UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2006
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR the transition period from to
--------------------- ------------------------
Commission file number: 0-20824
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INFOCROSSING, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3252333
------------------------------- ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2 Christie Heights Street; Leonia, NJ 07605
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 840-4700
Check whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act) (Check
one:
Large Accelerated Filer [ ] Accelerated Filer [X] Non-accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
There were 21,736,569 shares of the registrant's Common Stock, $0.01 par value,
outstanding as of November 6, 2006.
Page 1
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Amounts)
September 30, December 31,
ASSETS 2006 2005
--------------- ---------------
(Unaudited)
CURRENT ASSETS:
Cash and equivalents $ 12,614 $ 16,892
Trade accounts receivable, net of allowances for doubtful accounts of
$428 and $637 at September 30, 2006 and December 31, 2005, respectively 25,364 25,631
Due from related parties 164 254
Prepaid software costs 8,539 5,604
Deferred income taxes 2,097 2,097
Current deferred customer acquisition costs 1,030 1,084
Other current assets 8,132 4,064
------------ ------------
Total current assets 57,940 55,626
Property, equipment and purchased software, net 41,367 40,749
Deferred software, net 2,269 1,581
Goodwill 158,405 150,799
Other intangible assets, net 17,540 19,853
Deferred income taxes 7,202 10,098
Deferred customer acquisition costs 2,845 2,770
Deferred financing costs 3,088 3,710
Other non-current assets 1,352 1,249
------------ ------------
TOTAL ASSETS $ 292,008 $ 286,435
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 9,912 $ 11,880
Current portion of long-term debt and capitalized lease obligations 17,475 15,551
Accrued expenses 16,384 20,719
Income taxes payable 1,695 560
Current deferred revenues 3,731 1,000
------------ ------------
Total current liabilities 49,197 49,710
Notes payable, long-term debt and capitalized lease obligations, net of current
portion 114,707 123,734
Deferred revenues, net of current portion 4,989 3,017
Other long-term liabilities 3,495 2,944
------------ ------------
TOTAL LIABILITIES 172,388 179,405
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock; $0.01 par value; 3,000,000 shares authorized; none issued - -
Common stock; $0.01 par value; 50,000,000 shares authorized; shares issued of
22,405,272
and 21,216,032 at September 30, 2006 and December 31, 2005, respectively 224 212
Additional paid-in capital 171,001 163,973
Accumulated deficit (47,984) (53,534)
------------ ------------
123,241 110,651
Less 668,969 shares at September 30, 2006 and December 31, 2005,
of common stock held in treasury, at cost (3,621) (3,621)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 119,620 107,030
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 292,008 $ 286,435
============ ============
See Notes to Consolidated Interim Financial Statements.
Page 2
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, In Thousands Except
Numbers of Shares and Per Share Amounts)
Three Months Ended September 30, Nine months Ended September 30,
---------------------------------------- ---------------------------------------
2006 2005 2006 2005
------------------ ------------------ ------------------ -----------------
(Unaudited) (Unaudited)
REVENUES $ 57,517 $ 34,094 $ 170,274 $ 106,815
--------------- --------------- --------------- --------------
COSTS and EXPENSES:
Costs of revenues, excluding
depreciation shown below 39,605 25,335 120,104 76,872
Selling and promotion costs 2,286 1,275 6,365 3,406
General and administrative expenses 4,537 3,065 14,351 9,454
Depreciation and amortization 4,248 2,713 12,508 8,004
--------------- --------------- --------------- --------------
50,676 32,388 153,328 97,736
--------------- --------------- --------------- --------------
INCOME FROM OPERATIONS 6,841 1,706 16,946 9,079
--------------- --------------- --------------- --------------
Interest income (121) (276) (368) (528)
Interest expense 2,565 1,710 7,684 4,917
--------------- --------------- --------------- --------------
2,444 1,434 7,316 4,389
--------------- --------------- --------------- --------------
INCOME BEFORE INCOME TAXES 4,397 272 9,630 4,690
Income tax expense 1,808 159 4,080 2,016
--------------- --------------- --------------- --------------
NET INCOME $ 2,589 $ 113 $ 5,550 $ 2,674
=============== =============== =============== ==============
BASIC EARNINGS PER SHARE:
Net income $ 0.12 $ 0.01 $ 0.26 $ 0.13
=============== =============== =============== ==============
Weighted average number of
common shares outstanding 21,671,508 20,213,613 21,233,936 20,183,031
=============== =============== =============== ==============
DILUTED EARNINGS PER SHARE:
Net income $ 0.11 $ 0.01 $ 0.25 $ 0.12
=============== =============== =============== ==============
Weighted average number of common shares
and share equivalents outstanding 22,571,627 21,031,167 22,063,689 22,047,307
=============== =============== =============== ==============
See Notes to Consolidated Interim Financial Statements.
Page 3
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited, in thousands)
Common Par Value Additional Accumulated Treasury Total
Shares Paid in Capital Deficit Stock at Cost
------------ ----------- ---------------- --------------- -------------- ------------
Balances,
December 31, 2005 21,216 $ 212 $ 163,973 $ (53,534) $ (3,621) $ 107,030
Exercises of stock
options and warrants 973 10 3,952 - - 3,962
Stock issued in connection
with an acquisition 216 2 1,784 - - 1,786
Portion of tax provision
relating to stock
option expense - - 50 - - 50
Fair value of stock options - - 1,242 - - 1,242
Net income - - - 5,550 - 5,550
------------ ----------- --------------- -------------- ----------- ------------
Balances,
September 30, 2006 22,405 $ 224 $ 171,001 $ (47,984) $ (3,621) $ 119,620
============ =========== =============== ============== =========== ============
See Notes to Consolidated Interim Financial Statements.
Page 4
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine months Ended September 30,
-------------------------------------------
2006 2005
-------------------- --------------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,550 $ 2,674
Adjustments to reconcile net income to cash provided by operating activities
(operating activities include the operations of companies acquired subsequent
to their respective acquisition dates):
Depreciation and amortization 12,508 8,004
Additions to allowance for doubtful accounts - 1,285
Accretion of discounted convertible debt 263 130
Deferred income taxes 2,945 960
Compensation expense related to stock options 1,242 -
Deferred compensation expense related to executive pension benefits 323 277
Payments received on related party balances, net of interest charges 90 (11)
Decrease (increase) in:
Trade accounts receivable 366 5,736
Prepaid software costs (2,935) (434)
Deferred customer acquisition costs and other current assets (2,287) (557)
Other non-current assets 517 324
Increase (decrease) in:
Accounts payable (2,168) (646)
Accrued expenses (4,731) (1,470)
Income taxes payable 56 (440)
Deferred revenues 3,402 (847)
Other liabilities 64 273
----------------- -----------------
Net cash provided by operating activities 15,205 15,258
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment, and purchased software (3,811) (3,078)
Payments related to acquisitions (4,936) (554)
Disposal of property - 15
Repurchase of stock - (483)
Increase in deferred software costs (653) (625)
----------------- -----------------
Net cash used in investing activities (9,400) (4,725)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt and capitalized leases (14,019) (3,453)
Exercises of stock options and warrants 3,962 5,895
----------------- -----------------
Net cash (used in) provided by financing activities (10,057) 2,442
----------------- -----------------
Net cash (used in) provided by continuing operations (4,252) 12,975
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Payments on portion of accrued loss on leased facilities relating to
discontinued operations (26) (39)
----------------- -----------------
Net increase in cash and equivalents 4,278 12,936
Cash and equivalents, beginning of period 16,892 26,311
----------------- -----------------
Cash and equivalents, end of the period $ 12,614 $ 39,247
================= =================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 7,071 $ 5,516
================= =================
Income taxes $ 1,073 $ 1,232
================= =================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITY:
Equipment acquired subject to capital leases $ 6,544 $ 4,679
================= =================
Value of shares given in partial payment of an acquisition $ 1,786 $ -
================= =================
See Notes to Consolidated Interim Financial Statements.
Page 5
INFOCROSSING, INC. AND SUBSIDIAIRES
NOTES TO THE CONSOLIDATED INTERIM
FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The consolidated financial statements include the accounts of Infocrossing, Inc.
and its wholly owned subsidiaries (collectively, the "Company"). All significant
inter-company balances and transactions have been eliminated.
The consolidated balance sheet as of September 30, 2006, the consolidated
statements of operations for the three and nine months ended September 30, 2006
and 2005, the consolidated statements of cash flows for the nine months ended
September 30, 2006 and 2005, and the consolidated statement of stockholders'
equity for the nine months ended September 30, 2006 have not been audited. In
the opinion of management, all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations, and cash flows for the periods indicated have been made. The results
of operations and cash flows for the periods ended September 30, 2006 and 2005
are not necessarily indicative of the operating results for the full year.
In December 2004, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 123(R), Share-Based Payment, which establishes standards for
transactions in which an entity exchanges its equity instruments for goods or
services. This standard requires the Company to measure the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. This eliminates the exception to account for
such awards using the intrinsic method previously allowable under APB Opinion
No. 25. The Company adopted SFAS 123(R) using the modified-prospective method on
January 1, 2006.
Had the Company adopted SFAS 123(R) in prior periods, the impact of that
standard would have approximated the impact of SFAS 123 as described in the
disclosure of pro forma net income and earnings per share in previously filed
consolidated financial statements.
In July 2006, the Financial Accounting Standards Board ("FASB") released FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the
accounting and reporting for uncertainties in income taxes and prescribes a
comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be
taken in income tax returns. FIN 48 prescribes a two-step evaluation process for
tax positions. The first step is recognition based on a determination of whether
it is more likely than not that a tax position will be sustained upon
examination, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. The second step is to
measure a tax position that meets the more-likely-than-not threshold. The tax
position is measured at the largest amount of benefit that is greater than 50%
likely of being realized upon ultimate settlement. If a tax position does not
meet the more-likely-than-not recognition threshold, the benefit of that
position is not recognized in the financial statements. FIN 48 is effective
beginning in the first quarter of fiscal 2007. The cumulative effects, if any,
of applying FIN 48 will be recorded as an adjustment to retained earnings as of
the beginning of the period of adoption which for calendar year companies is
January 1, 2007. The Company is in the process of evaluating the potential
effects of FIN 48 on the consolidated financial statements and is not yet in a
position to determine what, if any, effects FIN 48 will have on the consolidated
financial statements.
There are no other changes to the Company's Critical Accounting Policies as
disclosed in our Annual Report on Form 10-K for December 31, 2005.
Certain reclassifications have been made to the prior periods to conform to the
current presentation.
Certain disclosures normally included in financial statements prepared in
accordance with U.S. generally accepted accounting principles have been
condensed or omitted. These consolidated interim financial statements should be
read in conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 2005.
