-----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, PUDFsAAy0reTiU6Wm7q+gaUzwbHOReiEAGcKRmlHAcoFYxZxFc4+LKwWAzetXPrH GgLGR7d2gU9qJVuzA/g1eQ== 0000893816-06-000041.txt : 20060510 0000893816-06-000041.hdr.sgml : 20060510 20060510165959 ACCESSION NUMBER: 0000893816-06-000041 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060510 DATE AS OF CHANGE: 20060510 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: 06827067 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 q106.txt QUARTERLY REPORT FOR MARCH 31, 2006 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, 2006 ------------------------------------------------- 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act) (Check one: Large Accelerated Filer [ ] Accelerated Filer [X] Non-accelerated Filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] There were 21,264,878 shares of the registrant's Common Stock, $0.01 par value, outstanding as of May 10, 2006. 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 2006 2005 --------------- -------------- (Unaudited) CURRENT ASSETS: Cash and equivalents $ 11,734 $ 16,892 Trade accounts receivable, net of allowances for doubtful accounts of $473 and $637 at March 31, 2006 and December 31, 2005, respectively 25,217 25,631 Due from related parties 158 254 Prepaid software costs 12,101 5,604 Deferred income taxes 2,097 2,097 Current deferred customer acquisition costs 1,002 1,084 Other current assets 5,678 4,064 ------------ ------------ Total current assets 57,987 55,626 Property, equipment and purchased software, net 40,024 40,749 Deferred software, net 1,776 1,581 Goodwill 154,678 150,799 Other intangible assets, net 19,190 19,853 Deferred income taxes 9,647 10,098 Deferred customer acquisition costs 3,388 2,770 Deferred financing costs 3,474 3,710 Other non-current assets 1,258 1,249 ------------ ------------ TOTAL ASSETS $ 291,422 $ 286,435 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 12,709 $ 11,880 Current portion of long-term debt and capitalized lease obligations 18,219 15,551 Accrued expenses 16,437 20,719 Income taxes payable 1,015 560 Current deferred revenue 2,032 1,000 ------------ ------------ Total current liabilities 50,412 49,710 Notes payable, long-term debt and capitalized lease obligations, net of current portion 121,260 123,734 Deferred revenue, net of current portion 6,151 3,017 Other long-term liabilities 3,184 2,944 ------------ ------------ TOTAL LIABILITIES 181,007 179,405 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock; $0.01 par value; 3,000,000 shares authorized; none issued - - Common stock; $0.01 par value; 50,000,000 shares authorized; shares issued of 21,451,485 and 21,216,032 at March 31, 2006 and December 31, 2005, respectively 215 212 Additional paid-in capital 166,344 163,973 Accumulated deficit (52,523) (53,534) ------------ ------------ 114,036 110,651 Less 668,969 shares at March 31, 2006 and December 31, 2005, of common stock held in treasury, at cost (3,621) (3,621) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 110,415 107,030 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 291,422 $ 286,435 ============ ============ See Notes to Consolidated Financial Statements.
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INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, In Thousands Except Numbers of Shares and Per Share Amounts) Three Months Ended March 31, ------------------------------------ 2006 2005 --------------- -------------- REVENUES $ 55,921 $ 37,527 --------------- -------------- COSTS and EXPENSES: Costs of revenues 40,265 25,847 Selling and promotion costs 1,958 958 General and administrative expenses 5,233 2,579 Depreciation and amortization 4,131 2,620 --------------- -------------- 51,587 32,004 --------------- -------------- INCOME FROM OPERATIONS 4,334 5,523 --------------- -------------- Interest income 105 126 Interest expense 2,522 1,591 --------------- -------------- 2,417 1,465 --------------- -------------- INCOME BEFORE INCOME TAXES 1,917 4,058 Income tax expense 906 1,621 --------------- -------------- NET INCOME $ 1,011 $ 2,437 =============== ============== BASIC INCOME PER SHARE: Net income $ 0.05 $ 0.12 =============== ============== Weighted average number of common shares outstanding 20,754,196 20,086,501 =============== ============== DILUTED INCOME PER SHARE: Net income $ 0.05 $ 0.11 =============== ============== Weighted average number of common shares and share equivalents outstanding 21,922,259 27,338,434 =============== ============== See Notes to Consolidated Financial Statements.
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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, December 31, 2005 21,216 $ 212 $ 163,973 $ (53,534) $ (3,621) $ 107,030 Exercises of stock options 19 1 123 - - 124 Stock issued in connection with an acquisition 216 2 1,784 - - 1,786 Fair value of stock options - - 464 - - 464 Net income - - - 1,011 - 1,011 ---------- --------- --------------- -------------- -------------- ------------- Balances, March 31, 2006 21,451 $ 215 $ 166,344 $ (52,523) $ (3,621) $ 110,415 ========== ========= =============== ============== ============== ============= See Notes to Consolidated Financial Statements.
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INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Three Months Ended March 31, ------------------------------------------- 2006 2005 -------------------- -------------------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,011 $ 2,437 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 4,131 2,620 Accretion of discounted convertible debt 88 31 Deferred income taxes 451 1,406 Compensation expense related to stock options 464 - Deferred compensation expense related to executive pension benefits 92 92 Payments received on related party balances, net of interest charges 96 (3) Decrease (increase) in: Trade accounts receivable 425 698 Prepaid software costs (6,497) (126) Deferred customer acquisition costs and other current assets (1,022) (963) Other non-current assets (391) 64 Increase (decrease) in: Accounts payable 717 217 Accrued expenses (4,440) (1,115) Income taxes payable 427 (216) Deferred revenue 4,165 47 Other liabilities 249 156 ----------------- ----------------- Net cash (used in) provided by operating activities (34) 5,345 ----------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, equipment, and purchased software (1,054) (779) Payments related to acquisitions (2,237) - Disposal of property - 15 Additional purchase price consideration. - (127) Increase in deferred software costs (308) (182) ----------------- ----------------- Net cash used in investing activities (3,599) (1,073) ----------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of debt and capitalized leases (1,640) (1,140) Exercises of stock options and warrants 124 5,827 ----------------- ----------------- Net cash (used in) provided by financing activities (1,516) 4,687 ----------------- ----------------- Net cash (used in) provided by continuing operations (5,149) 8,959 CASH FLOWS FROM DISCONTINUED OPERATIONS: Payments on portion of accrued loss on leased facilities relating to discontinued operations (9) (13) ----------------- ----------------- Net (decrease) increase in cash and equivalents (5,158) 8,946 Cash and equivalents, beginning of period 16,892 26,311 ----------------- ----------------- Cash and equivalents, end of the period $ 11,734 $ 35,257 ================= ================= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 2,612 $ 2,367 ================= ================= Income taxes $ 29 $ 437 ================= ================= SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITY: Equipment acquired subject to capital leases $ 1,727 $ 3,209 ================= ================= Shares given in partial payment of an acquisition $ 1,786 $ - ================= ================= 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, 2006, the consolidated statements of operations and cash flows for the three months ended March 31, 2006 and 2005, and the consolidated statement of stockholders' equity for the three months ended March 31, 2006 have not been audited. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows for the periods indicated have been made. The results of operations and cash flows for the periods ended March 31, 2006 and 2005 are not necessarily indicative of the operating results for the full year. In December 2004, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 123(R), 'Share-Based Payment', which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under APB Opinion No. 25. The Company adopted SFAS 123(R) using the modified-prospective method on January 1, 2006. Had the Company adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in previously filed consolidated financial statements. There are no other changes to the Company's Critical Accounting Policies as disclosed in our Annual Report on Form 10-K for December 31, 2005. Certain reclassifications have been made to the prior periods to conform to the current presentation. Certain disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. These consolidated interim financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2005. 