UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
AMENDMENT NO. 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) October 1, 2004
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INFOCROSSING, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware
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(State or Other Jurisdiction of Incorporation)
0-20824 13-3252333
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(Commission File Number) (IRS Employer Identification No.)
2 Christie Heights Street Leonia, New Jersey 07605
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(Address of Principal Executive Offices) (Zip Code)
(201) 840-4700
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(Registrant's Telephone Number, Including Area Code)
N/A
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(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (SEE General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
ITEM 2.01 COMPLETION OF ACQUISITION.
On October 1, 2004, Infocrossing, Inc. (the "Company") closed the previously
announced acquisition of the Medicaid, Medicare and Managed Care Claims
Processing Business ("Claims Processing Business") of Verizon Information
Technologies Inc. ("VITI") from Verizon Communications, Inc. (NYSE: VZ) for
$43.5 million in cash. The sale was structured as an acquisition of the common
stock of the Claims Processing Business. The Company financed the acquisition by
using cash on hand and by drawing $24.4 million from an existing line of credit
provided by CapitalSource Finance LLC. Immediately following the closing of the
transaction, the Claims Processing Business' name was changed to Infocrossing
Healthcare Services, Inc. ("IHS").
Other than in respect to this transaction, no material relationship exists
between the Company or its affiliates and either Verizon Communications, Inc. or
VITI.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired
Financial statements required by 17 CFR 210.3-05(b) are included
herewith as Appendix A.
(b) Pro Forma Financial Information
Pro forma financial information required by 17 CFR 210 is included
herewith as Appendix B.
(c) Exhibits
2.1 Purchase and Sale Agreement dated as of September 1, 2004 between
the Company and Verizon Data Services, Inc., filed with the
initial Current Report on Form 8-K dated October 4, 2004 and
incorporated herein by reference.
2.2 Stock Purchase Agreement between the Company and ITO Holdings,
LLC, dated as of March 3, 2004, incorporated by reference to
Exhibit 2.1 to a Current Report on Form 8-K filed April 7, 2004.
10.1 Consent, Waiver and First Amendment to Acquisition Loan Agreement
dated as of October 1, 2004 by and among the Company and
CapitalSource Finance, LLC, filed with the initial Current Report
on Form 8-K dated October 4, 2004 and incorporated herein by
reference.
2
(c) Exhibits (Continued)
10.2 Acquisition Loan Agreement dated July 29, 2004 between the
Company, various Lenders and CapitalSource Finance LLC as Agent
for the Lenders, incorporated by reference to Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for June 30, 2004.
10.3 Guarantee and Security Agreement dated as of July 29, 2004,
between the Company and certain of the Company's subsidiaries and
CapitalSource Finance LLC, incorporated by reference to Exhibit
10.8 to the Company's Quarterly Report on Form 10-Q for June 30,
2004.
10.4 Stock Pledge Agreement dated as of July 29, 2004, between the
Company and certain of the Company's subsidiaries and
CapitalSource Finance LLC, incorporated by reference to Exhibit
10.9 to the Company's Quarterly Report on Form 10-Q for June 30,
2004.
10.5 Amended and Restated Consent, Waiver, and First Amendment to
Acquisition Loan Agreement, dated as of October 6, 2004, by and
among the Company and CapitalSource Finance, LLC., incorporated
by reference to Exhibit 10.11 to the Company's Quarterly Report
on Form 10-Q for September 30, 2004.
10.6 Second Amendment to Acquisition Loan Agreement and Other
Documents, dated as of November 8, 2004, by and among the Company
and CapitalSource Finance, LLC., incorporated by reference to
Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q for
September 30, 2004.
10.7 Employment Agreement dated as of October 1, 2004 between Michael
J. Luebke and Infocrossing Healthcare Services, Inc. *
23.1 Consent of Moore Stephens Wurth Frazer and Torbet, LLP. *
99.1 Press Release of the Company, dated October 4, 2004, filed with
the initial Current Report on Form 8-K dated October 4, 2004 and
incorporated herein by reference.
* Filed herewith.
3
SIGNATURES
Pursuant to the requirements of the Securities and 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: December 17, 2004 By: /s/ WILLIAM J. McHALE
--------------------------
William J. McHale
SVP - Finance
4
APPENDIX A
FINANCIAL STATEMENTS
MEDICAID, MEDICARE AND MANAGED CARE
CLAIMS PROCESSING BUSINESS
OF VERIZON INFORMATION TECHNOLOGIES INC.
FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
SEPTEMBER 30, 2004, DECEMBER 31, 2003, AND DECEMBER 31, 2002
A-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors of Infocrossing, Inc.
We have audited the accompanying statements of assets, liabilities and
divisional capital of the Medicaid, Medicare and Managed Care Claims Processing
Business of Verizon Information Technologies Inc. as of September 30, 2004,
December 31, 2003 and 2002, and the related statements of operations and cash
flows for the nine months ended September 30, 2004 and for the years ended
December 31, 2003 and 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 standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. 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 the Medicaid, Medicare and
Managed Care Claims Processing Business of Verizon Information Technologies Inc.
as of September 30, 2004, December 31, 2003 and 2002, and the results of its
operations and its cash flows for the periods then ended, in conformity with
U. S. generally accepted accounting principles.
As discussed in Note 2, the Medicaid, Medicare and Managed Care Claims
Processing Business of Verizon Information Technologies Inc. did not operate as
a stand alone separate entity. The financial statements referred to above are
based on judgments, estimations, and allocations determined by the management of
Infocrossing, Inc.
