EXHIBIT 99.2
RISK FACTORS
You should carefully consider the following risk factors and warnings
before making an investment decision. If any of the following risks actually
occur, our business, financial condition, results of operations and prospects
could be materially and adversely affected. In such case, you may lose all or
part of your investment. You should also refer to the other information set
forth, including the annexes, or incorporated by reference in this offering
memorandum, including our consolidated financial statements and the related
notes included elsewhere in this offering memorandum and in the annexes to this
offering memorandum.
This offering memorandum and the documents included and incorporated by
reference herein, including the annexes, also contain forward-looking statements
that involve risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including the risks faced by us described below and elsewhere
in this offering memorandum.
RISKS RELATED TO OUR BUSINESS
LOSS OF MAJOR CLIENTS COULD REDUCE OUR REVENUES AND CAUSE ADDITIONAL LOSSES FOR
OUR BUSINESS.
Our customers include commercial enterprises, institutions, and
government agencies. For the three months ended March 31, 2004 and for the year
ended December 31, 2003, one client, ADT Security Services, Inc., accounted for
more than 10% of our consolidated revenue. For the years ended December 31, 2002
and December 31, 2001, two clients, ADT and Alicomp, a division of Alicare,
Inc., each accounted for more than 10% of our consolidated revenue. For both the
two-month period ended December 31, 2000 and the fiscal year ended October 31,
2000, Alicomp and International Masters Publishers, Inc. each accounted for in
excess of 10% of our consolidated revenue.
Our success depends substantially upon the retention of our major
customers as clients. Generally, we may lose a client as a result of a contract
expiration, merger or acquisition, business failure, or the selection of another
provider of information technology services. We cannot be sure that we will be
able to retain long-term relationships or secure renewals of short-term
relationships with ADT or our other major clients in the future.
OUR CONTRACTS CONTAIN TERMINATION PROVISIONS AND PRICING RISKS THAT COULD CAUSE
US TO LOSE OUR IT OUTSOURCING CONTRACTS OR LOSE MONEY ON OUR REMAINING IT
OUTSOURCING CONTRACTS.
Many of our IT outsourcing contracts with clients permit termination
upon ninety days notice and payment of an early termination fee. The ability of
our clients to terminate contracts creates an uncertain revenue stream. If
clients are not satisfied with our level of performance, pricing or other
attributes, our reputation in the IT outsourcing industry may suffer, which may
also materially and adversely affect our business, financial condition and
results of operations.
Some of our contracts contain pricing provisions that require the
payment of a set fee by the client for our services regardless of the costs we
incur in performing these services and/or provide for penalties in the event we
fail to achieve certain contract standards. These pricing provisions,
particularly in the case of long-term outsourcing agreements, require us to make
estimates and assumptions at the time we enter into the contracts that could
differ from actual results. These estimates may not necessarily reflect the
actual costs to provide the contracted services. Any increased or unexpected
costs or unanticipated delays in the performance of these engagements, including
delays caused by factors out of our control, could cause us to lose money on
these fixed price contracts and the losses could be material.
WE OPERATE IN HIGHLY COMPETITIVE MARKETS IN THE IT OUTSOURCING INDUSTRY WHICH
COULD CAUSE US TO LOSE EXISTING CUSTOMERS OR PREVENT US FROM OBTAINING NEW
CUSTOMERS.
We operate in highly competitive markets in the IT outsourcing
industry. Our current and potential competitors include other independent
computer service companies and divisions of diversified enterprises, as well as
the internal information technology departments of existing and potential
customers. Among the most significant of our competitors are IBM Corporation,
Electronic Data Systems Corporation, Affiliated Computer Services, Inc.,
Computer Sciences Corp. and SunGard Data Systems, Inc.
In general, the IT outsourcing services industry is fragmented, with
numerous companies offering services in limited geographic areas, vertical
markets, or product categories. Many of our larger competitors have
substantially greater financial and other resources than we do. We compete on
the basis of a number of factors, including price, quality of service,
technological innovation, breadth of services offered and responsiveness. Some
of these factors are beyond our control. For example, our larger competitors may
be able to enter into agreements with software licensors on more favorable terms
than us because the cost of software licensing depends on usage.
We cannot be sure that we will be able to compete successfully against
our competitors in the future. If we fail to compete successfully against our
current or future competitors with respect to these or other factors, our
business, financial condition, and results of operations will be materially and
adversely affected.
CHANGES IN TECHNOLOGY IN THE IT OUTSOURCING INDUSTRY COULD CAUSE OUR BUSINESS TO
LOSE MONEY OR COULD REQUIRE US TO INVEST ADDITIONAL CAPITAL IN NEW TECHNOLOGY.
