U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT 1 TO A CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported in the Initial Report):
APRIL 2, 2004
-------------
INFOCROSSING, INC.
(Exact name of issuer as specified in its charter)
DELAWARE 0-20824 13-3252333
------------------------------- ----------- ------------------
(State or other jurisdiction of Commission (IRS Employer
incorporation or organization) File Number Identification No.)
2 CHRISTIE HEIGHTS STREET LEONIA, NEW JERSEY 07605
(Address of principal executive offices)
(201) 840-4700
(Issuer's telephone number)
N/A
(Former name or former address, if changed
since last report.)
1
This report, in addition to the Company's recent historical results and
condition, contains statements concerning certain trends and other
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. These statements, in some cases, can otherwise
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 including, but not
limited to: incomplete or preliminary information; changes in government
regulations and policies; continued acceptance of the Company's products and
services in the marketplace; competitive factors; new products; technological
changes; the Company's dependence on third party suppliers; intellectual
property rights; difficulties with the integration of SMS; and other risks. For
any of these statements, the Company claims the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995, Public Law 104-67, 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. The Company undertakes 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 2. ACQUISITION OF ASSETS
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 based on the fair market value on
April 2, 2004 of $13.68 (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.
2
On April 2, 2004, the Company and its lenders 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 capacity of $25 million and a Term
Loan B facility with a maximum borrowing capacity of $15 million. The Company
borrowed $15 million under the Term Loan B facility and, along with
approximately $20 million from the private placement of the Company's common
stock completed on March 30, 2004, completed the SMS Acquisition. Term Loan B
bears interest at the prime rate 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 beginning May 1, 2004 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: (i) a maximum
leverage ratio; (ii) minimum consolidated earnings before interest, taxes,
depreciation, and amortization; (iii) a minimum debt coverage ratio; and (iv)
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.
As disclosed on a Form 8-K filed on April 1, 2004 and discussed above, the
Company consummated a $30.6 million private placement of 2,917,000 shares of its
common stock, the net proceeds of which were used in part to provide funding for
the SMS Acquisition.
Immediately following the Acquisition, the Company appointed Patrick A. Dolan as
President and Chief Operating Officer of the Company. Mr. Dolan, who previously
served as a manager of Holdings and the Chairman and Chief Executive Officer of
SMS, was also appointed to serve as the President of SMS. In addition, Robert B.
Wallach, the former President of the Company, was promoted to the position of
Vice-Chairman of the Board.
The Stock Purchase Agreement, the Term Loan Agreement, the Guaranty and Security
Agreement, the Stock Pledge Agreement, and Mr. Dolan's Employment Agreement are
incorporated by reference herein and the above descriptions of those documents
and the transactions contemplated thereby are qualified in their entirety by
reference to those exhibits previously filed.
The purpose of this amendment is to provide the financial statements and pro
forma financial information required by Item 7.
3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
7A. FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
Appendix A: Audited Financial Statements of ITO Acquisition Corporation for the
year ended December 31, 2003 and for the period from December 1 (inception) to
December 31, 2002.
Appendix B: Audited Financial Statements of Systems Management Specialists,
Inc., West Coast Division for the eleven month period ended November 30, 2002
and for the year ended December 31, 2001.
Appendix C: Audited Financial Statements of Acxiom Los Angeles Data Center for
the six months ended June 30, 2003 and for the years ended December 31, 2002 and
2001.
Appendix D: Unaudited Financial Statements of ITO Acquisition Corporation as of
March 31, 2004 and 2003 and for the three months ended March 31, 2004 and 2003.
7B. PRO FORMA FINANCIAL INFORMATION
Appendix E: Unaudited Condensed Combined Pro Forma Financial Information as
of March 31, 2004 and for three months ended March 31, 2004 and the year ended
December 31, 2003.
7C. EXHIBITS
The following exhibits are filed herewith:
Exhibit 23.1 Consent of BDO Seidman, LLP.
Exhibit 23.2 Consent of Moore Stephens Wurth Frazer and Torbet, LLP.
The following exhibits filed with the initial Current Report on Form 8-K dated
April 2, 2004 for the SMS Acquisition and the related financings are
incorporated herein by reference.
Exhibit 2.1 Stock Purchase Agreement, dated as of Match 3, 2004,
between Infocrossing Inc. and ITO Holdings, LLC.
Exhibit 10.1 Amended and Restated Term Loan Agreement, dated as of
April 2, 2004, among the Company, the lenders party thereto
and CapitalSource.
Exhibit 10.2 Guaranty and Security Agreement, dated as of April 2,
between SMS and CapitalSource.
Exhibit 10.3 Amended and Restated Stock Pledge Agreement, dated as of
April 2, 2004, among the Company, Amquest, Inc. and
CapitalSource.
Exhibit 10.4 Employment Agreement, dated as of April 2, 2004 by and
between the Company and Patrick A. Dolan.
Exhibit 10.5 Employment Agreement, dated as of April 2, 2004 by and
between the Company and Jim Cortens.
Exhibit 99.1 Press Release of Infocrossing, Inc., dated April 5, 2004.
4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INFOCROSSING, INC.
Date: June 10, 2004 /s/ WILLIAM J. McHALE
------------------------------------
William J. McHale
Senior Vice President of Finance
5
APPENDIX A
A-1
ITO ACQUISITION CORPORATION
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2003 AND
FOR THE PERIOD FROM DECEMBER 1 (INCEPTION)
THROUGH DECEMBER 31, 2002
A-2
INDEPENDENT AUDITORS' REPORT
Stockholders
ITO Acquisition Corporation
Brea, California
We have audited the accompanying balance sheets of ITO Acquisition Corporation
(the "Company") as of December 31, 2003 and 2002, and the related statements of
operations, changes in stockholder's equity and cash flows for the year ended
December 31, 2003 and for the period from December 1 (inception) through
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ITO Acquisition Corporation as
of December 31, 2003 and 2002, and the results of its operations and its cash
flows for the year ended December 31, 2003 and the period from December 1
(inception) through December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
/s/ BDO Seidman, LLP
January 21, 2004, except for
Note 7, as to which the
date is March 4, 2004
A-3
December 31, 2003 2002
- --------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 2,122,948 $ 8,174,388
Restricted Cash 801,860 -
Accounts receivable 3,560,810 2,295,639
Current portion of prepaid software licenses and other prepaid
expenses, net of accumulated amortization 1,052,412 535,918
- --------------------------------------------------------------------------------------------------------------------
Total current assets 7,538,030 11,005,945
- --------------------------------------------------------------------------------------------------------------------
EQUIPMENT AND IMPROVEMENTS
Equipment 5,428,792 292,912
Software 516,989 920
Furniture and fixtures 170,939 20,262
Leasehold improvements 106,165 101,644
- --------------------------------------------------------------------------------------------------------------------
6,222,885 415,738
Less accumulated depreciation and amortization (865,556) (21,259)
- --------------------------------------------------------------------------------------------------------------------
Equipment and improvements, net 5,357,329 394,479
- --------------------------------------------------------------------------------------------------------------------
Prepaid software licenses, net of current portion and accumulated
amortization 270,441 72,690
Goodwill 6,967,421 680,702
Other intangibles assets, net of accumulated
amortization of $415,000 (2003) and $25,000 (2002) 1,985,000 1,475,000
Deposits 157,553 121,478
- --------------------------------------------------------------------------------------------------------------------
$ 22,275,774 $ 13,750,294
====================================================================================================================
A-4
ITO ACQUISITION CORPORATION
BALANCE SHEETS
December 31, 2003 2002
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,371,216 $ 903,584
Other accrued expenses 2,593,510 877,122
Accrued compensation 1,343,790 865,555
Current portion of obligations under capital leases 1,615,195 683,036
Accrued license fee 41,214 65,997
Deferred revenue 87,449 87,449
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 8,052,374 3,482,743
Obligations under capital leases, less current portion 2,934,506 -
Deferred rent 183,061 -
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 11,169,941 3,482,743
- --------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock (1,000,000 shares issued and outstanding, no stated
par value) 100 100
Additional paid-in capital 17,648,580 10,501,478
Accumulated deficit (6,542,847) (234,027)
- --------------------------------------------------------------------------------------------------------------------
Total stockholder's equity 11,105,833 10,267,551
- --------------------------------------------------------------------------------------------------------------------
$ 22,275,774 $ 13,750,294
====================================================================================================================
See accompanying notes to financial statements.
A-5
ITO ACQUISITION CORPORATION
STATEMENTS OF OPERATIONS
For the period
from December 1
For the year (inception)
ended through
December 31, December 31,
2003 2002
- -----------------------------------------------------------------------------------------------------------------------
SERVICE REVENUES $ 26,866,693 $ 1,712,799
OPERATING EXPENSES
Salaries and related costs 11,464,767 917,433
Technology related costs 13,774,926 873,309
Facility costs 2,350,586 172,804
General and administrative expenses 902,810 22,746
Migration costs 4,078,454 -
Amortization of other intangible assets 390,000 25,000
- -----------------------------------------------------------------------------------------------------------------------
Total operating expenses 32,961,543 2,011,292
- -----------------------------------------------------------------------------------------------------------------------
OPERATING LOSS (6,094,850) (298,493)
- -----------------------------------------------------------------------------------------------------------------------
OTHER EXPENSE (INCOME)
Interest expense 211,570 5,534
Other income, net - (70,000)
- -----------------------------------------------------------------------------------------------------------------------
Total other expense (income) 211,570 (64,466)
- -----------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (6,306,420) (234,027)
INCOME TAXES 2,400 -
- -----------------------------------------------------------------------------------------------------------------------
NET LOSS $ (6,308,820) $ (234,027)
=======================================================================================================================
See accompanying notes to financial statements.
A-6
ITO ACQUISITION CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Common Stock Additional
----------------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
- ---------------------------------------------------------------------------------------------------------------------------
Capital contributions 1,000,000 $ 100 $ 10,499,900 $ - $ 10,500,000
Imputed incentive compensation - - 1,578 - 1,578
Net loss - - - (234,027 ) (234,027)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 1,000,000 100 10,501,478 (234,027 ) 10,267,551
Additional capital contributions - - 7,125,000 - 7,125,000
Imputed incentive compensation - - 22,102 - 22,102
Net loss - - - (6,308,820 ) (6,308,820)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 1,000,000 $ 100 $ 17,648,580 $ (6,542,847 ) $ 11,105,833
===========================================================================================================================
See accompanying notes to financial statements.
A-7
ITO ACQUISITION CORPORATION
STATEMENTS OF CASH FLOWS
For the period
from December 1
For the year (inception)
ended through
December 31, December 31,
2003 2002
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (6,308,820) $ (234,027)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,276,443 46,259
Impairment of fixed assets 662,057 -
Imputed compensation expense 22,102 1,578
Changes in assets and liabilities, net of effects from
acquisitions of businesses:
Accounts receivable (1,043,134) (623,449)
Prepaid software licenses and other prepaid expenses (714,245) 41,491
Deposits (15,055) (121,478)
Accounts payable 1,325,459 903,584
Accrued compensation (611,015) 217,227
Licensing fee obligations (24,783) 65,997
Other accrued expenses 1,663,887 (961,838)
Deferred revenue (447,758) 87,449
Deferred rent 183,061 -
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (4,031,801) (577,207)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash paid for SMS Acquisition - (1,650,946)
Net cash paid for Acxiom Acquisition (6,684,049) -
Purchases of equipment and improvements, net (378,438) -
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (7,062,487) (1,650,946)
- -----------------------------------------------------------------------------------------------------------------------
A-8
ITO ACQUISITION CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
For the period
from December 1
For the year (inception)
ended through
December 31, December 31,
2003 2002
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from capital contributions 7,125,000 10,500,000
Principal payments on obligations under capital leases (1,280,292) (97,459)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 5,844,708 10,402,541
- -----------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (5,249,580) 8,174,388
Cash and restricted cash, beginning of period 8,174,388 -
- -----------------------------------------------------------------------------------------------------------------------
Cash and restricted cash, end of period $ 2,924,808 $ 8,174,388
=======================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest $ 567,499 $ 5,534
=======================================================================================================================
Income taxes $ 2,400 $ -
=======================================================================================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Assets acquired under capital leases $ 4,442,754 $ -
=======================================================================================================================
See accompanying notes to financial statements.
