8-K/A 1 k8a-sms.txt AMENDMENT 1 TO SMS 8-K U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A AMENDMENT 1 TO A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported in the Initial Report): APRIL 2, 2004 ------------- INFOCROSSING, INC. (Exact name of issuer as specified in its charter) DELAWARE 0-20824 13-3252333 ------------------------------- ----------- ------------------ (State or other jurisdiction of Commission (IRS Employer incorporation or organization) File Number Identification No.) 2 CHRISTIE HEIGHTS STREET LEONIA, NEW JERSEY 07605 (Address of principal executive offices) (201) 840-4700 (Issuer's telephone number) N/A (Former name or former address, if changed since last report.) 1 This report, in addition to the Company's recent historical results and condition, contains statements concerning certain trends and other forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements, in some cases, can otherwise be identified by terminology such as "may," "will," "should," "expect," "anticipate," "intend," "plan," "believe," "estimate," "potential," or "continue," the negative of these terms or other comparable terminology. These statements involve a number of risks and uncertainties including, but not limited to: incomplete or preliminary information; changes in government regulations and policies; continued acceptance of the Company's products and services in the marketplace; competitive factors; new products; technological changes; the Company's dependence on third party suppliers; intellectual property rights; difficulties with the integration of SMS; and other risks. For any of these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, Public Law 104-67, as amended. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report and are based on information currently and reasonably known. The Company undertakes no obligation to release any revisions to or update these forward-looking statements to reflect events or circumstances that occur after the date of this Report or to reflect the occurrence or effect of anticipated or unanticipated events. ITEM 2. ACQUISITION OF ASSETS On April 2, 2004, the Company acquired all of the outstanding capital stock of ITO Acquisition Corporation, a California corporation doing business as Systems Management Specialists ("SMS"), from ITO Holdings, LLC ("Holdings") for approximately $35 million in cash and 135,892 shares of common stock of the Company valued at approximately $1,859,000 based on the fair market value on April 2, 2004 of $13.68 (the "SMS Acquisition"). SMS, headquartered in Orange County, California, provides computing operations, business process outsourcing and managed application services to clients primarily located in the western United States. SMS' principal assets consist of rights under contracts, leases of equipment, software licenses, real estate and intellectual property used in performing its business. The Company anticipates that SMS will continue to operate its business as a wholly owned subsidiary of the Company. 2 On April 2, 2004, the Company and its lenders amended and restated the term loan agreement, dated as of October 21, 2003 and amended on February 13, 2004 (the "Term Loan Agreement") to provide a portion of the funding for the SMS Acquisition. As amended and restated, the Term Loan Agreement provides for a Term Loan A facility with a maximum borrowing capacity of $25 million and a Term Loan B facility with a maximum borrowing capacity of $15 million. The Company borrowed $15 million under the Term Loan B facility and, along with approximately $20 million from the private placement of the Company's common stock completed on March 30, 2004, completed the SMS Acquisition. Term Loan B bears interest at the prime rate plus 3% with a floor of 9% and matures along with the Term Loan A on October 21, 2008. The term loans include monthly payments of interest beginning May 1, 2004 and monthly principal payments of $312,500 beginning in December 2004. The Term Loan Agreement is subject to certain restrictive covenants including, but not limited to: (i) a maximum leverage ratio; (ii) minimum consolidated earnings before interest, taxes, depreciation, and amortization; (iii) a minimum debt coverage ratio; and (iv) limitations on indebtedness, capital expenditures, investments, loans, mergers and acquisitions, stock issuances, transactions with affiliates, and the payment of dividends. The Term Loan Agreement is guaranteed by each of the Company's subsidiaries. The Term Loan Agreement is also secured by a pledge of substantially all of the assets of the Company and all of its subsidiaries. As disclosed on a Form 8-K filed on April 1, 2004 and discussed above, the Company consummated a $30.6 million private placement of 2,917,000 shares of its common stock, the net proceeds of which were used in part to provide funding for the SMS Acquisition. Immediately following the Acquisition, the Company appointed Patrick A. Dolan as President and Chief Operating Officer of the Company. Mr. Dolan, who previously served as a manager of Holdings and the Chairman and Chief Executive Officer of SMS, was also appointed to serve as the President of SMS. In addition, Robert B. Wallach, the former President of the Company, was promoted to the position of Vice-Chairman of the Board. The Stock Purchase Agreement, the Term Loan Agreement, the Guaranty and Security Agreement, the Stock Pledge Agreement, and Mr. Dolan's Employment Agreement are incorporated by reference herein and the above descriptions of those documents and the transactions contemplated thereby are qualified in their entirety by reference to those exhibits previously filed. The purpose of this amendment is to provide the financial statements and pro forma financial information required by Item 7. 3 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS 7A. FINANCIAL STATEMENTS OF BUSINESS ACQUIRED Appendix A: Audited Financial Statements of ITO Acquisition Corporation for the year ended December 31, 2003 and for the period from December 1 (inception) to December 31, 2002. Appendix B: Audited Financial Statements of Systems Management Specialists, Inc., West Coast Division for the eleven month period ended November 30, 2002 and for the year ended December 31, 2001. Appendix C: Audited Financial Statements of Acxiom Los Angeles Data Center for the six months ended June 30, 2003 and for the years ended December 31, 2002 and 2001. Appendix D: Unaudited Financial Statements of ITO Acquisition Corporation as of March 31, 2004 and 2003 and for the three months ended March 31, 2004 and 2003. 7B. PRO FORMA FINANCIAL INFORMATION Appendix E: Unaudited Condensed Combined Pro Forma Financial Information as of March 31, 2004 and for three months ended March 31, 2004 and the year ended December 31, 2003. 7C. EXHIBITS The following exhibits are filed herewith: Exhibit 23.1 Consent of BDO Seidman, LLP. Exhibit 23.2 Consent of Moore Stephens Wurth Frazer and Torbet, LLP. The following exhibits filed with the initial Current Report on Form 8-K dated April 2, 2004 for the SMS Acquisition and the related financings are incorporated herein by reference. Exhibit 2.1 Stock Purchase Agreement, dated as of Match 3, 2004, between Infocrossing Inc. and ITO Holdings, LLC. Exhibit 10.1 Amended and Restated Term Loan Agreement, dated as of April 2, 2004, among the Company, the lenders party thereto and CapitalSource. Exhibit 10.2 Guaranty and Security Agreement, dated as of April 2, between SMS and CapitalSource. Exhibit 10.3 Amended and Restated Stock Pledge Agreement, dated as of April 2, 2004, among the Company, Amquest, Inc. and CapitalSource. Exhibit 10.4 Employment Agreement, dated as of April 2, 2004 by and between the Company and Patrick A. Dolan. Exhibit 10.5 Employment Agreement, dated as of April 2, 2004 by and between the Company and Jim Cortens. Exhibit 99.1 Press Release of Infocrossing, Inc., dated April 5, 2004. 4 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. INFOCROSSING, INC. Date: June 10, 2004 /s/ WILLIAM J. McHALE ------------------------------------ William J. McHale Senior Vice President of Finance 5 APPENDIX A A-1 ITO ACQUISITION CORPORATION FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003 AND FOR THE PERIOD FROM DECEMBER 1 (INCEPTION) THROUGH DECEMBER 31, 2002 A-2 INDEPENDENT AUDITORS' REPORT Stockholders ITO Acquisition Corporation Brea, California We have audited the accompanying balance sheets of ITO Acquisition Corporation (the "Company") as of December 31, 2003 and 2002, and the related statements of operations, changes in stockholder's equity and cash flows for the year ended December 31, 2003 and for the period from December 1 (inception) through December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ITO Acquisition Corporation as of December 31, 2003 and 2002, and the results of its operations and its cash flows for the year ended December 31, 2003 and the period from December 1 (inception) through December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. /s/ BDO Seidman, LLP January 21, 2004, except for Note 7, as to which the date is March 4, 2004 A-3
December 31, 2003 2002 -------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash $ 2,122,948 $ 8,174,388 Restricted Cash 801,860 - Accounts receivable 3,560,810 2,295,639 Current portion of prepaid software licenses and other prepaid expenses, net of accumulated amortization 1,052,412 535,918 -------------------------------------------------------------------------------------------------------------------- Total current assets 7,538,030 11,005,945 -------------------------------------------------------------------------------------------------------------------- EQUIPMENT AND IMPROVEMENTS Equipment 5,428,792 292,912 Software 516,989 920 Furniture and fixtures 170,939 20,262 Leasehold improvements 106,165 101,644 -------------------------------------------------------------------------------------------------------------------- 6,222,885 415,738 Less accumulated depreciation and amortization (865,556) (21,259) -------------------------------------------------------------------------------------------------------------------- Equipment and improvements, net 5,357,329 394,479 -------------------------------------------------------------------------------------------------------------------- Prepaid software licenses, net of current portion and accumulated amortization 270,441 72,690 Goodwill 6,967,421 680,702 Other intangibles assets, net of accumulated amortization of $415,000 (2003) and $25,000 (2002) 1,985,000 1,475,000 Deposits 157,553 121,478 -------------------------------------------------------------------------------------------------------------------- $ 22,275,774 $ 13,750,294 ====================================================================================================================
A-4 ITO ACQUISITION CORPORATION BALANCE SHEETS
December 31, 2003 2002 -------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Accounts payable $ 2,371,216 $ 903,584 Other accrued expenses 2,593,510 877,122 Accrued compensation 1,343,790 865,555 Current portion of obligations under capital leases 1,615,195 683,036 Accrued license fee 41,214 65,997 Deferred revenue 87,449 87,449 -------------------------------------------------------------------------------------------------------------------- Total current liabilities 8,052,374 3,482,743 Obligations under capital leases, less current portion 2,934,506 - Deferred rent 183,061 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 11,169,941 3,482,743 -------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDER'S EQUITY Common stock (1,000,000 shares issued and outstanding, no stated par value) 100 100 Additional paid-in capital 17,648,580 10,501,478 Accumulated deficit (6,542,847) (234,027) -------------------------------------------------------------------------------------------------------------------- Total stockholder's equity 11,105,833 10,267,551 -------------------------------------------------------------------------------------------------------------------- $ 22,275,774 $ 13,750,294 ====================================================================================================================
See accompanying notes to financial statements. A-5 ITO ACQUISITION CORPORATION STATEMENTS OF OPERATIONS
For the period from December 1 For the year (inception) ended through December 31, December 31, 2003 2002 ----------------------------------------------------------------------------------------------------------------------- SERVICE REVENUES $ 26,866,693 $ 1,712,799 OPERATING EXPENSES Salaries and related costs 11,464,767 917,433 Technology related costs 13,774,926 873,309 Facility costs 2,350,586 172,804 General and administrative expenses 902,810 22,746 Migration costs 4,078,454 - Amortization of other intangible assets 390,000 25,000 ----------------------------------------------------------------------------------------------------------------------- Total operating expenses 32,961,543 2,011,292 ----------------------------------------------------------------------------------------------------------------------- OPERATING LOSS (6,094,850) (298,493) ----------------------------------------------------------------------------------------------------------------------- OTHER EXPENSE (INCOME) Interest expense 211,570 5,534 Other income, net - (70,000) ----------------------------------------------------------------------------------------------------------------------- Total other expense (income) 211,570 (64,466) ----------------------------------------------------------------------------------------------------------------------- LOSS BEFORE INCOME TAXES (6,306,420) (234,027) INCOME TAXES 2,400 - ----------------------------------------------------------------------------------------------------------------------- NET LOSS $ (6,308,820) $ (234,027) =======================================================================================================================
