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Table of Contents

As filed with the Securities and Exchange Commission on October 28, 2011

Registration No. 333-176297

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT No. 4

to

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   30-0594121

(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  ¨

 

 

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 OCTOBER 28, 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 15 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   

Prospectus Summary

     1   

Risk Factors

     15   

Special Note Regarding Forward-Looking Statements

     32   

The Business Combination

     33   

Use of Proceeds

     39   

Dividend Policy

     40   

Capitalization

     41   

Dilution

     42   

Selected Historical and Unaudited Pro Forma Combined Financial and Other Data

     43   

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

     48   

The IT Solutions Industry

     92   

Business

     95   

Management

     109   

Executive Compensation

     117   

Certain Relationships and Related Party Transactions

     129   

Principal Stockholders

     133   

Description of Capital Stock

     135   

Shares Eligible for Future Sale

     138   

Underwriting

     141   

Legal Matters

     147   

Experts

     148   

Where You Can Find Additional Information

     149   

Glossary of Terms

     150   

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.

 

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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. 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 in this Prospectus Summary under the heading “The Business Combination.”

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. FusionStorm Global Inc. was formed to acquire fusionstorm, Global Technology Resources, Inc. and Red River Computer Co., Inc., three information technology companies, with proceeds of this offering and shares of our common stock. To date, we have not conducted any operations other than in connection with our proposed acquisitions of fusionstorm, Global Technology Resources, Inc. and Red River Computer Co., Inc. and with this offering. Except as otherwise indicated or unless the context otherwise requires, the business operations and other information given in this Prospectus Summary assumes that this offering and these acquisitions have occurred.

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 (as resellers of the broad range of IT hardware and software products that we offer to our clients) 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.

 

 

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We offer a comprehensive suite of managed services, including hosting and cloud services and advanced technical resources to support our clients’ ongoing IT needs. Cloud services include remote application management and delivery, virtual desktop infrastructure, and application and server virtualization. Our hosting and cloud services can be delivered from either our data centers or from IT systems and networks that reside in our clients’ facilities and are owned by the client. 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.

Our engineers design, build, integrate and deliver business-driven technology solutions for our clients. As of June 30, 2011, we employed approximately 275 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, VMware and Wal-Mart.com. Of these clients, Facebook represented more than 5% of our pro forma combined revenues in both 2009 and 2010, and Wal-Mart.com represented more than 5% of our pro forma combined revenues in 2010.

Our unaudited pro forma combined revenues, gross profit and net loss for the year ended December 31, 2010 were $727.3 million, $123.3 million and $(14.3 million), respectively. For the six months ended June 30, 2011, our unaudited pro forma combined revenues, gross profit and net income were $338.7 million, $59.9 million and $0.3 million, respectively, representing growth of 10% and 5% with regard to revenues and gross profit, respectively, over the corresponding period in 2010.

For the year ended December 31, 2010, FS’s revenues, gross profit and net loss were $376.3 million, $71.4 million and $(16.4 million), respectively. GTRI’s revenues, gross profit and net income for the same period were $163.6 million, $29.0 million and $3.0 million, respectively. Red River’s revenues, gross profit and net income for the same period were $187.4 million, $23.0 million and $5.9 million, respectively.

For the year ended December 31, 2009, FS’s revenues, gross profit and net loss were $237.5 million, $54.7 million and $(12.5 million), respectively. GTRI’s revenues, gross profit and net loss for the same period were $169.1 million, $22.5 million and $(0.6 million), respectively. Red River’s revenues, gross profit and net income for the same period were $164.3 million, $18.2 million and $2.1 million, respectively.

For the year ended December 31, 2008 FS’s revenues, gross profit and net income were $249.4 million, $57.3 million and $1.2 million, respectively. GTRI’s revenues, gross profit and net income for the same period were $128.1 million, $17.6 million and $0.1 million, respectively. Red River’s revenues, gross profit and net loss for the same period were $131.9 million, $12.2 million and $(0.1 million), respectively.

Our primary operations are based in the United States with offices and other facilities in 21 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.

 

 

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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 fusionstorm (FS), Global Technology Resources, Inc. (GTRI) and Red River Computer Co., Inc. (Red River, and together with FS and GTRI, the Businesses) and with this offering.

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 FS and John G. Varel, as representative of the FS shareholders; on June 20, 2011 and October 3, 2011, the parties entered into amendments 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 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. The aggregate consideration that we will pay in connection with our acquisitions of FS, GTRI and Red River under the merger agreement and the stock purchase agreements is $138.5 million in cash (to be adjusted for certain working capital and other amounts) and a number of shares of our common stock equal to $128.5 million (to be adjusted for certain working capital and other amounts) divided by the price per share of our common stock 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). See the section entitled “The Business Combination” for additional information regarding the terms of our acquisition agreements with FS, GTRI and Red River, including the purchase price for each acquisition.

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.

Since the execution of the merger agreement and the stock purchase agreements, the Company and the management of each of FS, GTRI and Red River have worked together to identify and implement measures so that the transactions contemplated by those agreements will be consummated, and to prepare for the operation of the Company after completion of the Business Combination and the closing of this offering. As part of these efforts, the Company and its incoming management have identified the individuals who will lead its commercial division, its public sector division and its services division, developed organizational charts, taken steps to reduce costs at each of the Businesses and identified revenue-generating opportunities. Some of these actions have already taken place and others will take place prior to or upon the closing of this offering. For example, GTRI and Red River have entered into two teaming agreements which enable GTRI to sell products and services under Red River’s General Services Administration Federal Supply Schedule and to sell products under Red River’s Solutions for Enterprise-Wide Procurement contract administered by the National Aeronautics and Space Administration. In addition, FS and GTRI are collaborating on providing technology products, professional services, managed hosting, virtual desktop infrastructure, virtual computing environments and managed services to certain GTRI clients, as well as providing specialized staff augmentation for a project on which FS is a subcontractor. Further, FS and Red River have identified opportunities in which Red River will be able to leverage certain certifications held by FS employees.

 

 

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Our cash-saving measures at each of the Businesses, together with certain actions required by the merger agreement and the stock purchase agreements, have resulted and are expected to continue to result in cash savings, which we refer to collectively as Merger Reductions. See the sections entitled “The Business Combination—Actions Relating to the Business Combination” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—FusionStorm Global Inc.—Results of Operations” for additional information regarding the Merger Reductions.

We currently have one shareholder, Bluefin Management, LLC, the manager of which is James Monroe. Mr. Monroe is currently the sole director and an executive officer of the Company. Mr. Monroe is also the manager of JLM Management LLC, which holds a majority equity interest in Bluefin Management, LLC. No current shareholder or affiliate of FS, GTRI or Red River currently holds any ownership interest in, or is currently an officer or director of, Bluefin Management, LLC or the Company.

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.

 

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).

 

 

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Technologies

  

Description of Services and Market Size

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).

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.

 

 

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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 275 engineers, technicians and subject matter experts as of June 30, 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 pace with emerging technologies.

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 26 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 June 30, 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 June 30, 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,

 

 

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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.

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

 

 

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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.

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 successfully integrate the businesses following our proposed acquisitions of FS, GTRI and Red River.

 

   

We may be unable to achieve some or all of the benefits we expect to achieve from the integration of FS, GTRI and Red River.

 

   

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.

 

 

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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. 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 June 30, 2011 and the summary statement of operations data for each of the six-month periods ended June 30, 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 six-month periods ended June 30, 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 June 30, 2011 combines our Predecessor’s balance sheet with those of the Company, GTRI and Red River as of June 30, 2011, assuming the Business Combination and the closing of this offering occurred on June 30, 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,     Six months ended
June 30,
    Year ended
December 31,
2010
    Six months ended
June 30,
 
    2008     2009     2010     2010     2011       2010     2011  
    ($ in thousands)  

Statement of Operations Data:

               

Revenues(1)

  $ 249,396      $ 237,469      $ 376,308      $ 187,382      $ 188,220      $ 727,283      $ 308,452      $ 338,658   

Cost of revenue(1)

    192,105        182,746        304,958        150,423        149,856        603,944        251,413        278,733   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    57,291        54,723        71,350        36,959        38,364        123,339        57,039        59,925   

Operating expenses(2)

    51,473        68,771        76,049        40,002        36,888        125,298        59,622        57,144   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    5,818        (14,048     (4,699     (3,043     1,476        (1,959     (2,583     2,781   

Interest expense(3)

    (4,853     (3,584     (3,063     (2,907     (4,967     (1,617     (487     (2,437

Other (expense) income(1)

    (73     294        (517     (18     (270     (405     154        (178
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    892        (17,338     (8,279     (5,968     (3,761     (3,981     (2,916     166   

Income tax (expense) benefit(4)

    (1,061     6,197        2,127        1,533        615        (141     786        (375
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

    (169     (11,141     (6,152  

 

(4,435

    (3,146     (4,122     (2,130     (209

Income (loss) from discontinued operations

    1,376        (1,314     (10,205     (1,538     490        (10,205     (1,538     490   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 1,207      $ (12,455   $ (16,357   $ (5,973   $ (2,656   $ (14,327   $ (3,668   $ 281   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other

Financial Data (unaudited):

               

EBITDA(5)

            $ (1,702   $ 957      $ 8,882   

Adjusted EBITDA(6)(7)

            $ 21,464      $ 12,424      $ 10,347   

 

     Predecessor     Pro Forma(8)  
     June 30, 2011  
     ($ in thousands)  

Balance Sheet Data:

    

Cash and cash equivalents

   $ 935      $ 27,190   

Total current assets

     132,742        219,441   

Total assets

     175,715        333,537   

Current portion of long-term debt

     17,221        -   

Total current liabilities

     170,282        204,897   

Long-term debt, net of current portion

     738        -   

Total liabilities

     180,004        220,546   

Total shareholders’ (deficit) equity

     (4,289     112,991   

 

(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 reflects the elimination of certain operating costs of the Businesses, including (i) the disposition by GTRI of RSC, (ii) the elimination of certain expenses related to RR Realty and (iii) the elimination of the change in fair value of the Predecessor’s phantom stock plan. 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.

