each of FS, GTRI and Red River set forth below for the years ended December 31, 2008, 2009 and 2010 and the consolidated balance sheet data for each of FS, GTRI and Red River as of December 31, 2009 and 2010 are derived from the audited consolidated financial statements of FS, GTRI and Red River, which are included elsewhere in this prospectus. The historical consolidated statement of operations data for each of FS, GTRI and Red River for the years ended December 31, 2006 and 2007 and the historical balance sheet data for each of FS, GTRI and Red River as of December 31, 2006, 2007 and 2008 are derived from the unaudited financial statements of each of FS, GTRI and Red River, respectively, that are not included in this prospectus. The statement of operations data for each of FS, GTRI and Red River for the three-month periods ended March 31, 2010 and 2011 and the balance sheet data for each of FS, GTRI and Red River as of March 31, 2011 are derived from the unaudited financial statements of FS, GTRI and Red River, respectively, that are included elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management of each of FS, GTRI and Red River, include all adjustments necessary for a fair presentation of the information set forth herein.

The summary unaudited pro forma combined statement of operations data presented for the year ended December 31, 2010 and, for the three-month periods ended March 31, 2010 and 2011, combine the results of our Predecessor’s operations with those of the Company, GTRI and Red River, assuming the Business Combination and the closing of this offering occurred on January 1, 2010. The unaudited pro forma combined balance sheet data as of March 31, 2011 combines our Predecessor’s balance sheet with those of the Company, GTRI and Red River as of March 31, 2011, assuming the Business Combination and the closing of this offering occurred on March 31, 2011. The assumptions used and pro forma adjustments derived from such assumptions are based on currently available information and we believe such assumptions are reasonable under the circumstances. For a description of all such assumptions and adjustments used in preparing the unaudited pro forma combined financial statements, see “Unaudited Pro Forma Combined Financial Statements” included elsewhere in this Prospectus. The summary unaudited pro forma combined financial statements are presented for informational purposes only, do not purport to represent what our results of operations or financial condition actually would have been had the relevant transactions been consummated on the dates indicated and are not necessarily indicative of our results of operations for any future period or our financial condition as of any future date.

You should read this summary financial data together with “Unaudited Pro Forma Combined Financial Statements,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes of the Company, FS, GTRI and Red River included elsewhere in this prospectus.

 

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FusionStorm Global Inc.

 

    Predecessor     Pro Forma  
    Year ended December 31,     Three Months ended
March 31,
    Year ended
December 31,
2010
    Three Months
ended March 31,
 
    2006     2007     2008     2009     2010         2010             2011           2010     2011  

Statement of Operations
Data:

  ($ in thousands)  

Revenues(1)

  $ 170,640      $ 203,812      $ 249,396      $ 237,469      $ 376,308      $ 67,313      $ 94,339      $ 727,283      $ 123,941      $ 155,489   

Cost of revenue(1)

    138,471        159,397        192,105        182,746        304,958        51,390        74,398        603,944        100,001        126,122   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    32,169        44,415        57,291        54,723        71,350        15,923        19,941        123,339        23,940        29,367   

Operating expenses(2)

    31,007        36,791        51,473        68,771        76,049        19,909        17,465        117,667        28,609        26,905   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    1,162        7,624        5,818        (14,048     (4,699     (3,986     2,476        5,672        (4,669     2,462   

Interest expense(1)

    (2,841     (5,344     (4,853     (3,584     (3,063     (1,492     (2,550     (3,542     (1,574     (2,651

Other (expense) income(1)

    (1,865     (2,046     (73     294        (517     (13     (245     (405     89        (201
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

    (3,544     234        892        (17,338     (8,279     (5,491     (319     1,725        (6,154     (390

Income tax (expense) benefit(3)

    (699     (1,222     (1,061     6,197        2,127        1,411        99        (1,683     1,606        185   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

    (4,243     (988     (169     (11,141     (6,152     (4,080     (220     42        (4,548     (205

Income (loss) from discontinued operations

    -        -        1,376        (1,314     (10,205     (988     (61     (10,205     (988     (61
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (4,243   $ (988   $ 1,207      $ (12,455   $ (16,357   $ (5,068   $ (281   $ (10,163   $ (5,536   $ (266
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial Data (unaudited):

                   

EBITDA(4)

                $ 5,929      $ (3,451   $ 5,240   

Adjusted EBITDA(5)

                $ 33,140      $ 5,558      $ 7,507   

 

     Predecessor     Pro Forma(6)  
     December 31,     March 31,
2011
    March 31,
2011
 
     2006     2007     2008     2009     2010      

Balance Sheet Data:

   ($ in thousands)  

Cash and cash equivalents

   $ 924      $ 1,129      $ 2,060      $ 888      $     1,055      $     4,063      $   27,524   

Total current assets

     81,757        93,533        88,992        100,844        122,440        135,612        225,269   

Total assets

     100,490        112,133        171,216        177,891        166,371        182,148        349,392   

Current portion of long-term debt

     2,810        1,756        7,594        8,780        30,980        26,872        -   

Total current liabilities

     77,122        90,375        105,110        135,305        154,762        168,847        199,863   

Long-term debt, net of current portion

     19,987        17,952        10,358        1,727        2,988        1,797        -   

Total liabilities

     102,422        114,961        171,495        188,393        168,080        184,540        229,306   

Total shareholders’ (deficit) equity

     (1,932     (2,828     (279     (10,502     (1,709     (2,392     120,086   

 

(1) Pro forma reflects the disposition of Relevant Security Corporation (RSC) by GTRI and the termination of the status of RRCC Realty, LLC (RR Realty) as a variable interest entity consolidated with Red River for accounting purposes.
(2) Pro forma adjustments include the elimination of certain operating costs of the Businesses, including (i) the elimination of certain salary and related expenses attributable to the prior owners of the Businesses, duplicative executives and other personnel, (ii) the contractual termination of a consulting agreement between us and Monroe & Company, LLC, (iii) the elimination of expenses related to a charitable foundation associated with FS that will be terminated upon the closing of the Business Combination, (iv) the disposition by GTRI of RSC and (v) the elimination of certain expenses related to RR Realty. These eliminations are partially offset by incremental amortization expense resulting from the intangible assets to be acquired in the acquisitions of GTRI and Red River.
(3) Pro forma adjustment represents the additional income tax expense resulting from GTRI and Red River’s loss of their status as Subchapter S Corporations in the Business Combination.
(4)

We present EBITDA in this prospectus to provide investors with a supplemental measure of our operating performance. EBITDA is a non-GAAP financial measure. We define EBITDA as net income (loss) before interest expense, income tax benefit (expense) and depreciation and amortization. The Company believes that EBITDA may be useful to investors for measuring the Company’s ability to make new investments and to meet working capital requirements. EBITDA as calculated by the Company may not be consistent with calculations of EBITDA by other companies. EBITDA should not be considered in isolation from or as a substitute for net income (loss), cash flows from operating activities or other

 

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  statements of operations or cash flows prepared in accordance with generally accepted accounting principles or as a measure of profitability or liquidity.
(5) We define Adjusted EBITDA as net income (loss) before interest expense, income tax benefit (expense), depreciation and amortization, loss from discontinued operations, commission expense, share-based compensation and legal fees. We believe that Adjusted EBITDA is an important measure of our operating performance because it allows management, lenders, investors and analysts to evaluate and assess our core operating results from period to period after removing the impact of changes to our capitalization structure, income tax status and other non-operational items that affect comparability. Adjusted EBITDA is not intended to represent cash flow from operations as defined by U.S. GAAP and should not be used as an alternative to net income (loss) as an indicator of operating performance or to cash flow as a measure of liquidity. Because not all companies use identical calculations, these presentations of Adjusted EBITDA may not be comparable to other similarly-titled measures used by other companies. Adjusted EBITDA is calculated as follows:

 

    Pro Forma  
    Year ended
December 31,
2010
    Three Months
ended March 31,
2010
    Three Months
ended March 31,
2011
 
    ($ in thousands)  

Reconciliation of Adjusted EBITDA:

     

Net (loss) income

  $ (10,163   $ (5,536   $ (266

Interest expense

    3,542        1,574        2,651   

Income tax expense (benefit)

    1,683        (1,606     (185

Depreciation and amortization

    10,867        2,117        3,040   
 

 

 

   

 

 

   

 

 

 

EBITDA

    5,929        (3,451     5,240   

Loss from discontinued operations(a)

    10,205        988        61   

Share-based compensation(b)

    8,014        4,763        909   

Commission expense(c)

    5,000        926        961   

Legal fees(d)

    3,992        2,332        336   
 

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (unaudited)

  $ 33,140      $  5,558      $  7,507   
 

 

 

   

 

 

   

 

 

 

 

  (a) Reflects the elimination of income (loss) from discontinued operations in an amount of $10,205 for the year ended December 31, 2010, $988 for the three months ended March 31, 2010, and $61 for the three months ended March 31, 2011 relating to the October 2010 disposition of assets and liabilities of two subsidiaries of the Predecessor.
  (b) Reflects the elimination of expenses of $8,014 for the year ended December 31, 2010, $4,763 for the three months ended March 31, 2010, and $909 for the three months ended March 31, 2011 attributable to share-based compensation of the Predecessor and GTRI. The stock-based compensation of the Predecessor comprises options to acquire shares of Predecessor’s common stock pursuant to its 2008 Restated Stock Option Plan and a phantom stock plan for the benefit of Daniel Serpico. Pursuant to the merger agreement, by which the Company will acquire the Predecessor, all outstanding options to acquires shares of the Predecessor’s common stock will be exercised or terminated prior to completion of the Business Combination.
  (c) Reflects the elimination of certain cash commission expenses of $5,000 for the year ended December 31, 2010, $926 for the three months ended March 31, 2010, and $961 for the three months ended March 31, 2011 for which stock-based compensation will be substituted as contemplated by the merger agreement by which the Company will acquire the Predecessor.
  (d) Reflects the elimination of expenses of $3,992 for the year ended December 31, 2010, $2,332 for the three months ended March 31, 2010, and $336 for the three months ended March 31, 2011 attributable to legal fees and settlement payments incurred in connection with certain legal proceedings in which the Predecessor was a party.

 

(6) Reflects an assumed offering of $175,000 after deducting (i) estimated underwriting discounts and commissions, (ii) estimated offering expenses, (iii) the cash portion of the purchase price for FS, GTRI and Red River, (iv) the repayment of certain indebtedness of FS, GTRI and Red River and (v) for accrued expense obligations. Also reflects purchase accounting adjustments to record GTRI and Red River’s assets acquired and liabilities assumed at fair value.

 

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GTRI

 

     Year ended December 31,      Three Months ended
March 31,
 
     2006     2007     2008     2009     2010      2010      2011  

Statement of Operations Data:

   ($ in thousands)  

Revenues

   $ 74,793      $ 100,885      $ 128,053      $ 169,119      $ 163,585       $   30,714       $   25,664   

Cost of revenue

     64,748        83,143        110,417        146,649        134,540         26,295         20,482   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Gross profit

     10,045        17,742        17,636        22,470        29,045         4,419         5,182   

Operating expenses

     6,034        12,629        17,523        23,071        26,205         5,167         5,835   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Income (loss) from operations

     4,011        5,113        113        (601     2,840         (748      (653

Interest expense

     (104     (11     (101     (83     23         (42      (9

Other (expense) income

     (1     146        89        (67     (25      62         14   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss)

     3,906        5,248        101        (751     2,838         (728      (648

Less: minority interest in RSC

     -        -        -        106        161         37         52   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to GTRI and RSC

   $ 3,906      $ 5,248      $ 101      $ (645   $ 2,999       $ (691    $ (596
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

     December 31,      March 31,
2011
 
     2006      2007      2008      2009      2010     

Balance Sheet Data:

   ($ in thousands)  

Cash, cash equivalents and investment in trading securities

   $ 1,099       $ 4,294       $ 671       $ 2,229       $   5,511       $     2,036   

Total current assets

     17,269         21,604         20,788         41,933         35,091         22,433   

Total assets

     17,809         22,635         23,060         44,944         38,481         25,718   

Promissory note payable to related party, current portion

     -         -         -         -         93         96   

Total current liabilities

     13,378         14,818         16,456         39,126         31,146         19,237   

Promissory note payable to related party

     -         -         -         -         323         311   

Related party payable

     -         -         -         83         165         165   

Total liabilities

     13,378         14,862         16,727         39,546         32,082         20,154   

Total stockholders’ equity

     4,431         7,773         6,333         5,398         6,399         5,564   

 

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Red River

 

     Year ended December 31,      Three Months ended
March 31,
 
     2006     2007     2008     2009     2010      2010      2011  

Statement of Operations Data:

   ($ in thousands)  

Revenues

   $ 89,823      $ 104,536      $ 131,935      $ 164,343      $ 187,434       $ 25,914       $ 35,486   

Cost of revenue

     82,313        95,900        119,735        146,144        164,398         22,316         31,242   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Gross profit

     7,510        8,636        12,200        18,199        23,036         3,598         4,244   

Operating expenses

     7,800        8,314        11,869        15,900        16,449         3,443         4,181   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

(Loss) income from operations

     (290     322        331        2,299        6,587         155         63   

Interest expense

     (585     (693     (534     (348     (499      (95      (100

Other income (expense)

     -        70        166        123        105         32         30   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

(Loss) income before provision for state income taxes

     (875     (301     (37     2,074        6,193         92         (7

Income tax (expense) benefit

     -        (16     (67     39        (252      (3      4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net (loss) income

   $ (875   $ (317   $ (104   $ 2,113      $ 5,941       $ 89       $ (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

     December 31,      March 31,
2011
 
     2006     2007     2008     2009      2010     

Balance Sheet Data:

   ($ in thousands)  

Cash and cash equivalents

   $ 1      $ -      $ 71      $ 344       $ 157       $ 192   

Total current assets

     20,676        22,348        33,828        38,711         77,113         45,922   

Total assets

     21,813        24,592        37,084        42,308         80,752         49,417   

Current portion of long-term debt

     107        100        157        230         189         216   

Total current liabilities

     21,972        25,107        37,130        40,363         74,777         44,378   

Long-term debt, net of current portion

     1,861        274        1,212        1,393         1,268         759   

Total liabilities

     23,834        25,382        38,500        41,984         76,197         45,269   

Total stockholders’ (deficit) equity

     (2,021     (789     (1,416     325         4,555         4,148   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with “Selected Historical and Pro Forma Consolidated Financial and Other Data” and our consolidated financial statements and accompanying notes included elsewhere in this prospectus. This discussion contains forward-looking statements, based on current expectations and related to our plans, estimates, beliefs and anticipated future financial performance. These statements involve risks and uncertainties and our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Risk Factors,” “Special Note Regarding Forward-Looking Statements” and elsewhere in this prospectus.

Our Business

We are a provider of diversified IT solutions to domestic and international commercial enterprises, as well as to the public sector, including federal, state and local government entities, and educational institutions. We provide end-to-end IT solutions, including hardware and software integration, pre-sales and technical consulting, and both professional and managed services to address our clients’ business needs. We engage with our clients throughout all aspects of their IT investment, providing services from the initial needs assessment and design to procurement and implementation to on-going support and hosting.

Basis of Presentation

We were incorporated in 2009 to create and develop a leading, globally branded provider of diversified, end-to-end IT solutions. To date, we have conducted operations only in connection with the Business Combination and this offering.

In connection with the Business Combination, on May 14, 2011, we and our wholly owned subsidiary, Merger Sub, entered into the merger agreement with FS and John G. Varel, as representative of the FS shareholders. On June 20, 2011, the parties entered into an amendment to this merger agreement. Pursuant to the merger agreement, Merger Sub will merge with and into FS, with FS surviving the merger as our direct, wholly owned subsidiary. On May 31, 2011, we entered into a stock purchase agreement with GTRI, the shareholders of GTRI and Glenn Smith, as representative of the GTRI shareholders, pursuant to which we will acquire all of the issued and, outstanding shares of GTRI. On June 2, 2011, we entered into a stock purchase agreement with Red River, the shareholders of Red River and Richard Bolduc, as representative of the Red River shareholders, pursuant to which we will acquire all of the issued and outstanding shares of Red River. We will consummate the merger with FS contemporaneously with the closing of this offering, and acquire GTRI and Red River immediately thereafter.

Immediately following completion of the Business Combination, FS, Red River and GTRI will operate as our wholly owned subsidiaries. The Business Combination will be accounted for under the acquisition method of accounting, and FS will be considered the acquiror of both Red River and GTRI for accounting purposes. The amounts assigned to the identifiable assets acquired and liabilities assumed in connection with the Business Combination will be based on estimated fair values as of the dates of the acquisitions, with the remainder, if any, to be recorded as goodwill. The fair values will be determined by our management, taking into consideration information supplied by the management of each of FS, GTRI and Red River and other relevant information.

The discussion and analysis of our results of operations that appears below addresses (i) selected pro forma combined results of operations of the Company for the three-month period ended March 31, 2011 compared to the three-month period ended March 31, 2010, reflecting (a) certain pro forma adjustments to the historical financial statements of the Company, FS, GTRI and Red River, (b) completion of the Business Combination and (c) the closing of this offering and the application of the net proceeds of this offering and (ii) unaudited pro forma combined revenues and cost of revenue of the Company for the year ended December 31, 2010, reflecting the adjustments and other items described above, compared to unaudited pro forma combined revenues and cost of revenue of FS, GTRI and Red River for the year ended December 31, 2009.

 

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Additionally, we discuss selected unaudited results of operations of each of FS, GTRI and Red River for (i) the three-month period ended March 31, 2011 compared to the three-month period ended March 31, 2010, (ii) the year ended December 31, 2010 compared to the year ended December 31, 2009 and (iii) the year ended December 31, 2009 compared to the year ended December 31, 2008.

