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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the two months ended: December 31, 2000
Commission file number: 0-20824
INFOCROSSING, INC.
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(Exact name of registrant as specified in its Charter)
Delaware 13-3252333
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(State or other jurisdiction of (IRS
Employer incorporation or
organization) Identification No.)
2 Christie Heights Street Leonia, NJ 07605
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 840-4700
Securities registered pursuant to Section 12(b)
of the Exchange Act: None Securities registered
pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.01 Par Value per Share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days: [X] Yes [ ] No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in a definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
On February 28, 2001, the aggregate market value of the outstanding shares of
voting stock held by non-affiliates of the registrant was approximately
$23,167,000.
On February 28, 2001, 5,874,282 shares of the registrant's Common Stock, $0.01
par value, were outstanding.
Part III of this document incorporates by reference a Definitive Proxy
Statement to be filed by the Company on or before April 30, 2001.
1
PART I
Item 1. Description of Business
General
Infocrossing, Inc. (together with its subsidiaries, the "Company"), was
organized as a New York corporation in October 1984 and reincorporated in
Delaware as of August 31, 1999. On June 5, 2000, the Company changed its name
from Computer Outsourcing Services, Inc. to highlight its expanded business base
that now includes Internet Data Centers and automated integrated managed
services. The Company provides data system outsourcing services in the following
areas (1) Internet Data Center and server-hosting services; (2) a full suite of
automated integrated managed services that assure optimal performance, security,
reliability, and scalability of a customer's computer systems operations; (3)
information technology ("IT") hosting services; and (4) systems infrastructure
and operations consulting. The Company expects greater future growth potential
from the activities described in (1) and (2) above, although such activities
were not significant in the two-month period ended December 31, 2000. Its
customers include commercial enterprises, institutions, and government agencies.
The Company has grown through strategic acquisitions as well as business
development.
The Company's core activity has been providing infrastructure, systems, and
managed network services to large- and medium-size enterprises. Due to rapid
changes and increasing complexities in information technology, outsourcing is an
efficient solution for many businesses.
On September 15, 2000, the Company's Board of Directors voted to change the
Company's year ending date from October 31st to December 31st.
Private Sale of Securities
On April 7, 2000, the Company entered into a Securities Purchase Agreement
providing for a group of investors to purchase $60 million of the Company's
securities in a private placement. The transaction was approved by the Company's
stockholders at the Annual Meeting of Stockholders held on May 8, 2000.
The private placement transaction closed on May 10, 2000. The Company issued
157,377 shares of redeemable 8% Series A Cumulative Convertible Participating
Preferred Stock (the "Series A Preferred Stock") and warrants to purchase
2,531,926 shares of the Company's common stock at an exercise price of $0.01 per
share. The Company received $58,430,596 after payment of issuance costs and
related legal fees.
The Company primarily will use the net proceeds from this transaction to pursue
its business plan of expanding its managed services activities through its own
Internet Data Centers (each of which shall be referred to as an "IDC") and
Managed Service Centers (each of which shall be referred to as an "MSC"), as
well as at customer locations connected to an IDC or MSC. The Company also
repaid debt having an aggregate principal balance of $5 million from these
proceeds.
2
The Data Systems Outsourcing Industry
The outsourcing of data systems services, whereby a client company obtains all
or part of its information processing requirements (including systems design,
software management and hardware, network communications, training, maintenance,
and support) from providers such as the Company, continues to be a growing
trend. The Company believes that it is generally 10% to 50% more cost-effective
and efficient for its clients to outsource information processing services to
the Company than it would be to provide equivalent services for themselves by
purchasing or leasing in-house systems and hiring or contracting for service and
support personnel.
Outsourcing provides clients with the following benefits:
o The refocus of personnel, financial, and technological resources on
core business and client-related activities;
o Access to highly skilled personnel and technology resources;
o Access to resources that support technological reengineering;
o Access to experienced resources to perform selected information
processing functions;
o Reduction of operating costs; and
o Reduction of future investment in infrastructure not directly related
to the core business activity.
Business Objectives
The Company's objective is to provide a comprehensive alternative to meet all or
part of its clients' information technology and mission-critical Internet
requirements. Typically, the Company enters into contracts with clients
providing for automatic renewal unless prior written notice is given. The
contracts have varying terms typically ranging from one to five years. The rates
for the Company's services vary according to factors such as the volume and
types of services used by a particular client.
Industry-specific outsourcing applications and services are developed, so that
the Company's in-depth knowledge of a particular industry can be applied to
servicing multiple clients in that field. The Company currently provides
outsourcing services to approximately 485 clients in such diverse fields as
financial services, publishing, home health care, apparel, and consumer
products.
3
The Company's services include the following:
Internet Data Center and Server-Hosting Services
The Company began offering Internet Data Center services in January
2000 by retooling a portion of its state-of-the-art mainframe data
center into an IDC. At its IDCs, the Company offers server- hosting,
Internet access, and a full suite of automated integrated managed
services (the "AIMS System") to enterprises with mission-critical
Internet requirements. Hosting Internet systems demands many of the
same skills, procedures, and physical requirements as for mainframe and
midrange environments. In November 2000, the Company opened its second
IDC in a 52,000 square foot facility in metropolitan Atlanta. It also
has begun development of a 54,000 square foot IDC in the Northern
Virginia high-technology corridor.
The Company's IDCs are networked to allow centralized remote management
from a Command Center. Currently, the Company has a single Command
Center in Leonia, NJ, but plans to build a second one for redundancy.
The Company's IDCs feature state-of-the-art physical and network
infrastructure including:
o Multi-layered security with 24x7 guard station, video surveillance,
and restricted physical and network access.
o Redundant power systems with two tiers of back-up to ensure
continuous operation in the event of a power outage.
o Leading edge fire suppression as well as smoke and fire detection
systems.
o Redundant climate control systems in a raised floor environment.
o Multiple, high bandwidth, network access points with physically
diverse connections into the IDC.
The Company will supplement its IDCs with Managed Service Centers. MSCs
are points of presence in colocation facilities offering sufficient
power and network bandwidth to allow the Company to deliver managed
services to customers remotely. The Company announced its plans to
focus development on MSCs and remote delivery of the AIMS System in
January 2001. With this strategy, the Company will be able to maximize
its potential managed services revenue without the high capital
investment of developing fully-equipped IDCs. Previously, the Company
had announced plans to develop 20 IDCs and emphasized that its IDCs
would be differentiated from those of competitors because of the
availability of a high level of automated managed services. Since the
AIMS System has been designed for portability, the Company has modified
its strategy to deploy these services remotely thereby reducing the
capital requirements of building numerous IDCs.
4
Automated Integrated Managed Services
The Company's current AIMS System includes:
o Client Access Services consisting of Web-based tools that
allow customers to view, manage, and update their systems in
real-time through ultra-secure Web interfaces.
o Monitoring Services ranging from simple pinging of hardware to
check availability to the building and maintenance of
customized scripts that proactively monitor and report on
status and performance of all critical components of a
customer's systems and network.
o Security Services covering physical and logical components of
a customer's systems to ensure the ultimate integrity and
security of customers' data assets.
o Technical Support Services providing a comprehensive suite of
tools available on a 24x7 basis to handle asset management,
change management, incident management, and problem
resolution.
o Storage Services which take advantage of the latest data
mirroring technology enable instant access to incremental
storage, enterprise disaster protection, and non-disruptive
data backups, restorations, migrations, and testing.
The Company has designed and built its AIMS System for portability,
accessibility, reliability, and scalability. These offerings thereby
deliver mainframe dependability to the open systems and Internet
computing operations of both traditional enterprises and Internet
businesses. The Company will enhance and expand its AIMS System to
satisfy changes in technology and customer requirements.
Portability means that these managed services can be delivered directly
to customers' systems whether they are housed in an Infocrossing IDC,
in another colocation facility, or on the customers' own premises.
Remote delivery of managed services is limited only by the availability
of network connectivity to the remote location. The Company's managed
services, with the exception of remote Storage Services, require
limited network bandwidth which is readily available at most customer
sites. Although remote Storage Services require higher bandwidth
network connections, these are also generally available where target
customers for such services house and run their computers.
Both the Internet and private networks are used to provide customers
accessibility to the Company's automated integrated managed services.
This feature gives the customer's and Infocrossing's technical support
staff greater flexibility in managing and monitoring the customer's
systems from anywhere at any time.
5
It is essential that the AIMS System platform is always up and running
and critical data is never lost. Reliability is ensured by running the
managed services on highly available systems, eliminating single points
of failure through system redundancy, and maintaining back-up copies of
all critical data.
Scalability is an attribute of the AIMS System platform that enables it
to support efficiently any number of customers. A relatively small
system can be set up in a new region to serve the initial customer
base. As the number of customers grows, the regional systems can be
gradually expanded to handle increased processing and storage needs.