2. ACQUISITIONS (i)STRUCTURE, LLC On November 30, 2005, the Company acquired 100 percent of the membership interests of (i)Structure, LLC ("(i)Structure") from Level 3 Financing, Inc., a Delaware corporation ("Level 3") for a cash payment of approximately $82,267,000 and 346,597 shares of Company stock valued at $2,500,000. The Company funded the cash portion of the purchase price through a combination of the net proceeds of $67,043,000 from a $70 million debt facility which matures April 14, 2009, $11,512,000 in net proceeds from the sale/leaseback of land and an 88,000 rentable square foot building in Omaha, Nebraska (the "Omaha Property"), and the remainder with available cash. Subsequent to the acquisition, the Company also sold and leased back a 60,000 square foot building and improvements in Tempe, Arizona (the "Tempe Property"). The Tempe Property is subject to a ground lease. An affiliate of Level 3 was and continues to be a vendor of communications services to the Company and to (i)Structure. This vendor relationship is independent of, and did not affect the decision to enter into, the purchase of (i)Structure. Page 6 The following table summarizes the preliminary fair values of the assets acquired and the liabilities assumed at the date of the (i)Structure Acquisition. Certain information has not been received from the seller, the receipt of which may affect the preliminary fair values. The intangible asset subject to amortization relates to customer contracts acquired and is being amortized over seven years. All of the goodwill is deductible for tax purposes. November 30, 2005 (In thousands) Trade accounts receivable $ 6,403 Other current assets 4,695 ----------- Total current assets 11,098 Property, equipment, and purchased software 36,894 (see discussion of sale-leasebacks above) Intangible asset subject to amortization 9,400 Goodwill 46,456 ----------- Total assets acquired 103,848 ----------- Accounts payable and accrued expenses (15,484) Deferred revenue (1,279) Capitalized lease obligations (318) ----------- Total liabilities assumed (17,081) ----------- Purchase price $ 86,767 =========== In January 2006, the Company purchased substantially all of the assets and the business, and assumed certain liabilities, of a provider of enterprise application services, for approximately $1,786,000 in cash and 216,241 shares of Company stock (the "EAS Acquisition"). This acquisition gave rise to approximately $3,819,000 of goodwill and an estimated $250,000 in amortizable customer contracts The Company had agreed to register the shares issued for the (i)Structure and EAS Acquisitions for resale on Form S-3. This Registration Statement was declared effective April 21, 2006. The Company will not receive any of the proceeds from these resales. The following unaudited condensed combined pro forma information for the quarter ended March 31, 2005 gives effect to the (i)Structure Acquisition as if it had occurred on January 1, 2005. The pro forma information may not be indicative of the results that actually would have occurred had the transaction been in effect on the date indicated, nor does it purport to indicate the results that may be obtained in the future. The pro forma information does not give effect to planned synergies and cost savings. For example, the Company expects to achieve annual pretax cost savings of between $9 and $11 million through the elimination of redundant positions and other savings. The pro forma information also does not give effect to the EAS Acquisition because the impact this acquisition would have on the pro forma information is not material. Pro Forma Information (In Thousands except Per Share Data) Quarter ended March 31, 2005 Revenues $ 55,027 ============= Net income $ 782 ============= Basic net earnings per share $ 0.04 ============= Diluted net earnings per equivalent share $ 0.04 ============= The results of each of the aforementioned acquisitions are included with that of the Company for the period subsequent to the respective acquisition dates. Page 7 3. STOCK PLAN AND STOCK OPTION PLANS 2005 Stock Plan - --------------- On June 13, 2005, the stockholders approved a Board of Directors resolution establishing the Company's 2005 Stock Plan (the "2005 Plan"). The Company has reserved 1,000,000 of the authorized shares of Common Stock for issuance under the 2005 Plan. On June 15, 2006, the stockholders of the Company will vote on a proposal to increase the shares reserved for the 2005 Plan to 2,000,000. Unless terminated earlier, the 2005 Plan will terminate on the tenth anniversary of the day immediately preceding the date on which the 2005 Plan was approved by the stockholders. The 2005 Plan and the 2002 and 1992 Plans described below (collectively, the "Plans") are administered by a committee (the "Committee") consisting of at least three Directors provided, however, that the composition of such committee shall comply with applicable rules of the Securities and Exchange Commission, as may be amended from time to time, and applicable listing requirements, as may be amended from time to time. The Committee has full power to select from among the persons eligible for awards, the individuals to whom awards will be granted, to make any combination of awards to participants and to determine the specific terms of each award, subject to the provisions of the Plan. Persons eligible to participate in the Plan generally will be those officers, employees and Directors of the Company and consultants to the Company who are responsible for or contribute to the management, growth or profitability of the Company, as selected from time to time by the Committee. STOCK OPTIONS GRANTED TO EMPLOYEES. The 2005 Plan permits the granting of both incentive stock options ("Incentive Options") and non-qualified stock options ("Non-Qualified Options") to Company employees. The exercise price of each option shall be determined by the Committee but shall not be less than 100% of the fair market value for the shares on the date of grant. The term of each option shall be fixed by the Committee and may not exceed 10 years from the date of grant. The Committee shall determine at what time or times each option may be exercised and, subject to the provisions of the 2005 Plan, the period of time, if any, after death, disability or termination of employment during which options may be exercised. Options may also be made exercisable in installments. Both Incentive Options and Non-Qualified Options typically vest (become exercisable) either upon the date of grant or over a three-year period. To qualify as Incentive Options, options must meet additional federal tax requirements, as may be amended from time to time, including limits on the value of shares subject to Incentive Options which first become exercisable in any one year, and a shorter term and higher minimum exercise price in the case of certain large stockholders. STOCK OPTIONS GRANTED TO NON-EMPLOYEE DIRECTORS AND CONSULTANTS. The 2005 Plan permits the granting of Non-Qualified Options to non-employee officers and Directors of the Company and to consultants to the Company. The exercise price of such Non-Qualified Options shall be determined by the Committee and shall not be less than 100% of the fair market value of the Common Stock on the date of grant. The term of each option shall be fixed by the Committee and may not exceed 10 years from the date of grant. The Committee shall determine at what time or times each option may be exercised and, subject to the provisions of the 2005 Plan, the period of time, if any, after death, disability or termination of employment during which options may be exercised. Options may also be made exercisable in installments. Upon exercise of options, the option exercise price must be paid in full either (i) in cash (ii) with the approval of the Committee (which may be withheld in its sole discretion), by the surrender of shares of the Company's common stock then owned by the grantee, (iii) from the proceeds of a loan from an independent broker-dealer whereby the loan is secured by the option or the stock to be received upon exercise, or (iv) by any combination of the foregoing and with the approval of the Committee (which may be withheld in its sole discretion) may be affected wholly or in part by monies borrowed from the Company pursuant to repayment terms and conditions as shall be determined from time to time by the Committee, in its discretion, separately with respect to each exercise of an Incentive Option and each grantee; provided, that each such method and time for payment and each such borrowing and terms and conditions of repayment shall then be permitted by and be in compliance with applicable law. Page 8 STOCK APPRECIATION RIGHTS. At the discretion of the Committee, options granted under the 2005 Plan to officers, employees, Directors or consultants may include stock appreciation rights. The exercise price of each stock appreciation right shall be determined by the Committee but shall not be less than 100% of the fair market value for the underlying shares on the date of grant. Such stock appreciation rights are only exercisable with their related stock options. Upon exercise of a stock appreciation right a grantee shall be entitled to receive in stock the difference between the current fair market value of common stock and the original exercise price of the underlying stock option. Stock appreciation rights not exercised with the exercise of the underlying option will automatically terminate. RESTRICTED STOCK AND UNRESTRICTED STOCK. The Committee may also award shares of Common Stock subject to such conditions and restrictions as the Committee may determine ("Restricted Stock"). The purchase price, if any, of shares of Restricted Stock shall be determined by the Committee. Recipients