UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 31, 2004
Commission file number: 0-20824
INFOCROSSING, INC.
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(Exact name of Registrant as specified in its Charter)
DELAWARE 13-3252333
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2 CHRISTIE HEIGHTS STREET; LEONIA, NJ 07605
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 840-4700
Check whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): [ ] Yes [X] No.
There were 18,326,631 shares of the registrant's Common Stock, $0.01 par value,
outstanding as of May 10, 2004.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
2004 2003
----------------- -----------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 39,553 $ 10,073
Trade accounts receivable, net of allowances for
doubtful accounts of $616 and $570, respectively 4,400 3,592
Due from related parties 229 226
Prepaid license fees 785 945
Other current assets 2,853 1,780
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47,820 16,616
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PROPERTY and EQUIPMENT, net 17,419 18,249
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OTHER ASSETS:
Deferred software, net 1,157 1,264
Goodwill, net 28,361 28,361
Other intangible assets, net 707 788
Security deposits and other non-current assets 2,270 1,384
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32,495 31,797
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TOTAL ASSETS $ 97,734 $ 66,662
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LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 3,250 $ 2,768
Current portion of long-term debt and capitalized lease obligations 2,329 2,559
Current portion of accrued loss on leased facilities 207 202
Accrued expenses 2,185 1,516
Current deferred revenue 1,319 1,356
-------------- -------------
9,290 8,401
LONG-TERM LIABILITES:
Notes payable, long-term debt and capitalized lease obligations 25,647 25,732
Accrued loss on leased facilities, net of current portion 674 732
Deferred revenue, net of current portion 21 42
Other long-term liabilities 975 954
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TOTAL LIABILITIES 36,607 35,861
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock; $0.01 par value; 3,000,000 shares authorized; none issued - -
Common stock; $0.01 par value; 50,000,000 shares authorized; shares issued
of 18,805,609 and 15,732,038, respectively 188 157
Additional paid-in capital 139,372 109,565
Accumulated deficit (75,295) (76,070)
-------------- -------------
64,265 33,652
Less 618,969 and 594,990 shares, respectively,
of common stock held in treasury, at cost (3,138) (2,851)
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TOTAL STOCKHOLDERS' EQUITY 61,127 30,801
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TOTAL LIABILITES AND STOCKHOLDERS' EQUITY $ 97,734 $ 66,662
============== =============
See Notes to Consolidated Financial Statements.
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
------------------------------------
THREE MONTHS ENDED MARCH 31,
------------------------------------
2004 2003
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REVENUES $ 15,176 $ 13,129
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COSTS and EXPENSES:
Costs of revenues, excluding depreciation shown below 10,223 8,774
Selling and promotion costs 736 712
General and administrative expenses 1,377 1,364
Depreciation and amortization 1.593 1,416
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13,929 12,266
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INCOME FROM OPERATIONS 1,247 863
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Interest income (38) (20)
Interest expense 703 593
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665 573
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INCOME BEFORE INCOME TAXES 582 290
Income tax (benefit) expense (193) 20
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NET INCOME 775 270
Accretion and dividends on redeemable preferred stock - (2,448)
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NET INCOME (LOSS) TO COMMON STOCKHOLDERS $ 775 $ (2,178)
=============== ==============
BASIC INCOME (LOSS) PER SHARE:
Net income (loss) to common stockholders $ 0.05 $ (0.40)
=============== ==============
Weighted average number of common shares outstanding 15,193 5,379
=============== ==============
DILUTED INCOME (LOSS) PER SHARE:
Net income (loss) to common stockholders $ 0.05 $ (0.40)
=============== ==============
Weighted average number of common shares and
share equivalents outstanding 17,146 5,379
=============== ==============
See Notes to Consolidated Financial Statements.