A-9
ITO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF BUSINESS AND NATURE OF OPERATIONS
SIGNIFICANT
ACCOUNTING ITO Acquisition Corporation ("Acquisition Corp" or the
POLICIES "Company"), a California corporation and a wholly-owned
subsidiary of ITO Holdings, LLC ("Holdings"), was created in
2002 to acquire the operations of a California based
business, Systems Management Specialists, Inc., principally
engaged in providing information technology outsourcing
services (the "First Acquisition"). In 2003, Acquisition
Corp also acquired the West Coast operations of Acxiom
Corporation (the "Second Acquisition").
SMS ACQUISITION
Effective December 1, 2002, Acquisition Corp acquired
certain assets, rights, and properties and assumed certain
obligations of Systems Management Specialists, Inc., a
Delaware Corporation ("SMS").
The First Acquisition is summarized as follows:
------------------------------------------------------------
Cash consideration paid $ 1,650,946
Acquisition costs incurred 406,152
Liabilities assumed 2,861,631
Tangible and financial assets purchased (2,738,027)
Goodwill recorded (680,702)
Identifiable intangible assets purchased (1,500,000)
------------------------------------------------------------
$ -
============================================================
ACXIOM ACQUISITION
On June 30, 2003, the Company acquired certain of the
assets, rights, and properties and assumed certain
obligations of Acxiom Corporation, a Delaware Corporation.
A-10
ITO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF The Second Acquisition is summarized as follows:
SIGNIFICANT
ACCOUNTING ------------------------------------------------------------
POLICIES
(CONTINUED) Cash consideration paid $ 6,684,049
Acquisition costs incurred 142,173
Liabilities assumed 1,589,509
Tangible and financial assets purchased (1,229,012)
Goodwill recorded (6,286,719)
Identifiable intangible assets purchased (900,000)
------------------------------------------------------------
$ -
============================================================
LIQUIDITY
The Company is newly formed and is subject to the general
risks associated with a new venture, including the risk of
business failure. The Company has incurred substantial
operating losses since inception, and has a working capital
deficit at December 31, 2003. Although the Company has cash
reserves to allow it to continue operations for the
foreseeable future, it must be successful in achieving
profitability in order to continue to operate on a long-term
basis. The Company has taken steps to increase its customer
base and reduce its operating costs. The Company believes it
will attain profitability in mid 2004 (unaudited). There can
be no assurances that the Company will successfully
implement its plans. The accompanying financial statements
do not reflect any adjustments that might be necessary as a
result of the negative outcome of this uncertainty.
REVENUE RECOGNITION
Revenue is recorded when services are performed and
collectibility of the related receivable is reasonable
assured.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with
remaining maturities at purchase of three months or less to
be cash and cash equivalents.
A-11
ITO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF RESTRICTED CASH
SIGNIFICANT
ACCOUNTING The Company maintains a restricted cash money market account
POLICIES as required by an agreement with a lease financing company
(CONTINUED) totaling $801,860 and $0 as of December 31, 2003 and 2002,
respectively. The Company is permitted to reduce the balance
of the restricted cash account ratably over a one-year
period ending September 2004.
EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are stated at cost, less
depreciation and amortization. Depreciation and amortization
are calculated under accelerated and straight-line methods
over the estimated useful lives of the assets (or lease
term, if shorter).
ESTIMATED LIVES
---------------------
Equipment 1-5 years
Software 3 years
Furniture and fixtures 5 years
Leasehold improvements 3 years
Maintenance and repairs are charged to expense as incurred.
Significant renewals and betterments are capitalized.
LONG-LIVED ASSETS
The Company assesses the recoverability of long-lived assets
by determining whether the depreciation of such assets over
their remaining lives can be recovered through projected
undiscounted cash flows. The amount of impairment, if any,
is then measured based on fair value and is charged to
operations in the period in which such impairment is
determined by management.
During the year ended December 31, 2003, the Company
impaired assets with a net book value of approximately
$662,000 which is included in migration costs in the
accompanying statement of operations. As of December 31,
2003 and 2002, the Company's management had not identified
any other material impairments of its long-lived assets.
A-12
ITO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF GOODWILL AND OTHER INTANGIBLE ASSETS
SIGNIFICANT
ACCOUNTING The Company accounts for goodwill and other intangible
POLICIES assets pursuant to Statement of Financial Accounting
(CONTINUED) Standards No. 142, "Goodwill and Other Intangible Assets."
Goodwill is not amortized. Other intangible assets represent
purchased customer contracts and are being amortized over an
estimated useful life of 5 years. In addition, goodwill and
other intangible assets are reviewed for impairment annually
or whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable. If the expected
future cash flows from goodwill and the identifiable
intangible assets and their eventual disposition is less
than their carrying value, an impairment loss is recognized
and measured using fair value.
MIGRATION COSTS
The Company incurred certain one-time expenses related to
the conversion of certain customers related to the Second
Acquisition from the Los Angeles location to the Brea
location totaling approximately $4,078,454 for the year
ended December 31, 2003. Migration costs include $172,521
related to disputed obligations under capital leases (see
Note 5).
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company
to concentration of credit risk consist primarily of cash
and accounts receivables. The Company places its cash with
major financial institutions. At times, cash balances may be
in excess of amounts insured by Federal agencies. As of
December 31, 2003, approximately $2,471,446 in cash
balances, before taking into effect issued but uncleared
checks, were in excess of Federal insurance limits.
A-13
ITO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF VENDORS
SIGNIFICANT
ACCOUNTING Two vendors accounted for 28% and 12%, respectively, of
POLICIES purchases for the year ended December 31, 2003. Accounts
(CONTINUED) payable for these vendors aggregated approximately 12% and
17% of gross accrued and accounts payable at December 31,
2003, respectively.
Three vendors accounted for 46%, 16% and 12% of purchases
for the Period ended December 31, 2002. Accounts payable for
these vendors aggregated approximately 17%, 0% and 0% of
gross accrued and accounts payable at December 31, 2002,
respectively.
Management believes that the loss of any of its major
vendors would not have a material adverse effect on the
Company's operations long-term, due to the availability of
other vendors.
CUSTOMERS
Credit is extended for all customers based on financial
condition, and generally, collateral is not required. Credit
losses are provided for in the financial statements based on
management's evaluation of historical credit losses and the
collectibility of specific accounts receivable. At December
31, 2003 and 2002, management of the Company concluded that
a reserve for bad debt was not required.
One customer accounted for 12% of net service revenue for
the year ended December 31, 2003. Accounts receivable for
this customer aggregated approximately 9% of gross accounts
receivable at December 31, 2003. One additional customer
accounted for 11% of gross accounts receivable at December
31, 2003.
Five customers accounted for 14%, 14%, 12%, 11% and 10%,
respectively, of net service revenue for the year ended
December 31, 2002. Accounts receivable for these customer
aggregated approximately 27% of gross accounts receivable at
December 31, 2002. Two additional customers accounted for
12% and 11%, respectively, of gross accounts receivable at
December 31, 2002.
A-14
ITO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF Management believes that the loss of any of its major
SIGNIFICANT customers would not have a material adverse effect on the
ACCOUNTING Company's operations long-term, due to the availability of
POLICIES other customers.
(CONTINUED)
INCOME TAXES
The Company uses the liability method of accounting for
income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109 "Accounting for Income
Taxes." Deferred income taxes are recognized based on the
differences between financial statement and income tax bases
of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to
reverse. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount
expected to be realized. Acquisition Corp's provision for
income taxes represents the current tax payable for the
period and the change during the period in deferred tax
assets and liabilities. Acquisition Corp incurred a net
taxable loss for all periods presented. At December 31,
2003, Acquisition Corp's deferred tax assets approximated
$2,800,000, which primarily consisted of net operating loss
carryforwards that have been fully reserved. The Company's
Federal and state net operating loss carryforwards
approximated $6,000,000 and $3,600,000, respectively, and
expire in 2023 and 2013, respectively.
2. GOODWILL AND The changes in the carrying amount of goodwill for the year
OTHER INTANGIBLE ended December 31, 2003 and the Period ended December 31,
ASSETS 2002 are as follows:
Amount
------------------------------------------------------------
Balance, December 1, 2002 $ -
SMS Acquisition 680,702
------------------------------------------------------------
Balance, December 31, 2002 680,702
Acxiom Acquisition 6,286,719
------------------------------------------------------------
Balance, December 31, 2003 $ 6,967,421
============================================================
A-15
ITO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. GOODWILL AND Other intangible assets at December 31, 2003 and 2002 are
OTHER INTANGIBLE summarized as follows:
ASSETS
(CONTINUED)
2003 2002
------------------------------------------------------------
Other intangible assets:
Customer Contracts $ 2,400,000 $ 1,500,000
Accumulated amortization (415,000) (25,000)
------------------------------------------------------------
$ 1,985,000 $ 1,475,000
============================================================
The changes in the carrying amount of the other intangible
assets for the year ended December 31, 2003 and the Period
ended December 31, 2002 are as follows:
Amount
------------------------------------------------------------
Balance, December 1, 2002 $ -
SMS Acquisition 1,500,000
------------------------------------------------------------
Balance, December 31, 2002 1,500,000
Acxiom Acquisition 900,000
------------------------------------------------------------
Balance, December 31, 2003 $ 2,400,000
============================================================
The Company recorded intangible amortization expense in the
amount of $390,000 and $25,000 for the year ended December
31, 2003 and the Period ended December 31, 2002,
respectively.
A-16
ITO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. GOODWILL AND The estimated amortization expense for the five succeeding
OTHER INTANGIBLE years ending December 31 and thereafter are as follows:
ASSETS
(CONTINUED)
Years ending December 31,
------------------------------------------------------------
2004 $ 480,000
2005 480,000
2006 480,000
2007 455,000
2008 90,000
------------------------------------------------------------
$ 1,985,000
============================================================
3. TECHNOLOGY Technology related costs for the year ended December 31,
RELATED COSTS 2003 and the Period ended December 31, 2002 are summarized
as follows:
2003 2002
------------------------------------------------------------
Software licensing $ 8,365,234 $ 542,090
Hardware operating leases and
maintenance 1,515,246 103,339
Hardware depreciation 745,650 17,460
Telecommunications 1,229,120 86,287
Other technology related costs 1,919,676 124,133
------------------------------------------------------------
$ 13,774,926 $ 873,309
============================================================
4. COMMITMENTS AND ADVISORY FEE
CONTINGENCIES
The member agreement of Holdings provides for an annual
advisory fee to be paid to RLH Investors, LP in the amount
of $25,000. The annual fee is due in arrears on the
anniversary of the closing of the transaction each year
(December 20). The advisory fees are included in the
Company's general and administrative expenses in the
accompanying statements of operations.
A-17
ITO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS AND DEFERRED CLOSING FEE
CONTINGENCIES
(CONTINUED) A fee totaling $169,700 is payable to certain affiliated
entities of Holdings, based upon certain criteria specified
in the Holdings' member agreement. To date, such fee has not
been paid or accrued.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain officers
and members which provide for specified base salaries plus
incentive compensation and other benefits.