See accompanying notes to financial statements. A-6 ITO ACQUISITION CORPORATION STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Common Stock Additional ----------------------------------- Paid-In Accumulated Shares Amount Capital Deficit Total --------------------------------------------------------------------------------------------------------------------------- Capital contributions 1,000,000 $ 100 $ 10,499,900 $ - $ 10,500,000 Imputed incentive compensation - - 1,578 - 1,578 Net loss - - - (234,027 ) (234,027) --------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2002 1,000,000 100 10,501,478 (234,027 ) 10,267,551 Additional capital contributions - - 7,125,000 - 7,125,000 Imputed incentive compensation - - 22,102 - 22,102 Net loss - - - (6,308,820 ) (6,308,820) --------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2003 1,000,000 $ 100 $ 17,648,580 $ (6,542,847 ) $ 11,105,833 ===========================================================================================================================
See accompanying notes to financial statements. A-7 ITO ACQUISITION CORPORATION STATEMENTS OF CASH FLOWS
For the period from December 1 For the year (inception) ended through December 31, December 31, 2003 2002 ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (6,308,820) $ (234,027) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,276,443 46,259 Impairment of fixed assets 662,057 - Imputed compensation expense 22,102 1,578 Changes in assets and liabilities, net of effects from acquisitions of businesses: Accounts receivable (1,043,134) (623,449) Prepaid software licenses and other prepaid expenses (714,245) 41,491 Deposits (15,055) (121,478) Accounts payable 1,325,459 903,584 Accrued compensation (611,015) 217,227 Licensing fee obligations (24,783) 65,997 Other accrued expenses 1,663,887 (961,838) Deferred revenue (447,758) 87,449 Deferred rent 183,061 - ----------------------------------------------------------------------------------------------------------------------- Net cash used in operating activities (4,031,801) (577,207) ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net cash paid for SMS Acquisition - (1,650,946) Net cash paid for Acxiom Acquisition (6,684,049) - Purchases of equipment and improvements, net (378,438) - ----------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (7,062,487) (1,650,946) -----------------------------------------------------------------------------------------------------------------------
A-8 ITO ACQUISITION CORPORATION STATEMENTS OF CASH FLOWS (CONTINUED)
For the period from December 1 For the year (inception) ended through December 31, December 31, 2003 2002 ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from capital contributions 7,125,000 10,500,000 Principal payments on obligations under capital leases (1,280,292) (97,459) ----------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 5,844,708 10,402,541 ----------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash (5,249,580) 8,174,388 Cash and restricted cash, beginning of period 8,174,388 - ----------------------------------------------------------------------------------------------------------------------- Cash and restricted cash, end of period $ 2,924,808 $ 8,174,388 ======================================================================================================================= SUPPLEMENTAL CASH FLOW INFORMATION: CASH PAID DURING THE PERIOD FOR: Interest $ 567,499 $ 5,534 ======================================================================================================================= Income taxes $ 2,400 $ - ======================================================================================================================= SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Assets acquired under capital leases $ 4,442,754 $ - =======================================================================================================================
See accompanying notes to financial statements. A-9 ITO ACQUISITION CORPORATION NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF BUSINESS AND NATURE OF OPERATIONS SIGNIFICANT ACCOUNTING ITO Acquisition Corporation ("Acquisition Corp" or the POLICIES "Company"), a California corporation and a wholly-owned subsidiary of ITO Holdings, LLC ("Holdings"), was created in 2002 to acquire the operations of a California based business, Systems Management Specialists, Inc., principally engaged in providing information technology outsourcing services (the "First Acquisition"). In 2003, Acquisition Corp also acquired the West Coast operations of Acxiom Corporation (the "Second Acquisition"). SMS ACQUISITION Effective December 1, 2002, Acquisition Corp acquired certain assets, rights, and properties and assumed certain obligations of Systems Management Specialists, Inc., a Delaware Corporation ("SMS"). The First Acquisition is summarized as follows: ------------------------------------------------------------ Cash consideration paid $ 1,650,946 Acquisition costs incurred 406,152 Liabilities assumed 2,861,631 Tangible and financial assets purchased (2,738,027) Goodwill recorded (680,702) Identifiable intangible assets purchased (1,500,000) ------------------------------------------------------------ $ - ============================================================ ACXIOM ACQUISITION On June 30, 2003, the Company acquired certain of the assets, rights, and properties and assumed certain obligations of Acxiom Corporation, a Delaware Corporation. A-10 ITO ACQUISITION CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF The Second Acquisition is summarized as follows: SIGNIFICANT ACCOUNTING ------------------------------------------------------------ POLICIES (CONTINUED) Cash consideration paid $ 6,684,049 Acquisition costs incurred 142,173 Liabilities assumed 1,589,509 Tangible and financial assets purchased (1,229,012) Goodwill recorded (6,286,719) Identifiable intangible assets purchased (900,000) ------------------------------------------------------------ $ - ============================================================ LIQUIDITY The Company is newly formed and is subject to the general risks associated with a new venture, including the risk of business failure. The Company has incurred substantial operating losses since inception, and has a working capital deficit at December 31, 2003. Although the Company has cash reserves to allow it to continue operations for the foreseeable future, it must be successful in achieving profitability in order to continue to operate on a long-term basis. The Company has taken steps to increase its customer base and reduce its operating costs. The Company believes it will attain profitability in mid 2004 (unaudited). There can be no assurances that the Company will successfully implement its plans. The accompanying financial statements do not reflect any adjustments that might be necessary as a result of the negative outcome of this uncertainty. REVENUE RECOGNITION Revenue is recorded when services are performed and collectibility of the related receivable is reasonable assured. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with remaining maturities at purchase of three months or less to be cash and cash equivalents. A-11 ITO ACQUISITION CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF RESTRICTED CASH SIGNIFICANT ACCOUNTING The Company maintains a restricted cash money market account POLICIES as required by an agreement with a lease financing company (CONTINUED) totaling $801,860 and $0 as of December 31, 2003 and 2002, respectively. The Company is permitted to reduce the balance of the restricted cash account ratably over a one-year period ending September 2004. EQUIPMENT AND IMPROVEMENTS Equipment and improvements are stated at cost, less depreciation and amortization. Depreciation and amortization are calculated under accelerated and straight-line methods over the estimated useful lives of the assets (or lease term, if shorter). ESTIMATED LIVES --------------------- Equipment 1-5 years Software 3 years Furniture and fixtures 5 years Leasehold improvements 3 years Maintenance and repairs are charged to expense as incurred. Significant renewals and betterments are capitalized. LONG-LIVED ASSETS The Company assesses the recoverability of long-lived assets by determining whether the depreciation of such assets over their remaining lives can be recovered through projected undiscounted cash flows. The amount of impairment, if any, is then measured based on fair value and is charged to operations in the period in which such impairment is determined by management. During the year ended December 31, 2003, the Company impaired assets with a net book value of approximately $662,000 which is included in migration costs in the accompanying statement of operations. As of December 31, 2003 and 2002, the Company's management had not identified any other material impairments of its long-lived assets. A-12 ITO ACQUISITION CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF GOODWILL AND OTHER INTANGIBLE ASSETS SIGNIFICANT ACCOUNTING The Company accounts for goodwill and other intangible POLICIES assets pursuant to Statement of Financial Accounting (CONTINUED) Standards No. 142, "Goodwill and Other Intangible Assets." Goodwill is not amortized. Other intangible assets represent purchased customer contracts and are being amortized over an estimated useful life of 5 years. In addition, goodwill and other intangible assets are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the expected future cash flows from goodwill and the identifiable intangible assets and their eventual disposition is less than their carrying value, an impairment loss is recognized and measured using fair value. MIGRATION COSTS The Company incurred certain one-time expenses related to the conversion of certain customers related to the Second Acquisition from the Los Angeles location to the Brea location totaling approximately $4,078,454 for the year ended December 31, 2003. Migration costs include $172,521 related to disputed obligations under capital leases (see Note 5). CONCENTRATION OF CREDIT RISK Financial instruments which potentially expose the Company to concentration of credit risk consist primarily of cash and accounts receivables. The Company places its cash with major financial institutions. At times, cash balances may be in excess of amounts insured by Federal agencies. As of December 31, 2003, approximately $2,471,446 in cash balances, before taking into effect issued but uncleared checks, were in excess of Federal insurance limits. A-13 ITO ACQUISITION CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF VENDORS SIGNIFICANT ACCOUNTING Two vendors accounted for 28% and 12%, respectively, of POLICIES purchases for the year ended December 31, 2003. Accounts (CONTINUED) payable for these vendors aggregated approximately 12% and 17% of gross accrued and accounts payable at December 31, 2003, respectively. Three vendors accounted for 46%, 16% and 12% of purchases for the Period ended December 31, 2002. Accounts payable for these vendors aggregated approximately 17%, 0% and 0% of gross accrued and accounts payable at December 31, 2002, respectively. Management believes that the loss of any of its major vendors would not have a material adverse effect on the Company's operations long-term, due to the availability of other vendors. CUSTOMERS Credit is extended for all customers based on financial condition, and generally, collateral is not required. Credit losses are provided for in the financial statements based on management's evaluation of historical credit losses and the collectibility of specific accounts receivable. At December 31, 2003 and 2002, management of the Company concluded that a reserve for bad debt was not required. One customer accounted for 12% of net service revenue for the year ended December 31, 2003. Accounts receivable for this customer aggregated approximately 9% of gross accounts receivable at December 31, 2003. One additional customer accounted for 11% of gross accounts receivable at December 31, 2003. Five customers accounted for 14%, 14%, 12%, 11% and 10%, respectively, of net service revenue for the year ended December 31, 2002. Accounts receivable for these customer aggregated approximately 27% of gross accounts receivable at December 31, 2002. Two additional customers accounted for 12% and 11%, respectively, of gross accounts receivable at December 31, 2002. A-14 ITO ACQUISITION CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF Management believes that the loss of any of its major SIGNIFICANT customers would not have a material adverse effect on the ACCOUNTING Company's operations long-term, due to the availability of POLICIES other customers. (CONTINUED) INCOME TAXES The Company uses the liability method of accounting for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes." Deferred income taxes are recognized based on the differences between financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. Acquisition Corp's provision for income taxes represents the current tax payable for the period and the change during the period in deferred tax assets and liabilities. Acquisition Corp incurred a net taxable loss for all periods presented. At December 31, 2003, Acquisition Corp's deferred tax assets approximated $2,800,000, which primarily consisted of net operating loss carryforwards that have been fully reserved. The Company's Federal and state net operating loss carryforwards approximated $6,000,000 and $3,600,000, respectively, and expire in 2023 and 2013, respectively. 