The markets for our services change rapidly because of technological
innovation, new product and service introductions, and changes in customer
requirements, among other factors. New products and services and new technology
often render existing information services or technology infrastructure
obsolete, costly, or otherwise unmarketable. For example, the introduction of
new software applications for a particular computer platform will make other
computer platforms less attractive to companies desiring to use the new
applications. As a result, our success depends on our ability to timely innovate
and integrate new technologies into our service offerings. We cannot be sure
that we will be successful at adopting and integrating new technologies into our
service offerings in a timely manner.
Advances in technology also require us to expend substantial resources
to acquire and utilize new technologies in our business. We must continue to
commit resources to train our personnel in the use of these new technologies. We
must also continue to train personnel to maintain the compatibility of existing
hardware and software systems with these new technologies. We cannot be sure
that we will be able to continue to commit the resources necessary to update our
technology infrastructure at the rate demanded by our markets.
OUR SYSTEMS AND PROCESSES ARE NOT PROTECTED BY PATENTS OR BY REGISTERED
COPYRIGHTS, TRADEMARKS, TRADE NAMES OR SERVICE MARKS AND AS A RESULT, OUR
COMPETITORS MAY BE ABLE TO USE OUR SYSTEMS AND PROCESSES TO COMPETE AGAINST US
AND HURT OUR BUSINESS.
We believe that because of the rapid pace of technological change in
the computer industry, copyright and other forms of intellectual property
protection are of less significance than factors such as the knowledge and
experience of management and other personnel, and our ability to develop,
enhance, market, and acquire new systems and services. As a result, our systems
and processes are not protected by patents or by registered copyrights,
trademarks, trade names, or service marks. To protect our proprietary services
and software from illegal reproduction, we rely on certain mechanical techniques
in addition to trade secret laws, restrictions in certain of our customer
agreements with respect to use of our services and disclosure to third parties,
and internal non-disclosure safeguards, including confidentiality restrictions
with certain employees. Despite these efforts, it may be possible for our
competitors or clients to copy aspects of our trade secrets. This could have a
material adverse effect on our business, financial condition, and results of
operations.
INTELLECTUAL PROPERTY LITIGATION COULD CAUSE US TO LOSE MONEY AND LOWER OUR
STANDING IN THE IT OUTSOURCING INDUSTRY.
In recent years, there has been significant litigation in the United
States involving patent and other intellectual property rights. We are not
currently involved in any material intellectual property litigation. We may,
however, be a party to intellectual property litigation in the future to protect
our trade secrets or know-how.
Our suppliers, customers, and competitors may have patents and other
proprietary rights that cover technology employed by us. Such persons may also
seek patents in the future. Due to the confidential nature of United States
patent applications, we are not aware of all patents or other intellectual
property rights of which our services may pose a risk of infringement. Others
asserting rights against us could force us to defend ourselves against alleged
infringement of intellectual property rights. We could incur substantial costs
to prosecute or defend any such litigation, and intellectual property litigation
could force us to do one or more of the following:
o cease selling or using services that incorporate the challenged
technology;
o redesign those services that incorporate the challenged technology;
and
o obtain from the holder of the infringed intellectual property right a
license to sell or use the relevant technology, which may require us to pay
royalties, which could be substantial.
In addition, we generally agree in our contracts to indemnify our
clients for any expenses or liabilities they may incur resulting from claimed
infringements of the intellectual property rights of third parties. In some
instances, the amount of these indemnities may be greater than the revenues we
receive from the client.
Furthermore, any ongoing intellectual property litigation could cause
us to lose customers and harm our reputation within the IT outsourcing industry.
FAILURE TO PROPERLY MANAGE GROWTH COULD CAUSE OUR BUSINESS TO LOSE MONEY.
We have expanded our operations rapidly in recent years. We intend to
expand our operations in the foreseeable future to pursue existing and potential
market opportunities. This growth places a significant demand on management and
operational resources. In order to manage growth effectively, we must implement
and improve our operational systems and controls on a timely basis. If we fail
to implement these systems and controls, our business, financial condition, and
results of operations will be materially and adversely affected.
ACQUISITIONS WE MAKE MAY NOT PROVIDE EXPECTED BENEFITS AND COULD POSSIBLY RESULT
IN A LOSS OF MONEY AND RESOURCES.
We intend to consider selective acquisition opportunities going forward
such as our recent acquisition of SMS. Therefore, we may acquire businesses or
technologies in the future that we believe are a strategic fit with our
business. These acquisitions may result in unforeseen operating difficulties and
expenditures and may absorb significant management attention that would
otherwise be available for ongoing development of our business. In addition, the
integration of businesses or technologies may prove to be more difficult than
expected, and we may be unsuccessful in maintaining and developing relations
with the employees, customers and business partners of acquisition targets.