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(UNAUDITED, IN THOUSANDS)
COMMON PAR VALUE ADDITIONAL ACCUMULATED TREASURY TOTAL
SHARES PAID IN CAPITAL DEFICIT STOCK AT COST
------------ -------------- ---------------- ----------------- -------------- -------------
Balances,
December 31, 2003 15,732 $ 157 $ 109,565 $ (76,070) $ (2,851) $ 30,801
Exercises of stock options 30 - 313 - (287) 26
Issuance of a warrant - - 137 - - 137
Vesting of a non-qualified
stock option - - 19 - - 19
Exercises of warrants 127 2 994 - - 996
Private placement of
common stock 2,917 29 28,344 - - 28,373
Net income - - - 775 - 775
------------ ----------- ------------- -------------- ----------- ------------
Balances,
March 31, 2004 18,806 $ 188 $ 139,372 $ (75,295) $ (3,138) $ 61,127
============ =========== ============= ============== =========== ============
See Notes to Consolidated Financial Statements.
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
-------------------------------------------
THREE MONTHS ENDED MARCH 31,
-------------------------------------------
2004 2003
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(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 775 $ 270
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 1,593 1,416
Accretion of discounted Debentures - 139
Non-employee option and warrant issued for services 19 -
Decrease (increase) in:
Trade accounts receivable (808) 962
Prepaid license fees and other current assets (794) 50
Security deposits and other non-current assets (886) (152)
Increase (decrease) in:
Accounts payable 482 (590)
Income taxes payable 18 21
Accrued expenses 274 834
Payments on accrued loss on leased facilities (39) (37)
Deferred revenue and other liabilities (37) (1,128)
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Net cash provided by operating activities 597 1,785
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (128) (969)
Payments of costs related to the acquisition of AmQUEST, Inc. - (200)
Increase in deferred software costs (30) (28)
----------------- -----------------
Net cash used in investing activities (158) (1,197)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from a private equity placement 28,768 -
Repayment of debt and capitalized leases (732) (462)
Exercises of stock options and warrants 1,022 -
Interest on related party balances (3) (2)
----------------- -----------------
Net cash provided by (used in) financing activities 29,055 (464)
----------------- -----------------
Net cash provided by continuing operations 29,494 124
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Payments on portion of accrued loss on leased facilities relating to
discontinued operations (14) (13)
----------------- -----------------
Net increase in cash and equivalents 29,480 111
Cash and equivalents, beginning of period 10,073 7,026
----------------- -----------------
Cash and equivalents, end of the period $ 39,553 $ 7,137
================= =================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 675 $ 85
================= =================
Income taxes $ 20 $ 51
================= =================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITY:
Equipment acquired subject to capital leases $ 417 $ 1,262
================= =================
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Treasury shares received in payment of a stock option exercise $ 287 $ -
================= =================
Additional Debentures issued in lieu of a cash payment of interest $ - $ 636
================= =================
See Notes to Consolidated Financial Statements.
INFOCROSSING, INC. AND SUBSIDIAIRES
NOTES TO THE CONSOLIDATED INTERIM
FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated balance sheets as of March 31, 2004 and the consolidated
statements of operations, the consolidated statement of stockholders' equity,
and the consolidated statements of cash flows for the three months ended March
31, 2004 and 2003 have not been audited. In the opinion of management, all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position, results of operations, and cash flows for
the periods indicated have been made. The results of operations and cash flows
for the period ended March 31, 2004 is not necessarily indicative of the
operating results for the full year.
Certain reclassifications have been made to the prior period to conform to the
current presentation.
Certain disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted. These consolidated interim financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended December 31, 2003, as amended.
The consolidated financial statements include the accounts of Infocrossing, Inc.
and its wholly owned subsidiaries (collectively, the "Company"). All significant
intercompany balances and transactions have been eliminated.
2. STOCK-BASED COMPENSATION
The Company accounts for stock options granted to employees and directors under
the Plan in accordance with Accounting Principles Board Opinion No. 25 and
related Interpretations. Accordingly, no compensation cost has been recognized
for stock option awards. Had compensation cost been determined in accordance
with Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation", the Company's income (loss) in thousands of dollars
and income (loss) per common share for the three months ended March 31, 2004 and
2003 would have been as follows:
THREE MONTHS ENDED MARCH 31,
---------------------------------------
2004 2003
----------------- ------------------
Net income (loss) to common stockholders:
As reported $ 775 $ (2,178)
Deduct: stock-based
employee compensation,
net of taxes (769) (730)
-------------- ---------------
Pro forma $ 6 $ (2,908)
============== ===============
Net income (loss) to common stockholders per diluted share:
As reported $ 0.05 $ (0.40)
============== ===============
Pro forma $ 0.00 $ (0.54)
============== ===============
3. NOTES PAYABLE
On October 21, 2003, in connection with the redemption of the Company's
Redeemable Preferred Stock, the Company issued $25,000,000 of senior secured
term loans maturing in October 2008. These term loans were held by the prior
holders of the Redeemable Preferred Stock. On February 13, 2004, the term loans
were purchased by a financial institution. The terms and conditions of the term
loans were not materially altered.
