-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OjDYrCMwHI6+iBUs7X4NyJcCVtu8lu2YtItuKJPOvNf4PYarQNJYXyJNdFBQXlLk hR6tHpDQhWnRACUxi5TsBg== 0000893816-04-000085.txt : 20041115 0000893816-04-000085.hdr.sgml : 20041115 20041115172617 ACCESSION NUMBER: 0000893816-04-000085 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041115 DATE AS OF CHANGE: 20041115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INFOCROSSING INC CENTRAL INDEX KEY: 0000893816 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 133252333 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20824 FILM NUMBER: 041147002 BUSINESS ADDRESS: STREET 1: 2 CHRISTIE HEIGHTS STREET CITY: LEONIA STATE: NJ ZIP: 07605 BUSINESS PHONE: 2018404700 MAIL ADDRESS: STREET 1: 2 CHRISTIE HEIGHTS STREET CITY: LEONIA STATE: NJ ZIP: 07605 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTER OUTSOURCING SERVICES INC DATE OF NAME CHANGE: 19930328 10-Q 1 q304.txt 10-Q FOR SEPTEMBER 30, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: SEPTEMBER 30, 2004 Commission file number: 0-20824 INFOCROSSING, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its Charter) DELAWARE 13-3252333 ------------------------------- ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 2 CHRISTIE HEIGHTS STREET, LEONIA, NJ 07605 --------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (201) 840-4700 Check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): [ ] Yes [X] No. There were 18,953,975 shares of the registrant's Common Stock, $0.01 par value, outstanding as of November 11, 2004. PAGE 1 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS
INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) SEPTEMBER 30, DECEMBER 31, 2004 2003 ----------------- ----------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and equivalents $ 38,743 $ 10,073 Trade accounts receivable, net of allowances for doubtful accounts of $646 and $570, respectively 12,027 3,592 Due from related parties 234 226 Prepaid license fees 1,676 945 Other current assets 4,130 1,780 -------------- ------------- 56,810 16,616 -------------- ------------- PROPERTY and EQUIPMENT, net 22,666 18,249 -------------- ------------- OTHER ASSETS: Deferred software, net 1,049 1,264 Goodwill 77,837 28,361 Other intangible assets, net 2,524 788 Security deposits and other non-current assets 2,582 1,384 -------------- ------------- 83,992 31,797 -------------- ------------- TOTAL ASSETS $ 163,468 $ 66,662 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 6,215 $ 2,768 Current portion of long-term debt and capitalized lease obligations 3,628 2,559 Current portion of accrued loss on leased facilities 215 202 Accrued expenses 6,408 1,516 Deferred revenue 1,235 1,356 -------------- ------------- 17,701 8,401 LONG-TERM LIABILITIES: Convertible notes 69,511 - Other long-term debt and capitalized lease obligations 6,275 25,732 Accrued loss on leased facilities, net of current portion 557 732 Deferred revenue, net of current portion - 42 Other long-term liabilities 1,703 954 -------------- ------------- TOTAL LIABILITIES 95,747 35,861 -------------- ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock; $0.01 par value; 3,000,000 shares authorized; none issued - - Common stock; $0.01 par value; 50,000,000 shares authorized; shares issued of 19,305,468 and 15,732,038, respectively 193 157 Additional paid-in capital 144,182 109,565 Accumulated deficit (73,516) (76,070) -------------- ------------- 70,859 33,652 Less 618,969 and 594,990 shares, respectively, of common stock held in treasury, at cost (3,138) (2,851) -------------- ------------- TOTAL STOCKHOLDERS' EQUITY 67,721 30,801 -------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 163,468 $ 66,662 ============== =============
See Notes to Consolidated Financial Statements. PAGE 2
INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------------- --------------------------------------- 2004 2003 2004 2003 ------------------ ------------------ ------------------ ----------------- (UNAUDITED) (UNAUDITED) REVENUES $ 26,445 $ 14,114 $ 66,232 $ 40,825 --------------- --------------- --------------- -------------- COSTS and EXPENSES: Costs of revenues, excluding depreciation shown below 18,514 9,363 46,303 27,266 Selling and promotion costs 801 805 2,442 2,259 General and administrative expenses 1,859 1,274 5,117 4,143 Depreciation and amortization 2,186 1,561 5,896 4,450 --------------- --------------- --------------- -------------- 23,360 13,003 59,758 38,118 --------------- --------------- --------------- -------------- INCOME FROM OPERATIONS 3,085 1,111 6,474 2,707 --------------- --------------- --------------- -------------- Interest income (126) (15) (206) (52) Fees related to loans repaid - - 1,347 - Interest expense 969 641 2,783 1,871 --------------- --------------- --------------- -------------- 842 626 3,924 1,819 --------------- --------------- --------------- -------------- INCOME BEFORE INCOME TAXES 2,243 485 2,550 888 Income tax (benefit) expense 202 34 (4) 62 --------------- --------------- --------------- -------------- NET INCOME 2,041 451 2,554 826 Accretion and dividends on redeemable preferred stock - (2,556) - (7,506) --------------- --------------- --------------- -------------- NET INCOME (LOSS) TO COMMON STOCKHOLDERS $ 2,041 $ (2,105) $ 2,554 $ (6,680) =============== =============== =============== ============== BASIC INCOME (LOSS) PER SHARE: Net income (loss) to common stockholders $ 0.11 $ (0.39) $ 0.15 $ (1.24) =============== =============== =============== ============== Weighted average number of common shares outstanding 18,620,252 5,386,340 17,382,089 5,382,725 =============== =============== =============== ============== DILUTED INCOME (LOSS) PER SHARE: Net income (loss) to common stockholders $ 0.10 $ (0.39) $ 0.13 $ (1.24) =============== =============== =============== ============== Weighted average number of common shares and share equivalents outstanding 21,088,760 5,386,340 19,599,100 5,382,725 =============== =============== =============== ==============
See Notes to Consolidated Financial Statements. PAGE 3
INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED, IN THOUSANDS) COMMON ADDITIONAL ACCUMULATED TREASURY SHARES PAR VALUE PAID IN CAPITAL DEFICIT STOCK AT COST TOTAL -------- --------- ---------------- ----------------- -------------- --------------- Balances, 15,732 $ 157 $ 109,565 $ (76,070) $ (2,851) $ 30,801 December 31, 2003 Exercises of stock options 48 1 427 - (287) 141 Issuance of a warrant - - 137 - - 137 Non- employee option issued for services - - 31 - - 31 Shares issued in connection with acquisitions 259 3 2,936 - - 2,939 Exercises of warrants 349 3 2,742 - - 2,745 Private placement of common stock 2,917 29 28,344 - - 28,373 Net income - - - 2,554 - 2,554 -------- --------- ------------- -------------- ----------- ------------ Balances, September 30, 2004 19,305 $ 193 $ 144,182 $ (73,516) $ (3,138) $ 67,721 ======== ========= ============= ============== =========== ============
See Notes to Consolidated Financial Statements. PAGE 4
INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) ------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------- 2004 2003 ------------------- -------------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,554 $ 826 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 5,896 4,450 Accretion of discounted debentures - 424 Unamortized fees related to loans repaid 1,097 - Amortization of debt discount 31 - Non-employee option and warrant issued 168 - Interest on related party balances (8) (7) Decrease (increase) in: Trade accounts receivable (5,122) 825 Prepaid license fees and other current assets (1,863) (850) Security deposits and other non-current assets (449) (21) Increase (decrease) in: Accounts payable 859 (1,082) Income taxes payable 230 62 Accrued expenses (3,372) (450) Payments on accrued loss on leased facilities (119) (111) Deferred revenue and other liabilities 177 (260) ---------------- ----------------- Net cash provided by operating activities 79 3,806 ---------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (852) (1,253) Payment of purchase price and costs relating to acquisitions, net of cash acquired (42,785) (350) Increase in deferred software costs (233) (90) ---------------- ----------------- Net cash used in investing activities (43,870) (1,693) ---------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from a private equity placement 28,373 - Proceeds from Term Loans 15,000 - Proceeds from a private placement of convertible notes 69,480 - Payment of costs related to the convertible notes and Term Loans (655) - Repayment of Term Loans, other debt and capitalized leases (42,581) (1,737) Exercises of stock options and warrants 2,886 52 ---------------- ----------------- Net cash provided by (used in) financing activities 72,503 (1,685) ---------------- ----------------- Net cash provided by continuing operations 28,712 428 CASH FLOWS FROM DISCONTINUED OPERATIONS: Payments on portion of accrued loss on leased facilities relating to discontinued operations (42) (38) ---------------- ----------------- Net increase in cash and equivalents 28,670 390 Cash and equivalents, beginning of period 10,073 7,026 ---------------- ----------------- Cash and equivalents, end of the period $ 38,743 $ 7,416 ================ ================= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 956 $ 334 ================ ================= Income taxes $ 103 $ 132 ================ ================= SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITY: Equipment acquired under capital leases $ 4,464 $ 2,108 ================ ================= Common stock issued in connection with an acquisition $ 2,939 - ================ ================= SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: Treasury shares received in payment of a stock option exercise $ 287 $ - ================ ================= Additional Debentures issued in lieu of a cash payment of interest $ - $ 1,310 ================ =================
See Notes to Consolidated Financial Statements. PAGE 5 INFOCROSSING, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Infocrossing, Inc. and its wholly owned subsidiaries (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated. The consolidated balance sheet as of September 30, 2004, the consolidated statements of operations for the three and nine months ended September 30, 2004 and 2003, the consolidated statements of cash flows for the nine months ended September 30, 2004 and 2003, and the consolidated statement of stockholders' equity for the nine months ended September 30, 2004 have not been audited. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows for the periods indicated have been made. The results of operations and cash flows for the periods ended September 30, 2004 and 2003 are not necessarily indicative of the operating results for the full year. Certain reclassifications have been made to the prior periods to conform to the current presentation. Certain disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. These consolidated interim financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2003, as amended. 2. ACQUISITIONS 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 $34,589,000 in cash, $1,441,000 in related acquisition costs and 135,892 shares of common stock of the Company valued at approximately $1,439,000 (the "SMS Acquisition"). The value of the 135,892 shares was determined using the average market price of the Company's common stock two days before and after March 4, 2004, when the terms of the acquisition were determined and announced. The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed on the basis of their respective fair values. In connection with the preliminary allocation of the purchase price, goodwill of $40,660,000 and an intangible asset subject to amortization in the amount of $1,650,000, relating to customer contracts and relationships, was recorded. The intangible asset has an estimated useful life of five years. In connection with an acquisition by SMS prior to April 2004, the Company may have to pay contingent consideration for a period of up to four years. Through September 30, 2004, such contingent consideration totaled $222,000, which was recorded as additional goodwill. 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. Subsequent to the SMS Acquisition, SMS continues to operate its business as a wholly-owned subsidiary of the Company. The results of SMS are included with that of the Company for the period subsequent to the SMS Acquisition. PAGE 6 The following table summarizes the preliminary fair values of the assets acquired and the liabilities assumed at the date of the SMS Acquisition. The Company is in the process of finalizing the fair value of certain assets, thus the allocation of the purchase price is subject to adjustment. APRIL 2, 2004 (IN THOUSANDS) Accounts receivable $ 3,313 Other current assets 1,447 ------------------ Total current assets 4,760 Property and equipment 4,033 Intangible assets subject to amortization 1,650 Other assets acquired 793 Goodwill 40,660 ------------------ Total assets acquired 51,896 ------------------ Accrued expenses and accounts payable (8,148) Current capital leases (1,529) Other current liabilities (87) ------------------ Total current liabilities (9,764) Non-current liabilities (4,663) ------------------ Total liabilities assumed (14,427) ------------------ Purchase price $ 37,469 ================== The following unaudited condensed combined pro forma Statements of Operations for the nine month periods ended September 30, 2004 and 2003 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 the first day of each of the periods presented (January 1, 2004 and 2003). The pro forma Statements of Operations 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. CONSOLIDATED CONDENSED PRO FORMA STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------- 2004 2003 ----------------- ------------------ Revenues $ 74,622 $ 68,867 ============= =============== Net income (loss) $ 1,006 $ (3,124) ============= =============== Net income (loss) to common stockholders $ 1,006 $ (10,630) ============= =============== Basic income (loss) to common stockholders per common share $ 0.06 (1.93) ============= =============== Diluted income (loss) to common stockholders per common share and share equivalents $ 0.05 $ (1.93) ============= =============== During the period ended September 30, 2004, the Company used $7,090,000 in cash, incurred approximately $180,000 of acquisition-related costs, and issued 123,193 shares of common stock valued at $1,500,000 for other acquisitions. These acquisitions were accounted for using the purchase method of accounting. The allocation of purchase price is as follows: customer lists with a life of five years for $500,000, $100,000 in fixed assets, $424,000 of assumed liabilities, and goodwill of $8,594,000. PAGE 7 3. STOCK-BASED COMPENSATION The Company accounts for stock options granted to employees and directors under the Company's 2002 Stock Option and Stock Appreciation Rights Plan in accordance with Accounting Principles Board Opinion No. 25 and related Interpretations. No compensation cost is reflected in the net income (loss) with respect to options granted with an exercise price equal to the market value of the underlying common shares on the date of the grant. Had compensation cost been determined in accordance with Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation", the Company's income (loss) in thousands of dollars and income (loss) per common share for the three and nine months ended September 30, 2004 and 2003 would have been as follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------------- --------------------------------------- 2004 2003 2004 2003 ------------------ ------------------ ------------------ ----------------- Net income (loss) to common stockholders as reported $ 2,041 $ (2,105) $ 2,554 $ (6,680) Deduct stock-based employee compensation determined under the fair value method for all awards (1,601) (499) (3,461) (1,523) --------------- --------------- --------------- -------------- Pro forma $ 440 $ (2,604) $ (907) $ (8,203) =============== =============== =============== ============== Net income (loss) to common stockholders per share Basic as reported $ 0.11 $ (0.39) $ 0.15 $ (1.24) =============== =============== =============== ============== Diluted as reported 0.10 (0.39) 0.13 (1.24) =============== =============== =============== ============== Basic, pro forma $ 0.02 $ (0.48) $ (0.05) $ (1.52) =============== =============== =============== ============== Diluted, pro forma 0.02 (0.48) (0.05) (1.52) =============== =============== =============== ==============