Key Business Metrics

Revenues

Our revenues consist of product revenues, maintenance and support services revenues, professional services revenues and managed services revenues, each of which is discussed in more detail below. We experience fluctuations in quarterly revenues as a result of seasonal IT spending patterns among our clients. Many of our U.S. federal government agency clients tend to spend a substantial portion of their IT budgets in the second half of the year following the U.S. federal budget process, and many of our commercial clients also spend a substantial portion of their IT budgets in the second half of the year.

Products. Product revenues consist of sales of third party hardware and software. We recommend and procure hardware and software products from various technology OEMs and integrate them into one seamless solution. We are generally not required to carry significant amounts of inventory on behalf of our clients or to assure a continuous supply or immediate delivery of technology products from OEMs, and we provide our clients with the right to return defective technology products.

Maintenance and Support Services. Maintenance and support services are typically provided by third parties who are the primary obligors of these services under the maintenance and support service contracts. Revenues from maintenance and support services provided by third parties are recorded on a net basis. A portion of FS’s maintenance and support services are provided directly by FS under the associated contracts. Revenues from maintenance and support services provided by FS are recorded on a gross basis.

Professional Services. Our professional services revenues are derived from consulting, design, integration, testing and implementation in the areas of data center architecture, systems design, management and automation, virtualization, security, cloud infrastructure, application consulting and rationalization, database and SharePoint development, open source services and JAVA and .Net services. Professional services revenues also include post-implementation maintenance and support services such as on-site maintenance and repair, equipment lifecycle analysis and renewal services, remote infrastructure monitoring and general help desk and call center services. Our professional services arrangements typically have a duration of less than a year, and are fixed fee or time and materials-based. We sell professional services in all of the geographic areas in which we operate.

Managed Services. Our managed services revenues are derived from network management and monitoring, database administration, application management and monitoring, backup and recovery, data protection, managed VoIP, detailed security testing and monitoring, and emerging cloud-based services including managed hosting, hosted applications, VDI and application and server virtualization. Our managed services arrangements typically have a duration of one to three years, and include a fixed fee component and a variable fee component dependent upon usage level. We sell managed services in all of the geographic areas in which we operate.

Cost of Revenue / Gross Profit

Cost of revenue includes all costs related to the delivery of our products, professional services and managed services. Cost of product revenue consists primarily of the costs of product (net of vendor rebates). Because revenues from maintenance and support service contracts are typically recorded on a net basis, there is typically no associated cost of revenue. Cost of professional services revenue consists primarily of direct labor of engineers and related benefits costs, subcontracted services, certain travel expenses and related depreciation and facility expenses. Cost of managed services revenue consists primarily of direct labor of personnel and related benefits costs, certain travel expenses, facility related expenses and related depreciation expense.

 

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Gross profit is revenues minus cost of revenue, and represents profit after selling products, maintenance and support services, professional services, and managed services and deducting the costs directly associated with the sale of such products and services. Gross margin is gross profit divided by revenues. Because revenues from maintenance and support service contracts are typically recorded on a net basis, the gross margin on most of these revenues is 100%. However, the gross margin on revenues from maintenance and support service contracts that are recorded on a gross basis are substantially lower.

Operating Expenses

Operating expenses include selling, general and administrative expenses, as well as all other depreciation and amortization expenses. Selling, general and administrative expenses include salaries, benefits and commissions of our sales personnel and sales engineers who are engaged in the selling process, marketing expenses such as advertising, costs of product literature and trade shows, the costs of executive, financial, human resources and administrative personnel, and indirect labor of engineers and related benefits costs. We provide for depreciation and amortization of property and equipment, including computer equipment and software, furniture, equipment, automobiles and leasehold improvements, as well as intangible assets that we have purchased as part of prior acquisitions, over the useful life of the asset.

Interest Expense

Interest expense consists primarily of interest incurred by us in respect of our credit facilities and vendor payables, including any imputed interest expense on notes payable and amortization of debt discount.

Other Income (Expense)

Other income (expense) is composed of interest income and other income or expense. Interest income consists primarily of interest earned by us pursuant to notes receivable. Other income or expense consists primarily of, in the case of FS, income or expense related to the change in fair value of warrants classified as a liability, and in the case of GTRI and Red River, gains and losses on investments.

Income Tax (Expense) Benefit

Income tax (expense) benefit represents provisions for federal, state, local and foreign income taxes.

Income (Loss) from Continuing Operations

Income (loss) from continuing operations is income (loss) before income taxes minus income tax (expense) benefit.

Income (Loss) from Discontinued Operations

Income (loss) from discontinued operations is income (loss) from operations and disposal of discontinued operations minus related income tax (expense) benefit.

FusionStorm Global Inc.

Results of Operations

Selected Unaudited Pro Forma Combined Quarterly Results of Operations

The following table sets forth selected unaudited pro forma combined results of operations of the Company for each of the three-month periods ended March 31, June 30, September 30 and December 31, 2010 and March 31, 2011. The following table presents our selected unaudited pro forma combined quarterly financial

 

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data, reflecting (i) certain pro forma adjustments to the historical financial statements of the Company, FS, GTRI and Red River, (ii) completion of the Business Combination and (iii) the closing of this offering and the application of the net proceeds of this offering. The assumptions used and pro forma adjustments derived from such assumptions are based on currently available information, and we believe such assumptions are reasonable under the circumstances. The selected unaudited pro forma combined quarterly financial data presented below are derived from and should be read in conjunction with the Company’s unaudited pro forma combined financial statements and the notes thereto and the financial statements of each of the Company, FS, GTRI and Red River included elsewhere in this prospectus.

 

     Three Months ended  
     March 31, 2010     June 30, 2010      Sept. 30, 2010      Dec. 31, 2010      March 31, 2011  
     ($ in thousands)  

Revenues

   $ 123,941      $ 184,511       $ 193,762       $ 225,069       $ 155,489   

Cost of revenue

     100,001        151,412         163,372         189,159         126,122   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     23,940        33,099         30,390         35,910         29,367   

Operating expenses

     28,609        30,106         26,159         32,793         26,905   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

(Loss) income from operations

   $ (4,669   $ 2,993       $ 4,231       $ 3,117       $ 2,462   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Comparison of Three Months ended March 31, 2010 and 2011

Revenues. Revenues were $155.5 million for the three months ended March 31, 2011, an increase of $31.6 million or 26% from $123.9 million for the same period in 2010.

Product revenues were $136.3 million for the three months ended March 31, 2011, an increase of $25.7 million or 23% from $110.6 million for the same period in 2010. Maintenance and support services revenues were $7.2 million for the three months ended March 31, 2011, an increase of $2.4 million or 50% from $4.8 million for the same period in 2010. Professional services revenues were $7.4 million for the three months ended March 31, 2011, an increase of $0.6 million or 9% from $6.8 million for the same period in 2010. Managed services revenues were $4.5 million for the three months ended March 31, 2011, an increase of $2.7 million from $1.8 million for the same period in 2010.

Cost of Revenue / Gross Profit. Cost of revenue was $126.1 million for the three months ended March 31, 2011, an increase of $26.1 million or 26% from $100.0 million for the same period in 2010. Cost of revenue was 81% of revenues for each of the three-month periods ended March 31, 2011 and 2010. Gross profit was $29.3 million for the three months ended March 31, 2011, an increase of $5.3 million or 22% from $24.0 million for the same period in 2010. Gross margin was 19% for each the three-month periods ended March 31, 2011 and 2010.

Gross profit earned on product revenues was $20.0 million for the three months ended March 31, 2011, an increase of $2.9 million or 17% from $17.1 million for the same period in 2010. Gross margin on product was 15% for each of the three-month periods ended March 31, 2011 and 2010.

Gross profit earned on maintenance and support services revenues was $6.6 million for the three months ended March 31, 2011, an increase of $2.8 million from $3.8 million for the same period in 2010. Gross margin on maintenance and support services was 92% for the three months ended March 31, 2011, compared to 79% for the same period in 2010.

Gross profit earned on professional services revenues was $1.6 million for the three months ended March 31, 2011, a decrease of $0.7 million or 30% from $2.3 million for the same period in 2010. Gross margin on professional services was 22% for the three months ended March 31, 2011, compared to 34% for the same period in 2010.

 

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Gross profit earned on managed services revenues was $1.1 million for the three months ended March 31, 2011, an increase of $0.3 million or 38% from $0.8 million for the same period in 2010. Gross margin on managed services was 24% for the three months ended March 31, 2011, compared to 44% for the same period in 2010.

Operating Expenses. Operating expenses were $26.9 million for the three months ended March 31, 2011, a decrease of $1.7 million or 6% from $28.6 million for the same period in 2010.

Comparison of Years ended December 31, 2009 and 2010

The following table sets forth unaudited pro forma combined revenues and cost of revenue of the Company, FS, GTRI and Red River for the years ended December 31, 2009 and 2010, reflecting (i) certain pro forma adjustments to the historical financial statements of the Company, FS, GTRI and Red River, (ii) completion of the Business Combination and (iii) the closing of this offering and the application of the net proceeds of this offering. The assumptions used and pro forma adjustments derived from such assumptions are based on currently available information, and we believe such assumptions are reasonable under the circumstances. The unaudited pro forma combined financial data for the year ended December 31, 2010 presented below are derived from and should be read in conjunction with the Company’s unaudited pro forma combined financial statements and the notes thereto and the financial statements of each of the Company, FS, GTRI and Red River included elsewhere in this prospectus.

 

     Year ended December 31,  
     2009      2010  
     ($ in thousands)  

Revenues

   $ 570,931       $ 727,283   

Cost of revenue

     475,538         603,944   
  

 

 

    

 

 

 

Gross profit

   $ 95,393       $ 123,339   
  

 

 

    

 

 

 

Revenues. Revenues were $727.3 million for the year ended December 31, 2010, an increase of $156.4 million or 27% from $570.9 million for the same period in 2009. Product revenues were $657.4 million for the year ended December 31, 2010, an increase of $133.5 million or 25% from $523.9 million for the same period in 2009. Maintenance and support services revenues were $24.7 million for the year ended December 31, 2010, an increase of $5.2 million or 27% from $19.5 million for the same period in 2009. Professional services revenues were $31.0 million for the year ended December 31, 2010, an increase of $10.1 million or 48% from $20.9 million for the same period in 2009. Managed services revenues were $14.2 million for the year ended December 31, 2010, an increase of $7.5 million from $6.7 million for the same period in 2009.

Cost of Revenue. Cost of revenue was $603.9 million for the year ended December 31, 2010, an increase of $128.4 million or 27% from $475.5 million for the same period in 2009. Cost of revenue was 83% of revenues for each of the years ended December 31, 2010 and 2009. Gross profit was $123.3 million for the year ended December 31, 2010, an increase of $28.0 million or 29% from 95.4 million for the same period in 2009. Gross margin was 17% for each of the years ended December 31, 2010 and 2009.

Gross profit earned on product revenues was $89.1 for the year ended December 31, 2010, an increase of $23 or 35% from $66.1 for the same period in 2009. Gross margin on product was 14% for the year ended December 31, 2010, compared to 13% for the same period in 2009.

Gross profit earned on maintenance and support services revenues was $22.2 for the year ended December 31, 2010, an increase of $5.1 or 30% from $17.1 for the same period in the 2009. Gross margin on maintenance and support services was 90% for the year ended December 31, 2010 compared to 88% for the same period in 2009.

 

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Gross profit earned on professional services revenues was $6.9 million for the year ended December 31, 2010, a decrease of $0.1 million or 1% from $7.0 million for the same period in 2009. Gross margin on professional services was 22% for the year ended December 31, 2010, compared to 33% from the same period in 2009.

Gross profit earned on managed services revenues was $5.1 million for the year ended December 31, 2010, an increase of $0.9 million or 21% from $4.2 million for the same period in 2009. Gross margin on managed services was 36% for the year ended December 31, 2010, compared to 63% for the same period in 2009.

Financial Position, Liquidity and Capital Resources

Our unaudited pro forma combined primary sources of liquidity as of March 31, 2011 consisted of approximately $27.5 million of cash and cash equivalents and approximately $         million available under the credit facilities of FS, GTRI and Red River. Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and size of potential acquisitions, the expansion of our sales and marketing activities, the expansion of our engineering capabilities, and capital expenditures to expand our managed services offerings. Of the $         million in net proceeds of this offering after deducting estimated underwriting discounts and commissions and estimated offering expenses, we intend to use approximately $         million to pay the cash portion of the purchase price for FS, GTRI and Red River in the Business Combination, approximately $         million to repay certain indebtedness of FS, GTRI and Red River, and approximately $         million for working capital and other general corporate purposes, including the expansion of our current business through acquisitions of complementary or strategic businesses, the enhancement of our existing services and solutions and the hiring of additional personnel to increase our business development, sales and marketing activities. To the extent that our cash and cash equivalents, cash flow from operating activities and net proceeds of this offering are insufficient to fund our future activities, we may need to raise additional funds through bank credit arrangements or public or private equity or debt financings.

We expect to incur substantial integration costs associated with the Business Combination, including, among others, costs incurred in connection with the implementation of a centralized financial reporting and management system and compliance with Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual assessment of our internal controls over financial reporting. In addition, certain agreements pursuant to which FS previously acquired certain businesses provide for “earn-outs” or performance payments, requiring the payment of consideration over time based on the performance of the acquired business and other factors. As of March 31, 2011, we estimate that the aggregate amount of such payments will be $1.2 million.

Each of FS, GTRI and Red River has experienced, and we expect to continue to experience, fluctuations in quarterly revenues as a result of seasonal patterns among clients. The businesses of each of GTRI and Red River are generally stronger in the second half of the year when U.S. federal government agencies tend to spend a substantial portion of their IT budgets following the U.S. federal budget process. FS’s business has also generally been stronger in the second half of the year due, in part, to the cyclical trends in IT spending by its commercial clients, many of which spend a substantial portion of their IT budgets in that half of the year.

FS

Overview

FS, founded in 1995, provides IT solutions primarily to commercial clients across the United States, combining technology products from leading vendors and OEMs with a range of professional services, managed services and maintenance and support services offerings.

 

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Results of Operations

Comparison of Three Months ended March 31, 2010 and 2011

The following table sets forth selected unaudited results of operations of FS for each of the three-month periods ended March 31, 2010 and 2011, which are derived from the unaudited financial statements and the notes thereto of FS included elsewhere in this prospectus. The unaudited financial statements of FS have been prepared on the same basis as FS’s annual consolidated financial statements appearing elsewhere in this prospectus and, in the opinion of management, reflect all adjustments consisting of normal recurring adjustments considered necessary to present fairly the results of operations for the three-month periods ended March 31, 2010 and 2011. Operating results for any fiscal quarter are not necessarily indicative of results for the full year.

 

     Three Months ended March 31,  
             2010                     2011          
     ($ in thousands)  

Revenues

   $ 67,313      $ 94,339   

Cost of revenue

     51,390        74,398   
  

 

 

   

 

 

 

Gross profit

     15,923        19,941   

Operating expenses

     19,909        17,465   
  

 

 

   

 

 

 

(Loss) income from operations

     (3,986     2,476   

Interest expense

     (1,492     (2,550

Other (expense) income

     (13     (245
  

 

 

   

 

 

 

(Loss) income before income taxes

     (5,491     (319

Income tax (expense) benefit

     1,411        99   
  

 

 

   

 

 

 

(Loss) income from continuing operations

     (4,080     (220

(Loss) income from discontinued operations

     (988     (61
  

 

 

   

 

 

 

Net (loss) income

   $ (5,068   $ (281
  

 

 

   

 

 

 

Revenues. Revenues were $94.3 million for the three months ended March 31, 2011, an increase of $27.0 million or 40% from $67.3 million for the same period in 2010.

Product revenues were $80.5 million for the three months ended March 31, 2011, an increase of $21.3 million or 36% from $59.2 million for the same period in 2010. The increase in product revenues was primarily the result of increased demand for networking equipment and storage capacity among FS clients, including in connection with the significant expansion of a large client’s retail store footprint throughout the United States and abroad, as well as technology upgrades to this client’s existing retail stores.

Maintenance and support services revenues were $5.4 million for the three months ended March 31, 2011, an increase of $2.1 million from $3.3 million for the same period in 2010. The increase in maintenance and support services revenues was primarily the result of increased demand for support related to product sales.

Professional services revenues were $4.1 million for the three months ended March 31, 2011, an increase of $1.0 million from $3.1 million for the same period in 2010. The increase in professional services revenues was primarily attributable to ongoing, multiple location retail store technology implementations for a large client.

Managed services revenues were $4.4 million for the three months ended March 31, 2011, an increase of $2.7 million from $1.7 million for the same period in 2010. The increase in managed services revenue was primarily the result of an April 2010 acquisition of a managed services company.

Cost of Revenue / Gross Profit. Cost of revenue was $74.4 million for the three months ended March 31, 2011, an increase of $23.0 million or 45% from $51.4 million for the same period in 2010. Cost of revenue was

 

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79% of revenues for the three months ended March 31, 2011, compared to 76% for the same period in 2010. Gross profit was $19.9 million for the three months ended March 31, 2011, an increase of $4.0 million or 25% from $15.9 million for the same period in 2010. Gross margin was 21% for the three months ended March 31, 2011, compared to 24% for the same period in 2010.

Gross profit earned on product revenues was $13.4 million for the three months ended March 31, 2011, an increase of $2.2 million or 20% from $11.2 million for the same period in 2010. Gross margin on product was 17% for the three-month period ended March 31, 2011, compared to 19% for the same period in 2010, primarily due to lower vendor rebates. Vendor rebates were 4% of product revenues for the three months ended March 31, 2011, compared to 6% for the same period in 2010. This reduction in vendor rebates was due to certain vendors changing their rebate programs during 2010, affecting certain IT solutions providers, including FS.