2. GOODWILL AND The changes in the carrying amount of goodwill for the year OTHER INTANGIBLE ended December 31, 2003 and the Period ended December 31, ASSETS 2002 are as follows: Amount ------------------------------------------------------------ Balance, December 1, 2002 $ - SMS Acquisition 680,702 ------------------------------------------------------------ Balance, December 31, 2002 680,702 Acxiom Acquisition 6,286,719 ------------------------------------------------------------ Balance, December 31, 2003 $ 6,967,421 ============================================================ A-15 ITO ACQUISITION CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. GOODWILL AND Other intangible assets at December 31, 2003 and 2002 are OTHER INTANGIBLE summarized as follows: ASSETS (CONTINUED) 2003 2002 ------------------------------------------------------------ Other intangible assets: Customer Contracts $ 2,400,000 $ 1,500,000 Accumulated amortization (415,000) (25,000) ------------------------------------------------------------ $ 1,985,000 $ 1,475,000 ============================================================ The changes in the carrying amount of the other intangible assets for the year ended December 31, 2003 and the Period ended December 31, 2002 are as follows: Amount ------------------------------------------------------------ Balance, December 1, 2002 $ - SMS Acquisition 1,500,000 ------------------------------------------------------------ Balance, December 31, 2002 1,500,000 Acxiom Acquisition 900,000 ------------------------------------------------------------ Balance, December 31, 2003 $ 2,400,000 ============================================================ The Company recorded intangible amortization expense in the amount of $390,000 and $25,000 for the year ended December 31, 2003 and the Period ended December 31, 2002, respectively. A-16 ITO ACQUISITION CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. GOODWILL AND The estimated amortization expense for the five succeeding OTHER INTANGIBLE years ending December 31 and thereafter are as follows: ASSETS (CONTINUED) Years ending December 31, ------------------------------------------------------------ 2004 $ 480,000 2005 480,000 2006 480,000 2007 455,000 2008 90,000 ------------------------------------------------------------ $ 1,985,000 ============================================================ 3. TECHNOLOGY Technology related costs for the year ended December 31, RELATED COSTS 2003 and the Period ended December 31, 2002 are summarized as follows: 2003 2002 ------------------------------------------------------------ Software licensing $ 8,365,234 $ 542,090 Hardware operating leases and maintenance 1,515,246 103,339 Hardware depreciation 745,650 17,460 Telecommunications 1,229,120 86,287 Other technology related costs 1,919,676 124,133 ------------------------------------------------------------ $ 13,774,926 $ 873,309 ============================================================ 4. COMMITMENTS AND ADVISORY FEE CONTINGENCIES The member agreement of Holdings provides for an annual advisory fee to be paid to RLH Investors, LP in the amount of $25,000. The annual fee is due in arrears on the anniversary of the closing of the transaction each year (December 20). The advisory fees are included in the Company's general and administrative expenses in the accompanying statements of operations. A-17 ITO ACQUISITION CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. COMMITMENTS AND DEFERRED CLOSING FEE CONTINGENCIES (CONTINUED) A fee totaling $169,700 is payable to certain affiliated entities of Holdings, based upon certain criteria specified in the Holdings' member agreement. To date, such fee has not been paid or accrued. EMPLOYMENT AGREEMENTS The Company has employment agreements with certain officers and members which provide for specified base salaries plus incentive compensation and other benefits. ENTERPRISE SOFTWARE AGREEMENTS The Company has an enterprise agreement with a software company which requires an annual revenue based fee equal to 5% of total service revenue less required fixed quarterly payments. The following is the schedule of the minimum annual payments pursuant to the agreement: Years ending December 31, ------------------------------------------------------------ 2004 $ 1,000,000 2005 1,000,000 ------------------------------------------------------------ Total minimum annual payments $ 2,000,000 ============================================================ Revenue based fees totaling $1,447,443 were incurred in 2003, which exceeded the fixed payments in 2003 by $850,674. A-18 ITO ACQUISITION CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. COMMITMENTS AND The Company has another enterprise agreement with a CONTINGENCIES software company which provides for fixed payments through (CONTINUED) 2007. The following is a schedule of the minimum annual payments pursuant to the agreement: Years ending December 31, ------------------------------------------------------------ 2004 $ 699,000 2005 825,000 2006 915,000 2007 478,000 ------------------------------------------------------------ Total minimum annual payments $ 2,917,000 ============================================================ The Company paid $816,745 and $0 of fees related to this agreement in 2003 and 2002, respectively. CUSTOMER CONTRACT COMMISSION The Company is required to pay customer contract commissions to certain parties which originally introduced customers to the Company. Such commissions are based on revenue relating to the customer contracts. The Company incurred $138,772 and $0 in commissions for the year ended December 31, 2003 and the Period ended December 31, 2002. A-19 ITO ACQUISITION CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. LEASES CAPITAL LEASES Obligations under capital leases consist of the following:
2003 2002 --------------------------------------------------------------------------------- Obligation under capital lease, bearing interest at a rate of 11.36%; payable in monthly payments of approx. $73,886 through September 2007 $ 2,754,756 $ - Obligation under capital lease, bearing interest at a rate of 7.0%; payable in monthly payments of approx. $15,618 through September 2007 616,564 - Obligation under capital lease, bearing interest at a rate of 7.15%; payable in monthly payments of approx. $27,149 through October 2004 606,905 - Obligation under capital lease, bearing interest at a rate of 5.12%; payable in monthly payments of approx. $10,931 through August 2007 428,613 - Obligation under capital lease, bearing interest at a rate of 7.0%; payable in monthly payments of approx. $14,255 through May 2004 83,813 -
A-20 ITO ACQUISITION CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. LEASES (CONTINUED)
2003 2002 --------------------------------------------------------------------------------- Obligation under capital lease, bearing interest at a rate of 7.0%; payable in monthly payments of approx. $6,754 through September 2004 59,050 - Obligation under capital leases, bearing interest at rates varying from 8% to 9.87%; payable in monthly payments aggregating approximately $58,505 through September 2003 - 508,314 Obligation under capital lease, bearing interest at a rate of 8.86%; payable in monthly payments of approximately $44,488 through April 2003. - 174,722 -----------------------------------------=----------------------------------------- 4,549,701 683,036 Less current portion (1,615,195) (683,036) ----------------------------------------------------------------------------------- $ 2,934,506 $ - ===================================================================================
At December 31, 2003, included in one of the above referenced capital leases is a $236,402 balloon payment due upon lease termination. The Company does not believe that it assumed this balloon payment obligation as part of the Acxiom acquisition; accordingly, the Company is disputing this obligation. However, the Company has accrued and reflected said obligation as a component of obligations under capital leases. A-21 ITO ACQUISITION CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. LEASES OPERATING LEASES (CONTINUED) The Company leases certain facilities and equipment under noncancellable operating leases. Certain of the Company's operating lease agreements provide for scheduled rent increases during the lease term. Accordingly, rent expense is recorded on a straight-line basis over the respective terms of the leases. Total rental expense was $1,843,715 and $125,889 for the year ended December 31, 2003 and the Period ended December 31, 2002, respectively. The Company recorded approximately $183,061 and $0 as of December 31, 2003 and 2002, respectively, in deferred rent liability. The following is a schedule of future minimum rental payments under these operating and capital leases: Capital Total Operating Lease Years ending December 31, Lease Payments Payments ------------------------------------------------------------ 2004 $ 1,701,466 $ 1,995,179 2005 1,568,131 1,205,224 2006 1,581,082 1,205,224 2007 1,615,209 969,796 2008 1,516,793 - Thereafter 1,486,231 - ------------------------------------------------------------ Total minimum lease payments $ 9,468,912 5,375,423 ========================================== Less amount representing interest on capital leases (825,722) ------------------------------------------------------------ Present value of minimum capital lease payments $ 4,549,701 ============================================================ A-22 ITO ACQUISITION CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. RETIREMENT PLAN The Company maintains a retirement savings plan which is intended to qualify under Section 401(k) of the Internal Revenue Code. The plan covers substantially all employees of the Company. Participating employees are allowed to contribute up to a specified percent of their cash compensation limited to the statutory maximum of $12,000 for 2003. The Company makes contributions to the plan at the discretion of management. 7. SUBSEQUENT On March 4, 2004, Infocrossing, Inc., a public company, EVENT entered into a definitive agreement to acquire the Company (UNAUDITED) for $36.5 million in cash and Infocrossing's common stock, subject to adjustment as provided in the agreement. A-23 APPENDIX B B-1 SYSTEMS MANAGEMENT SPECIALISTS, INC. WEST COAST DIVISION FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT NOVEMBER 30, 2002 AND DECEMBER 31, 2001 B-2 Independent Auditors' Report The Board of Directors of ITO Acquisition Corp. We have audited the accompanying statements of assets, liabilities and affiliate investment of Systems Management Specialists. Inc ("SMS") West Coast Division (a business unit of SMS) as of November 30, 2002 and December 31, 2001, and the related statements of operations and cash flows for the eleven months ended November 30, 2002, and for the year ended December 31, 2001. These financial statements are the responsibility of the Division's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Systems Management Specialists, Inc. West Coast Division as of November 30, 2002 and December 31, 2001, and the results of its operations and cash flows for the eleven months ended November 30, 2002 and for the year ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ Moore Stephens Wurth Frazer and Torbet, LLP Orange, California March 29, 2004 B-3
SYSTEMS MANAGEMENT SPECIALISTS, INC. WEST COAST DIVISION (A BUSINESS UNIT OF SYSTEMS MANAGEMENT SPECIALISTS, INC.) STATEMENTS OF ASSETS, LIABILITIES AND AFFILIATE INVESTMENT ASSETS November 30, December 31, 2002 2001 ----------------- ---------------- CURRENT ASSETS Accounts receivable, net of allowance of $ 1,840,613 $ 2,317,690 $1,580,000 in 2002 and $5,650,000 in 2001, respectively Prepaid software maintenance fees 672,709 4,950,247 Refundable taxes 190,000 - Deferred income taxes - 190,000 ----------------- ---------------- Total current assets 2,703,322 7,457,937 ----------------- ---------------- PROPERTY AND EQUIPMENT, NET 2,628,077 3,564,079 ----------------- ---------------- TOTAL ASSETS $ 5,331,399 $ 11,022,016 ================= ================ LIABILITIES AND AFFILIATE INVESTMENT CURRENT LIABILITIES Accounts payable $ 1,886,076 $ 1,124,202 Accrued expenses 899,490 1,770,627 Income tax payable 800 240,000 Litigation reserve 1,000,000 1,000,000 Obligation on abandoned lease 3,450,000 4,035,000 Current portion of capital lease obligations 876,277 1,540,894 ----------------- ---------------- Total current liabilities 8,112,643 9,710,723 ----------------- ---------------- LONG-TERM DEBT Capital lease obligations, net of current portion 38,031 914,308 ----------------- ---------------- Total liabilities 8,150,674 10,625,031 ----------------- ---------------- AFFILIATE INVESTMENT (2,819,275) 396,985 ----------------- ---------------- COMMITMENTS AND CONTINGENCIES - - ----------------- ---------------- TOTAL LIABILITIES AND AFFILIATE INVESTMENT $ 5,331,399 $ 11,022,016 ================= ================
The accompanying notes are an integral part of these financial statements. B-4
SYSTEMS MANAGEMENT SPECIALISTS, INC. WEST COAST DIVISION (A BUSINESS UNIT OF SYSTEMS MANAGEMENT SPECIALISTS, INC.) STATEMENTS OF OPERATIONS FOR THE ELEVEN MONTH PERIOD ENDED NOVEMBER 30, 2002 AND THE YEAR ENDED DECEMBER 31, 2001 November 30, December 31, 2002 2001 ------------------------- ------------------------- REVENUES $ 25,262,568 $ 42,863,799 ------------------- -------------------- OPERATING EXPENSES Salaries, wages, and related costs 12,636,488 21,766,754 Software licensing and maintenance fees 3,641,596 3,649,139 Hardware operating leases and costs 3,158,801 3,557,271 Amortization of prepaid software maintenance fees 3,254,349 1,938,733 Data communication costs 2,332,173 4,667,187 Facility costs 1,998,540 2,587,584 Depreciation 2,099,939 2,599,694 General and administrative expenses 1,455,182 5,380,052 ------------------- -------------------- TOTAL OPERATING EXPENSES 30,577,068 46,146,414 ------------------- -------------------- OTHER EXPENSES Interest expense 80,930 315,611 Loss on impairment of property and equipment - 748,787 Loss on abandonment of property and equipment - 1,904,213 Loss on abandonment of lease - 4,035,000 ------------------- -------------------- TOTAL OTHER EXPENSES 80,930 7,003,611 ------------------- -------------------- LOSS BEFORE INCOME TAXES (5,395,430) (10,286,226) INCOME TAXES - 50,000 ------------------- -------------------- NET LOSS $ (5,395,430) $ (10,336,226) =================== ====================