4. NOTES PAYABLE TERM LOANS On October 21, 2003, in connection with the redemption of the Company's redeemable preferred stock, the Company issued $25,000,000 of senior secured term loans maturing in October 2008. These term loans were held by the prior holders of the redeemable preferred stock. On February 13, 2004, the term loans were purchased by a financial institution. The terms and conditions of the term loans were not materially altered. On April 2, 2004, the Company and the financial institution amended and restated the term loan agreement (the "Amended Term Loan Agreement") to provide a portion of the funding for the SMS Acquisition. The Amended Term Loan Agreement provided 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 on March 30, 2004 (see Note 6), completed the SMS Acquisition. Term Loan B bore interest at the prime rate plus 3% with a floor of 9% and was scheduled to mature along with the Term Loan A on October 21, 2008. The term loans included monthly payments of interest beginning May 1, 2004 and monthly principal payments of $312,500 beginning in December 2004. The Amended Term Loan Agreement was guaranteed by each of the Company's subsidiaries. The Amended Term Loan Agreement was also secured by a pledge of substantially all of the assets of the Company and all of its subsidiaries. The amount of the "make-whole premium" is set forth in the indenture. On June 30, 2004, the Company repaid Term Loan A and Term Loan B in full, plus interest accrued, from the proceeds of the private placement of convertible debt described below, and the unamortized balance of $1,097 of deferred financing costs were written off. PAGE 8 CONVERTIBLE DEBT On June 30, 2004, the Company completed a private offering of $60 million aggregate principal amount of 4.0% Convertible Senior Notes due July 15, 2024 (the "Notes"). Approximately $40 million of the net proceeds from this offering were used to repay the term loans described above. The remaining balance was used to fund acquisitions and for general corporate purposes. On July 6, 2004, the initial purchaser exercised its option in full to purchase an additional $12 million of the Notes. Net proceeds to the Company after discount and fees were approximately $69 million. Interest on the Notes is payable semi-annually in arrears beginning on January 15, 2005. Neither the Notes nor the shares of the Company's common stock into which they will be convertible were registered under the Securities Act of 1933, as amended, or any state securities laws, and they may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. On July 13, 2004, the Company filed a registration statement on Form S-3 covering the resale of the Notes and the shares of the Company's common stock into which they may be converted (the "Registration Statement"). This registration statement is not yet effective as of November 14, 2004. The Notes are convertible, subject to certain conditions, at the option of the holder prior to maturity, into shares of the Company's common stock at a specified conversion price, subject to certain adjustments. Upon conversion, the Company will have the right to deliver to the holders, at the Company's option, cash, shares of the Company's common stock, or a combination thereof. The conversion price will be adjusted to reflect stock dividends, stock splits, issuances of rights to purchase shares of common stock and other events. At the initial conversion price of $15.36, the $72 million of Notes would be convertible into 4,687,500 common shares. After the effective date of the Registration Statement and prior to the end of the 18th month thereafter, if the market price of the Company's common stock is less than 68.23% ($10.48 initially, subject to adjustment) of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period, the conversion price shall immediately be reduced by 17.38% (to $12.69 initially, subject to adjustment); provided that (i) this adjustment shall only be applicable to Notes that have been sold or otherwise distributed pursuant to the registration statement referred to above or pursuant to Rule 144(k) under the Securities Act (and such adjustment shall apply to all such Notes, regardless of whether they are so sold or distributed before or after adjustment), and (ii) there shall be no more than one such reduction of the conversion price during the term of the Notes. There are no financial covenants, other than a limitation on the incurrence of additional indebtedness, as defined in the indenture. The Company is not restricted from paying dividends, or issuing other securities, or repurchasing other securities issued by the Company. The holders may convert their Notes into shares of the Company's common stock, initially at the conversion price of $15.36 per share, equal to a conversion rate of approximately 65.1042 shares per $1,000 principal amount of Notes, prior to the close of business on their stated maturity date under any of the following circumstances: (a) during any fiscal quarter if the market price per share of the Company's common stock for a period of at least 20 consecutive trading days during the 30 consecutive trading day period ending on the last day of the preceding fiscal quarter is more than 130% of the applicable conversion price; (b) on or before July 15, 2019, during the five business-day period following any 10 consecutive trading-day period in which the trading price for the Notes during such ten-day period was less than 98% of the applicable conversion value (as described in the prospectus) for the Notes during that period, subject to certain limitations; (c) if the Notes have been called for redemption; or (d) upon the occurrence of specified corporate transactions. The specified transactions include: (a) certain distributions to the Company's common stockholders of rights to acquire shares of the Company's common stock at a discount; (b) certain distributions to the Company's common stockholders when the distribution has a per share value in excess of 5% of the market price of the Company's common stock; and (c) a consolidation, merger or binding share exchange pursuant to which the Company's common stock will be converted into cash, securities or other property. Upon a "change of control," as defined in the indenture, the holders can require the Company to repurchase all or part of the Notes for cash equal to 100% of principal plus accrued interest. A consolidation, merger, or binding exchange also may constitute a "change of control" in certain instances. If the "change of control" occurs prior to July 15, 2009, in certain instances, the Company may be required to pay a "make whole premium" when repurchasing the Notes. PAGE 9 The Company has a call option, pursuant to which it may redeem the Notes, in part or in whole, for cash at any time on or after July 15, 2007 at a price equal to 100% of the principal amount of the Notes, plus accrued interest plus a "premium" if the redemption is prior to July 15, 2009, provided, however, the Notes are only redeemable prior to July 15, 2009 if the market price of the Company's common stock has been at least 150% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period. The "premium" referred to in the preceding sentence shall be in an amount equal to $173.83 per $1,000 principal amount of Notes less the amount of any interest actually paid on such Notes prior to the redemption date. The holders of the Notes may require the Company to repurchase for cash all or a portion of the Notes on July 15, 2009, 2014, and 2019 at a repurchase price equal to 100% of the principal amount of the Notes plus any accrued interest. As of September 30, 2004, the Company has incurred costs and fees totaling $400,000 in connection with the issuance of the Notes. These costs are being amortized using the effective interest method over the twenty-year term of the Notes. The unamortized costs are included in Other Assets on the consolidated balance sheet. The Notes were recorded net of a 3.5% discount. The $2,520,000 discount ($2,489,000 at September 30, 2004) will be accreted to the book value of the Notes using the effective interest method over the same term. NON-REVOLVING LOAN FACILITY In July 2004, the Company established a $25 million non-revolving loan facility, available for use in connection with the acquisition of complementary businesses. Advances can be made during the first three years of the term of the facility and interest will be payable monthly in arrears at prime plus 3.0%. The interest rate floor is 8.5%. Monthly principal payments equal to 2.5% of the outstanding balance will commence at the conclusion of the draw period on July 1, 2007 and continue until March 2009 when any remaining balance will be due. Advances are subject to satisfying certain acquisition criteria and the approval of the lenders. The Company paid a 1.0% commitment fee at the closing of the loan and will pay a monthly unused-facility fee at the rate of 0.75% per annum until the Company borrows more than $10 million on a cumulative basis. The Company may incur prepayment penalties if it terminates the facility during the first 18 months or prepays any advance before the one-year anniversary of the applicable borrowing date. There were no amounts outstanding under the non-revolving loan facility at September 30, 2004. The facility and any loans made under the facility are guaranteed by all of the Company's subsidiaries, and any such loans and the guarantees are secured by a first-priority interest on substantially all of the Company's assets, including the capital stock and assets of the subsidiaries. The facility contains certain covenants including, but not limited to: a maximum leverage ratio; minimum consolidated earnings before interest, taxes, depreciation, and amortization; a minimum debt coverage ratio; and limitations on indebtedness, capital expenditures, investments, loans, mergers and acquisitions, stock issuances, and transactions with affiliates. In addition, the terms of the facility limit the Company's ability to pay dividends. The Company was in compliance with such covenants at September 30, 2004. On October 1, 2004, the Company borrowed $24.4 million under this facility to pay a portion of the cost of an acquisition (See Note 10). The amount borrowed represents the full loan availability under the line. The $0.6 million balance must remain available in the event the Company is required to fund an Interest Reserve, as defined in the loan agreement. 5. BASIC AND DILUTED EARNINGS PER COMMON SHARE Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128") requires the presentation of basic and diluted earnings per share ("EPS"). Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted EPS is computed using the weighted average number of common shares plus the dilutive effect of common stock equivalents. Common stock equivalents that are antidilutive are excluded from the computation of weighted average share equivalents. Certain common stock equivalents that are currently antidilutive may be dilutive in the future. In determining the diluted loss per common share for the three-month periods ended September 30, 2004 and 2003, common stock equivalents of approximately 740,000 and 3,488,000, respectively, have been excluded and, for the nine-month periods ended September 30, 2004 and 2003, common stock equivalents of approximately 741,000 and 3,253,000, respectively, have been excluded, since the effect of including such equivalents would have been antidilutive. PAGE 10 At its June 30 - July 1, 2004 meeting, the Emerging Issues Task Force of the Financial Accounting Standards Board reached a tentative conclusion on EITF ISSUE NO. 04-08, "THE EFFECT OF CONTINGENTLY CONVERTIBLE DEBT ON DILUTED EARNINGS PER SHARE," about the accounting for contingently convertible debt instruments, commonly referred to as CoCos. CoCos combine the features of contingently issuable shares with a convertible debt instrument. The Notes issued by the Company as of September 30, 2004 are CoCos. These instruments generally become convertible into common stock only if one or more specified events occurs, such as the underlying common stock achieving a specified price target. Under current interpretations of FASB Statement No. 128, EARNINGS PER SHARE, issuers of CoCos exclude the potential common shares underlying the CoCos from the calculation of diluted earnings per share until the market price or other contingency is met. When the contingency is met, generally the if-converted method is used to calculate the dilutive impact of the instrument. Under the if-converted method, the instrument is considered converted, with the resulting number of shares included in the denominator of the earnings per share calculation and the interest expense (net of tax) added back to the numerator of the earnings per share calculation. While a traditional convertible debt instrument may dilute earnings per share right away (application of the "if-converted' method is required even if the conversion option is out of the money), current accounting practice for CoCos avoids this dilution until a specified contingency is met. The Task Force reached a tentative conclusion that the contingently issuable shares guidance in Statement 128 does not apply to convertible debt. This conclusion was affirmed at the EITF's September 29-30, 2004 meeting. It is anticipated that FASB will amend Statement 128 effective for statement reporting periods ending after December 15, 2004. Beginning with the Company's annual report on Form 10K for December 31, 2004, the dilutive affect of contingently convertible debt will be included in the calculation of diluted earnings per share, using the if-converted method. Although the Company believes that the if-converted method will dilute earnings per share in the future, for the three and nine months ended September 30, 2004, the calculation increases diluted earnings per share by $0.01 and $0.02, respectively. 6. PRIVATE OFFERING OF SHARES On March 30, 2004, in a private placement, the Company issued 2,917,000 shares of common stock in exchange for net proceeds of $28,373,000. The private placement was made only to accredited investors in a transaction exempt from the registration requirements of the Securities Act of 1933. Investors who participated in the private placement received certain registration rights with respect to the common stock issued in the private placement. Approximately $20 million of the proceeds of the private placement were used to fund the SMS Acquisition discussed in Note 2. The remaining balance of the amount raised was used for the payment of fees and expenses of the offering and for working capital purposes. A registration statement on Form S-3 covering the shares issued in the private placement became effective on June 10, 2004. 7. INCOME TAXES In the period ended September 30, 2004, the Company recorded a tax benefit of $234,000 from the sale of New Jersey State net operating loss carryforwards ("NOLs"), offset by estimated state income tax expense of $230,000. At December 31, 2003, the Company had NOLs of approximately $37.3 million for federal income tax purposes that begin to expire in 2019. As a result of a recapitalization of the Company's capital structure on October 21, 2003, the timing and use of these NOLs in future years is expected to be limited in any one year. The Company's net deferred tax assets, including the benefit from the NOLs, have been fully offset by a valuation allowance due to the uncertainty of realizing such tax benefits. 