Gross profit earned on maintenance and support services revenues was $4.7 million for the three months ended March 31, 2011, an increase of $1.9 million or 68% from $2.8 million for the same period in 2010. Gross margin on maintenance and support services was 87% for the three-month period ended March 31, 2011, compared to 85% for the same period in 2010.

Gross profit earned on professional services revenues was $0.7 million for the three months ended March 31, 2011, a decrease of $0.4 million from $1.1 million for the same period in 2010. Gross margin on professional services was 17% for the three months ended March 31, 2011, compared to 35% for the same period in 2010. The decrease in gross margin on professional services was due to increased costs associated with the growth of FS’s professional services practice, with costs related to increased headcount of professional services personnel as well as an increased level of subcontracted labor, increasing more rapidly than revenues.

Gross profit earned on managed services revenues was $1.2 million for the three months ended March 31, 2011, an increase of $0.4 million or 50% from $0.8 million for the same period in 2010. Gross margin on managed services was 27% for the three months ended March 31, 2011, compared to 47% for the same period in 2010. The decrease in gross margin on managed services was primarily due to the acquisition of a managed services company in April 2010 that resulted in increased depreciation expense on related assets.

Operating Expenses. Operating expenses were $17.5 million for the three months ended March 31, 2011, a decrease of $2.4 million or 12% from $19.9 million for the same period in 2010.

Payroll expense (including taxes and benefits) was $6.5 million for the three months ended March 31, 2011, an increase of $1.3 million or 25% from $5.2 million for the same period in 2010. The increase was the result of continued investment in sales, marketing and key engineering areas to support demand in the areas of networking, storage and enterprise software. Infrastructure costs also increased in key areas of IT and operations for investments in cloud computing initiatives and inventory management, as well as in finance for increased demands in accounting and other support functions.

Commissions and variable compensation expense was $6.3 million for the three months ended March 31, 2011, an increase of $1.8 million or 40% from $4.5 million for the same period in 2010. Commissions are earned primarily based upon a percentage of the gross margin generated and therefore increased in parallel with the increase in gross profit. Variable compensation is earned as a result of achieving target-based objectives. For the three months ended March 31, 2011, commissions expense was 32% of gross profit, compared to 28% for the same period in 2010. Of the $6.3 million of commissions and variable compensation expense for the three months ended March 31, 2011, $1.6 million was variable compensation and $4.7 million was commissions paid to sales personnel based on gross margin amounts. Of the $4.5 million of commissions and variable compensation expense for the three months ended March 31, 2010, $1.3 million was variable compensation and $3.2 million was commissions paid to sales personnel based on gross margin amounts. The increase in variable compensation was primarily the result of sales personnel achieving target objectives based on increased revenues.

 

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Legal and accounting expense was $0.2 million for the three months ended March 31, 2011, a decrease of $1.8 million from $2.0 million for the same period in 2010. The decrease was due to the settlement of litigation in 2010.

All other operating expenses were $4.5 million for the three months ended March 31, 2011, a decrease of $3.7 million or 45% from $8.2 million for the same period in 2010. The decrease reflects a decline in FS’s obligations under its phantom stock plan.

Interest Expense. Interest expense was $2.6 million for the three months ended March 31, 2011, an increase of $1.1 million from $1.5 million for the same period in 2010. The increase resulted from an extension of outstanding trade payables and an increase in both the revolving line of credit with FS’s secured creditors and the interest cost on secured payables to a major distributor.

Other Income (Expense). Other income (expense) was immaterial for each of the three-month periods ended March 31, 2011 and 2010.

Income Tax (Expense) Benefit. FS recorded income tax (expense) benefit of an immaterial amount of $0.1 million for the three months ended March 31, 2011, decrease of $1.3 million from $1.4 million for the same period in 2010. The effective tax rate, or income tax (expense) benefit divided by income (loss) before income taxes, was 33% for the three months ended March 31, 2011, compared to 25% for the same period in 2010.

Income (Loss) from Continuing Operations. Income (loss) from continuing operations was $(0.2 million) for the three months ended March 31, 2011, an improvement of $3.9 million from $(4.1 million) for the same period in 2010. Income (loss) from continuing operations represented (0)% of revenues for the three months ended March 31, 2011, compared to (6)% for the same period in 2010. These improvements were a result of a decline in selling, general and administrative expenses to 19% of revenues for the three months ended March 31, 2011 from 30% of revenues for the same period in 2010.

Income (Loss) from Discontinued Operations. FS had income (loss) from discontinued operations of $0.1 million for the three months ended March 31, 2011, compared to $(1.0) million for the same period in 2010. This change was due to FS’s sale of a subsidiary in the fourth quarter of 2010.

 

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Comparison of Years ended December 31, 2009 and 2010

The following table sets forth selected results of operations of FS for each of the years ended December 31, 2009 and 2010, which are derived from the audited financial statements and the notes thereto of FS included elsewhere in this prospectus.

 

     Year ended December 31,  
         2009             2010      
     ($ in thousands)  

Revenues

   $ 237,469      $ 376,308   

Cost of revenue

     182,746        304,958   
  

 

 

   

 

 

 

Gross profit

     54,723        71,350   

Operating expenses

     68,771        76,049   
  

 

 

   

 

 

 

(Loss) income from operations

     (14,048     (4,699

Interest expense

     (3,584     (3,063

Other income (expense)

     294        (517
  

 

 

   

 

 

 

(Loss) income before income taxes

     (17,338     (8,279

Income (expense) tax benefit

     6,197        2,127   
  

 

 

   

 

 

 

(Loss) income from continuing operations

     (11,141     (6,152

(Loss) income from discontinued operations

     (1,314     (10,205
  

 

 

   

 

 

 

Net (loss) income

   $ (12,455   $ (16,357
  

 

 

   

 

 

 

Revenues. Revenues were $376.3 million for the year ended December 31, 2010, an increase of $138.8 million or 58% from $237.5 million for the same period in 2009.

Product revenues were $331.9 million for the year ended December 31, 2010, an increase of $125.4 million or 61% from $206.5 million for the same period in 2009. The increase in product revenues was primarily the result of increased demand for networking equipment, storage capacity and enterprise software among FS clients, including in connection with the significant expansion of a large client’s retail store footprint throughout the United States and abroad, as well as technology upgrades to this client’s existing retail stores.

Maintenance and support services revenues were $13.4 million for the year ended December 31, 2010, an increase of $1.0 million or 8% from $12.4 million for the same period in 2009. The increase in contract support revenues was primarily the result of increased demand for support related to product sales.

Professional services revenues were $17.3 million for the year ended December 31, 2010, an increase of $5.2 million or 43% from $12.1 million for the same period in 2009. The growth in professional services revenues was primarily attributable to ongoing, multiple location retail store technology implementations for a large client.

Managed services revenues were $13.7 million for the year ended December 31, 2010, an increase of $7.2 million from $6.5 million for the same period in 2009. The increase in managed services revenues resulted primarily from an April 2010 acquisition of a managed services company and clients’ increased demand for data center capacity.

Cost of Revenue / Gross Profit. Cost of revenue was $305.0 million for the year ended December 31, 2010, an increase of $122.2 million from $182.8 million for the same period in 2009. Cost of revenue was 81% of revenues for the year ended December 31, 2010, compared to 77% for the same period in 2009. FS’s gross profit was $71.3 million for the year ended December 31, 2010, an increase of $16.7 million or 31% from $54.7 million for the same period in 2009. FS’s gross margin was 19% for the year ended December 31, 2010, compared to 23% for the same period in 2009.

 

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Gross profit earned on product revenues was $53.0 million for the year ended December 31, 2010, an increase of $16.8 million or 46% from $36.2 million for the same period in 2009. Gross margin on product was 16% for the year ended December 31, 2010, compared to 18% for the same period in 2009.

Gross profit earned on maintenance and support services revenues was $10.9 million for the year ended December 31, 2010, an increase of $0.9 million or 9% from $10.0 million for the same period in the 2009. Gross margin on maintenance and support services was 81% for each of the years ending December 31, 2010 and 2009.

Gross profit earned on professional services revenues was $2.4 million for the year ended December 31, 2010, a decrease of $2.0 million or 45% from $4.4 million for the same period in 2009. Gross margin on professional services was 14% for the year ended December 31, 2010, compared to 37% from the same period in 2009. The decrease in gross margin on professional services was due to increased costs associated with the growth of FS’s professional services practice, including costs related to increased headcount of professional services personnel as well as an increased level of subcontracted labor.

Gross profit earned on managed services revenues was $5.1 million for the year ended December 31, 2010, an increase of $1.0 million or 24% from $4.1 million for the same period in 2009. Gross margin on managed services was 37% for the year ended December 31, 2010, compared to 63% for the same period in 2009. The decrease in gross margin on managed services was the result of a 2010 acquisition that resulted in increased depreciation expense on related assets.

Operating Expenses. Operating expenses were $76.0 million for the year ended December 31, 2010, an increase of $7.2 million or 10% from $68.8 million from the same period in 2009.

Payroll expenses (including taxes and benefits) were $23.8 million for the year ended December 31, 2010, an increase of $3.9 million or 20% from $19.9 million for the same period in 2009. The increase was the result of continued investment in sales, marketing and key engineering areas to support demand in the areas of networking, storage and enterprise software. Infrastructure costs also increased in key areas of IT and operations for investments in cloud computing initiatives and inventory management, as well as in finance for increased demands in accounting and other support functions.

Commissions and variable compensation expense was $25.3 million in 2010, an increase of $9.8 million or 63% from $15.5 million for the same period in 2009. Commissions are primarily earned based upon a percentage of the gross margin generated and therefore increased in parallel with the increase in gross profit. Variable compensation is earned as a result of achieving target-based objectives. For the year ended December 31, 2010, commissions expense was 35% of gross profit, compared to 28% for the same period in 2009. Of the $25.3 million of commissions and variable compensation expense in 2010, $9.6 million was variable compensation and $15.7 million was commissions paid to sales personnel based on gross margin amounts. Of the $15.5 million of commissions and variable compensation expense in 2009, $4.6 million was variable compensation and $10.9 million was commissions paid to sales personnel based on gross margin amounts. The increase in variable compensation was primarily the result of sales personnel achieving target objectives based on increased revenues.

Legal and accounting expense was $4.4 million for the year ended December 31, 2010 ($3.6 million of which was legal expense), a decrease of $14.5 million from $18.9 million for the same period in 2009. The decrease was due to litigation and related settlement costs declining significantly during the second half of 2010 in connection with legal proceedings alleging unfair business practices, including trade secret misappropriation and interference with prospective economic advantage.

All other operating expenses were $22.5 million for the year ended December 31, 2010, an increase of $8.0 million or 55% from $14.5 million from the same period in 2009. The increase reflects an increase in FS’s obligations under its phantom stock plan.

 

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Interest Expense. Interest expense was $3.1 million for the year ended December 31, 2010, a decrease of $0.5 million or 16% from $3.6 million for the same period in 2009. The decrease was due to payment in respect of notes payable and decreased interest expense due to a lower principal balance on the debt.

Other Income (Expense). Other income (expense) was $(0.5 million) for the year ended December 31, 2010, a decrease of $0.8 million from $0.3 million for the same period in 2009.

Income Tax (Expense) Benefit. FS recorded income tax (expense) benefit of $2.1 million for the year ended December 31, 2010, a decrease of $4.1 million from $6.2 million for the same period in 2009. The effective tax rate was 25% for the year ended December 31, 2010, compared to 36% for the same period in 2009.

Income (Loss) from Continuing Operations. FS’s recorded income (loss) from continuing operations of $(6.2 million) for the year ended December 31, 2010, an improvement of $4.9 million from $(11.1 million) for the same period in 2009. Income (loss) from continuing operations represented (2)% of revenues for the year ended December 31, 2010, compared to (5)% for the same period in 2009.

Income (Loss) from Discontinued Operations. Income (loss) from discontinued operations was $(10.2 million) for the year ended December 31, 2010, a decrease of $8.9 million from $(1.3 million) for the same period in 2009. The increase was attributable primarily to a subsidiary’s loss from operations of $(12.2 million) in 2010, prior to its disposition in the fourth quarter of 2010.

Comparison of Years ended December 31, 2008 and 2009

The following table sets forth selected results of operations of FS for each of the years ended December 31, 2008 and 2009, which are derived from the audited financial statements and the notes thereto of FS included elsewhere in this prospectus.

 

     Year ended December 31,  
           2008                 2009        
     ($ in thousands)  

Revenues

   $ 249,396      $ 237,469   

Cost of revenue

     192,105        182,746   
  

 

 

   

 

 

 

Gross profit

     57,291        54,723   

Operating expenses

     51,473        68,771   
  

 

 

   

 

 

 

Income (loss) from operations

     5,818        (14,048

Interest expense

     (4,853     (3,584

Other (expense) income

     (73     294   
  

 

 

   

 

 

 

Income (loss) before income taxes

     892        (17,338

Income tax (expense) benefit

     (1,061     6,197   
  

 

 

   

 

 

 

(Loss) income from continuing operations

     (169     (11,141

Income (loss) from discontinued operations

     1,376        (1,314
  

 

 

   

 

 

 

Net income (loss)

   $ 1,207      $ (12,455
  

 

 

   

 

 

 

Revenues. Revenues for the year ended December 31, 2009 were $237.5 million, a decrease of $11.9 million or 5% from $249.4 million for the same period in 2008.

Product revenues were $206.5 million for the year ended December 31, 2009, a decrease of $14.8 million or 7% from $221.3 million for the same period in 2008. The decrease in product revenues related to the lingering effects of the 2008 national economic downturn.

 

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Maintenance and support services revenues were $12.4 million for the year ended December 31, 2009, an increase of $0.6 million or 5% from $11.8 million for the same period in 2008.

Professional services revenues were $12.1 million for the year ended December 31, 2009, an increase of $1.7 million or 16% from $10.4 million for the same period in 2008. The increase in professional services revenues was primarily attributable to ongoing, multiple location retail store technology implementations for a large client.

Managed services revenues were $6.5 million for the year ended December 31, 2009, an increase of $0.6 million or 10% from $5.9 million for the same period in 2008.

Cost of Revenue / Gross Profit. Cost of revenue was $182.7 million for the year ended December 31, 2009, a decrease of $9.4 million or 5% from $192.1 million for the same period in 2008. Cost of revenue was 77% of revenues for each of the years ended December 31, 2009 and 2008. FS’s gross profit was $54.8 million for the year ended December 31, 2009, a decrease of $2.5 million or 4% from $57.3 million for the same period in 2008. FS’s gross margin was 23% for each of the years ended December 31, 2009 and 2008.

Gross profit earned on product revenues was $36.2 million for the year ended December 31, 2009, a decrease of $3.8 million or 10% from $40.0 million for the same period in 2008. Gross margin on product was 18% for each of the years ended December 31, 2009 and 2008.

Gross profit earned on maintenance and support services revenues was $10.0 million for the year ended December 31, 2009, an increase of $1.4 million or 16% from $8.6 million for the same period in 2008. Gross margin on maintenance and support services was 81% for the year ended December 31, 2009, compared to 73% for the same period in 2008.

Gross profit earned on professional services revenues was $4.4 million for the year ended December 31, 2009, a decrease of $0.2 million or 4% from $4.6 million for the same period in 2008. Gross margin on professional services was 36% for the year ended December 31, 2009, compared to 44% for the same period in 2008. The decrease in gross margin on professional services was due to increased headcount of professional services personnel, as well as an increased level of subcontracted labor to support growth of FS’s professional services practice.

Gross profit earned on managed services revenues was $4.1 million for each of the years ended December 31, 2009 and 2008. Gross margin on managed services was 63% for the year ended December 31, 2009, compared to 69% for the same period in 2008. The decrease in gross margin on managed services was due to increased depreciation expense on related assets.

Operating Expenses. Operating expenses were $68.8 million for the year ended December 31, 2009, an increase of $17.3 million or 34% from $51.5 million for the same period in 2008.

Payroll expenses accounted for $19.9 million of operating expenses in 2009, compared to $18.0 million (inclusive of $1.5 million of severance costs) in 2008. Commissions and variable compensation expenses decreased to $15.5 million in 2009 from $16.4 million in 2008. Of the $15.5 million of commissions and variable compensation in 2009, $4.6 million was variable compensation and $10.9 million was commissions paid to the FS sales personnel based on gross margin amounts. Of the $16.4 million of commissions and variable compensation in 2008, $4.8 million was variable compensation and $11.6 million was commission paid to FS sales personnel based on gross margin amounts. The increase in variable compensation was the result of sales personnel achieving target objectives based on certain revenue thresholds in the compensation plan.

Legal and accounting expense was $18.9 million in 2009 compared to $1.1 million in 2008, an increase of $17.8 million. This increase is attributable to a provision of $17.3 million in 2009 related to the settlement of certain litigation. All other operating expenses were $14.5 million for the year ended December 31, 2009, a decrease of $1.5 million or 9% from $16.0 million for the same period in 2008.

 

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Interest Expense. Interest expense was $3.6 million for the year ended December 31, 2009, a decrease of $1.3 million or 27% from $4.9 million for the same period in 2008. The decrease resulted from a decrease in the average amount outstanding under the revolving line of credit with FS’s secured creditors.

Other Income (Expense). Other income (expense) was $0.3 million for the year ended December 31, 2009, an improvement of $0.4 million from $(0.1 million) for the same period in 2008.

Income Tax (Expense) Benefit. FS recorded income tax (expense) benefit of approximately $6.2 million for the year ended December 31, 2009, an improvement of $7.3 million from $(1.1 million) for the same period in 2008. The effective tax rate was 36% for the year ended December 31, 2009 compared to 122% for the same period in 2008. The effective tax rate was significantly higher in 2008 as a result of the impact of permanent differences in that year combined with relatively low pre-tax income.