Since we will not be able to accurately predict these difficulties and
expenditures, it is possible that these costs may outweigh the value we realize
from the acquisitions. Future acquisitions could also result in issuances of
equity securities that would reduce our stockholders' ownership interest, the
incurrence of debt, contingent liabilities, deferred stock based compensation or
expenses related to the valuation of goodwill or other intangible assets and the
incurrence of large, immediate write-offs.
LOSS OF KEY PERSONNEL COULD CAUSE OUR BUSINESS TO LOSE MONEY OR CAUSE US TO
INVEST CAPITAL TO REPLACE SUCH PERSONNEL.
Our success depends largely on the skills, experience, and performance
of some key members of our management, including our Chairman and Chief
Executive Officer, Zach Lonstein. The loss of any key members of our management
may materially and adversely affect our business, financial condition, and
results of operations. In addition, loss of key members of management could
require us to invest capital to search for a suitable replacement. Such a search
could serve as a distraction to the remaining members of management preventing
them from focusing on the ongoing development of our business which, in turn,
could cause us to lose money.
OUR BUSINESS DEPENDS ON OUR ABILITY TO RECRUIT, TRAIN, AND RETAIN SKILLED
PERSONNEL TO PERFORM IT OUTSOURCING SERVICES; OUR FAILURE TO DO SO COULD
INCREASE OUR COSTS AND LIMIT OUR GROWTH.
We must continue to grow by hiring and training technically-skilled
people in order to perform services under our existing contracts and new
contracts that we will enter into. The people capable of filling these positions
are in great demand and recruiting and training qualified personnel require
substantial resources. Our business also experiences significant turnover of
technically-skilled people. If we fail to attract, train, and retain sufficient
numbers of these technically-skilled people, our business, financial condition,
and results of operations will be materially and adversely affected.
WE MAY HAVE DIFFICULTY ACHIEVING AND SUSTAINING PROFITABILITY AND MAY EXPERIENCE
ADDITIONAL LOSSES IN THE FUTURE.
From the fourth quarter of 1999 through the third quarter of 2003, we
incurred significant net losses. As of March 31, 2004, we had an accumulated
deficit of approximately $75.3 million, although we had positive net worth of
approximately $61.1 million. For the two quarters ended March 31, 2004, we had
net income totaling approximately $2.0 million. The quarters ended December 31,
2003 and March 31, 2004, respectively, were the first quarters of positive
earnings after sixteen consecutive quarters of net losses. There is no assurance
that we will generate positive net income in the future.
WE MAY NOT BE ABLE TO RAISE ADDITIONAL CAPITAL ON TERMS THAT ARE ACCEPTABLE TO
US, WHICH COULD LIMIT OUR GROWTH.
We may need to raise additional capital to develop or enhance our
technologies, to fund expansion, or to acquire complementary products,
businesses or technologies. Additional financing may not be available on terms
that are acceptable to us. If we raise additional funds through the issuance of
equity securities or securities convertible into or exercisable for equity
securities, the percentage ownership of our other stockholders would be reduced.
Additionally, these securities might have rights, preferences and privileges
senior to those of our current stockholders. If adequate funds are not available
on terms acceptable to us, our ability to develop and enhance our services, fund
expansion, and otherwise take advantage of unanticipated opportunities would be
significantly limited.
VARIABILITY OF QUARTERLY OPERATING RESULTS.
We expect our revenues and operating results to vary from quarter to
quarter. These variations are likely to be caused by many factors that are, to
some extent, outside our control, including the addition or loss of customers
and the time in the quarter that an addition or loss occurs; variability of fees
and expenses with respect to contractual arrangements when our fees are not
fixed; and an increase in depreciation or amortization because of the
acquisition of new equipment or software licenses and one time non-recurring and
unusual charges whether incurred in the ordinary course of business or not.
Accordingly, we believe that quarter-to-quarter comparisons of operating results
for preceding quarters are not necessarily meaningful. You should not rely on
the results of one quarter as an indication of our future performance.
RISKS RELATED TO THIS OFFERING
WE HAVE BROAD DISCRETION IN HOW WE USE THE NET PROCEEDS FROM THIS OFFERING AND
MAY USE THEM IN WAYS WITH WHICH YOU DISAGREE.
We plan to use the net proceeds from this offering to enhance our
liquidity and for other working capital needs and general corporate purposes,
including, without limitation, to fund potential acquisitions or to potentially
retire debt. Therefore, we will have discretion as to how we allocate the
proceeds, which could be in ways with which the noteholders and shareholders may
not agree. We cannot predict that the proceeds will be invested to yield a
favorable return. Because the proceeds are not required to be allocated to any
specific investment or transaction, you cannot determine the value or propriety
of our management's application of the proceeds on our behalf. See "Use of
Proceeds."