The Company's existing Command Center is designed to handle multiple
regional systems and can be expanded as necessary to support many more.
The redundant Command Center will be built to the same exacting
standards.
IT Hosting Services
The Company's IT Hosting Services allow clients to process and manage
core business applications typically run on large enterprise servers.
The Company provides skilled personnel, secure processing environments,
high service levels, and state-of-the art and emerging technologies to
meet client information processing requirements. Clients utilize the
Company's services in order to focus on their core business and
customer related activities while significantly reducing their
operating costs. The Company has developed industry specific experience
in markets which include publishing, financial services, apparel,
consumer products, and healthcare. Its clients in these markets rely on
the Company to combine its in-depth industry knowledge with information
technology solutions that meet their business objectives and
information processing requirements.
The Company provides Computer Facilities Management Services either at
its state-of-the-art data centers or at a client's location for medium
and large enterprises that outsource all or part of their Information
Processing functions. These services include the Company's core
Information Processing and Communications/Network Management Services
which operate 24 hours per day, each day of the year. Such services are
provided from a secure environment with critical back-up and safeguard
systems.
The Company provides a variety of customized IT services designed to
specific client requirements. These services include the development of
proprietary software utilized by the Company to meet the IT processing
requirements of particular clients. The Company manages the software
application and retains ownership of the software it develops.
The Company is developing managed services for business-to-business
interchanges. An example is a Web-enabled extranet to replace an
antiquated EDI subsystem that allows a vendor to receive orders and
floor selling information from a retailer electronically; transmit
invoices to a retailer electronically; maintain an electronic product
catalog accessible to a retailer; provide reports and on-line inquiries
of orders and shipments, along with comprehensive floor selling
reports; and generate automated advance ship notices. The Company's
extranet allows a small vendor or importer to conform to the
6
requirements of various large retailers and to continue as an approved
vendor of those retailers without a substantial investment in hardware
and technical personnel.
Systems Infrastructure and Operations Consulting
The Company has unique expertise in analyzing data center operations to
maximize operating performance and to minimize operating costs.
Consulting services include hardware selection; automation; disaster
recovery planning; systems management; storage management; and
performance reporting. The Company concentrates on aligning a client's
information systems with such client's business objectives to
strengthen the client's technology infrastructure to enable it to be
more competitive and to focus on its core business.
After performing analytical studies to identify areas of improvement,
the Company's professionals develop a transformation plan, manage the
implementation process, and monitor the results.
The Company has applied its expertise in infrastructure and operations
to managing its own Internet Data Centers and in creating and
delivering its automated integrated managed services.
Customer Service and Support
The Company believes that close attention to customer service and support has
been, and will continue to be, crucial to its success. The Company provides a
high degree of customer service and support, including customized training and
rapid response to client needs, which the Company believes generally exceeds
industry standards. Because of its attention to customer service, many of the
Company's client relationships have tended to be long-term.
Marketing and Sales
The Company currently targets its marketing efforts to a broad range of large
and medium-size enterprises as well as including Internet-centric business. The
Company's traditional customer base had been concentrated in specific industries
such as financial services, publishing, apparel, consumer products, and health
care, where it has developed industry specific services and a reputation for
technical expertise and excellent service. For the two-month period ended
December 31, 2000, Alicomp, a division of Alicare, Inc. and International
Masters Publishers, Inc. accounted for 16% and 17%, respectively, of the
Company's revenues. In fiscal 2000, these two companies accounted for 14% and
13%, respectively of the Company's revenues. In the two prior fiscal years, no
client accounted for 10% or more of revenues.
Initial contact is made by a variety of methods, including seminars, mailings,
telemarketing, referrals, and attendance at industry conventions and trade
shows. The Company's sales representatives and marketing support staff analyze
clients' requirements and prepare product demonstrations. In addition to
internal marketing efforts, the Company has formed strategic alliances to
generate additional sales. The Company also entered into agreements with certain
enterprises and individuals that would be entitled to receive compensation for
their assistance in procuring sales.
7
Product Development
Since the computer industry is characterized by rapid change in hardware and
software technology, the Company continually enhances its services to meet
client requirements. The Company is committed to maintaining its product
offerings at a very high level of technological proficiency and believes that it
has developed a reputation for providing innovative solutions to client
requirements. Where possible, the Company seeks to develop product offerings
characterized by a high degree of recurring usage, so that clients come to
depend on the Company's services. Product development is performed by the
Company's employees and in limited instances by outside consultants. Capitalized
expenditures for enhancements to existing products approximated $119,000,
$1,011,000, $905,000, and $892,000 for the two months ended December 31, 2000,
and the fiscal years ended October 31, 2000, 1999, and 1998, respectively.
Competition
Although the Company is not aware of other companies that provide as wide a
range of services and customer support as the Company does, other companies do
provide one or more of the Company's services. The Company's current and
potential competition includes other independent computer service companies and
divisions of diversified enterprises, as well as the internal IT departments of
existing and potential customers. The Company knows of no reliable statistic by
which it can determine the number of competitors. Among the best known of the
Company's competitors are Exodus Communications, Inc.; Digex Inc.; Globix Corp.;
IBM Corporation; Electronic Data Systems Corporation; Affiliated Computer
Services, Inc.; Computer Sciences Corp.; and Level 3 Communications, Inc. The
Company also competes with smaller, start-up companies that provide managed
services such as Loudcloud, Inc.; SilverBack Technologies; and NOCPulse Inc.
Aside from the larger competitors, the outsourcing service industry is
fragmented, with numerous companies offering services in limited geographic
areas, vertical markets, or product categories. Many of the Company's
competitors have substantially greater financial and other resources than the
Company, and there can be no assurance that the Company will be able to compete
effectively in the future.
Technological Changes
Although the Company is not aware of any pending or prospective technological
changes that would adversely affect its business, new developments in technology
could have a material adverse effect on the development or sales of some or all
of the Company's services or could render its services noncompetitive or
obsolete. There can be no assurance that the Company will be able to develop or
acquire new and improved services or systems which may be required in order for
it to remain competitive. The Company believes, however, that technological
changes do not present a material risk to the Company's business because the
Company expects to be able to adapt to and acquire any new technology more
easily than its existing and potential clients. In addition, technological
change increases the risk of obsolescence to potential clients that might
otherwise choose to maintain in-house systems rather than use the Company's
services, thus potentially creating selling opportunities for the Company.
8
Intellectual Property Matters
The Company's systems and processes are not protected by patents nor any
registered copyrights, trademarks, trade names, or service marks. To protect its
proprietary services and software from illegal reproduction, the Company relies
on certain mechanical techniques in addition to trade secret laws, restrictions
in certain of its customer agreements with respect to use of the Company's
services and disclosure to third parties, and internal non-disclosure
safeguards, including confidentiality restrictions with certain employees.
Despite the Company's efforts, it may be possible for competitors or clients to
copy aspects of the Company's trade secrets.
The Company believes that because of the rapid pace of technological change in
the computer industry, copyright and other forms of intellectual property
protection are of less significance than factors such as the knowledge and
experience of the Company's management and other personnel, and the Company's
ability to develop, enhance, market, and acquire new systems and services.
The Company is experienced in handling confidential and sensitive client
information, and maintains numerous security procedures to help ensure that the
confidentiality of client data is maintained.
Compliance with Environmental Laws
The Company has incurred no significant expense in its compliance with Federal,
state, and local environmental laws.
Employees
As of December 31, 2000, the Company had 260 full-time and 12 part-time
employees. None of the Company's employees is represented by a labor
organization and the Company is not aware of any activities seeking such
organization. The Company considers its relationship with its employees to be
satisfactory.
Insurance
The Company maintains insurance coverage that management believes is reasonable,
including errors and omissions coverage, business interruption insurance to fund
its operations in the event of catastrophic damage to any of its operations
centers, and insurance for the loss and reconstruction of its computer systems.
The Company also maintains extensive data backup procedures to protect both
client and Company data.
Financial Information about Geographic Areas
Substantially all of the Company's revenues are derived from U.S. sources.
9
Item 2. Description of Property
The Company leases a facility of approximately 67,000 square feet in Leonia, NJ
for its headquarters and data center operations. The lease expires on December
31, 2014.
On June 6, 2000, the Company announced the signing of a lease for a 52,000
square foot building located in metropolitan Atlanta. The Company redeveloped a
portion of this building into its second IDC, which opened in November 2000. The
lease expires on June 30, 2015.
On July 25, 2000, the Company announced the signing of a lease for a 54,000
square foot building that was under construction in the Northern Virginia high
tech corridor. The Company is evaluating design alternatives for this building
as its third IDC. The lease expires on December 31, 2015.