Income (Loss) from Continuing Operations. Income (loss) from continuing operations was $(11.1 million) for the year ended December 31, 2009, a decrease of $10.9 million from $(0.2 million) for the same period in 2008. Income (loss) from continuing operations represented (5)% of revenues for the year ended December 31, 2009, compared to (0.1)% for the same period in 2008.

Income (Loss) from Discontinued Operations. FS recorded income (loss) from discontinued operations of $(1.3 million) for the year ended December 31, 2009, an decrease of $2.7 million from $1.4 million for the same period in 2008.

Financial Position, Liquidity and Capital Resources

Overview

For the three-month period ended March 31, 2011 and the years ended December 31, 2008, 2009 and 2010, FS funded its operations primarily through a combination of cash provided by operating activities and credit facility borrowings. FS’s primary sources of liquidity as of March 31, 2011 consisted of approximately $4.1 million of cash and available credit of $4.0 million under its primary credit facility with GE Capital. FS’s principal uses of its cash resources during this 39-month period were to fund operations, invest in property and equipment, acquire other companies and service debt. FS’s liquidity declined from December 31, 2010 to March 31, 2011, as its net working capital deficit increased by $0.9 million during this period. Working capital deficit increased from $32.3 million at December 31, 2010 to $33.2 million at March 31, 2011. GE Capital’s $60 million credit facility was operational for the full year, allowing FS to restructure its long-term debt to a short term revolver facility exchanging 14% borrowing costs for variable interest rate debt at LIBOR plus 5.75%. Non-cash charges for the three months ended March 31, 2011 included depreciation of $1.5 million; provisions for doubtful accounts receivable of $0.2 million, debt forgiveness of $0.3 million and stock-based compensation of $0.4 million.

Cash Flows from Operating Activities

FS’s net cash from continuing operations provided by (used in) operating activities for the three months ended March 31, 2011 was $6.8 million, compared to $(12.0 million) for the same period in 2010. FS had income (loss) from continuing operations for the three months ended March 31, 2011 of $(0.3 million), adjusted by non-cash depreciation and amortization of $1.7 million, stock-based compensation of $(0.4 million), debt forgiveness of $(0.3 million), change in fair value of phantom stock of $1.3 million, change in fair value of warrant liability of $0.9 million and bad debt expense of $0.2 million. This compares to income (loss) from continuing operations of $(5.1 million) for the same period in 2010, adjusted by non-cash depreciation and amortization of $0.9 million, stock-based compensation of $4.1 million, debt forgiveness of $(0.3 million), change in fair value of phantom stock of $0.7 million, deferred taxes of $(1.9 million) and change in fair value of warrant liability of $0.5 million. Net changes in FS’s operating assets and liabilities provided an additional $3.4 million in cash for the three months ended March 31, 2011, compared to $11.9 million of cash used by the change in operating assets and liabilities for the same period in 2010.

FS’s net cash from continuing operations provided by (used in) operating activities for the year ended December 31, 2010 was ($17.4 million), compared to $12.0 million for the same period in 2009. FS had income

 

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(loss) from continuing operations for the year ended December 31, 2010 of $(16.4 million), adjusted by non-cash depreciation and amortization of $5.8 million, non-cash share-based compensation expense of $7.7 million, deferred taxes of $0.7 million and bad debt expense of $0.8 million, compared to $(12.5 million) for the same period in 2009, adjusted by non-cash depreciation and amortization of $2.6 million, non-cash share-based compensation expense of $1.8 million, debt forgiveness of $1.0 million, and deferred taxes of $6.4 million. Net changes in FS’s operating assets and liabilities used an additional $21.4 million in cash for the year ended December 31, 2010, compared to $25.4 million of cash provided by the change in operating assets and liabilities for the same period in 2009. The decrease in cash from operating activities resulting from the change in operating assets and liabilities was primarily the result of FS entering into a debt agreement in 2010, which increased cash from financing activities as opposed to utilizing a floor plan facility in 2009, which increased cash from operating activities.

FS’s net cash from continuing operations provided by (used in) operating activities for the year ended December 31, 2009 was $12.0 million, compared to $5.8 million for the same period in 2008. FS had income (loss) from continuing operations for the year ended December 31, 2009 of $(12.5 million), adjusted by non-cash depreciation and amortization of $2.6 million, non-cash share-based compensation expense of $1.8 million, debt forgiveness of $1.0 million, and deferred taxes of $6.4 million, compared to income (loss) from continuing operations of $(1.2 million) for the same period in 2008, adjusted by non-cash depreciation and amortization of $2.4 million and non-cash share-based compensation expense of $1.3 million. Net changes in FS’s operating assets and liabilities resulted in $25.4 million in additional cash provided by operating activities for the year ended December 31, 2009, compared to $1.5 million for the same period in 2008. The increase in cash provided by the changes in operating assets and liabilities were primarily driven by a $14.0 million increase in accrued expenses and other current payables in 2009.

Cash Flows from Investing Activities

FS’s investing activities consist almost entirely of purchases of property and equipment, including both equipment for its own operations and equipment used to provide managed services to its clients. FS’s net cash provided by (used) in investing activities was $0.9 million for the three months ended March 31, 2011, attributable to purchases of property and equipment of $1.0 million, compared to net cash provided by (used in) investing activities of ($0.2 million) for the same period in 2010, attributable to purchases of property and equipment of $0.9 million, offset by cash paid for restricted cash.

FS’s net cash used in investing activities was $7.8 million for the year ended December 31, 2010, attributable primarily to purchases of property and equipment of $5.3 million and the acquisition of an entity for $0.8 million, compared to net cash used in investing activities of $4.0 million for the same period in 2009, attributable primarily to purchases of property and equipment of $1.6 million and the acquisition of an entity for $1.3 million.

FS’s net cash used in investing activities was $4.0 million for the year ended December 31, 2009, attributable primarily to purchases of property and equipment of $1.6 million and the acquisition of an entity for $1.3 million, compared to net cash used in investing activities of $1.8 million for the same period in 2008, attributable primarily to purchases of property and equipment of $1.6 million.

Cash Flows from Financing Activities

FS’s net cash provided by (used in) financing activities was $(5.3 million) for the three months ended March 31, 2011, resulting primarily from the repayment of long-term debt. FS’s net cash provided by (used in) financing activities was $13.0 million for the same period in 2010, resulting primarily from advances on notes payable.

FS’s net cash provided by (used in) financing activities was $23.1 million for the year ended December 31, 2010, resulting primarily from advances of long-term debt of $22.2 million. FS’s net cash provided by (used in) financing activities was $(8.8 million) for the same period in 2009, attributable primarily to repayment of a note payable.

 

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FS’s net cash provided by (used in) financing activities was ($8.8 million) for the year ended December 31, 2009, attributable primarily to repayment of a note payable. FS’s net cash provided by (used in) financing activities was $(3.0 million) for the same period in 2008, attributable primarily to repayment of a note payable.

Indebtedness

FS has a $60.0 million working capital facility with a bank to cover its normal operating needs. The interest rate under this line of credit is equal to LIBOR plus 5.75% per annum (or 6.01% as of March 31, 2011) and the line of credit is secured by all of FS’s business assets. As of March 31, 2011, FS’s outstanding balance under this facility was $18.8 million. Additionally, FS has senior subordinated variable interest rate notes payable, due in monthly principal and interest installments through February 2013, with an interest rate of 11.74% as of March 31, 2011. The remaining balance on these notes was $1.7 million as of March 31, 2011. Capital leases secured by equipment totaled $0.6 million as of March 31, 2011, with monthly installments of principal and interest due through March 2012. Two notes resulting from a repayment agreement entered into during 2010 as the result of the settlement of a legal proceeding have an interest rate of 9% and an outstanding balance of $4.1 million as of March 31, 2011. FS also has various renegotiated trade payables due in monthly principal and, in certain cases interest, installments through October 2011. The weighted average interest rate is 10% and the outstanding amount is $3.0 million as of March 31, 2011. These notes represent certain trade payables that were extended and converted to debt obligations. FS, as part of the settlement of litigation in 2010, entered into a settlement agreement note which is non-interest bearing, and is due in monthly installments of principal through June 2011. There is a $0.4 million balance due on the note as of March 31, 2011.

Capital Expenditures

Capital expenditures were $1.0 million for each of the three-month periods ended March 31, 2011 and 2010. Capital expenditures for the years ended December 31, 2010, 2009 and 2008 were $5.3 million, $1.6 million and $1.6 million, respectively. FS’s capital expenditures in the foreseeable future will be primarily for additional assets required to expand its managed services offerings.

Contractual Obligations

     Payments due by Period  
Contractual Obligations:    Total      Less than
1  Year
     1-3
Years
     3-5
Years
     More Than
5  Years
 
     ($ in thousands)  

Current and long-term debt, excluding capital leases

   $ 33,406       $ 30,501       $ 2,905       $ -       $ -   

Capital leases

     726         591         135         -         -   

Operating leases

     5,132         1,507         2,400         905         320   

Purchases

     -         -         -         -         -   

Other long-term liabilities*

     1,109         300         633         176         -   

 

* Comprises estimated amounts due pursuant to “earn-outs” or performance payment provisions in connection with acquisitions, which require the payment of consideration over time based on the performance of the acquired business and certain related factors.

GTRI

Results of Operations

GTRI, incorporated in 1998, is a provider of IT solutions to the public sector and commercial clients. Prior to the Business Combination, GTRI elected to be treated under Subchapter S of the Internal Revenue Code of 1986, as amended, for federal income tax purposes. As a result, GTRI has not been subject to federal or state income tax at the corporate level. Accordingly, the quarterly and the annual results of operations of GTRI do not include income tax (expense) benefit. Following the Business Combination, GTRI will lose its status as a Subchapter S Corporation and will be included in the Company’s consolidated federal corporate income tax return.

 

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The quarterly and the annual results of operations of GTRI are consolidated with the accounts of RSC, GTRI’s majority-owned (85%) subsidiary. Prior to completion of the Business Combination, GTRI will dispose of its investment in RSC and as a result RSC’s accounts will no longer be consolidated with GTRI following the Business Combination.

Comparison of Three Months ended March 31, 2010 and 2011

The following table sets forth selected unaudited results of operations of GTRI for each of the three-month periods ended March 31, 2010 and 2011, which are derived from the unaudited financial statements and the notes thereto of GTRI included elsewhere in this prospectus. The unaudited financial statements of GTRI have been prepared on the same basis as GTRI’s annual consolidated financial statements appearing elsewhere in this prospectus and, in the opinion of management, reflect all adjustments consisting of normal recurring adjustments considered necessary to present fairly the results of operations for the three-month periods ended March 31, 2010 and 2011. Operating results for any fiscal quarter are not necessarily indicative of results for the full year.

 

     Three Months ended March 31,  
           2010                 2011        
     ($ in thousands)  

Revenues

   $ 30,714      $ 25,664   

Cost of revenue

     26,295        20,482   
  

 

 

   

 

 

 

Gross profit

     4,419        5,182   

Operating expenses

     5,167        5,835   
  

 

 

   

 

 

 

(Loss) income from operations

     (748     (653

Interest expense

     (42     (9

Other income (expense)

     62        14   
  

 

 

   

 

 

 

Net (loss) income

     (728     (648

Less: minority interest in Relevant Security Corporation

     37        52   
  

 

 

   

 

 

 

Net (loss) income attributable to GTRI and Relevant Security Corporation

   $ (691   $ (596
  

 

 

   

 

 

 

Revenues. Revenues were $25.7 million for the three months ended March 31, 2011, a decrease of $5.0 million or 16% from $30.7 million for the same period in 2010. GTRI’s revenues for each of these periods included no revenues attributable to RSC.

Product revenues were $21.4 million for the three months ended March 31, 2011, a decrease of $5.3 million or 20% from $26.7 million for the same period in 2010. This decrease in product revenues is a result of GTRI’s strategic decision to focus on sales of higher margin services offerings as opposed to product sales.

Maintenance and support services revenues were $1.3 million for the three months ended March 31, 2011, an increase of $0.8 million from $0.5 million for the same period in 2010. This increase in maintenance and support services revenues is primarily attributable to one customer.

Professional services revenues were $2.9 million for the three months ended March 31, 2011, a decrease of $0.5 million from $3.4 million for the same period in 2010.

Managed services revenues were $0.1 million for each of the three-month periods ended March 31, 2011 and 2010.

Cost of Revenue / Gross Profit. Cost of revenue was $20.5 million for the three months ended March 31, 2011, a decrease of $5.8 million or 22% from $26.3 million for the same period in 2010. Cost of revenue was 80% of revenues for the three months ended March 31, 2011, compared to 86% for the same period in 2010.

 

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Gross profit was $5.2 million for the three months ended March 31, 2011, an increase of $0.8 million or 18% from $4.4 million for the same period in 2010. Gross margin was 20% for the three months ended March 31, 2011, compared to 14% for the same period in 2010.

Gross profit earned on product revenues was $3.0 million for the three months ended March 31, 2011, an increase of $0.2 million or 7% from $2.8 million for the same period in 2010. Gross margin on product was 14% for the three-month period ended March 31, 2011, compared to 10% for the same period in 2010. These increases primarily relate to GTRI’s strategic decision to focus on sales of higher-margin services offerings.

Gross profit earned on maintenance and support services revenues was $1.3 million for the three months ended March 31, 2011, an increase of $0.8 million from $0.5 million for the same period in 2010. Because product revenues from maintenance and support service contracts are recorded on a net basis, the gross margin on these revenues is 100%.

Gross profit earned on professional services revenues was $0.9 million for the three months ended March 31, 2011, a decrease of $0.2 million or 18% from $1.1 million for the same period in 2010. Gross margin on professional services was 33% for each of the three-month periods ended March 31, 2011 and 2010.

Gross profit earned on managed services revenues was an immaterial amount in each of the three-month periods ended March 31, 2011 and 2010.

Operating Expenses. Operating expenses were $5.8 million for the three months ended March 31, 2011, an increase of $0.6 million or 12% from $5.2 million for the same period in 2010. This increase was primarily attributable to costs of indirect labor of engineers and related benefits costs, including both existing employees and new hires. GTRI’s operating expenses for the three months ended March 31, 2011 and 2010 include $0.3 million and $0.2 million, respectively, in expenses attributable to RSC.

Interest Expense. GTRI’s interest expense was immaterial for each of the three-month periods ended March 31, 2011 and 2010.

Other Income (Expense). GTRI’s other income (expense) was immaterial for each of the three-month periods ended March 31, 2011 and 2010.

Comparison of Years ended December 31, 2009 and 2010

The following table sets forth selected results of operations of GTRI for each of the years ended December 31, 2009 and 2010, which are derived from the audited financial statements and the notes thereto of GTRI included elsewhere in this prospectus.

 

     Year ended December 31,  
           2009                 2010        
     ($ in thousands)  

Revenues

   $ 169,119      $ 163,585   

Cost of revenue

     146,649        134,540   
  

 

 

   

 

 

 

Gross profit

     22,470        29,045   

Operating expenses

     23,071        26,205   
  

 

 

   

 

 

 

(Loss) income from operations

     (601     2,840   

Interest expense

     (83     23   

Other (expense) income

     (67     (25
  

 

 

   

 

 

 

Net (loss) income

     (751     2,838   

Less minority interest in Relevant Security Corporation

     106        161   
  

 

 

   

 

 

 

Net (loss) income attributable to GTRI and Relevant Security Corporation

   $ (645   $ 2,999   
  

 

 

   

 

 

 

 

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Revenues. Revenues were $163.6 million for the year ended December 31, 2010, a decrease of $5.5 million or 3% from $169.1 million for the same period in 2009. GTRI’s revenues for each of 2010 and 2009 include an immaterial amount of revenues attributable to RSC.

Product revenues were $143.2 million for the year ended December 31, 2010, a decrease of $12.0 million or 8% from $155.2 million for the same period in 2009. This decrease in product revenues is a result of GTRI’s strategic decisions to focus on sales of higher margin services offerings and to disengage with a certain client that had provided a high volume of low-margin product sales in 2009. This client represented $4.6 million and $34.4 million of product revenues for the years ended December 31, 2010 and 2009, respectively. Excluding this client, revenues grew from 2009 to 2010 primarily as a result of returns on GTRI’s investments to grow its public sector and enterprise practices by increased sales to existing and new clients.

Maintenance and support services revenues were $7.8 million for the year ended December 31, 2010, an increase of $2.2 million or 39% from $5.6 million for the same period in 2009. This increase in maintenance and support services revenues is primarily attributable to increased sales to a certain public sector client.

Professional services revenues were $12.1 million for the year ended December 31, 2010, an increase of $4.0 million or 49% from $8.1 million for the same period in 2009. The increase in professional services revenues is primarily due to returns on prior investments in engineering capabilities and certifications, including GTRI’s establishment in November 2009 of its enterprise service management practice and GTRI’s acquisition in January 2009 of a cabling business that was primarily a services provider.

Managed services revenues were $0.5 million for the year ended December 31, 2010, an increase of $0.3 million from $0.2 million for the same period in 2009. The increase in managed services revenues is primarily due to a continued focus on integrating the managed services practice into GTRI’s sales portfolio.

Cost of Revenue / Gross Profit. Cost of revenue was $134.5 million for the year ended December 31, 2010, a decrease of $12.1 million or 8% from $146.6 million for the same period in 2009. Cost of revenue as a percentage of revenues was 82% for the year ended December 31, 2010, compared to 87% for the same period in 2009. GTRI’s gross profit was $29.0 million for the year ended December 31, 2010, an increase of $6.5 million or 29% from $22.5 million for the same period in 2009. GTRI’s gross margin was 18% for the year ended December 31, 2010, compared to 13% for the same period in 2009.

Gross profit earned on product revenues was $16.8 million for the year ended December 31, 2010, an increase of $3.4 million or 25% from $13.4 million for the same period in 2009. Gross margin on product was 12% for the year ended December 31, 2010, compared to 9% for the same period in 2009. The margin expansion was due to increased sales to new and existing clients resulting from returns on GTRI’s investments to grow its public sector and enterprise practices.