THE NOTES WILL NOT CONTAIN FINANCIAL COVENANTS, OTHER THAN A COVENANT LIMITING
THE INCURRENCE OF ADDITIONAL INDEBTEDNESS BY US AND THERE IS LIMITED PROTECTION
IN THE EVENT OF A CHANGE OF CONTROL.
The indenture will not contain any financial covenants, other than the
limitation on the incurrence of additional indebtedness described under
"--Covenant Limiting the Incurrence of Additional Indebtedness." In particular,
the indenture will not contain covenants that will limit our ability to pay
dividends or make distributions on or redeem our capital stock and, therefore,
protect you in the event of a highly leveraged transaction or other similar
transaction. In addition, the requirement that we offer to repurchase the notes
upon a change of control is limited to the transactions specified in the
definition of a "change of control" under "Description of Notes--Repurchase at
Option of Holders--Change of Control Put." Accordingly, we could enter into
certain transactions, such as acquisitions, refinancings or a recapitalization,
that could affect our capital structure and the value of our common stock but
would not constitute a change of control.
OUR ABILITY TO REPURCHASE THE NOTES WITH CASH UPON A CHANGE OF CONTROL MAY BE
LIMITED.
In certain circumstances involving a change of control of Infocrossing,
you may require us to repurchase all or a portion of your notes to the extent
set forth in this offering memorandum. If a change in control were to occur, we
cannot assure you that, if required, we will have sufficient cash or other
financial resources at that time or would be able to arrange financing to pay
the repurchase price of the notes in cash. Our ability to repurchase the notes
in that event may be limited by law, by the indenture, by the terms of other
agreements relating to our senior debt and by indebtedness and agreements that
we may enter into in the future which may replace, supplement or amend our
existing or future debt. If a change in control occurs at a time when we are
prohibited from repurchasing or redeeming the notes, we could seek the consent
of lenders to repurchase the notes or could attempt to refinance the borrowings
that contain this prohibition. If we do not obtain a consent or refinance these
borrowings, we could remain prohibited from repurchasing the notes. Our failure
to repurchase the notes would constitute an event of default under the indenture
under which we will issue the notes, which might constitute a default under the
terms of our other indebtedness at that time.
THE MAKE WHOLE PREMIUM PAYABLE ON NOTES CONVERTED IN CONNECTION WITH, OR
TENDERED FOR REPURCHASE UPON, A CHANGE OF CONTROL MAY NOT ADEQUATELY COMPENSATE
YOU FOR THE LOST OPTION TIME VALUE OF YOUR NOTES AS A RESULT OF SUCH CHANGE OF
CONTROL.
If a change of control occurs on or prior to July 15, 2009, under
certain circumstances, we will pay a make whole premium on notes converted in
connection with, or tendered for repurchase upon, such change of control. The
amount of the make whole premium will be determined based on the date on which
the change of control becomes effective and the price paid per share of our
common stock in the transaction constituting the change of control, as described
below under "Description of the Notes -- Determination of the Make Whole
Premium." Although the make whole premium is designed to compensate you for the
lost option time value of your notes as a result of such change of control, the
amount of the make whole premium is only an approximation of such lost value and
may not adequately compensate you for such loss. In addition, if a change of
control occurs on or after July 15, 2009 or if the price paid per share of our
common stock in the transaction constituting the change of control is greater
than 246.5% of the conversion price or less than 81.6% of the conversion price
on the date of pricing of the notes, no make whole premium will be paid.
THE NOTES AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THE NOTES WILL BE
RESTRICTED.
The notes, and the common stock issuable upon conversion of the notes,
have not been registered under the Securities Act. Accordingly, the notes
offered hereby may only be offered or sold pursuant to an exemption from the
registration requirements of the Securities Act or pursuant to an effective
registration statement. We are required to register resales of the notes and the
common stock issuable upon conversion of the notes under the Securities Act,
within certain time periods set forth in this document. If the shelf
registration statement is not declared effective, the liquidity and price of the
notes and common stock issuable upon conversion of the notes would be adversely
affected.
YOUR RIGHT TO FULLY CONVERT NOTES MAY BE LIMITED.
Because you may only convert notes to the extent that you will not
beneficially own, immediately prior to such conversion, more than 19.9% of our
outstanding shares of common stock, you may not be able to fully convert your
notes.
THERE IS NO ESTABLISHED TRADING MARKET FOR THE NOTES AND WE WILL NOT SEEK TO
HAVE THE NOTES RATED.