ENTERPRISE SOFTWARE AGREEMENTS
The Company has an enterprise agreement with a software
company which requires an annual revenue based fee equal to
5% of total service revenue less required fixed quarterly
payments. The following is the schedule of the minimum
annual payments pursuant to the agreement:
Years ending December 31,
------------------------------------------------------------
2004 $ 1,000,000
2005 1,000,000
------------------------------------------------------------
Total minimum annual payments $ 2,000,000
============================================================
Revenue based fees totaling $1,447,443 were incurred in
2003, which exceeded the fixed payments in 2003 by $850,674.
A-18
ITO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS AND The Company has another enterprise agreement with a
CONTINGENCIES software company which provides for fixed payments through
(CONTINUED) 2007. The following is a schedule of the minimum annual
payments pursuant to the agreement:
Years ending December 31,
------------------------------------------------------------
2004 $ 699,000
2005 825,000
2006 915,000
2007 478,000
------------------------------------------------------------
Total minimum annual payments $ 2,917,000
============================================================
The Company paid $816,745 and $0 of fees related to this
agreement in 2003 and 2002, respectively.
CUSTOMER CONTRACT COMMISSION
The Company is required to pay customer contract commissions
to certain parties which originally introduced customers to
the Company. Such commissions are based on revenue relating
to the customer contracts. The Company incurred $138,772 and
$0 in commissions for the year ended December 31, 2003 and
the Period ended December 31, 2002.
A-19
ITO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LEASES CAPITAL LEASES
Obligations under capital leases consist of the following:
2003 2002
---------------------------------------------------------------------------------
Obligation under capital lease,
bearing interest at a rate of 11.36%;
payable in monthly payments of
approx. $73,886 through September 2007 $ 2,754,756 $ -
Obligation under capital lease,
bearing interest at a rate of 7.0%;
payable in monthly payments of
approx. $15,618 through September 2007 616,564 -
Obligation under capital lease,
bearing interest at a rate of 7.15%;
payable in monthly payments of
approx. $27,149 through October 2004 606,905 -
Obligation under capital lease,
bearing interest at a rate of 5.12%;
payable in monthly payments of
approx. $10,931 through August 2007 428,613 -
Obligation under capital lease,
bearing interest at a rate of 7.0%;
payable in monthly payments of
approx. $14,255 through May 2004 83,813 -
A-20
ITO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LEASES
(CONTINUED)
2003 2002
---------------------------------------------------------------------------------
Obligation under capital lease,
bearing interest at a rate of 7.0%;
payable in monthly payments of
approx. $6,754 through September 2004 59,050 -
Obligation under capital leases, bearing
interest at rates varying from
8% to 9.87%; payable in monthly
payments aggregating approximately
$58,505 through September 2003 - 508,314
Obligation under capital lease, bearing
interest at a rate of 8.86%; payable in
monthly payments of approximately
$44,488 through April 2003. - 174,722
-----------------------------------------=-----------------------------------------
4,549,701 683,036
Less current portion (1,615,195) (683,036)
-----------------------------------------------------------------------------------
$ 2,934,506 $ -
===================================================================================
At December 31, 2003, included in one of the above
referenced capital leases is a $236,402 balloon payment due
upon lease termination. The Company does not believe that it
assumed this balloon payment obligation as part of the
Acxiom acquisition; accordingly, the Company is disputing
this obligation. However, the Company has accrued and
reflected said obligation as a component of obligations
under capital leases.
A-21
ITO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LEASES OPERATING LEASES
(CONTINUED)
The Company leases certain facilities and equipment under
noncancellable operating leases.
Certain of the Company's operating lease agreements provide
for scheduled rent increases during the lease term.
Accordingly, rent expense is recorded on a straight-line
basis over the respective terms of the leases. Total rental
expense was $1,843,715 and $125,889 for the year ended
December 31, 2003 and the Period ended December 31, 2002,
respectively. The Company recorded approximately $183,061
and $0 as of December 31, 2003 and 2002, respectively, in
deferred rent liability.
The following is a schedule of future minimum rental
payments under these operating and capital leases:
Capital
Total Operating Lease
Years ending December 31, Lease Payments Payments
------------------------------------------------------------
2004 $ 1,701,466 $ 1,995,179
2005 1,568,131 1,205,224
2006 1,581,082 1,205,224
2007 1,615,209 969,796
2008 1,516,793 -
Thereafter 1,486,231 -
------------------------------------------------------------
Total minimum lease payments $ 9,468,912 5,375,423
==========================================
Less amount representing
interest on capital leases (825,722)
------------------------------------------------------------
Present value of minimum
capital lease payments $ 4,549,701
============================================================
A-22
ITO ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. RETIREMENT PLAN The Company maintains a retirement savings plan which is
intended to qualify under Section 401(k) of the Internal
Revenue Code. The plan covers substantially all employees of
the Company. Participating employees are allowed to
contribute up to a specified percent of their cash
compensation limited to the statutory maximum of $12,000 for
2003. The Company makes contributions to the plan at the
discretion of management.
7. SUBSEQUENT On March 4, 2004, Infocrossing, Inc., a public company,
EVENT entered into a definitive agreement to acquire the Company
(UNAUDITED) for $36.5 million in cash and Infocrossing's common stock,
subject to adjustment as provided in the agreement.
A-23
APPENDIX B
B-1
SYSTEMS MANAGEMENT SPECIALISTS, INC.
WEST COAST DIVISION
FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
NOVEMBER 30, 2002 AND DECEMBER 31, 2001
B-2
Independent Auditors' Report
The Board of Directors of ITO Acquisition Corp.
We have audited the accompanying statements of assets, liabilities and affiliate
investment of Systems Management Specialists. Inc ("SMS") West Coast Division (a
business unit of SMS) as of November 30, 2002 and December 31, 2001, and the
related statements of operations and cash flows for the eleven months ended
November 30, 2002, and for the year ended December 31, 2001. These financial
statements are the responsibility of the Division's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Systems Management Specialists,
Inc. West Coast Division as of November 30, 2002 and December 31, 2001, and the
results of its operations and cash flows for the eleven months ended November
30, 2002 and for the year ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Moore Stephens Wurth Frazer and Torbet, LLP
Orange, California
March 29, 2004
B-3
SYSTEMS MANAGEMENT SPECIALISTS, INC. WEST COAST DIVISION
(A BUSINESS UNIT OF SYSTEMS MANAGEMENT SPECIALISTS, INC.)
STATEMENTS OF ASSETS, LIABILITIES AND AFFILIATE INVESTMENT
ASSETS
November 30, December 31,
2002 2001
----------------- ----------------
CURRENT ASSETS
Accounts receivable, net of allowance of $ 1,840,613 $ 2,317,690
$1,580,000 in 2002 and $5,650,000 in 2001,
respectively
Prepaid software maintenance fees 672,709 4,950,247
Refundable taxes 190,000 -
Deferred income taxes - 190,000
----------------- ----------------
Total current assets 2,703,322 7,457,937
----------------- ----------------
PROPERTY AND EQUIPMENT, NET 2,628,077 3,564,079
----------------- ----------------
TOTAL ASSETS $ 5,331,399 $ 11,022,016
================= ================
LIABILITIES AND AFFILIATE INVESTMENT
CURRENT LIABILITIES
Accounts payable $ 1,886,076 $ 1,124,202
Accrued expenses 899,490 1,770,627
Income tax payable 800 240,000
Litigation reserve 1,000,000 1,000,000
Obligation on abandoned lease 3,450,000 4,035,000
Current portion of capital lease obligations 876,277 1,540,894
----------------- ----------------
Total current liabilities 8,112,643 9,710,723
----------------- ----------------
LONG-TERM DEBT
Capital lease obligations, net of current portion 38,031 914,308
----------------- ----------------
Total liabilities 8,150,674 10,625,031
----------------- ----------------
AFFILIATE INVESTMENT (2,819,275) 396,985
----------------- ----------------
COMMITMENTS AND CONTINGENCIES - -
----------------- ----------------
TOTAL LIABILITIES AND
AFFILIATE INVESTMENT $ 5,331,399 $ 11,022,016
================= ================
The accompanying notes are an integral part of these financial statements.
B-4
SYSTEMS MANAGEMENT SPECIALISTS, INC. WEST COAST DIVISION
(A BUSINESS UNIT OF SYSTEMS MANAGEMENT SPECIALISTS, INC.)
STATEMENTS OF OPERATIONS
FOR THE ELEVEN MONTH PERIOD ENDED NOVEMBER 30, 2002
AND THE YEAR ENDED DECEMBER 31, 2001
November 30, December 31,
2002 2001
------------------------- -------------------------
REVENUES $ 25,262,568 $ 42,863,799
------------------- --------------------
OPERATING EXPENSES
Salaries, wages, and related costs 12,636,488 21,766,754
Software licensing and maintenance fees 3,641,596 3,649,139
Hardware operating leases and costs 3,158,801 3,557,271
Amortization of prepaid software maintenance fees 3,254,349 1,938,733
Data communication costs 2,332,173 4,667,187
Facility costs 1,998,540 2,587,584
Depreciation 2,099,939 2,599,694
General and administrative expenses 1,455,182 5,380,052
------------------- --------------------
TOTAL OPERATING EXPENSES 30,577,068 46,146,414
------------------- --------------------
OTHER EXPENSES
Interest expense 80,930 315,611
Loss on impairment of property and equipment - 748,787
Loss on abandonment of property and equipment - 1,904,213
Loss on abandonment of lease - 4,035,000
------------------- --------------------
TOTAL OTHER EXPENSES 80,930 7,003,611
------------------- --------------------
LOSS BEFORE INCOME TAXES (5,395,430) (10,286,226)
INCOME TAXES - 50,000
------------------- --------------------
NET LOSS $ (5,395,430) $ (10,336,226)
=================== ====================
The accompanying notes are an integral part of these financial statements.
B-5
SYSTEMS MANAGEMENT SPECIALISTS, INC. WEST COAST DIVISION
(A BUSINESS UNIT OF SYSTEMS MANAGEMENT SPECIALISTS, INC.)
STATEMENTS OF CASH FLOWS
FOR THE ELEVEN MONTH PERIOD ENDED NOVEMBER 30, 2002
AND THE YEAR ENDED DECEMBER 31, 2001
November 30, December 31,
2002 2001
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,395,430) $ (10,336,226)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,099,939 2,599,694
Loss on impairment of property and equipment - 748,787
Loss on abandonment of property and equipment - 1,904,213
Loss on abandonment of lease - 4,035,000
Changes in operating assets and liabilities:
Accounts receivable 477,077 2,567,189
Prepaid expenses and other assets 4,277,538 (908,149)
Deferred income taxes - (190,000)
Refundable taxes (239,200) 240,000
Deposits - 16,674
Accounts payable 761,874 (1,639,204)
Accrued expenses (871,137) (549,285)
Obligation on abandoned lease (585,000) -
Deferred revenues - (1,903,883)
------------------ ------------------
Net cash flows from operating activities 525,661 (3,415,190)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,163,937) (1,521,255)
------------------ ------------------
Net cash flows from investing activities
(1,163,937) (1,521,255)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note receivable and advances to employees - 56,536
Payments on capital lease obligations (1,540,894) (1,883,931)
Net capital contributions from affiliate 2,179,170 6,763,840
------------------ ------------------
Net cash flows from financing activities
638,276 4,936,445
------------------ ------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS - -
CASH AND CASH EQUIVALENTS, BEGINNING - -
------------------ ------------------
CASH AND CASH EQUIVALENTS, ENDING $ - $ -
================== ==================
The accompanying notes are an integral part of these financial statements.
