10-Q 1 q105.txt FIRST QUARTER 2005 REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 2005 -------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR the transition period from ___________________ to _______________________ Commission file number: 0-20824 ------------------------------------------------------ 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): [X] Yes [ ] No. There were 20,249,983 shares of the registrant's Common Stock, $0.01 par value, outstanding as of May 3, 2005. Page 1 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS
INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AMOUNTS) MARCH 31, DECEMBER 31, ASSETS 2005 2004 --------------- --------------- (UNAUDITED) CURRENT ASSETS: Cash and equivalents $ 35,257 $ 26,311 Trade accounts receivable, net of allowances for doubtful accounts of $142 and $249 at March 31, 2005 and December 31, 2004, respectively 26,009 26,707 Due from related parties 241 238 Prepaid license fees 1,711 1,585 Deferred income taxes 1,260 1,260 Other current assets 5,613 4,650 ------------ ------------ Total current assets 70,091 60,751 Property, equipment and purchased software, net 27,002 25,113 Deferred software, net 1,153 1,077 Goodwill 103,976 103,177 Other intangible assets, net 11,898 12,328 Deferred income taxes 10,861 11,715 Security deposits and other non-current assets 2,425 2,489 ------------ ------------ TOTAL ASSETS $ 227,406 $ 216,650 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 9,258 $ 9,041 Current portion of long-term debt and capitalized lease obligations 4,358 3,683 Current portion of accrued loss on leased facilities 203 217 Accrued expenses 7,740 8,056 Income taxes payable 89 305 Deferred revenue 1,314 1,267 ------------ ------------ Total current liabilities 22,962 22,569 Notes payable, long-term debt and capitalized lease obligations, net of current portion 101,857 100,432 Accrued loss on leased facilities, net of current portion 471 505 Other long-term liabilities 2,063 1,907 ------------ ------------ TOTAL LIABILITIES 127,353 125,413 ------------ ------------ 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 20,860,843 and 20,395,473 at March 31, 2005 and December 31, 2004, respectively 209 204 Additional paid-in capital 156,652 150,278 Accumulated deficit (53,670) (56,107) ------------ ------------ 103,191 94,375 Less 618,969 shares at March 31, 2005 and December 31, 2004, of common stock held in treasury, at cost (3,138) (3,138) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 100,053 91,237 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 227,406 $ 216,650 ============ ============
See Notes to Consolidated Financial Statements. Page 2
INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED, IN THOUSANDS EXCEPT NUMBERS OF SHARES AND PER SHARE AMOUNTS) THREE MONTHS ENDED MARCH 31, ------------------------------------ 2005 2004 --------------- -------------- REVENUES $ 37,527 $ 15,176 --------------- -------------- COSTS and EXPENSES: Costs of revenues 25,847 10,223 Selling and promotion costs 958 736 General and administrative expenses 2,579 1,366 Depreciation and amortization 2,620 1,604 --------------- -------------- 32,004 13,929 --------------- -------------- INCOME FROM OPERATIONS 5,523 1,247 --------------- -------------- Interest income (126) (38) Interest expense 1,591 703 --------------- -------------- 1,465 665 --------------- -------------- INCOME BEFORE INCOME TAXES 4,058 582 Income tax (benefit) expense 1,621 (193) --------------- -------------- NET INCOME $ 2,437 $ 775 =============== ============== BASIC INCOME PER SHARE: Net income $ 0.12 $ 0.05 =============== ============== Weighted average number of common shares outstanding 20,086,501 15,192,584 =============== ============== DILUTED INCOME PER SHARE: Net income $ 0.11 $ 0.05 =============== ============== Weighted average number of common shares and share equivalents outstanding 27,338,434 17,145,750 =============== ==============
See Notes to Consolidated Financial Statements. Page 3
INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT (UNAUDITED, IN THOUSANDS) COMMON ADDITIONAL ACCUMULATED TREASURY SHARES PAR VALUE PAID IN CAPITAL DEFICIT STOCK AT COST TOTAL -------- --------- ---------------- ----------------- -------------- --------------- Balances, December 31, 2004 20,395 $ 204 $ 150,278 $ (56,107) $ (3,138) $ 91,237 Exercises of stock options 466 5 5,822 - - 5,827 Tax credit for disqualifying disposition of stock options - - 552 - - 552 Net income - - - 2,437 - 2,437 -------- --------- ------------- -------------- ----------- ------------ Balances, March 31, 2005 20,861 $ 209 $ 156,652 $ (53,670) $ (3,138) $ 100,053 ======== ========= ============= ============== =========== ============
See Notes to Consolidated Financial Statements. Page 4
INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) THREE MONTHS ENDED MARCH 31, ------------------------------------------- 2005 2004 -------------------- -------------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,437 $ 775 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 2,620 1,593 Accretion of discounted debentures 31 - Deferred income taxes 1,406 - Non-employee option and warrant issued for services - 19 Interest due on related party balances (3) (3) Decrease (increase) in: Trade accounts receivable 698 (808) Prepaid license fees and other current assets (1,089) (794) Security deposits and other non-current assets 64 (886) Increase (decrease) in: Accounts payable 217 482 Payments on accrued loss on leased facilities (35) (39) Accrued expenses (988) 274 Income taxes payable (216) 18 Deferred revenue and other liabilities 203 (37) ----------------- ----------------- Net cash provided by operating activities 5,345 594 ----------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (779) (128) Disposal of property 15 - Additional purchase price consideration. (127) - Increase in deferred software costs (182) (30) ----------------- ----------------- Net cash used in investing activities (1,073) (158) ----------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from a private equity placement - 28,768 Repayment of debt and capitalized leases (1,140) (732) Exercises of stock options and warrants 5,827 1,022 ----------------- ----------------- Net cash provided by (used in) financing activities 4,687 29,058 ----------------- ----------------- Net cash provided by continuing operations 8,959 29,494 CASH FLOWS FROM DISCONTINUED OPERATIONS: Payments on portion of accrued loss on leased facilities relating to discontinued operations (13) (14) ----------------- ----------------- Net increase in cash and equivalents 8,946 29,480 Cash and equivalents, beginning of period 26,311 10,073 ----------------- ----------------- Cash and equivalents, end of the period $ 35,257 $ 39,553 ================= ================= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 2,367 $ 675 ================= ================= Income taxes $ 437 $ 20 ================= ================= SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITY: Equipment acquired subject to capital leases $ 3,209 $ 417 ================= ================= SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: Treasury shares received in payment of a stock option exercise $ - $ 287 ================= =================