Page 6
2. Acquisitions
On November 30, 2005, the Company acquired 100 percent of the membership
interests of (i)Structure, LLC from Level 3 Financing, Inc., a Delaware
corporation ("Level 3") for a cash payment of approximately $82,267,000 and
346,597 shares of Company stock valued at $2,500,000 (the "(i)Structure
Acquisition"). The Company funded the cash portion of the purchase price through
a combination of the net proceeds of $67,043,000 from a $70 million debt
facility which matures April 14, 2009, $11,512,000 in net proceeds from the
sale/leaseback of land and an 88,000 rentable square foot building in Omaha,
Nebraska (the "Omaha Property"), and the remainder with available cash. In
September 2006, the Company and the State of Nebraska entered into an agreement
approving the Company's participation in a state incentive program for economic
growth based on maintaining certain levels of "qualified property," as defined,
within Nebraska. The application to participate in this program had been
submitted by (i)Structure, LLC prior to the (i)Structure Acquisition. The
incentive includes approximately $100,000 based on December 2005. Subsequent to
the acquisition, the Company also sold and leased back a 60,000 square foot
building and improvements in Tempe, Arizona (the "Tempe Property"). The Tempe
Property is subject to a ground lease. The purchase price for the (i)Structure
Acquisition is subject to an adjustment based on final values of certain
components of working capital, the values of which are being negotiated between
the Company and Level 3. In August 2006, (i)Structure, LLC's name was changed to
Infocrossing, LLC.
The following table summarizes the preliminary fair values of the assets
acquired and the liabilities assumed at the date of the (i)Structure
Acquisition. The settlement of the working capital adjustment noted above will
affect the final fair values. The intangible asset subject to amortization
relates to customer contracts acquired and is being amortized over seven years.
All of the goodwill is deductible for tax purposes.
November 30, 2005
(In thousands)
Trade accounts receivable $ 6,403
Other current assets 4,695
-----------
Total current assets 11,098
Property, equipment, and purchased software 36,770
(see discussion of sale-leasebacks above)
Intangible asset subject to amortization 9,400
Goodwill 46,580
-----------
Total assets acquired 103,848
-----------
Accounts payable and accrued expenses (15,484)
Deferred revenues (1,279)
Capitalized lease obligations (318)
-----------
Total liabilities assumed (17,081)
-----------
Purchase price $ 86,767
===========
During the period ended September 30, 2006, the Company acquired two additional
businesses (the "Minor Acquisitions") for approximately $3,513,000 in cash,
$179,000 in acquisition expenses, and 216,241 shares of the Company's common
stock valued at approximately $1,786,000. The purchase price was allocated to
tangible and intangible assets acquired and liabilities assumed based on their
preliminary respective fair values. As part of the allocation, approximately
$7,422,000 was allocated to goodwill, $400,000 was allocated to amortizable
intangible assets (contract rights and customer relationships) that are being
amortized over their estimated useful life of five years, and $500,000 to
purchased deferred software development cost being amortized over three years.
The goodwill related to the Minor Acquisitions is deductible for tax purposes.
The following unaudited condensed combined pro forma information for the three
and nine months ended September 30, 2005 gives effect to the (i)Structure
Acquisition as if it had occurred on January 1, 2005. The pro forma information
may not be indicative of the results that actually would have occurred had the
transaction been in effect on the date indicated, nor does it purport to
indicate the results that may be obtained in the future. The pro forma
information does not give effect to planned synergies and cost savings. For
example, the Company expects to achieve annual pre-tax cost savings of between
$11 and $12 million through the elimination of redundant positions and other
savings. The pro forma information also does not give effect to the Minor
Page 7
Acquisitions because the impact these acquisitions would have on the pro forma
information is not material.
Pro Forma Information
(In Thousands except Per Share Data)
3 Months Ended 9 months Ended
September 30, 2005 September 30, 2005
Revenues $ 52,194 $ 160,015
--------------------- -------------------
Net loss $ (1,542) $ (2,087)
--------------------- -------------------
Basic net loss per
share $ (0.07) $ (0.10)
--------------------- -------------------
Diluted net loss per
equivalent share $ (0.07) $ (0.10)
--------------------- -------------------
The results of each of the aforementioned acquisitions are included with that of
the Company for the period subsequent to the respective acquisition dates.
3. Stock Plan and Stock Option Plans
2005 Stock Plan
On June 13, 2005, the stockholders approved a Board of Directors resolution
establishing the Company's 2005 Stock Plan (the "2005 Plan"). The Company has
reserved 1,000,000 of the authorized shares of Common Stock for issuance under
the 2005 Plan. On June 15, 2006, the stockholders of the Company voted to
increase the shares reserved for the 2005 Plan to 2,000,000. Unless terminated
earlier, the 2005 Plan will terminate on the tenth anniversary of the day
immediately proceeding the date on which the 2005 Plan was approved by the
stockholders.
The 2005 Plan and the 2002 and 1992 Plans described below (collectively, the
"Plans") are administered by a committee (the "Committee") consisting of at
least three Directors provided, however, that the composition of such committee
shall comply with applicable rules of the Securities and Exchange Commission, as
may be amended from time to time, and applicable listing requirements, as may be
amended from time to time.
The Committee has full power to select from among the persons eligible for
awards, the individuals to whom awards will be granted, to make any combination
of awards to participants and to determine the specific terms of each award,
subject to the provisions of the Plan. Persons eligible to participate in the
Plan generally will be those officers, employees and Directors of the Company
and consultants to the Company who are responsible for or contribute to the
management, growth or profitability of the Company, as selected from time to
time by the Committee.
Stock Options Granted to Employees. The 2005 Plan permits the granting of both
incentive stock options ("Incentive Options") and non-qualified stock options
("Non-Qualified Options") to Company employees. The exercise price of each
option shall be determined by the Committee but shall not be less than 100% of
the fair market value for the shares on the date of grant.
The term of each option shall be fixed by the Committee and may not exceed 10
years from the date of grant. The Committee shall determine at what time or
times each option may be exercised and, subject to the provisions of the 2005
Plan, the period of time, if any, after death, disability or termination of
employment during which options may be exercised. Options may also be made
exercisable in installments. Both Incentive Options and Non-Qualified Options
typically vest (become exercisable) either upon the date of grant or over a
three-year period.
To qualify as Incentive Options, options must meet additional federal tax
requirements, as may be amended from time to time, including limits on the value
of shares subject to Incentive Options which first become exercisable in any one
year, and a shorter term and higher minimum exercise price in the case of
certain large stockholders.
Stock Options Granted to Non-Employee Directors and Consultants. The 2005 Plan
permits the granting of Non-Qualified Options to non-employee officers and
Directors of the Company and to consultants to the Company. The exercise price
of such Non-Qualified Options shall be determined by the Committee and shall not
be less than 100% of the fair market value of the Common Stock on the date of
grant.
Page 8
The term of each option shall be fixed by the Committee and may not exceed 10
years from the date of grant. The Committee shall determine at what time or
times each option may be exercised and, subject to the provisions of the 2005
Plan, the period of time, if any, after death, disability or termination of
employment during which options may be exercised. Options may also be made
exercisable in installments.
Upon exercise of options, the option exercise price must be paid in full either
(i) in cash (ii) with the approval of the Committee (which may be withheld in
its sole discretion), by the surrender of shares of the Company's common stock
then owned by the grantee, (iii) from the cash proceeds of a loan from an
independent broker-dealer whereby the loan is secured by the option or the stock
to be received upon exercise, or (iv) by any combination of the foregoing and
with the approval of the Committee (which may be withheld in its sole
discretion) may be affected wholly or in part by monies borrowed from the
Company pursuant to repayment terms and conditions as shall be determined from
time to time by the Committee, in its discretion, separately with respect to
each exercise of an Incentive Option and each grantee; provided, that each such
method and time for payment and each such borrowing and terms and conditions of
repayment shall then be permitted by and be in compliance with applicable law.
Stock Appreciation Rights. At the discretion of the Committee, options granted
under the 2005 Plan to officers, employees, Directors or consultants may include
stock appreciation rights. The exercise price of each stock appreciation right
shall be determined by the Committee but shall not be less than 100% of the fair
market value for the underlying shares on the date of grant. Such stock
appreciation rights are only exercisable with their related stock options. Upon
exercise of a stock appreciation right a grantee shall be entitled to receive in
stock the difference between the current fair market value of common stock and
the original exercise price of the underlying stock option. Stock appreciation
rights not exercised with the exercise of the underlying option will
automatically terminate.
Restricted Stock and Unrestricted Stock. The Committee may also award shares of
Common Stock subject to such conditions and restrictions as the Committee may
determine ("Restricted Stock"). The purchase price, if any, of shares of
Restricted Stock shall be determined by the Committee.
Recipients of Restricted Stock must enter into a Restricted Stock award
agreement with the Company, in such form as the Committee determines, setting
forth the restrictions to which the shares are subject and the date on which the
restrictions will lapse and the shares become vested. The Committee may at any
time waive such restrictions or accelerate such dates. If a participant who
holds shares of Restricted Stock terminates the relationship with the Company
for any reason (including death) prior to the vesting of such Restricted Stock,
the Company shall have the right to require the forfeiture of such Restricted
Stock in exchange for the amount, if any, which the participant paid for them.
Prior to the vesting of Restricted Stock, the participant will have all rights
of a stockholder with respect to the shares, including voting and dividend
rights, subject only to the conditions and restrictions set forth in the 2005
Plan or in the Restricted Stock award agreement.
The Committee may also grant shares (at no cost or for a purchase price
determined by the Committee) under the 2005 Plan that are free from any
restrictions ("Unrestricted Stock"). Unrestricted Stock may be issued in
recognition of past services or other valid consideration.
Adjustments for Stock Dividends, Mergers, Etc. The Committee shall make
appropriate adjustments in connection with outstanding awards to reflect stock
dividends, stock splits and similar events. In the event of a merger,
liquidation or similar event, the Committee in its discretion may provide for
substitution or adjustments.
Amendments and Termination. The Board of Directors may at any time amend or
discontinue the 2005 Plan. Moreover, no such amendment, unless approved by the
stockholders of the Company, as may be required under (i) applicable rules of
the Securities and Exchange Commission, as may be amended from time to time, or
(ii) if the Stock is listed on a national securities exchange or the Nasdaq
system, with applicable listing requirements, as may be amended from time to
time, or (iii) with respect to Incentive Stock Options, as required under
applicable federal tax law or regulations, as may be amended from time to time.