B-6
SYSTEM MANAGEMENT SPECIALISTS, INC. WEST COAST DIVISION
(A BUSINESS UNIT OF SYSTEMS MANAGEMENT SPECIALISTS, INC.)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS. Systems Management Specialists, Inc.'s (SMS) West Coast
Division (the Division) is a business unit of SMS. The Division provides data
processing and information technology outsourcing services to businesses
throughout the United States. The Division has their headquarters in Brea,
California and a secondary location in Santa Ana, California. The Division also
provides on-site support personnel at customer locations when required. SMS also
has locations in Missouri, New Jersey, and Pennsylvania that were not part of
the West Coast Division.
BASIS OF PRESENTATION. The Division does not constitute a separate legal entity.
The financial statements of the Division present the operating results and the
financial position of the West Coast Division of SMS. The Division was dependent
on SMS to fund its working capital needs. Effective December 1, 2002, the
Division was acquired by ITO Acquisition Corp. which assumed responsibility for
funding its operations.
Prior to the acquisition by ITO Acquisition Corp., no financial statements were
available with accounting and disclosures normally presented for a separate
legal entity. The financial statements have been prepared from the historical
accounting records of SMS (a wholly-owned subsidiary of Marconi plc) and reflect
the application of allocation policies adopted by SMS and Marconi plc for
various costs and activities. All of the accounting judgments, estimations and
allocations in these financial statements are based on assumptions that
management believes are reasonable for purposes of preparing the Division's
financial statements. However, these allocations are estimates and are not
necessarily indicative of the costs that would have resulted had the Division
operated as a stand-alone, separate entity.
The financial statements of the Division have been prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission ("SEC") for inclusion in a Form 8-K to be filed by Infocrossing, Inc.
in connection with the acquisition of ITO Acquisition Corp. as described in note
11.
AFFILIATE INVESTMENT. The Division is dependent on SMS to fund its working
capital needs. All charges and allocations of costs for functions and services
provided by SMS are deemed paid by the Division, in cash, in the period in which
the cost is recorded in these financial statements. SMS does not charge the
Division interest on its investment in the Division.
Changes in SMS' investment in the Division were as follows:
Balance at December 31, 2000 $ 3,969,371
Net loss (10,336,226)
Net advances from SMS 6,763,840
-----------------
Balance at December 31, 2001 396,985
Net loss (5,395,430)
Net advances from SMS 2,179,170
-----------------
Balance at November 30, 2002 $ (2,819,275)
=================
IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets consist of property and
equipment and purchased software. The Division reviews its long-lived assets for
impairment whenever events or business circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
future cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by which
the carrying amount of the assets exceed the fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell. The Division's assessment in 2001 of the carrying value of
its long-lived assets resulted in approximately $1,904,000 of noncash charges
for the write-down of capitalized costs related to data processing hardware and
purchased software.
B-7
SYSTEM MANAGEMENT SPECIALISTS, INC. WEST COAST DIVISION
(A BUSINESS UNIT OF SYSTEMS MANAGEMENT SPECIALISTS, INC.)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PROPERTY AND EQUIPMENT. Property and equipment and purchased software are stated
at cost. Depreciation and amortization are computed using the straight-line
method over estimated useful lives of 2 to 10 years for property and equipment
and over the estimated useful lives or underlying lease which ever is shorter
for leasehold improvements and assets capitalized under capital lease
obligations. Maintenance and repairs are expensed as incurred.
REVENUE RECOGNITION. The Division recognizes revenue from services when the
services are rendered based on hourly and hardware utilization rates specified
in contracts, while related costs are recognized when incurred. The Division
provides services to medium to large sized companies under contracts with terms
ranging from six months to seven years.
PREPAID SOFTWARE MAINTENANCE FEES. Software maintenance fees paid on behalf of
the Division's customers are paid in advance for a twelve month period and are
amortized over the life of the maintenance agreement.
INCOME TAXES. The Division does not file separate federal or state income tax
returns as SMS files consolidated tax returns that include the operations of the
Division. The Division has recorded its federal and state current income tax
provision on a stand-alone basis as if the Company files separate tax returns.
The Division records a current provision for income taxes based upon amounts
payable or refundable. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis and operating loss and tax credit carry forwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Due to historical net losses of the Division, a
valuation allowance is established to offset related deferred tax assets.
USE OF ESTIMATES. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that effect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The Division's significant
estimates primarily relate to the assessment of the required accounts receivable
allowance for doubtful accounts, and the fair value of long-lived assets.
Additionally, significant estimates include the allocation to the Division of
its share of certain general and administrative costs incurred by SMS. Actual
results could differ from those estimates.
2. NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force ("EITF") finalized its
tentative consensus on EITF Issue 00-21, "Revenue Arrangements with Multiple
Deliverables," which provides guidance on the measurement and allocation of
revenue from sales undertakings to deliver more than one product or service. The
Division adopted the provisions of EITF 00-21 effective July 1, 2003. The
adoption of this pronouncement did not have a significant impact on the
financial condition or results of operations of the Division.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145 "Rescission of Statements No. 4, 14 and 64, Amendment of FASB Statement No.
13 and Technical Corrections." ("FAS 145"). This Statement rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt," and an amendment of
that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." This Statement also rescinds SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers." This Statement amends SFAS
No. 13, "Accounting for Leases," to eliminate any inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. FAS 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. This Statement is
effective for fiscal years beginning after May 15, 2002. The adoption of this
statement did not have a significant impact on the financial condition or
results of operations of the Division.
B-8
SYSTEM MANAGEMENT SPECIALISTS, INC. WEST COAST DIVISION
(A BUSINESS UNIT OF SYSTEMS MANAGEMENT SPECIALISTS, INC.)
NOTES TO FINANCIAL STATEMENTS
2. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." The
standard requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of commitment to an
exit or disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated with
restructuring, discontinued operations, plant closing, or other exit or disposal
activity. Previous accounting guidance was provided by EITF Issue No. 94-3,
"Liability Recognition for Certain Costs, Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 replaces EITF 94-3 and is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
The adoption of this statement did not have a significant impact on the
financial condition or results of operations of the Division.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). FIN 45 requires the recognition of certain
guarantees as liabilities at fair market value and is effective for guarantees
issued or modified after December 31, 2002. The Division has adopted the
disclosure requirement of FIN 45 and it did not have a significant impact on the
financial condition or results of operations of the Division.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148 "Accounting for Stock-Based Compensation -- Transition and Disclosure".
Effective for interim periods beginning after December 15, 2002, disclosure is
required for information on the fair value of stock options and the effect on
earnings per share (in tabular form) for both interim and annual reports. The
adoption of this statement did not have a significant impact on the financial
condition or results of operations of the Division.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51," effective February
1, 2003. Interpretation No. 46 requires the primary beneficiary of a variable
interest entity ("VIE") to consolidate the VIE under certain circumstances.
Interpretation No. 46 is effective for all new VIEs created or acquired after
January 31, 2003. For VIEs created or acquired prior to February 1, 2003,
Interpretation No. 46 must be applied for the first interim or annual period
beginning after December 15, 2003. The adoption of this pronouncement did not
have a significant impact on the financial condition or results of operations of
the Division.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting for derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The Division does not expect the adoption of SFAS No. 149 to have a
significant impact on the financial condition or results of operations of the
Division.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," which
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. For example, the Statement requires liability classification for a
financial instrument issued in the form of shares that are mandatorily
redeemable, e.g., includes an unconditional obligation requiring the issuer to
redeem it by transferring its assets at a specified or determinable date or
dates or upon an event that is certain to occur. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The Division does not expect the adoption of SFAS No. 150 to have a
significant impact on the financial condition or results of operations of the
Division.
B-9
SYSTEM MANAGEMENT SPECIALISTS, INC. WEST COAST DIVISION
(A BUSINESS UNIT OF SYSTEMS MANAGEMENT SPECIALISTS, INC.)
NOTES TO FINANCIAL STATEMENTS
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Management evaluates accounts receivable periodically for potential
uncollectible receivables based on contractual due dates. Management estimated
the reserve for doubtful accounts to be $1,580,000 and $5,650,000 at November
30, 2002 and December 31, 2001, respectively.
Balance at December 31, 2000 $ 746,695
Additions to the allowance 4,903,305
-----------------
Balance at December 31, 2001 5,650,000
Write-offs against the allowance (4,070,000)
-----------------
Balance at November 30, 2002 $ 1,580,000
=================
4. PROPERTY AND EQUIPMENT
As of November 30, 2002 and December 31, 2001, property and equipment consisted
of the following:
November 30, December 31,
2002 2001
Computer equipment $ 6,300,815 $ 7,955,243
Leasehold improvements 689,591 373,648
Purchased software 309,294 2,900,112
Furniture and fixtures 443,182 488,589
Less accumulated
depreciation and amortization (5,114,805) (8,153,513)
---------------- ------------------
Property and equipment, net $ 2,628,077 $ 3,564,079
================ ==================
Depreciation expense amounted to $2,099,939 and $2,599,694 for the period ended
November 30, 2002 and the year ended December 31, 2001, respectively.
5. ACCRUED EXPENSES
As of November 30, 2002 and December 31, 2001, accrued expenses consisted of the
following:
November 30, December 31,
2002 2001
Accrued wages, vacation,
and absences $ 877,126 $ 1,440,183
Other accrued expenses 22,364 330,444
------------------ -------------------
Total $ 899,490 $ 1,770,627
================== ===================
B-10
SYSTEM MANAGEMENT SPECIALISTS, INC. WEST COAST DIVISION
(A BUSINESS UNIT OF SYSTEMS MANAGEMENT SPECIALISTS, INC.)
NOTES TO FINANCIAL STATEMENTS
6. INCOME TAXES
The Division has incurred net operating losses for tax purposes in recent years.
The Division has not reflected any benefit of such net operating loss
carryforwards in the accompanying financial statements. The tax effects of
temporary differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities are as follows:
November 30, December 31,
2002 2001
Federal net operating loss carryforward $ 4,716,000 $ -
Reserve for bad debts 677,000 2,421,000
Reserve for impairments 1,826,000 2,545,000
Accrued expenses 662,000 816,000
Other differences (447,000) (406,000)
Valuation allowance (7,434,000) (5,186,000)
------------- -------------
Net deferred tax asset $ - $ 190,000
============= =============
The provision for income taxes differs from the expected tax expense, computed
by applying the federal corporate rate of 34% to earnings before income taxes as
follows:
November 30, December 31,
2002 2001
Expected federal benefit at 34% $ 1,834,000 $ 3,497,000
State income taxes 224,000 492,000
Change in deferred taxes 190,000 -
Change in valuation allowance (2,248,000) (3,939,000)
----------------- -------------------
Net provision for income taxes $ - $ 50,000
================= ===================
7. COMPENSATION AGREEMENTS
The Division has employment agreements with certain officers which provide for
specified base salaries plus incentive compensation and other benefits.
8. EMPLOYEE BENEFIT PLAN
The Division has a defined contribution benefit plan provided under Section
401(k) of the Internal Revenue Code whereby substantially all of the Division
employees may elect to make contributions to the plan through salary deferrals.
The Division may make discretionary contributions to the plan, but made no such
contributions for the periods ended November 30, 2002 and December 31, 2001,
respectively.
9. CAPITAL LEASES AND COMMITMENTS
The Division leases certain facilities and equipment under non-cancelable
operating leases and capital leases expiring through June 30, 2008. The rental
payments under operating leases are charged to expense as incurred. Total rent
expense for operating leases included in the accompanying statements of
operations was approximately $2,317,000 and $2,323,000 for the eleven months
ended November 30, 2002 and for the year ended December 31, 2001, respectively.
The Division abandoned its leasehold facility at its Santa Ana location in
September 2001. The remaining obligation under the contract is recorded on the
statements of assets, liabilities and affiliate investment as an obligation on
abandoned lease and the corresponding non-cash change is recorded on its
statement of operations as loss on abandonment of lease. The monthly payment
obligation is being paid on the behalf of the Division by SMS and Marconi plc.