of Restricted Stock must enter into a Restricted Stock award agreement with the Company, in such form as the Committee determines, setting forth the restrictions to which the shares are subject and the date on which the restrictions will lapse and the shares become vested. The Committee may at any time waive such restrictions or accelerate such dates. If a participant who holds shares of Restricted Stock terminates the relationship with the Company for any reason (including death) prior to the vesting of such Restricted Stock, the Company shall have the right to require the forfeiture of such Restricted Stock in exchange for the amount, if any, which the participant paid for them. Prior to the vesting of Restricted Stock, the participant will have all rights of a stockholder with respect to the shares, including voting and dividend rights, subject only to the conditions and restrictions set forth in the 2005 Plan or in the Restricted Stock award agreement. The Committee may also grant shares (at no cost or for a purchase price determined by the Committee) under the 2005 Plan that are free from any restrictions ("Unrestricted Stock"). Unrestricted Stock may be issued in recognition of past services or other valid consideration. ADJUSTMENTS FOR STOCK DIVIDENDS, MERGERS, ETC. The Committee shall make appropriate adjustments in connection with outstanding awards to reflect stock dividends, stock splits and similar events. In the event of a merger, liquidation or similar event, the Committee in its discretion may provide for substitution or adjustments. AMENDMENTS AND TERMINATION. The Board of Directors may at any time amend or discontinue the 2005 Plan. Moreover, no such amendment, unless approved by the stockholders of the Company, as may be required under (i) applicable rules of the Securities and Exchange Commission, as may be amended from time to time, or (ii) if the Stock is listed on a national securities exchange or the Nasdaq system, with applicable listing requirements, as may be amended from time to time, or (iii) with respect to Incentive Stock Options, as required under applicable federal tax law or regulations, as may be amended from time to time. 2002 and 1992 Stock Option Plans - -------------------------------- On June 25, 2002, the stockholders approved the Company's 2002 Stock Option and Stock Appreciation Rights Plan (the "2002 Plan"). In September 1992, the Company had adopted the 1992 Stock Option and Stock Appreciation Rights Plan (as subsequently amended and restated, "the 1992 Plan") that provided for the granting of options to employees, officers, directors, and consultants for the purchase of common stock. The material features of the 1992 Plan and the 2002 Plan are substantially the same. Incentive stock options could be granted only to employees and officers of the Company, while non-qualified options could be issued to directors and consultants, as well as to officers and employees of the Company. Both the 1992 Plan and the 2002 Plan provided a maximum exercise period of ten years. Qualified options granted to a 10% or greater stockholder had to have a maximum term of five years under Federal tax rules. As a matter of practice, except with respect to a 10% or greater stockholder, the typical exercise period for options granted under the 2002 and 1992 Plans was ten years from the date of grant. Page 9 Upon adoption of the 2005 Plan, the resolution of the Board of Directors stipulated that no further grants be made pursuant to the 2002 Plan. The grants previously made under the 2002 Plan will not be affected. The number of authorized shares available in the 2002 Plan is equal to the total unexercised options remaining at any time. At March 31, 2006, the number of unexercised options in the 2002 Plan was 2,429,023. Upon adoption of the 2002 Plan, the resolution of the Board of Directors stipulated that no further grants be made pursuant to the 1992 Plan. The grants previously made under the 1992 Plan will not be affected. The number of authorized shares available in the 1992 Plan is equal to the total unexercised options remaining at any time. At March 31, 2006, the number of unexercised options in the 1992 Plan was 854,979. Activity in the Plans during the periods from December 31, 2002 through March 31, 2006 is as follows:
Number of Exercise Price Range Weighted Average Options Exercise Price --------------- -------------------------- -------------------- Options outstanding, December 31, 2002 1,406,935 $3.25 - $37.78 $8.93 Options granted 228,750 $6.27 - $9.91 $8.34 Options exercised (19,034) $4.50 - $7.71 $5.57 Options cancelled (85,897) $4.63 - $27.25 $11.64 --------------- Options outstanding, December 31, 2003 1,530,754 $3.25 - 37.78 $8.73 Options granted 1,844,750 $6.98 - $17.38 $13.66 Options exercised (345,668) $3.25 - $12.59 $5.66 Options cancelled (17,231) $4.86 - $29.98 $10.06 --------------- Options outstanding, December 31, 2004 3,012,605 $3.63 - $37.78 $12.10 Options granted 470,250 $7.365 - $18.43 $10.18 Options granted in excess of market 750,000 $25.00 $25.00 Options exercised (473,962) $3.875 - $13.68 $12.44 Options cancelled (73,251) $4.00 - $27.25 $15.21 --------------- Options outstanding, December 31, 2005 3,685,642 $3.63 - $37.78 $14.37 Options granted 161,452 $10.285 $10.29 Options exercised (19,212) $5.42 - $8.21 $6.43 Options cancelled (25,728) $6.84 - $27.25 $17.35 --------------- Options outstanding, March 31, 2006 3,802,154 $3.63 - $37.78 $14.22 ===============
The intrinsic value (calculated by subtracting the exercise price from the fair value on the date of exercise) for options exercised during the quarter ended March 31, 2006 was approximately $109,000. Page 10 Additional information regarding activity relating to unvested options during the quarter ended March 31, 2006:
Number of Unvested Weighted Average Options Exercise Price Range Exercise Price --------------- -------------------------- -------------------- Unvested Options, December 31, 2005 501,980 $6.31 - $18.43 $13.91 Options granted - unvested 115,000 $10.285 $10.29 Options vesting (51,307) $6.32 - $18.43 $15.58 Unvested options cancelled (22,447) $6.84 - $18.43 $17.38 --------------- Unvested Options, March 31, 2006 543,226 $6.31 - $18.43 $12.84 ===============
Additional information regarding exercise price ranges of options outstanding and exercisable:
Weighted Weighted Average Average Weighted Contractual Exercise Number of Average Life Number of Price of Exercise Price Options Exercise Remaining Options Exercisable Range Outstanding Prices (Years) Exercisable Options - -------------------- ---------------- ------------- --------------- -------------- --------------- $3.63 - $5.44 97,727 $5.06 3.1 97,727 $5.06 $5.45 - $8.16 277,329 $7.13 6.9 276,720 $7.13 $8.17 - $12.23 2,021,276 $10.69 7.2 1,708,985 $10.86 $12.24 - $18.35 582,563 $16.58 7.9 366,291 $16.41 $18.36 - $27.53 815,759 $24.57 2.5 801,505 $24.68 $27.54 - $37.78 7,500 $34.80 3.9 7,500 $34.80 ---------------- -------------- 3,802,154 3,258,728 ================ ==============
There were 3,258,728; 3,183,762; 2,445,576; and 1,262,972 options exercisable at March 31, 2006 and December 31, 2005, 2004, and 2003, respectively. At March 31, 2006, there were 481,548 options available for future grant, of which 125,000 are reserved pursuant to an executive's employment agreement and 11,750 are reserved for promised issuances, subject to Committee approval. At March 31, 2006, the Company has reserved 3,055,095 common shares for issuance upon exercise of the following warrants: (i) 1,062,500 shares exercisable at $5.86 per share expiring January 31, 2007; (ii) 65,000 shares exercisable at $18.00 per share expiring September 16, 2010; (iii) 50,000 shares exercisable at $15.00 per share expiring January 13, 2009; and (iv) 1,877,595 shares exercisable at $7.86 per share expiring October 20, 2008. At March 31, 2006, the Company had reserved 5,673,760 shares for issuance upon the potential exchange of the $72,000,000 outstanding convertible notes. Total shares reserved for exchange of convertible debt and the exercise of warrants and options (including options available for grant) is 13,012,557. Page 11 Stock-Based Compensation - ------------------------ The Company adopted SFAS 123(R) (see Note 1) using the modified prospective method effective as of January 1, 2006. As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", the Company previously accounted for share-based payments to employees using APB Opinion 25's intrinsic value method and, as such, generally recognized no compensation cost for employee stock options. Accordingly, the adoption of SFAS 123(R)'s fair value method will have a significant impact on its results of operations. Had the Company adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share below. The fair value of each stock option is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2006: a risk-free interest rate of 4.595%; expected lives of three years; and expected volatility of 47.58%. The following weighted average assumptions were used for grants in 2005: a risk-free interest rate of 3.38%; expected lives of three years; and expected volatility of 33.31%. The expense recorded in general and administrative expenses, representing the fair value of options vesting during the quarter ended March 31, 2006, was approximately $464,000. At the Company's current effective tax rate, the after-tax effect of this charge in the first quarter of 2006 was $254,000 or $0.01 per both basic and diluted shares. The unrecorded pretax compensation cost related to unvested options at March 31, 2006 totals approximately $1,948,000, amortizable over the period ending December 31, 2008. Additional option grants will increase this amount, and forfeitures of out-of-the-money options held by terminating employees will reduce it. The weighted average amortization period is 2.1 years. The Company has not determined what impact SFAS 123(R) might have on the nature, timing, and amounts of its share-based compensation to employees in the future. Had compensation cost been determined in accordance with SFAS No. 123, the Company's income in thousands of dollars and basic and diluted earnings per common share for the three month period ended March 31, 2005 would have been as follows: Three Months Ended March 31, 2005 ------------------ Net income as reported $ 2,437 Deduct stock-based employee compensation determined under the fair value method for all awards, net of tax (1,223) --------------- Pro forma income $ 1,214 =============== Net income per share: Basic as reported $ 0.12 =============== Diluted as reported $ 0.11 =============== Basic, pro forma $ 0.06 =============== Diluted, pro forma $ 0.06 =============== Page 12 4. BASIC AND DILUTED EARNINGS PER COMMON SHARE The Company computes earnings per share in accordance with SFAS No. 128, "Earnings per Share." Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share adjusts basic earnings per share for the effects of convertible securities, stock options and warrants and other potentially dilutive financial instruments, only in the periods in which such effect is dilutive. For the quarters ended March 31, 2006 and 2005, 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 1,142,649 and 7,251,933 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 calculation of earnings per share for the quarters ended March 31, 2006 and 2005 excludes 2,443,622 and 973,600 shares, respectively, related to out-of-the-money stock options and warrants because to include them in the calculation would be antidilutive. The effect of the convertible securities is excluded in 2006 because it is not dilutive. The adoption of SFAS 123(R) did not have a material impact on the number of diluted shares outstanding, and did not change earnings per share. 5. INCOME TAXES In the period ended March 31, 2006, the Company recorded income tax expense of 906,000, consisting of a current provision of $455,000 and a deferred provision of $451,000. The effective rate in the Current Quarter was 46%, compared with 40% in the Prior Year's Quarter. The increase in the effective rate reflects greater state income tax expense since the Company now conducts business in more states, including states with higher income tax rates, than in the comparable period last year. A deferred tax benefit reflects future income tax savings realizable when tax credits, net operating loss carry-forwards, or other deductions based on temporary differences between taxable income and income before income taxes can be used to reduce income taxes. If there is uncertainty of realizing deferred tax benefits, a valuation allowance must be established. The Company had a deferred tax valuation allowance of $2,462,000 at March 31, 2006. The Company has net operating loss carry-forwards of approximately $42,000,000 for Federal income tax purposes that begin to expire in 2019. The use of these net operating loss carry-forwards is limited in amount in future years pursuant to Section 382 of the Internal Revenue Code. 6. RELATED PARTY TRANSACTIONS. In February 2006, the Chairman and Vice Chairman each paid $50,000 to reduce their respective indebtedness to the Company. The employment agreements of the Chairman and Vice Chairman provide for lifetime pension benefits of $180,000 annually for the Chairman and $120,000 annually for the Vice Chairman, which will be paid beginning with the commencement of each executive's reduced part-time employment period. The pension benefits payable to each of the Chairman and the Vice Chairman are not payable pursuant to a funded qualified pension plan. The Company did not make any contributions for 2005, and does not expect to contribute to this plan in 2006. The expense recorded in each of the periods ended March 31, 2006 and 2005 was $92,000. Page 13 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Our management believes that we are a leading provider of selective information technology outsourcing services to enterprise clients. We deliver a full suite of outsourced solutions that enable clients to leverage our infrastructure and process expertise to improve their efficiency and reduce their operating costs. During our history of more than twenty years, we have developed expertise in managing complex computing environments, beginning with traditional data center outsourcing services and evolving to a comprehensive set of managed solutions. We support a variety of clients, and assure the optimal performance, security, reliability, and scalability of our clients' mainframes, distributed servers, and networks, irrespective of where the systems' components are located. Strategic acquisitions have contributed significantly to our historical growth and remain an integral component of our long-term growth strategy. On November 30, 2005, we acquired 100% of the membership interests in (i)Structure, LLC., a Delaware limited liability company ("(i)Structure") with operations in Colorado and data centers in Omaha, NE and Tempe, AZ, from Level 3 Financing, Inc. for a total purchase price of approximately $86,767,000, including related acquisition costs of $2,000,000 and 346,597 shares of our common stock valued at $2,500,000 (the "(i)Structure Acquisition"). The operations of (i)Structure are included in consolidated operations from the date of the acquisition. (i)Structure is being integrated into our operations so that the entire enterprise will benefit from operational leverage and consolidation. The (i)Structure Acquisition was recorded as a purchase in accordance with the Financial Accounting Standards Board, Statements of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), which requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. We operate in one reportable segment of providing information technology outsourcing services. RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2006 AND 2005 For the quarter ended March 31, 2006 (the "Current Quarter"), revenues increased $18,394,000 (49%) to $55,921,000 from $37,527,000 for the quarter ended March 31, 2005 (the "Prior Year's Quarter"). This net increase includes $19,564,000 of revenue from clients added as the result of the (i)Structure Acquisition. Excluding revenues added from the business acquired, revenues decreased by $1,170,000 (3%). The decrease is net of growth from both new and existing customers. Costs of revenues increased by $14,418,000 (56%) to $40,265,000 during the Current Quarter compared with $25,847,000 for the Prior Year's Quarter. The increase results from the expansion of the capacity and quality of our infrastructure to deliver the additional client services activities added by the (i)Structure Acquisition. Costs of revenues as a percentage of revenues increased to 72% in the Current Quarter from 69% in the Prior Year's Quarter, reflecting a lower gross margin percentage of 28% in the Current Quarter compared with 31% in the Prior Year's Quarter. This is related to the reduction of revenues other than from the acquisition without offsetting cost reductions. Cost reductions had been deferred during 2005 in anticipation of new revenue opportunities that did not materialize and the (i)Structure Acquisition. Our infrastructure provides a shared operating environment that enables us to integrate new clients, including clients acquired through acquisitions. After the close of the (i)Structure acquisition, we began implementing cost reductions that are expected to result in savings of between $9,000,000 to $11,000,000 in 2006, with a portion of the savings to be realized in the second quarter of 2006 with additional savings expected to be realized in the third and fourth quarters of the year. Identified synergies are expected to result in between $13,000,000 to $15,000,000 in annualized savings once the reductions have been fully implemented by the end of 2006. We expect gross margins to improve to approximately 33% by the end of the year. Selling and promotion costs increased by $1,000,000 (104%) to $1,958,000 for the Current Quarter from $958,000 for the Prior Year's Quarter, and increased as a percentage of revenues to 4% for the Current Quarter from 3% for the Prior Year's Quarter. Of this increase, $857,000 (86% of the increase) is attributable to additional compensation and related expenses for an expanded sales force. The remainder of the increase is attributable to expanded marketing activities. Page 14 General and administrative expenses increased by $2,654,000 (103%) to $5,233,000 for the Current Quarter from $2,579,000 for the Prior Year's Quarter. Approximately $761,000, or 29% of the total increase, was related to the (i)Structure Acquisition. Approximately $554,000 (21% of the total increase) was due to professional fees, including $446,000 in legal fees. Severance costs arising from the integration of the acquisition was responsible for $206,000, or 8% of the increase. Finally, approximately $464,000 (17%) was due to the non-cash expense of stock options. On January 1, 2006, we adopted Statement of Financial Accounting