8. RELATED PARTY TRANSACTIONS The initial purchaser of the Notes described in Note 4 above, Lehman Brothers, Inc. ("Lehman"), received a discount of $2,520,000, representing 3.5% of the $72,000,000 principal amount of the securities. An affiliate of the initial purchaser, LBI Group, Inc. ("LBI"), beneficially owned 2.5% of the Company's common stock prior to the offering acquired Notes as part of the offering. Following the completion of the offering, LBI beneficially owned 5.8% and Lehman beneficially owned 4.7% of the Company's outstanding common stock. Both LBI and Lehman share the same common parent. In September 2004, Lehman sold $4,000,000 in Notes to an investor, reducing the Lehman's beneficial ownership to 3.3%. PAGE 11 9. LEGAL PROCEEDINGS On November 1, 2004, the Company was served with a summons and complaint in a lawsuit commenced by two former employees of ITO Acquisition Corporation d/b/a Systems Management Specialists, now known as Infocrossing West, Inc. ("West") filed in the Superior Court of California, Orange County (Case No. 04CC10709). Plaintiffs assert that they had been induced to join West in 2002 based on promises of receiving equity interests and options to acquire additional equity in West. Plaintiffs assert that on numerous occasions they had received verbal assurance of receiving the foregoing equity interests in West. The Company acquired West on April 2, 2004. Plaintiffs' employment with West terminated shortly after the Company's acquisition of West. West has requested indemnification pursuant to the Stock Purchase Agreement between the Company and ITO Holdings, LLC ("Holdings") dated as of March 3, 2004 (the "SPA") for breaches of numerous representations and warranties contained in the SPA. Holdings represented and warranted to the Company, among other things, that it owned all of West's capital stock and there were no other equity interests or commitments relating to West's capital stock. Plaintiffs maintain that they are entitled to direct damages of at least $15 million plus punitive damages, costs, attorneys' fees, and other relief as the court may award. In addition, one of the plaintiffs also asserts a claim for unpaid commissions of approximately $30,000. Responsive pleadings are not due as of the date of filing this Form 10-Q. The Company is continuing to evaluate the effect of these actions, however it does believe that the above matters will be resolved without any material adverse impact on the Company's financial position, results of operations, or cash flows. 10. SUBSEQUENT EVENTS On October 1, 2004, the Company acquired a segment of Verizon Information Technologies Inc. ("VITI"). The sale was structured as an acquisition of the common stock of VITI for a cash purchase price of $43,500,000. The Company financed the $43,500,000 purchase price by borrowing $24,375,000 from the non-revolving loan facility to pay a portion of the cost of the acquisition and utilizing cash on hand for the remaining balance. Immediately following the acquisition, VITI's name was changed to Infocrossing Healthcare Services, Inc. On November 3, 2004, the Company announced the resignation of Patrick A. Dolan, who had served as President, Chief Operating Officer and Director since April 2004. Robert B. Wallach, Vice-Chairman and Director, re-assumed the roles of President and Chief Operating Officer. Mr. Wallach had held these positions prior to the appointment of Mr. Dolan in April 2004. PAGE 12 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management believes that we are a leading provider of information technology, or IT, and business process outsourcing services to enterprise clients. We deliver a full suite of managed and outsourced solutions that enable clients to leverage our infrastructure and process expertise to improve their efficiency and reduce their operating costs. During our nearly twenty year history, we have developed expertise in managing complex computing environments, beginning with traditional data center outsourcing services and evolving to a comprehensive set of managed solutions. We support a variety of clients, and assure the optimal performance, security, reliability, and scalability of our clients' mainframes, distributed servers, and networks, irrespective of where the systems' components are located. Strategic acquisitions have contributed significantly to our historical growth and remain an integral component of our long-term growth strategy. On 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 a total purchase price of approximately $37,469,000 including related acquisition costs of $1,441,000 and 135,892 shares of our common stock valued at $1,439,000 (the "SMS Acquisition). In June 2004, the name of this subsidiary was changed to Infocrossing West, Inc. In connection with an acquisition by SMS prior to April 2004, the Company may have to pay contingent consideration for a period of up to four years. Through September 30, 2004, such contingent consideration totaled $222,000, which was recorded as additional goodwill. 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. During the period ended September 30, 2004, we used $7,090,000 in cash, incurred an estimated $180,000 of acquisition-related costs, and issued 123,193 shares of common stock valued at $1,500,000 for other acquisitions, including a business that offers e-mail security services. The acquired businesses are being integrated into the Company so that the entire enterprise will benefit from operational leverage and consolidation. These acquisitions were accounted for using the purchase method of accounting. The allocation of purchase price is as follows: customer lists with a five-year life for $500,000, $100,000 in fixed assets, $424,000 in assumed liabilities, and goodwill of $8,594,000. The operations of SMS and the other acquisitions are included in consolidated operations from the date of the respective acquisitions in the second and third quarters of 2004. On October 1, 2004, we acquired a segment of Vertizon Information Technologies, Inc. ("VITI") for a total purchase price of $43,500,000. On November 3, 2004, the Company announced the resignation of Patrick A. Dolan, who had served as President, Chief Operating Officer and Director since April 2004. Robert B. Wallach, Vice-Chairman and Director, re-assumed the roles of President and Chief Operating Officer. Mr. Wallach had held these positions prior to the appointment of Mr. Dolan in April 2004. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 Net income increased by $1,590,000 from income of $451,000 for the three months ended September 30, 2003 (the "Prior Year Quarter") to income of $2,041,000 for the three months ended September 30, 2004 (the "Current Quarter") on 87% higher revenues. For the Current Quarter, the results of operations include SMS and other acquisitions. For the Current Quarter, revenues increased $12,331,000 (87%) to $26,445,000 from $14,114,000 for the Prior Year Quarter. Approximately $9,567,000 of this growth is attributable to revenue from clients added as the result of acquisitions. The remainder of approximately $2,764,000 represents organic growth, including $1,231,000 related to services performed on a special project. PAGE 13 Costs of revenues increased $9,151,000 (98%) to $18,514,000 during the Current Quarter compared with $9,363,000 for the Prior Year Quarter. The increase results from the expansion of revenues from both acquisitive and organic growth. Costs of revenues as a percentage of revenues increased from 66% in the Prior Year Quarter to 70% in the Current Quarter, reflecting a lower gross margin. We had expected our gross margins to decline until the completion of the integration of SMS. At the time of its acquisition, SMS had not reached critical mass on a standalone basis so its gross margins were lower than ours. The lower gross margin was in part due to not making certain planned personnel reductions in the Current Quarter. These reductions were eliminated as a result of the increased labor requirements for the integration of VITI. We expect our gross margin to improve as the integration of the acquisitions progress. Selling and promotion costs were virtually unchanged in the Current Quarter compared with the Prior Year Quarter, and as a result declined as a percentage of revenues from 6% in the Prior Year Quarter to 3% in the Current Quarter. The reduction as a percentage of revenue reflects the benefits of integration of the acquired businesses. General and administrative expenses increased $585,000 (46%) to $1,859,000 for the Current Quarter from $1,274,000 for the Prior Year Quarter. General and administrative expenses declined as a percentage of revenue from 9% in the Prior Year Quarter to 7% in the Current Quarter, reflecting the benefits of operational leverage and consolidation of the acquired businesses. Approximately $472,000, or 81% of the total increase, was related to the acquisition of SMS. Approximately $78,000 (13% of the total increase) was due to professional fees relating to Sarbanes Oxley documentation and certification. Depreciation and amortization of fixed assets and other intangibles increased $625,000 (40%), from $1,561,000 for the Prior Year Quarter to $2,186,000 for the Current Quarter. Depreciation of equipment and other fixed assets and amortization of the value of customer lists related to acquisitions totaled $303,000 in the Current Quarter. Despite these increases, depreciation and amortization decreased as a percentage of revenues to 9% in the Current Quarter as compared with 11% in the Prior Year Quarter. Net interest expense of $842,000 was recorded for the Current Quarter compared with $626,000 for the Prior Year Quarter. The net increase of $216,000 reflects an increase of $111,000 in interest income and an increase of $327,000 in interest expense, due to larger average outstanding balances of both cash and debt than in the Prior Year Quarter. In the Current Quarter, we recorded an estimated state income tax expense of $202,000, compared with state income tax expense of $34,000 recorded in the Prior Year Quarter. At December 31, 2003, we had Federal net operating loss carryforwards ("NOLs") of approximately $37.3 million that begin to expire in 2019. As a result of the redemption of our preferred stock on October 21, 2003 and the subsequent issuances of common stock, the timing and use of these NOLs in future years is expected to be limited in any one year. The carrying value of our net deferred tax assets, including the benefit from the NOLs, has been fully offset by a valuation allowance due to the uncertainty of realizing such tax benefits. We had net income of $2,041,000 for the Current Quarter compared with net income of $451,000 for the Prior Year Quarter. Net loss to common shareholders of $2,105,000 for the Prior Year Quarter reflects a charge of $2,556,000 for the accretion and dividends on redeemable preferred stock. On October 21, 2003, we redeemed all outstanding preferred stock; therefore no accretion and dividends were recorded in the Current Quarter. We had income per common share of $0.11 on a basic basis and $0.10 on a diluted basis, compared with a loss of $0.39 per share for the Prior Year Quarter, on both a basic and diluted basis. The number of weighted average shares increased from 5.4 million shares for the Prior Year Quarter to 18.6 million shares on a basic basis and 21.1 million shares on a diluted basis in the Current Quarter, largely because of the issuance of 259,000 shares for acquisitions in 2004; private placements of (a) 9,739,111shares of common stock and warrants to purchase 3,408,689 shares of common stock in October 2003 and (b) 2,917,000 shares of common stock in March 2004; and 349,000 shares issued upon exercise of warrants granted as part of the convertible notes financing in July 2004. Common stock equivalents are excluded in determining the net income or loss per share when the inclusion of such equivalents would be antidilutive. PAGE 14 RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 Net income improved by $1,728,000 from $826,000 for the nine months ended September 30, 2003 (the "Prior Period") to income of $2,554,000 for the nine months ended September 30, 2004 (the "Current Period") on 62% higher revenues. For the Current Period, the results of operations include SMS and other acquisitions and a one-time charge of $1,347,000 for fees related to loans repaid relating to 9.0% term loans of approximately $40 million. We repaid the term loans with a portion of the proceeds received from the issuance of the Notes. For the Current Period, revenues increased $25,407,000 (62%) to $66,232,000 from $40,825,000 for the Prior Period. Approximately $19,233,000 of this growth is attributable to revenues from clients added as a result of acquisitions. The remainder of approximately $6,174,000 represents organic growth, including $1,231,000 related to services performed on a special project. Costs of revenues increased $19,037,000 (70%) to $46,303,000 during the Current Period compared with $27,266,000 for the Prior Period. The increase results from the expansion of revenues from both acquisitive and organic growth. Costs of revenues as a percentage of revenues increased from 67% in the Prior Period to 70% in the Current Period, reflecting a lower gross margin. We had expected our gross margins to decline until the completion of the integration of SMS. At the time of its acquisition, SMS had not reached critical mass on a stand alone basis so its gross margins were lower than ours. The lower gross margin was in part due to not making certain planned personnel reductions in the Current Period. These reductions were eliminated as a result of the increased labor requirements for the integration of VITI. We expect our gross margin to improve as the integration of the acquisitions progress. Selling and promotion costs increased $183,000 (8%) to $2,442,000 in the Current Period from $2,259,000 for the Prior Period, but declined as a percentage of revenue from 6% in the Prior Period to 4% in the Current Period. The reduction as a percentage of revenue reflects the benefits of the integration of the acquired businesses. General and administrative expenses increased $974,000 (23%) to $5,117,000 for the Current Period from $4,143,000 for the Prior Period, but declined as a percentage of revenue from 10% in the Prior Period to 8% in the Current Period, reflecting the benefits of operational leverage and consolidation of the acquired businesses. $970,000 of the increase related to expenses from the SMS acquisition. Depreciation and amortization of fixed assets and other intangibles increased $1,446,000 (32%) from $4,450,000 for the Prior Period to $5,896,000 for the Current Period. Depreciation of equipment and other fixed assets and amortization of the value of customer lists related to acquisitions totaled $718,000. Despite these increases, depreciation and amortization declined as a percentage of revenues, from 11% in the Prior Period to 9% for the Current Period as a result of the 62% increase in revenues. Net interest expense of $3,924,000 was recorded for the Current Period compared with $1,819,000 for the Prior Period. As a result of the repayment of the term loans of approximately $40 million, discussed in Liquidity and Capital Resources below, the unamortized balance of costs and expenses of $1,347,000 relating to the term loans was expensed during the Current Period. The remainder of the net increase of $758,000 reflects an increase of $912,000 in interest expense, due to a larger average outstanding debt balance than in the Prior Period, offset by an increase in interest income of $154,000. In the Current Period, we recorded a tax benefit of $234,000 from the sale of New Jersey State NOLs, offset by estimated state income tax expense of $230,000, compared with state income tax expense of $62,000 recorded in the Prior Period. At December 31, 2003, we had Federal NOLs of approximately $37.3 million for federal income tax purposes that begin to expire in 2019. As a result of the redemption of our preferred stock on October 21, 2003 and subsequent issuances of common stock, the timing and use of these NOLs in future years is expected to be limited in any one year. The carrying value of our net deferred tax assets, including the benefit from the NOLs, has been fully offset by a valuation allowance due to the uncertainty of realizing such tax benefits. PAGE 15 Net income for the Current Period was $2,554,000 compared with $826,000 for the Prior Period. Net income for the Current Period is after the one-time charge of $1,347,000 for the unamortized balance of costs and expenses relating to the 9.0% term loans of approximately $40 million that were repaid during the Current Period. Net loss to common stockholders after accretion and accrued dividends on preferred stock was $6,680,000 for the Prior Period. On October 21, 2003, we redeemed all outstanding preferred stock; therefore no accretion and dividends were recorded in the Current Period. We had income per common share of $0.15 on a basic basis and $0.13 on a diluted basis, compared with a loss of $1.24 per share for the Prior Period, on both a basic and diluted basis. The number of weighted average shares increased from 5.4 million shares on both a basic and diluted basis for the Prior Period to 17.4 million shares on a basic basis and 19.6 million shares on a diluted basis in the Current Period, largely because of the issuance of 259,000 shares for acquisitions in 2004; private placements of (a) 9,739,111 shares of common stock and warrants to purchase 3,408,689 shares of common stock in October 2003 and (b) 2,917,000 shares of common stock in March 2004; and 349,000 shares issued upon exercise of warrants granted as part of the convertible notes financing in July 2004. Common stock equivalents are excluded in determining the net income or loss per share when the inclusion of such equivalents would be antidilutive. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was approximately $79,000 for the nine months ended September 30, 2004 (the "Current Period"). During the Current Period, we had $2,554,000 of net income, $5,896,000 of depreciation and amortization, and a charge of $1,097,000 to expense the unamortized balance of costs and expenses relating to the repayment of approximately $40 million of 9.0% term loans. Net cash provided by operating activities is net of approximately $1,800,000 of payments of pre-acquisition liabilities assumed and approximately $1,200,000 of payments of liabilities arising from purchase accounting adjustments in connection with the SMS acquisition. Other significant working capital changes include the recognition of deferred revenue of $147,000, $449,000 of costs relating to certain new clients that are being amortized over the various contract terms, and an increase in accounts receivable of $5,122,000. We expect our balance of accounts receivable to increase as our revenues increase. 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 $36 million in cash and costs and 135,892 shares of our common stock. As described below, the cash portion of the purchase price was funded with proceeds from a term loan and the issuance of common stock in a private placement. Other investing activities during the nine months ended September 30, 2004 include $852,000 for the purchase of property and equipment. During the Current Period, we also entered into capital leases on equipment having an aggregate carrying value of approximately $4,464,000. In March 2004, we issued 2,917,000 shares of common stock in exchange for $28,373,000, net of fees and expenses. The shares were issued in a private placement to accredited investors in a transaction exempt from the registration requirements of the Securities Act of 1933. Approximately $20 million of the proceeds of the private placement were used to fund the acquisition of SMS, discussed above. The remainder of the amount raised was used for working capital purposes and additional acquisitions. A registration statement on Form S-3 covering the resale of the shares issued in the private placement became effective on June 10, 2004. On October 21, 2003, in connection with the redemption of our redeemable preferred stock, we issued $25 million of senior secured term loans maturing in October 2008. These term loans were held by the prior holders of the redeemable preferred stock. On February 13, 2004, the term loans were purchased by a financial institution. The terms and conditions of the term loans were not materially altered. On April 2, 2004, the term loan agreement was amended and restated to provide a portion of the funding for the acquisition of SMS. On June 30, 2004, we repaid the outstanding balance on the term loans. On June 30, 2004, we completed a private offering of $60 million aggregate principal amount of 4.0% Convertible Senior Notes due July 15, 2024 (the "Notes"). Approximately $40 million of the net proceeds from this offering were used to repay the 9.0% term loans described in the previous paragraph. The remaining balance was used to fund acquisitions and for general corporate purposes. On July 6, 2004, the initial purchaser exercised its option in full to purchase an additional $12 million of the Notes. Net proceeds after a discount of $2,520,000 and approximately $752,000 of costs and fees were approximately $68,728,000. Interest on the Notes is payable semi-annually in arrears beginning on January 15, 2005. PAGE 16 Offers and sales of the Notes were made only in the United States to qualified institutional buyers in transactions exempt from the registration requirements of the Securities Act of 1933, as amended (the Securities Act"). The notes were originally issued by us in a transaction exempt from the registration requirements of the Securities Act and were immediately resold by the initial purchaser in reliance on Rule 144A. Neither the Notes nor the shares of our common stock into which they will be convertible were registered under the Securities Act of 1933, as amended, or any state securities laws, and they may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. On July 13, 2004, we filed a registration statement on Form S-3 covering the resale of the Notes and the shares of our common stock into which they may be converted (the "Registration Statement"). This registration statement is not effective as of November 14, 2004. The Notes are convertible, subject to certain conditions, at the option of the holder prior to maturity, into shares of our common stock at a specified conversion price, subject to certain adjustments. The conversion price will be adjusted to reflect stock dividends, stock splits, issuances of rights to purchase shares of common stock and other events. Upon conversion, we will have the right to deliver to the holders, at our option, cash, shares of our common stock, or a combination thereof. At the initial conversion price of $15.36, the $72 million of Notes would be convertible into 4,687,500 common shares. After the effective date of the Registration Statement and prior to the end of the 18th month thereafter, if the market price of our common stock is less than 68.23% ($10.48 initially, subject to adjustment) of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period, the conversion price shall immediately be reduced by 17.38% (to $12.69 initially, subject to adjustment); provided that (i) this adjustment shall only be applicable to Notes that have been sold or otherwise distributed pursuant to the registration statement referred to above or pursuant to Rule 144(k) under the Securities Act (and such adjustment shall apply to all such Notes, regardless of whether they are so sold or distributed before or after adjustment), and (ii) there shall be no more than one such reduction of the conversion price during the term of the Notes. The holders may convert their Notes into shares of our common stock, initially at the conversion price of $15.36 per share, equal to a conversion rate of approximately 65.1042 shares per $1,000 principal amount of Notes, prior to the close of business on their stated maturity date under any of the following circumstances: (1) during any fiscal quarter if the market price per share of our common stock for a period of at least 20 consecutive trading days during the 30 consecutive trading day period ending on the last day of the preceding fiscal quarter is more than 130% of the applicable conversion price; (2) on or before July 15, 2019, during the five business-day period following any 10 consecutive trading-day period in which the trading price for the Notes during such ten-day period was less than 98% of the applicable conversion value for the Notes during that period, subject to certain limitations; (3) if the Notes have been called for redemption; or (4) upon the occurrence of specified corporate transactions. The specified transactions include: (1) certain distributions to our common stockholders of rights to acquire shares of our common stock at a discount; (2) certain distributions to our common stockholders when the distribution has a per share value in excess of 5% of the market price of our common stock; and (3) a consolidation, merger or binding share exchange pursuant to which our common stock will be converted into cash, securities or other property. Upon a "change of control," as defined in the indenture, the holders can require us to repurchase all or part of the Notes for cash equal to 100% of principal plus accrued interest. A consolidation, merger, or binding exchange also may constitute a "change of control" in certain instances. If the "change of control" occurs prior to July 15, 2009, in certain instances, we may be required to pay a "make whole premium" when repurchasing the Notes. The amount of the "make whole premium" is set forth in the indenture. We have a call option, pursuant to which we may redeem the Notes, in part or in whole, for cash at any time on or after July 15, 2007 at a price equal to 100% of the principal amount of the Notes, plus accrued interest plus a "premium" if the redemption is prior to July 15, 2009, provided, however, the Notes are only redeemable prior to July 15, 2009 if the market price of our common stock has been at least 150% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period. The "premium" referred to in the preceding sentence shall be in an amount equal to $173.83 per $1,000 principal amount of Notes, less the amount of any interest actually paid on such Notes prior to the redemption date. The holders of the Notes may require that we purchase for cash all or a portion of the Notes on July 15, 2009, 2014, and 2019 at a repurchase price equal to 100% of the principal amount of the Notes plus any accrued interest. There are no financial covenants, other than a limitation on the incurrence of additional indebtedness, as defined in the indenture. We are not restricted from paying dividends, or issuing other securities, or repurchasing other securities issued by us under the terms of the indenture. Other financing activities during the Current Period included $2,644,000 in payments of principal with respect to other debt and capital lease obligations and the receipt of $2,886,000 from exercises of options and warrants. PAGE 17 In July 2004, we established a $25 million, non-revolving loan facility, available for use in connection with the acquisition of complementary businesses. Advances can be made during the first three years of the term of the facility and interest will be payable monthly in arrears at prime plus 3.0%. The interest rate floor is 8.5%. Monthly principal payments equal to 2.5% of the outstanding balance will commence at the conclusion of the draw period and continue until March 2009 when any remaining balance will be due. Advances are subject to satisfying certain acquisition criteria and the approval of the lenders. We paid a 1.0% commitment fee at the closing of the loan and will pay an unused facility fee at the rate of 0.75% per annum until we borrow more than $10 million on a cumulative basis. We may incur prepayment penalties if we terminate the facility during the first 18 months or prepay any advance prior to the one-year anniversary of the applicable borrowing date. As of September 30, 2004, there were no advances made under this facility. The facility and any loans made under the facility are guaranteed by all of our subsidiaries, and any such loans and the guarantees are secured by a first-priority interest on substantially all of our assets, including the capital stock and assets of the subsidiaries. The facility contains certain covenants including, but not limited to: a maximum leverage ratio; minimum consolidated earnings before interest, taxes, depreciation, and amortization; a minimum debt coverage ratio; and limitations on indebtedness, capital expenditures, investments, loans, mergers and acquisitions, stock issuances, and transactions with affiliates. In addition, the terms of the facility limit our ability to pay dividends. We were in compliance with such covenants at September 30, 2004. On October 1, 2004, we acquired a segment of Verizon Information Technologies Inc. (VITI). The sale, which was structured as an acquisition of the common stock of VITI for a cash purchase price of $43,500,000, was financed by borrowing $24,375,000 from the non-revolving loan facility to pay a portion of the cost of the acquisition and utilizing cash on hand for the remaining balance. The amount borrowed represents the full loan availability under the line. The $625,000 million balance must remain available in the event we are required to fund an Interest Reserve, as that term is defined in the loan agreement. Immediately following the acquisition, VITI's name was changed to Infocrossing Healthcare Services, Inc. As of September 30, 2004, we had cash and equivalents of $38,743,000 of which approximately $19,125,000 was used on October 1, 2004 to complete the acquisition of VITI. As of November 11, 2004, we had cash and equivalents of approximately $20,000,000 We believe that our cash and equivalents, current assets, and cash generated from future operating activities will provide adequate resources to fund our ongoing operating requirements for at least the next twelve months. We may need to obtain additional financing to fund significant acquisitions or other substantial investments. EBITDA EBITDA represents net income before interest, taxes, depreciation and amortization. We present EBITDA because we consider such information an important supplemental measure of our performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies with comparable market capitalization to us, many of which present EBITDA when reporting their results. We also use EBITDA as one of the factors used to determine the total amount of bonuses available to be awarded to executive officers and other employees. Our credit agreement uses EBITDA (with additional adjustments) to measure compliance with covenants such as interest coverage and debt incurrence. EBITDA is also used by prospective and current lessors as well as potential lenders to evaluate potential transactions with us. In addition, EBITDA is also widely used by us and other buyers to evaluate and price potential acquisition candidates. For the three and nine months ended September 30, 2004, our EBITDA was $5,271,000 and $12,370,000, respectively, compared with $2,672,000 and $7,157,000 for the three and nine-month periods ended September 30, 2003, respectively. EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. Generally Accepted Accounting Principles ("GAAP"). Some of these limitations are: (a) EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (b) EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; and (c) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and EBITDA does not reflect any cash requirements for such capital expenditures. Because of these limitations, EBITDA should not be considered as a principal indicator of our performance. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA only supplementally. PAGE 18 The reconciliation of EBITDA with net income for the three and nine-month periods ended September 30, 2004 and 2003 is as follows (in thousands):