/s/ Moore Stephens Wurth Frazer and Torbet, LLP
Orange, California
December 10, 2004
A-2
MEDICAID, MEDICARE AND MANAGED CARE CLAIMS PROCESSING BUSINESS OF
VERIZON INFORMATION TECHNOLOGIES INC.
STATEMENTS OF ASSETS, LIABILITIES AND DIVISIONAL CAPITAL
ASSETS September 30, December 31, December 31,
------ 2004 2003 2002
--------------------------------------------
CURRENT ASSETS
Accounts receivable $ 4,504,463 $ 9,222,265 $ 7,056,360
Unbilled receivables 4,641,971 5,751,257 4,138,186
--------------------------------------------
Total current assets 9,146,434 14,973,522 11,194,546
--------------------------------------------
PROPERTY AND EQUIPMENT, NET 2,048,981 2,506,336 2,731,986
--------------------------------------------
TOTAL ASSETS $ 11,195,415 $ 17,479,858 $ 13,926,532
============================================
LIABILITIES AND DIVISIONAL CAPITAL
- ----------------------------------
CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 476,600 $ 528,962 $ 755,025
Payroll, payroll taxes and
payroll benefits accrued 1,354,080 3,034,416 1,434,054
Deferred revenues - 450 1,182,234
Deferred rent 111,585 120,716 -
--------------------------------------------
Total current liabilities 1,942,265 3,684,544 3,371,313
--------------------------------------------
DIVISIONAL CAPITAL 9,253,150 13,795,314 10,555,219
--------------------------------------------
COMMITMENTS AND CONTINGENCIES - - -
--------------------------------------------
TOTAL LIABILITIES AND
DIVISIONAL CAPITAL $ 11,195,415 $ 17,479,858 $ 13,926,532
============================================
The accompanying notes are an integral part of these financial statements
A-3
MEDICAID, MEDICARE AND MANAGED CARE CLAIMS PROCESSING BUSINESS OF
VERIZON INFORMATION TECHNOLOGIES INC.
STATEMENTS OF OPERATIONS
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2004, AND THE
YEARS ENDED DECEMBER 31, 2003 AND 2002
September 30, December 31, December 31,
2004 2003 2002
--------------------------------------------
REVENUES $ 36,213,345 $ 52,014,856 $ 54,256,282
--------------------------------------------
EXPENSES
Cost of revenue 23,126,725 35,463,934 37,483,537
Selling, general and
administrative expenses 2,831,250 3,725,000 3,650,000
Voluntary separation
incentive plan - 2,844,500 -
Depreciation and amortization 531,134 298,290 370,148
--------------------------------------------
TOTAL EXPENSES 26,489,109 42,331,724 41,503,685
--------------------------------------------
INCOME BEFORE INCOME TAX PROVISION
IN LIEU OF INCOME TAXES 9,724,236 9,683,132 12,752,597
PROVISION IN LIEU OF INCOME TAXES 3,685,000 3,656,000 4,816,000
--------------------------------------------
NET INCOME $ 6,039,236 $ 6,027,132 $ 7,936,597
============================================
The accompanying notes are an integral part of these financial statements
A-4
MEDICAID, MEDICARE AND MANAGED CARE CLAIMS PROCESSING BUSINESS OF
VERIZON INFORMATION TECHNOLOGIES INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2004, AND THE
YEARS ENDED DECEMBER 31, 2003 AND 2002
September 30, December 31, December 31,
2004 2003 2002
--------------------------------------------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 6,039,236 $ 6,027,132 $ 7,936,597
Adjustments to reconcile net
income to net cash from
operating activities:
Depreciation and amortization 531,134 298,290 370,148
Changes in operating assets
and liabilities:
Accounts receivable 4,717,802 (2,165,905) 1,512,837
Unbilled receivables 1,109,286 (1,613,071) (231,898)
Accounts payable and
accrued expenses (52,362) (226,063) 43,061
Deferred revenues (450) (1,181,784) (12,000,157)
Deferred rent (9,131) 120,716 -
Payroll, payroll taxes
and payroll benefits
payable (1,680,336) 1,600,362 (41,895)
Other current liabilities - - (1,889,418)
--------------------------------------------
Net cash flows from
operating activities 10,655,179 2,859,677 (4,300,725)
--------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property
and equipment (73,779) (72,640) (446,437)
--------------------------------------------
Net cash flows from
investing activities (73,779) (72,640) (446,437)
--------------------------------------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Deemed cash contributions
by parent - - 4,747,162
Deemed cash distributions
to parent (10,581,400) (2,787,037) -
--------------------------------------------
Net cash flows from
financing activities (10,581,400) (2,787,037) 4,747,162
--------------------------------------------
NET CHANGE IN CASH
AND CASH EQUIVALENTS - - -
CASH AND CASH EQUIVALENTS,
BEGINNING - - -
--------------------------------------------
CASH AND CASH EQUIVALENTS,
ENDING $ - $ - $ -
============================================
Provision in lieu of income
taxes deemed paid $ 3,685,000 $ 3,656,000 $ 4,816,000
============================================
The accompanying notes are an integral part of these financial statements
A-5
MEDICAID, MEDICARE AND MANAGED CARE CLAIMS PROCESSING BUSINESS OF
VERIZON INFORMATION TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, ACQUISTION AND TRANSITION
Medicaid, Medicare and Managed Care Claims Processing Business of Verizon
Information Technologies Inc. (the "Claims Processing Business") is engaged in
the business of providing customers in the healthcare industry with information
technology outsourcing services, healthcare transaction processing services,
Health Insurance Portability and Accountability Act consulting and
implementation services, payer application solutions and Medicaid fiscal agent
services. Such customers mainly are located in Missouri, Florida, Arizona,
Alabama, Arkansas, North Dakota, Utah, and Montana.