The notes contain certain covenants including, but not limited to: a maximum
leverage ratio; minimum consolidated earnings before interest, taxes,
depreciation, and amortization; a minimum debt coverage ratio; and limitations
on indebtedness, capital expenditures, investments, loans, mergers and
acquisitions, stock issuances, and transactions with affiliates. In addition,
the terms of the notes limit the Company's ability to pay dividends. The Company
was in compliance with such loan covenants at March 31, 2004.
4. BASIC AND DILUTED EARNINGS PER COMMON SHARE
Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS
128") requires the presentation of basic and diluted earnings per share ("EPS").
Basic EPS is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding during each period. Diluted
EPS is computed using the weighted average number of common shares plus the
dilutive effect of common stock equivalents. Common stock equivalents that are
antidilutive are excluded from the computation of weighted average share
equivalents.
Certain common stock equivalents that are currently antidilutive may be dilutive
in the future. In determining the diluted loss per common share for the
three-month periods ended March 31, 2004 and 2003, common stock equivalents of
approximately 694,000 and 6,205,000, respectively, have been excluded since the
effect of including such equivalents would have been antidilutive.
5. PRIVATE OFFERING OF SHARES
On March 30, 2004 (the "Closing Date"), in a private placement, the Company
issued 2,917,000 shares of common stock in exchange for net proceeds of
$28,768,500. The private placement was made only to accredited investors in a
transaction exempt from the registration requirements of the Securities Act of
1933. Investors who participated in the private placement received certain
registration rights with respect to the common stock issued in the private
placement. Approximately $20 million of the proceeds of the private placement
were used to fund the acquisition discussed in Note 7. The remainder of the
amount raised will be used for the payment of fees and expenses of the offering
and for working capital purposes.
6. INCOME TAXES
In the quarter ended March 31, 2004, the Company recorded a tax benefit of
$234,000 from the sale of New Jersey State net operating loss carryforwards
("NOLs"), offset by estimated state income tax expense of $41,000. At December
31, 2003, the Company had NOLs of approximately $37.3 million for federal income
tax purposes that begin to expire in 2019. As a result of a recapitalization of
the Company's capital structure on October 21, 2003, the timing and use of these
NOLs in future years is expected to be limited in any one year. The Company's
net deferred tax assets, including the benefit from the NOLs, have been fully
offset by a valuation allowance due to the uncertainty of realizing such tax
benefits.
7. SUBSEQUENT EVENTS
ACQUISITION & ADDITIONAL TERM LOANS
On April 2, 2004, the Company acquired all of the outstanding capital stock of
ITO Acquisition Corporation, a California corporation doing business as Systems
Management Specialists ("SMS"), from ITO Holdings, LLC ("Holdings") for
approximately $35 million in cash and 135,892 shares of common stock of the
Company valued at approximately $1,859,000 (the "SMS Acquisition"). SMS,
headquartered in Orange County, California, provides computing operations,
business process outsourcing and managed application services to clients
primarily located in the western United States. SMS' principal assets consist of
rights under contracts, leases of equipment, software licenses, real estate and
intellectual property used in performing its business. The Company anticipates
that SMS will continue to operate its business as a wholly owned subsidiary of
the Company.
The Company is in the process of valuing the assets acquired and liabilities
assumed. It is estimated that the value of customer contracts acquired will be
approximately $1,500,000 and the remainder of the purchase price, including
costs and fees, will be allocated to goodwill.