B-11
SYSTEM MANAGEMENT SPECIALISTS, INC. WEST COAST DIVISION
(A BUSINESS UNIT OF SYSTEMS MANAGEMENT SPECIALISTS, INC.)
NOTES TO FINANCIAL STATEMENTS
9. CAPITAL LEASES AND COMMITMENTS (CONTINUED)
The following is a schedule of future minimum rental payments under these
operating and capital leases:
Total Capital
Operating Lease Lease
Payments Payments
------------------ -------------------
Period ending November 30:
2003 $ 3,011,157 $ 876,277
2004 1,574,418 38,031
2005 1,467,313 -
2006 1,480,982 -
2007 645,464 -
Thereafter 382,721 -
------------------ -------------------
Total minimum lease payments $ 8,562,055 $ 914,308
================== ===================
10. BUSINESS CONCENTRATIONS AND CONTINGENCIES
VENDOR CONCENTRATIONS. Two vendors accounted for a combined 68% and 42% of
purchases for the period ended November 30, 2002 and the year ended December 31,
2001, respectively. Management believes that the loss of any of its major
vendors would not have a material adverse effect on the Division's long-term
operations, due to the availability of other vendors.
CREDIT RISK. The Division provides services primarily to large commercial
corporations. Credit is extended for all customers based on their financial
condition and collateral is generally not required.
CUSTOMER CONCENTRATIONS. Two customers accounted for 22.4% and one customer
accounted for 14.9% of net service revenue for the period ended November 30,
2002, and for the year ended December 31, 2001, respectively. Four customers
aggregated approximately 38.7% and 74.7% of gross accounts receivable at
November 30, 2002, and December 31, 2001, respectively.
11. SUBSEQUENT EVENTS
ITO ASSET PURCHASE AGREEMENT. Effective December 1, 2002, substantially all of
the assets of the Division were sold to ITO Acquisition Corp. ("ITO"), a wholly
owned subsidiary of ITO Holdings, LLC. As part of the transaction, ITO paid cash
for substantially all of the assets while assuming liabilities and certain
customer contracts, operating leases, and other contractual obligations.
Immediately prior to the sale, no material relationship existed between the
Division and ITO, any director or officer of ITO or any associate or any
director or officer.
INFOCROSSING ASSET PURCHASE AGREEMENT. During March, 2004, ITO Acquisition Corp.
entered into an agreement to sell substantially all of its assets to
Infocrossing, Inc. This agreement includes the sale of operating assets and
customer base of the Division. The agreement provided for total consideration of
approximately $36.5 million including cash and common stock of Infocrossing,
Inc.
12. LEGAL PROCEEDINGS
In conducting general business activities, the Division has been named as a
party to certain litigation matters. There is one proceeding that in the opinion
of management may result in an adverse judgment. Management has recorded a
$1,000,000 reserve for this proceeding. Payments of the claim from this matter,
if any, will be borne by SMS or its parent Marconi plc. There are no other legal
proceedings pending, threatened against or involving the Division, which, in the
opinion of management, will have a material adverse effect upon results of
operations or financial condition of the Division.
B-12
APPENDIX C
C-1
ACXIOM LOS ANGELES DATA CENTER
FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
JUNE 30, 2003, DECEMBER 31, 2002 AND 2001
C-2
Independent Auditors' Report
The Board of Directors of ITO Acquisition Corp.
We have audited the accompanying statements of assets, liabilities and affiliate
investment of Acxiom Los Angeles Data Center (a business unit of Acxiom
Corporation) as of June 30, 2003, December 31, 2002 and December 31, 2001, and
the related statements of operations and cash flows for the six months ended
June 30, 2003, and for the years ended December 31, 2002 and December 31, 2001.
These financial statements are the responsibility of the Division's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Acxiom Los Angeles Data Center
as of June 30, 2003, December 31, 2002 and 2001, and the results of its
operations and cash flows for the six months ended June 30, 2003 and for the
years ended December 31, 2002 and 2001, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Moore Stephens Wurth Frazer and Torbet, LLP
Orange, California
March 29, 2004
C-3
ACXIOM LOS ANGELES DATA CENTER
(A BUSINESS UNIT OF ACXIOM CORPORATION)
STATEMENTS OF ASSETS, LIABILITIES AND AFFILIATE INVESTMENT
ASSETS
June 30, December 31, December 31,
2003 2002 2001
------------------- ------------------- -------------------
CURRENT ASSETS
Cash and cash equivalents $ - $ - $ 10,000
Accounts receivable, net of allowance of
$90,000, $90,000, and $600,000 for 2003,
2002, and 2001, respectively 2,496,147 2,661,817 3,769,536
Current portion of notes receivable 125,702 85,000 572,000
Unbilled receivables 48,238 213,122 355,163
Prepaid expenses and other current assets 372,412 512,000 767,801
---------------- --------------- ----------------
Total current assets 3,042,499 3,471,939 5,474,500
---------------- --------------- ----------------
PROPERTY AND EQUIPMENT, NET 1,356,076 3,277,561 4,022,929
---------------- --------------- ----------------
OTHER ASSETS
Deposits 86,088 92,366 28,920
Software licenses 891,060 1,639,000 1,076,940
Goodwill 1,807,000 1,807,000 1,807,000
Migration deferral 399,741 779,784 1,587,749
Notes receivable - 126,000 77,000
---------------- --------------- ----------------
Total other assets 3,183,889 4,444,150 4,577,609
---------------- --------------- ----------------
TOTAL ASSETS $ 7,582,464 $ 11,193,650 $ 14,075,038
================ =============== ================
LIABILITIES AND AFFILIATE INVESTMENT
CURRENT LIABILITIES
Accounts payable $ 1,342,492 $ 1,433,265 $ 1,503,545
Accrued expenses 1,154,907 1,019,138 985,278
Deferred revenues 447,757 576,307 310,927
Current portion of capital lease obligations 325,785 283,540 302,083
---------------- --------------- ----------------
Total current liabilities 3,270,941 3,312,250 3,101,833
---------------- --------------- ----------------
LONG-TERM DEBT
Capital lease obligations, net of current portion 254,086 435,575 719,115
---------------- --------------- ----------------
Total liabilities 3,525,027 3,747,825 3,820,948
---------------- --------------- ----------------
AFFILIATE INVESTMENT 4,057,437 7,445,825 10,254,090
---------------- --------------- ----------------
COMMITMENTS AND CONTINGENCIES - - -
---------------- --------------- ----------------
TOTAL LIABILITIES AND
AFFILIATE INVESTMENT $ 7,582,464 $ 11,193,650 $ 14,075,038
================ =============== ================
The accompanying notes are an integral part of these financial statements.
C-4
ACXIOM LOS ANGELES DATA CENTER
(A BUSINESS UNIT OF ACXIOM CORPORATION)
STATEMENTS OF OPERATIONS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2003
AND THE YEARS ENDED DECEMBER 31, 2002 AND 2001
June 30, December 31, December 31,
2003 2002 2001
------------------ ----------------- ---------------
REVENUES $ 9,450,172 $ 20,862,734 $ 28,194,239
------------------ -------------------- -------------------
OPERATING EXPENSES
Hardware, software, and telecommunications 4,360,622 10,080,925 10,559,356
Salaries, wages, and related costs 4,520,824 10,029,275 10,242,515
Depreciation 946,923 2,066,856 1,836,293
General and administrative 128,400 307,800 355,200
Facility
costs 860,014 1,628,854 2,421,802
Amortization - - 571,981
---------------- ----------------- ---------------
TOTAL OPERATING EXPENSES 10,816,783 24,113,710 25,987,147
---------------- ----------------- ---------------
OTHER INCOME AND EXPENSES
Interest
income 7,365 30,722 70,640
Loss on abandonment of property and equipment (476,996) (427,414) (1,929,680)
Loss on impairment of property and equipment (536,753) - -
---------------- ----------------- ---------------
TOTAL OTHER INCOME AND EXPENSES (1,006,384) (396,692) (1,859,040)
---------------- ----------------- ---------------
(LOSS) INCOME BEFORE INCOME TAXES (2,372,995) (3,647,668) 348,052
INCOME TAXES - - -
---------------- ----------------- ---------------
NET (LOSS) INCOME $ (2,372,995) $ (3,647,668) $ 348,052
================ ================= ===============
The accompanying notes are an integral part of these financial statements.
C-5
ACXIOM LOS ANGELES DATA CENTER
(A BUSINESS UNIT OF ACXIOM CORPORATION)
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2003
AND THE YEARS ENDED DECEMBER 31, 2002 AND 2001
June 30, December 31, December 31,
2003 2002 2001
------------------ ------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (2,372,995) $ (3,647,668) $ 348,052
Adjustments to reconcile net (loss) income to
net cash flows from operating activities:
Depreciation and amortization 946,923 2,066,856 2,408,274
Loss on abandonment of property and equipment 476,996 427,414 1,929,680
Loss on impairment of property and equipment 536,753 - -
Changes in operating assets and liabilities:
Accounts receivable 165,670 1,107,719 286,218
Prepaid expenses and other assets 139,588 255,801 492,372
Unbilled receivables 164,884 142,041 (20,403)
Deposits 6,278 (63,446) 59,089
Software licenses 747,940 (562,060) (79,742)
Migration deferral 380,043 807,965 (965,256)
Notes
receivable 85,298 438,000 59,000
Accounts payable (90,773) (70,280) 841,597
Accrued expenses 135,769 33,860 (968,753)
Deferred revenues (128,550) 265,380 230,499
--------------- ---------------- -----------------
Net cash flows from operating activities 1,193,824 1,201,582 4,620,627
--------------- ---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (39,187) (1,748,902) (5,375,158)
--------------- ---------------- -----------------
Net cash flows from investing activities (39,187) (1,748,902) (5,375,158)
--------------- ---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (139,244) (302,083) 945,826
Net capital contributions (distributions) from
affiliate (1,015,393) 839,403 (214,092)
--------------- ---------------- -----------------
Net cash flows from financing activities (1,154,637) 537,320 731,734
--------------- ---------------- -----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS - (10,000) (22,797)
CASH AND CASH EQUIVALENTS, BEGINNING - 10,000 32,797
--------------- ---------------- -----------------
CASH AND CASH EQUIVALENTS, ENDING $ - $ - $ 10,000
=============== ================ =================
The accompanying notes are an integral part of these financial statements.
C-6
ACXIOM LOS ANGELES DATA CENTER
(A BUSINESS UNIT OF ACXIOM CORPORATION)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS. Acxiom Los Angeles Outsourcing Data Center ("the Division")
was a business unit of Acxiom Corporation operating data centers which provided
outsourced technology services to various companies from its offices in Woodland
Hills and Los Angeles, California. The Division also provided on-site support
personnel at customer locations when required.
BASIS OF PRESENTATION. The Division does not constitute a separate legal entity.
The financial statements of the Division present the operating results and the
financial position of the Los Angeles outsourcing data center of Acxiom
Corporation. The Division was dependent on Acxiom Corporation to fund its
working capital needs through June 2003. Effective July 1, 2003, the Division
was acquired by ITO Acquisition Corp. which assumed responsibility for funding
its operations.
Prior to the acquisition by ITO Acquisition Corp., no financial statements were
available with accounting and disclosures normally presented for a separate
legal entity. The financial statements have been prepared from the historical
accounting records of Acxiom Corporation and reflect the application of
allocation policies adopted by ITO Acquisition Corp. for various costs and
activities. All of the accounting judgments, estimations and allocations in
these financial statements are based on assumptions that the management of ITO
Acquisition Corp. believe are reasonable for purposes of preparing the
Division's financial statements. However, these allocations are estimates and
are not necessarily indicative of the costs that would have resulted had the
Division operated as a stand-alone, separate entity.