 

 

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(3) Pro forma includes the elimination of interest expense associated with (i) the disposition of RSC and termination of RR Realty as a variable interest entity, (ii) debt that will be repaid in conjunction with the Business Combination and (iii) the elimination of the change in fair value of the Predecessor’s liability classified warrants that will be settled or forfeited in conjunction with the Business Combination.
(4) Pro forma includes the additional income tax expense resulting from GTRI and Red River’s loss of their status as Subchapter S Corporations in the Business Combination and the impact of the pro forma adjustments.
(5) 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.
(6) We define Adjusted EBITDA as net income (loss) before interest expense, income tax benefit (expense), depreciation and amortization, loss from discontinued operations, share-based compensation, legal fees and acquisition-related transaction costs. 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-recurring items that affect comparability across periods. 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
    Six Months
ended June 30,
2010
    Six Months
ended June 30,
2011
 
     ($ in thousands)  

Reconciliation of Adjusted EBITDA:

      

Net (loss) income

   $ (14,327   $ (3,668   $ 281   

Interest expense

     1,617        487        2,437   

Income tax expense (benefit)

     141        (786     375   

Depreciation and amortization

     10,867        4,924        5,789   
  

 

 

   

 

 

   

 

 

 

EBITDA

     (1,702     957        8,882   

Loss (income) from discontinued operations(a)

     10,205        1,538        (490

Share-based compensation(b)

     8,014        6,465        73   

Legal fees(c)

     3,992        3,014        327   

Acquisition-related transaction costs(d)

     955        450        1,555   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (unaudited)

   $ 21,464      $ 12,424      $ 10,347   
  

 

 

   

 

 

   

 

 

 

 

  (a) Reflects the elimination of a loss from discontinued operations in an amount of $10,205 for the year ended December 31, 2010, $1,538 for the six months ended June 30, 2010, and income of $490 for the six months ended June 30, 2011 relating to the October 2010 disposition of assets and liabilities of two subsidiaries of the Predecessor.
  (b)

Reflects the add-back of certain non-cash expenses of $8,014 for the year ended December 31, 2010, $6,465 for the six-months ended June 30, 2010, and $73 for the six months ended June 30, 2011 attributable to share-based compensation of the Predecessor and GTRI. The share-based compensation of the Predecessor consists of options to acquire shares of Predecessor’s common stock pursuant to its stock option plans. The Company believes that this approach enhances the ability of management and many investors to compare

 

 

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  financial results over multiple periods and allows for greater insight into the financial and operational performance of the Company.
  (c) Reflects the add-back of certain non-recurring expenses of $3,992 for the year ended December 31, 2010, $3,014 for the six months ended June 30, 2010, and $327 for the six months ended June 30, 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.
  (d) Reflects the add-back of legal, accounting and consulting fees incurred directly in connection with the Business Combination and the offering, in the aggregate amount of $955 for the year ended December 31, 2010, $450 for the six months ended June 30, 2010 and $1,555 for the six months ended June 30, 2011.

 

(7) Adjusted EBITDA does not include the Merger Reductions which totaled $12.2 million, $5.6 million and $8.1 million for the year ended December 31, 2010 and for the six-month periods ended June 30, 2010 and 2011, respectively. Specifically, for the year ended December 31, 2010 and the six-month periods ended June 30, 2010 and 2011, Adjusted EBITDA does not include the following Merger Reductions: (i) cash savings of $5.0 million, $2.6 million and $3.0 million, respectively, attributable to the replacement of certain cash-based compensation (including commissions and other variable compensation) with share-based compensation and (ii) cash savings of $7.2 million, $3.0 million and $5.1 million, respectively, attributable to the elimination or contractual adjustment of certain salary and related expenses attributable to previous owners of the Businesses, duplicative executives and other personnel. The expense reduction associated with the cash savings described in clause (i) of the preceding sentence would have been offset by non-cash charges of $5.5 million, $2.9 million and $3.3 million for the year ended December 31, 2010 and for the six-month periods ended June 30, 2010 and 2011, respectively, attributable to the share-based compensation which replaced a portion of cash-based compensation. The Merger Reductions referred to in this footnote (7) are more fully discussed in the sections entitled “The Business Combination—Actions Relating to the Business Combination” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—FusionStorm Global Inc.—Results of Operations.”
(8) 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 in conjunction with the Business Combination 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 successfully integrate the businesses following our proposed acquisitions of FS, GTRI and Red River.

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.

For example, we expect to incur substantial expenses in connection with the integration process. In addition, each of FS, GTRI and Red River offers different services, has different capabilities, targets different clients and has a different management style, which increases 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, and our failure to do so could have a material adverse effect on our business, financial condition and results of operations.

We may be unable to achieve some or all of the benefits we expect to achieve from the integration of FS, GTRI and Red River.

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. Further, such benefits may be realized later than expected, and the costs of implementing these measures may be greater than anticipated. There can be no assurance 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.

 

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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 June 30, 2011, we had 27 facilities in 14 states across the United States and two facilities in Europe. As of June 30, 2011, FS, GTRI and Red River collectively had 693 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 June 30, 2011, we had unaudited pro forma combined intangible assets and goodwill of $102.1 million, which represented 31% 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 2008, 2009 and 2010 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 in each of these years. Specifically, the identified issues relate to controls over the financial reporting process and the timely identification and resolution of accounting issues, including 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.

During the period from January 15, 2011 to May 20, 2011, FS experienced service disruptions to multiple clients hosted on one of its managed services platforms. During this time, clients using these services experienced sporadic disruptions lasting from a few minutes to six hours, intermittently making those services partially or wholly unavailable. In response, FS identified a technology limitation which resulted in instability on this managed services platform under certain high workload situations. FS then implemented a corrective action and communication plan to communicate with affected clients and to migrate those clients off the problem technology. Since the completion of this migration, FS has experienced no material customer outages.

 

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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, 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 guarantee 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.

 

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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 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

 

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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 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.

Reductions in spending by the U.S. government resulting from current federal budget trends could have a material adverse effect on our business, financial condition and results of operations.

A portion of our revenues derives from contracts with U.S. federal government entities. These revenues depend significantly upon government budget trends. Future budget allocations to the government entities with whom we contract could be reduced as a result of several factors, including changes in spending policies by the current and future presidential administrations and Congress, the U.S. federal government’s budget deficits, changes in spending priorities and possible political pressure to reduce U.S. government spending in general. Each of these factors could lead to declines in IT-related expenditures by the government entities with whom we contract. Such declines could have a material adverse effect on our business, financial condition and results of operations.

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;

 

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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 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

 

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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 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.

 

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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.

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

 

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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 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

 

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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 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;

 

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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 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

 

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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;

 

   

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 (to be adjusted for certain working capital amounts) minus the sum of (a) the long-term debt of FS and the current portion of the long-term debt of FS (which was $18 million in the aggregate as of June 30, 2011), (b) certain payments to be made under a phantom stock plan (the amount of which depend on the price of our common stock in this offering but which FS estimates to be $7.3 million as of June 30, 2011) and (c) certain contingent bonus payments of $1.4 million, plus a payment for certain capital expenditure amounts; and (ii) a number of shares of our common stock equal to $100 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).

The following table summarizes the merger consideration:

 

Form of Consideration

  

Amount

Cash   

$100 million (to be adjusted for certain working capital amounts), minus:

 

•    long-term debt of FS and current portion of long-term debt of FS,

 

•    certain payments under FS phantom stock plan, and

 

•    certain FS contingent bonus payments;

 

plus:

 

•    a payment for certain FS capital expenditure amounts.

FS Global Common Stock   

Number of shares equal to $100 million divided by the price per share of common stock 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).

With respect to FS’s debt, if the merger with FS had closed on June 30, 2011, the cash portion of the purchase price would have been reduced by an aggregate amount of $18 million relating to the long-term debt of FS and the current portion of the long-term debt of FS.

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 acceleration and exercise or termination of all outstanding options or warrants, to participate and assist in this offering and to enter into amendments to certain compensation arrangements to substitute stock-based compensation for a portion of the cash-based compensation otherwise payable under such compensation plans. The amendments to compensation arrangements include the

 

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replacement of a portion of the cash component of such compensation, such that if the amended compensation arrangements had been in effect as of January 1, 2011, FS’s cash expenses in respect of compensation in 2011 would be reduced by an aggregate amount of at least twenty percent and at least $5 million, and if the amended compensation arrangements had been in effect as of January 1, 2010, FS’s cash expenses in respect of compensation would have been reduced by $5 million in 2010. Under the amended compensation arrangements, which will be effective from the closing of the Business Combination and this offering until December 31, 2012, the Company will issue to each affected employee the number of shares of the Company’s common stock having a fair market value of up to 110% of the amount of the cash-based compensation foregone by the employee. For purposes of the amended compensation arrangements, the fair market value of a share of the Company’s common stock is the average closing price per share for the ten trading days prior to the issuance of the shares. The cash savings attributable to the amendment of these compensation arrangements constitute a portion of the Merger Reductions.

Under the merger agreement, we have agreed to issue options to acquire, in the aggregate, up to 555,000 shares of our common stock under our 2011 Equity Incentive Plan to certain FS employees who agree to amend their compensation arrangements. The exercise price per share of these options will be equal to the price of our common stock in this offering, and the right to exercise the options will be subject to vesting. The estimated aggregate fair value of these options will be $         at the closing of this offering (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 the shares of our common stock underlying these options represent, in the aggregate,     % of our issued and outstanding common stock immediately after the closing of this offering. These option grants are in addition to options to be issued to certain of our named executive officers pursuant to their respective employment agreements to be entered into in connection with the Business Combination.