Effective October 1, 2004, Infocrossing, Inc. ("Infocrossing") acquired 150
shares of no par value common stock (constituting all of the authorized, issued
and outstanding shares of common stock) of Verizon Information Technologies Inc.
("VITI") from Verizon Data Services, Inc. ("VDSI" or "Parent") for $43,500,000.
Prior to the acquisition of its capital stock VITI's business activities
consisted of several operating businesses including the activities of the Claims
Processing Business. As part of the sale of its capital stock, VITI transferred
all non-claims processing business and specific assets and liabilities to
another entity which was not part of the acquisition. Following the purchase,
VITI's name was changed to Infocrossing Healthcare Services, Inc. (the
"Company").
Also, effective October 1, 2004, VITI entered into a transition services
agreement with Verizon Information Technologies LLC, ("VITL"), by which VITI
will purchase from VITL certain data processing services, including computing
and help desk services, as set forth in this agreement for an initial term of
six months with automatic renewals for successive periods of three months unless
either party shall have given the other party appropriate notice of termination.
The agreement establishes a monthly mainframe processing fee based on actual
usage of CPU hours for prime CPU, CPU hours for batch CPU, as well as other
processing charges. In addition, professional services are billed separately on
a per hour basis. Management of the Claims Processing Business estimates that
the need to utilize the transition services provided by VITL will be six months,
after which Infocrossing will be rendering the majority of the services
currently provided by the transition service agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. Prior to the acquisition by Infocrossing, no financial
statements were available with accounting and disclosures normally presented for
a separate legal entity. The financial statements of the Claims Processing
Business present its operating results and financial position and are based on
the historical accounting records of VITI. All of the accounting judgments,
estimations and allocations in these financial statements are assumptions that
the management of Infocrossing believe are reasonable for the purpose of
preparing the Claims Processing Business' financial statements. However, these
policies, including various allocations, are estimates and are not necessarily
indicative of the costs that would have resulted had the Claims Processing
Business operated as a stand-alone, separate entity. The accompanying financial
statements do not reflect purchase price allocation adjustments which will be
made by Infocrossing.
The financial statements of the Claims Processing Business have been prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission ("SEC") for inclusion in an amendment to Form 8-K to be
filed by Infocrossing in connection with the acquisition of the Claims
Processing Business as disclosed in Note 1.
A-6
MEDICAID, MEDICARE AND MANAGED CARE CLAIMS PROCESSING BUSINESS OF
VERIZON INFORMATION TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
DIVISIONAL CAPITAL. All charges and allocations of costs for functions and
services provided by Parent are deemed paid by the Claims Processing Business,
in cash, in the period in which the cost is recorded in these financial
statements. All cash is deemed to be distributed to the Parent as received.
Changes in Divisional Capital were as follows:
Balance at December 31, 2001 $ (2,128,540)
Net income 7,936,597
Capital contributions by Parent 4,747,162
-----------------
Balance at December 31, 2002 10,555,219
Net income 6,027,132
Deemed distributions to Parent (2,787,037)
-----------------
Balance at December 31, 2003 13,795,314
Net income 6,039,236
Deemed distributions to Parent (10,581,400)
-----------------
Balance at September 30, 2004 $ 9,253,150
=================
As discussed in Note 1, Infocrossing acquired all the capital stock of VITI. The
capital structure as of October 1, 2004, is as follows:
Common stock, no par value
150 shares authorized;
issued and outstanding,
as of September 30, 2004
and December 31, 2003 and 2002 $ 150
Accumulated earnings, net of deemed
distributions of $8,621,275
to the Parent 9,253,000
-----------------
$ 9,253,150
=================
UNBILLED RECEIVABLES. Unbilled receivables include amounts billable for services
rendered prior to September 30, 2004 and December 31, 2003 and 2002, that were
billed after the end of the respective periods.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. Management of the Claims Processing Business
evaluates accounts receivable periodically for potential uncollectible
receivables based on contractual due dates. Historically, the Claims Processing
Business has not experienced any significant bad debts.
A-7
MEDICAID, MEDICARE AND MANAGED CARE CLAIMS PROCESSING BUSINESS OF
VERIZON INFORMATION TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets consist of property and
equipment. The Claims Processing Business 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 cost to sell. No adjustments to the carrying value of
long-lived assets were recorded for the nine-month period ended September 30,
2004, and for the years ended December 31, 2003 and 2002.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost, net of
accumulated depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over estimated useful lives of 3 to 10
years, except for leasehold improvements where amortization is calculated over
their estimated useful lives or underlying lease terms, whichever is shorter.
Maintenance and repairs are expensed as incurred.
REVENUE RECOGNITION. The Claims Processing Business recognizes revenues from
services when the services are rendered in accordance with customer contracts.
Prepayments on contracts are recorded as deferred revenue in the accompanying
statements of assets, liabilities and divisional capital. Unbilled services on
contracts are recorded as unbilled receivables in the accompanying statements of
assets, liabilities, and divisional capital.
INCOME TAXES. The Claims Processing Business did not constitute a separate tax
filing entity for income tax purposes. Accordingly, the Claims Processing
Business has recorded an "income tax provision in lieu of taxes" as if it had
filed separate income tax returns as a stand alone entity. Such provision has
been recorded in the accompanying financial statements using the maximum
statutory tax rates in effect during the respective periods. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statements carrying amounts of existing assets
and liabilities and their respective tax basis. 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. As of September 30, 2004 and December 31, 2003 and 2002,
there were no deferred tax assets or liabilities.