The financial statements of the Division have been prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission ("SEC") for inclusion in a Form 8-K to be filed by Infocrossing, Inc.
in connection with the acquisition of ITO Acquisition Corp. as described in note
10.
AFFILIATE INVESTMENT. The Division has been dependent upon Acxiom Corporation to
fund its working capital needs. All charges and allocations of costs for
functions and services provided by Acxiom Corporation are deemed paid by the
Division, in cash, in the period in which the cost is recorded in these
financial statements. Acxiom Corporation does not charge the Company interest on
its investment in the Company.
Changes in Acxiom Corporation investment in the Division were as follows:
Balance at December 31, 2000 $ 10,120,130
Net income 348,052
Net distributions to the Division (214,092)
---------------
Balance at December 31, 2001 10,254,090
Net loss (3,647,668)
Net advances from affiliate 839,403
---------------
Balance at December 31, 2002 7,445,825
Net loss (2,372,996)
Net distributions to the Division (1,015,392)
---------------
Balance at June 30, 2003 $ 4,057,437
===============
IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets consist of property and
equipment and purchased software. The Division reviews its long-lived assets for
impairment whenever events or business circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. The Division's assessment in 2003 of
the carrying value of it long-lived assets resulted in approximately $537,000 of
noncash charges for the write-down of capitalized costs related to leasehold
improvements.
PROPERTY AND EQUIPMENT. Property and equipment and purchased software are
recorded at cost. Depreciation and amortization are computed using the
straight-line method over estimated useful lives of 2 to 3 years for equipment
and furniture and the term of the underlying lease for leasehold improvements.
Maintenance and repairs are expensed as incurred.
C-7
ACXIOM LOS ANGELES DATA CENTER
(A BUSINESS UNIT OF ACXIOM CORPORATION)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
REVENUE RECOGNITION. The Division provides services under contracts with terms
ranging from hourly to several years. Revenue is recognized when services are
rendered based on hourly and hardware utilization rates specified in contracts.
Prepayments on contracts are recorded as deferred revenue on the accompanying
statement of assets, liabilities, and affiliate investment. Unbilled services on
contracts are recorded as unbilled receivables on the accompanying statement of
assets, liabilities, and affiliate investment.
INCOME TAXES. The Division does not file separate federal or state income tax
returns as Acxiom Corporation files consolidated tax returns that include the
operations of the Division. The Division has recorded its federal and state
current income tax provision on a stand-alone basis as if the Company files
separate tax returns. The Division records a current provision for income taxes
based upon amounts payable or refundable. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Due to historical net
losses of the Division, a valuation allowance is established to offset all
related deferred tax assets.
USE OF ESTIMATES. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The Division's significant
estimates primarily relate to the assessment of the required accounts receivable
allowance for doubtful accounts and fair value of long-lived assets.
Additionally, significant estimates include the allocation to the Division of
its share of certain general and administrative costs incurred by Acxiom
Corporation. Actual results could differ from those estimates.
GOODWILL. Goodwill is reviewed for impairment annually or whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable.
MIGRATION DEFERRAL. The Division incurs certain one-time expenses related to the
conversion of certain customers on technology outsourcing contracts. The costs
are amortized over the life of the contract.
2. NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force ("EITF") finalized its
tentative consensus on EITF Issue 00-21, "Revenue Arrangements with Multiple
Deliverables," which provides guidance on the measurement and allocation of
revenue from sales undertakings to deliver more than one product or service. The
Division adopted the provisions of EITF 00-21 effective July 1, 2003. The
adoption of this pronouncement did not have a significant impact on the
financial condition or results of operations of the Division.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145 "Rescission of Statements No. 4, 14 and 64, Amendment of FASB Statement No.
13 and Technical Corrections." ("FAS 145"). This Statement rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt," and an amendment of
that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." This Statement also rescinds SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers." This Statement amends SFAS
No. 13, "Accounting for Leases," to eliminate any inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. FAS 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. This Statement is
effective for fiscal years beginning after May 15, 2002. The adoption of this
statement did not have a significant impact on the financial condition or
results of operations of the Division.
C-8
ACXIOM LOS ANGELES DATA CENTER
(A BUSINESS UNIT OF ACXIOM CORPORATION)
NOTES TO FINANCIAL STATEMENTS
2. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." The
standard requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of commitment to an
exit or disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated with
restructuring, discontinued operations, plant closing, or other exit or disposal
activity. Previous accounting guidance was provided by EITF Issue No. 94-3,
"Liability Recognition for Certain Costs, Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 replaces EITF 94-3 and is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
The adoption of this statement did not have a significant impact on the
financial condition or results of operations of the Division.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). FIN 45 requires the recognition of certain
guarantees as liabilities at fair market value and is effective for guarantees
issued or modified after December 31, 2002. The Division has adopted the
disclosure requirement of FIN 45 and it did not have a significant impact on the
financial condition or results of operations of the Division.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148 "Accounting for Stock-Based Compensation -- Transition and Disclosure".
Effective for interim periods beginning after December 15, 2002, disclosure is
required for information on the fair value of stock options and the effect on
earnings per share (in tabular form) for both interim and annual reports. The
adoption of this statement did not have a significant impact on the financial
condition or results of operations of the Division.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51," effective February
1, 2003. Interpretation No. 46 requires the primary beneficiary of a variable
interest entity ("VIE") to consolidate the VIE under certain circumstances.
Interpretation No. 46 is effective for all new VIEs created or acquired after
January 31, 2003. For VIEs created or acquired prior to February 1, 2003,
Interpretation No. 46 must be applied for the first interim or annual period
beginning after December 15, 2003. The adoption of this pronouncement did not
have a significant impact on the financial condition or results of operations of
the Division.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting for derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The Division does not expect the adoption of SFAS No. 149 to have a
significant impact on the financial condition or results of operations of the
Division.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," which
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. For example, the Statement requires liability classification for a
financial instrument issued in the form of shares that are mandatorily
redeemable, e.g., includes an unconditional obligation requiring the issuer to
redeem it by transferring its assets at a specified or determinable date or
dates or upon an event that is certain to occur. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The Division does not expect the adoption of SFAS No. 150 to have a
significant impact on the financial condition or results of operations of the
Division.
C-9
ACXIOM LOS ANGELES DATA CENTER
(A BUSINESS UNIT OF ACXIOM CORPORATION)
NOTES TO FINANCIAL STATEMENTS
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Management evaluates accounts receivable periodically for potential
uncollectible receivables based on contractual due dates. Management estimated
the reserve for doubtful accounts to be $90,000 at June 30, 2003, as well as
$90,000 and $600,000 as of December 31, 2002 and 2001, respectively.
Balance at December 31, 2000 $ 1,350,000
Write-offs against the allowance (750,000)
---------------
Balance at December 31, 2001 600,000
Write-offs against the allowance (510,000)
---------------
Balance at December 31, 2002 90,000
Write-offs against the allowance -
---------------
Balance at June 30, 2003 $ 90,000
===============
4. PROPERTY AND EQUIPMENT
As of June 30, 2003, December 31, 2002 and 2001, property and equipment
consisted of the following:
June 30, December 31, December 31,
2003 2002 2001
Furniture and fixtures $ 103,998 $ 98,903 $ 8,006
Data processing equipment 1,592,720 2,974,407 3,587,032
Leasehold improvements 695,742 1,232,495 7,890
Equipment under capital lease obligations 1,169,058 1,169,058 1,169,058
Less accumulated depreciation and (569,771
amortization (1,595,119) (1,638,561) )
Less accumulated amortization of equipment
under capital lease obligations (610,323) (558,741) (179,286)
----------------- ---------------- -----------------
Property and equipment, net $ 1,356,076 $ 3,277,561 $ 4,022,929
================= ================ =================
5. ACCRUED EXPENSES
As of June 30, 2003, December 31, 2002 and 2001, accrued expenses consisted of
the following:
June 30, December 31, December 31,
2003 2002 2001
Accrued vacation and absences $ 735,208 $ 858,000 $ 735,000
Other accrued expenses 419,699 161,138 250,278
----------------- ----------------- -----------------
Total $ 1,154,907 $ 1,019,138 $ 985,278
================= ================= =================
C-10
ACXIOM LOS ANGELES DATA CENTER
(A BUSINESS UNIT OF ACXIOM CORPORATION)
NOTES TO FINANCIAL STATEMENTS
6. INCOME TAXES
The Division has incurred net operating losses for tax purposes in recent years.
The Division has not reflected any benefit of such net operating loss
carryforwards in the accompanying financial statements. The tax effects of
temporary differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities are as follows:
June 30, December 31, December 31,
2003 2002 2001
Federal net operating loss carryforward $ 3,229,000 $ 2,160,000 $ 371,000
Allowance for doubtful accounts 39,000 39,000 278,000
Accrued vacation 315,000 368,000 315,000
------------------ ------------------ -------------------
Deferred tax assets 3,583,000 2,567,000 964,000
Deferred state tax liability (151,000) (113,000) (56,000)
Valuation allowance (3,432,000) (2,454,000) (908,000)
------------------ ------------------ -------------------
Net deferred tax asset $ - $ - $ -
================== ================== ===================
The provision for income taxes differs from the expected tax expense, computed
by applying the federal corporate rate of 34% to earnings before income taxes as
follows:
June 30, December 31, December 31,
2003 2002 2001
Expected federal benefit at 34% $ 807,000 $ 1,240,000 $ 118,000
Amortization deduction of goodwill 97,000 194,000 -
State income taxes 74,000 112,000 16,000
Change in valuation allowance (978,000) (1,546,000) (134,000)
------------------ ------------------ -------------------
Net provision for income taxes $ - $ - $ -
================== ================== ===================
7. CAPITAL LEASES AND COMMITMENTS
The Division leases its facilities under non-cancelable operating lease
arrangements expiring through June 2009. The rental payments under these leases
are charged to expense as incurred. Total rent expense included in the
accompanying statements of operations was approximately $416,000 for the six
months ended June 30, 2003 and $492,000 and $360,000 for the years ended
December 31, 2002 and 2001, respectively.
The Division also leases certain equipment under operating leases that are
primarily related to data processing with monthly lease payments totaling
$31,884.
The following is a schedule of future minimum rental payments, excluding
property taxes and other operating expenses, required under all non-cancelable
operating leases:
Total Capital
Operating Lease Lease
Period ending December 31: Payments Payments
------------------- --------------------
2003 $ 628,527 $ 144,296
2004 1,335,082 435,575
2005 1,024,078 -
2006 877,012 -
2007 865,794 -
Thereafter 1,071,902 -
------------------- --------------------
Total minimum lease payments $ 5,802,395 $ 579,871
=================== ====================
C-11
ACXIOM LOS ANGELES DATA CENTER
(A BUSINESS UNIT OF ACXIOM CORPORATION)
NOTES TO FINANCIAL STATEMENTS
8. RETIREMENT PLAN
The Division has a retirement savings plan which covers substantially all
employees. The Division matches 50% of the employee's contributions under both
plans up to 6% annually and may contribute additional amounts to the plans from
the Division's earnings at the discretion of the board of directors.
9. BUSINESS CONCENTRATIONS AND CONTINGENCIES
CREDIT RISK. The Division provides services primarily to large commercial
corporations. Credit is extended based on an evaluation of the customer's
financial condition and collateral is generally not required.