The two IDC leases required the Company to provide security deposits aggregating
approximately $2,086,000 in the form of standby letters of credit, which the
Company collateralizes by means of restricted cash funds invested in
certificates of deposit. The amounts of these letters of credit may be reduced,
at various times and subject to various conditions, to an aggregate of
approximately $725,000 by 2010.
In July 2000, the Company closed a sales office in Charlotte, NC. The activities
of this office have been consolidated with those in Leonia, NJ, and the Company
is actively seeking a subtenant for the space. The space is not suitable for
conversion into an IDC or MSC. The Company accrued approximately $514,000 for
future lease payments on this facility through the end of the lease on December
31, 2002.
The Company also leases 13,307 square feet of office space as follows:
Location Square Feet Lease Expiration Date
-------------- ----------- ---------------------
Aberdeen, NJ 5,700 June 30, 2001
New York, NY 5,700 December 31, 2009
Glendale, CA 1,907 May 31, 2005
The Company generally leases its equipment under standard commercial leases, in
some cases with purchase options, which the Company exercises from time to time.
The Company's equipment is generally covered by standard commercial maintenance
agreements.
The Company believes its current facilities are in good condition and are
adequate to accommodate its current volume of business as well as anticipated
increases.
10
Item 3. Legal Proceedings
Atlas Business Service Corp. ("Atlas") vs. Infocrossing, Inc.
- --------------------------------------------------------------
In June 2000, the Company commenced an action against Atlas, a former customer,
in the Supreme Court of New York, New York County (Index No. 00/602461) to
collect approximately $45,000 in outstanding data processing invoices. Atlas
filed an answer in which it asserted certain affirmative defenses alleging that
the services were deficient. Discovery is proceeding in this action.
In September 2000, the Company was served with a complaint in connection with a
lawsuit commenced by Atlas in August 2000 in Federal District Court for the
Southern District of New York (00 CIV. 6521). Atlas alleges that a breach of
contract by the Company in providing data processing services resulted in the
loss of three customers and annual revenue of $700,000. The Company filed an
answer denying all of the material allegations and asserting several affirmative
defenses. Pursuant to a Scheduling Order, discovery must be completed by June
21, 2001.
It is premature to give a proper evaluation of the probability of a favorable or
unfavorable outcome. While it is again premature to give a proper evaluation of
the potential liability, Atlas has demanded damages of not less than $5 million.
Management believes that the above matters will be resolved without any material
adverse impact to the Company's financial position, results of operations, or
cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
11
PART II
Item 5. Market for Registrant's Common
Stock and Related Stockholder Matters
The Company's common stock is traded on the NASDAQ Stock Market under the symbol
IFOX. Prior to June 5, 2000, the date on which the Company changed its name from
Computer Outsourcing Services, Inc., the Company's symbol was COSI. For the
periods reported below, the following table sets forth the high and low bid
quotations for the common stock as reported by NASDAQ-NMS.
BID
-----------------
High Low
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For the year ended October 31, 1999:
1st Quarter (November 1, 1998 - January 31, 1999) 16.000 8.750
2nd Quarter (February 1, 1999 - April 30, 1999) 12.125 7.000
3rd Quarter (May 1, 1999 - July 31, 1999) 12.250 8.500
4th Quarter (August 1, 1999 - October 31, 1999) 10.750 7.125
For the year ended October 31, 2000:
1st Quarter (November 1, 1999 - January 31, 2000) 37.325 9.188
2nd Quarter (February 1, 2000 - April 30, 2000) 54.875 14.250
3rd Quarter (May 1, 2000 - July 31, 2000) 25.250 13.250
4th Quarter (August 1, 2000 - October 31, 2000) 24.125 11.313
For the two months ended December 31, 2000 13.000 5.125
The closing price of the Company's common stock on NASDAQ-NMS on February 28,
2001 was $7.125 per share. The Company has approximately 94 stockholders of
record. In addition, the Company believes that there are approximately 1,000
beneficial owners holding their shares in "street name."
Private Sale of Securities
On April 7, 2000, the Company entered into a Securities Purchase Agreement
providing for a group of investors (the "Purchasers") to purchase $60 million of
the Company's securities in a private placement. The transaction was approved by
the Company's stockholders at the Annual Meeting of Stockholders held on May 8,
2000.
The private placement transaction closed on May 10, 2000. The Company issued
157,377 shares of redeemable 8% Series A Cumulative Convertible Participating
Preferred Stock (the "Series A Preferred Stock") and warrants to purchase
2,531,926 shares of the Company's common stock at an exercise price of $0.01 per
share. The Company received $58,430,596 after payment of issuance costs and
related legal fees.
The Company primarily will use the net proceeds from this transaction to pursue
its business plan of expanding its managed services activities through its own
IDCs, MSCs, and at customer locations connected to an IDC or MSC. The Company
also repaid debt having a principal balance of $5 million from these proceeds.
12
Each share of Series A Preferred Stock maintains a liquidation preference of
$381.25 per share, or an aggregate of $60 million for all 157,377 shares, plus
accumulated and accrued dividends. Each share of Series A Preferred Stock bears
dividends at the rate of $7.625 payable on March 1, June 1, September 1, and
December 1 of each year. Such dividends will accumulate and compound quarterly
at a rate of 8% per annum for approximately the first three years. Thereafter,
dividends may be accumulated and compounded quarterly at 8% per annum or paid in
cash, at the option of the Company. Each share of Series A Preferred Stock is
convertible initially into ten shares of common stock of the Company at the
option of the Purchasers, subject to adjustment provided in the Certificate of
Designation.
The conversion price of the Series A Preferred Stock shall be adjusted from time
to time if the Company: (i) pays a stock dividend; (ii) except in certain
instances, issues or sells any shares of common stock or convertible securities
at a price per share less than $14.61, as adjusted; (iii) subdivides or
reclassifies its common stock; (iv) distributes assets to holders of common
stock; or (v) makes a tender offer for all or any portion of its common stock.
The Company has the option to redeem the Series A Preferred Stock at any time
following five years from the closing date at the greater of (x) $381.25 per
share plus all accrued and unpaid dividends or (y) the market value per share at
the date of redemption of the common stock into which shares of the Series A
Preferred Stock are convertible. The holders have a one-year right to require
the Company to redeem shares of Series A Preferred Stock after seven years from
the closing date for $381.25 per share, plus all accrued and unpaid dividends
thereon, in certain circumstances.
Each share of Series A Preferred Stock is entitled to vote on all matters on
which holders of common stock are entitled to vote, with each share of Series A
Preferred Stock having a number of votes equal to the number of shares of common
stock into which the Series A Preferred Stock is convertible.
The approval of the holders of two-thirds of the shares of Series A Preferred
Stock is required for the Company to: (i) amend its charter or by-laws so as to
adversely effect the rights or preferences of the Series A Preferred Stock; (ii)
merge or transfer all or substantially of its assets, reorganize, or take any
action that is expected to result in a change of control of the Company or a
planned liquidation; (iii) impose material restrictions on the Company's ability
to honor the rights of the holders of the Series A Preferred Stock; (iv)
authorize or sell any class or series of equity securities (other than stock
options pursuant to existing plans or upon the conversion of the Series A
Preferred Stock or the exercise of the warrants) which ranks senior to, or pari
passu with, the Series A Preferred Stock; (v) subdivide or modify any
outstanding shares of the Company if the rights of the holders of the Series A
Preferred Stock are impaired; or (vi) pay any dividends on any class of stock
(other than the Series A Preferred Stock) or redeem or repurchase any equity
securities of the Company or its subsidiaries.
The warrants issued in connection with this transaction must be exercised before
May 11, 2007.
13
The sale of shares of Series A Preferred Stock, the warrants, and the shares of
common stock issuable upon conversion of the Series A Preferred Stock or
exercise of the Warrants are not registered under the Securities Act. The
Company has entered into a Registration Rights Agreement providing for certain
demand registration and unlimited piggyback registrations, subject to certain
limitations.
The investors, the Company and certain specified officers of the Company (the
"Management Stockholders") entered into a Stockholders Agreement. Among other
things, the Stockholders Agreement provides: (i) limitations on transfers of the
Company's securities; (ii) the agreement of the parties to vote all securities
to elect certain designees to the Company's Board of Directors; and (iii) that
certain acts may not be taken without the prior written approval of the
directors nominated by the investors.
Dividends
The Company has not paid dividends to holders of its common stock since
inception and does not plan to pay dividends on its common stock in the
foreseeable future. The Company intends to retain earnings to finance growth.
Repurchase of Securities
On November 16, 2000, the Company announced that its Board of Directors approved
a repurchase of up to 500,000 shares of the Company's common stock. All
repurchases are to be made in open market transactions at prevailing market
prices, subject to applicable securities laws. As of December 31, 2000, the
Company had repurchased 6,900 shares for approximately $68,000. The Company may
repurchase stock pursuant to this program at any time.