Page 9
2002 and 1992 Stock Option Plans
On June 25, 2002, the stockholders approved the Company's 2002 Stock Option and
Stock Appreciation Rights Plan (the "2002 Plan"). In September 1992, the Company
had adopted the 1992 Stock Option and Stock Appreciation Rights Plan (as
subsequently amended and restated, the 1992 Plan") that provided for the
granting of options to employees, officers, directors, and consultants for the
purchase of common stock. The material features of the 1992 Plan and the 2002
Plan are substantially the same. Incentive stock options could be granted only
to employees and officers of the Company, while non-qualified options could be
issued to directors and consultants, as well as to officers and employees of the
Company. Both the 1992 Plan and the 2002 Plan provided a maximum exercise period
of ten years. Qualified options granted to a 10% or greater stockholder had to
have a maximum term of five years under Federal tax rules. As a matter of
practice, except with respect to a 10% or greater stockholder, the typical
exercise period for options granted under the 2002 and 1992 Plans was ten years
from the date of grant.
No further grants will be made pursuant to either the 2002 Plan or the 1992
Plan. The grants previously made under these plans will not be affected. The
number of authorized shares available in the 2002 Plan is equal to the total
unexercised options remaining at any time. At September 30, 2006, the number of
unexercised options in the 2002 Plan and the 1992 Plan was 3,191,999.
Activity in the Plans during the periods from December 31, 2002 through
September 30, 2006 is as follows:
Number of Exercise Price Range Weighted Average
Options Exercise Price
--------------- -------------------------- --------------------
Options outstanding, December 31, 2002 1,406,935 $3.25 - $37.78 $8.93
Options granted 228,750 $6.27 - $9.91 $8.34
Options exercised (19,034) $4.50 - $7.71 $5.57
Options cancelled (85,897) $4.63 - $27.25 $11.64
---------------
Options outstanding, December 31, 2003 1,530,754 $3.25 - 37.78 $8.73
Options granted 1,844,750 $6.98 - $17.38 $13.66
Options exercised (345,668) $3.25 - $12.59 $5.66
Options cancelled (17,231) $4.86 - $29.98 $10.06
---------------
Options outstanding, December 31, 2004 3,012,605 $3.63 - $37.78 $12.10
Options granted 470,250 $7.365 - $18.43 $10.18
Options granted in excess of market 750,000 $25.00 $25.00
Options exercised (473,962) $3.875 - $13.68 $12.44
Options cancelled (73,251) $4.00 - $27.25 $15.21
---------------
Options outstanding, December 31, 2005 3,685,642 $3.63 - $37.78 $14.37
Options granted 555,206 $10.29 - $13.03 $11.76
Options exercised (72,272) $3.63 - $9.91 $6.36
Options cancelled (75,088) $5.33 - $27.25 $16,03
---------------
Options outstanding, September 30, 2006 4,093,488 $4.37 - $37.78 $14,12
===============
Page 10
The intrinsic value (calculated by subtracting the exercise price from the fair
value on the date of exercise) for options exercised during the nine months
ended September 30, 2006 was approximately $378,000.
Additional information regarding activity relating to unvested options during
the nine months ended September 30, 2006:
Number of
Unvested Weighted Average
Options Exercise Price Range Exercise Price
--------------- -------------------------- --------------------
Unvested Options, December 31, 2005 501,980 $6.31 - $18.43 $13.91
Options granted - unvested 482,431 $10.28 - $13.03 $11.88
Options vesting (183,282) $6.32 - $18.43 $12.37
Unvested options cancelled (48,414) $6.84 - 18.43 $16.00
---------------
Unvested Options, September 30, 2006 752,715 $7.50 - $18.43 $12.55
===============
Additional information regarding exercise price ranges of options outstanding
and exercisable:
Weighted Weighted
Average Average
Weighted Contractual Exercise
Number of Average Life Number of Price of
Exercise Price Options Exercise Remaining Options Exercisable
Range Outstanding Prices (Years) Exercisable Options
- -------------------- ---------------- ------------- --------------- -------------- ---------------
$3.63 - $5.44 67,631 $5.24 1.7 67,631 $5.24
$5.45 - $8.16 266,026 $7.14 6.4 266,018 $7.14
$8.17 - $12.23 2,109,456 $10.70 7.0 1,787,269 $10.82
$12.24 - $18.35 833,656 $15.36 7.8 410,602 $16.41
$18.36 - $27.53 809,219 $24.61 1.9 801,753 $24.67
$27.54 - $37.78 7,500 $34.80 3.4 7,500 $34.80
---------------- --------------
4,093,488 $14.12 3,340,773 $14.48
================ ==============
There were 3,340,773; 3,183,762; 2,445,576; and 1,262,972 options exercisable at
September 30, 2006 and December 31, 2005, 2004, and 2003, respectively. At
September 30, 2006, there were 1,097,961 options available for future grant, of
which 325,000 are reserved pursuant to executive employment agreements.
At September 30, 2006, the Company has reserved 1,814,478 common shares for
issuance upon exercise of the following warrants: (i) 65,000 shares exercisable
at $18.00 per share expiring September 16, 2010; (ii) 50,000 shares exercisable
at $15.00 per share expiring January 13, 2009; and (iii) 1,699,478 shares
exercisable at $7.86 per share expiring October 20, 2008. During the nine months
ended September 30, 2006, warrants for 567,184 common shares were exercised for
cash, and warrants for 673,434 shares were exercised without cash payment by
surrendering warrants for 339,891 shares and receiving 333,543 common shares.
At September 30, 2006, the Company had reserved 5,673,760 shares for issuance
upon the potential exchange of the $72,000,000 outstanding convertible notes.
Total shares reserved for exchange of convertible debt and the exercise of
warrants and options (including options available for grant) are 12,679,687.
Page 11
Stock-Based Compensation
The Company adopted SFAS 123(R) (see Note 1) using the modified prospective
method effective as of January 1, 2006.
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company previously accounted for share-based payments to employees using APB
Opinion 25's intrinsic value method and, as such, generally recognized no
compensation cost for employee stock options. Accordingly, the adoption of SFAS
123(R)'s fair value method will have a significant impact on its results of
operations. Had the Company adopted SFAS 123(R) in prior periods, the impact of
that standard would have approximated the impact of SFAS 123 as described in the
disclosure of pro forma net income and earnings per share below.
The fair value of each stock option is estimated on the date of the grant using
the Black-Scholes option pricing model with the following assumptions used for
grants in 2006: a risk-free interest rates of between 4.37% and 5.20%; expected
lives of between three and five years; and expected volatilities of between
44.0% and 48.4%. The following assumptions were used for grants in 2005:
risk-free interest rates of between 3.38% and 4.13%; expected lives of three
years; and expected volatility of between 33.3% and 48.1%.
The expense recorded in general and administrative expenses, representing the
fair value of options vesting during the nine months ended September 30, 2006,
was approximately $1,242,000. At the Company's current effective tax rate, the
after-tax effect of this charge in the nine months ended September 30, 2006 was
approximately $708,000 or $0.03 per both basic and diluted shares. The expense
recorded in the third quarter of 2006 was approximately $401,000, with an
after-tax effect of $228,000, or $0.01 per both basic and diluted shares. The
unrecorded pre-tax compensation cost related to unvested options at September
30, 2006 totals approximately $2,890,000, amortizable over the period ending
September 30, 2009. Additional option grants will increase this amount, and
forfeitures of out-of-the-money options held by terminating employees will
reduce it. The weighted average amortization period is 2.2 years.
The Company has not determined what impact SFAS 123(R) might have on the nature,
timing, and amounts of its share-based compensation to employees in the future.
Had compensation cost been determined in accordance with SFAS No. 123, the
Company's income in thousands of dollars and basic and diluted earnings per
common share for the three and nine month periods ended September 30, 2005 would
have been as follows:
Three Months Ended Nine months Ended
September 30, 2005 September 30, 2005
-------------------- -------------------
Net income as reported $ 113 $ 2,674
Deduct stock-based
employee compensation determined
under the fair value method for all
awards, net of tax (258) (1,671)
------------- ------------
Pro forma income (loss) $ (145) $ 1,003
============= ============
Net earnings (loss) per share:
Basic as reported $ 0.01 $ 0.13
============= ============
Diluted as reported $ 0.01 $ 0.12
============= ============
Basic, pro forma $ (0.01) $ 0.05
============= ============
Diluted, pro forma $ (0.01) $ 0.05
============= ============
Page 12
4. Basic and Diluted Earnings Per Common Share
The Company computes earnings per share in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings per share is computed by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted earnings per share adjusts basic earnings per share for the
effects of convertible securities, stock options and warrants and other
potentially dilutive financial instruments, only in the periods in which such
effect is dilutive. For the quarters ended September 30, 2006 and 2005, the
weighted average number of shares used in calculating diluted earnings per share
includes options and warrants to purchase common stock aggregating 3,228,573 and
3,665,996 shares, respectively. For the nine months ended September 30, 2006 and
2005, the weighted average number of shares used in calculating diluted earnings
per share includes options and warrants to purchase common stock aggregating
3,228,573 and 5,094,245 shares, respectively. The calculation of earnings per
share for the quarters ended September 30, 2006 and 2005 excludes 2,679,393 and
2,935,799 shares, respectively, related to out-of-the-money stock options and
warrants because to include them in the calculation would be antidilutive. The
calculation of earnings per share for the nine months ended September 30, 2006
and 2005 excludes 2,679,393 and 1,507,550 shares, respectively, related to
out-of-the-money stock options and warrants, because the inclusion of such
options and warrants would be anti-dilutive. The effect of the convertible
securities is excluded in the reported periods because it is not dilutive. The
adoption of SFAS 123(R) did not have a material impact on the number of diluted
shares outstanding, and did not materially change the calculation of earnings
per share.
5. Income Taxes
In the period ended September 30, 2006, the Company recorded income tax expense
of $4,080,000, consisting of a current provision of $1,135,000, a deferred
provision of $2,945,000, and an increase in paid in capital of $50,000 for the
excess tax deduction relating to stock option expense. The effective rate in the
Current Period was 42%, compared with 43% in the Prior Year's Period.
A deferred tax benefit reflects future income tax savings realizable when tax
credits, net operating loss carry-forwards, or other deductions based on
temporary differences between taxable income and income before income taxes can
be used to reduce income taxes. If there is uncertainty of realizing deferred
tax benefits, a valuation allowance must be established. The Company had a
deferred tax valuation allowance of $2,462,000 at September 30, 2006. The
Company has net operating loss carry-forwards of approximately $42,000,000 for
Federal income tax purposes that begin to expire in 2019. The use of these net
operating loss carry-forwards is limited in amount in future years pursuant to
Section 382 of the Internal Revenue Code.
6. Related Party Transactions.
In February 2006, the Chairman and Vice Chairman each paid $50,000 to reduce
their respective indebtedness to the Company.