ADVERTISING AND MARKETING. Advertising and marketing costs are expensed as
incurred.
RESEARCH AND DEVELOPMENT. Research and development costs are expensed as
incurred.
A-8
MEDICAID, MEDICARE AND MANAGED CARE CLAIMS PROCESSING BUSINESS OF
VERIZON INFORMATION TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
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 Claims Processing
Business' significant estimates primarily relate to the assessment of the
required accounts receivable allowance for doubtful accounts, determinations of
unbilled receivables and the allocation of certain shared costs and expenses
allocated to the Claims Processing Business. Actual results could differ from
those estimates.
LEASES. Operating leases and related rentals are charged to expense as incurred,
over the respective lease periods. Where leases provide for incentives such as a
free rent period or escalation clauses, the total base rental set-out under the
lease is charged on a straight line basis over the respective term of the
related leases, and the difference between that amount and the amount payable is
reflected as deferred rent in the accompanying financial statements. The base
rent is expensed on a straight-line basis over the term of the leases.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts of accounts
receivable, unbilled receivables, accounts payable and accrued expenses,
payroll, payroll taxes and other current liabilities approximate fair value due
to the short maturities of these instruments.
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2003, FASB issued SFAS 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities", which amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement is effective for contracts entered into or modified
and for hedging relationships designated after June 30, 2003. The adoption of
this statement had no effect on the Claims Processing Business' operating
results or financial position.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain financial
Instruments with Characteristics of Both Liabilities and Equity". The statement
improves the accounting for three types of financial instruments that were
previously accounted for as equity - mandatory redeemable shares, instruments
that may require the issuer to buy back shares and certain obligations that can
be settled with shares. The statement requires that those instruments be
accounted for as liabilities in the statement of financial position. The
statement is effective for all 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 adoption of this statement had
no affect on the Claims Processing Business' operating results or financial
position.
A-9
MEDICAID, MEDICARE AND MANAGED CARE CLAIMS PROCESSING BUSINESS OF
VERIZON INFORMATION TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS
4. PROPERTY AND EQUIPMENT
As of September 30, 2004, December 31, 2003 and December 31, 2002, property and
equipment consisted of:
September 30, December 31, December 31,
2004 2003 2002
--------------------------------------------
Software $ 1,812,978 $ 120,909 $ 120,909
Data processing equipment 1,692,988 1,163,512 1,064,127
Other equipment 407,293 385,794 332,542
Furniture and fixtures 237,981 237,981 237,981
Leasehold improvements 100,989 100,989 84,888
System development - 2,169,265 2,265,363
--------------------------------------------
4,252,229 4,178,450 4,105,810
Accumulated depreciation
and amortization (2,203,248) (1,672,114) (1,373,824)
--------------------------------------------
Property, plant and
equipment, net $ 2,048,981 $ 2,506,336 $ 2,731,986
============================================
Depreciation and amortization expense amounted to $531,134, $298,290, and
$370,148, for the nine month period ended September 30, 2004 and the years ended
December 31, 2003 and 2002, respectively.
5. INCOME TAXES
The Claims Processing Business did not constitute a separate entity for income
tax purposes. Accordingly, the Claims Processing Business has recorded an
"income tax provision in lieu of income taxes, as if it had filed separate
income tax return as a stand alone entity. As of September 30, 2004, and
December 31, 2003 and 2002, there were no deferred tax assets or liabilities.
The provision in lieu of income taxes has been recorded using the maximum
statutory tax rates in effect during the respective periods, as follows:
YEARS ENDED
NINE MONTHS ENDED DECEMBER 31,
SEPTEMBER 30, 2004 2003 2002
------------------ -----------------------------
Federal tax provision
in lieu of income taxes $ 3,137,000 $ 3,105,000 $ 4,120,000
State tax provisions
In lieu of income taxes 548,000 551,000 696,000
------------------ ------------- -------------
$ 3,685,000 $ 3,656,000 $ 4,816,000
================== ============= =============
A-10
MEDICAID, MEDICARE AND MANAGED CARE CLAIMS PROCESSING BUSINESS OF
VERIZON INFORMATION TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS
5. INCOME TAXES (CONT'D)
Income tax expense for the nine month period ended September 30, 2004 and the
years ended December 31, 2003 and 2002 is determined in accordance with FAS 109.
Reconciliations between the effective tax rate on income before provision in
lieu of income taxes and the federal statutory rate are presented below:
NINE MONTHS ENDED % OF YEAR ENDED % OF YEAR ENDED % OF
SEPTEMBER 30, 2004 PRETAX DECEMBER 31, 2003 PRETAX DECEMBER 31, 2002 PRETAX
------------------ ------ ----------------- ------ ----------------- ------
Tax at statutory rate $ 3,403,483 35.0% $ 3,389,096 35.0% $ 4,463,409 35.0%
State taxes - net 360,694 3.70 363,660 3.76 458,176 3.59
Other - net (79,177) (.82) (96,756) (1.0) (105,585) (.83)
---------------- ----- ---------------- ----- ---------------- -----
Provision in lieu of
income taxes $ 3,685,000 37.88% $ 3,656,000 37.76% $ 4,816,000 37.76%
================ ===== ================ ===== ================ =====
6. VOLUNTARY SEPARATION INCENTIVE PLAN
During 2003, Verizon Communications, Inc. ("Verizon") offered certain of its
qualifying employees and employees of its subsidiaries the opportunity to
separate from their employment. The Voluntary Separation Incentive Plan (the
"Plan") provided for a lump sum separation payment plus continuing benefits
extending for a period subsequent to their separation. In this regard, certain
employees of the Claims Processing Business separated from their employment
under the Plan. The cost associated with the lump sum separation payment
aggregated $2,844,500. The cost associated with providing continuing benefits
extending for a period subsequent to the employees' separation cannot be
reasonably estimated.