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. These closing conditions include, among others, obtaining approval by the shareholders of FS and the sole shareholder of Merger Sub of the transactions contemplated by the merger agreement. The approval of the FS shareholders has already been obtained, and the Company, in its capacity as the sole shareholder of Merger Sub, intends to approve the transactions contemplated by the merger agreement prior to the closing of this offering. The Company considers the successful completion of this offering to be the consummation of a firm-commitment underwritten offering conducted primarily in the United States through a nationally recognized investment banking firm which results in our common stock being listed or quoted for trading on The New York Stock Exchange or The NASDAQ Global Market and which also results in net proceeds to the Company in an amount sufficient to allow us to meet our obligations under the merger agreement and the stock purchase agreements with GTRI and Red River to pay the aggregate purchase price for the Business Combination. The merger is also contingent upon our shares received by the FS shareholders representing at least 28% of our outstanding stock following this offering, including the shares of our common stock to be issued as consideration in our acquisitions of GTRI and Red River, but 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. This condition could result in the FS shareholders receiving shares of our common stock

 

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with an aggregate value of greater than $100 million. 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.

We currently have one shareholder, Bluefin Management, LLC. No current officer, director, shareholder or affiliate of FS played any role in the formation or operations of the Company or Bluefin Management, LLC, and no current officer, director, shareholder or affiliate of FS is currently an officer, director or shareholder of the Company or Bluefin Management, LLC. The merger agreement represents an arms-length transaction between the Company and FS, and was negotiated by the Company’s and FS’s respective executive management teams. The merger agreement and the transactions contemplated thereby have been approved, in accordance with applicable law, by FS’s sole director, the holders of a majority of the outstanding shares of capital stock of FS, the Company’s sole director and Merger Sub’s sole director, and will be approved by the Company in its capacity as the sole shareholder of Merger Sub prior to the closing of this offering.

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 June 30, 2011) and 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).

The following table summarizes the consideration to be paid in connection with the acquisition of GTRI:

 

Form of Consideration

  

Amount

Cash   

$12.5 million, plus or minus:

 

•    certain GTRI working capital amounts;

 

minus:

 

•    certain outstanding indebtedness of GTRI, and

 

•    change in control payments owed by GTRI.

FS Global Common Stock    Number of shares equal to $12.5 million divided by the price per share of common stock 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).

With respect to GTRI’s indebtedness, if our acquisition of GTRI had closed on June 30, 2011, the cash portion of the purchase price would have been reduced by an aggregate amount of $0.4 million relating to with the aggregate amount of certain outstanding indebtedness of GTRI.

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.

 

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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. The Company considers the successful completion of this offering to be the consummation of a firm-commitment underwritten offering conducted primarily in the United States through a nationally recognized investment banking firm which results in our common stock being listed or quoted for trading on The New York Stock Exchange or The NASDAQ Global Market and which also results in net proceeds to the Company in an amount sufficient to allow us to meet our obligations under the stock purchase agreement, the merger agreement with FS and the stock purchase agreement with Red River to pay the aggregate purchase price for the Business Combination. 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.

No current officer, director, shareholder of affiliate of GTRI played any role in the formation or operations of the Company or Bluefin Management, LLC (the Company’s sole shareholder), and no current officer, director, shareholder or affiliate of GTRI is currently an officer, director or shareholder of the Company or Bluefin Management, LLC. The stock purchase agreement represents an arms-length transaction among the Company, GTRI and the GTRI shareholders, and was negotiated on behalf of the Company by its executive management team and on behalf of GTRI and the GTRI shareholders by GTRI’s executive management team and principal shareholders. The stock purchase agreement has been approved by GTRI’s board of directors, the holders of all of the outstanding shares of capital stock of GTRI and the Company’s sole director.

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 ($0.3 million as of June 30, 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.

 

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The following table summarizes the consideration to be paid in connection with the acquisition of Red River:

 

Form of Consideration

  

Amount

Cash   

$26 million, minus:

 

•    certain outstanding indebtedness of Red River, and

 

•    certain other financial obligations of Red River;

 

plus or minus:

 

•    certain Red River EBITDA and working capital amounts.

FS Global Common Stock    Number of shares equal to $12.5 million plus or minus certain EBITDA and working capital amounts, divided by the price per share of common stock 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).

With respect to Red River’s indebtedness, if our acquisition of Red River had closed on June 30, 2011, the cash portion of the purchase price would have been reduced by an aggregate amount of $0.3 million relating to certain outstanding Red River indebtedness.

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.

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. The Company considers the successful completion of this offering to be the consummation of a firm-commitment underwritten offering conducted primarily in the United States through a nationally recognized investment banking firm which results in our common stock being listed or quoted for trading on The New York Stock Exchange or The NASDAQ Global Market and which also results in net proceeds to the Company in an amount sufficient to allow us to meet our obligations under the stock purchase agreement, the merger agreement with FS and the stock purchase agreement with GTRI to pay the aggregate purchase price for the Business Combination. Our acquisition of Red River does not include RRCC Realty, LLC (RR Realty), a variable interest

 

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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.

No current officer, director, shareholder or affiliate of Red River played any role in the formation or operations of the Company or Bluefin Management, LLC (the Company’s sole shareholder), and no current officer, director, shareholder or affiliate of Red River is currently an officer, director or shareholder of the Company or Bluefin Management, LLC. The stock purchase agreement represents an arms-length transaction among the Company, Red River and the Red River shareholders, and was negotiated on behalf of the Company by its executive management team and on behalf of Red River and the Red River shareholders by Red River’s executive management team and principal shareholders. The stock purchase agreement has been approved by Red River’s board of directors, the holders of all of the outstanding shares of capital stock of Red River and the Company’s sole director.

Actions Relating to the Business Combination

Since the execution of the merger agreement and the stock purchase agreements, the Company and the management of each of FS, GTRI and Red River have worked together to identify and implement measures so that the transactions contemplated by the acquisition agreements will be consummated, and to prepare for the operation of the Company after completion of the Business Combination and the closing of this offering. As part of these efforts, the Company and its incoming management have identified the individuals who will lead its commercial sales efforts, its public sector efforts and its professional and managed services practices, developed organizational charts, taken steps to reduce costs at each of the Businesses and identified revenue-generating opportunities. Some of these actions have already taken place and others will take place prior to or upon the closing of this offering. For example, GTRI and Red River have entered into two teaming agreements which enable GTRI to sell products and services under Red River’s General Services Administration Federal Supply Schedule and to sell products under Red River’s Solutions for Enterprise-Wide Procurement contract administered by the National Aeronautics and Space Administration. In addition, FS and GTRI are collaborating on providing technology products, professional services, managed hosting, virtual desktop infrastructure, virtual computing environments and managed services to certain GTRI clients, as well as providing specialized staff augmentation for a project on which FS is a subcontractor. Further, FS and Red River have identified opportunities in which Red River will be able to leverage certain certifications held by FS employees.

If these plans had been implemented as of January 1, 2010, the Merger Reductions attributable to these actions and to certain actions required by the merger agreement and the stock purchase agreements would have totaled $12.2 million, $5.6 million and $8.1 million for the year ended December 31, 2010 and for the six-month periods ended June 30, 2010 and 2011, respectively. Specifically, these Merger Reductions include:

 

   

$5.0 million, $2.6 million and $3.0 million for the year ended December 31, 2010 and for the six-month periods ended June 30, 2010 and 2011, respectively, attributable to the substitution of share-based compensation for a portion of the cash-based compensation otherwise payable under certain FS compensation arrangements, which expense reductions would have been offset by non-cash charges of $5.5 million, $2.9 million and $3.3 million for the year ended December 31, 2010 and for the six-month periods ended June 30, 2010 and 2011, respectively, attributable to such share-based compensation; and

 

   

$7.2 million, $3.0 million and $5.1 million for the year ended December 31, 2010 and for the six-month periods ended June 30, 2010 and 2011, respectively, attributable to the elimination or contractual adjustment of certain salaries and related expenses attributable to previous owners of the Businesses, duplicative executives and other personnel who have exited FS, GTRI or Red River.

 

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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. 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, acquisitions of complementary or strategic businesses, and the payment of approximately $             in fees to Monroe & Company, LLC for professional services pursuant to a Consulting Agreement between us and Monroe & Company, LLC.

FS has a working capital facility with a bank, under which the outstanding balance ($10.7 million at June 30, 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 5.94% as of June 30, 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 June 30, 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 June 30, 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 June 30, 2011     
     Predecessor     Pro Forma     
     ($ in thousands)     

Cash and cash equivalents

   $ 935        
  

 

 

      

Debt, including current and long-term:

       

Current portion of long-term debt

   $ 17,221        

Long-term debt, net of current portion

     738        
  

 

 

      

Total debt

     17,959        
  

 

 

      

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

     31,647        

Treasury stock

     (123     

Accumulated deficit

     (35,814     
  

 

 

      

Total stockholders equity

     (4,289     
  

 

 

      

Total capitalization

   $ 13,670        
  

 

 

      

 

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 June 30, 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 June 30, 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 June 30, 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 six-month periods ended June 30, 2010 and 2011 and the balance sheet data for each of FS, GTRI and Red River as of June 30, 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 six-month periods ended June 30, 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 June 30, 2011 combines our Predecessor’s balance sheet with those of the Company, GTRI and Red River as of June 30, 2011, assuming the Business Combination and the closing of this offering occurred on June 30, 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,     Six Months ended
June 30,
    Year ended
December 31,
2010
    Six Months ended
June 30,
 
    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      $ 187,382      $ 188,220      $ 727,283      $ 308,452      $ 338,658   

Cost of revenue(1)

    138,471        159,397        192,105        182,746        304,958        150,423        149,856        603,944        251,413        278,733   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    32,169        44,415        57,291        54,723        71,350        36,959        38,364        123,339        57,039        59,925   

Operating expenses(2)

    31,007        36,791        51,473        68,771        76,049        40,002        36,888        125,298        59,622        57,144   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    1,162        7,624        5,818        (14,048     (4,699     (3,043     1,476        (1,959     (2,583     2,781   

Interest expense(3)

    (2,841     (5,344     (4,853     (3,584     (3,063     (2,907     (4,967     (1,617     (487     (2,437

Other (expense) income(1)

    (1,865     (2,046     (73     294        (517     (18     (270     (405     154        (178
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