Recent Issuances of Unregistered Securities
During the two months ended December 31, 2000, the Company did not sell or issue
its common stock in any transaction exempt from registration as private
placements pursuant to Section 4(2) of the Securities Act of 1933.
14
Item 6. Selected Financial Data (In Thousands Except For Per Share Amounts)
-------------------------------------------------------------------
Two Months
Ended December 31, Years ended October 31:
-------------------- --------------------------------------------------------
2000 1999 2000 1999 1998 1997 1996
-------- -------- -------- -------- -------- -------- --------
(Unaudited)
Revenues $ 3,521 $ 4,874 $ 24,471 $ 34,265 $ 30,403 $ 24,396 $ 21,222
-------- -------- -------- -------- -------- --------
Net income/(loss)
from continuing
operations (4,440) (343) (14,983) 1,661 1,079 688 498
-------- -------- -------- -------- -------- -------- --------
Loss on discontinued
operation, net
of income tax
benefit - - - - (76) (127) (165)
-------- -------- -------- -------- -------- -------- --------
Gain on sale of
discontinued
operation, net
of income tax
provision - - - - 1,696 - -
-------- -------- -------- -------- -------- -------- --------
Net income/(loss)
to common
stockholders $ (5,790) $ (343) $(18,819) $ 1,661 $ 2,699 $ 561 $ 333
======== ======== ======== ======== ======== ======== ========
Net Income/(Loss)
to common stock-
holders per
diluted common
share $ (0.98) $ (0.07) $ (3.58) $ 0.34 $ 0.61 $ 0.14 $ 0.08
======== ======== ======== ======== ======== ======== ========
Total assets $ 78,449 $ 30,597 $ 78,844 $ 27,554 $ 26,949 $ 19,143 $ 17,859
======== ======== ======== ======== ======== ======== ========
Long term
obligations and
(beginning in
fiscal 2000)
redeemable
preferred
stock $ 38,214 $ 2,014 $ 34,146 $ - $ 12 $ 272 $ 1,648
-------- -------- -------- -------- -------- -------- --------
15
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
During 1999, with the rapid growth of eCommerce and iBusiness, the Company
focused on meeting the exploding requirements of enterprises to outsource their
Internet activities. The Company retooled a portion of its state-of-the-art data
center into an Internet Data Center ("IDC") from which the Company now offers
server-hosting as well as systems and network management services to companies
with mission-critical Internet requirements. The Company differentiates itself
from competitors by offering a comprehensive suite of automated integrated
managed services (the "AIMS System") to enhance the efficiency, reliability, and
security of a customer's online activities.
In June 2000, the Company announced the signing of a lease on a 52,000 square
foot building located in metropolitan Atlanta. The Company redeveloped
approximately half of this building as its second IDC. In July 2000, the Company
announced the signing of a lease for a 54,000 square foot building that was
under construction as its third IDC. This facility, located in the Northern
Virginia high tech corridor, was turned over to the Company in November 2000 for
development as an IDC. The Company is presently evaluating design alternatives
with respect to the development of this facility.
The capital requirements of developing and equipping IDCs are demanding. In
January 2001, as a result of the successful development of the AIMS System that
could be remotely delivered and accessed, the Company announced that it would
develop Managed Service Centers ("MSCs") in colocation facilities from which it
could offer automated integrated managed services to users of such facilities as
well as others through remote delivery. The Company will add offsite customer
locations to the network covering the Company's IDCs and MSCs. This strategy
allows the Company to broaden its customer base for the AIMS System while
controlling its capital costs. By automating the services and developing them
with an architecture permitting remote delivery and access, the services are
scalable without significant infrastructure costs.
Initially, subject to the availability of financing, the Company planned to
develop a total of 20 IDCs. Depending on financing and specific geographic
conditions, the Company may develop additional IDCs on a selective basis. Its
strategy of developing MSCs and remotely delivering automated managed services
should foster growth without excessive capital requirements. As described in
Liquidity and Capital Resources, the Company completed the sale of $60 million
of securities in a private placement on May 10, 2000.
16
Two Months ended December 31, 2000 as
Compared to the Two Months ended December 31, 1999
For the two months ended December 31, 2000 (the "Current Period"), revenues
decreased $1,353,000 (27.8%) to $3,521,000 from $4,874,000 for the two months
ended December 31, 1999 (the "Prior Period"). Revenues were impacted negatively
as a result of the redeployment of consultants from providing services for fees
to developing a comprehensive suite of automated integrated managed services to
attract clients requiring mission-critical Internet solutions. The decline in
revenue also reflects the loss of two major clients, as well as the Company's
decision to discontinue certain low margin activities that are inconsistent with
its current business strategy. The two former clients include a major publishing
company that had given notice in 1997, as previously reported, of its intention
to exercise an option to cancel its contract after June 30, 1999 by paying a
cash penalty. The Company continued to perform significant services for this
publisher through December 1999. The other former client, an apparel
manufacturer, ceased outsourcing its information technology operations. The
Company assisted the apparel manufacturer in implementing the necessary systems
to allow the former client to satisfy its information technology operations
internally. The Company ceased providing services to the apparel manufacturer in
October 2000.
Operating costs increased $1,321,000 (35.2%) to $5,076,000 during the Current
Period compared with $3,755,000 in the Prior Period. The increase primarily
consists of IDC operating costs and the development of automated managed
services to be offered throughout the planned network of IDCs, MSCs, and other
locations of customers' hardware.
Selling and promotion costs increased $346,000 (71.6%) to $830,000 during the
Current Period compared with $484,000 in the Prior Period. The increase is
attributable to a larger staff needed to market the Company's IDCs and automated
managed services.
General and administrative expenses increased $1,328,000 (109.0%) to $2,546,000
for the Current Period from $1,218,000 for the Prior Period, reflecting higher
costs associated with the Company's server-hosting and managed services
activities. Current Period expenses also include $479,000 of amortization of a
restricted stock award. Amortization of intangibles acquired in connection with
the Enterprise Purchase were $90,000 for the Current Period versus $76,000 for
the Prior Period.
The Company recorded net interest income of $491,000 in the Current Period,
compared with net interest income of $21,000 in the Prior Period. The increase
of $470,000 reflects interest income from a significantly higher average balance
of interest-earning assets during the Current Period, offset by approximately
$30,000 of interest expense on a larger average outstanding debt balance than in
the Prior Period.
The Company recorded no tax benefit for the Current Period versus a tax benefit
of $219,000 for the Prior Period. The cumulative tax benefit recorded by the
Company is limited to the anticipated refund the Company will receive as a
result of carrying back a portion of the pretax loss to prior years.
17
The Company had a net loss of $4,440,000 in the Current Period versus a net loss
of $343,000 for the Prior Period. Net loss to common stockholders after
accretion, accumulated dividends, and accrued dividends on preferred stock was
$5,790,000 for the Current Period. The loss per common share was $0.98 for the
Current Period compared with a loss per common share of $0.07 in the Prior
Period, on both a basic and diluted basis. Common stock equivalents were ignored
in determining the net loss per share for both periods, since the inclusion of
such equivalents would be anti-dilutive.
Fiscal Year 2000 as Compared to Fiscal Year 1999
On December 18, 1998, the Company, through a wholly-owned subsidiary, acquired
certain assets and the business of Enterprise Technology Group, Incorporated
(the "Enterprise Purchase"). The Company's subsidiary, ETG, Inc. ("ETG"),
provides information technology consulting services with a focus on
infrastructure management solutions.
During fiscal 2000, revenues decreased $9,794,000 (28.6%) to $24,471,000 from
$34,265,000 for the year ended October 31, 1999. This fall-off in revenue was
due primarily to two factors: a temporary shift in IT contract spending to Year
2000 compliance and management's decision to redirect consulting staff to the
development of the Company's AIMS System. Since Year 2000 compliance was of
paramount concern, many companies were reluctant to make any changes with
respect to their information technology functions. There was a pronounced
decline in requests for proposals for major outsourcing contracts. With Year
2000 concerns alleviated, there was renewed interest in outsourcing. The
potential effect of this renewed interest was not realized, until late in fiscal
2000, due to the lengthy sales cycle of a major outsourcing assignment. The
Company has entered into three multi-year, outsourcing engagements that are
anticipated to generate in excess of $6,000,000 in revenue during the terms of
the contracts.
Revenues also were impacted negatively as a result of the redeployment of
consultants from providing services for fees to developing a comprehensive suite
of automated integrated managed services to attract clients requiring
mission-critical Internet solutions. The decline in revenue also reflects the
loss of a major publishing client, the absence of Year-2000 related revenues,
and income received in fiscal 1999 from a covenant not to compete. As previously
reported, the publishing client had given notice in 1997 of its intention to
exercise an option to cancel its contract after June 30, 1999 by paying a cash
penalty. The decline also reflects the Company's decision to discontinue certain
low margin activities that are inconsistent with its current business strategy.