In addition, the registration statement may not be available to holders
at all times, and selling security holders may be subject to certain
restrictions and potential liability under the Securities Act. See "Description
of the Notes--Registration Rights." There is no existing market for the notes
and, although the notes are expected to be eligible for trading in the PORTALSM
market by "qualified institutional buyers" as defined in Rule 144A under the
Securities Act, there can be no assurance as to the liquidity of any markets
that may develop for the notes, the ability of holders of the notes to sell
their notes, or the prices at which holders would be able to sell their notes.
Future trading prices of the notes will depend on many factors, including, among
other things:
o our ability to register the resales of the notes;
o prevailing interest rates;
o our operating results;
o the market for similar securities; and
o the price of our common stock.
The initial purchaser has advised us that it currently intend to make a
market in the notes offered hereby; however, the initial purchaser is not
obligated to do so and, if commenced, any market making may be discontinued at
any time without notice. We do not intend to apply for listing of the notes
offered hereby on any securities exchange. As a result, the market price of the
notes and our common stock could be harmed.
Additionally, we will not seek to have the notes rated. Credit rating
agencies evaluate the companies in our industry as a whole and provider credit
ratings based on their overall view of our industry. Since we will not have the
notes rated, you will not get the benefited of such a view.
OUR SIGNIFICANT AMOUNT OF INDEBTEDNESS AND INTEREST EXPENSE WILL LIMIT OUR CASH
FLOW AND COULD ADVERSELY AFFECT OUR OPERATIONS AND OUR ABILITY TO MAKE FULL
PAYMENT ON YOUR NOTES.
Upon consummation of the offering contemplated hereby, we will have a
significant level of debt and interest expense. On an as adjusted basis giving
effect to the acquisition of SMS and this offering and the application of the
proceeds, we would have had approximately $67.8 million in indebtedness
outstanding as of March 31, 2004.
Our significant indebtedness poses risks to our business, including the
risks that:
o we could use a substantial portion of our consolidated cash flow
from operations to pay principal and interest on our debt, thereby
reducing the funds available for working capital, capital
expenditures, acquisitions and other general corporate purposes;
o insufficient cash flow from operations may force us to sell
assets, or seek additional capital, which we may be unable to do
at all or on terms favorable to us;
o our level of indebtedness may make us more vulnerable to economic or
industry downturns; and
o our debt service obligations increase our vulnerabilities to
competitive pressures, because many our competitors are less
leveraged than we are.
In addition, the indenture governing the notes does not limit our
ability to incur additional indebtedness in the future. If new indebtedness is
incurred, the related risks that we now face could intensify. See
"Capitalization" and the financial statements and notes included in this
offering memorandum, in the annexes hereto or incorporated by reference herein.
Our ability to make required payments on the notes and to satisfy any other debt
obligations will depend on our future operating performance and our ability to
obtain additional debt or equity financing on commercially reasonable terms.
TO SERVICE OUR DEBT, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH. OUR ABILITY
TO GENERATE CASH DEPENDS ON MANY FACTORS.
Our ability to make payments on or to refinance our indebtedness and to
fund our operations and planned capital expenditures depends on our ability to
generate cash in the future. This, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond our control.
We expect to continue to require substantial amounts of cash. Our
primary cash requirements include capital expenditures, ongoing operating
expense, required income tax payments, and interest and principal payments under
our indebtedness.
Our primary sources of future liquidity are expected to be cash,
current assets, cash generated from future operating activities and further
issuances of debt or equity securities, depending on capital market conditions.
Additionally, the type, timing and terms of any future financing
selected by us will be dependent upon our cash needs, the availability of other
financing sources and the prevailing conditions in the financial markets. We
cannot assure you that any of these sources or our anticipated primary sources
of future liquidity will be available to us at any given time or that the terms
on which these sources may be available will be favorable to us.
YOUR RIGHT TO RECEIVE PAYMENTS ON THESE NOTES IS EFFECTIVELY SUBORDINATED TO THE
RIGHTS OF OUR EXISTING AND FUTURE SECURED CREDITORS.
Holders of our secured indebtedness will have claims that are prior to
your claims as holders of the notes to the extent of the value of the assets
securing that other indebtedness. Notably, our senior secured term loans are
secured by liens on substantially all of our assets. The notes will be
effectively subordinated to all that secured indebtedness. In the event of any
distribution or payment of our assets in any foreclosure, dissolution,
winding-up, liquidation, reorganization, or other bankruptcy proceeding, holders
of secured indebtedness will have prior claim to those of our assets that
constitute their collateral. Holders of the notes will participate ratably with
all holders of our unsecured indebtedness that is deemed to be of the same class
as the notes, and potentially with all of our other general creditors, based
upon the respective amounts owed to each holder or creditor, in our remaining
assets. In any of the foregoing events, we cannot assure you that there will be
sufficient assets to pay amounts due on the notes. As a result, holders of notes
may receive less, ratably, than holders of secured indebtedness. As of March 31,
2004, we had approximately $28.0 million of debt. As of March 31, 2004, after
giving pro forma effect to the SMS acquisition and this offering, we would have
had approximately $67.8 million of debt.