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, --------------------------------- -------------------------------- 2004 2003 2004 2003 --------------- -------------- -------------- -------------- NET INCOME $ 2,041 $ 451 $ 2,554 $ 826 Add (deduct): Income tax provision (benefit) 202 34 (4) 62 Net interest expense 842 626 3,924 1,819 Depreciation and amortization 2,186 1,561 5,896 4,450 ------------ ----------- ----------- ----------- EBITDA $ 5,271 $ 2,672 $ 12,370 $ 7,157 ============ =========== =========== ===========
EBITDA is a measure of our performance that is not required by, or presented in accordance with, GAAP. EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income, income (loss) from operating activities or any other performance measures derived in accordance with GAAP. CRITICAL ACCOUNTING POLICIES AND ESTIMATES GENERAL Our Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles, which require the selection and application of significant accounting policies, and which require management to make significant estimates and assumptions. We believe that the following are some of the more critical judgment areas in the application of our accounting policies. REVENUE RECOGNITION The majority of services are provided under a combination of fixed monthly fees and time and materials billings. Contracts with customers typically range from one to five years. Revenue is recognized (1) after we have obtained an executed service contract from the customer; (2) as the services are rendered; (3) when the price is fixed as per the service contract; and (4) when we believe that collectibility is reasonably assured, based on our credit risk policies and procedures that we employ. ALLOWANCE FOR DOUBTFUL ACCOUNTS We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. TANGIBLE AND INTANGIBLE ASSETS We have significant tangible and intangible assets on our balance sheet, primarily property and equipment, deferred software costs, and intangible assets, primarily goodwill, related to acquisitions. The assignment of useful lives to these assets and the valuation and classification of intangible assets involves significant judgments and the use of estimates. The testing of these tangible and intangibles under established accounting guidelines for impairment also requires significant use of judgment and assumptions. Our assets are tested and reviewed for impairment on an ongoing basis under the established accounting guidelines. Changes in business conditions or changes in the decisions of management as to how assets will be deployed in our operations could potentially require future adjustments to asset valuations. As of September 30, 2004 there were no indicators of impairment. PAGE 19 DEFERRED TAXES A tax valuation allowance is established, as needed, to reduce net deferred tax assets to the amount for which recovery is probable. As of September 30, 2004, we have established a full valuation allowance against our net deferred tax assets because of our history of operating losses. Depending on the amount and timing of taxable income we may generate in the future, as well as other factors including limitations that may arise from changes in our ownership, we could recognize no benefit from our deferred tax assets, or we could recognize some or all of their full value. EARNINGS PER SHARE At its June 30 - July 1, 2004 meeting, the Emerging Issues Task Force of the Financial Accounting Standards Board reached a tentative conclusion on EITF ISSUE NO. 04-08, "THE EFFECT OF CONTINGENTLY CONVERTIBLE DEBT ON DILUTED EARNINGS PER SHARE," about the accounting for contingently convertible debt instruments, commonly referred to as CoCos. CoCos combine the features of contingently issuable shares with a convertible debt instrument. The Notes we issued on June 30, 2004 and July 6, 2004 are CoCos. These instruments generally become convertible into common stock only if one or more specified events occurs, such as the underlying common stock achieving a specified price target. Under current interpretations of FASB Statement No. 128, EARNINGS PER SHARE, issuers of CoCos exclude the potential common shares underlying the CoCos from the calculation of diluted earnings per share until the market price or other contingency is met. When the contingency is met, generally the if-converted method is used to calculate the dilutive impact of the instrument. Under the if-converted method, the instrument is considered converted, with the resulting number of shares included in the denominator of the earnings per share calculation and the interest expense (net of tax) added back to the numerator of the earnings per share calculation. While a traditional convertible debt instrument may dilute earnings per share right away (application of the "if-converted' method is required even if the conversion option is out of the money), current accounting practice for CoCos avoids this dilution until a specified contingency is met. The Task Force reached a tentative conclusion that the contingently issuable shares guidance in Statement 128 does not apply to convertible debt. This conclusion was affirmed at the EITF's September 29-30, 2004 meeting. It is anticipated that FASB will amend Statement 128 effective for statement reporting periods ending after December 15,2004. If such amendment is adopted as anticipated, beginning with our annual report on Form 10-K for December 31, 2004, the dilutive affect of contingently convertible debt will be included in the calculation of diluted earnings per share, using the if-converted method. FORWARD-LOOKING STATEMENTS Statements made in this Report, including the foregoing financial statements and notes, other than statements of historical fact, are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. These statements relate to future events or our future financial performance, including statements relating to products, customers, suppliers, business prospects and effects of acquisitions. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," "expect," "anticipate," "intend," "plan," "believe," "estimate," "potential," or "continue," the negative of these terms or other comparable terminology. These statements involve a number of risks and uncertainties and as such, final results could differ from estimates or expectations due to a number of factors including, without limitation: incomplete or preliminary information; changes in government regulations and policies; continued acceptance of our products and services in the marketplace; competitive factors; new products; technological changes; our dependence on third party suppliers; intellectual property rights; difficulties with the integration of acquisitions including ITO Acquisition Corporation, d/b/a Systems Management Specialists and Verizon Information Technologies, Inc., now known as Infocrossing Healthcare Services, Inc.; and other risks and uncertainties including those set forth in this Report that could cause actual events or results to differ materially from any forward-looking statement. For any of these factors, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended. PAGE 20 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 to us. Except as required by law, we undertake no obligation to release any revisions to or update these forward-looking statements to reflect events or circumstances that occur after the date of this Report or to reflect the occurrence or effect of anticipated or unanticipated events. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK We are not exposed to material gains or losses related to the impact of interest rate changes, foreign currency fluctuations, or changes in the market values of our investments. We generally invest in fixed income securities - typically commercial paper, certificates of deposit, and money market accounts issued only by major corporations and financial institutions of recognized strength and security - and hold all investments to maturity. At September 30, 2004, our outstanding fixed rate debt was approximately $72,000,000 with interest payable semi-annually at 4%, plus $3,334,000 of debt with interest payable monthly at various rates. If market rates decline, we run the risk that the related required payments on the fixed rate debt will exceed those that would be paid based on then current market rates. MARKET RISK Our accounts receivable are subject, in the normal course of business, to collection risks. We regularly assess these risks and have policies and business practices to mitigate the adverse effects of collection risks. As a result, we do not anticipate any material losses in this area in excess of the recorded allowance for doubtful accounts. FOREIGN CURRENCY RISKS We have no material foreign operations. ITEM 4 - CONTROLS AND PROCEDURES An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Senior Vice President of Finance, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our management, including the Chief Executive Officer and the Senior Vice President of Finance, concluded that our disclosure controls and procedures were effective as of September 30, 2004. There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PAGE 21 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS Corcoran and Tallas v. Cortens, Dolan, ITO Acquisition Corporation d/b/a Systems Management Specialists, and Does 1 through 50 On November 1, 2004, we were served with a summons and complaint in a lawsuit commenced by two former employees of ITO Acquisition Corporation d/b/a Systems Management Specialists, now known as Infocrossing West, Inc. ("West") filed in the Superior Court of California, Orange County (Case No. 04CC10709). Plaintiffs assert that they had been induced to join West in 2002 based on promises of receiving equity interests and options to acquire additional equity in West. Plaintiffs assert that on numerous occasions they had received verbal assurance of receiving the foregoing equity interests in West. We had acquired West on April 2, 2004. Plaintiffs' employment with West terminated shortly after our acquisition of West. West has requested indemnification pursuant to the Stock Purchase Agreement between us and ITO Holdings, LLC ("Holdings") dated as of March 3, 2004 (the "SPA") for breaches of numerous representations and warranties contained in the SPA. Holdings represented and warranted to us, among other things, that it owned all of West's capital stock and there were no other equity interests or commitments relating to West's capital stock. Plaintiffs maintain that they are entitled to direct damages of at least $15 million plus punitive damages, costs, attorneys' fees, and other relief as the court may award. In addition, one of the plaintiffs also asserts a claim for unpaid commissions of approximately $30,000. Responsive pleadings are not due as of the date of filing this Form 10-Q. It is premature to give a proper evaluation of the probability of a favorable or unfavorable outcome. While it is again premature to give a proper evaluation of the potential liability, we believe that the above matters will be resolved without any material adverse impact on our financial position, results of operations, or cash flows. ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. (a) Issuances of Unregistered Securities During the Quarter: Stock issued for a purchase: On July 31, 2004, in connection with the acquisition of Mailwatch from EasyLink Services Corporation ("EasyLink"), EasyLink was issued 123,193 restricted shares of the common stock of the Company as a portion of the purchase price. This transaction is exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. Convertible securities sold: As discussed further under Management's Discussion and Analysis of Financial Condition and Results of Operations, on July 6, 2004, the Lehman Brothers, Inc. exercised its option in full to purchase an additional $12 million of the Company's 4.0% Convertible Senior Notes due July 15, 2024. The Notes are convertible, subject to certain conditions, at the option of the holder prior to maturity, into shares of our common stock at a specified conversion price, subject to certain adjustments. The conversion price will be adjusted to reflect stock dividends, stock splits, issuances of rights to purchase shares of common stock and other events. Upon conversion, we will have the right to deliver to the holders, at our option, cash, shares of our common stock, or a combination thereof. At the initial conversion price of $15.36, the $72 million of Notes would be convertible into 4,687,500 common shares. After the effective date of the Registration Statement and prior to the end of the 18th month thereafter, if the market price of our common stock is less than 68.23% ($10.48 initially, subject to adjustment) of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period, the conversion price shall immediately be reduced by 17.38% (to $12.69 initially, subject to adjustment); provided that (i) this adjustment shall only be applicable to Notes that have been sold or otherwise distributed pursuant to the registration statement referred to above or pursuant to Rule 144(k) under the Securities Act (and such adjustment shall apply to all such Notes, regardless of whether they are so sold or distributed before or after adjustment), and (ii) there shall be no more than one such reduction of the conversion price during the term of the Notes. PAGE 22 Offers and sales of the Notes were made only in the United States to qualified institutional buyers in transactions exempt from the registration requirements of the Securities Act of 1933, as amended (the Securities Act"). The notes were originally issued by us in a transaction exempt from the registration requirements of the Securities Act and were immediately resold by Lehman Brothers, Inc., the initial purchaser, in reliance on Rule 144A. Neither the Notes nor the shares of our common stock into which they will be convertible were registered under the Securities Act of 1933, as amended, or any state securities laws, and they may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. On July 13, 2004, we filed a registration statement on Form S-3 covering the resale of the Notes and the shares of our common stock into which they may be converted (the "Registration Statement"). This registration statement is not effective as of November 14, 2004. The proceeds were used to repay approximately $39.5 million of outstanding debt and the balance of $30 million was retained for acquisitions and general corporate purposes. After the closing of the Notes, and as of the date of filing this Report, we expended approximately $20 million for acquisitions. The cash expended for acquisitions was from cash on hand at the time of payment. PAGE 23 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 2 Stock Purchase Agreement between the Company and ITO Holdings, LLC, dated as of March 3, 2004, incorporated by reference to Exhibit 2.1 to a Current Report on Form 8-K filed April 7, 2004. 2.1 Purchase and Sale Agreement, dated as of September 1, 2004 between Verizon Data Services, Inc. and the Company, incorporated by reference to Exhibit 2.1 to a Current Report on Form 8-K filed October 14, 2004. 3.1A Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to the Company's Form 10-KSB for the period ended October 31, 1999. 3.1B Certificate of Amendment to the Company's Certificate of Incorporation, filed May 8, 2000, to increase the authorized shares and to remove Article 11, incorporated by reference to the Company's report on Form 10-Q for the period ended April 30, 2000. 3.1C Certificate of Amendment to the Company's Certificate of Incorporation, filed as of June 5, 2000, to change the name of the Company to Infocrossing, Inc., incorporated by reference to the Company's report on Form 10-Q for the period ended April 30, 2000. 3.2 By-Laws, as amended, incorporated by reference to Exhibit 3.2 to the Company's Form 10-Q/A filed May 17, 2004. 4.1 Securities Purchase Agreement, dated as of March 24, 2004, by and among the Company and certain purchasers of the Company's common stock, incorporated by reference to Exhibit 4.1 to a Current Report on Form 8-K filed April 1, 2004. 