    (3,544     234        892        (17,338     (8,279     (5,968     (3,761     (3,981     (2,916     166   

Income tax (expense) benefit(4)

    (699     (1,222     (1,061     6,197        2,127        1,533        615        (141     786        (375
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

    (4,243     (988     (169     (11,141     (6,152     (4,435     (3,146     (4,122     (2,130     (209

Income (loss) from discontinued operations

    -        -        1,376        (1,314     (10,205     (1,538     490        (10,205     (1,538     490   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (4,243   $ (988   $ 1,207      $ (12,455   $ (16,357   $ (5,973   $ (2,656   $ (14,327   $ (3,668   $ 281   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial Data (unaudited):

                   

EBITDA(5)

                $ (1,702   $ 957      $ 8,882   

Adjusted EBITDA(6)(7)

                $ 21,464      $ 12,424      $ 10,347   

 

     Predecessor     Pro Forma(8)  
     December 31,     June 30,
2011
    June  30,
2011
 
     2006     2007     2008     2009     2010      

Balance Sheet Data:

   ($ in thousands)  

Cash and cash equivalents

   $ 924      $ 1,129      $ 2,060      $ 888      $     1,055      $       935      $   27,190   

Total current assets

     81,757        93,533        88,992        100,844        122,440        132,742        219,441   

Total assets

     100,490        112,133        171,216        177,891        166,371        175,715        333,537   

Current portion of long-term debt

     2,810        1,756        7,594        8,780        30,980        17,221        -   

Total current liabilities

     77,122        90,375        105,110        135,305        154,762        170,282        204,897   

Long-term debt, net of current portion

     19,987        17,952        10,358        1,727        2,988        738        -   

Total liabilities

     102,422        114,961        171,495        188,393        168,080        180,004        220,546   

Total shareholders’ (deficit) equity

     (1,932     (2,828     (279     (10,502     (1,709     (4,289     112,991   

 

(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 reflects the elimination of certain operating costs of the Businesses, including (i) the disposition by GTRI of RSC, (ii) the elimination of certain expenses related to RR Realty and (iii) the elimination of the change in fair value of the Predecessor’s phantom stock plan. 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 includes the elimination of interest expense associated with (i) the disposition of RSC and termination of RR Realty as a variable interest entity, (ii) debt that will be repaid in conjunction with the Business Combination and (iii) the elimination of the change in fair value of the Predecessor’s liability classified warrants that will be settled or forfeited in conjunction with the Business Combination.
(4) Pro forma includes the additional income tax expense resulting from GTRI and Red River’s loss of their status as Subchapter S Corporations in the Business Combination and the impact of the pro forma adjustments.
(5) 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.

 

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(6) We define Adjusted EBITDA as net income (loss) before interest expense, income tax benefit (expense), depreciation and amortization, loss from discontinued operations, share-based compensation, legal fees and acquisition-related transaction costs. 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-recurring items that affect comparability across periods. 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
    Six Months
ended June 30,
2010
    Six Months
ended June 30,
2011
 
    ($ in thousands)  

Reconciliation of Adjusted EBITDA:

     

Net (loss) income

  $ (14,327   $ (3,668   $ 281   

Interest expense

    1,617        487        2,437   

Income tax expense (benefit)

    141        (786     375   

Depreciation and amortization

    10,867        4,924        5,789   
 

 

 

   

 

 

   

 

 

 

EBITDA

    (1,702     957        8,882   

Loss (income) from discontinued operations(a)

    10,205        1,538        (490

Share-based compensation(b)

    8,014        6,465        73   

Legal fees(c)

    3,992        3,014        327   

Acquisition-related transaction costs(d)

    955        450        1,555   
 

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (unaudited)

  $ 21,464      $  12,424      $  10,347   
 

 

 

   

 

 

   

 

 

 

 

  (a) Reflects the elimination of a loss from discontinued operations in an amount of $10,205 for the year ended December 31, 2010, $1,538 for the six months ended June 30, 2010, and income of $490 for the six months ended June 30, 2011 relating to the October 2010 disposition of assets and liabilities of two subsidiaries of the Predecessor.
  (b) Reflects the add-back of certain non-cash expenses of $8,014 for the year ended December 31, 2010, $6,465 for the six-months ended June 30, 2010, and $73 for the six months ended June 30, 2011 attributable to share-based compensation of the Predecessor and GTRI. The share-based compensation of the Predecessor consists of options to acquire shares of Predecessor’s common stock pursuant to its stock option plans. The Company believes that this approach enhances the ability of management and many investors to compare financial results over multiple periods and allows for greater insight into the financial and operational performance of the Company.
  (c) Reflects the add-back of certain non-recurring expenses of $3,992 for the year ended December 31, 2010, $3,014 for the six months ended June 30, 2010, and $327 for the six months ended June 30, 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.
  (d) Reflects the add-back of legal, accounting and consulting fees incurred directly in connection with the Business Combination and the offering, in the aggregate amount of $955 for the year ended December 31, 2010, $450 for the six months ended June 30, 2010 and $1,555 for the six months ended June 30, 2011.

 

(7) Adjusted EBITDA does not include the Merger Reductions which totaled $12.2 million, $5.6 million and $8.1 million for the year ended December 31, 2010 and for the six-month periods ended June 30, 2010 and 2011, respectively. Specifically, for the year ended December 31, 2010 and the six-month periods ended June 30, 2010 and 2011, Adjusted EBITDA does not include the following Merger Reductions: (i) cash savings of $5.0 million, $2.6 million and $3.0 million, respectively, attributable to the replacement of certain cash-based compensation (including commissions and other variable compensation) with share-based compensation and (ii) cash savings of $7.2 million, $3.0 million and $5.1 million, respectively, attributable to the elimination or contractual adjustment of certain salary and related expenses attributable to previous owners of the Businesses, duplicative executives and other personnel. The expense reduction associated with the cash savings described in clause (i) of the preceding sentence would have been offset by non-cash charges of $5.5 million, $2.9 million and $3.3 million for the year ended December 31, 2010 and for the six-month periods ended June 30, 2010 and 2011, respectively, attributable to the share-based compensation which replaced a portion of cash-based compensation. The Merger Reductions referred to in this footnote (7) are more fully discussed in the sections entitled “The Business Combination— Actions Relating to the Business Combination” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—FusionStorm Global Inc.—Results of Operations.”

 

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(8) 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 in conjunction with the Business Combination 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.

GTRI

 

     Year ended December 31,      Six Months ended
June 30,
 
     2006     2007     2008     2009     2010      2010      2011  

Statement of Operations Data:

   ($ in thousands)  

Revenues

   $ 74,793      $ 100,885      $ 128,053      $ 169,119      $ 163,585       $   66,587       $   68,692   

Cost of revenue

     64,748        83,143        110,417        146,649        134,540         53,182         56,145   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Gross profit

     10,045        17,742        17,636        22,470        29,045         13,405         12,547   

Operating expenses

     6,034        12,629        17,523        23,071        26,205         12,015         12,008   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Income (loss) from operations

     4,011        5,113        113        (601     2,840         1,390         539   

Interest expense

     (104     (11     (101     (83     23         (96      (17

Other (expense) income

     (1     146        89        (67     (25      111         21   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss)

     3,906        5,248        101        (751     2,838         1,405         543   

Less: minority interest in RSC

     -        -        -        106        161         89         66   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to GTRI and RSC

   $ 3,906      $ 5,248      $ 101      $ (645   $ 2,999       $ 1,494       $ 609   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

     December 31,      June 30,
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       $     4,736   

Total current assets

     17,269         21,604         20,788         41,933         35,091         29,617   

Total assets

     17,809         22,635         23,060         44,944         38,481         32,826   

Promissory note payable to related party, current portion

     -         -         -         -         93         98   

Total current liabilities

     13,378         14,818         16,456         39,126         31,146         26,409   

Promissory note payable to related party

     -         -         -         -         323         284   

Related party payable

     -         -         -         83         165         202   

Total liabilities

     13,378         14,862         16,727         39,546         32,082         27,348   

Total stockholders’ equity

     4,431         7,773         6,333         5,398         6,399         5,478   

 

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Red River

 

     Year ended December 31,      Six Months ended
June 30,
 
     2006     2007     2008     2009     2010      2010      2011  

Statement of Operations Data:

   ($ in thousands)  

Revenues

   $ 89,823      $ 104,536      $ 131,935      $ 164,343      $ 187,434       $ 54,483       $ 81,746   

Cost of revenue

     82,313        95,900        119,735        146,144        164,398         47,808         72,732   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Gross profit

     7,510        8,636        12,200        18,199        23,036         6,675         9,014   

Operating expenses

     7,800        8,314        11,869        15,900        16,449         6,928         7,983   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

(Loss) income from operations

     (290     322        331        2,299        6,587         (253      1,031   

Interest expense

     (585     (693     (534     (348     (499      (184      (228

Other income (expense)

     -        70        166        123        105         45         71   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

(Loss) income before provision for state income taxes

     (875     (301     (37     2,074        6,193         (392      874   

Income tax (expense) benefit

     -        (16     (67     39        (252      16         (37
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net (loss) income

   $ (875   $ (317   $ (104   $ 2,113      $ 5,941       $ (376    $ 837   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

     December 31,      June 30,
2011
 
     2006     2007     2008     2009      2010     

Balance Sheet Data:

   ($ in thousands)  

Cash and cash equivalents

   $ 1      $ -      $ 71      $ 344       $ 157       $ 248   

Total current assets

     20,676        22,348        33,828        38,711         77,113         35,901   

Total assets

     21,813        24,592        37,084        42,308         80,752         39,372   

Current portion of long-term debt

     107        100        157        230         189         193   

Total current liabilities

     21,972        25,107        37,130        40,363         74,777         33,994   

Long-term debt, net of current portion

     1,861        274        1,212        1,393         1,268         750   

Total liabilities

     23,834        25,382        38,500        41,984         76,197         34,834   

Total stockholders’ (deficit) equity

     (2,021     (789     (1,416     325         4,555         4,538   

 

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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. To date, we have not conducted any operations other than in connection with the Business Combination and this offering. Except as otherwise indicated or unless the context otherwise requires, the business operations and other information given in this Management’s Discussion and Analysis of Financial Condition and Results of Operations assumes that this offering and the Business Combination have occurred.