The accompanying notes are an integral part of these financial statements. B-5
SYSTEMS MANAGEMENT SPECIALISTS, INC. WEST COAST DIVISION (A BUSINESS UNIT OF SYSTEMS MANAGEMENT SPECIALISTS, INC.) STATEMENTS OF CASH FLOWS FOR THE ELEVEN MONTH PERIOD ENDED NOVEMBER 30, 2002 AND THE YEAR ENDED DECEMBER 31, 2001 November 30, December 31, 2002 2001 ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (5,395,430) $ (10,336,226) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 2,099,939 2,599,694 Loss on impairment of property and equipment - 748,787 Loss on abandonment of property and equipment - 1,904,213 Loss on abandonment of lease - 4,035,000 Changes in operating assets and liabilities: Accounts receivable 477,077 2,567,189 Prepaid expenses and other assets 4,277,538 (908,149) Deferred income taxes - (190,000) Refundable taxes (239,200) 240,000 Deposits - 16,674 Accounts payable 761,874 (1,639,204) Accrued expenses (871,137) (549,285) Obligation on abandoned lease (585,000) - Deferred revenues - (1,903,883) ------------------ ------------------ Net cash flows from operating activities 525,661 (3,415,190) ------------------ ------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (1,163,937) (1,521,255) ------------------ ------------------ Net cash flows from investing activities (1,163,937) (1,521,255) ------------------ ------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Note receivable and advances to employees - 56,536 Payments on capital lease obligations (1,540,894) (1,883,931) Net capital contributions from affiliate 2,179,170 6,763,840 ------------------ ------------------ Net cash flows from financing activities 638,276 4,936,445 ------------------ ------------------ NET CHANGE IN CASH AND CASH EQUIVALENTS - - CASH AND CASH EQUIVALENTS, BEGINNING - - ------------------ ------------------ CASH AND CASH EQUIVALENTS, ENDING $ - $ - ================== ==================
The accompanying notes are an integral part of these financial statements. B-6 SYSTEM MANAGEMENT SPECIALISTS, INC. WEST COAST DIVISION (A BUSINESS UNIT OF SYSTEMS MANAGEMENT SPECIALISTS, INC.) NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS OPERATIONS. Systems Management Specialists, Inc.'s (SMS) West Coast Division (the Division) is a business unit of SMS. The Division provides data processing and information technology outsourcing services to businesses throughout the United States. The Division has their headquarters in Brea, California and a secondary location in Santa Ana, California. The Division also provides on-site support personnel at customer locations when required. SMS also has locations in Missouri, New Jersey, and Pennsylvania that were not part of the West Coast Division. BASIS OF PRESENTATION. The Division does not constitute a separate legal entity. The financial statements of the Division present the operating results and the financial position of the West Coast Division of SMS. The Division was dependent on SMS to fund its working capital needs. Effective December 1, 2002, the Division was acquired by ITO Acquisition Corp. which assumed responsibility for funding its operations. Prior to the acquisition by ITO Acquisition Corp., no financial statements were available with accounting and disclosures normally presented for a separate legal entity. The financial statements have been prepared from the historical accounting records of SMS (a wholly-owned subsidiary of Marconi plc) and reflect the application of allocation policies adopted by SMS and Marconi plc for various costs and activities. All of the accounting judgments, estimations and allocations in these financial statements are based on assumptions that management believes are reasonable for purposes of preparing the Division's financial statements. However, these allocations are estimates and are not necessarily indicative of the costs that would have resulted had the Division operated as a stand-alone, separate entity. The financial statements of the Division have been prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission ("SEC") for inclusion in a Form 8-K to be filed by Infocrossing, Inc. in connection with the acquisition of ITO Acquisition Corp. as described in note 11. AFFILIATE INVESTMENT. The Division is dependent on SMS to fund its working capital needs. All charges and allocations of costs for functions and services provided by SMS are deemed paid by the Division, in cash, in the period in which the cost is recorded in these financial statements. SMS does not charge the Division interest on its investment in the Division. Changes in SMS' investment in the Division were as follows: Balance at December 31, 2000 $ 3,969,371 Net loss (10,336,226) Net advances from SMS 6,763,840 ----------------- Balance at December 31, 2001 396,985 Net loss (5,395,430) Net advances from SMS 2,179,170 ----------------- Balance at November 30, 2002 $ (2,819,275) ================= IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets consist of property and equipment and purchased software. The Division reviews its long-lived assets for impairment whenever events or business circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Division's assessment in 2001 of the carrying value of its long-lived assets resulted in approximately $1,904,000 of noncash charges for the write-down of capitalized costs related to data processing hardware and purchased software. B-7 SYSTEM MANAGEMENT SPECIALISTS, INC. WEST COAST DIVISION (A BUSINESS UNIT OF SYSTEMS MANAGEMENT SPECIALISTS, INC.) NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT. Property and equipment and purchased software are stated at cost. Depreciation and amortization are computed using the straight-line method over estimated useful lives of 2 to 10 years for property and equipment and over the estimated useful lives or underlying lease which ever is shorter for leasehold improvements and assets capitalized under capital lease obligations. Maintenance and repairs are expensed as incurred. REVENUE RECOGNITION. The Division recognizes revenue from services when the services are rendered based on hourly and hardware utilization rates specified in contracts, while related costs are recognized when incurred. The Division provides services to medium to large sized companies under contracts with terms ranging from six months to seven years. PREPAID SOFTWARE MAINTENANCE FEES. Software maintenance fees paid on behalf of the Division's customers are paid in advance for a twelve month period and are amortized over the life of the maintenance agreement. INCOME TAXES. The Division does not file separate federal or state income tax returns as SMS files consolidated tax returns that include the operations of the Division. The Division has recorded its federal and state current income tax provision on a stand-alone basis as if the Company files separate tax returns. The Division records a current provision for income taxes based upon amounts payable or refundable. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Due to historical net losses of the Division, a valuation allowance is established to offset related deferred tax assets. USE OF ESTIMATES. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Division's significant estimates primarily relate to the assessment of the required accounts receivable allowance for doubtful accounts, and the fair value of long-lived assets. Additionally, significant estimates include the allocation to the Division of its share of certain general and administrative costs incurred by SMS. Actual results could differ from those estimates. 2. NEW ACCOUNTING PRONOUNCEMENTS In November 2002, the Emerging Issues Task Force ("EITF") finalized its tentative consensus on EITF Issue 00-21, "Revenue Arrangements with Multiple Deliverables," which provides guidance on the measurement and allocation of revenue from sales undertakings to deliver more than one product or service. The Division adopted the provisions of EITF 00-21 effective July 1, 2003. The adoption of this pronouncement did not have a significant impact on the financial condition or results of operations of the Division. In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145 "Rescission of Statements No. 4, 14 and 64, Amendment of FASB Statement No. 13 and Technical Corrections." ("FAS 145"). This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." This Statement amends SFAS No. 13, "Accounting for Leases," to eliminate any inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. FAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. This Statement is effective for fiscal years beginning after May 15, 2002. The adoption of this statement did not have a significant impact on the financial condition or results of operations of the Division. B-8 SYSTEM MANAGEMENT SPECIALISTS, INC. WEST COAST DIVISION (A BUSINESS UNIT OF SYSTEMS MANAGEMENT SPECIALISTS, INC.) NOTES TO FINANCIAL STATEMENTS 2. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED) In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with restructuring, discontinued operations, plant closing, or other exit or disposal activity. Previous accounting guidance was provided by EITF Issue No. 94-3, "Liability Recognition for Certain Costs, Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 replaces EITF 94-3 and is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of this statement did not have a significant impact on the financial condition or results of operations of the Division. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires the recognition of certain guarantees as liabilities at fair market value and is effective for guarantees issued or modified after December 31, 2002. The Division has adopted the disclosure requirement of FIN 45 and it did not have a significant impact on the financial condition or results of operations of the Division. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 "Accounting for Stock-Based Compensation -- Transition and Disclosure". Effective for interim periods beginning after December 15, 2002, disclosure is required for information on the fair value of stock options and the effect on earnings per share (in tabular form) for both interim and annual reports. The adoption of this statement did not have a significant impact on the financial condition or results of operations of the Division. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51," effective February 1, 2003. Interpretation No. 46 requires the primary beneficiary of a variable interest entity ("VIE") to consolidate the VIE under certain circumstances. Interpretation No. 46 is effective for all new VIEs created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, Interpretation No. 46 must be applied for the first interim or annual period beginning after December 15, 2003. The adoption of this pronouncement did not have a significant impact on the financial condition or results of operations of the Division. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amends and clarifies financial accounting and reporting for derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Division does not expect the adoption of SFAS No. 149 to have a significant impact on the financial condition or results of operations of the Division. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," which establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. For example, the Statement requires liability classification for a financial instrument issued in the form of shares that are mandatorily redeemable, e.g., includes an unconditional obligation requiring the issuer to redeem it by transferring its assets at a specified or determinable date or dates or upon an event that is certain to occur. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Division does not expect the adoption of SFAS No. 150 to have a significant impact on the financial condition or results of operations of the Division. B-9 SYSTEM MANAGEMENT SPECIALISTS, INC. WEST COAST DIVISION (A BUSINESS UNIT OF SYSTEMS MANAGEMENT SPECIALISTS, INC.) NOTES TO FINANCIAL STATEMENTS 3. ALLOWANCE FOR DOUBTFUL ACCOUNTS Management evaluates accounts receivable periodically for potential uncollectible receivables based on contractual due dates. Management estimated the reserve for doubtful accounts to be $1,580,000 and $5,650,000 at November 30, 2002 and December 31, 2001, respectively. Balance at December 31, 2000 $ 746,695 Additions to the allowance 4,903,305 ----------------- Balance at December 31, 2001 5,650,000 Write-offs against the allowance (4,070,000) ----------------- Balance at November 30, 2002 $ 1,580,000 ================= 4. PROPERTY AND EQUIPMENT As of November 30, 2002 and December 31, 2001, property and equipment consisted of the following: November 30, December 31, 2002 2001 Computer equipment $ 6,300,815 $ 7,955,243 Leasehold improvements 689,591 373,648 Purchased software 309,294 2,900,112 Furniture and fixtures 443,182 488,589 Less accumulated depreciation and amortization (5,114,805) (8,153,513) ---------------- ------------------ Property and equipment, net $ 2,628,077 $ 3,564,079 ================ ================== Depreciation expense amounted to $2,099,939 and $2,599,694 for the period ended November 30, 2002 and the year ended December 31, 2001, respectively. 5. ACCRUED EXPENSES As of November 30, 2002 and December 31, 2001, accrued expenses consisted of the following: November 30, December 31, 2002 2001 Accrued wages, vacation, and absences $ 877,126 $ 1,440,183 Other accrued expenses 22,364 330,444 ------------------ ------------------- Total $ 899,490 $ 1,770,627 ================== =================== B-10 SYSTEM MANAGEMENT SPECIALISTS, INC. WEST COAST DIVISION (A BUSINESS UNIT OF SYSTEMS MANAGEMENT SPECIALISTS, INC.) NOTES TO FINANCIAL STATEMENTS 6. INCOME TAXES The Division has incurred net operating losses for tax purposes in recent years. The Division has not reflected any benefit of such net operating loss carryforwards in the accompanying financial statements. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows: November 30, December 31, 2002 2001 Federal net operating loss carryforward $ 4,716,000 $ - Reserve for bad debts 677,000 2,421,000 Reserve for impairments 1,826,000 2,545,000 Accrued expenses 662,000 816,000 Other differences (447,000) (406,000) Valuation allowance (7,434,000) (5,186,000) ------------- ------------- Net deferred tax asset $ - $ 190,000 ============= ============= The provision for income taxes differs from the expected tax expense, computed by applying the federal corporate rate of 34% to earnings before income taxes as follows: November 30, December 31, 2002 2001 Expected federal benefit at 34% $ 1,834,000 $ 3,497,000 State income taxes 224,000 492,000 Change in deferred taxes 190,000 - Change in valuation allowance (2,248,000) (3,939,000) ----------------- ------------------- Net provision for income taxes $ - $ 50,000 ================= =================== 7. COMPENSATION AGREEMENTS The Division has employment agreements with certain officers which provide for specified base salaries plus incentive compensation and other benefits. 8. EMPLOYEE BENEFIT PLAN The Division has a defined contribution benefit plan provided under Section 401(k) of the Internal Revenue Code whereby substantially all of the Division employees may elect to make contributions to the plan through salary deferrals. The Division may make discretionary contributions to the plan, but made no such contributions for the periods ended November 30, 2002 and December 31, 2001, respectively. 9. CAPITAL LEASES AND COMMITMENTS The Division leases certain facilities and equipment under non-cancelable operating leases and capital leases expiring through June 30, 2008. The rental payments under operating leases are charged to expense as incurred. Total rent expense for operating leases included in the accompanying statements of operations was approximately $2,317,000 and $2,323,000 for the eleven months ended November 30, 2002 and for the year ended December 31, 2001, respectively. The Division abandoned its leasehold facility at its Santa Ana location in September 2001. The remaining obligation under the contract is recorded on the statements of assets, liabilities and affiliate investment as an obligation on abandoned lease and the corresponding non-cash change is recorded on its statement of operations as loss on abandonment of lease. The monthly payment obligation is being paid on the behalf of the Division by SMS and Marconi plc. B-11 SYSTEM MANAGEMENT SPECIALISTS, INC. WEST COAST DIVISION (A BUSINESS UNIT OF SYSTEMS MANAGEMENT SPECIALISTS, INC.) NOTES TO FINANCIAL STATEMENTS 9. CAPITAL LEASES AND COMMITMENTS (CONTINUED) The following is a schedule of future minimum rental payments under these operating and capital leases: Total Capital Operating Lease Lease Payments Payments ------------------ ------------------- Period ending November 30: 2003 $ 3,011,157 $ 876,277 2004 1,574,418 38,031 2005 1,467,313 - 2006 1,480,982 - 2007 645,464 - Thereafter 382,721 - ------------------ ------------------- Total minimum lease payments $ 8,562,055 $ 914,308 ================== =================== 10. BUSINESS CONCENTRATIONS AND CONTINGENCIES VENDOR CONCENTRATIONS. Two vendors accounted for a combined 68% and 42% of purchases for the period ended November 30, 2002 and the year ended December 31, 2001, respectively. Management believes that the loss of any of its major vendors would not have a material adverse effect on the Division's long-term operations, due to the availability of other vendors. CREDIT RISK. The Division provides services primarily to large commercial corporations. Credit is extended for all customers based on their financial condition and collateral is generally not required. CUSTOMER CONCENTRATIONS. Two customers accounted for 22.4% and one customer accounted for 14.9% of net service revenue for the period ended November 30, 2002, and for the year ended December 31, 2001, respectively. Four customers aggregated approximately 38.7% and 74.7% of gross accounts receivable at November 30, 2002, and December 31, 2001, respectively. 11. SUBSEQUENT EVENTS ITO ASSET PURCHASE AGREEMENT. Effective December 1, 2002, substantially all of the assets of the Division were sold to ITO Acquisition Corp. ("ITO"), a wholly owned subsidiary of ITO Holdings, LLC. As part of the transaction, ITO paid cash for substantially all of the assets while assuming liabilities and certain customer contracts, operating leases, and other contractual obligations. Immediately prior to the sale, no material relationship existed between the Division and ITO, any director or officer of ITO or any associate or any director or officer. INFOCROSSING ASSET PURCHASE AGREEMENT. During March, 2004, ITO Acquisition Corp. entered into an agreement to sell substantially all of its assets to Infocrossing, Inc. This agreement includes the sale of operating assets and customer base of the Division. The agreement provided for total consideration of approximately $36.5 million including cash and common stock of Infocrossing, Inc. 12. LEGAL PROCEEDINGS In conducting general business activities, the Division has been named as a party to certain litigation matters. There is one proceeding that in the opinion of management may result in an adverse judgment. Management has recorded a $1,000,000 reserve for this proceeding. Payments of the claim from this matter, if any, will be borne by SMS or its parent Marconi plc. There are no other legal proceedings pending, threatened against or involving the Division, which, in the opinion of management, will have a material adverse effect upon results of operations or financial condition of the Division. B-12 APPENDIX C C-1 ACXIOM LOS ANGELES DATA CENTER FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT JUNE 30, 2003, DECEMBER 31, 2002 AND 2001 C-2 Independent Auditors' Report The Board of Directors of ITO Acquisition Corp. We have audited the accompanying statements of assets, liabilities and affiliate investment of Acxiom Los Angeles Data Center (a business unit of Acxiom Corporation) as of June 30, 2003, December 31, 2002 and December 31, 2001, and the related statements of operations and cash flows for the six months ended June 30, 2003, and for the years ended December 31, 2002 and December 31, 2001. These financial statements are the responsibility of the Division's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Acxiom Los Angeles Data Center as of June 30, 2003, December 31, 2002 and 2001, and the results of its operations and cash flows for the six months ended June 30, 2003 and for the years ended December 31, 2002 and 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ Moore Stephens Wurth Frazer and Torbet, LLP Orange, California March 29, 2004 C-3
ACXIOM LOS ANGELES DATA CENTER (A BUSINESS UNIT OF ACXIOM CORPORATION) STATEMENTS OF ASSETS, LIABILITIES AND AFFILIATE INVESTMENT ASSETS June 30, December 31, December 31, 2003 2002 2001 ------------------- ------------------- ------------------- CURRENT ASSETS Cash and cash equivalents $ - $ - $ 10,000 Accounts receivable, net of allowance of $90,000, $90,000, and $600,000 for 2003, 2002, and 2001, respectively 2,496,147 2,661,817 3,769,536 Current portion of notes receivable 125,702 85,000 572,000 Unbilled receivables 48,238 213,122 355,163 Prepaid expenses and other current assets 372,412 512,000 767,801 ---------------- --------------- ---------------- Total current assets 3,042,499 3,471,939 5,474,500 ---------------- --------------- ---------------- PROPERTY AND EQUIPMENT, NET 1,356,076 3,277,561 4,022,929 ---------------- --------------- ---------------- OTHER ASSETS Deposits 86,088 92,366 28,920 Software licenses 891,060 1,639,000 1,076,940 Goodwill 1,807,000 1,807,000 1,807,000 Migration deferral 399,741 779,784 1,587,749 Notes receivable - 126,000 77,000 ---------------- --------------- ---------------- Total other assets 3,183,889 4,444,150 4,577,609 ---------------- --------------- ---------------- TOTAL ASSETS $ 7,582,464 $ 11,193,650 $ 14,075,038 ================ =============== ================ LIABILITIES AND AFFILIATE INVESTMENT CURRENT LIABILITIES Accounts payable $ 1,342,492 $ 1,433,265 $ 1,503,545 Accrued expenses 1,154,907 1,019,138 985,278 Deferred revenues 447,757 576,307 310,927 Current portion of capital lease obligations 325,785 283,540 302,083 ---------------- --------------- ---------------- Total current liabilities 3,270,941 3,312,250 3,101,833 ---------------- --------------- ---------------- LONG-TERM DEBT Capital lease obligations, net of current portion 254,086 435,575 719,115 ---------------- --------------- ---------------- Total liabilities 3,525,027 3,747,825 3,820,948 ---------------- --------------- ---------------- AFFILIATE INVESTMENT 4,057,437 7,445,825 10,254,090 ---------------- --------------- ---------------- COMMITMENTS AND CONTINGENCIES - - - ---------------- --------------- ---------------- TOTAL LIABILITIES AND AFFILIATE INVESTMENT $ 7,582,464 $ 11,193,650 $ 14,075,038 ================ =============== ================
The accompanying notes are an integral part of these financial statements. C-4
ACXIOM LOS ANGELES DATA CENTER (A BUSINESS UNIT OF ACXIOM CORPORATION) STATEMENTS OF OPERATIONS FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2003 AND THE YEARS ENDED DECEMBER 31, 2002 AND 2001 June 30, December 31, December 31, 2003 2002 2001 ------------------ ----------------- --------------- REVENUES $ 9,450,172 $ 20,862,734 $ 28,194,239 ------------------ -------------------- ------------------- OPERATING EXPENSES Hardware, software, and telecommunications 4,360,622 10,080,925 10,559,356 Salaries, wages, and related costs 4,520,824 10,029,275 10,242,515 Depreciation 946,923 2,066,856 1,836,293 General and administrative 128,400 307,800 355,200 Facility costs 860,014 1,628,854 2,421,802 Amortization - - 571,981 ---------------- ----------------- --------------- TOTAL OPERATING EXPENSES 10,816,783 24,113,710 25,987,147 ---------------- ----------------- --------------- OTHER INCOME AND EXPENSES Interest income 7,365 30,722 70,640 Loss on abandonment of property and equipment (476,996) (427,414) (1,929,680) Loss on impairment of property and equipment (536,753) - - ---------------- ----------------- --------------- TOTAL OTHER INCOME AND EXPENSES (1,006,384) (396,692) (1,859,040) ---------------- ----------------- --------------- (LOSS) INCOME BEFORE INCOME TAXES (2,372,995) (3,647,668) 348,052 INCOME TAXES - - - ---------------- ----------------- --------------- NET (LOSS) INCOME $ (2,372,995) $ (3,647,668) $ 348,052 ================ ================= ===============
The accompanying notes are an integral part of these financial statements. C-5
ACXIOM LOS ANGELES DATA CENTER (A BUSINESS UNIT OF ACXIOM CORPORATION) STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2003 AND THE YEARS ENDED DECEMBER 31, 2002 AND 2001 June 30, December 31, December 31, 2003 2002 2001 ------------------ ------------------- -------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (2,372,995) $ (3,647,668) $ 348,052 Adjustments to reconcile net (loss) income to net cash flows from operating activities: Depreciation and amortization 946,923 2,066,856 2,408,274 Loss on abandonment of property and equipment 476,996 427,414 1,929,680 Loss on impairment of property and equipment 536,753 - - Changes in operating assets and liabilities: Accounts receivable 165,670 1,107,719 286,218 Prepaid expenses and other assets 139,588 255,801 492,372 Unbilled receivables 164,884 142,041 (20,403) Deposits 6,278 (63,446) 59,089 Software licenses 747,940 (562,060) (79,742) Migration deferral 380,043 807,965 (965,256) Notes receivable 85,298 438,000 59,000 Accounts payable (90,773) (70,280) 841,597 Accrued expenses 135,769 33,860 (968,753) Deferred revenues (128,550) 265,380 230,499 --------------- ---------------- ----------------- Net cash flows from operating activities 1,193,824 1,201,582 4,620,627 --------------- ---------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (39,187) (1,748,902) (5,375,158) --------------- ---------------- ----------------- Net cash flows from investing activities (39,187) (1,748,902) (5,375,158) --------------- ---------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on capital lease obligations (139,244) (302,083) 945,826 Net capital contributions (distributions) from affiliate (1,015,393) 839,403 (214,092) --------------- ---------------- ----------------- Net cash flows from financing activities (1,154,637) 537,320 731,734 --------------- ---------------- ----------------- NET CHANGE IN CASH AND CASH EQUIVALENTS - (10,000) (22,797) CASH AND CASH EQUIVALENTS, BEGINNING - 10,000 32,797 --------------- ---------------- ----------------- CASH AND CASH EQUIVALENTS, ENDING $ - $ - $ 10,000 =============== ================ =================