Operating costs increased $2,879,000 (12.2%) to $26,512,000 during fiscal 2000
compared with $23,633,000 in fiscal 1999. The increase primarily consists of IDC
operating costs and the development of automated managed services to be offered
throughout the planned network of IDCs, MSCs, and other locations of customers'
hardware.
Selling and promotion costs increased $1,153,000 (56.1%) to $3,209,000 during
fiscal 2000 compared with $2,056,000 in fiscal 1999. The increase is
attributable to a larger staff needed to market the Company's IDCs and automated
managed services.
18
General and administrative expenses increased $6,878,000 (111.8%) to $13,032,000
for fiscal 2000 from $6,154,000 for fiscal 1999, reflecting higher costs
associated with the Company's server-hosting and managed services activities.
Current period expenses also include: $1,198,000 of amortization of a restricted
stock award; $457,000 of search and other professional fees incurred in
connection with entering into an employment agreement with a new CEO; and
$120,000 representing the value of warrants issued to settle certain rights held
by investors in a financing arrangement. Amortization of intangibles acquired in
connection with the Enterprise Purchase were $526,000 in fiscal 2000 versus
$381,000 for fiscal 1999.
In fiscal 2000, the Company accrued $514,000 of future lease costs related to a
closed sales office.
The Company recorded net interest income of $1,640,000 in fiscal 2000, compared
with net interest income of $286,000 in fiscal 1999. The increase of $1,354,000
reflects interest income from a significantly higher average balance of
interest-earning assets during fiscal 2000, offset by interest expense on a
larger average outstanding debt balance than in fiscal 1999.
The Company recorded a tax benefit of $2,173,000 for fiscal 2000 versus a tax
provision of $1,046,000 for fiscal 1999. The potential tax benefit for fiscal
2000 was reduced by a valuation allowance against net tax benefits. The
valuation allowance was necessitated by the expectation of continued losses
while the Company develops IDCs, MSCs, and additional automated managed service
offerings.
The Company recorded a net loss of $14,983,000 in fiscal 2000 versus net income
of $1,661,000 for fiscal 1999. Net loss to common stockholders after accretion,
accumulated dividends, and accrued dividends on preferred stock was $18,819,000
for fiscal 2000. The loss per common share was $3.58 for fiscal 2000 on both a
basic and diluted basis. For fiscal 1999, earnings per share were $0.36 and
$0.34 for basic and diluted common shares, respectively. Common stock
equivalents were ignored in determining the net loss per share for fiscal 2000,
since the inclusion of such equivalents would be anti-dilutive.
Fiscal Year 1999 as Compared to Fiscal Year 1998
On December 18, 1998, the Company acquired certain assets and the business of
Enterprise Technology Group, Inc. (the "Enterprise Purchase"). Enterprise
Technology Group provided information technology consulting services with a
focus on infrastructure management solutions.
For the year ended October 31, 1999, revenues increased $3,862,000 (12.7%) to
$34,265,000 from $30,403,000 recorded in the year ended October 31, 1998. The
Company's Year-2000 consulting revenues declined by approximately $1,665,000
from $1,972,000 for fiscal year 1998 to $307,000 for fiscal year 1999. Revenue
from a covenant not to compete was $1,000,000 in fiscal 1999 versus $440,000 for
fiscal 1998 as a result in an amendment to the non-compete agreement. Increased
revenues from other activities substantially exceeded the decline in Year-2000
consulting revenues.
19
Data processing costs increased $3,651,000 to $23,633,000 (69.0% of revenues)
during the current year, compared to $19,981,000 (65.7% of revenues) in the
prior year. Data processing costs rose as a result of higher sales and upgrades
in the Company's data center.
Selling and promotion costs increased $867,000 to $2,056,000, (6.0% of revenues)
during the current year compared to $1,189,000 (3.9% of revenues) in the prior
year. The increase is attributable to additional sales staff and increased
marketing initiatives.
General and administrative expenses increased $147,000 to $6,154,000 (18.0% of
revenues) in the current year as compared to $6,007,000 (19.8% of revenues) in
the prior year. Certain savings achieved by the Company were offset by expenses
related to the Enterprise Purchase and to the new offices in Charlotte, North
Carolina and New Haven, Connecticut.
Net interest income exceeded expense by $286,000 in fiscal 1999, and by $548,000
in fiscal 1998. The decrease in net interest income of $262,000 resulted from
lower cash balances after the Enterprise Purchase and the payment of income
taxes and costs related to the Sale of the Payroll Division.
The effective tax rate on income from continuing operations rose to 38.6% for
fiscal 1999 from 30% for fiscal 1998. The rate was lower in fiscal 1998 in part
because of tax credits that were utilized in such year.
After the provision for income taxes, the Company recorded a 54% increase in
income from continuing operations, from $1,079,000 ($0.24 per diluted share) for
the year ended October 31, 1998, to $1,661,000 ($0.34 per diluted share) for the
year ended October 31, 1999.
Liquidity and Capital Resources
During the two months ended December 31, 2000, the Company used net cash of
$3,558,000 in operations, primarily as a result of a pretax loss of $4,440,000
and a decrease in accounts payable of $893,000, offset by an increase in accrued
expenses of $890,000 and $503,000 in depreciation and amortization and $479,000
in amortization of a restricted stock award.
The Company invested $839,000 for the purchase of equipment and fixed assets as
well as IDC construction and $119,000 for product development and enhancement.
The Company also purchased 6,900 shares of its common stock in the open market
for $68,000, and redeemed maturing marketable debt securities totaling
$2,369,000.
The principal financing activities were a loan and a cash advance totaling
$1,489,000 to the Company's Chief Executive Officer. The employment agreement
with the CEO provided for an award of 800,000 restricted shares of common stock.
In connection with this award, the Company agreed to loan the CEO 50 percent of
any tax payable with respect to the restricted shares. Any such loan will bear
interest at the statutory rate and is payable when the Executive sells or
otherwise transfers the restricted shares. In connection with this provision, on
December 21, 2000 the Company loaned $1,291,000 to the CEO. The advance to the
CEO of $198,000 was repaid on January 3, 2001.
20
As of December 31, 2000, the Company had cash and equivalents and highly-liquid
short-term investments aggregating approximately $40,177,000.
The Company believes that the combination of its cash and other liquid assets
will provide adequate resources to fund its ongoing operating requirements. The
Company has announced plans to develop IDCs and MSCs in the United States and
abroad. As of December 31, 2000, the Company had commitments of approximately
$2,830,000 in connection with constructing and equipping its IDCs in Atlanta and
Northern Virginia.
Forward Looking Statements
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. As such, final results
could differ from estimates or expectations due to risks and uncertainties
including, but not limited to: incomplete or preliminary information; changes in
government regulations and policies; continued acceptance of the Company's
products and services in the marketplace; competitive factors; new products;
technological changes; the Company's dependence on third party suppliers;
intellectual property rights; and other risks. For any of these factors, the
Company claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995, as amended.
New Financial Accounting Standards
Derivatives - In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), the effective date of which was deferred for all
fiscal quarters of fiscal years beginning after June 15, 2000 by SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
Effective Date of SFAS No. 133. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. This statement did not have a
significant impact on the Company's financial position or results of operations.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
The Company is not significantly exposed to the impact of interest rate changes,
foreign currency fluctuations, or changes in the market values of its
investments. The Company primarily invests in certificates of deposit and
commercial paper issued only by major corporations and financial institutions of
recognized strength and security, and (with very few exceptions) holds all
investments to term. The Company generally invests in instruments of no more
than 60 days maturity.
21
Market Risk
The Company's accounts receivable are subject, in the normal course of business,
to collection risks. It regularly assesses these risks and has established
policies and business practices to protect against the adverse effects of
collection risks. As a result, the Company does not anticipate any material
losses in this area.
Foreign Currency Risks
The Company bills foreign customers in U.S. dollars only.
Item 8. Financial Statements
The Financial Statements and Notes thereto are set forth beginning at page F-1
of this Report. Also included is Schedule II, Valuation and Qualifying Accounts,
which schedule is set forth at page S-1 of this report. All other schedules for
which provision is made in the applicable accounting regulation of the
Securities and Exchange Commission are inapplicable and therefore have been
omitted.
Item 9. Changes In and Disagreements with
Accountants on Accounting and Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers
Compliance with Section 16(a) of the Securities Exchange Act
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
The contents of Part III are incorporated by reference to a Definitive Proxy
Statement to be filed by the Company on or before April 30, 2001.