CUSTOMER CONCENTRATIONS. For the six months ended June 30, 2003, three customers
accounted for 33% of revenues and three customers accounted for 33% of accounts
receivable. For the year ended December 31, 2002, two customers accounted for
22% of revenues and one customer accounted for 15% of accounts receivable. For
the year ended December 31, 2001, one customer accounted for 10% of revenues and
one customer accounted for 16% of accounts receivable.
10. SUBSEQUENT EVENTS
ITO ASSET PURCHASE AGREEMENT. Effective July 1, 2003, substantially all of the
assets used in the Division were sold to ITO Acquisition Corp. ("ITO"), a wholly
owned subsidiary of ITO Holdings, LLC. As part of the transaction, ITO paid
$6,684,049 in cash; assumed $1,589,000 in liabilities generated by the Division;
and assumed certain customer contracts, operating leases, and other contractual
obligations. Immediately prior to the sale, no material relationship existed
between the Division and ITO, any director or officer of ITO/Acxiom or any
associate of any director or officer.
INFOCROSSING ASSET PURCHASE AGREEMENT. During March 2004, ITO Acquisition Corp.
entered into an agreement to sell substantially all of its assets to
Infocrossing, Inc. This agreement includes the sale of operating assets and
customer base of the Division. The agreement provided for total consideration of
approximately $36.5 million including cash and common stock of Infocrossing,
Inc.
11. LEGAL PROCEEDINGS
In conducting general business activities, the Division has been named as a
party to certain litigation matters. There are no legal proceedings pending,
threatened against or involving the Division, which, in the opinion of
management, will have a material adverse effect upon results of operations or
financial condition of the Division.
C-12
APPENDIX D
UNAUDITED FINANCIAL STATEMENTS
OF ITO ACQUISITION CORPORATION
AS OF AND FOR THE QUARTER ENDED MARCH 31, 2004
D-1
ITO ACQUISITION CORPORATION
BALANCE SHEETS
MARCH 31, 2004 DECEMBER 31, 2003
------------------------- ---------------------------
ASSETS (UNAUDITED)
CURRENT ASSETS
Cash $ 330,064 $ 2,122,948
Restricted Cash 635,194 801,860
Accounts Receivable 3,313,018 3,560,810
Current portion of prepaid software licenses and other
prepaid expenses, net of accumulated amortization 1,389,780 1,052,412
- ------------------------------------------------------------------------------------------------------------------------------
Total current assets 5,668,056 7,538,030
- ------------------------------------------------------------------------------------------------------------------------------
EQUIPMENT AND IMPROVEMENTS
Equipment 6,133,688 5,428,792
Software 516,989 516,989
Furniture and fixtures 170,939 170,939
Leasehold improvements 106,165 106,165
- ------------------------------------------------------------------------------------------------------------------------------
6,927,781 6,222,885
Less accumulated depreciation and amortization (1,301,733) (865,556)
- ------------------------------------------------------------------------------------------------------------------------------
Equipment and improvements, net 5,626,048 5,357,329
- ------------------------------------------------------------------------------------------------------------------------------
Prepaid software licenses, net of current
portion and accumulated amortization 78,804 270,441
Goodwill 7,317,421 6,967,421
Other intangibles assets, net of accumulated
amortization of $535,000 (2004) and $415,000 (2003) 2,015,000 1,985,000
Deposits 157,553 157,553
- ------------------------------------------------------------------------------------------------------------------------------
$ 20,862,882 $ 22,275,774
==============================================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,031,681 $ 2,371,216
Other accrued expenses 2,650,298 2,593,510
Accrued compensation 986,302 1,343,790
Current portion of obligations under capital leases 1,614,370 1,615,195
Accrued license fee 249,319 41,214
Deferred revenue 87,449 87,449
- ------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 7,619,419 8,052,374
Obligations under capital leases, less current portion 3,074,711 2,934,506
Deferred liabilities 564,024 183,061
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 11,258,154 11,169,941
- ------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock (1,000,000 shares issued and
outstanding, no stated par value) 100 100
Additional paid-in capital 17,648,580 17,648,580
Accumulated deficit (8,043,952) (6,542,847)
- ------------------------------------------------------------------------------------------------------------------------------
Total stockholder's equity 9,604,728 11,105,833
- ------------------------------------------------------------------------------------------------------------------------------
$ 20,862,882 $ 22,275,774
==============================================================================================================================
See Notes to Unaudited Financial Statements
D-2
ITO ACQUISITION CORPORATION
STATEMENT OF OPERATIONS
(UNAUDITED)
FIRST QUARTER ENDED MARCH 31,
--------------------------------------------------
2004 2003
-------------------- -------------------
SERVICE REVENUES $ 8,389,638 $ 4,929,910
-------------------- -------------------
OPERATING EXPENSES
Salaries and related costs 3,934,239 2,368,780
Technology related costs 4,365,739 2,399,443
Facility costs 637,302 489,721
General and administrative expenses 330,624 194,313
Migration costs 401,346 -
Amortization of other intangible assets 120,000 -
-------------------- -------------------
Total operating expenses 9,789,249 5,452,257
-------------------- -------------------
OPERATING LOSS (1,399,611) (522,347)
Interest expense 101,494 12,487
-------------------- -------------------
LOSS BEFORE INCOME TAXES (1,501,105) (534,835)
INCOME TAXES - 800
-------------------- -------------------
NET LOSS $ (1,501,105) $ (535,635)
==================== ===================
See Notes to Unaudited Financial Statements
D-3
ITO ACQUISITION CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED) FIRST QUARTER ENDED MARCH 31,
-------------------------------------------------
2004 2003
------------------------ --------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,501,105) $ (535,635)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 556,177 62,552
Changes in assets and liabilities, net of effects from
acquisitions of businesses:
Accounts Receivables 184,849 261,210
Prepaid software licenses and other prepaid expenses (56,927) (279,709)
Accounts Payable (339,536) (51,388)
Accrued compensation (357,488) (426,665)
Licensing fee obligations 182,245 -
Other accrued expenses (93,213) (226,021)
Deferred rent 30,963 -
------------------------ --------------------
Net cash used in operating activities (1,394,035) (1,195,655)
------------------------ --------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment and improvements, net (125,707) (6,639)
------------------------ --------------------
Net cash used in investing activities (125,707) (6,639)
------------------------ --------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from capital contributions - 125,000
Principal payments on obligations under capital leases (439,808) (296,492)
------------------------ --------------------
Net cash provided by financing activities (439,808) (171,492)
------------------------ --------------------
Net (decrease) increase in cash (1,959,550) (1,373,786)
Cash and restricted cash, beginning of period 2,924,808 8,174,388
------------------------ --------------------
CASH AND RESTRICTED CASH, END OF PERIOD $ 965,258 $ 6,800,603
======================== ====================
See Notes to Unaudited Financial Statements
D-4
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The balance sheets as of March 31, 2004 and the statements of operations and
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 disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted. These unaudited interim financial statements
should be read in conjunction with the audited financial statements for the year
ended December 31, 2003.
The financial statements include the accounts of ITO Acquisition Corporation
(the "Company") including, subsequent to June 30, 2003, the results of
operations and net assets purchased from Acxiom Corporation.
2. ACQUISITION
On February 29, 2004 the Company purchased certain rights and assets and assumed
certain liabilities from Strategix, Ltd., a California corporation. The purchase
is summarized as follows:
Cash consideration $ -
Purchase price payable 500,000
Liabilities assumed -
Tangible and financial assets purchased -
Identifiable intangible asset purchased (150,000)
Goodwill recorded (350,000)
-----------------
$ -
=================
The initial purchase price payment of $150,000 will be made on June 28, 2004.
Additional payments of $350,000 will be made based upon operating results with a
maximum of $200,000 due on March 31, 2005 and a maximum of $150,000 due on March
31, 2006. Additional annual payments may be required until the total paid equals
$500,000.
3. SUBSEQUENT EVENT
On April 2, 2004, all the outstanding stock of the Company was purchased by
Infocrossing, Inc., a publicly traded company (NASDAQ - IFOX) located in Leonia,
New Jersey. It is anticipated that the Company will be operated as a subsidiary
of Infocrossing, Inc.
D-5
APPENDIX E
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
AS OF MARCH 31, 2004,
FOR THE QUARTER ENDED MARCH 31, 2004,
AND FOR THE YEAR ENDED DECEMBER 31, 2003
E-1
UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL INFORMATION
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 (the "SMS Acquisition"). The SMS Acquisition was effected pursuant to a
Stock Purchase Agreement, dated as of March 3, 2004 (the "Stock Purchase
Agreement"), between Holdings and us.
The following unaudited condensed combined pro forma Statement of Operations for
the year ended December 31, 2003 and the three month period ended March 31, 2004
give effect to the SMS Acquisition and to the acquisition of certain of the
assets, rights, properties, and assumed obligations of Acxiom Corporation by SMS
on June 30, 2003, as if they all had occurred on January 1, 2003. The following
unaudited condensed combined pro forma balance sheet at March 31, 2004 gives
effect to these transactions as if they had been completed as of March 31, 2004.
The acquisitions were accounted for under the purchase method of accounting.
Accordingly, the assets acquired and liabilities assumed have been recorded at
their estimated fair values at the date of the acquisition. The purchase price
has been allocated to the assets acquired and the liabilities assumed based upon
estimates of their respective fair values, which are subject to adjustment. The
Pro Forma Information has been prepared by our management.
The Pro Forma Information may not be indicative of the results that actually
would have occurred had the transactions been in effect on the dates indicated,
nor does it purport to indicate the results that may be obtained in the future.
The Pro Forma Information should be read in conjunction with the financial
statements and notes thereto of SMS, Acxiom Los Angeles Data Center, and the
West Coast Division of Systems Management Specialists appearing as appendices A
through D in this Report and our Quarterly Report on Form 10-Q for the quarter
ended March 31, 2004 and our Annual Report on Form 10-K for the year ended
December 31, 2003.
The accompanying Pro Forma Statements of Operations do not give effect to
planned synergies and cost savings. For example, we expect to achieve annual
cost savings of $3.5 million through the elimination of redundant positions.
E-2
UNAUDITED CONDENSED COMBINED PRO FORMA BALANCE SHEET
AS OF MARCH 31, 2004
(IN THOUSANDS)
ITO
INFOCROSSING, ACQUISITION PRO FORMA PRO FORMA
INC. (A) CORP (B) ADJUSTMENTS COMBINED
----------------- ---------------- --------------- ----------------
ASSETS
CURRENT ASSETS:
Cash, cash equivalents, and restricted cash $ 39,553 $ 965 $ (20,134) (H) $ 20,384
Trade accounts receivable, net of allowances for
doubtful accounts 4,400 3,313 7,713
Prepaid expenses and other current assets 3,867 1,390 5,257
----------------- ---------------- --------------- ----------------
47,820 5,668 (20,134) 33,354
PROPERTY AND EQUIPMENT, NET 17,419 5,626 (1,593) (I) 21,452
----------------- ---------------- --------------- ----------------
OTHER ASSETS:
Deferred software, net 1,157 - - 1,157
Goodwill 28,361 7,318 31,968 (O) 67,647
Other intangible assets, net 707 2,015 (365) (J) 2,357
Security deposits and other non-current assets 2,270 236 655 (K) 3,161
----------------- ---------------- --------------- ----------------
32,495 9,569 32,258 74,322
----------------- ---------------- --------------- ----------------
TOTAL ASSETS $ 97,734 $ 20,863 $ 10,531 $ 129,128
================= ================ =============== ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 3,250 $ 2,032 $ - $ 5,282
Current portion of notes payable, long-term debt
and capitalized lease obligations 2,329 1,614 (85) (L) 3,858
Current portion of accrued loss on leased facilities 207 - - 207
Accrued expenses 2,185 3,886 3,236 (M) 9,307
Current deferred revenue 1,319 87 - 1,406
----------------- ---------------- --------------- ----------------
9,290 7,619 3,151 20,060
LONG-TERM LIABILITIES:
Notes payable 24,875 - 15,000 (Q) 39,875
Other long-term debt and capitalized leases 772 3,075 126 (L) 3,973
Accrued loss on leased facilities, net of current portion 674 - - 674
Deferred revenue, net of current portion 21 - - 21
Other long-term liabilities 975 564 - 1,539
----------------- ---------------- --------------- ----------------
TOTAL LIABILITIES 36,607 11,258 18,277 66,142
----------------- ---------------- --------------- ----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock 188 - 1 (N) 189
Additional paid-in capital 139,372 17,649 (15,791) (N) 141,230
Accumulated Deficit (75,295) (8,044) 8,044 (N) (75,295)
----------------- ---------------- --------------- ----------------
64,265 9,605 (7,746) 66,124
Less common stock held in treasury, at cost (3,138) - - (3,138)
----------------- ---------------- --------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 61,127 9,605 (7,746) 62,986
----------------- ---------------- --------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 97,734 $ 20,863 $ 10,531 $ 129,128
================= ================ =============== ================
See accompanying notes to unaudited condensed combined
pro forma financial information.