7. RETIREMENT PLANS
Employees of the Claims Processing Business, as well as employees of other
business units, affiliates and subsidiaries of Verizon were able to participate
in the available retirement plans they qualified for by virtue of their
employment. The expense associated with these plans is included in and recorded
as part of the overall employee benefit costs. Such costs are included in cost
of revenue in the accompanying financial statements.
8. STOCK OPTIONS
Employees, to the extent they qualified, of the Claims Processing Business, as
well as employees of other business units and subsidiaries of Verizon were able
to participate in Verizon Stock Option Plans. There is no established market
value for the stock of the Claims Processing Business and the expense, if any,
associated with the stock options would be in part determined based on the
Verizon share price. No expense that might be associated with the Stock Option
Plan is being recorded in the accompanying financial statements.
A-11
MEDICAID, MEDICARE AND MANAGED CARE CLAIMS PROCESSING BUSINESS OF
VERIZON INFORMATION TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS
9. COMMITMENTS
The Claims Processing Business currently has operating leases for facilities in
Phoenix, Arizona, and Jefferson City, Missouri.
The lease in Arizona expires on April 30, 2008 with an option to renew for an
additional five-year period. Effective May 1, 2003, the original lease was
amended and decreased from approximately 45,307 rentable square feet to
approximately 11,326 rentable square feet. The lease provides for a rent
concession of seven months and contains escalation clauses, which cause the
monthly base rent to increase by a stated amount over the term of the lease.
The lease in Jefferson City expires on November 15, 2007 and has two one-year
renewal options. Effective May 13, 2002, the original lease was amended and
increased from approximately 18,630 gross square feet to approximately 24,730
gross square feet.
Following is a summary of the net facility costs for operating leases for the
nine-month period ended September 30, 2004, and the years ended December 31,
2003 and 2002:
September 30, December 31, December 31,
2004 2003 2002
--------------------------------------------
Facility costs $ 514,863 $ 1,115,573 $ 1,507,872
Sublease income (9,009) - (749,411)
------------- ------------- -------------
Net facility costs $ 505,854 $ 1,115,573 $ 758,461
============= ============= =============
The following is a schedule of annual future minimum rental payments, excluding
property taxes and other operating expenses, required under all non-cancelable
operating leases:
Total Operating
Lease Payments
---------------------
Period ending December 31:
2004 $ 124,039 *
2005 507,480
2006 513,143
2007 499,008
2008 84,945
--------------------
$ 1,728,615
====================
* Three month period October 31, 2004 through December 31, 2004
A-12
MEDICAID, MEDICARE AND MANAGED CARE CLAIMS PROCESSING BUSINESS OF
VERIZON INFORMATION TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS
10. BUSINESS CONCENTRATIONS AND CONTINGENCIES
CREDIT RISK. The Claims Processing Business provides services primarily to large
not-for profit and commercial corporations, and departmental units of the State
of Missouri. 30-day terms are extended for all customers based on their
financial condition and collateral is generally not required.
CUSTOMER CONCENTRATIONS. The following table discloses the number of customers
and their respective percentages of gross accounts receivable as of September
30, 2004, December 31, 2003 and 2002:
Number of Percentage of
of gross accounts
customers receivable
----------------- --------------------
September 30, 2004 3 74.70%
December 31, 2003 1 75.43%
December 31, 2002 2 71.31%
The concentration is mostly related to Medicaid fiscal agent services provided
to departmental units of the State of Missouri as well as data processing
services for Medicare claims.
The maximum amount of loss due to credit risk that, based on the gross accounts
receivable, the Claims Processing Business would incur if the customers that
make up the concentration failed to perform according to the terms of the
contracts is approximately $3,365,000, $6,957,000, and $5,032,000, as of
September 30, 2004, and December 31, 2003, and 2002, respectively.
For the nine months ended September 30, 2004, two customers accounted for 69.79%
of revenues. For the years ended December 31, 2003 and 2002, two customers
accounted for 66.82% and 66.26% of revenues, respectively.
Although a number of Medicaid and Medicare projects for which the Claims
Processing Business is the contractor or subcontractor are planned as multi-year
projects, the government normally funds these projects on an annual or more
frequent basis. Generally, the government has the right to change the scope of,
or terminate, these projects at its convenience. Certain customer contracts
require, among other things, the Claims Processing Business to meet certain
performance benchmarks as established and defined in the respective contracts,
and may provide for penalties in the event contractor standards are not
achieved.
11. SUBSEQUENT EVENTS
On October 1, 2004, Infocrossing acquired 150 shares of no par value common
stock (constituting all of the authorized, issued and outstanding shares of
common stock) of VITI from VDSI, for $43,500,000. The acquisition by
Infocrossing was partially financed with a non-revolving loan of $24,375,000, in
connection with which Infocrossing pledged the stock of VITI, and VITI joined in
a Guaranty and Security Agreement executed by all of Infocrossing's subsidiaries
to unconditionally guarantee Infocrossing's obligations pursuant to the loan.
VITI granted a lien to Infocrossing's lender on substantially all of its assets
other than permitted liens as allowed in the loan agreement.
Following the purchase VITI's, (the Claims Processing Business'), name was
changed to Infocrossing Healthcare Services, Inc.