THE NOTES WILL EFFECTIVELY RANK JUNIOR TO ALL EXISTING AND FUTURE LIABILITIES OF
OUR SUBSIDIARIES.
The notes will effectively rank junior to all existing and future
liabilities of our subsidiaries, including trade payables. In the event of a
bankruptcy, liquidation or dissolution of a subsidiary and following payment of
its liabilities, the subsidiary might not have sufficient assets remaining to
make any payments to us so that we can meet our obligations as the holding
company, including our obligations to you under the notes. As of March 31, 2004,
our subsidiaries had approximately $0.45 million of debt excluding any
intercompany debt. As of March 31, 2004, after giving pro forma effect to the
SMS acquisition and this offering, our subsidiaries would have had approximately
$5.2 million of debt excluding any intercompany debt. The indenture governing
the notes will not limit the ability of our subsidiaries to incur additional
debt.
OUR STOCK PRICE IS VOLATILE AND COULD DECLINE.
The price of our common stock has been, and is likely to continue to
be, volatile. For example, our stock price in the third quarter of 2001 was as
low as $4.00 per share and as high as $14.78 per share in the second quarter of
2004 (through June 22, 2004). The market price of our common stock may fluctuate
significantly in response to a number of factors, some of which are beyond our
control, including:
o quarterly variations in our operating results;
o announcements we make regarding significant contracts, acquisitions,
strategic partnerships, or joint
ventures;
o additions or departures of key personnel;
o changes in market valuations of information technology service
companies;
o changes in financial estimates by securities analysts; and
o sales of our common stock.
Because the notes are convertible into shares of our common stock,
volatility or depressed prices for our common stock could have a similar effect
on the trading price of the notes. Holders who receive common stock upon
conversion also will be subject to the risk of volatility and depressed prices
of our common stock. In addition, the existence of the notes may encourage short
selling in our common stock by market participants because the conversion of the
notes could depress the price of our common stock.
In addition, the stock market in general, and companies whose stock is
listed on The Nasdaq National Market, have experienced extreme price and volume
fluctuations that have often been disproportionate to the operating performance
of these companies. Broad market and industry factors may negatively affect the
market price of our common stock, regardless of our actual operating
performance.
AVAILABILITY OF SIGNIFICANT AMOUNTS OF OUR COMMON STOCK FOR SALE COULD CAUSE ITS
MARKET PRICE TO DECLINE.
As of June 18, 2004, there were 18,326,990 shares of our common stock
outstanding. If our stockholders sell substantial amounts of our common stock in
the public market following this offering or the perception exists that such
sales could occur, including shares issued upon exercise of outstanding common
stock purchase warrants, the market price of our common stock could fall.
As of June 18, 2004, Zach Lonstein, our Chairman and Chief Executive
Officer, beneficially owned 1,566,191 shares of our common stock. Substantially
all of those shares are available for sale in the public market pursuant to Rule
144 under the Securities Act, subject to certain volume, manner of sale and
other restrictions. Zach Lonstein may require us to register his shares for
resale, under certain conditions, pursuant to a registration rights agreement
that we entered into with him.
THE CONDITIONAL CONVERSION FEATURES OF THE NOTES COULD RESULT IN YOU RECEIVING
LESS THAN THE VALUE OF THE COMMON STOCK INTO WHICH A NOTE IS CONVERTIBLE.
The notes are convertible into common stock only if specified
conditions are met. If the specific conditions for conversion are not met you
will not be able to convert your notes, and you may not be able to receive the
value of the common stock into which the notes would otherwise be convertible.
UPON CONVERSION OF THE NOTES, WE MAY PAY CASH IN LIEU OF ISSUING SHARES OF OUR
COMMON STOCK OR A COMBINATION OF CASH AND SHARES OF OUR COMMON STOCK. THEREFORE,
HOLDERS OF THE NOTES MAY RECEIVE NO SHARES OF OUR COMMON STOCK OR FEWER SHARES
THAN THE NUMBER INTO WHICH THEIR NOTES ARE CONVERTIBLE.