E-3
UNAUDITED CONDENSED COMBINED PRO FORMA INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2003
(IN THOUSANDS)
INFOCROSSING, ITO ACQUISITION ACXIOM PRO FORMA
INC. (C) CORP (D) DIVISION (E) ADJUSTMENTS PRO FORMA COMBINED
----------------- ------------------ ----------------- ------------------ -------------------
Revenues $ 55,228 $ 26,867 $ 9,450 $ - $ 91,545
--------------- ---------------- --------------- --------------- -----------------
Costs of revenue, excluding
depreciation shown below 36,706 26,845 9,741 - 73,292
Selling, general & administrative
expenses 8,565 763 128 - 9,456
Non-recurring costs:
Migration costs - 4,078 - - 4,078
Losses on impairment and
abandonment - - 1,014 - 1,014
Depreciation and amortization 6,061 1,276 947 (786) (P) 7,498
--------------- ---------------- --------------- --------------- -----------------
51,332 32,962 11,830 (786) 95,338
--------------- ---------------- --------------- --------------- -----------------
Operating income (loss) 3,896 (6,095) (2,380) 786 (3,793)
Net interest expense (income) 2,498 212 (7) 1,353 (Q) 4,056
--------------- ---------------- --------------- --------------- -----------------
Income (loss) before income
tax expense (benefit) 1,398 (6,307) (2,373) (567) (7,849)
Income tax expense 42 2 - - 44
--------------- ---------------- --------------- --------------- -----------------
Net income (loss) 1,356 (6,309) (2,373) (567) (7,893)
Accretion and dividends on
redeemable preferred stock (6,877) - - - (6,877)
--------------- ---------------- --------------- --------------- -----------------
Net loss to common stockholders $ (5,521) $ (6,309) $ (2,373) $ (567) $ (14,770)
=============== ================ =============== =============== =================
Basic and diluted net loss to
common
stockholders per share $ (0.71) $ (1.88)
=============== =================
Weighted average common
shares outstanding 7,730 136 (R) 7,866
=============== =============== =================
See accompanying notes to unaudited condensed combined
pro forma financial information.
E-4
UNAUDITED CONDENSED COMBINED PRO FORMA INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(IN THOUSANDS)
ITO
INFOCROSSING, ACQUISITION PRO FORMA PRO FORMA
INC. (E) CORP (F) ADJUSTMENTS COMBINED
----------------- ----------------- ----------------- ------------------
Revenues $ 15,176 $ 8,390 $ - $ 23,566
--------------- --------------- -------------- ----------------
Costs of revenue, excluding depreciation shown below 10,223 6,461 - 16,684
Selling, general & administrative expenses 2,113 2,772 - 4,885
Depreciation and amortization 1,593 556 (219) (P) 1,930
--------------- --------------- -------------- ----------------
13,929 9,789 (219) 23,499
--------------- --------------- -------------- ----------------
Operating income (loss) 1,247 (1,399) 219 67
Net interest expense 665 102 267 (Q) (1,034)
--------------- --------------- -------------- ----------------
Income (loss) before income tax expense (benefit) 582 (1,501) (48) (967)
Income tax expense (benefit) (193) - - (193)
--------------- --------------- -------------- ----------------
Net income (loss) $ 775 $ (1,501) $ (48) $ (774)
=============== =============== ============== ================
Basic net income to common stockholders per share $ 0.05 $ (0.05)
=============== ================
Weighted average common shares outstanding 15,193 136 (R) 15,329
=============== ============== ================
Diluted net income to common stockholders per share $ 0.05 $ (0.05)
=============== ================
Weighted average common shares and equivalents
outstanding 17,146 136 (R) 15,329
=============== ============== ================
See accompanying notes to unaudited condensed combined
pro forma financial information.
E-5
NOTES TO UNAUDITED CONDENSED COMBINED
PRO FORMA FINANCIAL INFORMATION
(DOLLAR AMOUNTS IN THOUSANDS)
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 $34,919
in cash and 135,892 shares of our common stock valued at approximately $1,859
(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.
We recorded an estimated $1,442 in accrued fees and costs related to the
acquisition. The assets and liabilities of SMS were adjusted as discussed in the
following Notes, resulting in goodwill of $39,305.
We and our lender amended and restated a 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 $25,000 and a Term Loan B facility with a maximum borrowing
of $15,000. On April 2, 2004, we borrowed $15,000 from the Term Loan B facility
and received $14,785 net of loan origination costs of $215. We incurred an
additional $440 in estimated accrued legal and other professional fees in
connection with the Term Loan B facility. The total deferred loan costs and fees
of $655, will be expensed over the 54-month term of Term Loan B facility. 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 plus monthly principal payments of $312.5 beginning in
December 2004.
(A) Reflects our unaudited condensed consolidated balance sheet as of March 31,
2004.
(B) Reflects the unaudited condensed balance sheet of ITO Acquisition
Corporation as of March 31, 2004.
(C) Reflects our consolidated condensed statement of operations for the year
ended December 31, 2003.
(D) Reflects the condensed statement of operation of ITO Acquisition
Corporation for the year ended December 31, 2003 which includes the
operations of Acxiom from June 30, 2003, the date ITO Acquisition
Corporation acquired certain of the assets, rights, and properties and
assumed certain obligations of Acxiom Los Angeles Outsourcing Data Center
from Acxiom Corporation.
(E) Reflects the Statement of Operations of Acxiom Los Angeles Data Center for
the six months ended June 30, 2003.
(F) Reflects our unaudited condensed consolidated statement of operations for
the three months ended March 31, 2004.
E-6
NOTES TO UNAUDITED CONDENSED COMBINED
PRO FORMA FINANCIAL INFORMATION
(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
(G) Reflects the unaudited condensed statement of operations of ITO Acquisition
Corporation for the three months ended March 31, 2004.
(H) To record the cash paid for the SMS Acquisition and proceeds from Term Loan
B facility:
Cash paid for SMS Acquisition $ (34,919)
Proceeds from Term Loan B facility 14,785
--------
$ (20,134)
========
(I) To adjust by 1,593 the historical costs for certain items of equipment and
software acquired to reflect their estimated fair value.
(J) To adjust customer list to its fair value.
Customer list at net historical value $ 2,015
Customer list at its fair value (1) 1,650
---------------
$ (365)
===============
(1) Based on a valuation performed by us.
(K) To record deferred financing costs in connection with Term Loan B facility.
(L) To adjust capital leases as follows:
Current Long-term
Portion Portion
---------------------------
Reclassify amount from current to long-term $ (58) $ 58
Increase obligation to reflect amount due - 68
Reclassify portion to accrued expenses (27) -
----------- ------------
$ (85) $ 126
=========== ============
E-7
NOTES TO UNAUDITED CONDENSED COMBINED
PRO FORMA FINANCIAL INFORMATION
(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
(M) To adjust accrued expenses as follows:
Fees and costs related to SMS Acquisition $ 1,442
Legal and professional fees incurred in connection with
Term Loan B facility 440
Accrual for severance and retention bonuses (2) 659
Accrual for facilities and assets (3) 668
Reclassification of capital lease obligation (see note L) 27
------------
$ 3,236
============
(2) Represents costs related to the termination of employees of ITO
Acquisition Corporation in accordance with EITF 95-3 "Recognition of
Liabilities in Connection with a Purchase Business Combination". Our
management has formulated a plan and expects to have it completed
within one year of the date of acquisition.
(3) Represents costs in accordance with EITF 95-3 that the Company is
contractually obligated for but do not provide an economic benefit or
associated with generating revenues subsequent to the acquisition
date.
(N) To record the issuance of 135,892 shares of our common stock at $13.68 per
share and elimination of acquiree's historical equity in connection the SMS
Acquisition:
Common Additional Accumulated
Stock Paid-in-capital Deficit
--------------------------------------------
Pre-acquisition balance $ - $ (17,649) $ (8,044)
of SMS
Issuance of common stock 1 1,858 -
-------- ------------ ------------
$ 1 $ (15,791) $ (8,044)
======== ============ ============
E-8
NOTES TO UNAUDITED CONDENSED COMBINED
PRO FORMA FINANCIAL INFORMATION
(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
(O) To record adjustment to goodwill.
Purchase Price:
Cash $ (34,919)
Common stock issued (1,859)
Fees and costs (1,442) $ (38,220)
----------
Tangible assets acquired and liabilities
assumed (net of adjustments):
Cash and equivalents $ 330
Trade accounts receivable 3,313
Prepaid expenses and other current assets 2,025
Property and equipment 4,033
Other assets 236
Accounts payable (2,032)
Accrued expenses (3,913)
Capital leases (4,730)
Deferred revenue (87)
Other liabilities (564)
Accrual for severance and redundant facilities (1,327) (2,716)
----------
----------
(40,936)
Less balance allocated to customer lists 1,650
----------
Total Goodwill (39,286)
Pre-existing Balance 7,318
----------
Adjustment $ (31,968)
==========
E-9
NOTES TO UNAUDITED CONDENSED COMBINED
PRO FORMA FINANCIAL INFORMATION
(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
(P) Depreciation and amortization expense was adjusted for a reduction in
customer lists as a result of purchase price allocation discussed in Note
J, increase customer list amortization expense (six months) relating to the
assumed acquisition of Acxiom by SMS, and reduced depreciation expense
relating to the reduction in fixed asset fair values discussed in Note I.
Year Ended Three Months
December Ended March
31, 2003 31,02004
------------------------
Fixed asset depreciation reduction $ (726) $ (181)
Amortization of customer list
related to the Acxiom acquisition 90 -
SMS customer list amortization reduction (150) (38)
----------------------
$ (786) $ (219)
======================
(Q) To record borrowing under the Term Loan B facility of $15,000 in connection
with the SMS Acquisition, and the related additional interest expense,
taking into account assumed principal payments of $312 per month beginning
August 1, 2003 (the eighth month following the assumed acquisition date of
January 1, 2003) and amortization of related deferred financing costs as
follows:
Year Ended Three Months
December Ended March
31, 2003 31,02004
---------------------------
Interest expense (9% per annum) $ 1,207 $ 230
Amortization of deferred financing costs 146 37
-------- --------
$ 1,353 $ 267
======== ========
(R) To record the additional shares issued to Holdings in connection with the
SMS Acquisition.
The pro forma loss per share is based on 7,866 and 15,329 weighted average
shares outstanding for the year ended December 31, 2003 and the three
months ended March 31, 2004, respectively, reflect the shares issued in
connection with the SMS Acquisition, as if such shares were outstanding
beginning January 1, 2003.
E-10