4.2 Registration Rights Agreement, dated as of March 24, 2004, by and the Company and certain purchasers of the Company's common stock, incorporated by reference to Exhibit 4.2 to a Current Report on Form 8-K filed April 1, 2004. 4.3 Indenture, dated as of June 30, 2004, between the Company as issuer and Wells Fargo Bank, National Association, as trustee; and form of 4.00% Convertible Senior Notes due 2024, incorporated by reference to a Registration Statement on Form S-3 filed July 13, 2004. 4.4 Resale Rights Agreement, dated as of June 30, 2004, by and between the Company and Lehman Brothers, Inc. regarding the Company's 4.00% Convertible Senior Notes due 2024, incorporated by reference to a Registration Statement on Form S-3 filed July 13, 2004. 10.1 Amended and Restated Term Loan Agreement, dated as of April 2, 2004 between the lenders named therein and the Company, incorporated by reference to Exhibit 10.1 to a Current Report on Form 8-K filed April 7, 2004. 10.2 Guaranty and Security Agreement, dated as of April 2, 2004, between SMS and CapitalSource, incorporated by reference to Exhibit 10.2 to a Current Report on Form 8-K filed April 7, 2004. 10.3 Amended and Restated Stock Pledge Agreement, dated as of April 2, 2004, among the Company, Amquest, Inc. and CapitalSource, incorporated by reference to Exhibit 10.3 to a Current Report on Form 8-K filed April 7, 2004. 10.4 Employment Agreement, dated as of April 2, 2004, by and between the Company and Patrick A. Dolan, incorporated by reference to Exhibit 10.4 to a Current Report on Form 8-K filed April 7, 2004. 10.5 Employment Agreement, dated as of April 2, 2004, by and between the Company and Jim Cortens, incorporated by reference to Exhibit 10.5 to a Current Report on Form 8-K filed April 7, 2004. PAGE 24 (a) Exhibits (continued): 10.6 Amendment to Amended and Restated Credit Agreement, dated as of June 30, 2004, between the lenders named therein and the Company, incorporated by reference to a Registration Statement on Form S-3 filed July 13, 2004 10.7 Acquisition Loan Agreement dated July 29, 2004 between the Company, various Lenders and CapitalSource Finance LLC as Agent for the Lenders, incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10Q for June 30, 2004. 10.8 Guarantee and Security Agreement dated as of July 29, 2004, between the Company and certain of the Company's subsidiaries and CapitalSource Finance LLC, incorporated by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10Q for June 30, 2004. 10.9 Stock Pledge Agreement Dated as of July 29, 2004, between the Company and certain of the Company's subsidiaries and CapitalSource Finance LLC, incorporated by reference to Exhibit 10.9 to the Company's Quarterly Report on Form 10Q for June 30, 2004. 10.10 Consent, Waiver and First Amendment to Acquisition Loan Agreement dated as of October 1, 2004 by and among the Company and CapitalSource Finance, LLC., incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed October 4, 2004. 10.11 Amended and Restated Consent, Waiver, and First Amendment to Acquisition Loan Agreement, dated as of October 6, 2004, by and among the Company and CapitalSource Finance, LLC. 10.12 Second Amendment to Acquisition Loan Agreement and Other Documents, dated as of November 8, 2004, by and among the Company and CapitalSource Finance, LLC. 14 Code of Ethics, incorporated by reference to the Company's definitive Proxy Statement filed on April 29, 2004. 31 Certifications required by Rule 13a-14(a) to be filed. 32 Certifications required by Rule 13a-14(b) to be furnished but not filed. (b) Reports on Form 8K: On July 6, 2004, the Company announced the sale of an additional $12 million of convertible debt. On August 11, 2004, the Company announced earnings for the three and six months ended June 30, 2004. On September 1, 2004, the Company announced the pending acquisition of Verizon Information Technologies, Inc. PAGE 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INFOCROSSING, INC. November 15, 2004 /s/ ZACH LONSTEIN ------------------------------------------ Zach Lonstein Chairman & Chief Executive Officer November 15, 2004 /s/ WILLIAM J. McHALE ------------------------------------------ William J. McHale Senior Vice President of Finance PAGE 26 EX-31 2 x31_q304.txt SECTION 302 CERTIFICATIONS EXHIBIT 31 CERTIFICATIONS REQUIRED TO BE FILED BY RULE 13A-14(A) I, Zach Lonstein, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Infocrossing, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. November 15, 2004 /s/ ZACH LONSTEIN ----------------------------------------- Zach Lonstein Chairman and Chief Executive Officer EXHIBIT 31 (CONTINUED) CERTIFICATIONS REQUIRED TO BE FILED BY RULE 13A-14(A) I, William J. McHale, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Infocrossing, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. November 15, 2004 /s/ WILLIAM J. McHALE ----------------------------------------- William J. McHale Senior Vice President of Finance EX-32 3 x32_q304.txt SECTION 906 CERTIFICATION EXHIBIT 32 CERTIFICATIONS REQUIRED BY RULE 13A-14(B) TO BE FURNISHED BUT NOT FILED CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Infocrossing, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Zach Lonstein and William J. McHale, Chairman and Chief Executive Officer and Senior Vice President of Finance, respectively, of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ ZACH LONSTEIN /s/ WILLIAM J. McHALE - ------------------------------------ ----------------------------------- Zach Lonstein William J. McHale Chairman and Chief Executive Officer Senior Vice President of Finance November 15, 2004 November 15, 2004 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-10 4 x1011q304.txt AMENDED AMENDMENT 1 TO ACQUISITION AGREEMENT EXHIBIT 10.11 AMENDED AND RESTATED CONSENT, WAIVER AND FIRST AMENDMENT TO ACQUISITION LOAN AGREEMENT THIS AMENDED AND RESTATED CONSENT, WAIVER AND FIRST AMENDMENT TO ACQUISITION LOAN AGREEMENT, dated as of October 6, 2004 (the "AMENDMENT"), is entered into by and between CAPITALSOURCE FINANCE LLC, a Delaware limited liability company, in its capacity as agent (in such capacity, "AGENT") for the Lenders under the Loan Agreement referenced below, the Lenders party thereto, and INFOCROSSING, INC., a Delaware corporation ("BORROWER"). Capitalized terms used and not otherwise defined herein are used as defined in the Loan Agreement (as defined below). WHEREAS, the Agent, Lenders and the Borrower have entered into that certain Acquisition Loan Agreement dated as of July 29, 2004 (the "ORIGINAL LOAN AGREEMENT", and as the same has been amended by that certain Consent, Waiver and First Amendment to Acquisition Loan Agreement dated as of October 1, 2004 (the "ORIGINAL AMENDMENT"), and may further be amended, supplemented, modified and/or restated and in effect from time to time, the "LOAN AGREEMENT"); WHEREAS, pursuant to the terms of the Original Amendment, Agent and Lenders (i) amended the Original Loan Agreement, (ii) acknowledged and consented to the Borrower making 12 equal monthly payments of approximately $50,000 to IBM (collectively, the "IBM LEASE PAYMENTS") in connection with the financing of certain software from IBM for a one-year period, (iii) consented to Borrower acquiring all of the equity of Verizon Information Technologies Inc. ("Target") for a purchase price of $43,500,000 (the "SUBJECT ACQUISITION") pursuant to the terms of that certain Purchase and Sale Agreement dated as of September 1, 2004 between Borrower and Verizon Data Services Inc and (iv) agreed that, except for the conditions set forth on Exhibit A attached hereto (the "WAIVED CONDITIONS"), Borrower has met the conditions set forth in the Loan Agreement (the "CATEGORY 3 ACQUISITION CONDITIONS") for the Subject Acquisition to qualify as a Category 3 Permitted; WHEREAS, Agent, Lenders and Borrower have agreed to amend and restate in its entirety the Original Amendment with this Amendment to reflect further agreements with respect to the Loan Agreement. NOW, THEREFORE, in consideration of the premises and the other mutual covenants contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree to amend and restate the Original Amendment in its entirety as follows: Section 1. AMENDMENTS TO LOAN AGREEMENT. (a) Section 1 of the Loan Agreement is hereby amended by adding the following defined terms thereto in appropriate alphabetical order: "Fleet": means Fleet National Bank. "Fleet Payroll Account": means any payroll account maintained by any Loan Party at Fleet. "Fleet Zero Balance Account": means any zero balance account maintained by any Loan Party at Fleet. "IHS": means Infocrossing Healthcare Services, Inc., a Delaware corporation (formerly known as Verizon Information Technologies Inc.). "IHS Transfer Costs": means expenditures for the acquisition of hardware and software to house the operations of IHS as such operations are transitioned off of the systems of Verizon Data Services Inc. and onto the systems of Borrower and/or one or more of Borrower's Subsidiaries. (b) The definition of "Capital Expenditures" in Section 1 of the Loan Agreement is hereby amended and restated in its entirety to read as follows: "Capital Expenditures": for any period, with respect to any Person, the aggregate of all expenditures by such Person for the acquisition or leasing (pursuant to a Financing Lease) of fixed or capital assets or additions to equipment (including replacements, capitalized repairs and improvements during such period) which are or should be capitalized under GAAP on a balance sheet of such Person; provided that, Capital Expenditures shall not include (i) investments that constitute Permitted Acquisitions pursuant to subsection 6.9(h) or (ii) IHS Transfer Costs incurred through Fiscal Year 2005. (c) The definition of "Material Adverse Effect" in Section 1 of the Loan Agreement is amended and restated in its entirety to read as follows: "Material Adverse Effect": (i) a material adverse effect on (a) the condition (financial or otherwise), business, properties, assets, liabilities, operations or results of operations of the Borrower and the Subsidiaries, taken as a whole or (b) the validity or enforceability of this or any of the other Loan Documents or the rights or remedies of the Agent or the Lenders hereunder or thereunder, or (ii) any effect resulting from the assertion of any claim in excess of $4,000,000, individually or in the aggregate, against any Loan Party by any other Person with respect to any contract which constitutes or otherwise results in annual revenue to the Loan Parties, in the aggregate, in excess of $20,000,000. (d) Section 5 of the Loan Agreement shall be amended by adding the following immediately following Section 5.13: 5.14 Separate Entities. (a) The Borrower and its Subsidiaries (other than IHS) (collectively, the "IFOX Entities"), on the one hand, and IHS, on the other hand, shall at all times maintain the accounts, books, resolutions and records of the IFOX Entities separate from the accounts, books and records of IHS. (b) The IFOX Entities and IHS (i) have maintained and will maintain the books, records, resolutions and agreements of the IFOX Entities as official records and of IHS as official records, (ii) have not commingled and will not commingle the funds or assets of the IFOX Entities with those of IHS, (iii) have held and will hold the assets of the IFOX Entities in the names of the members thereof and the assets of IHS in the name of IHS, (iv) have conducted and will conduct the business of the IFOX Entities in the names of the members thereof and the business of IHS in the name of IHS, (v) have maintained and will maintain the financial statements, accounting records and other entity documents of the IFOX Entities separate from those of IHS, (vi) have paid and will pay the liabilities of the IFOX Entities out of the IFOX Entities' funds and assets and those of IHS out of IHS's funds and assets, (vii) have observed and will observe, with respect to the IFOX Entities and IHS, separately, all partnership, corporate or limited liability company formalities as applicable, (viii) have maintained and will maintain an arms-length relationship with their Affiliates, and have not entered and will not permit any of the IFOX Entities to enter into or be a party to, any transaction with IHS, or any partners, members, shareholders or Affiliates thereof, except in the ordinary course of business and on terms which are intrinsically fair and are not less favorable to the IFOX Entities than would be obtained in a comparable arms-length transaction with an unrelated third party, (ix) have allocated and will allocate fairly and reasonably as between the IFOX Entities and IHS shared expenses and overhead expenses, including, without limitation, shared office space, and as between the IFOX Entities and IHS, shall use separate stationery, invoices and checks, (x) have held and identified IHS and will hold IHS out and identify IHS as a separate and distinct entity from, and not as a division of any of, the IFOX Entities, and will not fail to correct any misunderstanding as to such separateness or distinction, (xi) have not paid and will not pay the salaries of the employees of IHS from the funds of any of the IFOX Entities, and (xii) have maintained and will maintain for IHS adequate capital for the normal obligations reasonably foreseeable in a business of IHS's size and character and in light of IHS's contemplated business operations; and, with respect to each of clauses (i) through (xii), in each case, unless otherwise agreed to in advance by Agent in its Permitted Discretion. (e) Schedule 6.1(a) to the Loan Agreement is hereby replaced in its entirety by Substitute Schedule 6.1(a) attached hereto. (f) Schedule 6.1(b) to the Loan Agreement is hereby amended to delete therefrom in its entirety the table of Minimum Adjusted EBITDA set forth therein and to substitute therefor the table of Minimum Adjusted EBIDTA set forth on Amended Schedule 6.1(b) attached hereto. (g) Subsection 6.1(c) of the Loan Agreement is hereby amended and restated in its entirety to read as follows: (c) Fixed Charge Ratio. Permit for any period of four consecutive fiscal quarters ending on the date set forth on Schedule 6.1(c), the ratio of (a) Consolidated EBITDA for such period, minus Capital Expenditures (other than to the extent attributable to the incurrence of Financing Leases or other Indebtedness) during such period minus taxes paid in cash during such period, to (b) Consolidated Fixed Charges for such period to be less than the amount set forth opposite such period specified on Schedule 6.1(c). (h) Subsection 6.2(c) of the Loan Agreement is hereby amended and restated in its entirety to read as follows: (c) Indebtedness of the Borrower and any of its Subsidiaries (other than IHS) incurred to finance the acquisition of fixed or capital assets pursuant to one or more Financing Leases (other than Financing Leases used to finance IHS Transfer Costs incurred through Fiscal Year 2005) in an aggregate principal amount not exceeding as to the Borrower and its Subsidiaries $4,000,000 at any time outstanding, provided that such Indebtedness shall be created substantially simultaneously with the capitalization or recapitalization of such fixed or capital assets on the balance sheet of the Borrower and its Subsidiaries; (i) Section 6.4 of the Loan Agreement is hereby amended by adding the following sentence at the end of such Section: Notwithstanding anything contained in any of the foregoing clauses (a) through (c), Borrower shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, merge, consolidate or otherwise amalgamate with or into IHS. (j) Section 6.17 of the Loan Agreement is hereby amended and restated in its entirety to read as follows: 6.17 Certain Bank Accounts. (a) Fleet Accounts. To the extent Borrower has not entered into a Deposit Account Control Agreement with Fleet with regard to the Fleet Payroll Account and/or the Fleet Zero Balance Account, (i) permit the aggregate amount on deposit in the Fleet