22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. The financial statements and schedule required to be filed in
satisfaction of Item 8 are listed in the Index to Consolidated Financial
Statements and Schedule which appears as page F-1 of this report.
2. The exhibits required to be filed as a part of this Annual Report
are listed below. The exhibits marked with an asterisk (*) are
incorporated by reference to the Company's Registration Statement on
Form SB-2 (No. 33-53888NY).
Exhibit No. Description
3.1A Restated Certificate of Incorporation, incorporated by
reference to Exhibit 3.1 to the Company's Form 10-KSB for
the period ended October 31, 1999.
3.1B Certificate of Amendment to the Company's Restated
Certificate of Incorporation, filed May 8, 2000 to increase
the number of authorized shares and to remove Article 11,
incorporated by reference to Exhibit 3.1B to the Company's
Form 10-Q for the period ended April 30, 2000.
3.2 Amended and Restated By-Laws, incorporated by reference to
Exhibit 3.2 to the Company's Form 10-KSB for the period
ended October 31, 1999.
4.1 Certificate of Designation of the Powers, Preferences and
other Special Rights of Series A Cumulative Convertible
Participating Preferred Stock, incorporated by reference to
the Company's Proxy Statement for the Annual Meeting held on
May 8, 2000.
4.2 Registration Rights Agreement by and among Computer
Outsourcing Services, Inc.; DB Capital Investors, LP; the
`Initial Sandler Holders' as defined in the agreement
("Sandler Holders"); and Zach Lonstein, incorporated by
reference to the Company's Proxy Statement for the Annual
Meeting held on May 8, 2000.
4.3 Warrant Agreement between Computer Outsourcing Services, Inc
and the Warrantholders Party thereto, incorporated by
reference to the Company's Proxy Statement for the Annual
Meeting held on May 8, 2000.
4.4 Stockholders Agreement by and among Computer Outsourcing
Services, Inc.; DB Capital Investors, LP; the Sandler
Holders; and the Management and Non-Management Stockholders
listed therein, incorporated by reference to the Company's
Proxy Statement for the Annual Meeting held on May 8, 2000.
10.1 Employment Agreement, dated as of June 15, 2000, between the
Company and Charles F. Auster, incorporated by reference to
Exhibit 10.3 to the Company's Form 10-Q for the period ended
July 31, 2000.
23
Exhibit No. Description
10.2 Employment Agreement, dated as of November 1, 1999, between
the Company and Zach Lonstein, incorporated by reference to
Exhibit 10.4 to the Company's Form 10-Q for the period ended
July 31, 2000.
10.3 Employment Agreement, dated as of November 1, 1999, between
the Company and Robert Wallach, incorporated by reference to
Exhibit 10.5 to the Company's Form 10-Q for the period ended
July 31, 2000.
10.4 Employment Agreement dated as of December 18, 1998 between
the COSI Acquisition Corp ("ETG") and Warren E. Ousley,
incorporated by reference to Form 8-K filed January 14,
1999.
10.5A * Consulting Agreement dated November 1, 1992 between the
Company and Stanley Berger ("Berger").
10.5B Consulting Agreement Amendment dated as of October 31, 1994
between the Company and Berger, incorporated by reference to
Exhibit 10.5B to the Company's Form 10-K for the period
ended October 31, 2000.
10.6A 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 period
ended October 31, 2000.
10.6B 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
period ended October 31, 2000.
10.7A Lease dated June 2, 1997 between the Company and Leonia
Associates, LLC, incorporated by reference to the Company's
Annual Report on Form 10-KSB for the year ended October 31,
1997.
10.7B First Amendment of Lease between Leonia Associates, LLC and
the Company, dated January 16, 1998, incorporated by
reference to the Company's Annual Report on Form 10-KSB for
the year ended October 31, 1998.
10.7C Second Amendment of Lease between Leonia Associates, LLC and
the Company, dated as of September 9, 1999, incorporated by
reference to Exhibit 10.8C to the Company's Form 10-KSB for
the period ended October 31, 1999.
10.7D Third Amendment of Lease between Leonia Associates, LLC and
the Company, dated as of August 28, 2000, incorporated by
reference to Exhibit 10.7D to the Company's 10-K for the
period ended October 31, 2000.
24
Exhibit No. Description
10.8 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.
10.9A Deed of Lease dated July 21, 2000 between the Company and
Beco-Terminal, LLC, ("BECO") incorporated by reference to
Exhibit 10.7 to the Company's Form 10-Q for the period ended
July 31, 2000.
10.9B First Amendment of Lease dated as of December 18, 2000
between the Company and BECO.
10.10 Amended and Restated 1992 Stock Option and Stock
Appreciation Rights Plan, incorporated by reference to
Appendix A to the Definitive Proxy for the Company's Annual
Meeting held on May 8, 2000.
10.11A Asset Purchase Agreement dated as of December 16, 1998, by
and among the Company, COSI Acquisition Corp, Enterprise
Technology Group, Inc.("Enterprise"), and certain stock-
holders of Enterprise, incorporated by reference to a Form
8-K on January 4, 1999.
10.11B Amendment Asset Purchase Agreement dated as of February 1,
2001, by and among the Company, ETG, Inc., Enterprise, and
certain stockholders of Enterprise.
10.11C Warrant to purchase 65,000 shares of the Company's common
stock, dated February 1, 2001, issued to Enterprise
10.12 Non-Competition and Non Solicitation Agreements dated as of
December 18, 1998 between COSI Acquisition Corp ("ETG") and
Enterprise, between ETG and Warren E. Ousley, and between
ETG and M. Peter Miller, incorporated by reference to a
Current Report on Form 8-K filed by the Company on January
4, 1999.
21 List of Subsidiaries of the Company
23 Consent of Ernst & Young LLP
(b) Reports on Form 8-K
None.
25
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INFOCROSSING, INC.
April 2, 2001 /s/
---------------------------------------------
Charles F. Auster - Chief Executive Officer
April 2, 2001 /s/
---------------------------------------------
Nicholas J. Letizia - Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
April 2, 2001 /s/
--------------------------------------------
Zach Lonstein - Chairman of the Board of
Directors
April 2, 2001 /s/
--------------------------------------------
Charles F. Auster - Director
April 2, 2001 /s/
--------------------------------------------
David C. Lee - Director
April 2, 2001 /s/
--------------------------------------------
Samantha McCuen - Director
April 2, 2001 /s/
--------------------------------------------
Kathleen Perone - Director
April 2, 2001 /s/
--------------------------------------------
Frank L. Schiff - Director
April 2, 2001 /s/
--------------------------------------------
Tyler T. Zachem - Director
26
INFOCROSSING, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
Page No.
-------
Report of Independent Auditors F-2
Consolidated Balance Sheets -
December 31, 2000, October 31, 2000 and 1999 F-3
Consolidated Statements of Operations -
Two-month Periods Ended December 31, 2000
and December 31, 1999 (Unaudited) F-6
Consolidated Statements of Operations -
Fiscal Years ended October 31, 2000, 1999 and 1998 F-7
Consolidated Statements of Stockholders' Equity -
Two-Month Period Ended December 31, 2000 and
Fiscal Years ended October 31, 2000, 1999 and 1998 F-9
Consolidated Statements of Cash Flows -
Two-month Periods Ended December 31, 2000
and December 31, 1999 (Unaudited) F-12
Consolidated Statements of Cash Flows -
Fiscal Years ended October 31, 2000, 1999 and 1998 F-14
Notes to Consolidated Financial Statements F-17
Schedule II: Valuation and Qualifying Accounts S-1
F-1
Report of Independent Auditors
The Board of Directors and Stockholders of
Infocrossing, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Infocrossing,
Inc. and subsidiaries (formerly Computer Outsourcing Services, Inc. and
subsidiaries) as of December 31, 2000 and October 31, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the two month period ended December 31, 2000 and for each of the three
years in the period ended October 31, 2000. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Infocrossing, Inc. and subsidiaries at December 31, 2000 and October 31, 2000
and 1999, and the consolidated results of their operations and their cash flows
for the two month period ended December 31, 2000 and for each of the three years
in the period ended October 31, 2000, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG, LLP
- ----------------------------
ERNST & YOUNG, LLP
New York, New York
February 21, 2001
F-2
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER OCTOBER 31,
----------- ------------------------
31, 2000 2000 1999
----------- ----------- -----------
ASSETS
CURRENT ASSETS:
Cash and equivalents $36,763,831 $40,585,057 $ 1,590,223
Marketable debt securities, at
cost which approximates market value 3,413,069 5,781,808 1,673,441
Trade accounts receivable, net of
allowance for doubtful accounts of
$525,957, $502,957 and $350,939 3,355,914 3,200,078 6,010,366
Prepaid and refundable income taxes 3,648,228 3,667,755 961,196
Deferred income taxes - current - - 591,178
Prepaid license fees 766,135 674,999 915,935
Other current assets 1,303,724 1,434,603 587,264
----------- ----------- -----------
49,250,901 55,344,300 12,329,603
----------- ----------- -----------
PROPERTY and EQUIPMENT, net 13,411,113 9,252,136 3,638,993
----------- ----------- -----------
OTHER ASSETS:
Deferred software, net 2,665,714 2,638,578 2,223,823
Intangibles, net 8,889,271 8,870,220 8,484,564
Due from related parties 1,665,688 170,609 132,314
Deferred income taxes - - 235,986
Security deposits and other
non-current assets 2,566,728 2,568,352 508,800
----------- ----------- -----------
15,787,401 14,247,759 11,585,487
----------- ----------- -----------
TOTAL ASSETS $78,449,415 $78,844,195 $27,554,083
=========== =========== ===========
Continued on Next Page.