The employment agreements of the Chairman and Vice Chairman provide for lifetime
pension benefits of $180,000 annually for the Chairman and $120,000 annually for
the Vice Chairman, which will be paid beginning with the commencement of each
executive's reduced part-time employment period. The pension benefits payable to
each of the Chairman and the Vice Chairman are not payable pursuant to a funded
qualified pension plan. The Company did not make any contributions for 2005, and
does not expect to contribute to this plan in 2006. The expense recorded in each
of the periods ended September 30, 2006 and 2005 was approximately $323,000 and
$277,000, respectively. The expense recorded in each of the quarters ended
September 30, 2006 and 2005 was approximately $108,000 and $92,000,
respectively.
Page 13
7. Notes Payable.
On July 12, 2006, the Company repaid the $5,000,000 balance on the revolving
credit facility.
The Credit Agreement between the Company and its lenders provides for quarterly
scheduled payments on the Term Loan beginning September 30, 2006, as well as
other payments required in the event certain transactions occur, including
payments equal to 50% of the receipt of funds from the exercise of warrants. On
May 11 and August 25, 2006, the Company made payments of $1,401,000 and $350,000
as a result of such warrant exercises, and made the scheduled payment of
$2,420,000 on September 30, 2006.
Page 14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Our management believes that we are a leading provider of selective information
technology outsourcing services to enterprise clients. We deliver a full suite
of outsourced solutions that enable clients to leverage our infrastructure and
process expertise to improve their efficiency and reduce their operating costs.
During our history of more than twenty years, we have developed expertise in
managing complex computing environments, beginning with traditional data center
outsourcing services and evolving to a comprehensive set of managed solutions.
We support a variety of clients, and assure the optimal performance, security,
reliability, and scalability of our clients' mainframes, distributed servers,
and networks, irrespective of where the systems' components are located.
Strategic acquisitions have contributed significantly to our historical growth
and remain an integral component of our long-term growth strategy.
On November 30, 2005, we acquired 100% of the membership interests in
(i)Structure, LLC, a Delaware limited liability company with operations in
Colorado and data centers in Omaha, NE and Tempe, AZ, from Level 3 Financing,
Inc. for a total purchase price of approximately $86,767,000, including related
acquisition costs of $2,000,000, and 346,597 shares of our common stock valued
at $2,500,000 (the "(i)Structure Acquisition"). In August 2006, we changed the
name of (i)Structure, LLC to Infocrossing, LLC.
The operations of Infocrossing, LLC are included in consolidated operations from
the date of the acquisition. The operations of this acquired company are being
integrated into our operations so that the entire enterprise will benefit from
operational leverage and consolidation. The (i)Structure Acquisition was
recorded as a purchase in accordance with the Financial Accounting Standards
Board, Statements of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS 141").
We operate in one reportable segment of providing information technology
outsourcing services.
Certain reclassifications were made to the prior years' financial statements to
conform to the current year presentation.
Results of Operations - Three Months Ended September 30, 2006 and 2005
For the quarter ended September 30, 2006 (the "Current Quarter"), revenues
increased $23,423,000 (69%) to $57,517,000 from $34,094,000 for the quarter
ended September 30, 2005 (the "Prior Year's Quarter"). This increase includes
$19,564,000 of revenues from clients added as the result of the (i)Structure
Acquisition. Excluding revenues added from the (i)Structure Acquisition,
revenues increased by $3,859,000 (11%). Our contracts are typically three to
five years in length and historically we have experienced an approximately 95%
retention rate. During the third quarter of 2006, the aggregate of all client
attrition totaled approximately $150,000 per month, or less than 1% of revenues.
Costs of revenues, excluding depreciation and amortization, increased by
$14,270,000 (56 %) to $39,605,000 during the Current Quarter compared with
$25,335,000 for the Prior Year's Quarter. The increase results from the
expansion of the capacity and quality of our infrastructure to deliver the
additional client services activities added by the (i)Structure Acquisition.
Costs of revenues, excluding depreciation and amortization, as a percentage of
revenues decreased to 69% in the Current Quarter from 74% in the Prior Year's
Quarter. Our infrastructure provides a shared operating environment that enables
us to integrate new clients, including clients acquired through acquisitions.
After the close of the (i)Structure Acquisition, we began implementing cost
reductions that we originally expected to result in savings of between
$9,000,000 to $11,000,000 in 2006. We now expect the savings in 2006 to be
between $11,000,000 and $12,000,000. These identified synergies are expected to
result in between $13,000,000 to $15,000,000 in annual savings with the
anticipated completion of the integration at the end of 2006. The cost savings
achieved in the Current Quarter reflect an estimated incentive attributable to
the Company's participation in a state incentive program for economic growth
based on maintaining certain levels of qualified property within the sponsoring
state. We entered into the final agreement with the state in September 2006.
Approximately $700,000 of the incentives is based on prior quarters. We expect
costs of revenues, excluding depreciation and amortization, as a percentage of
revenues to improve by dropping to 67% by the end of the year.
Selling and promotion costs increased by $1,011,000 (79%) to $2,286,000 for the
Current Quarter from $1,275,000 for the Prior Year's Quarter, and is
approximately 4% of revenues in each quarter. Additional compensation and
related expenses for an expanded sales force account for $794,000, or 79% of the
increase. The remainder of the increase is attributable to expanded marketing
activities.
Page 15
General and administrative expenses increased by $1,472,000 (48%) to $4,537,000
for the Current Quarter from $3,065,000 for the Prior Year's Quarter. An
increase of approximately $771,000 was related to the (i)Structure Acquisition.
Additionally, in the Current Quarter, there were increases of $361,000 in
compensation expense; $173,000 in professional fees, including legal,
accounting, director, and other professional fees; $82,000 in insurance
premiums; and $62,000 in occupancy costs. Non-cash expense of stock options for
$401,000 and severance of $88,000 related to the integration of the (i)Structure
Acquisition offset savings of $128,000 in compensation expense. The non-cash
expense of stock options included in general and administrative expenses was due
to the granting of stock options to directors and all employees (including
employees whose cash compensation was included in costs of revenues or selling
and promotion costs). On January 1, 2006, we adopted Statement of Financial
Accounting Standards ("SFAS") No. 123(R), Shared-Based Payment using the
modified prospective approach, which establishes standards for transactions in
which an entity exchanges its equity instruments for goods or services. This
standard requires us to measure the cost of employee services received in
exchange for an award of equity instruments based on the fair value of the award
on the grant date. SFAS No. 123(R) eliminates the intrinsic method previously
allowable under APB Opinion No. 25. At our current effective tax rate, the
after-tax effect of the expense of stock options in the Current Quarter was
$228,000 or $0.01 for both basic and diluted shares. Had we elected for early
adoption of this standard, the pre-tax expense we would have recorded in the
Prior Year's Quarter would have been approximately $445,000. The unrecorded
pre-tax compensation cost related to unvested options at September 30, 2006
totals approximately $2,890,000, amortizable over the period ending September
30, 2009. Additional option grants will increase this amount, and forfeitures of
out-of-the-money options held by terminating employees will reduce it.
Depreciation and amortization of fixed assets and intangibles increased
$1,535,000 (57 %) to $4,248,000 for the Current Quarter from $2,713,000 for the
Prior Year's Quarter. This increase was related to increases in assets resulting
from the (i)Structure Acquisition, including $519,000 in amortization of
customer contracts.
Net interest expense increased by $1,010,000 (70%) to $2,444,000 for the Current
Quarter from $1,434,000 for the Prior Year's Quarter. This net increase consists
of additional interest expense of $855,000 and a reduction in interest income of
$155,000 in interest income. Interest expense on the $72,000,000 aggregate
principal amount of 4.0% Convertible Senior Notes due July 15, 2024 (the
"Notes"), including amortization of deferred financing costs and discount, was
$815,000 for the Current Quarter compared with $796,000 in the Prior Year's
Quarter. The increase was solely attributable to the amortization of the
discount realized on the Notes during 2005. As explained in Liquidity and
Capital Resources below, in August 2005 the conversion price of the Notes was
reduced and a reduction of the carrying value of the Notes of $4,596,000 was
recorded as an increase in paid in capital. The amortization of this discount
increases interest expense by approximately $19,000 per month over the term of
the Notes. Interest expense on our bank loans in the Current Quarter was
$1,406,000 compared with interest expense (including amortization of deferred
financing costs) on bank debt in the Prior Year's Quarter of $587,000. The
average balance on such debt was $53,077,000 for the Current Quarter and
$24,375,000 for the Prior Year's Quarter.
For the Current Quarter, we recorded tax expense of $1,808,000, compared with
tax expense of $159,000 for the Prior Year's Quarter. The effective tax rate in
the Current Quarter was 41%, compared with an effective tax rate of 58% in the
Prior Year's Quarter. The higher effective tax rate in the Prior Year's Quarter
was due to the impact of state minimum taxes. Although income taxes were accrued
at an effective rate of 41% in the Current Quarter, they are payable at the rate
of 11% after the application of net operating loss carry-forwards.
A deferred tax benefit reflects future income tax savings realizable when tax
credits, net operating loss carry-forwards, or other deductions based on
temporary differences between taxable income and income before income taxes can
be used to reduce income taxes payable. If there is sufficient uncertainty of
realizing deferred tax benefits, a valuation allowance must be established. We
had a deferred tax valuation allowance of $2,462,000 at September 30, 2006. We
have net operating loss carry-forwards of approximately $42,000,000 for Federal
income tax purposes that begin to expire in 2019. The use of these net operating
loss carry-forwards is limited in amount in future years pursuant to Section 382
of the Internal Revenue Code of 1986.
We had net income of $2,589,000 for the Current Quarter compared with $113,000
for the Prior Year's Quarter. For the Current Quarter, we had basic earnings per
common share of $0.12 and diluted earnings per share of $0.11, compared with
earnings per common share of $0.01 per basic and diluted share for the Prior
Year's Quarter. The number of weighted average shares increased to approximately
21,672,000 basic shares from approximately 20,214,000 basic shares for the Prior
Year's Quarter, reflecting the issuance of approximately 563,000 shares for
Page 16
acquisitions, and the exercise of options and warrants for an additional 973,000
shares. For the Current Quarter and the Prior Year's Quarter, the weighted
average number of shares used in calculating diluted earnings per share includes
options and warrants to purchase common stock aggregating approximately
3,228,573 and 3,665,996 shares, respectively. The Notes are excluded from the
calculation of diluted shares in both periods since they were not dilutive.
Results of Operations - Nine Months Ended September 30, 2006 and 2005
For the nine months ended September 30, 2006 (the "Current Period"), revenues
increased $63,459,000 (59%) to $170,274,000 from $106,815,000 for the nine
months ended September 30, 2005 (the "Prior Year's Period"). This increase
includes $58,692,000 of revenues from clients added as the result of the
(i)Structure Acquisition. Excluding revenues added from the (i)Structure
Acquisition, revenues increased by $4,767,000 (4%).