See Notes to Consolidated Financial Statements. Page 5 INFOCROSSING, INC. AND SUBSIDIAIRES NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Infocrossing, Inc. and its wholly owned subsidiaries (collectively, the "Company"). All significant inter-company balances and transactions have been eliminated. The consolidated balance sheet as of March 31, 2005, the consolidated statements of operations and cash flows for the three months ended March 31, 2005 and 2004, and the consolidated statement of stockholders' equity for the three months ended March 31, 2005 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 March 31, 2005 and 2004 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, 2004, as amended. 2. ACQUISITIONS INFOCROSSING HEALTHCARE SERVICES, INC. On October 1, 2004, the Company acquired the Medicaid, Medicare and Managed Care claims processing business (the "Claims Processing Business") of Verizon Information Technologies Inc. from Verizon Communications Inc. The sale was structured as an acquisition of the common stock of the Claims Processing Business. The purchase price was $43,500,000 in cash and approximately $1,886,000 in related acquisition costs (the "IHS Acquisition"). Immediately following the closing of the IHS Acquisition, the Claims Processing Business' name was changed to Infocrossing Healthcare Services, Inc. ("IHS"). The 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 based on their respective fair values. In connection with the allocation of the purchase price, goodwill of $25,357,000 and an intangible asset subject to amortization in the amount of $10,320,000, relating to contract rights and customer relationships, was recorded. The intangible asset is being amortized over its estimated useful life of ten years. Page 6 The following table summarizes the preliminary amounts assigned to the identifiable assets acquired and the liabilities assumed based on estimated fair values as of the date of the IHS Acquisition with the remainder recorded as goodwill. OCTOBER 1, 2004 (IN THOUSANDS) Trade accounts receivable $ 9,146 Other current assets 57 ----------- Total current assets 9,203 Property, equipment, and purchased software 2,049 Intangible assets subject to amortization 10,320 Goodwill 25,357 ----------- Total assets acquired 46,929 ----------- Accrued expenses (1,380) Deferred revenue (72) Other current liabilities (91) ----------- Total current liabilities (1,543) ----------- Purchase price $ 45,386 =========== Since the Company is in the process of finalizing its estimate of the fair values of identifiable assets acquired and liabilities assumed, the allocation of the purchase price of the IHS acquisition is subject to adjustment. INFOCROSSING WEST, INC. 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 for $34,909,000 in cash, $1,224,000 in related acquisition costs and 135,892 shares of common stock of the Company valued at approximately $1,439,000. 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 based on their respective fair values. In connection with the allocation of the purchase price, goodwill of $41,320,000 and an intangible asset subject to amortization in the amount of $1,650,000, relating to contract rights and customer relationships, was recorded. 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 March 31, 2005, such contingent consideration totaled $405,000, which has been recorded as additional goodwill. Page 7 The following table summarizes the fair values of the assets acquired and the liabilities assumed as of the date of the SMS Acquisition. APRIL 2, 2004 (IN THOUSANDS) Trade accounts receivable $ 3,313 Other current assets 1,447 ------------------ Total current assets 4,760 Property, equipment, and purchased software 4,033 Intangible assets subject to amortization 1,650 Other assets 793 Goodwill 41,320 ------------------ Total assets acquired 52,556 ------------------ Accrued expenses (8,655) Current portion of capitalized lease obligations (1,529) Other current liabilities (87) ------------------ Total current liabilities (10,271) Long term liabilities (5,043) ------------------ Total liabilities assumed (15,314) ------------------ Purchase price, net of cash acquired of $330 $ 37,242 ================== As of March 31, 2005, the Company finalized its estimate of the fair value of accrued expenses for (a) severance and (b) redundant space and equipment leases. These adjustments are in addition to the contingent consideration discussed above, and resulted in an increase in goodwill of $672,000. The results of operations of the aforementioned acquisitions are included with that of the Company for the period subsequent to the respective acquisitions. The following unaudited condensed combined pro forma information for the quarter ended March 31, 2004 gives effect to the IHS Acquisition and the SMS Acquisition as if they had occurred on January 1, 2004. For the purposes of the pro forma information, the Company has assumed that, other than the related financings, it had sufficient cash to make the acquisitions. The pro forma information may not be indicative of the results that actually would have occurred had the transactions been in effect on the dates indicated, nor does it purport to indicate the results that may be obtained in the future. The pro forma information does not give effect to planned synergies and cost savings. PRO FORMA INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 (IN THOUSANDS EXCEPT PER SHARE DATA) Revenues $ 35,637 ------------- Net income $ 663 ------------- Basic net earnings per share $ 0.04 ------------- Diluted net earnings per equivalent share $ 0.04 ------------- Page 8 3. STOCK-BASED COMPENSATION In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards Number 123(R) ("SFAS No. 123(R)"), SHARE-BASED PAYMENT, which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under APB Opinion No. 25. SFAS 123(R) will be effective for fiscal years beginning on or after December 15, 2005. SFAS 123(R) permits public companies to adopt its requirements using one of the following two