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 and October 3, 2011, the parties entered into amendments 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 integration of the Businesses will begin following the closing of this offering, with the early areas of focus being consolidation of certain shared services including human resources, payroll, legal, cash and treasury management, and credit and collections. A centralized management team has been identified and integration

 

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planning has begun. The Company expects that substantially all of the key employees of the Businesses required to implement the integration plan are currently in place or will be in place as of the closing of this offering. The Company will operate as three business divisions: public sector division, commercial division and professional services. The Company expects that the integration will be substantially completed over a 12 to 18 month period following the closing of this offering. Although the aggregate integration costs are not known at this time, the Company believes that such costs will be offset by reduced personnel resulting from the integration.

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 six-month period ended June 30, 2011 compared to the six-month period ended June 30, 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.

Additionally, we discuss selected unaudited results of operations of each of FS, GTRI and Red River for (i) the six-month period ended June 30, 2011 compared to the six-month period ended June 30, 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. Our public sector revenues may be adversely affected by government budget cuts and other deficit reduction actions. However, to the extent that budget cuts and deficit reduction plans include reductions in government workforces, we believe there may be increased demand for IT products and services. In addition, U.S. federal contracts may be competitively bid out more frequently going forward than in the past. We believe that our past performance under federal contracts and enhanced capabilities arising from the Business Combination will allow us to effectively compete for these contracts.

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

 

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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.

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.

Commissions and variable compensation are included in operating expenses. At FS, GTRI and Red River, the majority of commissions are paid as a percentage of gross profit exclusive of vendor rebates. These commission plans are considered standard by each of the Businesses and can include either a fixed rate of gross profit or increase as earned gross profit increases. At Red River, if an employee generates a sale with negative gross profit, a portion of the loss is offset against current or future commissions earned. At FS and GTRI, there are also certain commission plans that are considered non-standard, which are paid as a percentage of either gross profit or revenue and include commissions on rebates and managed services revenues, as well as bonuses designed to incentivize short-term sales targets. In addition, FS has two types of variable compensation plans. One plan is structured according to certain sales targets and the other is based on achieving certain operating cash flow targets.

 

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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.

The Businesses

While FS, GTRI and Red River have certain differences, each has demonstrated an annual revenue growth rate between 20% and 22% during the period from 2008 through 2010. Depending, in part, on a variety of factors which may arise in any year including trends in the commercial and public sectors, the companies have experienced different growth and profitability results. FS’s stronger services offerings have generally resulted in higher gross profit margins on average during the periods presented than those experienced by GTRI or Red River during those periods.

FS

FS was formed in 1995 to provide 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.

FS sells hardware and software products from such leading technology OEMs as Cisco, EMC, F5, Hitachi Data Systems, Hewlett Packard, Juniper, NetApp, Oracle, Redhat, Symantec and VMWare. FS provides equipment sales and deployment solutions including proof of concept, procurement, project management, hardware and software integration, data center migration and initial system configuration and testing. FS offers maintenance and support services including on-site maintenance and repair, equipment lifecycle analysis and renewal services, remote infrastructure monitoring, support contract management and general help desk and call center services.

Among the IT consulting and professional services which FS offers are the design, procurement and integration of IT systems and solutions. FS’s professional services engineers have expertise across a variety of technologies including data center architecture, systems design, management and automation, virtualization, security, cloud infrastructure, application rationalization, database and Sharepoint development and JAVA and

 

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.Net services. FS’s managed services capabilities include network management and monitoring, database administration, application management and monitoring, backup and recovery, data protection, managed VoIP, security testing and monitoring and other infrastructure services, as well as emerging cloud services.

As of June 30, 2011, FS conducted its operations from 20 facilities located in nine U.S. states, Amsterdam, The Netherlands and Frankfurt, Germany. While FS services clients across the United States, its strongest presence is in California where nine of its facilities are located. As a result, in part, of its geographic diversity, FS has generally adopted a decentralized approach to management.

GTRI

GTRI was formed in 1998 to provide IT solutions to public sector entities and commercial clients. GTRI has served as a prime contractor or sub-contractor on projects for a broad range of U.S. federal government agencies including military and other security agencies. Until May 13, 2010, GTRI qualified as a “minority-owned” business under SBA regulations.

GTRI sells hardware and software products from leading technology OEMs such as Cisco, Dell, EMC, Hitachi Data Systems, HP, Citrix, Juniper, NetApp and VMWare. GTRI provides equipment sales and deployment solutions including proof of concept, design, procurement, project management, hardware and software integration and data migration. GTRI offers maintenance and support services including on-site maintenance and troubleshooting, equipment lifecycle analysis and renewal services, remote infrastructure monitoring and support contract management.

Among the professional services which GTRI offers are the design, procurement and integration of IT systems and solutions, and GTRI’s professional services engineers have expertise across a variety of technologies including data center optimization, systems design, management and automation, virtualization, security, cloud infrastructure, unified communications and asset lifecycle management. GTRI’s managed services capabilities include network management and monitoring, database administration, application monitoring, managed VoIP, security testing and monitoring, and other infrastructure services. GTRI’s service offerings include cabling infrastructure, enterprise service management application consulting, penetration testing, vulnerability assessments and product lifecycle management. Other features and capabilities include an ISO 9001 approved quality management system which includes a Microsoft Sharepoint-based dashboard utilized by the employee base for quality case automation and process sharing.

GTRI’s client base includes a portfolio of federal agencies (including the Department of Defense and civilian agencies), mid-market commercial businesses, state and private universities, school districts and large healthcare organizations across the country. As of June 30, 2011, GTRI conducted its operations from seven facilities located in five U.S. states. Six of GTRI’s facilities are located in the western United States. GTRI has generally adopted a centralized approach to management, with a significant focus on employee development through quality management and education initiatives.

Red River

Red River was formed in 1995 to provide IT solutions to U.S. public sector and healthcare clients. Red River has served as a prime contractor or sub-contractor on projects for a broad range of U.S. federal government agencies including, primarily, civilian agencies and prime contractors on Department of Defense contracts. Red River sells hardware and software products from such leading technology OEMs as Cisco, Dell, EMC, Hewlett Packard, NetApp and VMWare. As of June 30, 2011, Red River conducted its operations from facilities located in Claremont, New Hampshire and Reston, Virginia. Red River has generally adopted a centralized approach to management.

 

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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 and June 30, 2011. The following table presents our selected unaudited pro forma combined quarterly financial 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     June 30, 2011  
    ($ in thousands)        

Revenues

  $ 123,941      $ 184,511      $ 193,762      $ 225,069      $ 155,489      $ 183,169   

Cost of revenue

    100,001        151,412        163,372        189,159        126,122        152,611   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    23,940        33,099        30,390        35,910        29,367        30,558   

Operating expenses

    29,121        30,501        30,061        35,615        27,285        29,859   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

  $ (5,181   $ 2,598      $ 329      $ 295      $ 2,082      $ 699   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Since the execution of the merger agreement with FS and the stock purchase agreements with GTRI and Red River, the Company and the management of each of FS, GTRI and Red River have worked together to identify and implement measures so that the transactions contemplated by the acquisition agreements will be consummated, and to prepare for the operation of the Company after completion of the Business Combination and the closing of this offering. As part of these efforts, the Company and its incoming management have identified the individuals who will lead its commercial sales efforts, its public sector efforts and its professional and managed services practices, developed organizational charts, taken steps to reduce costs at each of the Businesses and identified revenue-generating opportunities. Some of these actions have already taken place and others will take place prior to or upon the closing of this offering. For example, GTRI and Red River have entered into two teaming agreements which enable GTRI to sell products and services under Red River’s General Services Administration Federal Supply Schedule and to sell products under Red River’s Solutions for Enterprise-Wide Procurement contract administered by the National Aeronautics and Space Administration. In addition, FS and GTRI are collaborating on providing technology products, professional services, managed hosting, virtual desktop infrastructure, virtual computing environments and managed services to certain GTRI clients, as well as providing specialized staff augmentation for a project on which FS is a subcontractor. Further, FS and Red River have identified opportunities in which Red River will be able to leverage certain certifications held by FS employees.

If these plans had been implemented as of January 1, 2010, the Merger Reductions attributable to these actions and to certain actions required by the merger agreement and the stock purchase agreements would have totaled $12.2 million, $5.6 million and $8.1 million for the year ended December 31, 2010 and for the six-month periods ended June 30, 2010 and 2011, respectively. Specifically, these Merger Reductions (and certain offsetting increases) include:

 

   

$5.0 million, $2.6 million and $3.0 million for the year ended December 31, 2010 and for the six-month periods ended June 30, 2010 and 2011, respectively, attributable to the substitution of share-based

 

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compensation for a portion of the cash-based compensation otherwise payable under certain FS compensation arrangements, which expense reductions would have been offset by non-cash charges of $5.5 million, $2.9 million and $3.3 million for the year ended December 31, 2010 and for the six-month periods ended June 30, 2010 and 2011, respectively, attributable to such share-based compensation;

 

   

$3.5 million, $1.2 million and $3.0 million for the year ended December 31, 2010 and for the six-month periods ended June 30, 2010 and 2011, respectively, attributable to the termination of certain employees of FS occurring after the execution and delivery of the merger agreement whose positions have been eliminated in preparation for completion of the Business Combination and the closing of this offering and whom the Company does not currently intend to replace, offset by the effect of certain executive employment agreements;

 

   

$0.8 million, $0.4 million and $0.5 million for the year ended December 31, 2010 and for the six-month periods ended June 30, 2010 and 2011, respectively, attributable to the termination of certain employees of GTRI occurring after the execution and delivery of the GTRI stock purchase agreement whose positions have been eliminated in preparation for completion of the Business Combination and the closing of this offering and whom the Company does not currently intend to replace, offset by the effect of certain executive employment agreements;