Costs of revenues, excluding depreciation and amortization, increased by
$43,232,000 (56%) to $120,104,000 during the Current Period compared with
$76,872,000 for the Prior Year's Period. The increase results from the expansion
of the capacity and quality of our infrastructure to deliver the additional
client services activities added by the (i)Structure Acquisition. Costs of
revenues, excluding depreciation and amortization, were 71% in the Current
Period and 72% in the Prior Year's Period. Our infrastructure provides a shared
operating environment that enables us to integrate new clients, including
clients acquired through acquisitions. After the close of the (i)Structure
Acquisition, we began implementing cost reductions that we originally expected
to result in savings of between $9,000,000 to $11,000,000 in 2006. We now expect
the savings in 2006 to be between $11,000,000 and $12,000,000. These identified
synergies are expected to result in between $13,000,000 to $15,000,000 in annual
savings once the reductions have been fully implemented by the end of 2006. The
cost savings achieved in the Current Period reflect an estimated incentive
attributable to the Company's participation in a state incentive program for
economic growth based on maintaining certain levels of qualified property within
the sponsoring state. We entered into the final agreement with the state in
September 2006. Approximately $100,000 of the incentives is based on December
2005. We expect costs of revenues, excluding depreciation and amortization, as a
percentage of revenues to improve by dropping to 67% by the end of the year.
Selling and promotion costs increased by $2,959,000 (87%) to $6,365,000 for the
Current Period from $3,406,000 for the Prior Year's Period, and increased as a
percentage of revenues to 4% for the Current Period from 3% for the Prior Year's
Period. Additional compensation and related expenses for an expanded sales force
account for $2,292,000 or 77% of the increase. The remainder of the increase is
attributable to expanded marketing activities.
General and administrative expenses increased by $4,897,000 (52%) to $14,351,000
for the Current Period from $9,454,000 for the Prior Year's Period. An increase
of approximately $2,268,000 was related to the (i)Structure Acquisition.
Additionally, in the Current Period, there were increases of $1,520,000 in
compensation expense; $1,130,000 in professional fees, including legal,
accounting, director, and other professional fees; $304,000 in occupancy costs;
and $290,000 in insurance premiums. Increased expenses were partially offset by
a reduction in bad debt expense of approximately $1,350,000 in the Current
Period. In the Prior Year's Period, we added approximately $1,300,000 to the
allowance for doubtful accounts, including a charge of $1,000,000 relating to
incremental usage-based charges billed to a customer in 2004. Non-cash expense
of stock options for $1,242,000 and severance of $349,000 related to the
integration of the (i)Structure Acquisition offset savings of $71,000 in
compensation expense. The non-cash expense of stock options included in general
and administrative expenses was due to the granting of stock options to
directors and all employees (including employees whose cash compensation was
included in costs of revenues or selling and promotion costs). On January 1,
2006, we adopted SFAS No. 123(R) using the modified prospective approach, which
establishes standards for transactions in which an entity exchanges its equity
instruments for goods or services. This standard requires us to measure the cost
of employee services received in exchange for an award of equity instruments
based on the fair value of the award on the grant date. It eliminates the
intrinsic method previously allowable under APB Opinion No. 25. At our current
effective tax rate, the after-tax effect of the expense of stock options in the
Current Period was approximately $708,000 or $0.03 per both basic and diluted
shares. Had we elected for early adoption of this standard, the pre-tax expense
we would have recorded in the Prior Year's Period would have been $2,880,000.
The unrecorded pre-tax compensation cost related to unvested options at
September 30, 2006 totals approximately $2,890,000, amortizable over the period
ending September 30, 2009. Additional option grants will increase this amount,
and forfeitures of out-of-the-money options held by terminating employees will
reduce it.
Page 17
Depreciation and amortization of fixed assets and intangibles increased
$4,504,000 (56%) to $12,508,000 for the Current Period from $8,004,000 for the
Prior Year's Period. This increase was related to increases in assets resulting
from the (i)Structure Acquisition, including $1,557,000 in amortization of
customer contracts.
Net interest expense increased by $2,927,000 to $7,316,000 for the Current
Period from $4,389,000 for the Prior Year's Period. This increase consists of
additional interest expense of $2,767,000 and a reduction in interest income of
$160,000. Interest expense on the Notes, including amortization of deferred
financing costs and discount, was $2,445,000 for the Current Period compared
with $2,313,000 in the Prior Year's Period. The increase was solely attributable
to the amortization of the discount realized on the Notes during 2005. As
explained in Liquidity and Capital Resources below, in August 2005 the
conversion price of the Notes was reduced and a reduction of the carrying value
of the Notes of $4,596,000 was recorded as an increase in paid in capital. The
amortization of this discount increases interest expense by approximately
$19,000 per month over the term of the Notes. Interest expense on bank debt in
the Current Period was $4,253,000 compared with interest expense (including
amortization of deferred financing costs) on bank debt in the Prior Year's
Period of $1,656,000. The average balance of such debt was $57,405,000 for the
Current Period and $24,375,000 for the Prior Year's Period.
For the Current Period, we recorded tax expense of $4,080,000, compared with tax
expense of $2,016,000 for the Prior Year's Period. The effective tax rate in the
Current Period was 42%, compared with an effective tax rate of 43% in the Prior
Year's Period. Although income taxes were accrued at a rate of 42% in the
Current Period, they are payable at the rate of 12% after the application of net
operating loss carry-forwards.
A deferred tax benefit reflects future income tax savings realizable when tax
credits, net operating loss carry-forwards, or other deductions based on
temporary differences between taxable income and income before income taxes can
be used to reduce income taxes payable. If there is sufficient uncertainty of
realizing deferred tax benefits, a valuation allowance must be established. We
had a deferred tax valuation allowance of $2,462,000 at September 30, 2006. We
have net operating loss carry-forwards of approximately $42,000,000 for Federal
income tax purposes that begin to expire in 2019. The use of these net operating
loss carry-forwards is limited in amount in future years pursuant to Section 382
of the Internal Revenue Code of 1986.
We had net income of $5,550,000 for the Current Period compared with $2,674,000
for the Prior Year's Period. For the Current Period, we had basic earnings per
common share of $0.26 and diluted earnings per share of $.025, compared with
earnings per common share of $0.13 per basic share and $0.12 per diluted share
for the Prior Year's Period. The number of weighted average shares increased to
approximately 21,234,000 basic shares from approximately 20,183,000 basic shares
for the Prior Year's Period, reflecting the issuance of approximately 563,000
shares for acquisitions, and the exercise of options and warrants for an
additional 973,000 shares. For the Current Period and the Prior Year's Period,
the weighted average number of shares used in calculating diluted earnings per
share includes options and warrants to purchase common stock aggregating
approximately 3,228,573 and 5,094,245 shares, respectively. The Notes are
excluded from the calculation of diluted shares in both periods since they were
not dilutive.
Liquidity and Capital Resources
Net cash provided by operating activities was $15,205,000 for the Current Period
on $5,550,000 of net income. Significant sources of cash during the Current
Period included: $12,771,000 of depreciation, amortization and the accretion of
debt discount; the accrual of $323,000 for a non-qualified unfunded pension
plan; $366,000 from a decrease in accounts receivable; $3,001,000 from a
decrease in deferred tax assets and an increase in taxes payable; a decrease of
$517,000 in deferred customer acquisition costs and other assets;$1,242,000 from
the non-cash-expense related to stock options now required pursuant to SFAS
123(R); and a $3,402,000 increase in deferred revenues, including approximately
$3,000,000 from one customer. Significant uses of cash during the Current Period
include an increase in prepaid expenses and other current assets of $5,222,000,
which includes an annual payment made in February 2006 of $7,650,500 for
software license fees payable pursuant to an (i)Structure, LLC (now known as
Infocrossing, LLC.) contract that was effective prior to the acquisition; and a
decrease in accounts payable and accrued expenses of $6,899,000 as a result of
payments of liabilities assumed on the balance sheets of companies acquired. In
the third quarter of 2006, cash flow from operations was reduced by delays in
collecting approximately $3,500,000 in certain accounts receivable, the majority
of which were collected in October. The delay was caused by changing the name of
(i)Structure, LLC to Infocrossing, LLC and billing (i)Structure, LLC clients in
the name of Infocrossing, LLC in September 2006. The utilization of a portion of
the Company's net operating loss carry-forwards is reflected in the decrease in
deferred tax assets.
Page 18
In the Current Period, we paid $4,516,000 related to the Minor Acquisitions and
$420,000 in costs related to the (i)Structure Acquisition. Other investing
activities during the Current Period include $3,811,000 for the purchase of
fixed assets. During the Current Period, we also entered into capital leases
having an aggregate carrying value of approximately $6,544,000 and invested
$653,000 in internally-developed software.
Financing activities during the Current Period include the repayment of
$5,000,000 on the revolving credit facility; payments of $4,171,000 on the Term
Loan; and $4,848,000 of capital leases and the receipt of $3,962,000 from the
exercise of stock options and warrants. In addition, we entered into $6,544,000
of new capital lease agreements during the Current Period.
On November 30, 2005, we entered into a $70,000,000 senior secured credit
facility (the "Credit Agreement"), with each of the banks and other financial
institutions that either now or in the future are parties thereto as lenders
(the "Lenders"), Bank of America, N.A., as sole and exclusive administrative and
collateral agent and as a lender ("Bank of America"), and Banc of America
Securities LLC, as sole and exclusive lead arranger and sole book manager. The
Credit Agreement provides for a $55 million term loan, subject to a combination
of scheduled quarterly repayment amounts beginning September 30, 2006 and
potential annual payments due no more than 95 days after each year-end of 50% of
our Excess Cash Flow, as that term is defined in the Credit Agreement, with the
first due no later than April 3, 2007. In addition, if we receive certain types
of cash payments, including but not limited to insurance proceeds, proceeds from
the sale of assets, or proceeds from the exercise of stock warrants and certain
stock options, we are required to make a prepayment of the term loan in the
amount of one-half of the received proceeds. On May 11 and August 25, 2006, the
Company made payments of $1,401,000 and $350,000 as a result of warrant
exercises, and made the scheduled payment of $2,420,000 on September 30, 2006.
The scheduled amounts due on the term loan for the next four quarters total
$10,892,000. The Credit Agreement also provides for a $15 million revolving
credit facility (including letter of credit subfacilities). The maturity date
for both the term loan and the revolving credit facility is April 14, 2009. In
December 2005, we repaid $10,000,000 of the revolving credit facility and repaid
the remaining $5,000,000 on July 12, 2006. We may borrow against the revolving
credit facility again in the future, and we pay an unused line fee of 0.5% on
any amounts not drawn. At September 30, 2006, we have three standby letters of
credit aggregating $858,500 in lieu of security deposits and a performance bond.