Standards ("SFAS") No. 123(R), 'Shared-Based Payment' using the modified prospective approach, which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires us to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. It eliminates the intrinsic method previously allowable under APB Opinion No. 25. At our current effective tax rate, the after-tax effect of the expense of stock options in the Current Quarter was $254,000 or $0.01 per both basic and diluted shares. Had we elected for early adoption of this standard, the pretax expense we would have recorded in the Prior Year's Quarter would have been $2,039,000. The unrecorded pretax compensation cost related to unvested options at March 31, 2006 totals approximately $1,948,000, amortizable over the period ending December 31, 2008. Additional option grants will increase this amount, and forfeitures of out-of-the-money options held by terminating employees will reduce it. Depreciation and amortization of fixed assets and intangibles increased $1,511,000 (58%) to $4,131,000 for the Current Quarter from $2,620,000 for the Prior Year's Quarter. $1,486,000 of this increase was related to the (i)Structure Acquisition, including $519,000 in amortization of customer contracts. Net interest expense increased by $952,000 to $2,417,000 for the Current Quarter from $1,465,000 for the Prior Year's Quarter. This net increase consists of a reduction in interest income of $21,000 and additional interest expense of $931,000. Interest expense on the $72,000,000 aggregate principal amount of 4.0% Convertible Senior Notes due July 15, 2024 (the "Notes"), including amortization of deferred financing costs and discount, was $815,000 for the Current Quarter compared with $758,000 in the Prior Year's Quarter. The increase was solely attributable to the amortization of the discount realized on the Notes during 2005. As explained in Liquidity and Capital Resources below, in August 2005 the conversion price of the Notes was reduced and a reduction of the carrying value of the Notes of $4,596,000 was recorded as an increase in paid in capital. The amortization of this discount increases interest expense by approximately $19,000 per month over the term of the Notes. Interest expense on bank debt in the Prior Year's Quarter was $538,000 compared with interest expense (including amortization of deferred financing costs) on bank debt in the Current Quarter of $1,404,000. Such debt was $60,000,000 for the Current Quarter and $24,375,000 for the Prior Year's 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 there is uncertainty of realizing deferred tax benefits, a valuation allowance must be established. We had a deferred tax valuation allowance of $2,462,000 at March 31, 2006. We have net operating loss carry-forwards of approximately $42,000,000 for Federal income tax purposes that begin to expire in 2019. The use of these net operating loss carry-forwards is limited in amount in future years pursuant to Section 382 of the Internal Revenue Code of 1986. For the Current Quarter, we recorded a tax expense of $906,000, compared with tax expense of $1,621,000 for the Prior Year's Quarter. The effective rate in the Current Quarter was 46%, compared with 40% in the Prior Year's Quarter. The increase in the effective rate reflects greater state income tax expense since we now conduct business in more states, including states with higher income tax rates, than in the Prior Year's Quarter. We had net income of $1,011,000 for the Current Quarter compared with $2,437,000 for the Prior Year's Quarter. The decrease resulted from higher selling, general and administrative expense, as well as interest and depreciation expenses due to the (i)Structure acquisition. Page 15 For the Current Quarter, we had income per common share of $0.05 on both a basic and diluted basis, compared with income per common share of $0.12 per basic share and $0.11 per diluted share for the Prior Year's Quarter. The number of weighted average shares increased to approximately 20,754,000 basic shares from approximately 20,087,000 basic shares for the Prior Year's Quarter, reflecting the issuance of approximately 563,000 shares for acquisitions; the repurchase of 50,000 shares in the open market in July 2005; and the exercise of options for an additional 29,000 shares. Weighting the 2005 shares at 100% accounts for the remainder of the difference. Diluted weighted average shares decreased from approximately 27,338,000 diluted shares in the Prior Year's Quarter to approximately 21,999,000 diluted shares in the current quarter. Diluted shares in the Prior Year's Quarter include 4,687,500 shares issuable upon conversion of our convertible notes. The convertible notes are excluded from the calculation of diluted shares in the Current Quarter as they are not dilutive at this time. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities was $34,000 for the Current Quarter. During the Current Quarter, we had the following significant sources of cash: $1,011,000 of net income, $4,131,000 of depreciation and amortization; $878,000 from a decrease in deferred tax assets and an increase in taxes payable; $464,000 from the expensing of stock options now required pursuant to SFAS 123(R); a $4,165,000 increase in deferred revenue, including $3,000,000 from one customer; $717,000 from an increase in accounts payable; and $425,000 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 $7,519,000, including an annual payment of $7,650,500 for software license fees, payable pursuant to an (i)Structure contract existing from prior to the acquisition; and a decrease in accrued expenses of $4,440,000 as a result of payments needed on the balance sheets of companies acquired. The utilization of a portion of the Company's net operating loss carry-forwards is reflected in the decrease in deferred tax assets. In the Current Quarter, we paid $1,786,000 for a minor acquisition, and $450,000 of previously-accrued acquisition-related costs. Other investing activities during the Current Quarter include $1,054,000 for the purchase of fixed assets. During the Current Quarter, we also entered into capital leases having an aggregate carrying value of approximately $1,727,000 and invested $308,000 in internally-developed software. On November 30, 2005, we entered into a $70,000,000 senior secured credit facility (the "Credit Agreement"), with each of the banks and other financial institutions that either now or in the future are parties thereto as lenders (the "Lenders"), Bank of America, N.A., as sole and exclusive administrative and collateral agent and as a lender ("Bank of America"), and Banc of America Securities LLC, as sole and exclusive lead arranger and sole book manager. The Credit Agreement provides for a $55 million term loan facility, subject to amortization pursuant to the provisions of the Credit Agreement, and a $15 million revolving credit facility (including letter of credit subfacilities). The maturity date for both the term loan facility and the revolving credit facility is April 14, 2009. Loans outstanding under the Credit Agreement bear interest at LIBOR plus the Applicable Rate (as such term is defined in the Credit Agreement) or, at our option, the alternate base rate (the greater of the Bank of America prime rate or the federal funds rate plus one half of one percent (0.50%)) plus the Applicable Rate (as such term is defined in the Credit Agreement). In December, 2005, we repaid $10,000,000 of the revolving credit facility, and entered into a standby letter of credit of $500,000 for the benefit of one of our new customers. The amortization on the term loan due within the next twelve months is $7,500,000. Also, beginning in 2007, we are subject to a potential payment of 50% of our Excess Cash Flow, as that term is defined in the Credit Agreement, which is due no later than 95 days after each year end. In addition, if we receive certain types of cash payments, including but not limited to insurance proceeds, proceeds from the sale of assets, or proceeds from the exercise of stock warrants and certain stock options, we are required to make a prepayment of the term loan in the amount of one-half of the received proceeds. On April 27, 2006, we received $2,801,000 from the exercise of a stock warrant, and will pay $1,400,500 of this amount on or before May 11, 2006. The terms of the Credit Agreement include various covenants including, but not limited to: a maximum leverage ratio; minimum consolidated earnings before interest, taxes, depreciation, and amortization; a minimum debt coverage ratio; and limitations on indebtedness, capital expenditures, investments, loans, mergers and acquisitions, stock issuances and repurchases, and transactions with affiliates. In addition, the terms of the Credit Agreement limit our ability to pay cash dividends. We were in compliance with such covenants at March 31, 2006. Page 16 Financing activities during the Current Quarter include the repayment of approximately $1,640,000 of capital leases and the receipt of $124,000 from the exercise of stock options. In addition, we added $1,727,000 of equipment subject to new capital lease agreements during the Current Quarter. We have $72,000,000 of outstanding 4.0% Convertible Senior Notes due July 15, 2024 (the "Notes"). Interest on the Notes of $1,440,000 is payable semi-annually in July and January. The Notes are convertible, subject to certain conditions, at the option of the holder prior to maturity, into shares of our common stock at a specified conversion