 

   

$0.1 million, $0.1 million and $0.1 million for the year ended December 31, 2010 and for the six-month periods ended June 30, 2010 and 2011, respectively, attributable to the termination of certain employees of Red River occurring after the execution and delivery of the Red River stock purchase agreement whose positions have been eliminated in preparation for completion of the Business Combination and the closing of this offering and whom the Company does not currently intend to replace;

 

   

$0.8 million, $0.3 million and $0.6 million for the year ended December 31, 2010 and the for the six month periods ended June 30, 2010 and 2011, respectively, attributable to the termination of executives or employees who have been determined to be duplicative or have otherwise been identified for termination prior to or at the time of completion of the Business Combination and the closing of this offering and whom the Company does not currently intend to replace;

 

   

$0.9 million, $0.4 million and $0.3 million for the year ended December 31, 2010 and for the six month periods ended June 30, 2010 and 2011, respectively, attributable to the retirement and termination by Red River of two of its stockholders who are also senior executives of Red River, which retirements are conditions to the Company’s obligations under the Red River stock purchase agreement and whom the Company does not currently intend to replace; and

 

   

$1.1 million, $0.6 million and $0.6 million for the year ended December 31, 2010 and for the six-month periods ended June 30, 2010 and 2011, respectively, attributable to the retirement and termination by FS of a stockholder who is also a senior executive of FS, which termination is a condition to the Company’s obligations under the FS merger agreement and whom the Company does not currently intend to replace.

Comparison of Six Months ended June 30, 2010 and 2011

The following table sets forth selected unaudited pro forma combined results of operations of the Company for each of the six-month periods ended June 30, 2010 and 2011. The following table presents our selected unaudited pro forma combined financial data for such six-month periods 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 financial data for the six-month periods presented below are derived from and should be read in

 

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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.

 

     Six Months ended June 30,  
             2010                     2011          
     ($ in thousands)  

Revenues

   $ 308,452      $ 338,658   

Cost of revenue

     251,413        278,733   
  

 

 

   

 

 

 

Gross profit

     57,039        59,925   

Operating expenses

     59,622        57,144   
  

 

 

   

 

 

 

Income (loss) from operations

   $ (2,583   $ 2,781   
  

 

 

   

 

 

 

Revenues. Revenues were $338.7 million for the six months ended June 30, 2011, an increase of $30.2 million or 10% from $308.5 million for the same period in 2010.

Product revenues were $300.4 million for the six months ended June 30, 2011, an increase of $22.7 million or 8% from $277.7 million for the same period in 2010. Maintenance and support services revenues were $14.7 million for the six months ended June 30, 2011, an increase of $2.2 million or 18% from $12.5 million for the same period in 2010. Professional services revenues were $14.8 million for the six months ended June 30, 2011, an increase of $2.4 million or 19% from $12.4 million for the same period in 2010. Managed services revenues were $8.8 million for the six months ended June 30, 2011, an increase of $3.0 million or 52% from $5.8 million for the same period in 2010.

Cost of Revenue / Gross Profit. Cost of revenue was $278.7 million for the six months ended June 30, 2011, an increase of $27.3 million or 11% from $251.4 million for the same period in 2010. Cost of revenue was 82% of revenues for each of the six-month periods ended June 30, 2011 and 2010. Gross profit was $60.0 million for the six months ended June 30, 2011, an increase of $3.0 million or 5% from $57.0 million for the same period in 2010. Gross margin was 18% for each the six-month periods ended June 30, 2011 and 2010.

Gross profit earned on product revenues was $41.4 million for the six months ended June 30, 2011, an increase of $1.5 million or 4% from $39.9 million for the same period in 2010. Gross margin on product was 14% for each of the six-month periods ended June 30, 2011 and 2010.

Gross profit earned on maintenance and support services revenues was $13.5 million for the six months ended June 30, 2011, an increase of $2.0 million from $11.5 million for the same period in 2010. Gross margin on maintenance and support services was 92% for each of the six-month periods ended June 30, 2011 and 2010.

Gross profit earned on professional services revenues was $2.8 million for the six months ended June 30, 2011, a decrease of $0.5 million or 15% from $3.3 million for the same period in 2010. Gross margin on professional services was 19% for the six months ended June 30, 2011, compared to 27% for the same period in 2010.

Gross profit earned on managed services revenues was $2.3 million for the six months ended June 30, 2011, a decrease of $0.1 million or 4% from $2.4 million for the same period in 2010. Gross margin on managed services was 26% for the six months ended June 30, 2011, compared to 41% for the same period in 2010.

Operating Expenses. Operating expenses were $57.1 million for the six months ended June 30, 2011, a decrease of $2.5 million or 4% from $59.6 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

 

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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.

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 June 30, 2011 consisted of approximately $27.2 million of cash and cash equivalents and approximately $28.8 million available under the

 

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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, 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.

FS, GTRI and Red River use the same lender for their respective credit facilities. The Company is negotiating a consent with that lender relating to the continuation of those credit facilities following completion of the Business Combination and the closing of this offering on the same terms and conditions as currently apply. The lender has also presented to the Company a term sheet relating to a consolidated credit facility for the Company and the Businesses, which the Company expects will be entered into within three months after completion of the Business Combination and the closing of this offering. The consolidated credit facility is expected to be for an aggregate amount of $200 million (increasing to up to $225 million in certain circumstances), including a $75 million revolving asset-based line of credit, a $25 million “accordion” facility which increases the asset-based line of credit and which increases by up to $25 million (to an aggregate accordion facility of up to $50 million) under certain circumstances, and a $100 million distribution inventory line of credit (i.e., a floorplan facility).

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. FS is party to such an earn-out arrangement in connection with its acquisition of a company in November, 2009. Payments under this earn-out arrangement are based on the performance of the acquired business and certain related factors, and continue through the period ending November, 2014. As of June 30, 2011, we estimate that the aggregate amount of all remaining payments under this arrangement is $1.1 million. Because the earn-out payments are based on the performance of the acquired business, there is no maximum amount that could be due pursuant to this earn-out arrangement. In 2010, FS entered into a settlement agreement and a repayment agreement with PC Specialists (dba Technology Integration Group) and certain other parties, in connection with the resolution of litigation. The aggregate amount of FS’s obligations remaining under these agreements was $2.6 million as of June 30, 2011, and is included in long-term debt and the current portion of long-term debt in FS’s balance sheet. The Company does not believe that these repayment obligations or the “earn-out” payments referenced above will be material to its liquidity and capital resources.

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.

Additionally, ongoing global economic uncertainty, including financial market disruption, could cause our current and potential customers to delay or reduce technology purchases and result in longer sales cycles, slower

 

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adoption of new technologies and increased price competition. Credit risk associated with our customers and vendors may also be adversely impacted. In addition, although we do not anticipate the need for additional capital in the near term due to our current financial position, financial market disruption may adversely affect our access to additional capital.

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.

Results of Operations

Comparison of Six Months ended June 30, 2010 and 2011

The following table sets forth selected unaudited results of operations of FS for each of the six-month periods ended June 30, 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 six-month periods ended June 30, 2010 and 2011. Operating results for any interim fiscal period are not necessarily indicative of results for the full year.

 

     Six Months ended June 30,  
             2010                     2011          
     ($ in thousands)  

Revenues

   $ 187,382      $ 188,220   

Cost of revenue

     150,423        149,856   
  

 

 

   

 

 

 

Gross profit

     36,959        38,364   

Operating expenses

     40,002        36,888   
  

 

 

   

 

 

 

(Loss) income from operations

     (3,043     1,476   

Interest expense

     (2,907     (4,967

Other expense

     (18     (270
  

 

 

   

 

 

 

Loss before income taxes

     (5,968     (3,761

Income tax benefit

     1,533        615   
  

 

 

   

 

 

 

Loss from continuing operations

     (4,435     (3,146

(Loss) income from discontinued operations

     (1,538     490   
  

 

 

   

 

 

 

Net loss

   $ (5,973   $ (2,656
  

 

 

   

 

 

 

Revenues. Revenues were $188.2 million for the six months ended June 30, 2011, an increase of $0.8 million from $187.4 million for the same period in 2010.

Product revenues were $162.0 million for the six months ended June 30, 2011, a decrease of $7.3 million or 4% from $169.3 million for the same period in 2010. The decrease in product revenues was primarily attributable to an increase in deferred sales as a result of fewer shipments to FS’s largest customers during the quarter ended June 30, 2011 compared to the same period in 2010.

Maintenance and support services revenues were $9.6 million for the six months ended June 30, 2011, an increase of $3.2 million or 50% from $6.4 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 two significant customers.

 

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Professional services revenues were $8.1 million for the six months ended June 30, 2011, an increase of $2.0 million or 33% from $6.1 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 $8.6 million for the six months ended June 30, 2011, an increase of $3.0 million or 54% from $5.6 million for the same period in 2010. The increase in managed services revenue was primarily the result of FS’s April 2010 acquisition of a managed services company.

Cost of Revenue / Gross Profit. Cost of revenue was $149.9 million for the six months ended June 30, 2011, a decrease of $0.5 million from $150.4 million for the same period in 2010. Cost of revenue was 80% of revenues for each of the six-month periods ended June 30, 2011 and 2010. Gross profit was $38.4 million for the six months ended June 30, 2011, an increase of $1.4 million or 4% from $37.0 million for the same period in 2010. Gross margin was 20% for each of the six-month periods ended June 30, 2011 and 2010.

Gross profit earned on product revenues was $26.9 million for the six months ended June 30, 2011, a decrease of $1.1 million or 4% from $28.0 million for the same period in 2010. Gross margin on product was 16% for each of the six-month periods ended June 30, 2011 and 2010. Vendor rebates were $7.4 million for the six months ended June 30, 2011, compared to $7.7 million for the same period in 2010. Incentive programs offered to FS by vendors are periodically amended and, accordingly, FS may not be able to maintain the level of manufacturer incentives that it currently receives, which may cause gross margins to change.