Amounts used for letters of credit reduce the amount available to us for future
borrowings under the revolving credit facility. Loans outstanding under the
Credit Agreement bear interest at LIBOR (using one, three or six-month
contracts) plus the Applicable Rate or, at our option, the alternate base rate
(the greater of the Bank of America prime rate or the federal funds rate plus
one half of one percent (0.50%)) plus the Applicable Rate (as such term is
defined in the Credit Agreement). At September 30, 2006, the interest rate on
the term loan was 8.49%.
The terms of the Credit Agreement include various covenants including, but not
limited to: a maximum leverage ratio; minimum consolidated earnings before
interest, taxes, depreciation, and amortization; a minimum debt coverage ratio;
and limitations on indebtedness, capital expenditures, investments, loans,
mergers and acquisitions, stock issuances and repurchases, and transactions with
affiliates. In addition, the terms of the Credit Agreement limit our ability to
pay cash dividends. During the Current Quarter, the Credit agreement was amended
to change the definition of Consolidated Fixed Charges used in the calculation
of the debt coverage ratio covenant to include the trailing twelve months of
scheduled principal payments rather than payments scheduled to be made during
the following twelve months. We were in compliance with such covenants at
September 30, 2006.
We have $72,000,000 of outstanding 4.0% Convertible Senior Notes due July 15,
2024 (the "Notes"). Interest on the Notes of $1,440,000 is payable semi-annually
in July and January.
The Notes are convertible, subject to certain conditions, at the option of the
holder prior to maturity, into shares of our common stock at a specified
conversion price, subject to certain adjustments. The conversion price must be
adjusted to reflect stock dividends, stock splits, issuances of rights to
purchase shares of common stock, and other events. Upon conversion, we will have
the right to deliver to the holders, at our option, cash, shares of common
stock, or a combination thereof. At the initial conversion price of $15.36, the
$72,000,000 of Notes were convertible into 4,687,500 common shares. The Notes
and the shares of common stock into which they may be converted may be resold
pursuant to a registration statement on Form S-3 that became effective in August
2004.
On August 5, 2005, because the market price of our common stock was less than
$10.48 (68.23% of the initial conversion price) for at least 20 trading days
Page 19
during the 30 consecutive trading day period ending on August 5, 2005, a reset
adjustment was triggered, whereby the conversion price was immediately reduced
by 17.38% to $12.69. As a result of the reset adjustment, the number of common
shares into which the Notes are convertible is 5,673,759, an increase of 986,259
shares. No further reset adjustments will be made, but the adjusted conversion
price of $12.69 remains subject to adjustment as noted above for stock
dividends, splits, issuances of rights to purchase shares of common stock, and
other events .
The reset adjustment was valued in accordance with EITF 00-27, "Application of
Issue No. 98-5 - Certain Convertible Instruments" at $4,596,000, and this amount
was recorded as an increase to Additional Paid in Capital and as a discount to
the carrying value of the Notes. This additional discount is being accreted to
the carrying value of the Notes through a charge to interest expense over the
life of the Notes.
The holders may convert their Notes into shares of our common stock, at the
conversion price in effect at the time, prior to the close of business on their
stated maturity date under any of the following circumstances: (1) during any
fiscal period if the market price per share of our common stock for a period of
at least 20 consecutive trading days during the 30 consecutive trading day
period ending on the last day of the preceding fiscal quarter is more than 130%
of the applicable conversion price; (2) on or before July 15, 2019, during the
five business-day period following any 10 consecutive trading-day period in
which the trading price for the Notes during such ten-day period was less than
98% of the applicable conversion value for the Notes during that period, subject
to certain limitations; (3) if the Notes have been called for redemption; or (4)
upon the occurrence of specified corporate transactions, such as (a)
distributions to our common stockholders of rights to acquire shares of our
common stock at a discount; (b) distributions to our common stockholders when
the distribution has a per share value in excess of 5% of the market price of
our common stock; and (c) a consolidation, merger or binding share exchange
pursuant to which our common stock will be converted into cash, securities or
other property. Upon a "change of control," as defined in the indenture, the
holders can require us to repurchase all or part of the Notes for cash equal to
100% of principal plus accrued interest. A consolidation, merger, or binding
exchange also may constitute a "change of control" in certain instances. If the
"change of control" occurred prior to July 15, 2009, in certain instances, we
may be required to pay a "make whole premium" as defined in the indenture when
repurchasing the Notes.
We have a call option, pursuant to which the Notes may be redeemed, in part or
in whole, for cash at any time on or after July 15, 2007 at a price equal to
100% of the principal amount of the Notes, plus accrued interest plus a
"premium" if the redemption is prior to July 15, 2009, provided, however, the
Notes are only redeemable prior to July 15, 2009 if the market price of our
common stock has been at least 150% of the conversion price then in effect for
at least 20 trading days during any 30 consecutive trading day period. The
"premium" referred to in the preceding sentence shall be in an amount equal to
$173.83 per $1,000 principal amount of Notes, less the amount of any interest
actually paid on such Notes prior to the redemption date.
The holders of the Notes may require that we purchase for cash all or a portion
of the Notes on July 15, 2009, 2014, and 2019 at a repurchase price equal to
100% of the principal amount of the Notes plus any accrued interest. There are
no financial covenants, other than a limitation on incurring of additional
indebtedness, as defined in the indenture.
As of September 30, 2006, we had cash and equivalents of $12,614,000 and
approximately $14,142,000 of availability under our revolving credit facility.
At September 30, 2006, we have three standby letters of credit aggregating
$858,500 in lieu of performance bonds. Amounts used for letters of credit reduce
the amount available to us for future borrowings under the revolving credit
facility. As noted above, during the period ended September 30, 2006, we repaid
the $5,000,000 outstanding balance on the revolving credit facility and made a
total of $4,171,000 in payments on the Term Loan.
We believe that our cash and equivalents, current assets, and cash generated
from future operating activities will provide adequate resources to fund our
ongoing operating requirements for at least the next twelve months. We may need
to obtain additional financing to fund significant acquisitions or other
substantial investments.
EBITDA
EBITDA represents net income before interest, taxes, depreciation and
amortization. We present EBITDA because we consider such information an
important supplemental measure of our performance and believe it is frequently
used by securities analysts, investors and other interested parties in the
evaluation of companies with comparable market capitalization to us, many of
Page 20
which present EBITDA when reporting their results. We also use EBITDA as one of
the factors used to determine the total amount of bonuses available to be
awarded to executive officers and other employees. Our credit agreement uses
EBITDA (with additional adjustments) to measure compliance with covenants such
as interest coverage and debt incurred. EBITDA is also used by prospective and
current lessors as well as potential lenders to evaluate potential transactions
with us. In addition, EBITDA is also widely used by us and other buyers to
evaluate and determine the price of potential acquisition candidates.
For the Current Period our EBITDA increased by $12,371,000 (72%) to $29,454,000
from $17,083,000 for the comparable period in 2005. EBITDA for the Current
Period includes a non-cash charge of $1,242,000 relating to stock option expense
recorded under SFAS 123(R).
EBITDA has limitations as an analytical tool, and you should not consider it in
isolation, or as a substitute for analysis of our results as reported under U.S.
Generally Accepted Accounting Principles ("GAAP"). Some of these limitations
are: (a) EBITDA does not reflect changes in, or cash requirements for, our
working capital needs; (b) EBITDA does not reflect the significant interest
expense, or the cash requirements necessary to service interest or principal
payments, on our debts; and (c) although depreciation and amortization are
non-cash charges, the assets being depreciated and amortized may have to be
replaced in the future, and EBITDA does not reflect any cash requirements for
such capital expenditures. Because of these limitations, EBITDA should not be
considered as a principal indicator of our performance. We compensate for these
limitations by relying primarily on our GAAP results and using EBITDA only on a
supplemental basis.
The following table reconciles EBITDA to net income for the Current and Prior
Year's Period.
Reconciliation - in Thousands
- --------------------------------------------------------------------------------
Nine months Ended September 30,
--------------------------------------------
2006 2005
-------------------- --------------------
NET INCOME $ 5,550 $ 2,674
Add back:
Tax expense 4,080 2,016
Interest expense 7,316 4,389
Depreciation and amortization 12,508 8,004
---------------- ----------------
EBITDA $ 29,454 $ 17,083
================ ================
EBITDA is a measure of our performance that is not required by, or presented in
accordance with, GAAP. EBITDA is not a measurement of our financial performance
under GAAP and should not be considered as an alternative to net income, income
from operating activities or any other performance measures derived in
accordance with GAAP.
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board ("FASB") released FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the
accounting and reporting for uncertainties in income taxes and prescribes a
comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be
taken in income tax returns. FIN 48 prescribes a two-step evaluation process for
tax positions. The first step is recognition based on a determination of whether
it is more likely than not that a tax position will be sustained upon
examination, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. The second step is to
measure a tax position that meets the more-likely-than-not threshold. The tax
position is measured at the largest amount of benefit that is greater than 50%
likely of being realized upon ultimate settlement. If a tax position does not
meet the more-likely-than-not recognition threshold, the benefit of that
position is not recognized in the financial statements. FIN 48 is effective
beginning in the first quarter of fiscal 2007. The cumulative effects, if any,
of applying FIN 48 will be recorded as an adjustment to retained earnings as of
the beginning of the period of adoption which for calendar year companies is
January 1, 2007. We are in the process of evaluating the potential effects of
FIN 48 on the consolidated financial statements and are not yet in a position to
determine what, if any, effects FIN 48 will have on the consolidated financial
statements.