On April 2, 2004, the Company and its lender (see Note 3) amended and restated
the term loan agreement, dated as of October 21, 2003 and amended on February
13, 2004 (the "Term Loan Agreement") to provide a portion of the funding for the
SMS Acquisition. As amended and restated, the Term Loan Agreement provides for a
Term Loan A facility with a maximum borrowing of $25 million and a Term Loan B
facility with a maximum borrowing of $15 million. The Company borrowed $15
million from the Term Loan B facility and, along with approximately $20 million
from the private offering of shares completed on March 30, 2004, completed the
SMS Acquisition. Term Loan B is at an interest rate of Prime plus 3% with a
floor of 9% and matures along with the Term Loan A on October 21, 2008. The term
loans include monthly payments of interest and monthly principal payments of
$312,500 beginning in December 2004. The Term Loan Agreement is subject to
certain restrictive covenants including, but not limited to: a maximum leverage
ratio; minimum consolidated earnings before interest, taxes, depreciation, and
amortization; a minimum debt coverage ratio; and limitations on indebtedness,
capital expenditures, investments, loans, mergers and acquisitions, stock
issuances, transactions with affiliates, and the payment of dividends. The Term
Loan Agreement is guaranteed by each of the Company's subsidiaries. The Term
Loan Agreement is also secured by a pledge of substantially all of the assets of
the Company and all of its subsidiaries.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management believes that we are a leading provider of information technology, or
IT, and business process outsourcing services to enterprise clients. We deliver
a full suite of managed and outsourced solutions that enable clients to leverage
our infrastructure and process expertise to improve their efficiency and reduce
their operating costs. During our nearly twenty year history, we have developed
expertise in managing complex computing environments, beginning with traditional
data center outsourcing services and evolving to a comprehensive set of managed
solutions. We support a variety of clients, and assure the optimal performance,
security, reliability, and scalability of our clients' mainframes, distributed
servers, and networks, irrespective of where the systems' components are
located. Strategic acquisitions, such as the acquisition of AmQUEST, Inc. in
February 2002 and the acquisition of ITO Acquisition Corporation, a California
corporation doing business as Systems Management Specialists, or "SMS," on April
2, 2004, have contributed significantly to our historical growth and remain an
integral component of our long-term growth strategy.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
Net income improved by $505,000, from $270,000 for the three months ended March
31, 2003 (the "Prior Quarter") to $775,000 for the three months ended March 31,
2004 (the "Current Quarter") on 16% higher revenues. Operating costs in the
Current Quarter improved to 92% of revenue compared with 93% in the Prior
Quarter.
For the Current Quarter, revenues increased $2,047,000 (16%) to $15,176,000 from
$13,129,000 for the Prior Quarter. This growth is attributable to new customer
contracts added during the past twelve months and increased revenue from certain
existing customer contracts.
Costs of revenues increased $1,449,000 (17%) to $10,223,000 during the Current
Quarter compared with $8,774,000 for the Prior Quarter. Costs of revenues as a
percentage of revenue were 67% in both the Current and Prior Quarters.
Selling and promotion costs increased $24,000 (3%) to $736,000 in the Current
Quarter from $712,000 for the Prior Quarter.
General and administrative expenses increased $13,000 (1%) to $1,377,000 for the
Current Quarter from $1,364,000 for the Prior Quarter.
Depreciation and amortization of fixed assets and other intangibles increased
$177,000 (13%), from $1,416,000 for the Prior Quarter to $1,593,000 for the
Current Quarter, as a result of depreciation on additional computer equipment
acquired to support new customers. As a percentage of revenues, however,
depreciation and amortization declined from 11% in the Prior Quarter to 10% in
the Current Quarter.
Net interest expense of $665,000 was recorded for the Current Quarter compared
with $573,000 for the Prior Quarter. The net change of $92,000 reflects an
increase of $110,000 in interest expense, due to a larger average outstanding
debt balance than in the Prior Quarter, offset by an increase in interest income
of $18,000.
In the Current Quarter, we recorded a tax benefit of $234,000 from the sale of
New Jersey State net operating loss carryforwards ("NOLs"), offset by estimated
state income tax expense of $41,000, compared with state income tax expense of
$20,000 recorded in the Prior Quarter. At December 31, 2003, we had Federal NOLs
of approximately $37.3 million for federal income tax purposes that begin to
expire in 2019. As a result of a recapitalization of our capital structure on
October 21, 2003, the timing and use of these NOLs in future years is expected
to be limited in any one year. The carrying value of our net deferred tax
assets, including the benefit from the NOLs, has been fully offset by a
valuation allowance due to the uncertainty of realizing such tax benefits.