The accompanying notes are an integral part of these financial statements. C-6 ACXIOM LOS ANGELES DATA CENTER (A BUSINESS UNIT OF ACXIOM CORPORATION) NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS OPERATIONS. Acxiom Los Angeles Outsourcing Data Center ("the Division") was a business unit of Acxiom Corporation operating data centers which provided outsourced technology services to various companies from its offices in Woodland Hills and Los Angeles, California. The Division also provided on-site support personnel at customer locations when required. BASIS OF PRESENTATION. The Division does not constitute a separate legal entity. The financial statements of the Division present the operating results and the financial position of the Los Angeles outsourcing data center of Acxiom Corporation. The Division was dependent on Acxiom Corporation to fund its working capital needs through June 2003. Effective July 1, 2003, the Division was acquired by ITO Acquisition Corp. which assumed responsibility for funding its operations. Prior to the acquisition by ITO Acquisition Corp., no financial statements were available with accounting and disclosures normally presented for a separate legal entity. The financial statements have been prepared from the historical accounting records of Acxiom Corporation and reflect the application of allocation policies adopted by ITO Acquisition Corp. for various costs and activities. All of the accounting judgments, estimations and allocations in these financial statements are based on assumptions that the management of ITO Acquisition Corp. believe are reasonable for purposes of preparing the Division's financial statements. However, these allocations are estimates and are not necessarily indicative of the costs that would have resulted had the Division operated as a stand-alone, separate entity. The financial statements of the Division have been prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission ("SEC") for inclusion in a Form 8-K to be filed by Infocrossing, Inc. in connection with the acquisition of ITO Acquisition Corp. as described in note 10. AFFILIATE INVESTMENT. The Division has been dependent upon Acxiom Corporation to fund its working capital needs. All charges and allocations of costs for functions and services provided by Acxiom Corporation are deemed paid by the Division, in cash, in the period in which the cost is recorded in these financial statements. Acxiom Corporation does not charge the Company interest on its investment in the Company. Changes in Acxiom Corporation investment in the Division were as follows: Balance at December 31, 2000 $ 10,120,130 Net income 348,052 Net distributions to the Division (214,092) --------------- Balance at December 31, 2001 10,254,090 Net loss (3,647,668) Net advances from affiliate 839,403 --------------- Balance at December 31, 2002 7,445,825 Net loss (2,372,996) Net distributions to the Division (1,015,392) --------------- Balance at June 30, 2003 $ 4,057,437 =============== IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets consist of property and equipment and purchased software. The Division reviews its long-lived assets for impairment whenever events or business circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Division's assessment in 2003 of the carrying value of it long-lived assets resulted in approximately $537,000 of noncash charges for the write-down of capitalized costs related to leasehold improvements. PROPERTY AND EQUIPMENT. Property and equipment and purchased software are recorded at cost. Depreciation and amortization are computed using the straight-line method over estimated useful lives of 2 to 3 years for equipment and furniture and the term of the underlying lease for leasehold improvements. Maintenance and repairs are expensed as incurred. C-7 ACXIOM LOS ANGELES DATA CENTER (A BUSINESS UNIT OF ACXIOM CORPORATION) NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION. The Division provides services under contracts with terms ranging from hourly to several years. Revenue is recognized when services are rendered based on hourly and hardware utilization rates specified in contracts. Prepayments on contracts are recorded as deferred revenue on the accompanying statement of assets, liabilities, and affiliate investment. Unbilled services on contracts are recorded as unbilled receivables on the accompanying statement of assets, liabilities, and affiliate investment. INCOME TAXES. The Division does not file separate federal or state income tax returns as Acxiom Corporation files consolidated tax returns that include the operations of the Division. The Division has recorded its federal and state current income tax provision on a stand-alone basis as if the Company files separate tax returns. The Division records a current provision for income taxes based upon amounts payable or refundable. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Due to historical net losses of the Division, a valuation allowance is established to offset all related deferred tax assets. USE OF ESTIMATES. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Division's significant estimates primarily relate to the assessment of the required accounts receivable allowance for doubtful accounts and fair value of long-lived assets. Additionally, significant estimates include the allocation to the Division of its share of certain general and administrative costs incurred by Acxiom Corporation. Actual results could differ from those estimates. GOODWILL. Goodwill is reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. MIGRATION DEFERRAL. The Division incurs certain one-time expenses related to the conversion of certain customers on technology outsourcing contracts. The costs are amortized over the life of the contract. 2. NEW ACCOUNTING PRONOUNCEMENTS In November 2002, the Emerging Issues Task Force ("EITF") finalized its tentative consensus on EITF Issue 00-21, "Revenue Arrangements with Multiple Deliverables," which provides guidance on the measurement and allocation of revenue from sales undertakings to deliver more than one product or service. The Division adopted the provisions of EITF 00-21 effective July 1, 2003. The adoption of this pronouncement did not have a significant impact on the financial condition or results of operations of the Division. In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145 "Rescission of Statements No. 4, 14 and 64, Amendment of FASB Statement No. 13 and Technical Corrections." ("FAS 145"). This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." This Statement amends SFAS No. 13, "Accounting for Leases," to eliminate any inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. FAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. This Statement is effective for fiscal years beginning after May 15, 2002. The adoption of this statement did not have a significant impact on the financial condition or results of operations of the Division. C-8 ACXIOM LOS ANGELES DATA CENTER (A BUSINESS UNIT OF ACXIOM CORPORATION) NOTES TO FINANCIAL STATEMENTS 2. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED) In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with restructuring, discontinued operations, plant closing, or other exit or disposal activity. Previous accounting guidance was provided by EITF Issue No. 94-3, "Liability Recognition for Certain Costs, Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 replaces EITF 94-3 and is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of this statement did not have a significant impact on the financial condition or results of operations of the Division. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires the recognition of certain guarantees as liabilities at fair market value and is effective for guarantees issued or modified after December 31, 2002. The Division has adopted the disclosure requirement of FIN 45 and it did not have a significant impact on the financial condition or results of operations of the Division. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 "Accounting for Stock-Based Compensation -- Transition and Disclosure". Effective for interim periods beginning after December 15, 2002, disclosure is required for information on the fair value of stock options and the effect on earnings per share (in tabular form) for both interim and annual reports. The adoption of this statement did not have a significant impact on the financial condition or results of operations of the Division. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51," effective February 1, 2003. Interpretation No. 46 requires the primary beneficiary of a variable interest entity ("VIE") to consolidate the VIE under certain circumstances. Interpretation No. 46 is effective for all new VIEs created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, Interpretation No. 46 must be applied for the first interim or annual period beginning after December 15, 2003. The adoption of this pronouncement did not have a significant impact on the financial condition or results of operations of the Division. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amends and clarifies financial accounting and reporting for derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Division does not expect the adoption of SFAS No. 149 to have a significant impact on the financial condition or results of operations of the Division. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," which establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. For example, the Statement requires liability classification for a financial instrument issued in the form of shares that are mandatorily redeemable, e.g., includes an unconditional obligation requiring the issuer to redeem it by transferring its assets at a specified or determinable date or dates or upon an event that is certain to occur. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Division does not expect the adoption of SFAS No. 150 to have a significant impact on the financial condition or results of operations of the Division. C-9 ACXIOM LOS ANGELES DATA CENTER (A BUSINESS UNIT OF ACXIOM CORPORATION) NOTES TO FINANCIAL STATEMENTS 3. ALLOWANCE FOR DOUBTFUL ACCOUNTS Management evaluates accounts receivable periodically for potential uncollectible receivables based on contractual due dates. Management estimated the reserve for doubtful accounts to be $90,000 at June 30, 2003, as well as $90,000 and $600,000 as of December 31, 2002 and 2001, respectively. Balance at December 31, 2000 $ 1,350,000 Write-offs against the allowance (750,000) --------------- Balance at December 31, 2001 600,000 Write-offs against the allowance (510,000) --------------- Balance at December 31, 2002 90,000 Write-offs against the allowance - --------------- Balance at June 30, 2003 $ 90,000 =============== 4. PROPERTY AND EQUIPMENT As of June 30, 2003, December 31, 2002 and 2001, property and equipment consisted of the following:
June 30, December 31, December 31, 2003 2002 2001 Furniture and fixtures $ 103,998 $ 98,903 $ 8,006 Data processing equipment 1,592,720 2,974,407 3,587,032 Leasehold improvements 695,742 1,232,495 7,890 Equipment under capital lease obligations 1,169,058 1,169,058 1,169,058 Less accumulated depreciation and (569,771 amortization (1,595,119) (1,638,561) ) Less accumulated amortization of equipment under capital lease obligations (610,323) (558,741) (179,286) ----------------- ---------------- ----------------- Property and equipment, net $ 1,356,076 $ 3,277,561 $ 4,022,929 ================= ================ =================
5. ACCRUED EXPENSES As of June 30, 2003, December 31, 2002 and 2001, accrued expenses consisted of the following: June 30, December 31, December 31, 2003 2002 2001 Accrued vacation and absences $ 735,208 $ 858,000 $ 735,000 Other accrued expenses 419,699 161,138 250,278 ----------------- ----------------- ----------------- Total $ 1,154,907 $ 1,019,138 $ 985,278 ================= ================= =================
C-10 ACXIOM LOS ANGELES DATA CENTER (A BUSINESS UNIT OF ACXIOM CORPORATION) NOTES TO FINANCIAL STATEMENTS 6. INCOME TAXES The Division has incurred net operating losses for tax purposes in recent years. The Division has not reflected any benefit of such net operating loss carryforwards in the accompanying financial statements. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
June 30, December 31, December 31, 2003 2002 2001 Federal net operating loss carryforward $ 3,229,000 $ 2,160,000 $ 371,000 Allowance for doubtful accounts 39,000 39,000 278,000 Accrued vacation 315,000 368,000 315,000 ------------------ ------------------ ------------------- Deferred tax assets 3,583,000 2,567,000 964,000 Deferred state tax liability (151,000) (113,000) (56,000) Valuation allowance (3,432,000) (2,454,000) (908,000) ------------------ ------------------ ------------------- Net deferred tax asset $ - $ - $ - ================== ================== ===================
The provision for income taxes differs from the expected tax expense, computed by applying the federal corporate rate of 34% to earnings before income taxes as follows:
June 30, December 31, December 31, 2003 2002 2001 Expected federal benefit at 34% $ 807,000 $ 1,240,000 $ 118,000 Amortization deduction of goodwill 97,000 194,000 - State income taxes 74,000 112,000 16,000 Change in valuation allowance (978,000) (1,546,000) (134,000) ------------------ ------------------ ------------------- Net provision for income taxes $ - $ - $ - ================== ================== ===================
7. CAPITAL LEASES AND COMMITMENTS The Division leases its facilities under non-cancelable operating lease arrangements expiring through June 2009. The rental payments under these leases are charged to expense as incurred. Total rent expense included in the accompanying statements of operations was approximately $416,000 for the six months ended June 30, 2003 and $492,000 and $360,000 for the years ended December 31, 2002 and 2001, respectively. The Division also leases certain equipment under operating leases that are primarily related to data processing with monthly lease payments totaling $31,884. The following is a schedule of future minimum rental payments, excluding property taxes and other operating expenses, required under all non-cancelable operating leases:
Total Capital Operating Lease Lease Period ending December 31: Payments Payments ------------------- -------------------- 2003 $ 628,527 $ 144,296 2004 1,335,082 435,575 2005 1,024,078 - 2006 877,012 - 2007 865,794 - Thereafter 1,071,902 - ------------------- -------------------- Total minimum lease payments $ 5,802,395 $ 579,871 =================== ====================