Page 21
FORWARD-LOOKING STATEMENTS
Statements made in this Report on Form 10-Q (the "Quarterly Report"), including
the accompanying financial statements and notes, other than statements of
historical fact, are forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance, including statements relating to products, customers, suppliers,
business prospects and effects of acquisitions. In some cases, forward-looking
statements can be identified by terminology such as "may," "will," "should,"
"expect," "anticipate," "intend," "plan," "believe," "estimate," "potential," or
"continue," the negative of these terms or other comparable terminology. These
statements involve a number of risks and uncertainties and as such, final
results could differ from estimates or expectations due to a number of factors
including, without limitation: incomplete or preliminary information; changes in
government regulations and policies; continued acceptance of our products and
services in the marketplace; competitive factors; closing contracts with new
customers and renewing contracts with existing customers on favorable terms;
expanding services to existing customers; new products; technological changes;
our dependence on third party suppliers; intellectual property rights;
difficulties with the identification, completion, and integration of
acquisitions, including the completion of the integration of Verizon Information
Technologies Inc., now known as Infocrossing Healthcare Services, Inc.; and
(i)Structure, LLC, now known as Infocrossing, LLC; and other risks and
uncertainties including those set forth in this Quarterly Report that could
cause actual events or results to differ materially from any forward-looking
statement. For any of these factors, we claim the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995, as amended.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Quarterly Report and are
based on information currently and reasonably known to us. We undertake no
obligation to release any revisions to or update these forward-looking
statements to reflect events or circumstances that occur after the date of this
Quarterly Report or to reflect the occurrence or effect of anticipated or
unanticipated events.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
With respect to our investments, we are not significantly exposed to the impact
of interest rate changes, foreign currency fluctuations, or changes in market
values. We primarily invest in money market mutual funds or certificates of
deposit and commercial paper issued only by major corporations and financial
institutions of recognized strength and security, and hold all such investments
to term. We generally invest in instruments of no more than 30 days maturity. As
of September 30, 2006, however, we had $50,829,000 of outstanding debt bearing
interest at LIBOR plus the Applicable Rate (as such term is defined in the
Credit Agreement). At our option, this debt can alternatively bear interest at
the Applicable rate plus either the Bank of America prime rate or the federal
funds rate plus one-half of one percent (0.50%). Each one percent increase in
the interest rate we pay on the variable rate debt would result in an increase
in annual interest expense of $508,000. We believe that the carrying amount of
our fixed rate debt (the Notes) and capitalized leases of $81,353,000
approximates fair value based on interest rates that are currently available to
us with similar terms and remaining maturities.
Market Risk
Our accounts receivable are subject, in the normal course of business, to
collection risks. We regularly assess these risks and have established policies
and business practices to protect against the adverse effects of collection
risks. As a result, we do not anticipate any material losses in this area.
Foreign Currency Risks
We believe that our foreign currency risk is immaterial. Our income from foreign
sources is derived from a single customer and amounted to approximately 1% of
total revenues in 2005 and less than 1% for the Current Period.
Page 22
ITEM 4 - CONTROLS AND PROCEDURES.
An evaluation was performed under the supervision and with the participation of
our management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the
end of the period covered by this report. Based on that evaluation, our
management, including the Chief Executive Officer and the Chief Financial
Officer, concluded that our disclosure controls and procedures were effective as
of September 30, 2006. There have been no changes in our internal control over
financial reporting that occurred during our most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1A - RISK FACTORS
There have been no material changes to the Risk Factors discussed in our Annual
Report on Form 10-K for the period ended December 31, 2005.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Common Stock Issued for a Portion of Acquisition Price
In connection with the acquisition of certain net assets and the business of
Soft Link Solutions, Inc. in January 2006, the Company issued 216,241 shares of
common stock, $0.01 par value, valued at $1,786,000. The common stock was issued
without registration pursuant to an exemption provided by Section 4(2) of the
Securities Act of 1933, as this issuance of common stock does not involve a
public offering. The Company included these shares in a Registration Statement
on Form S-3, for the sale of these and other shares, filed with the Securities
and Exchange Commission. This Registration Statement was declared effective
April 21, 2006.
During the nine months ended September 30, 2006, warrants for 567,184 common
shares were exercised for cash, and warrants for 673,434 shares were exercised
without cash payment by surrendering warrants for 339,891 shares and receiving
333,543 common shares. These shares are registered for resale by the Company in
a Registration Statement on Form S-3.
Page 23
ITEM 6 - EXHIBITS
2.1 Purchase Agreement, dated October 24, 2005, by and between
Infocrossing, Inc. and Level 3 Financing, Inc., incorporated by
reference to Exhibit 10 to a Current Report on Form 8-K filed October
25, 2005.
3.1A Company's Restated Certificate of Incorporation, incorporated by
reference to the Company's Annual Report on Form 10-K for the period
ended December 31, 2004.
3.1B Certificate of Amendment to the Company's Certificate of
Incorporation, filed May 8, 2000, to increase the authorized shares
and to remove Article 11, incorporated by reference to the Company's
report on Form 10-Q for the period ended April 30, 2000.
3.1C Certificate of Amendment to the Company's Certificate of
Incorporation, filed as of June 5, 2000, to change the name of the
Company to Infocrossing, Inc., incorporated by reference to the
Company's report on Form 10-Q for the period ended April 30, 2000.
3.2 Amended and Restated Bylaws of the Company, incorporated herein by
reference to Exhibit 3.2 to the Company's Form 10-Q/A filed May 17,
2004.
4.1 Indenture, dated as of June 30, 2004, between the Company as issuer
and Wells Fargo Bank, National Association, as trustee; and form of
4.00% Convertible Senior Notes due 2024, incorporated by reference to
Exhibit 4.2 to a Registration Statement No. 333-117340 on Form S-3
filed July 13, 2004.
4.2 Resale Rights Agreement, dated as of June 30, 2004, by and between the
Company and Lehman Brothers, Inc. regarding the Company's 4.00%
Convertible Senior Notes due 2024, incorporated by reference to
Exhibit 4.4 to a Registration Statement No. 333-117340 on Form S-3
filed July 13, 2004.
4.3 Securities Purchase Agreement, dated as of March 24, 2004, by and
among the Company and certain purchasers of the Company's common
stock, incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K filed April 1, 2004.
4.4 Registration Rights Agreement, dated as of March 24, 2004, by and the
Company and certain purchasers of the Company's common stock,
incorporated by reference to Exhibit 4.2 to the Company's Current
Report on Form 8-K filed April 1, 2004.
4.5 Securities Purchase Agreement, dated as of October 16, 2003, by and
among the Company and certain purchasers of common stock and warrants,
incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K filed October 22, 2003.
4.6 Registration Rights Agreement, dated as of October 16, 2003, by and
among the Company and certain purchasers of common stock and warrants,
incorporated by reference to Exhibit 4.2 to the Company's Current
Report on Form 8-K filed October 22, 2003.
4.7 Exchange Agreement, dated as of October 16, 2003, by and among the
Company and holders of series A preferred stock and series A warrants,
incorporated by reference to Exhibit 4.3 to the Company's Current
Report on Form 8-K filed October 22, 2003.
4.8 Second Amended and Restated Registration Rights Agreement, dated as of
October 21, 2003, by and among the Company and certain stockholders of
the Company, incorporated by reference to Exhibit 4.4 to the Company's
Current Report on Form 8-K filed October 22, 2003.
4.9 Warrant Agreement dated as of February 1, 2002 by and between the
Company and the Warrantholders party thereto, incorporated by
reference to Exhibit 4.3 to the Company's Current Report on Form 8-K
filed February 5, 2002.
4.10 Warrant Agreement between the Company and the Warrantholders party
thereto, incorporated by reference to the Company's Annual Report on
Form 10-K for the period ended December 31, 2004.
Page 24
EXHIBITS (Continued):
10.1 Purchase and Sale Agreement, dated as of September 1, 2004 between
Verizon Data Services, Inc. and the Company, incorporated by reference
to Exhibit 2.1 to the Company's Current Report on Form 8-K filed
October 14, 2004.
10.2 Stock Purchase Agreement between the Company and ITO Holdings, LLC,
dated as of March 3, 2004, incorporated by reference to Exhibit 2.1 to
the Company's Current Report on Form 8-K filed April 7, 2004.
10.3 Stock Purchase Agreement dated as of February 5, 2002 by and between
the Company and American Software, Inc., incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K filed February
5, 2002.
10.4A Acquisition Loan Agreement dated July 29, 2004 between the Company,
various Lenders and CapitalSource Finance LLC as Agent for the Lenders
("Acquisition Loan Agreement"), incorporated by reference to Exhibit
10.7 to the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 2004.
10.4B Consent, Waiver and First Amendment to Acquisition Loan Agreement
dated as of October 1, 2004, incorporated by reference to Exhibit 10.1
to the Company's Current Report on Form 8-K filed October 4, 2004.
10.4C Amended and Restated Consent, Waiver, and First Amendment to
Acquisition Loan Agreement, dated as of October 6, 2004, incorporated
by reference to Exhibit 10.16 to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 2004.
10.4D Second Amendment to Acquisition Loan Agreement and Other Documents,
dated as of November 8, 2004, incorporated by reference to Exhibit
10.17 to the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 2004.
10.4E Third Amendment to Acquisition Loan Agreement and Other Documents,
dated as of December 29, 2004, incorporated by reference to the
Company's Annual Report on Form 10-K for December 31, 2004.
10.5A Guaranty and Security Agreement dated as of July 29, 2004, between
the Company and certain of the Company's subsidiaries and
CapitalSource Finance LLC ("Security Agreement"), incorporated by
reference to Exhibit 10.8 to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 2004.
10.5B Joinder to Security Agreement dated October 1, 2004, incorporated by
reference to the Company's Annual Report on Form 10-K for the period
ended December 31, 2004.
10.6A Stock Pledge Agreement dated as of July 29, 2004, between the Company
and certain of the Company's subsidiaries and CapitalSource Finance
LLC ("Stock Pledge Agreement"), incorporated by reference to Exhibit
10.9 to the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 2004.
10.6B Addendum to Stock Pledge Agreement dated October 1, 2004,
incorporated by reference to the Company's Annual Report on Form 10-K
for December 31, 2004.
10.7A Amended and Restated Term Loan Agreement, dated as of April 2, 2004
between the lenders named therein and the Company ("Amended and
Restated Term Loan Agreement"), incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K filed April 7, 2004.
10.7B First Amendment to Amended and Restated Term Loan Agreement, dated as
of June 30, 2004, between the lenders named therein and the Company,
incorporated by reference to Exhibit 4.5 to a Registration Statement
No. 333-117340 on Form S-3 filed July 13, 2004.
Page 25
EXHIBITS (Continued):
10.7C Term Loan Agreement dated as of October 21, 2003 by and among the
Company, Infocrossing Agent, Inc., and the lenders named therein,
incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K filed October 22, 2003.
10.7D First Amendment to Loan Agreement and other Loan Documents, dated as
of February 13, 2004, by and among the Company, certain subsidiaries
of the Company, certain lenders named therein, and CapitalSource
Finance LLC., incorporated by reference to the Company's Annual Report
on Form 10-K for the period ended December 31, 2004.
10.7E Master Assignment and Assumption Agreement, dated as of February 13,
2004, by and among by and among the Company, as borrower; certain
subsidiaries of the Company, as guarantors; Infocrossing Agent, Inc.,
as agent for assigning lenders named therein; assigning lenders named
therein; and CapitalSource Finance LLC., incorporated by reference to
the Company's Annual Report on Form 10-K for the period ended December
31, 2004.
10.8A Guaranty and Security Agreement, dated as of April 2, 2004, between a
subsidiary of the Company and CapitalSource, incorporated by reference
to Exhibit 10.2 to the Company's Current Report on Form 8-K filed
April 7, 2004.