We had net income of $775,000 for the Current Quarter compared with $270,000 for
the Prior Quarter. Net loss to common stockholders after accretion and accrued
dividends on preferred stock was $2,178,000 for the Prior Quarter. On October
21, 2003, we redeemed all outstanding preferred stock, thus no accretion and
dividends were recorded in the Current Quarter. We had income per common share
of $0.05 in both a basic and diluted basis, compared with a loss of $0.40 for
the Prior Quarter, also on both a basic and diluted basis. The number of
weighted average shares increased from 5.4 million shares for the Prior Quarter
to 15.2 million shares in the Current Quarter largely because of private
placements of (a) 9,739,111shares of common stock and warrants to purchase
3,408,689 shares of common stock in October 2003 and (b) 2,917,000 shares of
common stock in March 2004. The weighted average number of shares and share
equivalents was 17.1 million in the Current Quarter compared with 5.4 million
shares in the Prior Quarter. Common stock equivalents were excluded in
determining the net income or loss per share when the inclusion of such
equivalents would be antidilutive.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately $597,000 for the
three months ended March 31, 2004. During the Current Period, we had $775,000 of
net income and $1,593,000 of depreciation and amortization. Significant working
capital changes include an annual lease prepayment of $551,000 for the facility
in Norcross, GA, and the payment of approximately $1,025,000 of license fees and
$210,000 of other costs related to certain new clients that will be amortized
over the various contract terms. Other working capital changes include an
increase in accounts receivable of $808,000 offset by increases in accounts
payable and accrued expenses of $774,000.
Principal investing activities during the three months ended March 31, 2004
include $128,000 for the purchase of property and equipment. During the first
three months of 2004, we also entered into capital leases having an aggregate
carrying value of approximately $417,000.
On March 30, 2004, in a private placement, we issued 2,917,000 shares of common
stock in exchange for $28,768,500 net of fees and expenses. The private
placement was made only to accredited investors in a transaction exempt from the
registration requirements of the Securities Act of 1933. Investors who
participated in the private placement received certain registration rights with
respect to the common stock issued in the private placement. Approximately $20
million of the proceeds of the private placement were used to fund the
acquisition discussed in Subsequent Events. The remainder of the amount raised
will be used for working capital purposes.
Other financing activities during the Current Period included $732,000 in
payments of principal with respect to debt and capital lease obligations and the
receipt of $1,022,000 from exercises of options and warrants.
As of March 31, 2004, we had cash and equivalents of $39,553,000. We used
approximately $20 million of this to fund the acquisition discussed below. We
believe that our cash, cash remaining from the private placements, current
assets, and cash generated from future operating activities will provide
adequate resources to fund our ongoing operating requirements for at least the
next twelve months. We may need to obtain additional financing to fund
significant acquisitions or other substantial investments.
The following table summarizes information about our contractual obligations as
of December 31, 2003 and the periods in which payments are due. Certain of these
amounts are not required to be included in our consolidated balance sheet:
PAYMENTS DUE BY PERIOD (IN THOUSANDS)
------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1-3 4 - 5 AFTER
1 YEAR YEARS YEARS 5 YEARS
--------------- -------------- --------------- -------------- ---------------
Long-Term Debt (1) $ 24,956 $ 267 $ 490 $ 24,199 $ -
Operating Leases and
Software Licenses 30,801 4,930 7,384 6,886 11,601
Capital Lease Obligations 3,393 2,335 1,058 - -
Other Long-Term
Liabilities Reflected on
the Company's Balance
Sheet under GAAP (2) 934 202 377 355 -
--------------- -------------- --------------- -------------- ---------------
Total Contractual Cash
Obligations $ 60,084 $ 7,734 $ 9,309 $ 31,440 $ 11,601
=============== ============== =============== ============== ===============
(1) Does not give effect to the potential acceleration of payments based
on future performance.
(2) Payments of Accrued Loss on Leased Facilities. Excludes Deferred
Revenue, as it is not a cash obligation, and Deferred Rent, as
payments are included under Operating Leases.