methods: 1. A "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date. 2. A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all periods presented or (b) prior interim periods of the year of adoption. The Company plans to adopt SFAS 123(R) using the modified prospective method. As permitted by SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION", the Company currently accounts for share-based payments to employees using APB Opinion 25's intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS 123(R)'s fair value method will have a significant impact on its results of operations, although it will have no impact on its overall financial position. The impact of the adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share below. The Company has not determined what impact SFAS 123(R) might have on the nature of its share-based compensation to employees in the future. Page 9 Had compensation cost been determined in accordance with SFAS No. 123, the Company's income in thousands of dollars and basic and diluted earnings per common share for the three month periods ended March 31, 2005 and 2004, respectively, would have been as follows: THREE MONTHS ENDED MARCH 31, ---------------------------------------- 2005 2004 ------------------ ------------------ Net income as reported $ 2,437 $ 775 Deduct stock-based employee compensation determined under the fair value method for all awards, net of tax (1,223) (91) --------------- --------------- Pro forma income $ 1,214 $ 684 =============== =============== Net income per share: Basic as reported $ 0.12 $ 0.05 =============== =============== Diluted as reported $ 0.11 $ 0.05 =============== =============== Basic, pro forma $ 0.06 $ 0.05 =============== =============== Diluted, pro forma $ 0.06 $ 0.04 =============== =============== The Pro forma income and pro forma basic and diluted earnings per share for the period ended March 31, 2004 has been restated to properly account for forfeitures. 4. BASIC AND DILUTED EARNINGS PER COMMON SHARE The Company computes earnings per share in accordance with SFAS No. 128, "EARNINGS PER Share." Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share adjusts basic earnings per share for the effects of convertible securities, stock options and warrants and other potentially dilutive financial instruments, only in the periods in which such effect is dilutive. For the quarters ended March 31, 2005 and 2004, the weighted average number of shares used in calculating diluted earnings per share includes options and warrants to purchase common stock and, in 2005, the effects of convertible securities aggregating 7,251,933 and 1,953,166 shares, respectively. The calculation for 2005 also includes an increase to net earnings equal to interest expense relating to the convertible debt, adjusted for income taxes, of $456,000. The convertible securities were not outstanding in the quarter ended March 31, 2004. The calculation of earnings per share for the quarters ended March 31, 2005 and 2004 excludes 973,600 and 275,100 shares, respectively, related to out-of-the-money stock options and warrants because to include them in the calculation would be antidilutive. 5. INCOME TAXES In the period ended March 31, 2005, the Company recorded income tax expense of $1,621,000, consisting of a current provision of $294,000 and a deferred provision of $1,327,000. At December 31, 2004, the Company had net operating loss carryforwards of approximately $37 million for federal income tax purposes that begin to expire in 2019. The use of these net operating loss carryforwards may be limited under Section 382 of the Internal Revenue Code, as a result of cumulative changes in ownership of more than 50% over a three year period. The Company reviews its deferred tax asset on a quarterly basis to determine if a valuation allowance is required, primarily based on its estimate of future taxable income. Changes in the Company's assessment of the need for a valuation allowance could give rise to adjustments in the valuation allowance and tax expense in the period of change. Page 10 At December 31, 2004, the Company has federal alternative minimum tax credit carryforwards of approximately $60,000 that do not expire. 6. LEGAL PROCEEDINGS 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. 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 asserted a claim for unpaid commissions of approximately $30,000. On November 30, 2004, West filed an answer denying all of plaintiffs' allegations. Discovery commenced recently. West is indemnified 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. Holdings has confirmed its indemnification obligations with respect to the claims asserted by plaintiffs. If, however, discovery reveals that the commissions at issue were earned after March 3, 2004 or, if earned prior to such date, they were properly accrued, we agreed to cooperate with Holdings to determine the appropriate amount of commissions, if any, which would be due and owing from West. West believes it is in its best interest to resolve the commissions issue early in the litigation to avoid needless and protracted proceedings and expenses relating to such a minor dispute. Accordingly, Holdings has agreed that West will not be responsible for, or asked to contribute to, attorney's fees and costs associated with the resolution of the commissions claim. 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, the Company believes that the above matter will be resolved without any material adverse impact on our financial position, results of operations, or cash flows. Page 11 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 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 for a total purchase price of approximately $37,572,000 including related acquisition costs of $1,224,000 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 March 31, 2005, such contingent consideration totaled $405,000 that 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. On October 1, 2004, we acquired a segment of Verizon Information Technologies Inc. ("VITI") for a total purchase price of approximately $45,386,000 including related acquisition costs of $1,886,000. Immediately after the acquisition we changed VITI's name to Infocrossing Healthcare Services, Inc. ("IHS"). During 2004 we also used $7,090,000 in cash, incurred an estimated $116,000 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 integration of SMS was completed in early March 2005 and the integration of the smaller acquisitions substantially was completed in 2004. The integration of IHS is in process. The acquired businesses are being integrated into the Company so that the entire enterprise will enjoy the