See Notes to Consolidated Financial Statements.
F-3
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
DECEMBER OCTOBER 31,
----------- ------------------------
31, 2000 2000 1999
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,369,402 $ 2,262,836 $ 1,237,479
Current portion of long-term debt and
capitalized lease obligations 846,083 57,323 19,017
Current portion of accrued loss on
office subleases 510,112 474,699 256,429
Accrued expenses 4,205,520 3,315,126 1,514,514
Customer deposits and other
current liabilities 125,488 91,843 137,208
----------- ----------- -----------
7,056,605 6,201,827 3,164,647
----------- ----------- -----------
LONG-TERM LIABILITIES:
Long-term debt and capitalized
lease obligations, net of current
portion 2,777,409 60,037 -
Accrued loss on office subleases 1,537,955 1,622,568 1,564,592
----------- ----------- -----------
4,315,364 1,682,605 1,564,592
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE 8% SERIES A CUMULATIVE
CONVERTIBLE PARTICIPATING PREFERRED
STOCK; $0.01 par value; 300,000 shares
authorized; 157,377 shares issued and
outstanding (liquidation preference
$63,147,379 at December 31, 2000) 35,436,608 34,086,194 -
----------- ----------- -----------
Continued on Next Page.
See Notes to Consolidated Financial Statements.
F-4
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
DECEMBER OCTOBER 31,
----------- ------------------------
31, 2000 2000 1999
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
(Continued)
STOCKHOLDERS' EQUITY:
Preferred stock, 2,700,000 shares
authorized, $0.01 par value;
none issued - - -
Common stock, $0.01 par value;
50,000,000 shares authorized;
shares issued 5,888,311, 5,888,311,
and 4,737,915 in December 2000 and
October 2000 and 1999, respectively 58,882 58,882 47,379
Additional paid-in capital 58,936,812 58,789,912 15,519,826
Unamortized restricted stock award (9,822,917) (10,302,083) -
Retained earnings/(deficit) (17,344,526) (11,554,085) 7,264,952
----------- ----------- -----------
31,828,251 36,992,626 22,832,157
Less 12,508, 5,608 and 1,000 shares in
December 2000 and October 2000 and
1999, respectively, of common
stock held in treasury, at cost (187,413) (119,057) (7,313)
----------- ----------- -----------
31,640,838 36,873,569 22,824,844
----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $78,449,415 $78,844,195 $27,554,083
=========== =========== ===========
See Notes to Consolidated Financial Statements.
F-5
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
TWO MONTHS ENDED
DECEMBER 31,
-------------------------
2000 1999
----------- -----------
(Unaudited)
REVENUES $ 3,520,937 $ 4,873,722
----------- -----------
COSTS and EXPENSES:
Operating costs 5,076,415 3,755,177
Selling and promotion costs 829,806 483,515
General and administrative costs 2,546,170 1,218,473
Interest income, net (491,426) (20,780)
----------- -----------
7,960,965 5,436,385
----------- -----------
Loss from continuing
operations before income taxes (4,440,028) (562,663)
Income tax benefit - (219,439)
----------- -----------
NET LOSS $(4,440,028) $ (343,224)
Accretion and dividends on redeemable preferred stock (1,350,413) -
----------- -----------
NET LOSS TO COMMON STOCKHOLDERS $(5,790,441) $ (343,224)
=========== ===========
BASIC EARNINGS PER SHARE:
Net loss to common stockholders $ (0.98) $ (0.07)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 5,888,311 4,746,716
=========== ===========
DILUTED EARNINGS PER SHARE:
Net loss to common stockholders $ (0.98) $ (0.07)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND EQUIVALENTS OUTSTANDING 5,888,311 4,746,716
=========== ===========
See Notes to Consolidated Financial Statements.
F-6
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31,
----------------------------------------
2000 1999 1998
------------ ----------- -----------
REVENUES $ 24,471,450 $34,264,966 $30,403,381
------------ ----------- -----------
COSTS and EXPENSES:
Operating costs 26,512,325 23,632,609 19,981,231
Selling and promotion costs 3,209,302 2,056,260 1,189,424
General and administrative costs 13,032,061 6,154,404 6,007,071
Charge for loss on office subleases 514,371 - 2,236,583
Interest income, net (1,639,859) (285,973) (547,499)
------------ ----------- -----------
41,628,200 31,557,300 28,866,810
------------ ----------- -----------
Income/(loss) from continuing
operations before income taxes (17,156,750) 2,707,666 1,536,571
Income tax provision/(benefit) (2,173,443) 1,046,373 457,621
------------ ----------- -----------
Income/(loss) from continuing
operations (14,983,307) 1,661,293 1,078,950
Loss on discontinued operation, net
of income tax benefit of $60,079 - - (76,464)
Gain on sale of discontinued operation,
net of income tax provision of
$1,399,569 - - 1,696,160
------------ ----------- -----------
NET INCOME/(LOSS) $(14,983,307) $ 1,661,293 $ 2,698,646
Accretion and dividends on
redeemable preferred stock (3,835,730) - -
------------ ----------- -----------
NET INCOME/(LOSS)
TO COMMON STOCKHOLDERS $(18,819,037) $ 1,661,293 $ 2,698,646
============ =========== ===========
Continued on next page.
See Notes to Consolidated Financial Statements.
F-7
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Continued)
YEARS ENDED OCTOBER 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
BASIC EARNINGS PER SHARE:
Income/(loss) from continuing
operations to common stockholders $ (3.58) $ 0.36 $ 0.27
Loss from discontinued operation - - (0.02)
Gain on sale of discontinued operation - - 0.42
----------- ----------- -----------
Net income/(loss) to
common stockholders $ (3.58) $ 0.36 $ 0.67
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 5,251,457 4,636,525 4,058,376
=========== =========== ===========
DILUTED EARNINGS PER SHARE:
Income/(loss) from continuing
operations to common stockholders $ (3.58) $ 0.34 $ 0.24
Loss from discontinued operation - - (0.01)
Gain on sale of discontinued operation - - 0.38
----------- ----------- -----------
Net income/(loss) to
common stockholders $ (3.58) $ 0.34 $ 0.61
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND EQUIVALENTS OUTSTANDING 5,251,457 4,950,050 4,427,921
=========== =========== ===========
See Notes to Consolidated Financial Statements.
F-8
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Unamortized
Common Par Paid in Retained Restricted Treasury
Shares Value Capital Earnings Stock Award Stock Total
----------- ---------- ----------- ----------- ----------- ----------- -----------
Balances, October
31, 1997 3,826,102 $ 38,261 $ 9,595,789 $ 2,905,013 - - $12,539,063
Stock issued to
purchase assets 20,000 200 179,800 - - - 180,000
Exercises of stock
options and warrants 439,613 4,396 1,720,659 - - - 1,725,055
Tax benefit associated
with the exercise of
nonqualified options - - 450,589 - - - 450,589
Net income - - - 2,698,646 - - 2,698,646
----------- ---------- ----------- ----------- ----------- ----------- -----------
Balances, October
31, 1998 4,285,715 $ 42,857 $11,946,837 $ 5,603,659 - - $17,593,353
Stock issued for the
Enterprise Purchase 300,000 3,000 2,674,500 - - - 2,677,500
Exercises of stock
options 152,200 1,522 664,489 - - - 666,011
Purchased 1,000 shares
for treasury, at cost - - - - - (7,313) (7,313)
Tax benefit associated
with the exercise of
nonqualified options - - 234,000 - - - 234,000
Net income - - - 1,661,293 - - 1,661,293
----------- ---------- ----------- ----------- ----------- ----------- -----------
Balances, October
31, 1999 4,737,915 $ 47,379 $15,519,826 $ 7,264,952 $ - $ (7,313) $22,824,844
----------- ---------- ----------- ----------- ----------- ----------- -----------
Continued on next page.