Gross profit earned on maintenance and support services revenues was $8.3 million for the six months ended June 30, 2011, an increase of $3.0 million or 57% from $5.3 million for the same period in 2010. Gross margin on maintenance and support services was 86% for the six month period ended June 30, 2011, compared to 83% for the same period in 2010.

Gross profit earned on professional services revenues was $0.8 million for the six months ended June 30, 2011, a decrease of $0.5 million or 38% from $1.3 million for the same period in 2010. Gross margin on professional services was 10% for the six months ended June 30, 2011, compared to 21% 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 $2.4 million for each of the six-month periods ended June 30, 2011 and 2010. Gross margin on managed services was 28% for the six months ended June 30, 2011, compared to 43% for the same period in 2010. The decrease in gross margin on managed services was primarily due to FS’s acquisition of a managed services company in April 2010 that resulted in increased depreciation expense on related assets.

Operating Expenses. Operating expenses were $36.9 million for the six months ended June 30, 2011, a decrease of $3.1 million or 8% from $40.0 million for the same period in 2010. The decrease was primarily attributable to a decline in legal and accounting expenses and in other operating expenses, offset by an increase in payroll and commission expense.

Legal and accounting expense was $0.8 million for the six months ended June 30, 2011, a decrease of $2.3 million or 74% from $3.1 million for the same period in 2010. The decrease was due to the settlement of litigation in 2010.

All other operating expenses were $10.4 million for the six months ended June 30, 2011, a decrease of $4.4 million or 30% from $14.8 million for the same period in 2010. The decrease reflects a decline in stock-based compensation expense, offset slightly by an increase in FS’s obligations under its phantom stock plan.

Payroll expense (including taxes and benefits) was $13.5 million for the six months ended June 30, 2011, an increase of $2.3 million or 21% from $11.2 million for the same period in 2010. The increase was the result of

 

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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 $12.1 million for the six months ended June 30, 2011, an increase of $1.2 million or 11% from $10.9 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 six months ended June 30, 2011, commissions and variable compensation expense was 32% of gross profit, compared to 30% for the same period in 2010. Of the $12.2 million of commissions and variable compensation expense for the six months ended June 30, 2011, $9.2 million was commissions paid to sales personnel based on gross margin amounts and $3.0 million was variable compensation. Of the $10.9 million of commissions and variable compensation expense for the six months ended June 30, 2010, $8.3 million was commissions paid to sales personnel based on gross margin amounts and $2.6 million was variable compensation. The increase in variable compensation was primarily the result of sales personnel achieving target objectives.

Interest Expense. Interest expense was $5.0 million for the six months ended June 30, 2011, an increase of $2.1 million or 72% from $2.9 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. FS extended its secured payables to a major distributor as a result of limited cash available to repay borrowings. As a result of a reduction of interest costs associated with trade payables and based on available cash projections, FS believes that interest expense will either decrease or remain flat for the remainder of the current fiscal year as compared to the six months ended June 30, 2011. FS’s revolving line of credit will be repaid in connection with completion of the Business Combination and the closing of this offering, significantly reducing the related interest costs. In addition, FS anticipates that it will further reduce interest expense as a result of using certain cash resources and borrowings under new financing agreements to be entered into following completion of the Business Combination and the closing of this offering to repay a portion of the outstanding trade payables to this major distributor.

Other Income (Expense). Other income (expense) was immaterial for each of the six-month periods ended June 30, 2011 and 2010.

Income Tax Benefit. FS recorded income tax benefit of $0.6 million for the six months ended June 30, 2011, a decrease of $0.9 million from $1.5 million for the same period in 2010. The effective tax rate, or income tax (expense) benefit divided by income (loss) before income taxes, was 16% for the six months ended June 30, 2011, compared to 26% for the same period in 2010.

Income (Loss) from Continuing Operations. Income (loss) from continuing operations was $(3.1 million) for the six months ended June 30, 2011, a decrease of $0.9 million from $(4.4 million) for the same period in 2010. Income (loss) from continuing operations represented (2)% of revenues for each of the six-month periods ended June 30, 2011 and 2010.

Income (Loss) from Discontinued Operations. Income (loss) from discontinued operations was $0.5 million for the six months ended June 30, 2011, an increase of $2.0 million from $(1.5 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. The retail store expansion project for this client is ongoing, and the Company expects the project to continue through at least the third calendar quarter of 2012. The technology upgrade project for this client is also ongoing, with the client experiencing a continuing need for larger networks and more advanced systems to deliver new applications and content in its existing retail stores. Accordingly, the Company does not anticipate a reduction in revenue from this client during this period.

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

 

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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.

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.

 

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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.

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.

 

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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.

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.

 

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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.

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 six-month period ended June 30, 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 June 30, 2011 consisted of approximately $0.9 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 42-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 June 30, 2011, as its net working capital deficit increased by $5.7 million during this period. Working capital deficit increased from $32.3 million at December 31, 2010 to $38.0 million at June 30, 2011. Assuming the Company’s acquisition of FS pursuant to the merger agreement occurred on June 30, 2011, FS’s working capital deficit of $38.0 million would have been reduced by approximately $25.0 million, as the $17.0 million of FS’s current portion of long-term debt and FS’s $8.0 million payment obligation under its phantom stock plan will each be paid down to zero in connection with the closing. The Company may elect to further reduce FS’s working capital deficit following the closing of its acquisition of FS. 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%. A significant distributor reduced its interest rate associated with outstanding trade payables during September, 2011 and the reduction is effective through at least February, 2012. Non-cash charges for the six months ended June 30, 2011 included depreciation of $3.2 million; debt forgiveness of $0.5 million and stock-based compensation of $0.1 million. In 2010, FS entered into a settlement agreement and a repayment agreement with PC Specialists (dba Technology Integration Group) and certain other parties, in connection with the resolution of litigation. The aggregate amount of FS’s obligations remaining under these agreements was $2.6 million as of June 30, 2011, and is included in long-term debt and the current portion of long-term debt in FS’s

 

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balance sheet. FS does not believe that these repayment obligations will be material to its liquidity and capital resources. FS believes that its existing cash resources, credit facilities and borrowing capabilities are sufficient to support its operating requirements and investment strategies for the next twelve months.

Cash Flows from Operating Activities

FS’s net cash from continuing operations provided by (used in) operating activities for the six months ended June 30, 2011 was $15.1 million, compared to $(9.2 million) for the same period in 2010. FS had income (loss) from continuing operations for the six months ended June 30, 2011 of $(3.1 million), adjusted by non-cash depreciation and amortization of $3.2 million, stock-based compensation of $0.1 million, debt forgiveness of $(0.5 million), change in fair value of phantom stock of $2.0 million, change in fair value of warrant liability of $1.4 million and bad debt expense of $(0.3 million). This compares to income (loss) from continuing operations of $(4.4 million) for the same period in 2010, adjusted by non-cash depreciation and amortization of $2.4 million, stock-based compensation of $6.1 million, debt forgiveness of $(0.5 million), change in fair value of phantom stock of $1.4 million, deferred taxes of $(3.1 million) and change in fair value of warrant liability of $1.0 million. Net changes in FS’s operating assets and liabilities provided an additional $13.2 million in cash for the six months ended June 30, 2011, compared to $(12.3 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 (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 $0.8 million for the six months ended June 30, 2011, attributable to purchases of property and equipment of $2.6 million, offset by a decrease in restricted cash of $3.5 million, compared to net cash provided by (used in) investing activities of $(2.5 million) for the same period in 2010, attributable primarily to purchases of property and equipment of $2.3 million.

 

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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 $(16.1 million) for the six months ended June 30, 2011, resulting primarily from the repayment of long-term debt and net repayments of its financing facility. FS’s net cash provided by (used in) financing activities was $12.3 million for the same period in 2010, resulting primarily from net proceeds from the Company’s financing facility.

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.

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 5.94% as of June 30, 2011) and the line of credit is secured by all of FS’s business assets. As of June 30, 2011, FS’s outstanding balance under this facility was $10.7 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 June 30, 2011. The remaining balance on these notes was $1.5 million as of June 30, 2011. Capital leases secured by equipment totaled $0.4 million as of June 30, 2011, with monthly installments of principal and interest due through March 2012. Two notes resulting from a repayment agreement entered into during 2010 in connection with the settlement of legal proceedings have an interest rate of 9% and an outstanding balance of $3.7 million as of June 30, 2011. FS also has renegotiated trade payables due in monthly principal and, in certain cases, interest installments through October 2011, with a weighted average interest rate of 10% and an aggregate outstanding balance of $1.8 million as of June 30, 2011.

Capital Expenditures

Capital expenditures were $2.6 million and $2.4 million for the six-month periods ended June 30, 2011 and 2010, respectively. Capital expenditures for the years ended December 31, 2010, 2009 and 2008 were $5.3 million, $1.6 million and $1.6 million, respectively. The increase in capital expenditures from 2009 to 2010 related primarily to increased purchases of managed services hosting equipment, which totaled $4.0 million in 2010. FS expects to purchase approximately $0.7 million of fixed assets during the remainder of 2011 and $3.8 million of fixed assets during 2012, including equipment for a new data center as well as ordinary course purchases of managed services hosting equipment.

 

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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.

The six-month period 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 Six Months ended June 30, 2010 and 2011

The following table sets forth selected unaudited results of operations of GTRI for each of the six-month periods ended June 30, 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 six-month periods ended June 30, 2010 and 2011. Operating results for any interim fiscal period are not necessarily indicative of results for the full year.

 

     Six Months ended June 30,  
             2010                     2011          
     ($ in thousands)  

Revenues

   $ 66,587      $ 68,692   

Cost of revenue

     53,182        56,145   
  

 

 

   

 

 

 

Gross profit

     13,405        12,547   

Operating expenses

     12,015        12,008   
  

 

 

   

 

 

 

(Loss) income from operations

     1,390        539   

Interest expense

     (96     (17

Other income (expense)

     111        21   
  

 

 

   

 

 

 

Net (loss) income

     1,405        543   

Less: minority interest in Relevant Security Corporation

     89        66   
  

 

 

   

 

 

 

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

   $ 1,494      $ 609   
  

 

 

   

 

 

 

 

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Revenues. Revenues were $68.7 million for the six months ended June 30, 2011, an increase of $2.1 million or 3% from $66.6 million for the same period in 2010. GTRI’s revenues for each of these periods included no revenues attributable to RSC.