synergistic benefit from operational leverage and consolidation. The foregoing acquisitions were recorded as purchases in accordance with the Financial Accounting Standards Board, Statements of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"). The Company and its subsidiaries operate in one reportable segment of providing information technology and business process outsourcing services. RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2005 AND 2004 Net income increased by $1,662,000 (214.5%) from $775,000 for the quarter ended March 31, 2004 (the "Prior Year's Quarter") to $2,437,000 for the quarter ended March 31, 2005 (the "Current Quarter") on 147.3% higher revenues. For the Current Quarter, the results of operations include SMS, IHS, and other acquisitions completed in 2004. None of the acquisitions were completed during the Prior Year's Quarter. For the Current Quarter, revenues increased $22,351,000 (147.3%) to $37,527,000 from $15,176,000 for the Prior Year's Quarter. Approximately $21,085,000 of this growth is attributable to revenue from clients added as the result of acquisitions completed in 2004. Approximately $1,266,000 represents organic growth from existing as well as new customers. Page 12 Costs of revenues increased by $15,624,000 (152.8%) to $25,847,000 during the Current Quarter compared with $10,223,000 for the Prior Year's Quarter. The increase results from the expansion of revenues from both acquisitions and organic growth. Costs of revenues as a percentage of revenues increased to 68.9% in the Current Quarter from 67.4% in the Prior Year's Quarter, reflecting a lower gross margin. Our infrastructure provides a shared operating environment that enables us to effectively integrate new clients, including clients acquired through acquisitions. Due to higher compensation costs in the Current Quarter, selling and promotion costs increased by $222,000 (30.2%) to $958,000 for the Current Quarter from $736,000 for the Prior Year's Quarter, but decreased as a percentage of revenues to 2.6% for the Current Quarter from 4.9% for the Prior Year's Quarter. Higher compensation costs reflect a larger sales staff in the Current Quarter than in the Prior Year's Quarter. The reduction as a percentage of revenue reflects the benefits of integration of the acquired businesses. General and administrative expenses increased by $1,213,000 (88.8%) to $2,579,000 for the Current Quarter from $1,366,000 for the Prior Year's Quarter. General and administrative expenses declined as a percentage of revenue to 6.9% in the Current Quarter from 9.0% in the Prior Year's Quarter, reflecting the benefits of operational leverage and consolidation of the acquired businesses. Approximately $572,000, or 47.2% of the total increase, was related to acquisitions completed in 2004 after the Prior Year's Quarter. Approximately $275,000 (22.7% of the total increase) was due to professional fees relating to compliance costs with respect to the Sarbanes-Oxley Act of 2002, approximately $108,000 (8.9%) was due to increases in other professional fees, and approximately $92,000 (7.6%) was due to higher insurance costs incurred because of the increase in the Company's size and activities. Depreciation and amortization of fixed assets and other intangibles increased $1,016,000 (63.3%) to $2,620,000 for the Current Quarter from $1,604,000 for the Prior Year's Quarter. Of this increase, $762,000 of depreciation of fixed assets and amortization of other intangibles was related to acquisitions completed in 2004 after the Prior Year's Quarter. The remainder of the increase of $254,000 resulted from new fixed asset additions during twelve months ended March 31, 2005. Despite these increases, depreciation and amortization decreased as a percentage of revenues to 7.0% in the Current Quarter compared with 10.6% in the Prior Year's Quarter. Net interest expense increased by $800,000 to $1,465,000 for the Current Quarter from $665,000 for the Prior Year's Quarter. This net increase consists of $88,000 in additional interest income and $888,000 in additional interest expense. The increases in interest income and expense are due to larger average outstanding balances of both cash and outstanding debt, respectively, in the Current Quarter. A deferred tax benefit reflects future income tax savings realizable when tax credits, net operating loss carry-forwards, or other deductions based on temporary differences between taxable income and income before income taxes can be used to reduce income taxes. If it is more likely than not that the deferred tax assets will not be realizable, a valuation allowance must be established. Deferred tax assets decreased during 2004 since we recognized deferred tax assets at amounts considered by management, more likely than not, to be realized. Based on our recent history of profitability and our forecasts for future periods, management has determined that it is more likely than not that the net operating loss carry-forwards and other temporary differences will be realized. As of March 31, 2005, we have net operating loss carry-forwards of approximately $35,000,000 for Federal income tax purposes that begin to expire in 2019. The use of these net operating loss carry-forwards may be limited in amount in future years pursuant to Section 382 of the Internal Revenue Code. For the Current Quarter, we recorded a tax expense of $1,621,000, consisting of a current provision of $294,000 and a deferred provision of $1,327,000, compared with a tax benefit of $193,000 for the Prior Year's Quarter. The tax benefit for the Prior Year's Quarter included $234,000 from the sale of New Jersey state net operating loss carry-forwards. Due to a lack of SMS's history of generating taxable income, we recorded a valuation allowance equal to 100% of their net deferred tax assets. In the event that we are able to generate taxable earnings from SMS in the future and determine it is more likely than not that we can realize our deferred tax assets, an adjustment to the valuation allowance would be made which may increase goodwill in the period that such determination is made. We have net income of $2,437,000 for the Current Quarter compared with $775,000 for the Prior Year's Quarter. Page 13 In the Current Quarter, we had income per common share of $0.12 on a basic basis and $0.11 on a diluted basis, compared with income per common share of $0.05 on both a basic basis and diluted basis for the Prior Year's Quarter. The number of weighted average shares increased to approximately 20,087,000 shares on a basic basis and approximately 27,338,000 shares on a diluted basis for the Current Quarter from approximately 15,193,000 shares on a basic basis and approximately 17,146,000 shares on a diluted basis for the Prior Year's Quarter. The increase in shares reflects (i) a private placement of 2,917,000 shares of common stock in March 2004; (ii) the potential conversion of $72,000,000 of 4% convertible notes due July 15, 2024, which were issued in mid 2004, into 4,687,500 shares of common stock; and (iii) the issuance of 259,085 shares of common stock for acquisitions after March 31, 2004. The shares and equivalents enumerated in the immediately preceding sentence are in absolute amounts, not weighted average amounts. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $5,345,000 for the quarter ended March 31, 2005 (the "Current Quarter"). During the Current Quarter, we had sources of cash of $2,437,000 of net income, $2,620,000 of depreciation and amortization; $1,406,000 from a decrease in deferred tax assets; $203,000 from an increase in other current and long-term liabilities; and $698,000 from a decrease in accounts receivable. Significant uses of cash during the Current Quarter include an increase in prepaid expenses and other current assets of $1,089,000 and a decrease in accrued expenses of $988,000. The utilization of a portion of the Company's net operating loss carry-forwards is reflected in the decrease in deferred tax assets. On June 30, 2004, we completed a private offering of $60,000,000 aggregate principal amount of 4.0% Convertible Senior Notes due July 15, 2024 (the "Notes"). Approximately $40,000,000 of the net proceeds from this offering was used to repay 9.0% notes payable outstanding. 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 $12,000,000 of the Notes. Net proceeds after a discount of $2,520,000 and approximately $591,000 of costs and fees were approximately $68,889,000. Interest on the Notes is payable semi-annually in arrears beginning on January 15, 2005. 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. The Notes and the shares of common stock into which they may be converted may be resold pursuant to a registration statement on Form S-3 that became effective in December 2004. We will not receive any proceeds from any sales of common stock under this registration statement. 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 $72,000,000 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 14 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" occurred 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 incurring 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. In July 2004, we established a $25,000,000, 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 $10,000,000 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 December 31, 2004. On October 1, 2004, we borrowed $24,375,000 from the non-revolving loan facility to pay a portion of the cost of the IHS acquisition. The amount borrowed represents the full loan availability under the line. The $625,000 balance must remain available in the event we are required to fund an Interest Reserve, as that term is defined in the loan agreement. Monthly principal payments of approximately $609,000 will begin on July 1, 2007, and a final payment of $11,578,000 is scheduled to be made on March 15, 2009. Page 15 Financing activities during the Current Quarter include the repayment of approximately $1,140,000 of capital leases and the receipt of $5,827,000 from the exercise of employee stock options. In addition, we added $3,209,000 of equipment subject to new capital lease agreements during the Current Quarter. On February 22, 2005, we filed a preliminary, or "shelf" registration statement with the Securities and Exchange Commission. This registration statement will permit us to sell equity or debt securities, in any combination, for up to $125,000,000. We intend to use the net proceeds we expect to receive from the sale of the securities to reduce our outstanding debt and to fund possible acquisitions and investments. The exact timing and terms of this financing will depend upon market conditions and other factors. There can be no assurance that such financing will occur. As of March 31, 2005, we had cash and equivalents of $35,257,000 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 incurred. EBITDA is also used by prospective and current lessors as well as potential lenders to evaluate potential transactions with us. In addition, EBITDA is also widely used by us and other buyers to evaluate and determine the price of potential acquisition candidates. For the Current Quarter our EBITDA increased by $5,292,000 (185.6%) to $8,143,000 from $2,851,000 for the comparable period in 2004. EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. Generally Accepted Accounting Principles ("GAAP"). Some of these limitations are: (a) EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (b) EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; and (c) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and EBITDA does not reflect any cash requirements for such capital expenditures. Because of these limitations, EBITDA should not be considered as a principal indicator of our performance. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA only on a supplemental basis. The following table reconciles EBITDA to net income for the Current and Prior Year's Quarter. RECONCILIATION - IN THOUSANDS ------------------------------------------------------------------------------- QUARTER ENDED MARCH 31, ------------------------------------------ 2005 2004 ------------------ ------------------ NET INCOME $ 2,437 $ 775 Add back (deduct): Tax expense (benefit) 1,621 (193) Interest expense 1,465 665 Depreciation and amortization 2,620 1,604 ------------------ ------------------ EBITDA $ 8,143 $ 2,851 ================== ================== Page 16 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. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued SFAS No. 153, EXCHANGES OF NONMONETARY ASSETS, which eliminated the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not believe the adoption of SFAS No. 153 will have a material impact on our operating results or financial position. In December 2004, the FASB issued SFAS No. 123 (R), SHARED-BASED PAYMENT, which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under APB Opinion No. 25. SFAS 123(R) originally was to be effective for interim or annual reporting periods beginning on or after June 15, 2005, but the Securities and Exchange Commission delayed the effective date until annual reporting periods beginning after December 15, 2005. SFAS 123(R) permits public companies to adopt its requirements using one of the following two methods: 1. A "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all shared based payments granted after the effective date and (b) based on the requirements of FASB 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date. 2. A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under FASB 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. We plan to adopt FASB 123(R) using the modified-prospective method. As permitted by FASB 123, we currently account for shared-based payments to employees using APB Opinion 25's intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of SFAS 123(R)'s fair value method will have a significant impact on our results of operations, although it will have no impact on our overall financial position. The impact of the adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of FASB 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 to our consolidated financial statements. We have not determined what impact SFAS 123(R) might have on the nature of our shared-based compensation to employees in the future. 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 that involve risks and uncertainties. These statements relate to future events or our future financial performance, including statements relating to products, customers, suppliers, business prospects and effects of acquisitions. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," "expect," "anticipate," "intend," "plan," "believe," "estimate," "potential," or "continue," the negative of these terms or other comparable terminology. These statements involve a number of risks and uncertainties and as such, final results could differ from estimates or expectations due to a number of factors including, without limitation: incomplete or preliminary information; changes in government regulations and policies; continued acceptance of our products and services in the marketplace; competitive factors; closing contracts with new customers on favorable terms; expanding services to existing customers; new products; technological changes; our dependence on third party suppliers; intellectual property rights; difficulties with the identification, completion, and integration of acquisitions, including the integration of Verizon Information Technologies Inc., now known as Infocrossing Healthcare Services, Inc.; and other risks and Page 17 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. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. INTEREST RATE RISK We are not significantly exposed to the impact of interest rate changes, foreign currency fluctuations, or changes in the market values of our investments. We primarily invest in money market mutual funds or certificates of deposit and commercial paper issued only by major corporations and financial institutions of recognized strength and security, and hold all such investments to term. We generally invest in instruments of no more than 30 days maturity. Our debt is at a fixed rate of interest, and the carrying amount of long-term debt approximates fair value based on interest rates that are currently available to us with similar terms and remaining maturities. MARKET RISK Our accounts receivable are subject, in the normal course of business, to collection risks. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of collection risks. As a result, we do not anticipate any material losses in this area. FOREIGN CURRENCY RISKS We have no significant foreign-source income, and bill foreign customers in U.S. dollars only. ITEM 4 - CONTROLS AND PROCEDURES. An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, our management, including the Chief Executive Officer and the Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of March 31, 2005. 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. 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. 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 asserted a claim for unpaid commissions of approximately $30,000. On November 30, 2004, West filed an answer denying all of plaintiffs' allegations. Discovery commenced recently. Page 18 West is indemnified 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. Holdings has confirmed its indemnification obligations with respect to the claims asserted by plaintiffs. If, however, discovery reveals that the commissions at issue were earned after March 3, 2004 or, if earned prior to such date, they were properly accrued, we agreed to cooperate with Holdings to determine the appropriate amount of commissions, if any, which would be due and owing from West. West believes it is in its best interest to resolve the commissions issue early in the litigation to avoid needless and protracted proceedings and expenses relating to such a minor dispute. Accordingly, Holdings has agreed that West will not be responsible for, or asked to contribute to, attorney's fees and costs associated with the resolution of the commissions claim. 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 matter will be resolved without any material adverse impact on our financial position, results of operations, or cash flows. Page 19 ITEM 6 - EXHIBITS 2.1 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. 2.2 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. 2.3 Stock Purchase Agreement dated as of February 5, 2002 by and between the Company and American Software, Inc., incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed February 5, 2002. 3.1A Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1A to the Company's Annual Report on Form 10-K for the period ended December 31, 2004. 3.1B Certificate of Amendment to the Company's Certificate of Incorporation, filed May 8, 2000, to increase the authorized shares and to remove Article 11, incorporated by reference to the Company's report on Form 10-Q for the period ended April 30, 2000. 3.1C Certificate of Amendment to the Company's Certificate of Incorporation, filed as of June 5, 2000, to change the name of the Company to Infocrossing, Inc., incorporated by reference to the Company's report on Form 10-Q for the period ended April 30, 2000. 3.2 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 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. 4.2 Resale Rights Agreement, dated as of June 30, 2004, by and between the Company and Lehman Brothers, Inc. regarding the Company's 4.00% Convertible Senior Notes due 2024, incorporated by reference to a Registration Statement on Form S-3 filed July 13, 2004. 4.3 Securities Purchase Agreement, dated as of March 24, 2004, by and among the Company and certain purchasers of the Company's common stock, incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed April 1, 2004. 