price, subject to certain adjustments. The conversion price must be adjusted to reflect stock dividends, stock splits, issuances of rights to purchase shares of common stock and other events. Upon conversion, we will have the right to deliver to the holders, at our option, cash, shares of common stock, or a combination thereof. At the initial conversion price of $15.36, the $72,000,000 of Notes were convertible into 4,687,500 common shares. The Notes and the shares of common stock into which they may be converted may be resold pursuant to a registration statement on Form S-3 that became effective in August 2004. On August 5, 2005, because the market price of our common stock was less than 68.23% ($10.48) of the initial conversion price for at least 20 trading days during the 30 consecutive trading day period ending on August 5, 2005, a reset adjustment was triggered, whereby the conversion price was immediately reduced by 17.38% to $12.69. As a result of the reset adjustment, the number of common shares into which the Notes are convertible is 5,673,759, an increase of 986,259 shares. No further reset adjustments will be made, but the adjusted conversion price of $12.69 remains subject to adjustment as noted above for stock dividends, splits, etc. The reset adjustment was valued in accordance with EITF 00-27, "Application of Issue No. 98-5 - Certain Convertible Instruments" at $4,596,000, and this amount was recorded as an increase to Additional Paid in Capital and as a discount to the carrying value of the Notes. This additional discount will be accreted to the carrying value of the Notes through a charge to interest expense over the life of the Notes. The holders may convert their Notes into shares of our common stock, at the conversion price in effect at the time, prior to the close of business on their stated maturity date under any of the following circumstances: (1) during any fiscal 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, such as (a) distributions to our common stockholders of rights to acquire shares of our common stock at a discount; (b) distributions to our common stockholders when the distribution has a per share value in excess of 5% of the market price of our common stock; and (c) a consolidation, merger or binding share exchange pursuant to which our common stock will be converted into cash, securities or other property. Upon a "change of control," as defined in the indenture, the holders can require us to repurchase all or part of the Notes for cash equal to 100% of principal plus accrued interest. A consolidation, merger, or binding exchange also may constitute a "change of control" in certain instances. If the "change of control" occurred prior to July 15, 2009, in certain instances, we may be required to pay a "make whole premium" as defined in the indenture when repurchasing the Notes. We have a call option, pursuant to which the Notes may be redeemed, in part or in whole, for cash at any time on or after July 15, 2007 at a price equal to 100% of the principal amount of the Notes, plus accrued interest plus a "premium" if the redemption is prior to July 15, 2009, provided, however, the Notes are only redeemable prior to July 15, 2009 if the market price of our common stock has been at least 150% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period. The "premium" referred to in the preceding sentence shall be in an amount equal to $173.83 per $1,000 principal amount of Notes, less the amount of any interest actually paid on such Notes prior to the redemption date. Page 17 The holders of the Notes may require that we purchase for cash all or a portion of the Notes on July 15, 2009, 2014, and 2019 at a repurchase price equal to 100% of the principal amount of the Notes plus any accrued interest. There are no financial covenants, other than a limitation on incurring of additional indebtedness, as defined in the indenture. As of March 31, 2006, we had cash and equivalents of $11,734,000 and approximately $9,500,000 of availability under our revolving credit facility. 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 $322,000 (4%) to $8,465,000 from $8,143,000 for the comparable period in 2005. EBITDA for the Current Quarter includes a non-cash charge of $464,000 relating to stock option expense recorded under SFAS 123(R). EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. Generally Accepted Accounting Principles ("GAAP"). Some of these limitations are: (a) EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (b) EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; and (c) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and EBITDA does not reflect any cash requirements for such capital expenditures. Because of these limitations, EBITDA should not be considered as a principal indicator of our performance. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA only on a supplemental basis. The following table reconciles EBITDA to net income for the Current and Prior Year's Quarter. Reconciliation - in Thousands - -------------------------------------------------------------------------------- Quarter Ended March 31, -------------------------------------------- 2006 2005 -------------------- -------------------- NET INCOME $ 1,011 $ 2,437 Add back: Tax expense 906 1,621 Interest expense 2,417 1,465 Depreciation and amortization 4,131 2,620 -------------------- -------------------- EBITDA $ 8,465 $ 8,143 ==================== ==================== EBITDA is a measure of our performance that is not required by, or presented in accordance with, GAAP. EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income, income from operating activities or any other performance measures derived in accordance with GAAP. Page 18 RECENT ACCOUNTING PRONOUNCEMENTS None FORWARD-LOOKING STATEMENTS Statements made in this Report on Form 10-Q (the "Quarterly Report"), including the accompanying financial statements and notes, other than statements of historical fact, are forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance, including statements relating to products, customers, suppliers, business prospects and effects of acquisitions. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," "expect," "anticipate," "intend," "plan," "believe," "estimate," "potential," or "continue," the negative of these terms or other comparable terminology. These statements involve a number of risks and uncertainties and as such, final results could differ from estimates or expectations due to a number of factors including, without limitation: incomplete or preliminary information; changes in government regulations and policies; continued acceptance of our products and services in the marketplace; competitive factors; closing contracts with new customers and renewing contracts with existing customers on favorable terms; expanding services to existing customers; new products; technological changes; our dependence on third party suppliers; intellectual property rights; difficulties with the identification, completion, and integration of acquisitions, including the completion of the integration of Verizon Information Technologies Inc., now known as Infocrossing Healthcare Services, Inc., (i)Structure, LLC; and other risks and uncertainties including those set forth in this Quarterly Report that could cause actual events or results to differ materially from any forward-looking statement. For any of these factors, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report and are based on information currently and reasonably known to us. We undertake no obligation to release any revisions to or update these forward-looking statements to reflect events or circumstances that occur after the date of this Quarterly Report or to reflect the occurrence or effect of anticipated or unanticipated events. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. INTEREST RATE RISK With respect to our investments, we are not significantly exposed to the impact of interest rate changes, foreign currency fluctuations, or changes in market values. We primarily invest in money market mutual funds or certificates of deposit and commercial paper issued only by major corporations and financial institutions of recognized strength and security, and hold all such investments to term. We generally invest in instruments of no more than 30 days maturity. As of March 31, 2006, however, we had $60,000,000 of outstanding debt bearing interest at LIBOR plus the Applicable Rate (as such term is defined in the Credit Agreement). At our option, this debt can alternatively bear interest at the Applicable rate plus either the Bank of America prime rate or the federal funds rate plus one-half of one percent (0.50%). Each one percent increase in the interest rate we pay on the variable rate debt would result in an increase in annual interest expense of $600,000. We believe that the carrying amount of our fixed rate debt (the Notes) and capitalized leases of $79,285,000 approximates fair value based on interest rates that are currently available to us with similar terms and remaining maturities. MARKET RISK Our accounts receivable are subject, in the normal course of business, to collection risks. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of collection risks. As a result, we do not anticipate any material losses in this area. Page 19 FOREIGN CURRENCY RISKS We believe that our foreign currency risk is immaterial. Our income from foreign sources is derived from a single customer and amounted to approximately 1% of total revenues in 2005 and less than 1% for the Current Quarter. 