Gross profit earned on maintenance and support services was $7.8 million for the year ended December 31, 2010, an increase of $2.2 million or 39% from $5.6 million for the same period in 2009.

Gross profit earned on professional services revenues was $4.4 million for the year ended December 31, 2010, an increase of $0.9 million or 26% from $3.5 million for the same period in 2009. Gross margin on professional services was 36% for the year ended December 31, 2010, compared to 43% from the same period in 2009. Professional services gross profit grew due to a focus on solutions-based sales coupled with the establishment of GTRI’s enterprise services management practice and its acquisition in January 2009 of a cabling business that was primarily a services provider. The decrease in gross margin was due primarily to the acquired lower-margin cabling business.

Gross profit earned on managed services revenues was $0.1 million for the year ended December 31, 2010, compared to an immaterial amount for the same period in 2009. Gross margin on managed services was 21% for

 

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the year ended December 31, 2010, compared to 30% for the same period in 2009. The increase in managed services gross profit is primarily due to greater sales incentive through additional promotional compensation, increased traction with GTRI’s enterprise markets, and improvement of procedures for providing managed services.

Operating Expenses. Operating expenses were $26.2 million for the year ended December 31, 2010, an increase of $3.1 million or 13% from $23.1 million for the same period in 2009. Operating expenses were 16% of revenues for the year ended December 31, 2010, compared to 14% for the same period in 2009. These increases are primarily attributable to costs of indirect labor of engineers and related benefits costs, including both existing employees and new hires. GTRI’s operating expenses for 2010 and 2009 include $1.2 million and $0.7 million, respectively, in expenses attributable to RSC.

Interest Expense. Interest expense was an immaterial amount for the year ended December 31, 2010, a decrease of $0.1 million compared to $0.1 million for the same period in 2009. This decrease reflected amortization of a discount on related party debt.

Other Income (Expense). GTRI’s other income (expense) was immaterial for each of the years ended December 31, 2010 and 2009.

Comparison of Years ended December 31, 2008 and 2009

The following table sets forth selected results of operations of GTRI for each of the years ended December 31, 2008 and 2009, which are derived from the audited financial statements and the notes thereto of GTRI included elsewhere in this prospectus.

 

     Year ended December 31,  
             2008                     2009          
     ($ in thousands)  

Revenues

   $ 128,053      $ 169,119   

Cost of revenue

     110,417        146,649   
  

 

 

   

 

 

 

Gross profit

     17,636        22,470   

Operating expenses

     17,523        23,071   
  

 

 

   

 

 

 

Income (loss) from operations

     113        (601

Interest expense

     (101     (83

Other income (expense)

     89        (67
  

 

 

   

 

 

 

Net income (loss)

     101        (751

Less: minority interest in Relevant Security Corporation

     -        106   
  

 

 

   

 

 

 

Net income (loss) attributable to GTRI and Relevant Security Corporation

   $ 101      $ (645
  

 

 

   

 

 

 

Revenues. Revenues were $169.1 million for the year ended December 31, 2009, an increase of $41.0 million or 32% from $128.1 million for the same period in 2008.

Product revenues were $155.2 million for the year ended December 31, 2009, an increase of $37.0 million or 31% from $118.2 million for the same period in 2008. This increase in product revenues is primarily a result of an increase in the number of GTRI’s enterprise and federal sales personnel, including pre-sales engineers, from 2008 to 2009, which enabled GTRI to increase sales to existing and new clients.

Maintenance and support services revenues were $5.6 million for the year ended December 31, 2009, an increase of $0.4 million or 8% from $5.2 million for the same period in 2008. This increase is primarily attributable to one customer.

 

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Professional services revenues were $8.1 million for the year ended December 31, 2009, an increase of $3.6 million or 80% from $4.5 million for the same period in 2008. This increase in professional services revenues is primarily due to GTRI’s focus on wireless and cabling services, including investments in additional pre-sales engineers and through the acquisitions of a wireless business in July 2008 and a cabling business in January 2009.

Managed services revenues were $0.2 million for the year ended December 31, 2009, an increase of $0.1 million from $0.1 million for the same period in 2008. The increase in managed services revenues is primarily due to a continued focus on integrating the managed services practice into GTRI’s sales portfolio.

Cost of Revenue / Gross Profit. Cost of revenue was $146.6 million for the year ended December 31, 2009, an increase of $36.2 million or 33% from $110.4 million for the same period in 2008. Cost of revenue as a percentage of revenues was 87% for the year ended December 31, 2009, compared to 86% for the same period in 2008. GTRI’s gross profit was $22.5 million for the year ended December 31, 2009, an increase of $4.8 million or 28% from $17.6 million for the same period in 2008. GTRI’s gross margin was 13% for the year ended December 31, 2009, compared to 14% for the same period in 2008.

Gross profit earned on product revenues was $13.4 million for the year ended December 31, 2009, an increase of $3.5 million or 35% from $9.9 million for the same period in 2008. Gross margin on product was 9% for the year ended December 31, 2009 compared to 8% for the same period in 2008. These increases relate to increased sales to new and existing clients resulting from returns on GTRI’s investments to grow its public sector and enterprise practices.

Gross profit earned on professional services revenues was $3.5 million for the year ended December 31, 2009, an increase of $0.9 million or 37% from $2.5 million for the same period in 2008. Gross margin on professional services was 43% for the year ended December 31, 2009, compared to 56% from the same period in 2008. The increase in professional services revenue was due to GTRI’s strategic focus on solutions-based sales, while the decrease in gross margin was due to decreased efficiency resulting from continued penetration of new clients and associated lower revenues per project.

Gross profit earned on maintenance and support services revenues was $5.6 million for the year ended December 31, 2009, an increase of $0.4 million or 7% from $5.2 million for the same period in 2008.

Gross profit earned on managed services revenues was $0.1 million for the year ended December 31, 2009, compared to an immaterial amount for the same period in 2008. Gross margin on managed services was 30% for the year ended December 31, 2009, compared to 14% for the same period in 2008. The increase in gross margin on managed services was the result of economies of scale generated by an increase in the number of devices per dedicated managed services employee.

Operating Expenses. Operating expenses were $23.1 million for the year ended December 31, 2009, an increase of $5.5 million or 32% from $17.5 million for the same period in 2008. Operating expenses were 14% of revenues for the year ended December 31, 2009, compared to 14% for the same period in 2008. The increase in operating expenses is primarily attributable to increased hiring of personnel and related payroll and benefits costs. GTRI’s operating expenses for 2009 include $0.7 million in expenses attributable to RSC, which was formed in 2009.

Interest Expense. Interest expense was $0.1 million for the year ended December 31, 2009, compared to $0.1 million for the same period in 2008.

Other Income (Expense). GTRI’s other income (expense) was immaterial for each of the years ended December 31, 2009 and 2008.

 

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Financial Position, Liquidity and Capital Resources

For the three-month period ended March 31, 2011 and the years ended December 31, 2010, 2009 and 2008, GTRI funded its operations primarily through a combination of cash provided by operating activities and credit facility borrowings. GTRI’s primary sources of liquidity as of March 31, 2011 consisted of approximately $2.0 million of cash, cash equivalents and short-term investments and approximately $22.2 million available under a revolving line of credit. GTRI’s principal uses of its cash resources during this 39-month period were to fund operations, invest in property and equipment, acquire other companies and service debt. GTRI believes its existing cash resources and credit facility are sufficient to support its operating requirements and investment strategies for at least the next 12 months.

Cash Flows from Operating Activities

GTRI’s net cash provided by (used in) operating activities for the three months ended March 31, 2011 was $7.2 million, compared to $17.1 million for the same period in 2010. GTRI had net income (loss) for the three months ended March 31, 2011 of $(0.6 million), adjusted by non-cash depreciation and amortization of $0.2 million and changes in asset and liability accounts that provided $7.6 million, compared to net income (loss) of $(0.7 million) for the same period in 2010, adjusted by non-cash depreciation and amortization of $0.2 million and changes in asset and liability accounts that provided $17.6 million.

GTRI’s net cash provided by (used in) operating activities for the year ended December 31, 2010 was $13.5 million, compared to $(13.4 million) for the same period in 2009. GTRI’s net cash provided by (used in) operating activities for 2010 includes $(1.2 million) attributable to RSC. GTRI had net income (loss) for the year ended December 31, 2010 of $2.8 million, adjusted by non-cash depreciation and amortization of $0.7 million and non-cash share-based compensation expense of $0.3 million, compared to net income (loss) of $(0.8 million) for the same period in 2009, adjusted by non-cash depreciation and amortization of $0.6 million.

GTRI’s net cash provided by (used in) operating activities for the year ended December 31, 2009 was $(13.4 million), compared to $(1.0 million) for the same period in 2008. GTRI had net income (loss) for the year ended December 31, 2009 of $(0.8 million), adjusted by non-cash depreciation and amortization of $0.6 million, compared to net income (loss) of $0.1 million for 2008, adjusted by non-cash depreciation and amortization of $0.4 million.

Cash Flows from Investing Activities

GTRI’s investing activities consist primarily of purchases of property and equipment, including both network equipment and non-network capital expenditures, as well as lending to related parties. GTRI’s net cash used in investing activities was $0.1 million for the three months ended March 31, 2011, compared to net cash used in investing activities of $0.2 million for the same period in 2010, in each case attributable primarily to purchases of property and equipment.

GTRI’s net cash used in investing activities was $0.9 million for the year ended December 31, 2010, attributable primarily to purchases of property and equipment, compared to net cash used in investing activities of $1.2 million for the same period in 2009, attributable primarily to purchases of property and equipment of $0.7 million and advances on related party notes receivable of $0.4 million.

GTRI’s net cash used in investing activities was $1.2 million for the year ended December 31, 2009, attributable primarily to purchases of property and equipment of $0.7 million and advances on related party notes receivable of $0.4 million, compared to net cash used in investing activities of $1.5 million for the same period in 2008, attributable primarily to purchases of property and equipment of $0.9 million and purchases of life insurance in the amount of $0.4 million.

 

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Cash Flows from Financing Activities

GTRI’s net cash provided by (used in) financing activities was $(10.6 million) for the three months ended March 31, 2011, resulting primarily from payments in respect of GTRI’s line of credit of $10.4 million and shareholder distributions of $0.2 million. GTRI’s net cash provided by (used in) financing activities was $(17.3 million) for the same period in 2010, attributable to payments in respect of GTRI’s line of credit of $17.1 million and shareholder distributions of $0.2 million.

GTRI’s net cash provided by (used in) financing activities was $(9.2 million) for the year ended December 31, 2010, resulting primarily from payments in respect of GTRI’s line of credit of $7.4 million and shareholder distributions of $1.1 million. GTRI’s net cash provided by (used in) financing activities was $16.1 million for the same period in 2009, attributable to $16.2 million in net proceeds from GTRI’s line of credit, partially offset by $0.2 million in distributions to shareholders.

GTRI’s net cash provided by (used in) financing activities was $16.1 million for the year ended December 31, 2009, attributable to net proceeds from GTRI’s line of credit, partially offset by distributions to shareholders. GTRI’s net cash provided by (used in) financing activities was $(1.0 million) for the same period in 2008, resulting from shareholder distributions of $1.5 million, partially offset by $0.5 million in net proceeds from GTRI’s line of credit.

Indebtedness

GTRI has a $35.0 million line of credit with a bank, which increases to $40.0 million seasonally, to finance client-related hardware purchases. The interest rate under this line of credit is equal to the one month LIBOR plus 4.75% per annum (or 4.99% at March 31, 2011), payable monthly on advances outstanding for greater than 60 days; no interest is payable on advances outstanding for 60 days or less. The line of credit is collateralized by all of GTRI’s assets. As of March 31, 2011, GTRI’s outstanding balance under this line of credit was $12.8 million. GTRI paid no interest under this line of credit for the three months ended March 31, 2011 and for year ended December 31, 2010. As of March 31, 2011, the outstanding principal amount due in respect of an unsecured promissory note which matures on March 31, 2015, was $0.4 million.

Capital Expenditures

Capital expenditures for the three-month periods ended March 31, 2011 and 2010 were $0.1 million and $0.2 million, respectively. Capital expenditures for the years ended December 31, 2010, 2009 and 2008 were $0.9 million, $0.7 million and $0.9 million, respectively. GTRI’s capital expenditures in the foreseeable future will be primarily for additional assets required to expand its managed services offerings, as well as property and equipment tied to the ordinary course of business.

Contractual Obligations

 

     Payments due by Period  
Contractual Obligations:    Total      Less than
1 Year
     1-3
Years
     3-5
Years
     More Than
5 Years
 
     ($ in thousands)  

Current and long-term debt, excluding capital leases

   $ 526       $ 135       $ 209       $ 182       $             -   

Capital leases

     75         19         32         24         -   

Operating leases

     1,370         651         714         5         -   

Purchases

     -         -         -         -         -   

Other long-term liabilities

     282         -         282         -         -   

 

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Red River

Results of Operations

Red River, founded in 1995, is a provider of IT solutions to the U.S public sector and the healthcare industry. Prior to the Business Combination, Red River elected to be treated under Subchapter S of the Internal Revenue Code of 1986, as amended, for federal income tax purposes. As a result, Red River has not been subject to federal income tax at the corporate level. However, Red River has been subject to income tax in various state jurisdictions. Accordingly, the quarterly and the annual results of operations of Red River include a provision for state income taxes. Following the Business Combination, Red River will lose its status as a Subchapter S Corporation and will be included in the Company’s consolidated federal corporate income tax return.

The quarterly and the annual results of operations of Red River are consolidated with the accounts of RR Realty, a variable interest entity in which Red River is the primary beneficiary. As a condition of the Company’s acquisition of Red River, Red River will be released from its guarantee of $0.5 million of RR Realty’s debt. Following this release, Red River will no longer be the primary beneficiary of RR Realty and, as a result, RR Realty’s accounts will no longer be consolidated with Red River following the Business Combination.

Comparison of Three Months ended March 31, 2010 and 2011

The following table sets forth selected unaudited results of operations of Red River for each of the three-month periods ended March 31, 2010 and 2011, which are derived from the unaudited financial statements and the notes thereto of Red River included elsewhere in this prospectus. The unaudited financial statements of Red River have been prepared on the same basis as Red River’s annual consolidated financial statements appearing elsewhere in this prospectus and, in the opinion of management, reflect all adjustments consisting of normal recurring adjustments considered necessary to present fairly the results of operations for the three-month periods ended March 31, 2010 and 2011. Operating results for any fiscal quarter are not necessarily indicative of results for the full year.

 

     Three Months ended March 31,  
           2010                 2011        
     ($ in thousands)  

Revenues

   $ 25,914      $ 35,486   

Cost of revenue

     22,316        31,242   
  

 

 

   

 

 

 

Gross profit

     3,598        4,244   

Operating expenses

     3,443        4,181   
  

 

 

   

 

 

 

Income (loss) from operations

     155        63   

Interest expense

     (95     (100

Other income (expense)

     32        30   
  

 

 

   

 

 

 

Income (loss) before provision for state income taxes

     92        (7

Income tax (expense) benefit

     (3     4   
  

 

 

   

 

 

 

Net income (loss)

   $ 89      $ (3
  

 

 

   

 

 

 

Revenues. Revenues were $35.5 million for the three months ended March 31, 2011, an increase of $9.6 million or 37% from $25.9 million for the same period in 2010.

Product revenues were $34.4 million for the three months ended March 31, 2011, an increase of $9.2 million or 37% from $25.2 million for the same period in 2010. This increase in product revenues is primarily due to continued improving returns on prior investments in pre- and post-sales consulting and engineering, which drives product sales.

 

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Maintenance and support services revenues was $0.6 million for the quarter ended March 31, 2011, an increase of $0.1 million or 20% from $0.5 million for the same period in 2010. The increase in maintenance and support services revenues is due primarily to Red River’s increased product revenues related to the expansion of its engineering capabilities and certifications during the period from 2005 through 2007.

Professional services revenues were $0.5 million for the three months ended March 31, 2011, an increase of $0.3 million from $0.2 million for the same period in 2010. The increase in services revenue is due primarily to returns on Red River’s increased investments in its engineering capabilities and certifications during the period from 2005 through 2007.

Cost of Revenue / Gross Profit. Cost of revenue was $31.2 million for the three months ended March 31, 2011, an increase of $8.9 million or 40% from $22.3 million for the same period in 2010. Cost of revenue was 88% of revenues for the three months ended March 31, 2011, compared to 86% of revenues for the same period in 2010. Red River’s gross profit was $4.3 million for the three months ended March 31, 2011, an increase of $0.7 million or 19% from $3.6 million for the same period in 2010. Red River’s gross margin was 12% for the three months ended March 31, 2011, compared to 14% for the same period in 2010.

Gross profit earned on product revenues was $3.7 million for the three months ended March 31, 2011, an increase of $0.6 million or 19% from $3.1 million for the same period in 2010. Gross margin on product was 11% for the three months ended March 31, 2011, compared to 12% for the same period in 2010. The decrease in gross margin was attributable to a change in product mix quarter to quarter.

Gross profit earned on maintenance and support services revenues was $0.6 million for the three months ended March 31, 2011, an increase of $0.1 million or 20% from $0.5 million for the same period in 2010. Because product revenues from maintenance and support service contracts were recorded on a net basis, the gross margin on these revenues was 100%.

Gross profit earned on professional services revenues was an immaterial amount for each of the three-month periods ended March 31, 2011 and 2010.