4.4 Registration Rights Agreement, dated as of March 24, 2004, by and the Company and certain purchasers of the Company's common stock, incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed April 1, 2004. Page 20 (a) Exhibits (continued): 4.5 Securities Purchase Agreement, dated as of October 16, 2003, by and among the Company and certain purchasers of common stock and warrants, incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed October 22, 2003. 4.6 Registration Rights Agreement, dated as of October 16, 2003, by and among the Company and certain purchasers of common stock and warrants, incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed October 22, 2003. 4.7 Exchange Agreement, dated as of October 16, 2003, by and among the Company and holders of series A preferred stock and series A warrants, incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K filed October 22, 2003. 4.8 Second Amended and Restated Registration Rights Agreement, dated as of October 21, 2003, by and among the Company and certain stockholders of the Company, incorporated by reference to Exhibit 4.4 to the Company's Current Report on Form 8-K filed October 22, 2003. 4.9 Warrant Agreement dated as of February 1, 2002 by and between the Company and the Warrantholders party thereto, incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K filed February 5, 2002. 4.10 Warrant Agreement dated as of May 10, 20000 between the Company and the Warrantholders Party thereto, incorporated by reference to Exhibit 4.10 to the Company's Annual Report on Form 10-K for the period ended December 31, 2004. 10.1 Letter of Employment between the Company and John Lalli, dated as of May 15, 2002. 10.2 Contract for Services between Verizon Information Technologies, Inc. (now Infocrossing Healthcare Services, Inc.) and the State of Missouri, including Amendments 1 through 6. 10.3A 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. 10.3B 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. 10.3C Amended and Restated Consent, Waiver, and First Amendment to Acquisition Loan Agreement, dated as of October 6, 2004, by and among the Company and CapitalSource Finance, LLC, incorporated by reference to Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2004. 10.3D Second Amendment to Acquisition Loan Agreement and Other Documents, dated as of November 8, 2004, by and among the Company and CapitalSource Finance, LLC incorporated by reference to Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2004. 10.3E Third Amendment to Acquisition Loan Agreement and Other Documents, dated as of December 29, 2004, incorporated by reference to Exhibit 10.4E to the Company's Annual Report on Form 10-K for the period ended December 31, 2004. Page 21 (a) Exhibits (continued): 10.4A 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. 10.4B Joinder to Security Agreement dated October 1, 2004, incorporated by reference to Exhibit 10.5B to the Company's Annual Report on Form 10-K for the period ended December 31, 2004. 10.5A 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. 10.5B Addendum to Stock Pledge Agreement dated October 1, 2004, incorporated by reference to Exhibit 10.6B to the Company's Annual Report on Form 10-K for the period ended December 31, 2004. 10.6A Amended and Restated Term Loan Agreement, dated as of April 2, 2004 between the lenders named therein and the Company ("Amended and Restated Term Loan Agreement"), incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed April 7, 2004. 10.6B First Amendment to Amended and Restated Term Loan Agreement, dated as of June 30, 2004, between the lenders named therein and the Company, incorporated by reference to Exhibit 4.5 to a Registration Statement No. 333-117340 on Form S-3 filed July 13, 2004. 10.6C Term Loan Agreement dated as of October 21, 2003 by and among the Company, Infocrossing Agent, Inc., and the lenders named therein, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed October 22, 2003. 10.6D First Amendment to Loan Agreement and other Loan Documents, dated as of February 13, 2004, by and among the Company, certain subsidiaries of the Company, certain lenders named therein, and CapitalSource Finance LLC. 10.6E Master Assignment and Assumption Agreement, dated as of February 13, 2004, by and among by and among the Company, as borrower; certain subsidiaries of the Company, as guarantors; Infocrossing Agent, Inc., as agent for assigning lenders named therein; assigning lenders named therein; and CapitalSource Finance LLC, incorporated by reference to Exhibit 10.7E to the Company's Annual Report on Form 10-K for the period ended December 31, 2004. 10.7A Guaranty and Security Agreement, dated as of April 2, 2004, between a subsidiary of the Company and CapitalSource, incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed April 7, 2004. 10.7B Guaranty and Security Agreement dated as of October 21, 2003 by and among the Company, Infocrossing Agent, Inc., and the Company's subsidiaries, incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed October 22, 2003. 10.8 Amended and Restated Stock Pledge Agreement, dated as of April 2, 2004, among the Company, a subsidiary of the Company, and CapitalSource, incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed April 7, 2004. Page 22 (a) Exhibits (continued): 10.9 Employment Agreement between the Company and Zach Lonstein, dated as of January 1, 2005, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed January 5, 2005, superseding an Employment Agreement, dated as of November 1, 1999, incorporated by reference to Exhibit 10.4 to the Company's Form 10-Q for the period ended July 31, 2000. 10.10 Employment Agreement between the Company and Robert Wallach, dated as of January 1, 2005, incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed January 5, 2005, superseding an Employment Agreement, dated as of November 1, 1999, incorporated by reference to Exhibit 10.5 to Infocrossing's Form 10-Q for the period ended July 31, 2000. 10.11A Employment Agreement, dated as of April 2, 2004, by and between the Company and Patrick A. Dolan, incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed April 7, 2004. 10.11B Settlement and Release Agreement dated as of October 15, 2004 by and among the Company and Patrick A. Dolan, incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K filed November 5, 2004. 10.12A Employment Agreement, dated as of April 2, 2004, by and between the Company and Jim Cortens, incorporated by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K filed April 7, 2004. 10.12B Settlement and Release Agreement dated as of October 15, 2004 by and among the Company and Jim Cortens, incorporated by reference to Exhibit 13B to the Company's Annual Report on Form 10-K for the period ended December 31, 2004. 