We have the right to satisfy our conversion obligation to holders by
issuing shares of common stock, by paying the cash value of the common stock
into which the notes are convertible or by a combination thereof. Accordingly,
upon conversion of all or a portion of the notes, holders may not receive any
shares of our common stock, or they might receive fewer shares of common stock
relative to the conversion value of the notes. Further, our liquidity may be
reduced to the extent that we choose to deliver cash rather than shares of
common stock upon the conversion of the notes.
IF WE ELECT TO SETTLE UPON CONVERSION IN CASH OR A COMBINATION OF CASH AND
COMMON STOCK, THERE WILL BE A DELAY IN SETTLEMENT.
Upon conversion, if we elect to settle in cash or a combination of cash
and our common stock, there will be a significant delay in settlement. In
addition, because the amount of cash or common stock that a holder will receive
in these circumstances will be based on the sales price of our common stock for
an extended period between the conversion date and the settlement date, holders
will bear the market risk with respect to the value of the common stock for such
extended period. See "Description of the Notes - Conversion Rights."
BEFORE CONVERSION, HOLDERS OF THE NOTES WILL NOT BE ENTITLED TO ANY SHAREHOLDER
RIGHTS, BUT WILL BE SUBJECT TO ALL CHANGES AFFECTING OUR SHARES.
If you hold notes, you will not be entitled to any rights with respect to shares
of our common stock, including voting rights and rights to receive dividends or
distributions. However, the common stock you receive upon conversion of your
notes will be subject to all changes affecting our common stock. Except for
limited cases under the adjustments to the conversion price, you will be
entitled only to rights that we may grant with respect to shares of our common
stock if and when we deliver shares to you upon your election to convert your
notes into shares. For example, if we seek approval from shareholders for a
potential merger, or if an amendment is proposed to our certificate of
incorporation or by-laws that requires shareholder approval, holders of notes
will not be entitled to vote on the merger or amendment.
IF WE PAY CASH DIVIDENDS ON OUR COMMON STOCK, YOU MAY BE DEEMED TO HAVE RECEIVED
A TAXABLE DIVIDEND WITHOUT THE RECEIPT OF ANY CASH.
If we pay cash dividends on our common stock, an adjustment to the
conversion rate may result, and you may be deemed to have received a taxable
dividend subject to United States federal income tax without the receipt of any
cash. If you are a non-U.S. holder (as defined in "Material United States
Federal Income Tax Considerations"), such deemed dividend may be subject to
United States federal withholding tax at a 30% rate or such lower rate as may be
specified by an applicable treaty. See "Material United States Federal Income
Tax Considerations."
CONVERSION OF THE NOTES WILL DILUTE THE OWNERSHIP INTEREST OF EXISTING
SHAREHOLDERS AND FUTURE ISSUANCES OF OUR SECURITIES COULD DILUTE YOUR OWNERSHIP.
The conversion of some or all of the notes will dilute the ownership
interest of existing shareholders. Any sales in the public market of the common
stock issuable upon such conversion could adversely affect prevailing market
prices of our common stock. In addition, the existence of the notes may
encourage short selling by market participants because the conversion of the
notes could depress the price of our common stock.
Additionally, we may decide to raise additional funds through public or
private debt or equity financing to fund our operations. If we raise funds by
issuing equity securities, the percentage ownership of current stockholders will
be reduced, and the new equity securities may have rights prior to those of the
common stock issuable upon conversion of the notes. We cannot predict the
effect, if any, that future sales of our common stock or notes, or the
availability of shares of our common stock or notes for future sale, will have
on the market price of our common stock or notes. Sales of substantial amounts
of our common stock (including shares issued upon the exercise of stock options
or warrants or the conversion of the notes), or the perception that such sales
could occur, may adversely affect prevailing market prices for our common stock
and notes.
WE HAVE NOT PAID CASH DIVIDENDS ON OUR COMMON STOCK AND DO NOT EXPECT TO DO SO.
We have never declared or paid a cash dividend on our common stock. We
do not anticipate paying any cash dividends on our common stock in the
foreseeable future. BECAUSE THE NOTES ARE REPRESENTED BY GLOBAL NOTES REGISTERED
IN THE NAME OF A DEPOSITARY, YOU WILL NOT BE A "HOLDER" UNDER THE INDENTURE AND
YOUR ABILITY TO TRANSFER OR PLEDGE THE NOTES COULD BE LIMITED.
The notes will be represented by one of more global securities
registered in the name of Cede & Co. as nominee for The Depository Trust Company
("DTC"). Except in the limited circumstances described in this offering
memorandum, owners of beneficial interests in the global securities will not be
entitled to receive physical delivery of notes in certificated form and will not
be considered "holders" of the notes under the indenture for any purpose.