Operating Expenses. Operating expenses were $4.2 million for the three months ended March 31, 2011, an increase of $0.8 million or 24% from $3.4 million for the same period in 2010. Operating expenses were 12% of revenues for the three months ended March 31, 2011, compared to 13% for the same period in 2010. The increase in operating expenses is primarily attributable to increased salaries, benefits and payroll taxes, which increased by $0.6 million due to an increase in staffing levels, and the general increase to the cost of benefits, partially offset by a reduction in commissions which were lower by $0.1 million due to a change in Red River’s commission plan late in the first quarter of 2010. The decrease in operating expenses as a percentage of revenue is primarily attributable to increased operational efficiency.

Interest Expense. Interest expense was immaterial in each of the three-month periods ended March 31, 2011 and 2010.

Other Income (Expense). Red River’s other income (expense) was immaterial in each of the three-month periods ended March 31, 2011 and 2010.

Income Tax (Expense) Benefit. Red River recorded an immaterial benefit and provision for state income taxes for each of the three-month periods ended March 31, 2011 and 2010, respectively. The amounts reflect the effective estimated composite state income tax rates for 2011 and 2010.

 

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Comparison of Years ended December 31, 2009 and 2010

The following table sets forth selected results of operations of Red River for each of the years ended December 31, 2009 and 2010, which are derived from the audited financial statements and the notes thereto of Red River included elsewhere in this prospectus.

 

     Year ended December 31,  
           2009                 2010        
     ($ in thousands)  

Revenues

   $ 164,343      $ 187,434   

Cost of revenue

     146,144        164,398   
  

 

 

   

 

 

 

Gross profit

     18,199        23,036   

Operating expenses

     15,900        16,449   
  

 

 

   

 

 

 

Income (loss) from operations

     2,299        6,587   

Interest expense

     (348     (499

Other income (expense)

     123        105   
  

 

 

   

 

 

 

Income (loss) before provision for state income taxes

     2,074        6,193   

Income tax (expense) benefit

     39        (252
  

 

 

   

 

 

 

Net income (loss)

   $ 2,113      $ 5,941   
  

 

 

   

 

 

 

Revenues. Revenues were $187.4 million for the year ended December 31, 2010, an increase of $23.1 million or 14% from $164.3 million for the same period in 2009.

Product revenues were $182.2 million for the year ended December 31, 2010, an increase of $20.0 million or 12% from $162.2 million for the same period in 2009. This increase in product revenues is primarily due to continued improving returns on prior investments in pre- and post-sales consulting and engineering, which drives product sales.

Maintenance and support services revenues were $3.5 million for the year ended December 31, 2010, an increase of $2.0 million from $1.5 million for the same period in 2009. The increase in maintenance and support services revenues is due primarily to Red River’s increased product revenues related to the expansion of its engineering capabilities and certifications during the period from 2005 through 2007.

Professional services revenues were $1.7 million for the year ended December 31, 2010, an increase of $1.1 million from $0.6 million for the same period in 2009. The increase in professional services revenues is due primarily to returns on Red River’s increased investments in its engineering capabilities and certifications during the period from 2005 through 2007.

Cost of Revenue / Gross Profit. Cost of revenue was $164.4 million for the year ended December 31, 2010, an increase of $18.3 million or 13% from $146.1 million for the same period in 2009. Cost of revenue as a percentage of revenues was 88% for the year ended December 31, 2010, compared to 89% for the same period in 2009. Red River’s gross profit was $23.0 million for the year ended December 31, 2010, an increase of $4.8 million or 27% from $18.2 million for the same period in 2009. Red River’s gross margin was 12% for the year ended December 31, 2010, compared to 11% for the same period in 2009.

Gross profit earned on product revenues was $19.2 million for the year ended December 31, 2010, an increase of $2.6 million or 16% from $16.6 million for the same period in 2009. Gross margin on product was 11% for the year ended December 31, 2010, compared to 10% for the same period in 2009.

Gross profit earned on maintenance and support services revenues was $3.5 million for the year ended December 31, 2010, an increase of $2.0 million from $1.5 million for the same period in 2009.

 

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Gross profit earned on professional services revenues was $0.3 million for the year ended December 31, 2010, an increase of $0.2 million from $0.1 million for the same period in 2009. Gross margin on professional services was 18% for the year ended December 31, 2010, compared to 17% from the same period in 2009.

Operating Expenses. Operating expenses were $16.4 million for the year ended December 31, 2010, an increase of $0.5 million or 3% from $15.9 million for the same period in 2009. Operating expenses were 9% of revenues for the year ended December 31, 2010, compared to 10% for the same period in 2009. The increase in operating expenses is primarily attributable to increased selling expenses related to indirect labor of engineers and related benefits costs and increased depreciation and amortization, partially offset by a reduction in general and administrative expenses related to compensation of certain officers. The decrease in operating expenses as a percentage of revenues is primarily attributable to increased operational efficiency and returns on Red River’s investments in its engineering capabilities and certifications during the period from 2005 through 2007.

Interest Expense. Interest expense was $0.5 million for the year ended December 31, 2010, an increase of $0.2 million or 67% from $0.3 million for the same period in 2009. This increase is primarily the result of an increase in interest expense on Red River’s credit facility due to a higher average outstanding balance of $10.4 million in 2010 compared to $7.9 million in 2009.

Other Income (Expense). Red River’s other income (expense) was $0.1 million in each of the years ended December 31, 2010 and 2009.

Income Tax (Expense) Benefit. Red River recorded a provision for state income taxes of $0.3 million for the year ended December 31, 2010, an increase of $0.3 million from a benefit of an immaterial amount for the same period in 2009. The amounts reflect the effective estimated composite state income tax rates for 2010 and 2009, and represent 5% and 0% of Red River’s income before provision for state income taxes in 2010 and 2009, respectively.

Comparison of Years ended December 31, 2008 and 2009

The following table sets forth selected results of operations of Red River for each of the years ended December 31, 2008 and 2009, which are derived from the audited financial statements and the notes thereto of Red River included elsewhere in this prospectus.

 

     Year ended December 31,  
           2008                 2009        
     ($ in thousands)  

Revenues

   $ 131,935      $ 164,343   

Cost of revenue

     119,735        146,144   
  

 

 

   

 

 

 

Gross profit

     12,200        18,199   

Operating expenses

     11,869        15,900   
  

 

 

   

 

 

 

Income (loss) from operations

     331        2,299   

Interest expense

     (534     (348

Other income (expense)

     166        123   
  

 

 

   

 

 

 

(Loss) income before provision for state income taxes

     (37     2,074   

Income tax (expense) benefit

     (67     39   
  

 

 

   

 

 

 

Net (loss) income

   $ (104   $ 2,113   
  

 

 

   

 

 

 

Revenues. Revenues were $164.3 million the year ended December 31, 2009, an increase of $32.4 million or 25% from $131.9 million for the same period in 2008.

Product revenues were $162.2 million for the year ended December 31, 2009, an increase of $31.3 million or 24% from $130.9 million for the same period in 2008. This increase in product revenues is primarily due to continued improving returns on prior investments in pre- and post-sales consulting and engineering, which drives product sales.

 

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Maintenance and support services revenues were $1.5 million for the year ended December 31, 2009, an increase of $0.6 million from $0.9 million for the same period in 2008. The increase in maintenance and support services revenues is due primarily to Red River’s increased product sales related to the expansion of its engineering capabilities and certifications during the period from 2005 through 2007.

Professional services revenues were $0.6 million for the year ended December 31, 2009, an increase of $0.5 million from $0.1 million for the same period in 2008. The increase in professional services revenues is due primarily to Red River’s increased investments in its engineering capabilities and certifications during the period from 2005 through 2007.

Cost of Revenue / Gross Profit. Cost of revenue was $146.1 million for the year ended December 31, 2009, an increase of $26.4 million or 22% from $119.7 million for the same period in 2008. Cost of revenue as percentage of revenues was 89% for the year ended December 31, 2009, compared to 91% for the same period in 2008. Red River’s gross profit was $18.2 million for the year ended December 31, 2009, an increase of $6.0 million or 49% from $12.2 million for the same period in 2008. Red River’s gross margin was 11% for the year ended December 31, 2009, compared to 9% for the same period in 2008.

Gross profit earned on product revenues was $16.6 million for the year ended December 31, 2009, an increase of $5.3 million or 47% from $11.3 million for the same period in 2008. Gross margin on product on was 10% for the year ended December 31, 2009, compared to 9% for the same period in 2008. The increase in margin is attributable primarily to returns on Red River’s investments in its engineering capabilities and certifications during the period from 2005 through 2007.

Gross profit earned on maintenance and support services revenues was $1.5 million for the year ended December 31, 2009, an increase of $0.6 million from $0.9 million for the same period in 2008.

Gross profit earned on professional services revenues was immaterial for each of the years ended December 31, 2009 and 2008.

Operating Expenses. Operating expenses were $15.9 million for the year ended December 31, 2009, an increase of $4.0 million or 34% from $11.9 million for the same period in 2008. Operating expenses were 10% of revenues for the year ended December 31, 2009, compared to 9% for the same period in 2008. The increase in operating expenses is primarily attributable to increased selling expenses related to indirect labor of engineers and related benefits costs, increased general and administrative expenses related to rent associated with Red River’s relocation to its current headquarters in Claremont, New Hampshire and a $0.6 million note receivable being deemed uncollectible in 2009.

Interest Expense. Interest expense was $0.3 million for the year ended December 31, 2009, a decrease of $0.2 million or 40% from $0.5 million for the same period in 2008. This decrease represents a decrease in interest expense on Red River’s credit facility due to a lower average outstanding balance of $7.9 million in 2009 compared to $9.2 million in 2008 and a lower effective interest rate.

Other Income (Expense). Red River’s other income (expense) was approximately the same in each of the years ended December 31, 2009 and 2008.

Income Tax (Expense) Benefit. Red River recorded an immaterial benefit and provision for state income taxes in the years ended December 31, 2009 and 2008, respectively. The amounts reflect the effective estimated composite state income tax rates for 2009 and 2008.

 

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Financial Position, Liquidity and Capital Resources

For the three-month period ended March 31, 2011 and the years ended December 31, 2010, 2009 and 2008, Red River funded its operations primarily through a combination of cash provided by operating activities and credit facility borrowings. Red River’s primary sources of liquidity as of March 31, 2011 consisted of approximately $0.2 million of cash and cash equivalents and approximately $1.9 million available under a line of credit. Red River’s principal uses of its cash resources during this 39-month period were to fund operations, invest in property and equipment, and service debt. Red River believes its existing cash resources and credit facility are sufficient to support its operating requirements and investment strategies for at least the next 12 months.

Cash Flows from Operating Activities

Red River’s net cash provided by (used in) operating activities for the three months ended March 31, 2011, was $8.1 million, compared to $2.2 million for the same period in 2010. Red River had an immaterial net loss for the three months ended March 31, 2011, adjusted by non-cash depreciation and amortization of $0.1 million, a decrease in accounts receivable of $35.1 million, a decrease in accounts payable of $(21.7 million), and a decrease in accrued expenses of $(1.4 million). This compares to net income (loss) of $0.1 million for the same period in 2010, adjusted by non-cash depreciation and amortization of $0.1 million, a decrease in accounts receivable of $13.3 million, deferred costs of $0.3 million and prepaid expenses and other assets of $0.3 million, partially offset by a decrease in accounts payable of $(12.5 million), and accrued expenses of $(0.3 million).

Red River’s net cash provided by (used in) operating activities for the year ended December 31, 2010, was $(7.4 million), compared to $8.7 million for the same period in 2009. Red River had net income (loss) for the year ended December 31, 2010 of $5.9 million, adjusted by increases in accounts receivable of $(30.1 million), deferred costs of $(7.5 million) and vendor rebates receivable of $(1.2 million), partially offset by increases in accounts payable of $23.6 million and accrued expenses of $0.8 million. This compares to net income (loss) of $2.1 million for the same period in 2009, adjusted by increases in accounts receivable of $(4.6 million), offset by increases in accounts payable of $10.0 million and decreases in deferred costs of $0.6 million.

Red River’s net cash provided by (used in) operating activities for the year ended December 31, 2009, was $8.7 million, compared to $(2.5 million) for the same period in 2008. Red River had net income (loss) for the year ended December 31, 2009 of $2.1 million, adjusted by increases in accounts receivable of $(4.6 million), offset by increases in accounts payable of $10.0 million and decreases in deferred costs of $0.6 million. This compares to net income (loss) of $(0.1 million) for the same period in 2008, adjusted by increases in accounts receivable of $(5.3 million), vendor rebates receivable of $(0.4 million) and deferred costs of $(6.0 million), partially offset by an increase in accounts payable of $7.6 million and an increase in accrued expenses of $1.0 million.

Cash Flows from Investing Activities

Red River’s investing activities consist primarily of restricted cash, purchases of fixtures and equipment, and principal received on loans initiated by Red River in 2006 and 2007 in connection with potential business opportunities with two entities in Alaska. Red River’s net cash provided by investing activities was an immaterial amount for the three months ended March 31, 2011, attributable primarily to repayment of certain amounts in respect of the loans initiated in 2006 and 2007. This compares to net cash used in investing activities of an immaterial amount for the same period in 2010, mainly composed of purchases of fixed assets.

Red River’s net cash used in investing activities was $0.6 million for the year ended December 31, 2010, attributable primarily to restricted cash of $0.5 million from an investment in a two-year certificate of deposit and purchases of fixtures and equipment of $0.2 million, partially offset by receipts of $0.2 million from the loans initiated in 2006 and 2007. This compares to net cash used in investing activities of $0.6 million for the same period in 2009, comprising purchases of fixtures and equipment of $0.4 million and advances of $0.2 million in respect of the loans initiated in 2006 and 2007.

 

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Red River’s net cash used in investing activities was $0.6 million for the year ended December 31, 2009, comprising purchases of fixtures and equipment of $0.4 million and advances of $0.2 million in respect of the loans initiated in 2006 and 2007. This compares to net cash used in investing activities of $0.8 million for the same period in 2008, primarily comprising advances of $0.7 million in respect of the loans initiated in 2006 and 2007.

Cash Flows from Financing Activities

Red River’s net cash provided by (used in) financing activities was $(8.1 million) for the three months ended March 31, 2011, including net payments on Red River’s line of credit of $7.6 million and dividends to shareholders of $0.4 million. This compares to net cash provided by (used in) financing activities of $(2.1 million) for the same period in 2010, consisting primarily of net payments on Red River’s line of credit of $2.0 million.

Red River’s net cash provided by (used in) financing activities was $7.8 million for the year ended December 31, 2010, comprising primarily net advances on Red River’s line of credit of $9.8 million, partially offset by dividends to shareholders of $1.7 million and payments of principal on long term debt of $0.3 million. This compares to net cash provided by (used in) financing activities of $(7.8 million) for the same period in 2009, consisting primarily of net payments on Red River’s line of credit of $7.2 million, dividends to shareholders of $0.4 million and payments of principal on long-term debt of $0.2 million.

Red River’s net cash provided by (used in) financing activities was $(7.8 million) for the year ended December 31, 2009, consisting primarily of net payments on Red River’s line of credit of $7.2 million, dividends to shareholders of $0.4 million and payments of principal on long term debt of $0.2 million. This compares to net cash provided by (used in) financing activities of $3.4 million for the same period in 2008, consisting primarily of $3.1 million of net advances on its line of credit, proceeds from shareholder receivables of $0.3 million and proceeds from issuance of treasury shares of $0.5 million, partially offset by dividends to shareholders of $0.5 million.

Indebtedness

Red River has a $19.5 million line of credit with a bank to cover its normal operating needs. The interest rate under this line of credit is equal to LIBOR plus 3.25% per annum (or 3.51% as of March 31, 2011). The line of credit is secured by all of Red River’s business assets. As of March 31, 2011, Red River’s outstanding balance under this line of credit was $10.1 million. Red River also has certain unsecured vendor lines of credit under which it may purchase vendor products interest free during the stated period of terms. Vendor terms generally range from 30 – 60 days, at which point an 18% per annum late fee may be enforced. As of March 31, 2011, Red River has nine vendors which, individually, had stated lines of credit of at least $1.0 million. The total credit available from these nine vendors was $46.8 million as of March 31, 2011, with $26.8 million outstanding as of such date. Red River’s long-term debt obligations consist of a note payable to the Business Finance Authority of New Hampshire in the amount of $0.5 million. The note bears interest at a rate of 6.25% per annum, and payments are interest-only until maturity in April 2015 when all principal and accrued unpaid interest are due. Long-term debt also includes a unsecured note payable to a former stockholder in the principal amount of $0.4 million, which bears interest at a rate of 5% per annum through maturity in December 2018. Red River makes monthly payments of principal and interest in an amount of $5,700 in respect of this note. Red River’s long-term debt also includes a note payable to a bank in a principal amount of $0.2 million, which bears interest at a rate of 6.75% per annum and is secured by real property. Red River makes monthly payments in respect of this note, and principal and accrued unpaid interest on this note are payable at maturity in May 2014. A balloon payment for remaining principal of $0.2 million is due in July 2014.

 

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Capital Expenditures

Capital expenditures for each of the three month periods ended March 31, 2011 and 2010 were an immaterial amount. Capital expenditures for the years ended December 31, 2010, 2009 and 2008 were $0.2 million, $0.4 million and $0.1 million, respectively. Red River does not expect capital expenditures in excess of these historical amounts in the foreseeable future.

Contractual Obligations

The following table summarizes Red River’s contractual obligations as of December 31, 2010 and the effect that such obligations are expected to have on its liquidity and cash flow in future periods.