10.13 Employment Agreement, dated as of October 1, 2004, by and between a subsidiary of the Company and Michael J. Luebke, incorporated by reference to Exhibit 14 to the Company's Annual Report on Form 10-K for the period ended December 31, 2004. 10.14A Company's 2002 Stock Option and Stock Appreciation Rights Plan ("2002 Plan"), incorporated by reference to Appendix B to the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders held on June 25, 2002. 10.14B Amendment to 2002 Plan adopted by the Board of Directors on January 21, 2005, incorporated by reference to Exhibit 10.15B to the Company's Annual Report on Form 10-K for the period ended December 31, 2004. 10.14C Amendment to 2002 Plan approved at the Company's Annual Meeting of Stockholders held on June 15, 2004, incorporated by reference to Exhibit 10.15C to the Company's Annual Report on Form 10-K for the period ended December 31, 2004. 10.14D Amendment to 2002 Plan adopted by the Board of Directors on April 1, 2004, incorporated by reference to Exhibit 10.15D to the Company's Annual Report on Form 10-K for the period ended December 31, 2004. 10.15A Amended and Restated 1992 Stock Option and Stock Appreciation Rights Plan ("1992 Plan"), incorporated by reference to Appendix A to Company's Definitive Proxy Statement for the Annual Meeting of Stockholders held on May 8, 2000. Page 23 (a) Exhibits (continued): 10.15B Amendment to 1992 Plan approved at the Company's Annual Meeting of Stockholders held on June 22, 2001, incorporated by reference to Exhibit 10.16B to the Company's Annual Report on Form 10-K for the period ended December 31, 2004. 10.16 Stock Option Agreement under the Company's 2002 Stock Option and Stock Appreciation Rights Plan, dated January 21, 2005, between the Company and Zach Lonstein, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed November 5, 2004. 10.17A Lease dated June 2, 1997 between the Company and Leonia Associates, LLC, incorporated by reference to Exhibit 10.18A to the Company's Annual Report on Form 10-K for the period ended December 31, 2004. 10.17B First Amendment of Lease between the Company and Leonia Associates, LLC, dated January 16, 1998, incorporated by reference to Exhibit 10.18B to the Company's Annual Report on Form 10-K for the period ended December 31, 2004. 10.17C Second Amendment of Lease between the Company and Leonia Associates, LLC, dated as of September 9, 1999, incorporated by reference to Exhibit 10.18C to the Company's Annual Report on Form 10-K for the period ended December 31, 2004. 10.17D Third Amendment of Lease between the Company and Leonia Associates, LLC, dated as of August 28, 2000, incorporated by reference to Exhibit 10.7D to the Company's 10-K for the fiscal year ended October 31, 2000. 10.17E Fourth Amendment of Lease between the Company and Leonia Associates, LLC, dated as of April 19, 2004, incorporated by reference to Exhibit 10.18E to the Company's Annual Report on Form 10-K for the period ended December 31, 2004. 10.18A Office Lease Agreement dated May 22, 2000 between the Company and Crocker Realty Trust, incorporated by reference to Exhibit 10.6 to the Company's Form 10-Q for the period ended July 31, 2000. 10.18B First Amendment to Lease dated as of April 1, 2002 by and between Crocker Realty Trust, L.P. and the Company, incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for period ended March 31, 2002. 10.19A Tenth Floor Option Agreement between the Company, G-H-G Realty Company ("GHG"), and RSL Com USA, Inc. ("RSL"), dated as of November 30, 1999, with related notice of exercise dated February 14, 2000, incorporated by reference to Exhibit 10.6A to the Company's Form 10-K for the fiscal year ended October 31, 2000. 10.19B Eleventh Floor Option Agreement between the Company, GHG, and RSL, dated as of November 30, 1999, with related notice of exercise dated December 2, 1999, incorporated by reference to Exhibit 10.6B to the Company's 10-K for the fiscal year ended October 31, 2000. Page 24 (a) Exhibits (continued): 10.20A* Master Services Agreement dated as of May 24, 2001 among the Company, Alicomp, a Division of Alicare, Inc. and ADT Security Services, Inc., incorporated by reference to Exhibit 10.1A to a Registration Statement No. 333-110173 on Form S-3 filed February 6, 2004. 10.20B* Amendment to Master Services Agreement among the Company, Alicomp, a Division of Alicare, Inc. and ADT Security Services, Inc. dated as of January 11, 2002, incorporated by reference to Exhibit 10.1B to a Registration Statement No. 333-110173 on Form S-3 filed February 6, 2004. 10.20C* Computer Services Agreement dated as of March 21, 1997 by and between the Company and Alicomp, a Division of Alicare, Inc., incorporated by reference to Exhibit 10.2A to a Registration Statement No. 333-110173 on Form S-3 filed February 6, 2004. 10.20D* Marketing Agreement dated as of March 21, 1997 by and between the Company and Alicomp, a Division of Alicare, Inc., incorporated by reference to Exhibit 10.2B to a Registration Statement No. 333-110173 on Form S-3 filed February 6, 2004. 10.20E* Extension Agreement dated as of October 1, 2002 by and between the Company and Alicomp, a Division of Alicare, Inc., incorporated by reference to Exhibit 10.2C to a Registration Statement No. 333-110173 on Form S-3 filed February 6, 2004. 10.20F* Extension Agreement dated as of December 30, 2003 by and between the Company and Alicomp, a Division of Alicare, Inc., incorporated by reference to Exhibit 10.2D to a Registration Statement No. 333-110173 on Form S-3 filed February 6, 2004. 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) and Section 302 of the Sarbanes-Oxley Act of 2002 to be filed. 32 Certifications required by Rule 13a-14(b) and 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) to be furnished but not filed. * Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Page 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. May 10, 2005 /s/ ZACH LONSTEIN ------------------------------------------ Zach Lonstein Chairman & Chief Executive Officer May 10, 2005 /s/ WILLIAM J. McHALE ------------------------------------------ William J. McHale Senior Vice President of Finance Page 26 EXHIBITS FILED HEREWITH 10.1 Letter of Employment between the Company and John Lalli, dated as of May 15, 2002. 10.2 Contract for Services between Verizon Information Technologies, Inc. (now Infocrossing Healthcare Services, Inc.) and the State of Missouri., including Amendments 1 through 6 31 Certifications required by Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002 to be filed. 32 Certifications required by Rule 13a-14(b) and 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) to be furnished but not filed.