Instead, owners must rely on the procedures of DTC and its participants to
protect their interests under the indenture. In addition, because the laws of
some states require that certain persons take physical delivery in definitive
form of securities they own, you may be unable to transfer your notes to those
persons. Your ability to pledge your interest in the notes to persons or
entities that do not participate in the DTC system may also be adversely
affected by the lack of a certificate.
THE NOTES MAY CONSTITUTE A CONTINGENT PAYMENT DEBT INSTRUMENT, IN WHICH CASE YOU
MAY BE REQUIRED TO RECOGNIZE A SIGNIFICANT AMOUNT OF ADDITIONAL INCOME ON A
CONSTANT YIELD BASIS AND TO TREAT AS ORDINARY INCOME RATHER THAN CAPITAL GAIN
ANY INCOME REALIZED ON THE TAXABLE DISPOSITION OF THE NOTES.
If a change of control occurs, you may require us to repurchase for
cash all or a portion of your notes. If there is a repurchase pursuant to a
change of control and certain conditions are met, we will be required to pay a
make-whole premium in addition to 100% of the principal amount plus any accrued
and unpaid interest. Although the matter is not free from doubt, we intend to
take the position that the likelihood that such make-whole premium would be paid
is remote. However, there is no assurance that our position would be respected
by the Internal Revenue Service or, if challenged, upheld by a court. If the
Internal Revenue Service were to challenge our position and successfully assert
that such likelihood is not remote, the notes may constitute a contingent
payment debt instrument. In such event, if you are a U.S. holder (as defined
under "Material United States Federal Income Tax Considerations"), you would be
required to include amounts in income, as original issue discount, on a constant
yield to maturity basis, based on a rate comparable to the rate at which we
would issue fixed rate nonconvertible, non-contingent notes with similar terms
and conditions. Such amounts would be significantly in excess of cash received
while the notes are outstanding. In addition, you will recognize ordinary income
upon a sale, exchange, conversion, redemption or repurchase of the notes at a
gain. In computing such gain, the amount realized by a U.S. holder will include,
in the case of a conversion, the amount of cash and the fair market value of the
common stock received. You are strongly urged to consult your own tax advisors
as to the U.S. federal, state and other tax consequences relating to the notes.
For more information, see "Material United States Federal Income Tax
Considerations."
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS, THE STOCKHOLDER
AGREEMENT AND DELAWARE LAW COULD DETER TAKEOVER ATTEMPTS AND PREVENT
STOCKHOLDERS FROM OBTAINING A PREMIUM FOR THEIR SHARES.
Some provisions of our certificate of incorporation and bylaws, the
stockholder agreement and Delaware law could delay, prevent, or make more
difficult a merger, tender offer, or proxy contest involving us. Among other
things:
o under our certificate of incorporation, our board of directors may
issue up to 3,000,000 shares of our preferred stock and may
determine the price, rights, preferences, privileges and
restrictions, including voting and conversion rights, of these
shares of preferred stock;
o under our certificate of incorporation, our board of directors has
three classes of directors, with each director serving for a term
of three years; and
o under our certificate of incorporation, our stockholders may
remove our directors at any time, but only for cause.
o Delaware law limits transactions between us and persons that
acquire significant amounts of our stock without approval of our
board of directors.
CAPITALIZATION
The following table sets forth as of March 31, 2004 our: (i) actual
capitalization on a historical basis, (ii) capitalization adjusted to give pro
forma effect to the acquisition of SMS and related financings as if they had
occurred on March 31, 2004 and (iii) capitalization as adjusted to give effect
to the pro forma adjustments and this offering of the notes and the application
of the estimated proceeds as described under "Use of Proceeds." The table should
be read in conjunction with our consolidated financial statements and related
notes thereto, the information contained under the headings "Use of Proceeds,"
"Summary Consolidated Historical Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this offering memorandum or incorporated by reference in this
offering memorandum.
MARCH 31, 2004
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PRO FORMA FOR
THE SMS PRO FORMA
HISTORICAL ACQUISITION AS ADJUSTED
-------------- --------------- ----------------
Cash and equivalents $ 39,553 $ 20,384 $ 37,211
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Indebtedness:
Term loan A due October 21, 2008,
bearing interest at 9% $ 24,875 $ 24,875 $ --
Term loan B due October 21, 2008, bearing interest
at 3% over Prime with a minimum of 9% -- 15,000 --
Convertible senior notes offered hereby -- -- 60,000
Long-term portion of other debts and capital leases 772 3,973 3,973
---------- ----------- ------------
Total indebtedness 25,647 43,848 63,973
---------- ----------- ------------
Total stockholders' equity 61,127 62,986 62,986
---------- ----------- ------------
Total capitalization $ 86,774 $ 106,834 $ 126,959
========== =========== ============