SUBSEQUENT EVENTS
ACQUISITION & ADDITIONAL TERM LOANS
On April 2, 2004, we acquired all of the outstanding capital stock of ITO
Acquisition Corporation, a California corporation doing business as Systems
Management Specialists ("SMS"), from ITO Holdings, LLC ("Holdings") for
approximately $35 million in cash and 135,892 shares of common stock of the
Company valued at approximately $1,859,000 (the "SMS Acquisition"). The SMS
Acquisition was effected pursuant to a Stock Purchase Agreement, dated as of
March 3, 2004, between Holdings and the Company. SMS, headquartered in Orange
County, California, provides computing operations, business process outsourcing
and managed application services to clients primarily located in the western
United States. SMS' principal assets consist of rights under contracts, leases
of equipment, software licenses, real estate and intellectual property used in
performing its business. We anticipate that SMS will continue to operate its
business as a wholly owned subsidiary of the Company.
We are in the process of valuing the assets acquired and liabilities assumed. It
is estimated that the value of customer contracts acquired will be approximately
$1,500,000 and the remainder of the purchase price, including costs and fees,
will be allocated to goodwill.
On April 2, 2004, we and our lender amended and restated the term loan
agreement, dated as of October 21, 2003 and amended on February 13, 2004 (the
"Term Loan Agreement") to provide a portion of the funding for the SMS
Acquisition. As amended and restated, the Term Loan Agreement provides for a
Term Loan A facility with a maximum borrowing of $25 million and a Term Loan B
facility with a maximum borrowing of $15 million. We borrowed $15 million from
the Term Loan B facility and, along with approximately $20 million from the
private offering of shares completed on March 30, 2004, completed the SMS
Acquisition. Term Loan B is at an interest rate of Prime plus 3% with a floor of
9% and matures along with the Term Loan A on October 21, 2008. The term loans
include monthly payments of interest and monthly principal payments of $312,500
beginning in December 2004. The Term Loan Agreement is subject to certain
restrictive covenants including, but not limited to: a maximum leverage ratio;
minimum consolidated earnings before interest, taxes, depreciation, and
amortization; a minimum debt coverage ratio; and limitations on indebtedness,
capital expenditures, investments, loans, mergers and acquisitions, stock
issuances, transactions with affiliates, and the payment of dividends. The Term
Loan Agreement is guaranteed by each of our subsidiaries. The Term Loan
Agreement is also secured by a pledge of substantially all of our assets and all
of our subsidiaries.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
Our Consolidated Financial Statements are prepared in accordance with accounting
principles generally accepted in the United States, which require the selection
and application of significant accounting policies, and which require management
to make significant estimates and assumptions. We believe that the following are
some of the more critical judgment areas in the application of our accounting
policies.
Revenue Recognition
Our services are provided under a combination of fixed monthly fees and time and
materials billings. Contracts with customers typically range from one to five
years. Revenue is recognized (1) after we have obtained an executed service
contract from the customer; (2) as the services are rendered; (3) when the price
is fixed as per the service contract; and (4) when we believe that
collectibility is reasonably assured based on our credit risk policies and
procedures that we employ.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
Tangible and Intangible Assets
We have significant tangible and intangible assets on our balance sheet,
primarily property and equipment, deferred software costs, and intangible
assets, primarily goodwill, related to acquisitions. The assignment of useful
lives to these assets and the valuation and classification of intangible assets
involves significant judgments and the use of estimates. The testing of these
tangible and intangibles under established accounting guidelines for impairment
also requires significant use of judgment and assumptions. Our assets are tested
and reviewed for impairment on an ongoing basis under the established accounting
guidelines. Changes in business conditions or changes in the decisions of
management as to how assets will be deployed in our operations could potentially
require future adjustments to asset valuations.
Deferred Taxes
A tax valuation allowance is established, as needed, to reduce net deferred tax
assets to the amount for which recovery is probable. As of March 31, 2004, we
have established a full valuation allowance of $16.6 million against our net
deferred tax assets because of our history of operating losses. Depending on the
amount and timing of taxable income we may generate in the future, as well as
other factors including limitations that may arise from changes in our
ownership, we could recognize no benefit from our deferred tax assets, or we
could recognize some or all of their full value.