10.8B Guaranty and Security Agreement dated as of October 21, 2003 by and
among the Company, Infocrossing Agent, Inc., and the Company's
subsidiaries, incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K filed October 22, 2003.
10.9 Amended and Restated Stock Pledge Agreement, dated as of April 2,
2004, among the Company, a subsidiary of the Company, and
CapitalSource, incorporated by reference to Exhibit 10.3 to the
Company's Current Report on Form 8-K filed April 7, 2004.
10.10 Employment Agreement between the Company and Zach Lonstein, dated as
of January 1, 2005, incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed January 5, 2005,
superseding an Employment Agreement, dated as of November 1, 1999,
incorporated by reference to Exhibit 10.4 to the Company's Form 10-Q
for the period ended July 31, 2000.
10.11 Employment Agreement between the Company and Robert Wallach, dated as
of January 1, 2005, incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K filed January 5, 2005,
superseding an Employment Agreement, dated as of November 1, 1999,
incorporated by reference to Exhibit 10.5 to Infocrossing's Form 10-Q
for the period ended July 31, 2000.
10.12A Employment Agreement, dated as of April 2, 2004, by and between the
Company and Patrick A. Dolan, incorporated by reference to Exhibit
10.4 to the Company's Current Report on Form 8-K filed April 7, 2004.
10.12B Settlement and Release Agreement dated as of October 15, 2004 by and
among the Company and Patrick A. Dolan, incorporated by reference to
Exhibit 99.2 to the Company's Current Report on Form 8-K filed
November 5, 2004.
10.13A Employment Agreement, dated as of April 2, 2004, by and between the
Company and Jim Cortens, incorporated by reference to Exhibit 10.5 to
the Company's Current Report on Form 8-K filed April 7, 2004.
10.13B Settlement and Release Agreement dated as of October 15, 2004 by and
among the Company and Jim Cortens, incorporated by reference to the
Company's Annual Report on Form 10-K for December 31, 2004.
10.14 Employment Agreement, dated as of October 1, 2004, by and between a
subsidiary of the Company and Michael J. Luebke, incorporated by
reference to the Company's Annual Report on Form 10-K for December 31,
2004.
Page 26
EXHIBITS (Continued):
10.15A The Company's 2002 Stock Option and Stock Appreciation Rights Plan
("2002 Plan"), incorporated by reference to Appendix B to the
Company's Definitive Proxy Statement for the Annual Meeting of
Stockholders held on June 25, 2002.
10.15B Amendment to the 2002 Plan adopted by the Board of Directors on
January 21, 2005, incorporated by reference to the Company's Annual
Report on Form 10-K for December 31, 2004.
10.15C Amendment to the 2002 Plan approved at the Company's Annual Meeting
of Stockholders held on June 15, 2004, incorporated by reference to
the Company's Annual Report on Form 10-K for December 31, 2004.
10.15D Amendment to the 2002 Plan adopted by the Board of Directors on
April 1, 2004, incorporated by reference to the Company's Annual
Report on Form 10-K for December 31, 2004.
10.16A Amended and Restated 1992 Stock Option and Stock Appreciation Rights
Plan ("1992 Plan"), incorporated by reference to Appendix A to
Company's Definitive Proxy Statement for the Annual Meeting of
Stockholders held on May 8, 2000.
10.16B Amendment to 1992 Plan approved at the Company's Annual Meeting of
Stockholders held on June 22, 2001, incorporated by reference to the
Company's Annual Report on Form 10-K for December 31, 2004.
10.17 Stock Option Agreement under the 2002 Plan, dated January 21, 2005,
between the Company and Zach Lonstein, incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed
November 5, 2004.
10.18A Lease dated June 2, 1997 between the Company and Leonia Associates,
LLC, incorporated by reference to the Company's Annual Report on Form
10-K for December 31, 2004.
10.18B First Amendment of Lease between the Company and Leonia Associates,
LLC, dated January 16, 1998, incorporated by reference to the
Company's Annual Report on Form 10-K for December 31, 2004.
10.18C Second Amendment of Lease between the Company and Leonia Associates,
LLC, dated as of September 9, 1999, incorporated by reference to the
Company's Annual Report on Form 10-K for December 31, 2004.
10.18D Third Amendment of Lease between the Company and Leonia Associates,
LLC, dated as of August 28, 2000, incorporated by reference to Exhibit
10.7D to the Company's 10-K for the fiscal year ended October 31,
2000.
10.18E Fourth Amendment of Lease between the Company and Leonia Associates,
LLC, dated as of April 19, 2004, incorporated by reference to the
Company's Annual Report on Form 10-K for December 31, 2004.
10.19A Office Lease Agreement dated May 22, 2000 between the Company and
Crocker Realty Trust, incorporated by reference to Exhibit 10.6 to the
Company's Form 10-Q for the period ended July 31, 2000.
10.19B First Amendment to Lease dated as of April 1, 2002 by and between
Crocker Realty Trust, L.P. and the Company, incorporated by reference
to Exhibit 10.1 to the Company's Form 10-Q for period ended March 31,
2002.
10.20 Tenth Floor Option Agreement between the Company, G-H-G Realty
Company ("GHG"), and RSL Com USA, Inc. ("RSL"), dated as of November
30, 1999, with related notice of exercise dated February 14, 2000,
incorporated by reference to Exhibit 10.6A to the Company's Form 10-K
for the fiscal year ended October 31, 2000.
Page 27
EXHIBITS (Continued):
10.21 Eleventh Floor Option Agreement between the Company, GHG, and RSL,
dated as of November 30, 1999, with related notice of exercise dated
December 2, 1999, incorporated by reference to Exhibit 10.6B to the
Company's 10-K for the fiscal year ended October 31, 2000.
10.22A* Master Services Agreement dated as of May 24, 2001 among the
Company, Alicomp, a Division of Alicare, Inc. and ADT Security
Services, Inc., incorporated by reference to Exhibit 10.1A to a
Registration Statement No. 333-110173 on Form S-3 filed February 6,
2004.
10.22B* Amendment to Master Services Agreement among the Company, Alicomp,
a Division of Alicare, Inc. and ADT Security Services, Inc. dated as
of January 11, 2002, incorporated by reference to Exhibit 10.1B to a
Registration Statement No. 333-110173 on Form S-3 filed February 6,
2004.
10.23* Computer Services Agreement dated as of March 21, 1997 by and
between the Company and Alicomp, a Division of Alicare, Inc.,
incorporated by reference to Exhibit 10.2A to a Registration Statement
No. 333-110173 on Form S-3 filed February 6, 2004.
10.24* Marketing Agreement dated as of March 21, 1997 by and between the
Company and Alicomp, a Division of Alicare, Inc., incorporated by
reference to Exhibit 10.2B to a Registration Statement No. 333-110173
on Form S-3 filed February 6, 2004.
10.25* Extension Agreement dated as of October 1, 2002 by and between the
Company and Alicomp, a Division of Alicare, Inc., incorporated by
reference to Exhibit 10.2C to a Registration Statement No. 333-110173
on Form S-3 filed February 6, 2004.
10.26* Extension Agreement dated as of December 30, 2003 by and between the
Company and Alicomp, a Division of Alicare, Inc., incorporated by
reference to Exhibit 10.2D to a Registration Statement No. 333-110173
on Form S-3 filed February 6, 2004.
10.27A Credit Agreement, dated November 30, 2005, between Infocrossing,
Inc., the lenders thereto, Bank of America, N.A. and Banc of America
Securities, LLC, incorporated by reference to a Current Report on Form
8-K filed December 1, 2005.
10.27B Security Agreement, dated November 30, 2005, between Infocrossing,
Inc., certain subsidiaries of Infocrossing, Inc., and Bank of America,
N.A., incorporated by reference to a Current Report on Form 8-K filed
December 1, 2005.
10.27C Securities Pledge Agreement, dated November 30, 2005, between
Infocrossing, Inc., certain subsidiaries of Infocrossing, Inc., and
Bank of America, N.A., incorporated by reference to a Current Report
on Form 8-K filed December 1, 2005.
10.28A Agreement of Sale and Leaseback, dated November 30, 2005, between
Infocrossing, Inc. and LSAC Operating Partnership, L.P., incorporated
by reference to a Current Report on Form 8-K filed December 1, 2005.
10.28B Lease dated November 30, 2005, between (i)Structure, LLC and LSAC
Omaha L.P., incorporated by reference to a Current Report on Form 8-K
filed December 1, 2005.
10.28C Lease dated December 29, 2005, between (i)Structure, LLC and LSAC
Tempe L.P. is not filed as it is substantially the same as that
between the (i)Structure, LLC and LSAC Omaha, L.P. except as to the
description of the building and the amount of rent.
10.29 Employment Agreement, dated as of January 1, 2006 between the Company
and Richard Giordanella, incorporated by reference to a Current Report
on Form 8-K filed January 6, 2006.
10.30 Special Sale Bonus Agreement between (i)Structure, LLC and Michael D.
Jones, incorporated by reference to Exhibit 10.30 to the Company's
Annual Report on Form 10-K for December 31, 2005.
Page 28
EXHIBITS (Continued):
10.31A The Company's 2005 Stock Plan, incorporated by reference to the
Company's Definitive Proxy Statement for the Annual Meeting of
Stockholders held on June 13, 2005.
10.31B Amendment to the 2005 Stock Plan, incorporated by reference to the
Company's Definitive Proxy Statement for the Annual Meeting of
Stockholders held on June 15, 2006.
10.32A Contract for Services between Verizon Information Technologies, Inc.
(now Infocrossing Healthcare Services, Inc.) and the State of
Missouri, including Amendments 1 through 6, (the "Missouri Contract")
incorporated by reference to the Company's Quarterly Report on Form
10-Q for March 31, 2005.
10.32B Amendments no. 7 and 8 to the Missouri Contract.
31 Certifications required by Rule 13a-14(a) and Section 302 of the
Sarbanes-Oxley Act of 2002 to be filed.
32 Certifications required by Rule 13a-14(b) and 18 U.S.C. Section 1350
(as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
to be furnished but not filed.
* Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
Page 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
INFOCROSSING, INC.
November 9, 2006 /s/ ZACH LONSTEIN
-----------------------------------------------
Zach Lonstein
Chairman & Chief Executive Officer
November 9, 2006 /s/ WILLIAM J. McHALE
-----------------------------------------------
William J. McHale
SVP-Finance and Chief Financial Officer
Page 30
EXHIBITS PROVIDED HEREWITH
10.32B Amendments no. 7 and 8 to the Missouri Contract.
31 Certifications required by Rule 13a-14(a) and Section 302 of the
Sarbanes-Oxley Act of 2002 to be filed.
32 Certifications required by Rule 13a-14(b) and 18 U.S.C. Section 1350
(as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
to be furnished but not filed.
Page 31