Payroll Account at any one time to exceed the aggregate amount reasonably necessary to fund the payroll requirements of Borrower and its Subsidiaries in the ordinary course of business or (ii) permit the aggregate amount on deposit in the Fleet Zero Balance Account to exceed zero dollars ($0.00) at any time, as the case may be. Section 2. CONSENTS. Subject to the terms hereof, Agent and Lenders hereby (i) acknowledge and consent to the IBM Lease Payments, (ii) irrevocably waive the Waived Conditions as a requirement for determining whether or not the Subject Acquisition constitutes a Permitted Acquisition, (iii) irrevocably consent to the consummation of the Subject Acquisition (iv) consent to Target establishing deposit accounts with Fleet so long as such accounts are subject to a Deposit Account Control Agreement, (v) consent to the execution and delivery by (A) Borrower of that certain Addendum to Stock Pledge Agreement dated of even date herewith and (B) IHS of that certain Joinder to Security Agreement of even date herewith. The foregoing are limited consents and the execution and delivery of this Amendment does not constitute (a) a waiver by Agent or any Lender of any Default or Event of Default now or hereafter existing or any other term or provision of the Loan Agreement or any other Loan Document or (b) a course of conduct or dealing among the parties. Each of the Addendum to Stock Pledge Agreement and Joinder to Security Agreement referred to above shall be deemed to be Loan Documents. Section 3. CONDITIONS. This Amendment shall be subject to satisfaction of the following conditions precedent or concurrent, after giving effect to this Amendment: (a) the representations and warranties contained herein and in all other Loan Documents shall be true and correct in all material respects as of the date hereof, except for such representations and warranties limited by their terms to a specific date; (b) no Default or Event of Default shall be in existence; (c) the Borrower shall have delivered to the Agent an executed original copy of this Amendment and each other agreement, document or instrument reasonably requested by the Agent in connection with this Amendment, each in form and substance reasonably satisfactory to Agent and Lenders; (d) the Borrower shall have paid all fees, costs and expenses owed to and/or incurred by the Agent and Lenders arising in connection with the Loan Documents and/or this Amendment; and (e) all proceedings taken in connection with the transactions contemplated by this Amendment and all documentation and other legal matters incident thereto shall be satisfactory to the Agent. Section 4. DELIVERY OF ADDITIONAL DOCUMENTS. The Borrower shall deliver, or caused to be delivered, to the Agent each the following within the respective time periods: (a) (i) As soon as possible, but in any event before November 30, 2004, IHS shall use reasonable best efforts to deliver or cause to be delivered to Agent (A) a landlord waiver and consent in form and substance reasonably satisfactory to Agent for each leased real property located in (y) Jefferson City, Missouri and (z) Phoenix, Arizona and (B) a Collateral Assignment of Leases in the form previously negotiated with Agent; and (ii) a landlord waiver and consent in form and substance reasonably satisfactory to Agent contemporaneously with the lease of new office space by IHS, if any, in replacement of the office space currently licensed in Tampa, Florida. The parties hereto agree that so long as IHS fails to obtain all of the foregoing landlord waivers and consents by the dates required above, Agent shall have the right, in its sole and absolute discretion, to charge IHS a fully earned collateral agent's fee of $5,000 per month, payable on the first day of each month thereafter until so obtained. (b) As soon as possible, but in any event before October 30, 2004, Borrower shall deliver or cause to be delivered to Agent a final draft of the employment and option agreement between IHS and Michael Luebke (the "LUEBKE Agreement"). The parties hereto agree that so long as IHS fails to obtain such agreement, Agent shall have the right, in its sole and absolute discretion, to charge IHS a fully earned collateral agent's fee of $1,000 per month, payable on the first day of each month thereafter until so obtained. (c) As soon as possible, but in any event before November 8, 2004, (i) fully executed Deposit Account Control Agreements (y) from Fleet in the forms previously negotiated with Agent and Fleet, to the extent any Loan Party maintains a deposit account at Fleet and (z) from each other bank and financial institution with which any Loan Party maintains a deposit account not subject to a Deposit Account Control Agreement, if any, in form and substance reasonably satisfactory to Agent, and (ii) an opinion from Borrower's legal counsel with respect to such Deposit Account Control Agreements, in form and substance substantially similar to the terms previously negotiated between the parties hereto. Any failure to comply with either of the foregoing clauses (i) or (ii) within such time period shall constitute and be deemed an Event of Default under the Loan Agreement. (d) As soon as possible, but in any event before October 8, 2004, Borrower shall deliver or cause to be delivered to Agent a good standing certificate from the New Jersey Secretary of State for ETG, Inc. The parties hereto agree that so long as Borrower fails to obtain such certificate, Agent shall have the right, in its sole and absolute discretion, to charge Borrower a fully earned collateral agent's fee of $1,000 per month, payable on the first day of each month hereafter. Section 5. LOAN AGREEMENT IN FULL FORCE AND EFFECT AS AMENDED. Except as specifically amended hereby, the Loan Agreement and other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed as so amended. Except as expressly set forth herein, this Amendment shall not be deemed to be a waiver, amendment or modification of any provisions of the Loan Agreement or any other Loan Document or any right, power or remedy of Agent or Lenders, or constitute a waiver of any provision of the Loan Agreement or any other Loan Document, or any other document, instrument and/or agreement executed or delivered in connection therewith or of any Default or Event of Default under any of the foregoing, in each case whether arising before or after the date hereof or as a result of performance hereunder or thereunder. Except as set forth herein, Agent and Lenders reserve all rights, remedies, powers, or privileges available under the Loan Agreement, the other Loan Documents, at law or otherwise. All references to the Loan Agreement shall be deemed to mean the Loan Agreement as modified hereby. This Amendment shall not constitute a novation or satisfaction and accord of the Loan Agreement and/or other Loan Documents, but shall constitute an amendment thereof. The parties hereto agree to be bound by the terms and conditions of the Loan Agreement and Loan Documents as amended by this Amendment, as though such terms and conditions were set forth herein. Each reference in the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of similar import shall mean and be a reference to the Loan Agreement as amended by this Amendment, and each reference herein or in any other Loan Documents to the "Loan Agreement" or "Credit Agreement" shall mean and be a reference to the Loan Agreement as amended and modified by this Amendment. Section 6. REPRESENTATIONS. Borrower hereby represents and warrants to Agent and Lenders as follows: (a) it is duly incorporated or organized, validly existing and in good standing under the laws of its jurisdiction of organization; (b) the execution, delivery and performance by it of this Amendment and all other Loan Documents executed and/or delivered in connection herewith are within its powers, have been duly authorized, and do not contravene (i) its articles of organization, operating agreement, or other organizational documents, or (ii) any applicable law; (c) no consent, license, permit, approval or authorization of, or registration, filing or declaration with any Governmental Authority or other Person, is required in connection with the execution, delivery, performance, validity or enforceability of this Amendment or any other Loan Documents executed and/or delivered in connection herewith by or against it; (d) this Amendment and all other Loan Documents executed and/or delivered in connection herewith has been duly executed and delivered by it; (e) this Amendment and all other Loan Documents executed and/or delivered in connection herewith constitute its legal, valid and binding obligation enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally or by general principles of equity; (f) except for the Waived Conditions, Borrower has met the Category 3 Acquisition Conditions; (g) after giving effect to this Amendment and the consummation of the Subject Acquisition, it is not in default under the Loan Documents and no Default or Event of Default exists, has occurred and is continuing or would result by the execution, delivery or performance of this Amendment or the consummation of the Subject Acquisition; and (h) the representations and warranties contained in the Loan Documents are true and correct in all material respects as of the date hereof as if made on the date hereof, except for such representations and warranties limited by their terms to a specific date. Section 7. MISCELLANEOUS. (a) This Amendment may be executed in any number of counterparts (including by facsimile), and by the different parties hereto on the same or separate counterparts, each of which shall be deemed to be an original instrument but all of which together shall constitute one and the same agreement. Each party agrees that it will be bound by its own facsimile signature and that it accepts the facsimile signature of each other party. The descriptive headings of the various sections of this Amendment are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof or thereof. Whenever the context and construction so require, all words herein in the singular number herein shall be deemed to have been used in the plural, and vice versa, and the masculine gender shall include the feminine and neuter and the neuter shall include the masculine and feminine. (b) This Amendment may not be changed, amended, restated, waived, supplemented, discharged, canceled, terminated or otherwise modified orally or by any course of dealing or in any manner other than as provided in the Loan Agreement. This Amendment shall be considered part of the Loan Agreement and shall be a Loan Document for all purposes under the Loan Agreement and other Loan Documents. (c) This Amendment, the Loan Agreement and the Loan Documents constitute the final, entire agreement and understanding between the parties with respect to the subject matter hereof and thereof and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements between the parties, and shall be binding upon and inure to the benefit of the successors and assigns of the parties hereto and thereto. There are no unwritten oral agreements between the parties with respect to the subject matter hereof and thereof. (d) THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE CHOICE OF LAW PROVISIONS SET FORTH IN THE LOAN AGREEMENT AND SHALL BE SUBJECT TO THE WAIVER OF JURY TRIAL AND NOTICE PROVISIONS OF THE LOAN AGREEMENT. (e) Borrower may not assign, delegate or transfer this Amendment or any of its rights or obligations hereunder. No rights are intended to be created under this Amendment for the benefit of any third party donee, creditor or incidental beneficiary of Borrower or any Guarantor. Nothing contained in this Amendment shall be construed as a delegation to Agent or Lenders of Borrower's or any Guarantor's duty of performance, including, without limitation, any duties under any account or contract in which Agent has or Lenders have a security interest or Lien. This Amendment shall be binding upon the Borrower and its successors and assigns. (f) Borrower shall pay all costs and expenses incurred by Agent and Lenders or any of their affiliates, including, without limitation, documentation and diligence fees and expenses, all search, audit, appraisal, recording, professional and filing fees and expenses and all other out-of-pocket charges and expenses (including, without limitation, UCC and judgment and tax lien searches and UCC filings and fees for post-Closing UCC and judgment and tax lien searches) and reasonable attorneys' fees and expenses, in connection with entering into, negotiating, preparing, reviewing and executing this Amendment and the documents, agreements and instruments contemplated hereby and all related agreements, documents and instruments, and all of the same shall be part of the Obligations. If Agent, any Lender or any of their affiliates uses in-house counsel for any of the purposes set forth above the Borrower expressly agrees that the Obligations include reasonable charges for such work commensurate with the fees that would otherwise be charged by outside legal counsel selected by such Person in its sole discretion for the work performed. (g) Borrower hereby (i) agrees that this Amendment shall not limit or diminish the obligations of Borrower under the Loan Documents, (ii) reaffirms its obligations under each of the Loan Documents to which it is a party, and (iii) agrees that each of such Loan Documents remains in full force and effect and is hereby ratified and confirmed. (h) All representations and warranties made in this Amendment shall survive the execution and delivery of this Amendment and no investigation by Agent or Lenders shall affect such representations or warranties or the right of Agent or Lenders to rely upon them. (i) BORROWER ACKNOWLEDGES AND AGREES THAT (A) IT HAS NO CLAIMS, COUNTERCLAIMS, OFFSETS, CREDITS OR DEFENSES TO THE LOAN DOCUMENTS AND THE PERFORMANCE OF ITS OBLIGATIONS THEREUNDER, OR (B) IF IT HAS ANY SUCH CLAIMS, COUNTERCLAIMS, OFFSETS, CREDITS OR DEFENSES TO THE LOAN DOCUMENTS AND/OR ANY TRANSACTION RELATED TO THE LOAN DOCUMENTS AND/OR THE OBLIGATIONS, THE SAME ARE HEREBY WAIVED, RELINQUISHED AND RELEASED IN CONSIDERATION OF AGENT'S AND LENDERS' EXECUTION AND DELIVERY OF THIS AMENDMENT. [SIGNATURES APPEAR ON FOLLOWING PAGE] IN WITNESS WHEREOF, each of the parties has duly executed this Amendment as of the day and year first written above. INFOCROSSING, INC., a Delaware corporation, as Borrower By: /s/ ZACH LONSTEIN ---------------------------------- Name: Zach Lonstein Title: Chairman and CEO CAPITALSOURCE FINANCE LLC, as Agent and a Lender By: /s/ STEVEN A. MUSELES ---------------------------------- Name: Steven A. Museles Title: Senior Vice President EXHIBIT A WAIVED CONDITIONS 1. The Borrower has entered into an agreement to lease certain software from IBM for a one-year period (the "IBM Lease Agreement"), pursuant to which IBM Lease Agreement the Borrower is required to make 12 equal monthly payments of approximately $50,000 to IBM. Such monthly payments are considered by the Agent to be Indebtedness under the Acquisition Loan Agreement and, as a result of the incurrence of such Indebtedness by the Borrower, as of the date of execution of the IBM Lease Agreement, the Borrower had unsecured Indebtedness of approximately $1,260,000, which amount exceeds the $1,000,000 amount of unsecured Indebtedness permitted to be incurred by Borrower pursuant to Section 6.2(j) of the Acquisition Loan Agreement. 2. The Borrower has not furnished to Agent and Lenders an executed term sheet and/or commitment letter with respect to the Acquisition, as no such document exists. The Borrower has not furnished a final draft of the employment and option agreement with Michael Luebke. Such agreement will be promptly delivered to the Agent, and in no event later than thirty (30) days from the date hereof. 3. The Agent has informed the Borrower that the Agent and the Required Lenders will deliver consent to the Acquisition at the closing of the Acquisition Advance. 