FORWARD-LOOKING STATEMENTS
Statements made in this Report, including the foregoing financial statements and
notes, other than statements of historical fact, are forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, that involve risks and uncertainties. These statements relate to future
events or our future financial performance, including statements relating to
products, customers, suppliers, business prospects and effects of acquisitions.
In some cases, forward-looking statements can be identified by terminology such
as "may," "will," "should," "expect," "anticipate," "intend," "plan," "believe,"
"estimate," "potential," or "continue," the negative of these terms or other
comparable terminology. These statements involve a number of risks and
uncertainties and as such, final results could differ from estimates or
expectations due to a number of factors including, without limitation:
incomplete or preliminary information; changes in government regulations and
policies; continued acceptance of our products and services in the marketplace;
competitive factors; new products; technological changes; our dependence on
third party suppliers; intellectual property rights; difficulties with the
integration of ITO Acquisition Corporation, d/b/a Systems Management
Specialists; and other risks and uncertainties including those set forth in this
Report that could cause actual events or results to differ materially from any
forward-looking statement. For any of these factors, we claim the protection of
the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, as amended.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Report and are based on
information currently and reasonably known to us. Except as required by law, we
undertake no obligation to release any revisions to or update these
forward-looking statements to reflect events or circumstances that occur after
the date of this Report or to reflect the occurrence or effect of anticipated or
unanticipated events.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are not exposed to material gains or losses related to the impact of interest
rate changes, foreign currency fluctuations, or changes in the market values of
our investments. We generally invest in fixed income securities - typically
commercial paper, certificates of deposit, and money market accounts issued only
by major corporations and financial institutions of recognized strength and
security - and hold all investments to maturity.
At March 31, 2004, our outstanding fixed rate debt was approximately
$27,967,000. If market rates decline, we run the risk that the related required
payments on the fixed rate debt will exceed those that would be paid based on
then current market rates.
Market Risk
Our accounts receivable are subject, in the normal course of business, to
collection risks. We regularly assess these risks and have policies and business
practices to mitigate the adverse effects of collection risks. As a result, we
do not anticipate any material losses in this area in excess of the recorded
allowance for doubtful accounts.
Foreign Currency Risks
We have no material foreign operations.
ITEM 4 - CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
our management, including the Chief Executive Officer and Senior Vice President
of Finance, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, our management, including the
Chief Executive Officer and the Senior Vice President of Finance, concluded that
our disclosure controls and procedures were effective as of March 31, 2004.
There have been no changes in our internal controls over financial reporting
that occurred during our last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITES
(c) Recent Issuances of Unregistered Securities
On March 30, 2004, in a private placement, we issued 2,917,000 shares of common
stock in exchange for $30,628,500. The private placement was made only to
accredited investors in a transaction exempt from the registration requirements
of the Securities Act of 1933. This transaction is exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933. Roth Capital Partners
acted as placement agent for this offering. Total fees and expenses of the
offering were approximately $2,258,000. Approximately $20 million of the
proceeds of the private placement were used to fund an acquisition consummated
on April 2, 2004. The remainder of the amount raised will be used for working
capital purposes. On April 12, 2004 a registration statement on Form S-3 was
filed by the Company on behalf of the investors as selling shareholders. We will
not receive any proceeds from any sales of stock under this registration
statement. The following is a listing of the investors
NUMBER OF SHARES
JLF Asset Management 715,000
Lehman Brothers 470,000
Janus Capital 400,000
Leaf Investment 335,000
J. Steven Emerson 290,000
Baron Funds 290,000
Trustman Funds 125,000
SF Capital 97,000
Crestview Capital 65,000
Corsair Capital 50,000
Topaz Partners 50,000
FlyLine Holdings 20,000
SRG Capital 10,000
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TOTAL 2,917,000
==================
ITEM 5 - OTHER INFORMATION
(a) Other Information
Code of Ethics
The Company has adopted a code of ethics that applies to the Company's principal
executive officer, principal financial officer, principal accounting officer or
controller, and persons performing similar functions. The Company has posted the
Code of Ethics on its website at www.infocrossing.com under the caption Investor
Relations. In addition, a copy of the Code of Ethics may be obtained by writing
to Infocrossing, Inc., attention: Corporate Secretary, 2 Christie Heights
Street, Leonia, NJ 07605.