Product revenues were $58.6 million for the six months ended June 30, 2011, an increase of $3.3 million or 6% from $55.3 million for the same period in 2010. This increase in product revenues is primarily attributable to one customer.

Maintenance and support services revenues were $3.9 million for the six months ended June 30, 2011, a decrease of $1.4 million or 26% from $5.3 million for the same period in 2010. This decrease in maintenance and support services revenues is primarily attributable to one customer.

Professional services revenues were $5.9 million for the six months ended June 30, 2011, an increase of $0.2 million or 4% from $5.7 million for the same period in 2010.

Managed services revenues were $0.3 million for the six months ended June 30, 2011, an increase of $0.1 million from $0.2 million for the same period in 2010.

Cost of Revenue / Gross Profit. Cost of revenue was $56.1 million for the six months ended June 30, 2011, an increase of $2.9 million or 6% from $53.2 million for the same period in 2010. Cost of revenue was 82% of revenues for the six months ended June 30, 2011, compared to 80% for the same period in 2010. Gross profit was $12.6 million for the six months ended June 30, 2011, a decrease of $0.8 million or 6% from $13.4 million for the same period in 2010. Gross margin was 18% for the six months ended June 30, 2011, compared to 20% for the same period in 2010.

Gross profit earned on product revenues was $6.7 million for the six months ended June 30, 2011, an increase of $0.5 million or 8% from $6.2 million for the same period in 2010. Gross margin on product was 11% for each of the six-month periods ended June 30, 2011 and 2010. These increases primarily relate to GTRI’s strategic decision to focus on sales of higher-margin services offerings. An increased focus on higher-margin services offerings, as opposed to the commoditized sale of products, is encouraged by the manufacturer in the form of providing increased margins on hardware related to the corresponding services projects. In addition, GTRI has achieved increased growth in program-related product sales with a specific public sector client.

Gross profit earned on maintenance and support services revenues was $3.9 million for the six months ended June 30, 2011, a decrease of $1.4 million or 26% from $5.3 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%. This decrease in maintenance and support services gross profit is primarily attributable to one customer.

Gross profit earned on professional services revenues was $2.3 million for the six months ended June 30, 2011, an increase of $0.4 million or 21% from $1.9 million for the same period in 2010. Gross margin on professional services was 39% for the six months ended June 30, 2011, compared to 33% for the same period in 2010.

Gross profit earned on managed services revenues was an immaterial amount for each of the six-month periods ended June 30, 2011 and 2010.

Operating Expenses. Operating expenses were $12.0 million for each of the six-month periods ended June 30, 2011 and 2010. GTRI’s operating expenses for the six months ended June 30, 2011 and 2010 include $0.4 million and $0.5 million, respectively, in expenses attributable to RSC.

Interest Expense. GTRI’s interest expense was an immaterial amount for the six months ended June 30, 2011, a decrease of $0.1 million from $0.1 million for the same period in 2010.

 

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Other Income (Expense). GTRI’s other income was an immaterial amount for the six months ended June 30, 2011, a decrease of $0.1 million from $0.1 million for the same period in 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   
  

 

 

   

 

 

 

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

 

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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 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.

 

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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.

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.

 

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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.

Financial Position, Liquidity and Capital Resources

For the six-month period ended June 30, 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 June 30, 2011 consisted of approximately $4.9 million of cash, cash equivalents and short-term investments and approximately $17.8 million available under a revolving line of credit. GTRI’s principal uses of its cash resources during this 42-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 operating activities for the six months ended June 30, 2011 was $6.4 million, compared to $14.2 million for the same period in 2010. GTRI had net income for the six months ended June 30, 2011 of $0.5 million, adjusted by non-cash depreciation and amortization of $0.4 million and changes in asset and liability accounts that provided $5.5 million, compared to net income of $1.4 million for the same period in 2010, adjusted by non-cash depreciation and amortization of $0.4 million and changes in asset and liability accounts that provided $12.4 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. The increase in cash from operating activities resulting from the change in operating assets and liabilities was primarily the result of collection of

 

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outstanding accounts receivable as of December 31, 2009 coupled with GTRI collecting accounts receivable more quickly in 2010, which increased cash from operating activities. 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 $0.2 million for the six months ended June 30, 2011, compared to net cash used in investing activities of $0.4 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.

Cash Flows from Financing Activities

GTRI’s net cash provided by (used in) financing activities was $(6.8 million) for the six months ended June 30, 2011, resulting primarily from payments in respect of GTRI’s line of credit of $5.3 million and shareholder distributions of $1.5 million. GTRI’s net cash provided by (used in) financing activities was $(13.8 million) for the same period in 2010, attributable primarily to payments in respect of GTRI’s line of credit of $12.9 million and shareholder distributions of $0.4 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.

 

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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 4.94% at June 30, 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 June 30, 2011, GTRI’s outstanding balance under this line of credit was $17.8 million. GTRI paid no interest under this line of credit for the six months ended June 30, 2011 and for year ended December 31, 2010. As of June 30, 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 six-month periods ended June 30, 2011 and 2010 were $0.2 million and $0.4 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         -         -   

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 six-month period 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 six-month period 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.

 

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Comparison of Six Months ended June 30, 2010 and 2011

The following table sets forth selected unaudited results of operations of Red River for each of the six-month periods ended June 30, 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 six-month periods ended June 30, 2010 and 2011. Operating results for any interim fiscal period are not necessarily indicative of results for the full year.

 

     Six Months ended June 30,  
           2010                  2011         
     ($ in thousands)  

Revenues

   $ 54,483      $ 81,746   

Cost of revenue

     47,808        72,732   
  

 

 

   

 

 

 

Gross profit

     6,675        9,014   

Operating expenses

     6,928        7,983   
  

 

 

   

 

 

 

Income (loss) from operations

     (253     1,031   

Interest expense

     (184     (228

Other income (expense)

     45        71   
  

 

 

   

 

 

 

Income (loss) before provision for state income taxes

     (392     874   

Income tax (expense) benefit

     16        (37
  

 

 

   

 

 

 

Net income (loss)

   $ (376   $ 837   
  

 

 

   

 

 

 

Revenues. Revenues were $81.7 million for the six months ended June 30, 2011, an increase of $27.2 million or 50% from $54.5 million for the same period in 2010.

Product revenues were $79.8 million for the six months ended June 30, 2011, an increase of $26.7 million or 50% from $53.1 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.

Maintenance and support services revenues were $1.1 million for the six months ended June 30, 2011, an increase of $0.3 million or 38% from $0.8 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 $0.8 million for the six months ended June 30, 2011, an increase of $0.2 million or 33% from $0.6 million for the same period in 2010. The consistency in 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 $72.7 million for the six months ended June 30, 2011, an increase of $24.9 million or 52% from $47.8 million for the same period in 2010. Cost of revenue was 89% of revenues for the six months ended June 30, 2011, compared to 88% of revenues for the same period in 2010. Red River’s gross profit was $9.0 million for the six months ended June 30, 2011, an increase of $2.3 million or 34% from $6.7 million for the same period in 2010. Red River’s gross margin was 11% for the six months ended June 30, 2011, compared to 12% for the same period in 2010.

 

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Gross profit earned on product revenues was $6.5 million for the six months ended June 30, 2011, an increase of $0.8 million or 14% from $5.7 million for the same period in 2010. Gross margin on product was 8% for the six months ended June 30, 2011, compared to 11% for the same period in 2010.

Gross profit earned on maintenance and support services revenues was $1.1 million for the six months ended June 30, 2011, an increase of $0.3 million or 38% from $0.8 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 six-month periods ended June 30, 2011 and 2010.

Operating Expenses. Operating expenses were $8.0 million for the six months ended June 30, 2011, an increase of $1.1 million or 16% from $6.9 million for the same period in 2010. Operating expenses were 10% of revenues for the six months ended June 30, 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. In addition, professional fees increased by $0.3 million period to period. The decrease in operating expenses as a percentage of revenue is primarily attributable to increased operational efficiency.

Interest Expense. Interest expense was $0.2 million for each of the six-month periods ended June 30, 2011 and 2010.

Other Income (Expense). Red River’s other income (expense) was an immaterial amount for each of the six-month periods ended June 30, 2011 and 2010.

Income Tax (Expense) Benefit. Red River recorded an immaterial tax (expense) benefit for state income taxes for each of the six-month periods ended June 30, 2011 and 2010. These amounts reflect the effective estimated composite state income tax rates for 2011 and 2010.

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.

 

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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.

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.

 

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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.

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.

 

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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.

Financial Position, Liquidity and Capital Resources

For the six-month period ended June 30, 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 June 30, 2011 consisted of approximately $0.2 million of cash and cash equivalents and approximately $7.0 million available under a line of credit. Red River’s principal uses of its cash resources during this 42-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 six months ended June 30, 2011, was $7.8 million, compared to $(3.2 million) for the same period in 2010. Red River had net income of $0.8 million for the six months ended June 30, 2011, adjusted by non-cash depreciation and amortization of $0.2 million, a decrease in accounts receivable of $33.1 million and a decrease in deferred costs of $7.1 million, partially offset by a decrease in accounts payable of $(32.0 million) and a decrease in accrued expenses of $(1.8 million). This compares to a net loss of $0.4 million for the same period in 2010, adjusted by non-cash depreciation and amortization of $0.2 million, a decrease in accounts receivable of $7.6 million and an increase in deferred revenue of $2.6 million, offset by increases in deferred costs of $(6.1 million) and prepaid expenses and other assets of $(0.6 million) and decreases in accounts payable of $(6.5 million) and accrued expenses of $(0.5 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),

 

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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