C-11 ACXIOM LOS ANGELES DATA CENTER (A BUSINESS UNIT OF ACXIOM CORPORATION) NOTES TO FINANCIAL STATEMENTS 8. RETIREMENT PLAN The Division has a retirement savings plan which covers substantially all employees. The Division matches 50% of the employee's contributions under both plans up to 6% annually and may contribute additional amounts to the plans from the Division's earnings at the discretion of the board of directors. 9. BUSINESS CONCENTRATIONS AND CONTINGENCIES CREDIT RISK. The Division provides services primarily to large commercial corporations. Credit is extended based on an evaluation of the customer's financial condition and collateral is generally not required. CUSTOMER CONCENTRATIONS. For the six months ended June 30, 2003, three customers accounted for 33% of revenues and three customers accounted for 33% of accounts receivable. For the year ended December 31, 2002, two customers accounted for 22% of revenues and one customer accounted for 15% of accounts receivable. For the year ended December 31, 2001, one customer accounted for 10% of revenues and one customer accounted for 16% of accounts receivable. 10. SUBSEQUENT EVENTS ITO ASSET PURCHASE AGREEMENT. Effective July 1, 2003, substantially all of the assets used in the Division were sold to ITO Acquisition Corp. ("ITO"), a wholly owned subsidiary of ITO Holdings, LLC. As part of the transaction, ITO paid $6,684,049 in cash; assumed $1,589,000 in liabilities generated by the Division; and assumed certain customer contracts, operating leases, and other contractual obligations. Immediately prior to the sale, no material relationship existed between the Division and ITO, any director or officer of ITO/Acxiom or any associate of any director or officer. INFOCROSSING ASSET PURCHASE AGREEMENT. During March 2004, ITO Acquisition Corp. entered into an agreement to sell substantially all of its assets to Infocrossing, Inc. This agreement includes the sale of operating assets and customer base of the Division. The agreement provided for total consideration of approximately $36.5 million including cash and common stock of Infocrossing, Inc. 11. LEGAL PROCEEDINGS In conducting general business activities, the Division has been named as a party to certain litigation matters. There are no legal proceedings pending, threatened against or involving the Division, which, in the opinion of management, will have a material adverse effect upon results of operations or financial condition of the Division. C-12 APPENDIX D UNAUDITED FINANCIAL STATEMENTS OF ITO ACQUISITION CORPORATION AS OF AND FOR THE QUARTER ENDED MARCH 31, 2004 D-1
ITO ACQUISITION CORPORATION BALANCE SHEETS MARCH 31, 2004 DECEMBER 31, 2003 ------------------------- --------------------------- ASSETS (UNAUDITED) CURRENT ASSETS Cash $ 330,064 $ 2,122,948 Restricted Cash 635,194 801,860 Accounts Receivable 3,313,018 3,560,810 Current portion of prepaid software licenses and other prepaid expenses, net of accumulated amortization 1,389,780 1,052,412 ------------------------------------------------------------------------------------------------------------------------------ Total current assets 5,668,056 7,538,030 ------------------------------------------------------------------------------------------------------------------------------ EQUIPMENT AND IMPROVEMENTS Equipment 6,133,688 5,428,792 Software 516,989 516,989 Furniture and fixtures 170,939 170,939 Leasehold improvements 106,165 106,165 ------------------------------------------------------------------------------------------------------------------------------ 6,927,781 6,222,885 Less accumulated depreciation and amortization (1,301,733) (865,556) ------------------------------------------------------------------------------------------------------------------------------ Equipment and improvements, net 5,626,048 5,357,329 ------------------------------------------------------------------------------------------------------------------------------ Prepaid software licenses, net of current portion and accumulated amortization 78,804 270,441 Goodwill 7,317,421 6,967,421 Other intangibles assets, net of accumulated amortization of $535,000 (2004) and $415,000 (2003) 2,015,000 1,985,000 Deposits 157,553 157,553 ------------------------------------------------------------------------------------------------------------------------------ $ 20,862,882 $ 22,275,774 ============================================================================================================================== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Accounts payable $ 2,031,681 $ 2,371,216 Other accrued expenses 2,650,298 2,593,510 Accrued compensation 986,302 1,343,790 Current portion of obligations under capital leases 1,614,370 1,615,195 Accrued license fee 249,319 41,214 Deferred revenue 87,449 87,449 ------------------------------------------------------------------------------------------------------------------------------ Total current liabilities 7,619,419 8,052,374 Obligations under capital leases, less current portion 3,074,711 2,934,506 Deferred liabilities 564,024 183,061 ------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 11,258,154 11,169,941 ------------------------------------------------------------------------------------------------------------------------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDER'S EQUITY Common stock (1,000,000 shares issued and outstanding, no stated par value) 100 100 Additional paid-in capital 17,648,580 17,648,580 Accumulated deficit (8,043,952) (6,542,847) ------------------------------------------------------------------------------------------------------------------------------ Total stockholder's equity 9,604,728 11,105,833 ------------------------------------------------------------------------------------------------------------------------------ $ 20,862,882 $ 22,275,774 ==============================================================================================================================
See Notes to Unaudited Financial Statements D-2
ITO ACQUISITION CORPORATION STATEMENT OF OPERATIONS (UNAUDITED) FIRST QUARTER ENDED MARCH 31, -------------------------------------------------- 2004 2003 -------------------- ------------------- SERVICE REVENUES $ 8,389,638 $ 4,929,910 -------------------- ------------------- OPERATING EXPENSES Salaries and related costs 3,934,239 2,368,780 Technology related costs 4,365,739 2,399,443 Facility costs 637,302 489,721 General and administrative expenses 330,624 194,313 Migration costs 401,346 - Amortization of other intangible assets 120,000 - -------------------- ------------------- Total operating expenses 9,789,249 5,452,257 -------------------- ------------------- OPERATING LOSS (1,399,611) (522,347) Interest expense 101,494 12,487 -------------------- ------------------- LOSS BEFORE INCOME TAXES (1,501,105) (534,835) INCOME TAXES - 800 -------------------- ------------------- NET LOSS $ (1,501,105) $ (535,635) ==================== ===================
See Notes to Unaudited Financial Statements D-3
ITO ACQUISITION CORPORATION STATEMENTS OF CASH FLOWS (UNAUDITED) FIRST QUARTER ENDED MARCH 31, ------------------------------------------------- 2004 2003 ------------------------ -------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (1,501,105) $ (535,635) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 556,177 62,552 Changes in assets and liabilities, net of effects from acquisitions of businesses: Accounts Receivables 184,849 261,210 Prepaid software licenses and other prepaid expenses (56,927) (279,709) Accounts Payable (339,536) (51,388) Accrued compensation (357,488) (426,665) Licensing fee obligations 182,245 - Other accrued expenses (93,213) (226,021) Deferred rent 30,963 - ------------------------ -------------------- Net cash used in operating activities (1,394,035) (1,195,655) ------------------------ -------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of equipment and improvements, net (125,707) (6,639) ------------------------ -------------------- Net cash used in investing activities (125,707) (6,639) ------------------------ -------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from capital contributions - 125,000 Principal payments on obligations under capital leases (439,808) (296,492) ------------------------ -------------------- Net cash provided by financing activities (439,808) (171,492) ------------------------ -------------------- Net (decrease) increase in cash (1,959,550) (1,373,786) Cash and restricted cash, beginning of period 2,924,808 8,174,388 ------------------------ -------------------- CASH AND RESTRICTED CASH, END OF PERIOD $ 965,258 $ 6,800,603 ======================== ====================
See Notes to Unaudited Financial Statements D-4 NOTES TO UNAUDITED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The balance sheets as of March 31, 2004 and the statements of operations and cash flows for the three months ended March 31, 2004 and 2003 have not been audited. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows for the periods indicated have been made. The results of operations and cash flows for the period ended March 31, 2004 is not necessarily indicative of the operating results for the full year. Certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These unaudited interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2003. The financial statements include the accounts of ITO Acquisition Corporation (the "Company") including, subsequent to June 30, 2003, the results of operations and net assets purchased from Acxiom Corporation. 2. ACQUISITION On February 29, 2004 the Company purchased certain rights and assets and assumed certain liabilities from Strategix, Ltd., a California corporation. The purchase is summarized as follows: Cash consideration $ - Purchase price payable 500,000 Liabilities assumed - Tangible and financial assets purchased - Identifiable intangible asset purchased (150,000) Goodwill recorded (350,000) ----------------- $ - ================= The initial purchase price payment of $150,000 will be made on June 28, 2004. Additional payments of $350,000 will be made based upon operating results with a maximum of $200,000 due on March 31, 2005 and a maximum of $150,000 due on March 31, 2006. Additional annual payments may be required until the total paid equals $500,000. 3. SUBSEQUENT EVENT On April 2, 2004, all the outstanding stock of the Company was purchased by Infocrossing, Inc., a publicly traded company (NASDAQ - IFOX) located in Leonia, New Jersey. It is anticipated that the Company will be operated as a subsidiary of Infocrossing, Inc. D-5 APPENDIX E UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION AS OF MARCH 31, 2004, FOR THE QUARTER ENDED MARCH 31, 2004, AND FOR THE YEAR ENDED DECEMBER 31, 2003 E-1 UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL INFORMATION On April 2, 2004, we acquired all of the outstanding capital stock of ITO Acquisition Corporation, a California corporation doing business as Systems Management Specialists ("SMS"), from ITO Holdings, LLC ("Holdings") for approximately $35 million in cash and 135,892 shares of common stock of the Company (the "SMS Acquisition"). The SMS Acquisition was effected pursuant to a Stock Purchase Agreement, dated as of March 3, 2004 (the "Stock Purchase Agreement"), between Holdings and us. The following unaudited condensed combined pro forma Statement of Operations for the year ended December 31, 2003 and the three month period ended March 31, 2004 give effect to the SMS Acquisition and to the acquisition of certain of the assets, rights, properties, and assumed obligations of Acxiom Corporation by SMS on June 30, 2003, as if they all had occurred on January 1, 2003. The following unaudited condensed combined pro forma balance sheet at March 31, 2004 gives effect to these transactions as if they had been completed as of March 31, 2004. The acquisitions were accounted for under the purchase method of accounting. Accordingly, the assets acquired and liabilities assumed have been recorded at their estimated fair values at the date of the acquisition. The purchase price has been allocated to the assets acquired and the liabilities assumed based upon estimates of their respective fair values, which are subject to adjustment. The Pro Forma Information has been prepared by our management. The Pro Forma Information may not be indicative of the results that actually would have occurred had the transactions been in effect on the dates indicated, nor does it purport to indicate the results that may be obtained in the future. The Pro Forma Information should be read in conjunction with the financial statements and notes thereto of SMS, Acxiom Los Angeles Data Center, and the West Coast Division of Systems Management Specialists appearing as appendices A through D in this Report and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 and our Annual Report on Form 10-K for the year ended December 31, 2003. The accompanying Pro Forma Statements of Operations do not give effect to planned synergies and cost savings. For example, we expect to achieve annual cost savings of $3.5 million through the elimination of redundant positions. E-2