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, 2006. There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS None ITEM 1A - RISK FACTORS There have been no material changes to the Risk Factors discussed in our Annual Report on Form 10-K for the period ended December 31, 2005. ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS COMMON STOCK ISSUED FOR A PORTION OF ACQUISITION PRICE In connection with the acquisition of certain net assets and the business of Soft Link Solutions, Inc. in January 2006, the Company issued 216,241 shares of common stock, $0.01 par value, valued at $1,786,000. The common stock was issued without registration pursuant to an exemption provided by Section 4(2) of the Securities Act of 1933, as this issuance of common stock does not involve a public offering. The Company included these shares in a Registration Statement on Form S-3, for the sale of these and other shares, filed with the Securities and Exchange Commission. This Registration Statement was declared effective April 21, 2006. Page 20 ITEM 6 - EXHIBITS 2.1 Purchase Agreement, dated October 24, 2005, by and between Infocrossing, Inc. and Level 3 Financing, Inc., incorporated by reference to Exhibit 10 to a Current Report on Form 8-K filed October 25, 2005. 3.1A Company's Restated Certificate of Incorporation, incorporated by reference to the Company's Annual Report on Form 10-K for the period ended December 31, 2004. 3.1B Certificate of Amendment to the Company's Certificate of Incorporation, filed May 8, 2000, to increase the authorized shares and to remove Article 11, incorporated by reference to the Company's report on Form 10-Q for the period ended April 30, 2000. 3.1C Certificate of Amendment to the Company's Certificate of Incorporation, filed as of June 5, 2000, to change the name of the Company to Infocrossing, Inc., incorporated by reference to the Company's report on Form 10-Q for the period ended April 30, 2000. 3.2 Amended and Restated Bylaws of the Company, incorporated herein by reference to Exhibit 3.2 to the Company's Form 10-Q/A filed May 17, 2004. 4.1 Indenture, dated as of June 30, 2004, between the Company as issuer and Wells Fargo Bank, National Association, as trustee; and form of 4.00% Convertible Senior Notes due 2024, incorporated by reference to Exhibit 4.2 to a Registration Statement No. 333-117340 on Form S-3 filed July 13, 2004. 4.2 Resale Rights Agreement, dated as of June 30, 2004, by and between the Company and Lehman Brothers, Inc. regarding the Company's 4.00% Convertible Senior Notes due 2024, incorporated by reference to Exhibit 4.4 to a Registration Statement No. 333-117340 on Form S-3 filed July 13, 2004. 4.3 Securities Purchase Agreement, dated as of March 24, 2004, by and among the Company and certain purchasers of the Company's common stock, incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed April 1, 2004. 4.4 Registration Rights Agreement, dated as of March 24, 2004, by and the Company and certain purchasers of the Company's common stock, incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed April 1, 2004. 4.5 Securities Purchase Agreement, dated as of October 16, 2003, by and among the Company and certain purchasers of common stock and warrants, incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed October 22, 2003. 4.6 Registration Rights Agreement, dated as of October 16, 2003, by and among the Company and certain purchasers of common stock and warrants, incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed October 22, 2003. 4.7 Exchange Agreement, dated as of October 16, 2003, by and among the Company and holders of series A preferred stock and series A warrants, incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K filed October 22, 2003. Page 21 (a) Exhibits (continued): 4.8 Second Amended and Restated Registration Rights Agreement, dated as of October 21, 2003, by and among the Company and certain stockholders of the Company, incorporated by reference to Exhibit 4.4 to the Company's Current Report on Form 8-K filed October 22, 2003. 4.9 Warrant Agreement dated as of February 1, 2002 by and between the Company and the Warrantholders party thereto, incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K filed February 5, 2002. 4.10 Warrant Agreement between the Company and the Warrantholders party thereto, incorporated by reference to the Company's Annual Report on Form 10-K for the period ended December 31, 2004. 10.1 Purchase and Sale Agreement, dated as of September 1, 2004 between Verizon Data Services, Inc. and the Company, incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed October 14, 2004 10.2 Stock Purchase Agreement between the Company and ITO Holdings, LLC, dated as of March 3, 2004, incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed April 7, 2004. 10.3 Stock Purchase Agreement dated as of February 5, 2002 by and between the Company and American Software, Inc., incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed February 5, 2002. 10.4A Acquisition Loan Agreement dated July 29, 2004 between the Company, various Lenders and CapitalSource Finance LLC as Agent for the Lenders ("Acquisition Loan Agreement"), incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2004. 10.4B Consent, Waiver and First Amendment to Acquisition Loan Agreement dated as of October 1, 2004, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed October 4, 2004. 10.4C Amended and Restated Consent, Waiver, and First Amendment to Acquisition Loan Agreement, dated as of October 6, 2004, incorporated by reference to Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2004. 10.4D Second Amendment to Acquisition Loan Agreement and Other Documents, dated as of November 8, 2004, incorporated by reference to Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2004. 10.4E Third Amendment to Acquisition Loan Agreement and Other Documents, dated as of December 29, 2004, incorporated by reference to the Company's Annual Report on Form 10-K for December 31, 2004. 10.5A Guaranty and Security Agreement dated as of July 29, 2004, between the Company and certain of the Company's subsidiaries and CapitalSource Finance LLC ("Security Agreement"), incorporated by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2004. 10.5B Joinder to Security Agreement dated October 1, 2004, incorporated by reference to the Company's Annual Report on Form 10-K for the period ended December 31, 2004. Page 22 (a) Exhibits (continued): 10.6A Stock Pledge Agreement dated as of July 29, 2004, between the Company and certain of the Company's subsidiaries and CapitalSource Finance LLC ("Stock Pledge Agreement"), incorporated by reference to Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2004. 10.6B Addendum to Stock Pledge Agreement dated October 1, 2004, incorporated by reference to the Company's Annual Report on Form 10-K for December 31, 2004. 10.7A Amended and Restated Term Loan Agreement, dated as of April 2, 2004 between the lenders named therein and the Company ("Amended and Restated Term Loan Agreement"), incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed April 7, 2004. 10.7B First Amendment to Amended and Restated Term Loan Agreement, dated as of June 30, 2004, between the lenders named therein and the Company, incorporated by reference to Exhibit 4.5 to a Registration Statement No. 333-117340 on Form S-3 filed July 13, 2004. 10.7C Term Loan Agreement dated as of October 21, 2003 by and among the Company, Infocrossing Agent, Inc., and the lenders named therein, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed October 22, 2003. 10.7D First Amendment to Loan Agreement and other Loan Documents, dated as of February 13, 2004, by and among the Company, certain subsidiaries of the Company, certain lenders named therein, and CapitalSource Finance LLC., incorporated by reference to the Company's Annual Report on Form 10-K for the period ended December 31, 2004. 10.7E Master Assignment and Assumption Agreement, dated as of February 13, 2004, by and among by and among the Company, as borrower; certain subsidiaries of the Company, as guarantors; Infocrossing Agent, Inc., as agent for assigning lenders named therein; assigning lenders named therein; and CapitalSource Finance LLC., incorporated by reference to the Company's Annual Report on Form 10-K for the period ended December 31, 2004. 10.8A Guaranty and Security Agreement, dated as of April 2, 2004, between a subsidiary of the Company and CapitalSource, incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed April 7, 2004. 10.8B Guaranty and Security Agreement dated as of October 21, 2003 by and among the Company, Infocrossing Agent, Inc., and the Company's subsidiaries, incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed October 22, 2003. 10.9 Amended and Restated Stock Pledge Agreement, dated as of April 2, 2004, among the Company, a subsidiary of the Company, and CapitalSource, incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed April 7, 2004. 10.10 Employment Agreement between the Company and Zach Lonstein, dated as of January 1, 2005, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed January 5, 2005, superseding an Employment Agreement, dated as of November 1, 1999, incorporated by reference to Exhibit 10.4 to the Company's Form 10-Q for the period ended July 31, 2000. 