A-13
APPENDIX B
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
AS OF SEPTEMBER 30, 2004,
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004, AND
FOR THE YEAR ENDED DECEMBER 31, 2003
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On October 1, 2004, we acquired the Medicaid, Medicare and Managed Care claims
processing business (the "Claims Processing Business") of Verizon Information
Technologies Inc. ("VITI") from Verizon Communications Inc. (NYSE: VZ). The sale
was structured as an acquisition of the common stock of the Claims Processing
Business. The purchase price was $43.5 million in cash (the "IHS Acquisition").
Immediately following the closing of the IHS Acquisition, the Claims Processing
Business' name was changed to Infocrossing Healthcare Services, Inc. ("IHS").
The IHS Acquisition was pursuant to a Purchase and Sale Agreement, dated as of
September 1, 2004, between Verizon Data Services, Inc. (VITI's parent) and us.
The IHS Acquisition, as discussed in the Notes to the unaudited pro forma
information, resulted in goodwill of $32.4 million.
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 pursuant to a Stock
Purchase Agreement, dated as of March 3, 2004 between Holdings and us. In June
2004, we changed SMS' name to Infocrossing West, Inc.
The following unaudited condensed combined pro forma balance sheet at September
30, 2004 gives effect to the IHS Acquisition as if it had been completed as of
September 30, 2004. The acquisition was 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 following unaudited condensed combined pro forma Statements of Operations
for the year ended December 31, 2003 and the nine month period ended September
30, 2004 give effect to the IHS Acquisition and the SMS Acquisition as if they
had occurred on January 1, 2003. For the purposes of the pro forma Statements of
Operations, we have assumed that, other than the related financings, we had
sufficient cash to make the acquisitions. 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 the Claims Processing Business appearing as
appendix A in this Report and our Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004 and our Annual Report on Form 10-K for the year ended
December 31, 2003.
The pro forma Statements of Operations do not give effect to planned synergies
and cost savings.
B-1
UNAUDITED CONDENSED COMBINED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 2004
(IN THOUSANDS)
INFOCROSSING
HEALTHCARE
INFOCROSSING, SERVICES, INC. PRO FORMA PRO FORMA
INC. (A) (B) ADJUSTMENTS COMBINED
----------------- ----------------- ----------------- ------------------
ASSETS
CURRENT ASSETS:
Cash, cash equivalents, and restricted cash $ 38,743 $ - $ (19,125) (C) $ 19,618
Trade accounts receivable, net of allowances for
doubtful accounts 12,027 9,146 21,173
Prepaid expenses and other current assets 6,040 - 677 (D) 6,717
----------------- ----------------- ----------------- ------------------
56,810 9,146 (18,448) 47,508
PROPERTY AND EQUIPMENT, NET 22,666 2,049 - 24,715
----------------- ----------------- ----------------- ------------------
OTHER ASSETS:
Goodwill 77,837 - 32,437 (E) 110,274
Other intangible assets, net 3,573 - 4,073 (F) 7,646
Security deposits and other non-current assets 2,582 - - 2,582
----------------- ----------------- ----------------- ------------------
83,992 - 36,510 120,502
----------------- ----------------- ----------------- ------------------
TOTAL ASSETS $ 163,468 $ 11,195 $ 18,062 $ 192,725
================= ================= ================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,215 $ - $ - $ 6,215
Current portion of long-term debt
and capitalized lease obligations 3,628 - - 3,628
Accrued expenses 6,623 1,830 3,052 (G) 11,505
Deferred rent - 112 (112) (H) -
Current deferred revenue 1,235 - - 1,235
----------------- ----------------- ----------------- ------------------
17,701 1,942 2,940 22,583
LONG-TERM LIABILITIES:
Convertible notes 69,511 - - 69,511
Other long-term debt and capitalized
lease obligations 6,275 - 24,375 (I) 30,650
Other long-term liabilities 2,260 - - 2,260
----------------- ----------------- ----------------- ------------------
TOTAL LIABILITIES 95,747 1,942 27,315 125,004
----------------- ----------------- ----------------- ------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock 193 - - 193
Additional paid-in capital 144,182 9,253 (9,253) (J) 144,182
Accumulated Deficit (73,516) - - (73,516)
----------------- ----------------- ----------------- ------------------
70,859 9,253 (9,253) 70,859
Less common stock held in treasury, at cost (3,138) - - (3,138)
----------------- ----------------- ----------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 67,721 9,253 (9,253) 67,721
----------------- ----------------- ----------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 163,468 $ 11,195 $ 18,062 $ 192,725
================= ================= ================= ==================
See accompanying notes to unaudited condensed
combined pro forma financial information.