UNAUDITED CONDENSED COMBINED PRO FORMA BALANCE SHEET AS OF MARCH 31, 2004 (IN THOUSANDS) ITO INFOCROSSING, ACQUISITION PRO FORMA PRO FORMA INC. (A) CORP (B) ADJUSTMENTS COMBINED ----------------- ---------------- --------------- ---------------- ASSETS CURRENT ASSETS: Cash, cash equivalents, and restricted cash $ 39,553 $ 965 $ (20,134) (H) $ 20,384 Trade accounts receivable, net of allowances for doubtful accounts 4,400 3,313 7,713 Prepaid expenses and other current assets 3,867 1,390 5,257 ----------------- ---------------- --------------- ---------------- 47,820 5,668 (20,134) 33,354 PROPERTY AND EQUIPMENT, NET 17,419 5,626 (1,593) (I) 21,452 ----------------- ---------------- --------------- ---------------- OTHER ASSETS: Deferred software, net 1,157 - - 1,157 Goodwill 28,361 7,318 31,968 (O) 67,647 Other intangible assets, net 707 2,015 (365) (J) 2,357 Security deposits and other non-current assets 2,270 236 655 (K) 3,161 ----------------- ---------------- --------------- ---------------- 32,495 9,569 32,258 74,322 ----------------- ---------------- --------------- ---------------- TOTAL ASSETS $ 97,734 $ 20,863 $ 10,531 $ 129,128 ================= ================ =============== ================ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable $ 3,250 $ 2,032 $ - $ 5,282 Current portion of notes payable, long-term debt and capitalized lease obligations 2,329 1,614 (85) (L) 3,858 Current portion of accrued loss on leased facilities 207 - - 207 Accrued expenses 2,185 3,886 3,236 (M) 9,307 Current deferred revenue 1,319 87 - 1,406 ----------------- ---------------- --------------- ---------------- 9,290 7,619 3,151 20,060 LONG-TERM LIABILITIES: Notes payable 24,875 - 15,000 (Q) 39,875 Other long-term debt and capitalized leases 772 3,075 126 (L) 3,973 Accrued loss on leased facilities, net of current portion 674 - - 674 Deferred revenue, net of current portion 21 - - 21 Other long-term liabilities 975 564 - 1,539 ----------------- ---------------- --------------- ---------------- TOTAL LIABILITIES 36,607 11,258 18,277 66,142 ----------------- ---------------- --------------- ---------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common Stock 188 - 1 (N) 189 Additional paid-in capital 139,372 17,649 (15,791) (N) 141,230 Accumulated Deficit (75,295) (8,044) 8,044 (N) (75,295) ----------------- ---------------- --------------- ---------------- 64,265 9,605 (7,746) 66,124 Less common stock held in treasury, at cost (3,138) - - (3,138) ----------------- ---------------- --------------- ---------------- TOTAL STOCKHOLDERS' EQUITY 61,127 9,605 (7,746) 62,986 ----------------- ---------------- --------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 97,734 $ 20,863 $ 10,531 $ 129,128 ================= ================ =============== ================
See accompanying notes to unaudited condensed combined pro forma financial information. E-3
UNAUDITED CONDENSED COMBINED PRO FORMA INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2003 (IN THOUSANDS) INFOCROSSING, ITO ACQUISITION ACXIOM PRO FORMA INC. (C) CORP (D) DIVISION (E) ADJUSTMENTS PRO FORMA COMBINED ----------------- ------------------ ----------------- ------------------ ------------------- Revenues $ 55,228 $ 26,867 $ 9,450 $ - $ 91,545 --------------- ---------------- --------------- --------------- ----------------- Costs of revenue, excluding depreciation shown below 36,706 26,845 9,741 - 73,292 Selling, general & administrative expenses 8,565 763 128 - 9,456 Non-recurring costs: Migration costs - 4,078 - - 4,078 Losses on impairment and abandonment - - 1,014 - 1,014 Depreciation and amortization 6,061 1,276 947 (786) (P) 7,498 --------------- ---------------- --------------- --------------- ----------------- 51,332 32,962 11,830 (786) 95,338 --------------- ---------------- --------------- --------------- ----------------- Operating income (loss) 3,896 (6,095) (2,380) 786 (3,793) Net interest expense (income) 2,498 212 (7) 1,353 (Q) 4,056 --------------- ---------------- --------------- --------------- ----------------- Income (loss) before income tax expense (benefit) 1,398 (6,307) (2,373) (567) (7,849) Income tax expense 42 2 - - 44 --------------- ---------------- --------------- --------------- ----------------- Net income (loss) 1,356 (6,309) (2,373) (567) (7,893) Accretion and dividends on redeemable preferred stock (6,877) - - - (6,877) --------------- ---------------- --------------- --------------- ----------------- Net loss to common stockholders $ (5,521) $ (6,309) $ (2,373) $ (567) $ (14,770) =============== ================ =============== =============== ================= Basic and diluted net loss to common stockholders per share $ (0.71) $ (1.88) =============== ================= Weighted average common shares outstanding 7,730 136 (R) 7,866 =============== =============== =================
See accompanying notes to unaudited condensed combined pro forma financial information. E-4
UNAUDITED CONDENSED COMBINED PRO FORMA INCOME STATEMENT FOR THE THREE MONTHS ENDED MARCH 31, 2004 (IN THOUSANDS) ITO INFOCROSSING, ACQUISITION PRO FORMA PRO FORMA INC. (E) CORP (F) ADJUSTMENTS COMBINED ----------------- ----------------- ----------------- ------------------ Revenues $ 15,176 $ 8,390 $ - $ 23,566 --------------- --------------- -------------- ---------------- Costs of revenue, excluding depreciation shown below 10,223 6,461 - 16,684 Selling, general & administrative expenses 2,113 2,772 - 4,885 Depreciation and amortization 1,593 556 (219) (P) 1,930 --------------- --------------- -------------- ---------------- 13,929 9,789 (219) 23,499 --------------- --------------- -------------- ---------------- Operating income (loss) 1,247 (1,399) 219 67 Net interest expense 665 102 267 (Q) (1,034) --------------- --------------- -------------- ---------------- Income (loss) before income tax expense (benefit) 582 (1,501) (48) (967) Income tax expense (benefit) (193) - - (193) --------------- --------------- -------------- ---------------- Net income (loss) $ 775 $ (1,501) $ (48) $ (774) =============== =============== ============== ================ Basic net income to common stockholders per share $ 0.05 $ (0.05) =============== ================ Weighted average common shares outstanding 15,193 136 (R) 15,329 =============== ============== ================ Diluted net income to common stockholders per share $ 0.05 $ (0.05) =============== ================ Weighted average common shares and equivalents outstanding 17,146 136 (R) 15,329 =============== ============== ================
See accompanying notes to unaudited condensed combined pro forma financial information. E-5 NOTES TO UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL INFORMATION (DOLLAR AMOUNTS IN THOUSANDS) On April 2, 2004, we acquired all of the outstanding capital stock of ITO Acquisition Corporation, a California corporation doing business as Systems Management Specialists ("SMS"), from ITO Holdings, LLC ("Holdings") for $34,919 in cash and 135,892 shares of our common stock valued at approximately $1,859 (the "SMS Acquisition"). SMS, headquartered in Orange County, California, provides computing operations, business process outsourcing and managed application services to clients primarily located in the western United States. We recorded an estimated $1,442 in accrued fees and costs related to the acquisition. The assets and liabilities of SMS were adjusted as discussed in the following Notes, resulting in goodwill of $39,305. We and our lender amended and restated a term loan agreement, dated as of October 21, 2003 and amended on February 13, 2004 (the "Term Loan Agreement") to provide a portion of the funding for the SMS Acquisition. As amended and restated, the Term Loan Agreement provides for a Term Loan A facility with a maximum borrowing of $25,000 and a Term Loan B facility with a maximum borrowing of $15,000. On April 2, 2004, we borrowed $15,000 from the Term Loan B facility and received $14,785 net of loan origination costs of $215. We incurred an additional $440 in estimated accrued legal and other professional fees in connection with the Term Loan B facility. The total deferred loan costs and fees of $655, will be expensed over the 54-month term of Term Loan B facility. Term Loan B is at an interest rate of Prime plus 3% with a floor of 9% and matures along with the Term Loan A on October 21, 2008. The term loans include monthly payments of interest plus monthly principal payments of $312.5 beginning in December 2004. (A) Reflects our unaudited condensed consolidated balance sheet as of March 31, 2004. (B) Reflects the unaudited condensed balance sheet of ITO Acquisition Corporation as of March 31, 2004. (C) Reflects our consolidated condensed statement of operations for the year ended December 31, 2003. (D) Reflects the condensed statement of operation of ITO Acquisition Corporation for the year ended December 31, 2003 which includes the operations of Acxiom from June 30, 2003, the date ITO Acquisition Corporation acquired certain of the assets, rights, and properties and assumed certain obligations of Acxiom Los Angeles Outsourcing Data Center from Acxiom Corporation. (E) Reflects the Statement of Operations of Acxiom Los Angeles Data Center for the six months ended June 30, 2003. (F) Reflects our unaudited condensed consolidated statement of operations for the three months ended March 31, 2004. E-6 NOTES TO UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL INFORMATION (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS) (G) Reflects the unaudited condensed statement of operations of ITO Acquisition Corporation for the three months ended March 31, 2004. (H) To record the cash paid for the SMS Acquisition and proceeds from Term Loan B facility: Cash paid for SMS Acquisition $ (34,919) Proceeds from Term Loan B facility 14,785 -------- $ (20,134) ======== (I) To adjust by 1,593 the historical costs for certain items of equipment and software acquired to reflect their estimated fair value. (J) To adjust customer list to its fair value. Customer list at net historical value $ 2,015 Customer list at its fair value (1) 1,650 --------------- $ (365) =============== (1) Based on a valuation performed by us. (K) To record deferred financing costs in connection with Term Loan B facility. (L) To adjust capital leases as follows: Current Long-term Portion Portion --------------------------- Reclassify amount from current to long-term $ (58) $ 58 Increase obligation to reflect amount due - 68 Reclassify portion to accrued expenses (27) - ----------- ------------ $ (85) $ 126 =========== ============ E-7 NOTES TO UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL INFORMATION (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS) (M) To adjust accrued expenses as follows: Fees and costs related to SMS Acquisition $ 1,442 Legal and professional fees incurred in connection with Term Loan B facility 440 Accrual for severance and retention bonuses (2) 659 Accrual for facilities and assets (3) 668 Reclassification of capital lease obligation (see note L) 27 ------------ $ 3,236 ============ (2) Represents costs related to the termination of employees of ITO Acquisition Corporation in accordance with EITF 95-3 "Recognition of Liabilities in Connection with a Purchase Business Combination". Our management has formulated a plan and expects to have it completed within one year of the date of acquisition. (3) Represents costs in accordance with EITF 95-3 that the Company is contractually obligated for but do not provide an economic benefit or associated with generating revenues subsequent to the acquisition date. (N) To record the issuance of 135,892 shares of our common stock at $13.68 per share and elimination of acquiree's historical equity in connection the SMS Acquisition: Common Additional Accumulated Stock Paid-in-capital Deficit -------------------------------------------- Pre-acquisition balance $ - $ (17,649) $ (8,044) of SMS Issuance of common stock 1 1,858 - -------- ------------ ------------ $ 1 $ (15,791) $ (8,044) ======== ============ ============ E-8 NOTES TO UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL INFORMATION (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS) (O) To record adjustment to goodwill. Purchase Price: Cash $ (34,919) Common stock issued (1,859) Fees and costs (1,442) $ (38,220) ---------- Tangible assets acquired and liabilities assumed (net of adjustments): Cash and equivalents $ 330 Trade accounts receivable 3,313 Prepaid expenses and other current assets 2,025 Property and equipment 4,033 Other assets 236 Accounts payable (2,032) Accrued expenses (3,913) Capital leases (4,730) Deferred revenue (87) Other liabilities (564) Accrual for severance and redundant facilities (1,327) (2,716) ---------- ---------- (40,936) Less balance allocated to customer lists 1,650 ---------- Total Goodwill (39,286) Pre-existing Balance 7,318 ---------- Adjustment $ (31,968) ========== E-9 NOTES TO UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL INFORMATION (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS) (P) Depreciation and amortization expense was adjusted for a reduction in customer lists as a result of purchase price allocation discussed in Note J, increase customer list amortization expense (six months) relating to the assumed acquisition of Acxiom by SMS, and reduced depreciation expense relating to the reduction in fixed asset fair values discussed in Note I. Year Ended Three Months December Ended March 31, 2003 31,02004 ------------------------ Fixed asset depreciation reduction $ (726) $ (181) Amortization of customer list related to the Acxiom acquisition 90 - SMS customer list amortization reduction (150) (38) ---------------------- $ (786) $ (219) ====================== (Q) To record borrowing under the Term Loan B facility of $15,000 in connection with the SMS Acquisition, and the related additional interest expense, taking into account assumed principal payments of $312 per month beginning August 1, 2003 (the eighth month following the assumed acquisition date of January 1, 2003) and amortization of related deferred financing costs as follows: Year Ended Three Months December Ended March 31, 2003 31,02004 --------------------------- Interest expense (9% per annum) $ 1,207 $ 230 Amortization of deferred financing costs 146 37 -------- -------- $ 1,353 $ 267 ======== ======== (R) To record the additional shares issued to Holdings in connection with the SMS Acquisition. The pro forma loss per share is based on 7,866 and 15,329 weighted average shares outstanding for the year ended December 31, 2003 and the three months ended March 31, 2004, respectively, reflect the shares issued in connection with the SMS Acquisition, as if such shares were outstanding beginning January 1, 2003. E-10