10.11 Employment Agreement between the Company and Robert Wallach, dated as of January 1, 2005, incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed January 5, 2005, superseding an Employment Agreement, dated as of November 1, 1999, incorporated by reference to Exhibit 10.5 to Infocrossing's Form 10-Q for the period ended July 31, 2000. Page 23 (a) Exhibits (continued): 10.12A Employment Agreement, dated as of April 2, 2004, by and between the Company and Patrick A. Dolan, incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed April 7, 2004. 10.12B Settlement and Release Agreement dated as of October 15, 2004 by and among the Company and Patrick A. Dolan, incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K filed November 5, 2004. 10.13A Employment Agreement, dated as of April 2, 2004, by and between the Company and Jim Cortens, incorporated by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K filed April 7, 2004. 10.13B Settlement and Release Agreement dated as of October 15, 2004 by and among the Company and Jim Cortens, incorporated by reference to the Company's Annual Report on Form 10-K for December 31, 2004. 10.14 Employment Agreement, dated as of October 1, 2004, by and between a subsidiary of the Company and Michael J. Luebke, incorporated by reference to the Company's Annual Report on Form 10-K for December 31, 2004. 10.15A Company's 2002 Stock Option and Stock Appreciation Rights Plan ("2002 Plan"), incorporated by reference to Appendix B to the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders held on June 25, 2002. 10.15B Amendment to 2002 Plan adopted by the Board of Directors on January 21, 2005, incorporated by reference to the Company's Annual Report on Form 10-K for December 31, 2004. 10.15C Amendment to 2002 Plan approved at the Company's Annual Meeting of Stockholders held on June 15, 2004, incorporated by reference to the Company's Annual Report on Form 10-K for December 31, 2004. 10.15D Amendment to 2002 Plan adopted by the Board of Directors on April 1, 2004, incorporated by reference to the Company's Annual Report on Form 10-K for December 31, 2004. 10.16A Amended and Restated 1992 Stock Option and Stock Appreciation Rights Plan ("1992 Plan"), incorporated by reference to Appendix A to Company's Definitive Proxy Statement for the Annual Meeting of Stockholders held on May 8, 2000. 10.16B Amendment to 1992 Plan approved at the Company's Annual Meeting of Stockholders held on June 22, 2001, incorporated by reference to the Company's Annual Report on Form 10-K for December 31, 2004. 10.17 Stock Option Agreement under the 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. 10.18A Lease dated June 2, 1997 between the Company and Leonia Associates, LLC, incorporated by reference to the Company's Annual Report on Form 10-K for December 31, 2004. 10.18B First Amendment of Lease between the Company and Leonia Associates, LLC, dated January 16, 1998, incorporated by reference to the Company's Annual Report on Form 10-K for December 31, 2004. 10.18C Second Amendment of Lease between the Company and Leonia Associates, LLC, dated as of September 9, 1999, incorporated by reference to the Company's Annual Report on Form 10-K for December 31, 2004. Page 24 (a) Exhibits (continued): 10.18D Third Amendment of Lease between the Company and Leonia Associates, LLC, dated as of August 28, 2000, incorporated by reference to Exhibit 10.7D to the Company's 10-K for the fiscal year ended October 31, 2000. 10.18E Fourth Amendment of Lease between the Company and Leonia Associates, LLC, dated as of April 19, 2004, incorporated by reference to the Company's Annual Report on Form 10-K for December 31, 2004. 10.19A Office Lease Agreement dated May 22, 2000 between the Company and Crocker Realty Trust, incorporated by reference to Exhibit 10.6 to the Company's Form 10-Q for the period ended July 31, 2000. 10.19B First Amendment to Lease dated as of April 1, 2002 by and between Crocker Realty Trust, L.P. and the Company, incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for period ended March 31, 2002. 10.20 Tenth Floor Option Agreement between the Company, G-H-G Realty Company ("GHG"), and RSL Com USA, Inc. ("RSL"), dated as of November 30, 1999, with related notice of exercise dated February 14, 2000, incorporated by reference to Exhibit 10.6A to the Company's Form 10-K for the fiscal year ended October 31, 2000. 10.21 Eleventh Floor Option Agreement between the Company, GHG, and RSL, dated as of November 30, 1999, with related notice of exercise dated December 2, 1999, incorporated by reference to Exhibit 10.6B to the Company's 10-K for the fiscal year ended October 31, 2000. 10.22A* Master Services Agreement dated as of May 24, 2001 among the Company, Alicomp, a Division of Alicare, Inc. and ADT Security Services, Inc., incorporated by reference to Exhibit 10.1A to a Registration Statement No. 333-110173 on Form S-3 filed February 6, 2004. 10.22B* Amendment to Master Services Agreement among the Company, Alicomp, a Division of Alicare, Inc. and ADT Security Services, Inc. dated as of January 11, 2002, incorporated by reference to Exhibit 10.1B to a Registration Statement No. 333-110173 on Form S-3 filed February 6, 2004. 10.23* Computer Services Agreement dated as of March 21, 1997 by and between the Company and Alicomp, a Division of Alicare, Inc., incorporated by reference to Exhibit 10.2A to a Registration Statement No. 333-110173 on Form S-3 filed February 6, 2004. 10.24* Marketing Agreement dated as of March 21, 1997 by and between the Company and Alicomp, a Division of Alicare, Inc., incorporated by reference to Exhibit 10.2B to a Registration Statement No. 333-110173 on Form S-3 filed February 6, 2004. 10.25* Extension Agreement dated as of October 1, 2002 by and between the Company and Alicomp, a Division of Alicare, Inc., incorporated by reference to Exhibit 10.2C to a Registration Statement No. 333-110173 on Form S-3 filed February 6, 2004. 10.26* Extension Agreement dated as of December 30, 2003 by and between the Company and Alicomp, a Division of Alicare, Inc., incorporated by reference to Exhibit 10.2D to a Registration Statement No. 333-110173 on Form S-3 filed February 6, 2004. 10.27A Credit Agreement, dated November 30, 2005, between Infocrossing, Inc., the lenders thereto, Bank of America, N.A. and Banc of America Securities, LLC, incorporated by reference to a Current Report on Form 8-K filed December 1, 2005. Page 25 (a) Exhibits (continued): 10.27B Security Agreement, dated November 30, 2005, between Infocrossing, Inc., certain subsidiaries of Infocrossing, Inc., and Bank of America, N.A., incorporated by reference to a Current Report on Form 8-K filed December 1, 2005. 10.27C Securities Pledge Agreement, dated November 30, 2005, between Infocrossing, Inc., certain subsidiaries of Infocrossing, Inc., and Bank of America, N.A., incorporated by reference to a Current Report on Form 8-K filed December 1, 2005. 10.28A Agreement of Sale and Leaseback, dated November 30, 2005, between Infocrossing, Inc. and LSAC Operating Partnership, L.P., incorporated by reference to a Current Report on Form 8-K filed December 1, 2005. 10.28B Lease, dated November 30, 2005, between (i)Structure, LLC and LSAC Omaha L.P., incorporated by reference to a Current Report on Form 8-K filed December 1, 2005. 10.28C Lease, dated December 29, 2005, between (i)Structure, LLC and LSAC Tempe L.P. is not filed as it is substantially the same as that between the (i)Structure, LLC and LSAC Omaha, L.P. except as to the description of the building and the amount of rent. 10.29 Employment Agreement, dated as of January 1, 2006 between the Company and Richard Giordanella, incorporated by reference to a Current Report on Form 8-K filed January 6, 2006. 10.30 Special Sale Bonus Agreement between (i)Structure, LLC and Michael D. Jones, incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for December 31, 2005. 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. * Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Page 26 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, 2006 /s/ ZACH LONSTEIN ------------------------------------------ Zach Lonstein Chairman & Chief Executive Officer May 10, 2006 /s/ WILLIAM J. McHALE ------------------------------------------ William J. McHale SVP - Finance and Chief Financial Officer Page 27 EXHIBITS FILED HEREWITH 31 Certifications required by Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002 to be filed. 32 Certifications required by Rule 13a-14(b) and 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) to be furnished but not filed. Page 28 EX-31 2 x31_1q06.txt SECTION 302 CERTIFICATIONS EXHIBIT 31 CERTIFICATIONS REQUIRED TO BE FILED BY RULE 13a-14(a) AND SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002. 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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. May 10, 2006 /s/ ZACH LONSTEIN ----------------------------------------- Zach Lonstein Chairman and Chief Executive Officer EXHIBIT 31 (Continued) CERTIFICATIONS REQUIRED TO BE FILED BY RULE 13a-14(a) AND SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002. 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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. May 10, 2006 /s/ WILLIAM J. McHALE ----------------------------------------- William J. McHale SVP - Finance and Chief Financial Officer EX-32 3 x32_1q06.txt SECTION 906 CERTIFICATIONS 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 March 31, 2005 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 SVP - Finance and Chief Financial Officer May 10, 2006 May 10, 2006 -----END PRIVACY-ENHANCED MESSAGE-----