B-2
UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INFOCROSSING
INFOCROSSING, INFOCROSSING HEALTHCARE PRO FORMA
INC. (K) WEST, INC (L) SERVICES (M) ADJUSTMENTS PRO FORMA COMBINED
----------------- ------------------ ----------------- ------------------ -------------------
Revenues $ 55,228 $ 36,317 $ 52,015 $ - $ 143,560
--------------- ---------------- --------------- --------------- -----------------
Costs of revenue, excluding
depreciation shown below 36,706 36,586 35,464 - 108,756
Selling, general & administrative
expenses 8,565 891 3,725 - 13,181
Non-recurring costs:
Migration costs - 4,078 - - 4,078
Losses on impairment and
abandonment - 1,014 - - 1,014
Voluntary separation incentive
plan - - 2,845 - 2,845
Depreciation and amortization 6,061 2,223 298 (262) (N) 8,320
--------------- ---------------- --------------- --------------- -----------------
51,332 44,792 42,332 (262) 138,194
--------------- ---------------- --------------- --------------- -----------------
Operating income 3,896 (8,475) 9,683 262 5,366
Net interest expense (income) 2,498 205 - 3,454 (O) 6,157
--------------- ---------------- --------------- --------------- -----------------
Income (loss) before income
tax expense (benefit) 1,398 (8,680) 9,683 (3,192) (791)
Income tax expense (benefit) 42 2 3,656 (3,656) (P) 44
--------------- ---------------- --------------- --------------- -----------------
Net income (loss) 1,356 (8,682) 6,027 464 (835)
Accretion and dividends on
redeemable preferred stock (6,877) - - - (6,877)
--------------- ---------------- --------------- --------------- -----------------
Net income (loss) to
common stockholders $ (5,521) $ (8,682) $ 6,027 $ 464 $ (7,712)
=============== ================ =============== =============== =================
Basic and diluted net loss to
common
stockholders per share $ (0.71) $ (0.98)
=============== =================
Weighted average common
shares outstanding 7,730 136 (Q) 7,866
=============== =============== =================
See accompanying notes to unaudited condensed
combined pro forma financial information.
B-3
UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INFOCROSSING
INFOCROSSING, INFOCROSSING, HEALTHCARE PRO FORMA
INC. (R) WEST, INC. (S) SERVICES (T) ADJUSTMENTS PRO FORMA COMBINED
----------------- ------------------ ----------------- ------------------ -------------------
Revenues $ 66,232 $ 8,390 $ 36,213 $ - $ 110,835
--------------- ---------------- --------------- --------------- -----------------
Costs of revenue, excluding
depreciation shown below 46,303 6,461 23,127 - 75,891
Selling, general & administrative
expenses 7,559 2,772 2,831 - 13,162
Depreciation and amortization 5,896 556 531 174 (N) 7,157
--------------- ---------------- --------------- --------------- -----------------
59,758 9,789 26,489 174 96,210
--------------- ---------------- --------------- --------------- -----------------
Operating income (loss) 6,474 (1,399) 9,724 (174) 14,625
Net interest expense 3,924 102 - 1,838 (O) 5,864
--------------- ---------------- --------------- --------------- -----------------
Income (loss) before income
tax expense (benefit) 2,550 (1,501) 9,724 (2,012) 8,761
Income tax expense (benefit) (4) - 3,685 (2,915) (P) 766
--------------- ---------------- --------------- --------------- -----------------
Net income (loss) 2,554 (1,501) 6,039 903 7,995
=============== ================ =============== =============== =================
Basic net income per share $ 0.15 $ 0.46
=============== =================
Weighted average common
shares outstanding 17,382 17,382
=============== =================
Diluted net income per share $ 0.13 $ 0.41
=============== =================
Weighted average common
shares and equivalents
outstanding 19,599 19,599
=============== =================
See accompanying notes to unaudited condensed
combined pro forma financial information.
B-4
NOTES TO UNAUDITED CONDENSED COMBINED
PRO FORMA FINANCIAL INFORMATION
(DOLLAR AMOUNTS IN THOUSANDS)
On October 1, 2004, we acquired the Medicaid, Medicare and Managed Care claims
processing business (the "Claims Processing Business") of Verizon Information
Technologies Inc. ("VITI") from Verizon Communications Inc. (NYSE: VZ). The sale
was structured as an acquisition of the common stock of the Claims Processing
Business. The purchase price was $43.5 million cash (the "IHS Acquisition").
Immediately following the closing of the transaction, the Claims Processing
Business' name was changed to Infocrossing Healthcare Services, Inc. ("IHS").
The IHS Acquisition was pursuant to a Purchase and Sale Agreement, dated as of
September 1, 2004, between Verizon Data Services, Inc. (VITI's parent) and us.
The IHS Acquisition, as discussed in the following Notes, resulted in goodwill
of $32,437.
The IHS Acquisition was partially financed by borrowing $24,375 on October 1,
2004 from a non-revolving loan facility at an interest rate of Prime plus 3%
with a floor of 8.5% maturing on March 15, 2009. The amount borrowed represents
the full loan availability under the line. The $625 balance must remain
available in the event we are required to fund an Interest Reserve, as defined
in the loan agreement.
On June 30, 2004, we completed a private offering of $60,000 aggregate principal
amount of 4.0% Convertible Senior Notes due July 15, 2024 (the "Notes").
Approximately $40,000 of the net proceeds from this offering were used to repay
two 9.0% term loans, including the loan to purchase SMS described below. On July
6, 2004, the initial purchaser exercised its option in full to purchase an
additional $12,000 of the Notes. Net proceeds after a discount of $2,520 and
approximately $752 of costs and fees were approximately $68,728. Interest on the
Notes is payable semi-annually in arrears beginning on January 15, 2005. These
Notes are reflected in the balance sheet of Infocrossing, Inc. at September 30,
2004.
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.
The assets and liabilities of SMS are included in the balance sheet of
Infocrossing, Inc. at September 30, 2004. In June 2004, we changed SMS' name to
Infocrossing West, Inc.
A portion of the funding for the SMS Acquisition was obtained from a loan in the
amount of $15,000 at an interest rate of Prime plus 3% with a floor of 9%
maturing October 21, 2008. This loan was repaid June 30, 2004 from the proceeds
of the Notes as described above.
B-5
NOTES TO UNAUDITED CONDENSED COMBINED
PRO FORMA FINANCIAL INFORMATION (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
A. Our unaudited condensed consolidated balance sheet as of September 30,
2004, which includes our previously completed SMS Acquisition.