4. As an accommodation to the Borrower, the Agent performed the searches referred to in paragraph (n) of Exhibit A to the Officer's Certificate of the Borrower dated the date hereof (the "Officer's Certificate") based on information provided to the Agent by the Borrower. To the best of the Borrower's knowledge, the Target is not subject to any Liens in favor of any Persons (other than Liens otherwise permitted under the Acquisition Loan Agreement). 5. The certification contained in paragraph (u) of Exhibit A to the Officer's Certificate is qualified by the following: (a) to Borrower's knowledge, the September 30, 2004 financial statement and balance sheet of the Target, which has not been reviewed by the Borrower prior to the date of this certification, will not disclose any liabilities or obligations with respect to Target which individually or in the aggregate could reasonably be expected to have a Material Adverse Effect and (b) to Borrower's knowledge, the matters described in Schedule 3.1.7(b)(1) to the Purchase and Sale Agreement dated as of September 1, 2004 between the Borrower and Verizon Data Services Inc. could reasonably be expected to have a Material Adverse Effect. 6. The certification contained in paragraph (w) of Exhibit A to the Officer's Certificate is qualified by the following: to Borrower's knowledge, no Material Adverse Effect has occurred or exists. 7. The Agent has not received an opinion of counsel to Seller in respect of the Acquisition. SUBSTITUTE SCHEDULE 6.1(A) Leverage Ratio Fiscal quarter ended Ratio June 30, 2004 2.50 to 1.00 September 30, 2004 2.50 to 1.00 December 31, 2004 2.75 to 1.00 March 31, 2005 2.75 to 1.00 June 30, 2005 2.50 to 1.00 September 30, 2005 2.50 to 1.00 December 31, 2005 2.50 to 1.00 March 31, 2006 2.50 to 1.00 June 30, 2006 2.50 to 1.00 September 30, 2006 2.25 to 1.00 December 31, 2006 2.25 to 1.00 March 31, 2007 2.25 to 1.00 June 30, 2007 2.25 to 1.00 September 30, 2007 2.00 to 1.00 December 31, 2007 2.00 to 1.00 March 31, 2008 2.00 to 1.00 June 30, 2008 2.00 to 1.00 September 30, 2008 1.75 to 1.00 December 31, 2008 1.75 to 1.00 The last day of each Fiscal Quarter 1.75 to 1.00 thereafter AMENDED SCHEDULE 6.1(B) The Minimum Adjusted EBITDA table in Schedule 6.1(b) shall be deleted and replaced with the following Minimum Adjusted EBITDA table: Fiscal quarter ended Amount* --------------------- ------ June 30, 2004 $12,300,000 September 30, 2004 $15,000,000 December 31, 2004 $25,300,000 March 31, 2005 $27,300,000 June 30, 2005 $29,800,000 September 30, 2005 $31,300,000 December 31, 2005 $32,300,000 March 31, 2006 $33,300,000 June 30, 2006 $33,300,000 September 30, 2006 $33,300,000 December 31, 2006 $33,300,000 March 31, 2007 $36,300,000 June 30, 2007 $36,300,000 September 30, 2007 $36,300,000 December 31, 2007 $36,300,000 March 31, 2008 $36,300,000 June 30, 2008 $36,300,000 September 30, 2008 $36,300,000 December 31, 2008 $36,300,000 The last day of each Fiscal Quarter $36,300,000 thereafter EX-10 5 x1012q304.txt AMENDMENT 2 TO ACQUISITION LOAN AGREEMENT EXHIBIT 10.12 SECOND AMENDMENT TO ACQUISITION LOAN AGREEMENT AND OTHER LOAN DOCUMENTS This SECOND AMENDMENT TO ACQUISITION LOAN AGREEMENT AND OTHER LOAN DOCUMENTS (this "Amendment"), dated as of November 8, 2004, is entered into by and between CAPITALSOURCE FINANCE LLC, a Delaware limited liability company, in its capacity as agent (in such capacity, "Agent") for the Lenders under the Loan Agreement referenced below, the Lenders party thereto, and INFOCROSSING, INC., a Delaware corporation ("Borrower"). R E C I T A L S: A. The Borrower, Agent and the Lenders have entered into that certain Acquisition Loan Agreement dated as of July 29, 2004 (as the same has been amended by that certain Amended and Restated Consent, Waiver and First Amendment to Acquisition Loan Agreement dated as of October 6, 2004 (the "First Amendment") and may further be amended, restated, supplemented or otherwise modified from time to time, the "Loan Agreement"). B. Borrower, Agent and the Lenders desire to amend and modify the Loan Agreement and the First Amendment as herein set forth. NOW, THEREFORE, in consideration of the mutual agreements herein contained, and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto agree as follows: 1. Definitions. Capitalized terms used herein, including in the above recitals, but not elsewhere defined herein shall have the respective meanings ascribed to such terms in the Loan Agreement. 2. Amendments. 2.1 Amendments to the Loan Agreement. Section 6.17 of the Loan Agreement hereby is amended and restated in its entirety to read as follows: 6.17 Certain Bank Accounts. To the extent Borrower or any Subsidiary of Borrower has not entered into a Deposit Account Control Agreement with respect to (a) any deposit, checking or other similar bank account (but not including any payroll, zero-balance or similar account), permit the aggregate amount on deposit in all such accounts at any time to exceed $75,000; (b) any payroll account, permit the aggregate amount on deposit in all payroll accounts (whether subject to Deposit Account Control Agreements or not) at any time to exceed the aggregate amount reasonably necessary to fund the payroll requirements of Borrower and its Subsidiaries in the ordinary course of business at such time and (c) any zero-balance or similar account, permit the aggregate amount on deposit in each such account at any time to exceed $-0-. 2.2 Amendments to First Amendment. The First Amendment ereby is amended as follows: (a) Section 4(c) of the First Amendment hereby is amended by deleting the date "November 8, 2004" and substituting "December 31, 2004" therefor. (b) Exhibit A attached to the First Amendment hereby is amended by deleting Paragraph 5(b) in its entirety and substituting the following therefor: (b) to Borrower's knowledge, the matters described in Schedule 3.1.7(b)(1) to the Purchase and Sale Agreement dated as of September 1, 2004 between the Borrower and Verizon Data Services Inc. could not reasonably be expected to have a Material Adverse Effect. 3. Conditions to Effectiveness. The effectiveness of this Amendment shall be subject to the satisfaction of all of the following conditions in a manner, form and substance satisfactory to the Agent: (a) the representations and warranties contained herein and in all other Loan Documents, as amended hereby, shall be true and correct in all material respects as of the date hereof, except for such representations and warranties limited by their terms to a specific date; (b) no Default or Event of Default shall be in existence; (c) the Borrower shall have delivered to the Agent an executed original copy of this Amendment and each other agreement, document or instrument reasonably requested by the Agent in connection with this Amendment, each in form and substance reasonably satisfactory to Agent and Lenders; (d) the Borrower shall have paid all fees, costs and expenses owed to and/or incurred by the Agent and Lenders arising in connection with the Loan Documents and/or this Amendment; and (e) all proceedings taken in connection with the transactions contemplated by this Amendment and all documentation and other legal matters incident thereto shall be satisfactory to the Agent. 4. Loan Agreement in Full Force and Effect as Amended. Except as specifically amended hereby, the Loan Agreement and other Loan Documents, including the First Amendment, shall remain in full force and effect and hereby are ratified and confirmed as so amended. Except as expressly set forth herein, this Amendment shall not be deemed to be a waiver, amendment or modification of any provisions of the Loan Agreement or any other Loan Document, including the First Amendment, or any right, power or remedy of Agent or Lenders, or constitute a waiver of any provision of the Loan Agreement or any other Loan Document, including the First Amendment, or any other document, instrument and/or agreement executed or delivered in connection therewith or of any Default or Event of Default under any of the foregoing, in each case whether arising before or after the date hereof or as a result of performance hereunder or thereunder. Except as set forth herein, Agent and Lenders reserve all rights, remedies, powers, or privileges available under the Loan Agreement, the other Loan Documents (including the First Amendment), at law or otherwise. All references to the Loan Agreement shall be deemed to mean the Loan Agreement as modified hereby. This Amendment shall not constitute a novation or satisfaction and accord of the Loan Agreement and/or other Loan Documents (including the First Amendment), but shall constitute an amendment thereof. The parties hereto agree to be bound by the terms and conditions of the Loan Agreement and the other Loan Documents (including the First Amendment) as amended by this Amendment, as though such terms and conditions were set forth herein. Each reference in the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of similar import shall mean and be a reference to the Loan Agreement as amended by this Amendment, and each reference herein or in any other Loan Document (including the First Amendment) to the "Loan Agreement" or "Credit Agreement" shall mean and be a reference to the Loan Agreement as amended and modified by this Amendment. 5. Representations. Borrower hereby represents and warrants to Agent and Lenders as follows: (a) it is duly incorporated, validly existing and in good standing under the laws of Delaware; (b) the execution, delivery and performance by it of this Amendment and all other Loan Documents executed and/or delivered in connection herewith are within its powers, have been duly authorized, and do not contravene (i) its articles of incorporation, by-laws, or other organizational documents, or (ii) any applicable law; (c) no consent, license, permit, approval or authorization of, or registration, filing or declaration with, any Governmental Authority or other Person is required in connection with the execution, delivery, performance, validity or enforceability of this Amendment or any other Loan Documents executed and/or delivered in connection herewith by or against it; (d) this Amendment and all other Loan Documents executed and/or delivered in connection herewith have been duly executed and delivered by it; (e) this Amendment and all other Loan Documents executed and/or delivered in connection herewith constitute its legal, valid and binding obligation enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally or by general principles of equity; (f) after giving effect to this Amendment, it is not in default under the Loan Documents and no Default or Event of Default exists, has occurred and is continuing; and (g) the representations and warranties contained in the Loan Documents (including the First Amendment) as amended hereby are true and correct in all material respects as of the date hereof as if made on the date hereof, except for such representations and warranties limited by their terms to a specific date. 6. Miscellaneous. (a) This Amendment may be executed in any number of counterparts (including by facsimile), and by the different parties hereto on the same or separate counterparts, each of which shall be deemed to be an original instrument but all of which together shall constitute one and the same agreement. Each party agrees that it will be bound by its own facsimile signature and that it accepts the facsimile signature of each other party. The descriptive headings of the various sections of this Amendment are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof or thereof. Whenever the context and construction so require, all words herein in the singular number herein shall be deemed to have been used in the plural, and vice versa, and the masculine gender shall include the feminine and neuter and the neuter shall include the masculine and feminine. (b) This Amendment may not be changed, amended, restated, waived, supplemented, discharged, canceled, terminated or otherwise modified orally or by any course of dealing or in any manner other than as provided in the Loan Agreement. This Amendment shall be considered part of the Loan Agreement and the First Amendment, as applicable, and shall be a Loan Document for all purposes under the Loan Agreement and the other Loan Documents. (c) This Amendment, the Loan Agreement and the other Loan Documents (including the First Amendment) constitute the final, entire agreement and understanding between the parties with respect to the subject matter hereof and thereof and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements between the parties, and shall be binding upon and inure to the benefit of the successors and assigns of the parties hereto and thereto. There are no unwritten oral agreements between the parties with respect to the subject matter hereof and thereof. (d) THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE CHOICE OF LAW PROVISIONS SET FORTH IN THE LOAN AGREEMENT AND SHALL BE SUBJECT TO THE WAIVER OF JURY TRIAL AND NOTICE PROVISIONS OF THE LOAN AGREEMENT. (e) Borrower may not assign, delegate or transfer this Amendment or any of its rights or obligations hereunder. No rights are intended to be created under this Amendment for the benefit of any third party donee, creditor or incidental beneficiary of Borrower or any Guarantor. Nothing contained in this Amendment shall be construed as a delegation to Agent or Lenders of Borrower's or any Guarantor's duty of performance, including, without limitation, any duties under any account or contract in which Agent has or Lenders have a security interest or Lien. This Amendment shall be binding upon the Borrower and its successors and assigns. (f) Borrower shall pay all costs and expenses incurred by Agent and Lenders or any of their affiliates, including, without limitation, reasonable attorneys' fees and expenses, in connection with entering into, negotiating, preparing, reviewing and executing this Amendment and the documents, agreements and instruments contemplated hereby and all related agreements, documents and instruments, and all of the same shall be part of the Obligations. If Agent, any Lender or any of their affiliates uses in-house counsel for any of the purposes set forth above the Borrower expressly agrees that the Obligations include reasonable charges for such work commensurate with the fees that would otherwise be charged by outside legal counsel selected by such Person in its sole discretion for the work performed. (g) Borrower hereby (i) agrees that this Amendment shall not limit or diminish the obligations of Borrower under the Loan Documents, (ii) reaffirms its obligations under each of the Loan Documents to which it is a party, and (iii) agrees that each of such Loan Documents, as amended hereby, remains in full force and effect and is hereby ratified and confirmed. (h) All representations and warranties made in this Amendment shall survive the execution and delivery of this Amendment and no investigation by Agent or Lenders shall affect such representations or warranties or the right of Agent or Lenders to rely upon them. (i) BORROWER ACKNOWLEDGES AND AGREES THAT (A) IT HAS NO CLAIMS, COUNTERCLAIMS, OFFSETS, CREDITS OR DEFENSES TO THE LOAN DOCUMENTS AND THE PERFORMANCE OF ITS OBLIGATIONS THEREUNDER, OR (B) IF IT HAS ANY SUCH CLAIMS, COUNTERCLAIMS, OFFSETS, CREDITS OR DEFENSES TO THE LOAN DOCUMENTS AND/OR ANY TRANSACTION RELATED TO THE LOAN DOCUMENTS AND/OR THE OBLIGATIONS, THE SAME ARE HEREBY WAIVED, RELINQUISHED AND RELEASED IN CONSIDERATION OF AGENT'S AND LENDERS' EXECUTION AND DELIVERY OF THIS AMENDMENT. [SIGNATURES APPEAR ON FOLLOWING PAGE] Second Amendment to Acquisition Loan Agreement and Other Loan Documents IN WITNESS WHEREOF, each of the parties has duly executed this Amendment as of the day and year first written above. INFOCROSSING, INC., a Delaware corporation, as Borrower By: /s/ ZACH LONSTEIN ---------------------------------- Name: Zach Lonstein Title: Chairman and CEO CAPITALSOURCE FINANCE LLC, as Agent and a Lender By: /s/ STEVEN A. MUSELES ---------------------------------- Name: Steven A. Museles Title: Senior Vice President -----END PRIVACY-ENHANCED MESSAGE-----