Code of Conduct
The Company has adopted a Code of Conduct that applies to all Directors,
officers and employees of the Company. The Company has posted the Code of
Conduct on its website at www.infocrossing.com under the caption Investor
Relations. In addition, a copy of the Code of Conduct may be obtained by writing
to Infocrossing, Inc., attention: Corporate Secretary, 2 Christie Heights
Street, Leonia, NJ 07605.
(b) Procedure for Stockholders to Recommend Nominees for Director:
The Board of Directors of the Company will consider shareholder recommendations
of candidates when the recommendations are submitted in a proper manner. Any
shareholder recommendations should include the candidate's name and
qualifications to serve as a Director. Submissions should be addressed to
Corporate Secretary, Infocrossing, Inc., 2 Christie Heights Street, Leonia, NJ
07605. For potential nominees to be considered at the 2005 annual meeting of
stockholders, the Corporate Secretary must receive the information no earlier
than December 14, 2004 and no later than January 13, 2005. The notice must
include the candidate's age, business address, residence address, principal
occupation or employment, the number of shares beneficially owned by the
candidate, and information that would be required to solicit a proxy under
federal securities laws. The notice must also include the nominating
shareholder's name, address, and the number of shares beneficially owned, as
well as the period such shares have been held by, the nominating shareholder.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2 Stock Purchase Agreement between the Company and ITO Holdings, LLC,
dated as of March 3, 2004, incorporated by reference to Exhibit 2.1 to
a Current Report on Form 8-K filed April 7, 2004.
3.1A Restated Certificate of Incorporation, incorporated by reference
to Exhibit 3.1 to the Company's Form 10-KSB for the period ended
October 31, 1999.
3.1B Certificate of Amendment to the Company's Certificate of
Incorporation, filed May 8, 2000, to increase the authorized
shares and to remove Article 11, incorporated by reference to the
Company's report on Form 10-Q for the period ended April 30, 2000.
3.1C Certificate of Amendment to the Company's Certificate of
Incorporation, filed as of June 5, 2000, to change the name of the
Company to Infocrossing, Inc., incorporated by reference to the
Company's report on Form 10-Q for the period ended April 30, 2000.
3.2 Amended and Restated By-Laws, incorporated by reference to Exhibit
3.2 to the Company's Form 10-KSB for the period ended October 31,
1999.
10 Amended and Restated Term Loan Agreement, dated as of April 2,
2004 between the lenders named therein and the Company,
incorporated by reference to Exhibit 10.1 to a Current Report on
Form 8-K filed April 7, 2004.
14 Code of Ethics, incorporated by reference to the Company's
definitive Proxy Statement filed on April 29, 2004.
31 Certifications required by Rule 13a-14(a) to be filed.
32 Certifications required by Rule 13a-14(b) to be furnished but not
filed.
99 Code of Conduct.
(b) Reports on Form 8-K:
On March 4, 2004, the Company announced a definitive agreement to purchase
ITO Acquisition Corp and proposed debt and equity financing for the
acquisition under Items 5 and 7 of Form 8-K.
On March 18, 2004, the Company released earnings for the fourth quarter and
full year ended December 31, 2003, under Items 9 and 12 of Form 8-K.
On March 26, 2004, the Company announced a private placement of securities
under Item 5 of Form 8-K.
On February 6, 2004, the Company amended the following Current Reports on
Form 8-K to correct the signature pages:
Earnings Release for March 31, 2003 filed May 7, 2003, Earnings
Release for June 30, 2003 filed August 7, 2003, Earnings Release for
September 30, 2003 filed November 13, 2003, Guidance Release for 2003
filed April 10, 2003, and Revised Guidance Release for 2003 filed
September 19, 2003.
On February 6, 2004, the Company amended a Current Report on Form 8-K,
originally filed on October 22, 2003 to announce the closing of a private
placement of common shares and a recapitalization of debt and equity, to
update and expand the information provided under Item 7 - Pro Forma
Statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
INFOCROSSING, INC.
May 14, 2004 /s/ ZACH LONSTEIN
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Zach Lonstein
Chairman & Chief Executive Officer
May 14, 2004 /s/ WILLIAM J. McHALE
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William J. McHale
Senior Vice President of Finance