B. The unaudited condensed balance sheet of Claims Processing Business as of
September 30, 2004.
C. To record the cash paid for the IHS Acquisition and proceeds from the
related loan.
Cash paid for the IHS Acquisition $ (43,500)
Proceeds from a loan 24,375
-------------
$ (19,125)
=============
D. To record a receivable from the Verizon Data Services, Inc. for certain
disbursements of amounts accrued by the Claims Processing Business.
E. To record the adjustment to goodwill.
Purchase price:
Cash $ 43,500
Fees and costs 1,693 $ 45,193
-----------
Tangible assets acquired and liabilities
assumed (net of adjustments):
Trade accounts receivable $ 9,146
Prepaid expenses and other current assets 677
Property and equipment 2,049
Accrued expenses (1,889)
Accrual for purchase related costs (1,300) 8,683
----------- ----------
36,510
Less balance allocated to customer lists 4,073
----------
Total goodwill $ 32,437
==========
F. To record the fair value of the customer list acquired based on a valuation
performed by management.
B-6
NOTES TO UNAUDITED CONDENSED COMBINED
PRO FORMA FINANCIAL INFORMATION (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
G. To record adjustments to accrued expenses.
Fees and costs associated with the IHS Acquisition $ 1,693
Accrual for outstanding checks 59
Accrual for redundant leases 1,150
Accrual for severance 150
-------------
$ 3,052
=============
H. To record the elimination of the Claims Processing Business' deferred rent.
I. To record borrowing related to the IHS Acquisition.
J. To record the elimination of the Claims Processing Business' historical
equity.
K. Reflects our consolidated condensed statement of operations for the year
ended December 31, 2003.
L. Reflects the condensed statement of operation of SMS for the year ended
December 31, 2003, which includes the operations of the Acxiom Los Angeles
Outsourcing Data Center from June 30, 2003, the date SMS acquired certain
of the assets, rights, and properties and assumed certain obligations of
the Acxiom Los Angeles Outsourcing Data Center from Acxiom Corporation (the
"Acxiom Acquisition"). For the purposes of this pro forma statement of
operations, the Acxiom Acquisition has been assumed to occur on January 1,
2003. See Amendment No. 1 to our Current Report on Form 8-K/A for the SMS
Acquisition filed on June 10, 2004.
M. Reflects the condensed statement of operations of the Claims Processing
Business for the year ended December 31, 2003.
B-7
NOTES TO UNAUDITED CONDENSED COMBINED
PRO FORMA FINANCIAL INFORMATION (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
N. Depreciation and amortization expense was adjusted for a reduction in the
fair valaue of the SMS customer lists and a reduction in SMS fixed asset
fair values as a result of the purchase price allocation, increased
customer list amortization expense for six months relating to the assumed
Acxiom Acquisition on January 1, 2003 (See Note L), and the additional
expense of the amortization of the IHS customer list.
Nine Months
Year Ended Ended
December 31, September
2003 30, 2004
--------------------------
SMS fixed asset depreciation reduction (1) $ (726) $ (181)
Amortization of customer list related
to the Acxiom Acquisition 90 -
SMS customer list amortization reduction (150) (38)
Amortization of the IHS customer list (2) 524 393
---------- ---------
$ (262) $ 174
========== =========
(1) The amounts for the nine months ended September 30, 2004 include
SMS and Acxiom adjustments through March 31, 2004. Effective
April 1, 2004, SMS and Acxiom are included in our statement of
operations.
(2) The IHS customer list is being amortized over ten years.
O. To record additional interest expense for the loans used for the SMS
Acquisition and the IHS Acquisition, and amortization of deferred financing
costs.
Nine Months
Year Ended Ended
December 31, September
2003 30, 2004
--------------------------
Interest expense for the SMS loan
(9% per annum) (1) $ 1,207 $ 230
Interest expense for the IHS loan
(8.5% per annum) 2,101 1,571
Amortization of deferred financing costs (1) 146 37
--------------------------
$ 3,454 $ 1,838
==========================
(1) The amounts for the nine months ended September 30, 2004 include
SMS and Acxiom adjustments through March 31, 2004. Effective
April 1, 2004, SMS and Acxiom are included in our statement of
operations.
B-8
NOTES TO UNAUDITED CONDENSED COMBINED
PRO FORMA FINANCIAL INFORMATION (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
P. To record adjustments to taxes, including the elimination of the Claims
Processing Business provisions in lieu of income taxes. For the nine months
ended September 30, 2004, record $770 in income tax expense for the
additional pro forma net income contributed by IHS, in excess of the
approximately $6,500 of Federal net operating loss carryforwards available
to us in 2004. For the year ended December 31, 2003, no additional tax is
required due to the loss. At December 31, 2003. we have net operating loss
carry-forwards of approximately $37.3 million for Federal income tax
purposes that begin to expire in 2019. The use of these net operating loss
carry-forwards may be restricted in amount in future years pursuant to
Section 382 of the Internal Revenue Code. The deferred tax asset associated
with carrying forward cumulative pre-tax losses has been fully offset by a
valuation allowance due to the uncertainty of realizing such tax benefits.
Q. To record the additional shares issued in connection with the SMS
Acquisition.
R. Reflects our unaudited condensed consolidated income statement for the nine
months ended September 30, 2004, which includes the accounts of SMS after
April 1, 2004.
S. Reflects the unaudited condensed income statement of SMS for the three
months ended March 31, 2004 (through the date of the SMS Acquisition).
T. Reflects the audited condensed income statement of the Claims Processing
Business for the nine months ended September 30, 2004.
B-9