 

     Payments due by Period  
Contractual Obligations:    Total      Less than
1 Year
     1-3
Years
     3-5
Years
     More Than
5 Years
 
    

($ in thousands)

 

Current and long-term debt, excluding capital leases

   $ 19,143       $ 17,875       $ 239       $ 833       $ 196   

Capital leases

     266         95         151         20         -   

Operating leases

     4,855         658         929         885         2,383   

Purchases

     -         -         -         -         -   

Other long-term liabilities

     -         -         -         -         -   

Off-Balance Sheet Arrangements—FusionStorm Global

We do not engage in any off-balance sheet activities or arrangements, except as described herein. RR Realty holds a 33% interest in Wainshal Partners, LLC, which is the managing member (with 90% ownership) of Claremont Mill Redevelopment, LLC, which owns the facility in Claremont, New Hampshire in which Red River’s current headquarters is located. Funding for the acquisition of the facility by Claremont Mill Redevelopment, LLC was provided through bank debt totaling $17.9 million, and the members of Wainshal Partners, LLC, including RR Realty, have jointly and severally guaranteed Claremont Mill Redevelopment, LLC’s payment of this debt. RR Realty can be required to perform on the guarantee only in the event of non-payment of the debt by Claremont Mill Redevelopment, LLC. Red River will no longer be the primary beneficiary of RR Realty following the completion of the Business Combination and RR Realty’s accounts will therefore no longer be consolidated with Red River following the Business Combination.

Critical Accounting Policies

The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate the critical accounting estimates, including those related to accounts receivable and inventory reserves, deferred tax asset valuation allowances, useful lives of property and equipment, asset impairment, certain accrued expenses, sales tax exposure, stock option valuation, warrant valuation as well as the overall valuation of the Company. We base the estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates.

FS’s critical accounting policies are discussed below. These policies are generally consistent with the accounting policies followed by each, GTRI and Red River, except as otherwise indicated. These critical accounting policies will be reviewed with the audit committee of our Board of Directors.

 

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Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectability is reasonably assured in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 605, Revenue Recognition. When the Company sells a hardware product in a single element arrangement that does not include any installation or configuration services, the Company recognizes the product revenues when title and risk of loss have transferred to the client, which is generally when it arrives and is accepted at the client’s location.

The Company also enters into revenue arrangements that consist of multiple deliverables of products and services. When a client order contains multiple products and services and such items are delivered at varying times, the Company determines whether the delivered items can be considered separate units of accounting. Delivered items are considered separate units of accounting if they have value to the client on a stand-alone basis and if delivery of undelivered items is probable and substantially in the Company’s control. However, if the delivered items do not have stand-alone value to the client without undelivered products or services, the Company recognizes revenue on the arrangement as a single unit of accounting, based on either the completed-contract or proportional-performance methods as described below.

The Company allocates value to each element following guidance issued by the FASB in October 2009. Under this guidance, the Company determines the fair value of each element by first determining whether it has vendor specific objective evidence (“VSOE”) for each element. For elements without VSOE, the Company next considers whether third-party evidence (“TPE”) of fair value exists. Finally, for elements where neither VSOE nor TPE exists, management estimates the selling price for each remaining element. After assigning a value to each element following this hierarchy, the Company allocates total arrangement consideration to the various elements on a relative basis and recognizes revenue on each element separately. The Company adopted this guidance in 2010 and has applied it retrospectively for all periods presented.

Generally, the Company’s deliverables meet the requirements for separation. For products, the Company is able to establish fair value based on VSOE, whereas for service the Company generally uses management’s estimate of selling price. Management determines the estimated selling price of its service elements considering a number of factors, including limited stand-alone sales, internal costs and gross margin targets, as well as external factors such as market and competitive conditions.

For contracts where the services performed in the last of a series of acts are very significant, in relation to the entire contract, performance is not deemed to have occurred until the final act is completed. Once customer acceptance has been received, or the last significant act is performed, the Company recognizes revenue. Revenue is generally recognized on professional service contracts using the completed-performance method. Revenue is generally recognized on managed service contracts on a straight-line basis except for setup fees which do not qualify as a separate unit of accounting. Such fees are initially deferred and recognized over the estimated customer life.

In many contracts, billing terms are agreed upon based on performance milestones such as the execution of a contract, the client’s acceptance of the equipment, and the partial or complete delivery of products and/or the completion of specified services. Billings made before delivery has occurred or services have been rendered are recorded as deferred revenue until the revenue recognition criteria are met.

On maintenance and support contracts where the primary obligor is the product manufacturer or another third party, the Company records its revenue on a net basis. When the Company is required to perform the underlying services as the primary obligor, the revenue is recorded on a gross basis. The substantial majority of the Company’s maintenance and support revenue is recorded on a net basis.

The Company also enters into sales arrangements with clients for both products and services where the Company performs as an agent or broker without assuming the risks and rewards of ownership of the goods and services. The Company recognizes revenue from these transactions on a net basis.

 

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When revenue on an arrangement is deferred, the Company capitalizes its direct and incremental costs of revenue. These costs are recorded as deferred assets and amortized over the same period and in the same manner as the related revenue.

The Company offers rights of return to its clients on the products it sells. The Company records a sales return allowance at the time of sale based on all available facts and circumstances, including historical information regarding product return rates. Changes to the sales return allowance are recorded as a component of revenues.

The Company records vendor rebates received under its vendor incentive programs pursuant to a binding arrangement as a reduction of cost of sales based on a systematic and rational allocation that is based upon progress by the Company toward earning the rebate provided the amounts are probable and reasonably estimable. If the rebate is not probable and reasonably estimable, it is recognized as the milestones are achieved. The Company records freight billed to clients as revenue and the related shipping costs as cost of revenue.

The Company collects and remits sales taxes on products and services that it purchases and sells under its contracts with clients, and reports such amounts using the net method in its consolidated statements of operations.

Vendor Rebates

We participate in vendor rebate programs associated with the sale of hardware and third party service support. These program rebates are principally earned by sales volume, client satisfaction levels, renewal rates and engineering certifications. The amounts earned under these programs are accrued when they are deemed probable and can be reasonably measured; otherwise, they are recorded when they are declared by the vendor or the cash is received, whichever is earlier. As a result of these estimates, the amount of rebates declared by the vendor or the amount of rebates received in cash, the effect of vendor rebates on cost of goods can vary significantly between quarterly and annual reporting periods. The rebates are recorded as a reduction of cost of goods in our consolidated statements of income. Accounts receivable from vendors are reported in our consolidated balance sheets.

Collectability of Accounts Receivable

The Company carries trade receivables at original invoice amount less an estimate made for doubtful receivables and returns based on a review of all outstanding amounts. In instances where the right of offset exists, trade receivables and accounts payable are presented net. Management determines the allowance for doubtful accounts by regularly evaluating individual client receivables and considering a client’s financial condition and credit history and current economic conditions. The Company writes off trade receivables when deemed uncollectible based on client specific facts other than when the right offset exists. The Company records recoveries of trade receivables previously written off when received. The Company’s policy for establishing a reserve for returns is described above under “Revenue Recognition.”

Realizability of Inventory Values

Inventory consists of computer hardware, parts and supplies. We make judgments about the ultimate realizability of our inventory in order to record our inventory at its lower of cost or market. These judgments involve reviewing current demand for our products in comparison to present inventory levels and reviewing inventory costs compared to current market values.

 

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Goodwill and other Long-Lived Assets

We evaluate our goodwill and indefinite lived intangible assets for impairment at least annually, at October 31, and whenever events or changes in circumstances indicate that the assets might be impaired. Testing for goodwill impairment is a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of its market capitalization with the carrying value of its net assets. If its total market capitalization is below the carrying value of our net assets, we perform the second step of the goodwill impairment test to measure the amount of impairment loss we record, if any.

Other intangible assets consist of customer lists, covenants not to compete and deferred financing costs. We evaluate our intangible assets for impairment whenever indicators of impairment exist. When impairment indicators exist, if the sum of the undiscounted cash flows related to an asset is less than the carrying value of the asset, impairment must be recognized in the financial statements. If an asset is deemed to be impaired, then the amount of the impairment loss recognized represents the excess of the asset’s carrying value as compared to its estimated fair value, based on management’s assumptions and projections. Customer lists are generally amortized over five years and deferred financing costs are generally amortized over a period of one to five years.

Accruals for Contractual Obligations and Contingent Liabilities

We record estimated liabilities for many forms of federal, state and local taxes, including income taxes. Our ultimate liability for these taxes depends upon a number of factors, including the interpretation of statutes. On products assembled or installed by us, we have varying degrees of warranty obligations. We use historical trends and make other judgments to estimate our liability for such obligations. In the normal course of business, we can be a party to threatened or actual litigation. In such cases, we evaluate our potential liability, if any, and determine if an estimate of that liability should be recorded in our financial statements. Estimating both the probability of our liability and the potential amount of the liability are highly subjective exercises and are evaluated frequently as the underlying circumstances change.

Stock-Based Compensation

We utilize the fair value method of accounting to account for share-based compensation awards. This requires us to measure and recognize in our statements of operations the expense associated with all share-based payment awards made to employees and directors based on estimated fair values. We use the Black-Scholes model to determine the fair value of share-based payment awards.

FS is a privately held company with no active market for its common stock. In April 2011, in connection with the preparation of FS’s consolidated financial statements for the year ended December 31, 2010 and in preparing for this offering, FS’s sole director and management undertook a retrospective analysis of the fair value of FS’s common stock at December 31, 2008, December 31, 2009, March 31, 2010, June 30, 2010, September 30, 2010, December 31, 2010 and March 31, 2011. As a part of that analysis, FS considered each of the following:

 

   

the capital structure of FS;

 

   

the illiquid nature of FS’s common stock, including the opportunity and timing for any expected liquidity events;

 

   

FS’s historical operating performance and FS’s projected performance going forward as of each valuation date;

 

   

significant events that have affected the operations of FS’s business; and

 

   

the market performance of publicly-traded companies FS identified as comparable companies.

In performing this retrospective analysis, FS utilized the valuation methodologies outlined in the AICPA’s Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation (the “practice

 

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aid”). An enterprise value was determined, appropriate discounts were applied and the resulting value was allocated to the common shareholders. The fair value was allocated to the common stock using the current value method of allocation. FS determined this method to be appropriate because only one class of stock is outstanding. FS believes that the valuation methodologies used in the retrospective analysis are reasonable and consistent with the practice aid.

FS estimated its enterprise value using two accepted valuation approaches, which are included in the practice aid, the guideline public company method and the discounted cash flow method. Under the guideline public company method, management derived an enterprise value by comparing FS to publicly traded companies in FS’s industry group. The companies used for comparison under the guideline public company method were selected based on a number of factors, including the similarity of their industry, business model and financial risk to FS’s. In determining FS’s enterprise value under this method, management used current revenue multiples of the peer companies applied to FS’s revenues for the corresponding period. For the discounted cash flow method, management utilized projections for future performance available at each valuation date.

To determine equity value, FS added cash on hand at the end of the applicable period and the cash from the assumed pro forma exercise of in-the-money stock options, and then subtracted all interest-bearing debt. FS then applied a discount for lack of control based on transaction data available for companies within the industry. FS also applied a discount for lack of marketability to account for the illiquid nature of FS’s common stock. This discount was based on the volatility of the stock price of comparable companies and has decreased over time. FS’s sole director has determined the fair value of the common stock at each of the previously mentioned dates to be as follows:

 

Date

   Fair Value per Common Share  

December 31, 2008

   $ 9.82   

December 31, 2009

   $ 9.94   

March 31, 2010

   $ 10.80   

June 30, 2010

   $ 11.75   

September 30, 2010

   $ 8.55   

December 31, 2010

   $ 6.77   

March 31, 2011

   $ 8.45   

December 31, 2008 Fair Value Calculation. The market approach resulted in an enterprise value of $241.5 million, determined by applying the market multiple to FS’s revenue for the year ended December 31, 2008 and adding cash on hand. The discounted cash flow analysis which was based on cash flow projections prepared by management resulted in a value of $263.0 million. FS weighted the two approaches putting greater weight on the discounted cash flow analysis as it was more specific to FS’s performance expectations. The enterprise value based on those weightings was $257.6 million. That value was reduced by debt of $19.3 million, and $0.7 million of cash proceeds from options were added, for an equity value of $239.0 million. The equity value was divided by 15.5 million fully diluted shares outstanding to arrive at the estimated fair value per share. FS then applied a discount for lack of control of 25% and a discount for lack of marketability of 15% to arrive at a per share value of $9.82. The discount for lack of control reflects the individual shareholders’ inability to make changes to the operations of the business due to their minority stake. Lack of control discounts are not readily observable from market data. To identify lack of control discounts, we researched available databases for control acquisitions of public companies and took the inverse of the premiums paid in those transactions as the discount for lack of control. The discount for marketability reflects the lower value placed on securities that are not freely transferable, as compared to those that trade frequently in an established market. The marketability discount was based on an Arithmetic Average Strike Put Model (“AASPM”) with an assumed dividend yield of 0%, a maturity of three years, and a risk-free rate of 1% based on the U.S. Treasury rate for bonds with a similar term. The put analysis included European put options as well as Asian put options, both the arithmetic average strike put model and the geometric average rate put model. From this analysis, the lowest of the calculated discounts was utilized.

 

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December 31, 2009 Fair Value Calculation. The market approach resulted in an enterprise value of $236.7 million, determined by applying the market multiple to FS’s revenue for the year ended December 31, 2009 and adding cash on hand. The discounted cash flow analysis which was based on cash flow projections prepared by management resulted in a value of $229.5 million. FS weighted the two approaches putting greater weight on the discounted cash flow analysis as it was more specific to FS’s performance expectations. The enterprise value based on those weightings was $231.3 million. That value was reduced by debt of $10.5 million, and $1.0 million of cash proceeds from options were added, for an equity value of $221.8 million. The equity value was divided by 14.2 million fully diluted shares outstanding to arrive at the estimated fair value per share. As with the December 31, 2008 valuation, FS then applied a discount for lack of control of 25% and a discount for lack of marketability of 15% to arrive at a per share value of $9.94.

March 31, 2010 Fair Value Calculation. The market approach resulted in an enterprise value of $226.0 million, determined by applying the market multiple to FS’s revenue for the trailing twelve months ended March 31, 2010 and adding cash on hand. The discounted cash flow analysis which was based on cash flow projections prepared by management resulted in a value of $248.6 million. FS weighted the two approaches putting greater weight on the discounted cash flow analysis as it was more specific to FS’s performance expectations. The enterprise value based on those weightings was $243.0 million. That value was reduced by debt of $23.8 million, and $2.4 million of cash proceeds from options were added, for an equity value of $221.6 million. The equity value was divided by 14.8 million fully diluted shares outstanding to arrive at the estimated fair value per share. FS then applied a discount for lack of control of 15% and a discount for lack of marketability of 15% to arrive at a per share value of $10.80. The discount for lack of control reflects the lower premium paid for companies within the industry in transactions taking place in 2009 compared to those in 2007 and 2008.

June 30, 2010 Fair Value Calculation. The market approach resulted in an enterprise value of $250.7 million, determined by applying the market multiple to FS’s revenue for the trailing twelve months ended June 30, 2010 and adding cash on hand. The discounted cash flow analysis which was based on cash flow projections prepared by management resulted in a value of $282.1 million. FS weighted the two approaches putting greater weight on the discounted cash flow analysis as it was more specific to FS’s performance expectations. The enterprise value based on those weightings was $274.2 million. That value was reduced by debt of $26.6 million, and $2.4 million of cash proceeds from options were added, for an equity value of $250.0 million. The equity value was divided by 16.3 million fully diluted shares outstanding to arrive at the estimated fair value per share. FS then applied a discount for lack of control of 15% and a discount for lack of marketability of 10% to arrive at a per share value of $11.75. The discount for lack of marketability reflects the lower volatility of the stocks of comparable companies used in the AASPM.

September 30, 2010 Fair Value Calculation. The market approach resulted in an enterprise value of $197.6 million, determined by applying the market multiple to FS’s revenue for the trailing twelve months ended September 30, 2010 and adding cash on hand. The discounted cash flow analysis which was based on cash flow projections prepared by management resulted in a value of $245.3 million. FS weighted the two approaches putting greater weight on the discounted cash flow analysis as it was more specific to FS’s performance expectations. The enterprise value based on those weightings was $233.4 million. That value was reduced by debt of $53.8 million, and $2.5 million of cash proceeds from options were added, for an equity value of $182.1 million. The equity value was divided by 16.3 million fully diluted shares outstanding to arrive at the estimated fair value per share. As with the June 30, 2010 calculation, FS then applied a discount for lack of control of 15% and a discount for lack of marketability of 10% to arrive at a per share value of $8.55.

The significant decrease in value from June 30, 2010 to September 30, 2010 was driven by the unexpected outcome of pending litigation against FS. FS had been accused of trade secret misappropriation, interference with prospective economic advantage, breach of fiduciary duty, breach of duty of loyalty, related aiding and abetting claims and unfair competition. A judgment was rendered in favor of the plaintiff on July 15, 2010 and the case ultimately settled on August 17, 2010. The final settlement resulted in FS being assessed compensatory damages

 

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of $9.7 million and punitive damages of $1.1 million for a total of $10.8 million. On August 17, 2010, FS agreed with the plaintiff to a deferral of the immediate payment of this sum and, as part of that agreement, FS agreed to pay a total of approximately $11.0 million. In response, creditors reduced FS’s credit lines which jeopardized FS’s ability to continue to operate. The additional risk associated with FS’s projected cash flows was accounted for by adding a premium to FS’s previous discount rate. In addition, FS lowered the multiple applied to FS’s trailing twelve month revenue to arrive at a more conservative value.

December 31, 2010 Fair Value Calculation. The market approach resulted in an enterprise value of $191.5 million, determined by applying the market multiple to FS’s revenue for the trailing twelve months ended December 30, 2010 and adding cash on hand. The discounted cash flow analysis which was based on cash flow projections prepared by management resulted in a value of $168.1 million. FS weighted the two approaches putting greater weight on the discounted cash flow analysis as it was more specific to FS’s performance expectations. The enterprise value based on those weightings was $173.9 million. That value was reduced by debt of $34.0 million, and $1.7 million of cash proceeds from options were added, for an equity value of $141.7 million. The equity value was divided by 16.0 million fully diluted shares outstanding to arrive at the estimated fair value per share. As with the September 30, 2010 calculation, FS then applied a discount for lack of control of 15% and a discount for lack of marketability of 10% to arrive at a per share value of $6.77.

The significant decrease in value from September 30, 2010 to December 31, 2010 was driven largely by the downward revision in the forecast. In addition, in October 2010, FS sold certain assets and liabilities of its wholly-owned subsidiary, Jeskell, for $1.8 million. In connection with this sale, FS received $1.3 million of cash and a promissory note for $569,000. Jeskell’s sales for the years ended December 31, 2010 and 2009, were $80.5 million and $143.2 million, respectively. When applying the market multiple to the reduced trailing twelve month revenues to exclude Jeskell and decreasing the forward looking projections, there was an additional decrease in the value of the enterprise.

March 31, 2011 Fair Value Calculation. The market approach resulted in an enterprise value of $213.2 million, determined by applying the market multiple to FS’s revenue for the trailing twelve months ended March 31, 2011 and adding cash on hand. The discounted cash flow analysis which was based on cash flow projections prepared by management resulted in a value of $190.0 million. FS weighted the two approaches putting greater weight on the discounted cash flow analysis as it was more specific to FS’s performance expectations. The enterprise value based on those weightings was $195.8 million. That value was reduced by debt of $28.7 million, and $2.2 million of cash proceeds from options were added, for an equity value of $169.4 million. The equity value was divided by 16.2 million fully diluted shares outstanding to arrive at the estimated fair value per share. FS then applied a discount for lack of control of 15% and a discount for lack of marketability of 5% to arrive at a per share value of $8.45. The discount for lack of marketability reflects a term of less than one year in the AASPM until the stock has liquidity.

Valuation models require the input of highly subjective assumptions. There are significant judgments and estimates inherent in the determination of these valuations. These judgments and estimates include assumptions regarding future performance, the time to undertake and complete an initial public offering or other liquidity event, as well as determinations of the appropriate valuation methods. If FS had made different assumptions, its stock-based compensation expense, net income (loss) and net income (loss) per share could have been significantly different. Additionally, because FS’s capital stock prior to this offering had characteristics significantly different from those which will apply to the Company’s common stock upon the closing of this offering, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable, single measure of fair value. The foregoing valuation methodologies are not the only valuation methodologies available and will not be used to value our common stock once this offering is complete. We cannot make assurances regarding any particular valuation of our shares.

Stock-based compensation was not significant at GTRI or Red River for any period presented.

 

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Recently Issued and Adopted Accounting Standards

In January 2010, the FASB issued an update to Fair Value Measurements and Disclosures. This update requires new disclosures of transfers in and out of Levels 1 and 2 and of activity in Level 3 fair value measurements. The update also clarifies the existing disclosures for levels of disaggregation and about inputs and valuation techniques. This update is effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company believes that the adoption of this update will not have an impact on its results of operations and financial condition.

Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial rates, including interest rates and foreign currency exchange rates. Substantially all of our operations are based in the United States and, accordingly, these transactions are denominated in U.S. dollars. Although currently we do not have any material foreign currency exposure, we may face exchange rate risk in the future as we expand our business internationally. Our market risk exposure results primarily from fluctuation in interest rates. In the normal course of business, we are exposed to changes in interest rates which affect our debt as well as our cash flows. Certain of FS’s, GTRI’s and Red River’s credit facilities contain a floating interest rate. As such, these interest rates are subject to market risk in the form of fluctuations of interest rates.

Inflation

Inflation generally affects us by increasing the cost of labor and equipment. We do not believe that inflation has had any material effect on our results of operations during 2006, 2007, 2008, 2009, 2010 or of the first quarter of fiscal 2011.

 

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THE IT SOLUTIONS INDUSTRY

IT Solutions

Companies are increasingly reliant on IT to drive business growth and to facilitate faster, more responsive and lower-cost business operations. Growth in the IT solutions industry is driven by companies seeking to modernize and upgrade existing systems infrastructure that is nearing the end of its product lifecycle, and by next generation technologies such as virtualization, cloud computing and mobility (each as discussed below in this “IT Solutions Industry” section). With increasing complexity of various technologies and how they work together, we believe that there has been a fundamental shift in the industry whereby companies have moved from buying hardware, software and services from different vendors to buying an integrated solution from an IT solutions provider. Companies often rely on the expertise and experience of an IT solutions provider to design their IT infrastructure and to procure and integrate the appropriate hardware and software to provide an integrated IT solution. This trend of companies turning to IT solutions providers is largely driven by limited in-house capacity, higher costs and challenges related to internal development, deployment and maintenance of complex IT infrastructure. Further, companies are increasingly looking to consolidate their vendors and minimize the number of providers they interact with for their IT needs. We believe companies are looking for providers who offer a broad portfolio of end-to-end capabilities including next generation technologies and new delivery models. According to the Gartner report G00211677 titled “Forecast Analysis: IT Outsourcing, Worldwide, 2009-2014, 1Q11 Update,” published March 2011, scope expansion is common once clients undertake one form of outsourcing for IT solutions. Gartner research shows they are disposed to increasing use and considering other outsourcing options; for example, outsourcing additional tasks, platforms or applications. According to the Gartner report G00214860 titled “Forecast Overview: IT Spending, Worldwide, 2008-2015, 2Q11 Update,” published August 2011, global IT spending in 2010 was estimated to be $3.4 trillion, with the market forecasted to grow to $4.4 trillion in 2015 at a CAGR of 5.3%.

New Technologies Driving Need for Evolving IT Solutions

Demand for integrated end-to-end IT solutions is driven by emerging technologies that are reshaping the IT landscape. As technology continues to evolve, we believe that companies are increasingly dependent on the expertise of IT solutions providers to help them adopt new emerging technologies.

Data Center / Virtualization. The proliferation of various forms of data, voice and video is redefining how companies and government entities approach their data center strategies. According to Cisco’s June 2011 “Visual Networking Index: Forecast and Methodology, 2010–2015”, internet traffic, a key driver for growth in consumer and enterprise data and network bandwidth demand, is expected to grow at a 32% CAGR from 2010 to 2015, with internet video expected to account for 58% of all consumer internet traffic by 2013. With the management of web-facing applications, a core process for many businesses, the demands for low latency, high network redundancy and flexible capacity have become critical, driving cost up significantly in a traditional data center model. Organizations and government entities are increasingly looking to alternative data center and IT strategies such as managed hosting, cloud computing or colocation. Outsourcing IT infrastructure and application management to cut costs continues to be a priority for many enterprises and government entities. Data center outsourcing demand is largely driven by a shortage of in-house IT skills, costs and capacity constraints facing IT organizations. With the creation of the office of Chief Information Officer for the U.S. government in 2009, there has been a push from the U.S. government to consolidate its IT infrastructure and data centers across its various entities and potentially adopt a private cloud infrastructure.

Further, technology innovations such as virtualization have revolutionized IT infrastructure by allowing multiple operating systems, mission-critical production platforms and other applications to run on a single server compared to the one-for-one application-to-server ratio in a traditional IT setup. Cloud computing represents the next phase of virtualization with the ability to deploy servers and other hardware in real time in a remote data center location. Organizations have turned to and relied on IT solutions providers to enable them in adopting

 

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virtualization and cloud computing in their IT infrastructure. According to the Gartner report G00213965 titled “Forecast Analysis: IT Outsourcing, Worldwide, 2010-2015, 2Q11 Update,” published March 31, 2011, the global data center outsourcing market was estimated to be $105 billion in 2010, and is forecasted to grow to $127 billion by 2015 at a CAGR of 3.8%. According to the IDC report 227532 titled “Market Analysis Perspective: Enterprise Virtualization Software—Mainstream Adoption of Virtualization to Enable Cloud and Mobility, 2011 and Beyond” from March 2011, the total market size for virtualization hardware, software and consulting services in 2009 was estimated to be $38 billion, forecasted to grow to $62 billion by 2013 at a CAGR of 12.9%.

Enterprise Network Infrastructure. Enterprise network infrastructure is becoming more complex with growing demand for flexibility, reliable real-time performance, low latency, security and high redundancy. The increase in the number of mobile devices, expanding telecom network build-out and application virtualization has resulted in the adoption of both public and private cloud delivery models. While virtualization allows for a significant reduction in infrastructure costs, it creates demands on the IP network due to virtualized physical servers and network storage devices using the IP network for simultaneous and real-time communications. The growth of voice and video over IP, and the proliferation of network-attached and wireless devices, virtualization and cloud computing are contributing to the need for network upgrades by enterprises. These drivers are placing greater demands on network bandwidth, especially for cloud services deployment, and network infrastructure services that ensure uninterrupted network availability. According to the IDC report 227416 titled “Market Analysis: Worldwide Enterprise Network Infrastructure 2011-2015 Forecast” from March 2011, following on from an excellent recovery in 2010, when the worldwide enterprise networking market grew just over 20% to $35 billion, the market is expected to grow to $55 billion by 2015 at an annual growth rate of 9.6%.

Unified Communications. The number of ways in which employees communicate with each other has steadily increased in recent years. Enterprises and government entities are faced with managing the exponential growth of voice, e-mail and video communication. Such growth in data has also heightened the need to integrate e-mail, voice and video communication technologies and to provide actionable intelligence to help manage the communications infrastructure. The need for anywhere, anytime mobile access and employee connectivity to enterprise systems has placed significant demands on bandwidth and increased security threats. Social media platforms are taking a more predominant role in unified communications as their adoption and acceptance in enterprises grows. Organizations are also adopting video conferencing as a means to collaborate with geographically dispersed teams. According to the IDC report 228281 titled “UC Moving Forward—Voice, Video, Collaboration” from June 2011, the U.S. unified communications market was estimated to be $7 billion in 2009 and is forecasted to grow to $13 billion by 2014 at a CAGR of 13.3%.

Managed Services and Cloud Computing. Managed network services vendors provide a packaged offering that encompasses day-to-day operations, as well as management and monitoring of a company’s network and communications infrastructure for a pre-determined monthly, quarterly or annual subscription. Managed network services include managed voice, VPN, conferencing, security and router services. The primary drivers for the services include a focus on operational efficiency and cost reduction, limited in-house technical resources, complexity of modern corporate networks and leveraging the scale and scope of service provider’s expertise. Managed network services can help organizations achieve the solid networking foundation needed for strategic business focused IT initiatives and reap the benefits of new IT delivery models such as software as a service (SaaS) and cloud computing. The primary business case for organizations adopting cloud computing is lower IT costs and operational savings beyond IT. Companies, especially small to mid-market players, typically rely on IT solutions providers to assess, plan, build and implement cloud services. According to the IDC report 223320 titled “Market Analysis: Worldwide Managed Network Services 2010-2014 Forecast” from May 2011, the worldwide managed network services market is expected to grow from $50 billion in 2010 to $78 billion by 2014 at a CAGR of 11.5%. According to the Gartner report G00213892 titled “Forecast: Public Cloud Services, Worldwide and Regions, Industry Sectors, 2010-2015” from June 2011, worldwide cloud application infrastructure and cloud system is expected to grow from $4 billion in 2010 to $22 billion in 2015 at a CAGR of 40.1%.

IT Security Services. With advancement in technology and its complexity, the need to ensure the security of IT infrastructure and enterprise data has become increasingly important. A key challenge for enterprises and

 

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government entities in adopting cloud-based services has been ensuring infrastructure security, especially in public cloud domains, where the infrastructure is shared by more than one company in most instances. IT Solutions providers have played a key role in helping organizations design and implement security solutions that maintain regulatory compliance requirements and proactively monitor the network for threats. According to the IDC report 228206 titled “Market Analysis: Worldwide and U.S. Security Services 2010-2015 Forecast and Analysis” from May 2011, the worldwide security services market was estimated to be $35 billion in 2010, and is expected to grow to $63 billion by 2015 at a CAGR of 12.5%.

Mobility. As mobile device acceptance in enterprise IT infrastructure continues to grow, new devices are becoming more and more powerful, allowing users to utilize applications that had previously been confined to the desktop. Employees and businesses are increasingly demanding anywhere, anytime and uninterrupted access to corporate networks, data and applications on their mobile devices. We believe that many companies continue to rely on IT solutions providers to integrate their mobile devices with the broader IT infrastructure, design and manage remote operations services as well as for other mobile device management functions such as maintaining PC hardware and software inventories, software distribution, security and compliance, authentication, access control, encryption and password protection and targeted backups. According to the IDC report 224437 titled “Market Analysis: Worldwide Mobile Device Management Enterprise 2010-2014 Forecast and 2009 Vendor Shares” from August 2010, the market size for worldwide mobile device management was estimated to be $265 million in 2009 and is forecasted to grow to $383 million by 2014 at a CAGR of 7.6%.

 

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BUSINESS

Overview

We are a provider of diversified IT solutions to domestic and international commercial enterprises, as well as the public sector, including federal, state and local government entities, and educational institutions. We provide end-to-end IT solutions, including hardware and software, pre-sales and technical consulting, professional services and managed, hosting and cloud services to address our clients’ business needs. We engage with our clients throughout all aspects of their IT infrastructure investment, providing services from the initial needs assessment and design to procurement and implementation to on-going support and hosting. We maintain relationships with many industry-leading technology OEMs, enabling us to recommend a wide range of solutions to our clients. Our consultative and technology agnostic approach allows us to deliver a seamless and integrated solution that best suits our clients’ requirements.

Our core competency is to provide comprehensive, integrated IT solutions that align our clients’ technology needs with their business and strategic objectives. Our pre-sales engineers, specialized professional services engineers and subject matter experts work alongside our clients’ internal IT teams to analyze our clients’ existing IT architecture and determine the appropriate solution. We then design, procure and implement an integrated IT solution that combines hardware and software, including security and compliance tools, from leading technology vendors. In addition, we continue to provide our clients with post-implementation support in the form of managed services and maintenance and support services. We also offer proprietary IT optimization tools and IT hosting and cloud services that help our clients cost-effectively transition to next generation technologies.

As technology and strategic business needs continue to evolve, our clients are increasingly challenged to modernize and upgrade their existing IT infrastructure. We help our clients keep pace with emerging technologies by offering a range of products and services, including: servers and storage; data center and network optimization; server, desktop and client virtualization; data protection; security and compliance tools; unified communications; and cloud-based services. We continue to specialize in a diverse range of vendor technologies and have achieved the highest certification levels with many leading OEMs. We have earned many partnership awards with our vendors, and members of our management team currently serve on the boards, advisory committees and councils of numerous manufacturers and distributors. Some of our key OEM relationships include Adobe, BlueCoat, CA Technologies, Cisco, Citrix, Dell, Dell Compellent, EMC, F5, Hewlett Packard, Hitachi Data Systems, IBM, Juniper, McAfee, NetApp, Novell, Oracle, RedHat, Sonicwall, Symantec, VMware and Websense.

We offer a comprehensive suite of managed services, including hosting and cloud services and advanced technical resources to support our clients’ on-going IT needs. Through our NOCs and data centers, we provide 24x7 remote monitoring services and network management tools, fully-managed and hosted IT solutions, and cloud-based infrastructure-as-a-service offerings. Our hosted and cloud-based offerings provide a secure and highly-scalable solution that affords our clients the flexibility to expand their IT spend as their businesses grow. Utilizing these services has allowed our clients to reduce their network and data center infrastructure and related operating and capital expenditures, and to focus on their core business activities while relying on us to keep their IT systems functional. We have relationships with colocation data center and hosting providers to offer hosted and cloud services from several facilities across the Unites States and Europe. We believe the breadth and quality of our technical and services capabilities differentiate us from our competitors.

Our engineers design, build, integrate and deliver business-driven technology solutions for our clients. As of March 31, 2011, we employed approximately 250 engineers, technicians and subject matter experts who collectively hold over 1,500 advanced certifications across more than 30 vendors and technologies. Our engineers generally average 12 years of experience. Our engineers continue to expand their technology skills, acquiring new certifications and keeping themselves up-to-date with emerging new technologies.

 

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Our clients include commercial enterprises, from leading small businesses to large corporations, as well as the public sector. Representative clients we serve include Celera, Cost Plus, the Department of Veterans Affairs, eBay, Equinix, Facebook, the Food and Drug Administration, Fujitsu, Google, PNC Bank, Ross Stores, Safeway, Salesforce.com, Sony, Symantec, the U.S. Air Force, the U.S. Navy, Visa, VMware and Wal-Mart.com.

Our corporate headquarters, three divisional hubs and 27 other offices and facilities across the United States and Europe allow us to provide nationwide and international coverage to our clients, while maintaining a local relationship with our single-location clients. We believe that our end-to-end integrated IT solutions, specialized professional services engineers, broad vendor relationships, experience serving our long-standing diversified clients and client-centric approach provide a strong value proposition and help strengthen our market position. For the year ended December 31, 2010, we derived approximately 60% and 40% of our unaudited pro forma combined revenues from commercial enterprises and the public sector, respectively. All of our top 10 clients in 2010 purchased solutions from us in each of the previous three years. We have long-term relationships with many of our top clients.

Our unaudited pro forma combined revenue and gross profit in 2010 were $727.3 million and $123.3 million, respectively. For the quarter ended March 31, 2011, our unaudited pro forma combined revenue and gross profit were $155.5 million and $29.4 million, respectively, representing growth of 25% and 23%, respectively, over the corresponding quarter in 2010. The table below shows each of the Businesses’ revenue and gross profit for the 12 months ending December 31, 2006 and December 31, 2010:

 

     Revenue     Gross Profit  
     2006      2010      CAGR     2006      2010      CAGR  
     ($ in thousands)  

FS

   $ 170,640       $ 376,308         22   $ 32,169       $ 71,350         22

GTRI

     74,793         163,585         22     10,045         29,045         30

Red River

     89,823         187,434         20     7,510         23,036         32