See Notes to Consolidated Financial Statements.
F-9
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
Additional Retained Unamortized
Common Par Paid in Earnings/ Restricted Treasury
Shares Value Capital (Deficit) Stock Award Stock Total
----------- ---------- ----------- ----------- ------------ ----------- -----------
Balances, October
31, 1999 4,737,915 $ 47,379 $15,519,826 $ 7,264,952 $ - $ (7,313) $22,824,844
Exercises of stock
options 170,478 1,704 969,597 - - - 971,301
4,608 shares
surrendered for stock
option exercise - - - - - (111,744) (111,744)
Contingent payment
relating to
purchase of assets 36,472 365 1,134,795 - - - 1,135,160
Exercise of warrants 75,000 750 374,250 - - - 375,000
Sale of restricted
shares by the
Company 68,446 684 999,312 - - - 999,996
Restricted stock award 800,000 8,000 11,492,000 - (11,500,000) - -
Amortization of
restricted stock
award - - - - 1,197,917 - 1,197,917
Issuance of warrants
in connection with
termination of a
financing arrangement - - 120,000 - - - 120,000
Accretion and dividends
on redeemable
preferred stock - - - (3,835,730) - - (3,835,730)
Issuance of warrants
in a private placement - - 28,180,132 - - - 28,180,132
Net loss - - - (14,983,307) - - (14,983,307)
----------- ---------- ----------- ----------- ------------ ----------- -----------
Balances, October
31, 2000 5,888,311 $ 58,882 $58,789,912 $(11,554,085) $(10,302,083) $ (119,057) $36,873,569
----------- ---------- ----------- ----------- ------------ ----------- -----------
Continued on next page.
See Notes to Consolidated Financial Statements
F-10
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
Additional Retained Unamortized
Common Par Paid in Earnings/ Restricted Treasury
Shares Value Capital (Deficit) Stock Award Stock Total
----------- ---------- ----------- ----------- ------------ ----------- -----------
Balances, October
31, 2000 5,888,311 $ 58,882 $58,789,912 $(11,554,085) $(10,302,083) $ (119,057) $36,873,569
Amortization of
restricted stock
award - - - - 479,166 - 479,166
Purchase 6,900 shares
for treasury, at cost - - - - - (68,356) (68,356)
Issuance of a warrant
in settlement of
contingent purchase
price - - 146,900 - - - 146,900
Accretion and dividends
on redeemable
preferred stock - - - (1,350,413) - - (1,350,413)
Net loss - - - (4,440,028) - - (4,440,028)
----------- ---------- ----------- ----------- ------------ ----------- -----------
Balances, December
31, 2000 5,888,311 $ 58,882 $58,936,812 $(17,344,526) $ (9,822,917) $ (187,413) $31,640,838
=========== ========== =========== =========== ============ =========== ===========
See Notes to Consolidated Financial Statements
F-11
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
TWO MONTHS ENDED
DECEMBER 31,
-------------------------
2000 1999
----------- -----------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,440,028) $ (343,224)
Adjustments to reconcile net loss to cash
provided by/(used in) operating activities:
Depreciation and amortization 502,557 336,797
Amortization of restricted stock award 479,166 -
Decrease/(increase) in:
Trade accounts receivable (155,836) 1,221,171
Prepaid and refundable income taxes 19,527 -
Prepaid license fees, prepaid expenses
and other current assets 44,170 805,150
Increase/(decrease) in:
Accounts payable (893,434) (123,284)
Income taxes payable - (219,439)
Accrued expenses 890,396 (572,566)
Receipts/(payments) on accrued loss
on office subleases (37,876) 14,647
Customer deposits and other current liabilities 33,645 -
----------- -----------
Net cash (used in)/provided by
operating activities (3,557,713) 1,119,252
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (839,177) (1,080,572)
Redemptions of investments in marketable
debt securities 2,368,739 733,435
Purchase of treasury stock (68,356) -
Increase in deferred software costs (118,828) (171,398)
Security deposits and other
noncurrent assets 1,624 (224)
----------- -----------
Net cash provided by/(used in)
investing activities $ 1,344,002 $ (518,759)
----------- -----------
Continued on next page.
See Notes to Consolidated Financial Statements.
F-12
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Continued)
TWO MONTHS ENDED
DECEMBER 31,
-------------------------
2000 1999
----------- -----------
(Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from a line of credit $ - $ 2,000,000
Repayment of debt and capitalized leases (101,112) (5,463)
Advances to related parties (1,495,079) -
Exercises of stock options and warrants - 216,459
----------- -----------
Net cash provided by/(used in)
financing activities (1,596,191) 2,210,996
----------- -----------
Net cash provided by/(used in)
continuing operations (3,809,902) 2,811,489
----------- -----------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Payments on portion of accrued loss on office sublease
relating to discontinued operation (11,324) (10,664)
----------- -----------
Net cash used in discontinued operation (11,324) (10,664)
----------- -----------
Net increase/(decrease) in cash and equivalents (3,821,226) 2,800,825
Cash and equivalents, beginning of the period 40,585,057 1,590,223
----------- -----------
Cash and equivalents, end of the period $36,763,831 $ 4,391,048
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense $ 1,369 $ 136
=========== ===========
Income taxes $ - $ -
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING ACTIVITIES:
Warrants issuable for the settlement
of contingent purchase price $ 146,900 $ -
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES:
Equipment purchased subject to capital leases $ 3,602,817 $ -
=========== ===========
See Notes to Consolidated Financial Statements.
F-13
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED OCTOBER 31,
----------------------------------------
2000 1999 1998
------------ ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income/(loss) from continuing
operations $(14,983,307) $ 1,661,293 $ 1,078,950
Adjustments to reconcile net income
to cash provided by/(used in)
operating activities:
Depreciation and amortization 2,307,777 1,893,081 1,707,072
Amortization of restricted
stock award 1,197,917 - -
Stock-based compensation 71,266 - -
Warrants issued in connection
with termination of a
credit agreement 120,000 - -
Income from a non-competition
agreement - (1,000,000) (440,000)
Accrued loss on office sublease 514,371 - 2,236,581
Deferred income taxes - 494,804 (1,962,378)
Decrease/(increase) in:
Trade accounts receivable 2,810,288 (1,558,248) (461,488)
Prepaid and refundable income taxes (1,879,395) - -
Prepaid license fees, prepaid
expenses and other current
assets (606,403) (323,660) 44,220
Increase/(decrease) in:
Accounts payable 1,025,357 208,073 (217,110)
Income taxes payable - (999,929) 1,276,429
Accrued expenses 1,800,612 (3,568) (213,383)
Payments on accrued loss on
office subleases (190,014) (415,200) (330,492)
Customer deposits and other
current liabilities (45,365) (65,579) (28,912)
------------ ----------- -----------
Net cash provided by/(used in)
operating activities (7,856,896) (108,933) 2,689,489
------------ ----------- -----------
Continued on next page.
See Notes to Consolidated Financial Statements.
F-14
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Continued)
YEARS ENDED OCTOBER 31,
----------------------------------------
2000 1999 1998
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment $ (6,564,057) $(1,848,267) $(1,500,680)
Disposal of equipment 2,750 - 14,960
Redemptions/(purchases) of investments
in marketable debt securities (4,108,367) 1,544,729 (3,218,170)
Proceeds from sale of the Payroll
Division - - 14,400,000
Amounts received from buyer for
assets held for sale - 82,695 25,000
Payment for the purchase of certain
Assets and the business of Enterprise
Technology Group, Inc. (the
"Enterprise Purchase") - (4,000,000) -
Payment of expenses related to the
Enterprise Purchase - (283,701) -
Purchase of treasury stock - (7,313) -
Increase in deferred software costs (1,011,231) (905,070) (892,010)
Security deposits and other
noncurrent assets (2,073,185) 45,410 (51,505)
------------ ----------- -----------
Net cash provided by/(used in)
investing activities (13,754,090) $(5,371,517) $ 8,777,595
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from a private
equity placement 58,430,596 - -
Proceeds from debt financing and a
line of credit 5,140,336 - -
Repayment of debt and
capitalized leases (5,041,993) (252,770) (2,320,780)
(Advances to)/repayments by related
parties, net (38,295) (43,001) 86,982
Proceeds from sale of common stock 999,996 - -
Exercises of stock options and warrants 1,163,291 666,011 1,725,055
------------ ----------- -----------
Net cash provided by/(used in)
financing activities 60,653,931 370,240 (508,743)
------------ ----------- -----------
Net cash provided by/(used in)
continuing operations 39,042,945 (5,110,210) 10,958,341
------------ ----------- -----------
Continued on next page.
See Notes to Consolidated Financial Statements.
F-15
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Continued)
YEARS ENDED OCTOBER 31,
----------------------------------------
2000 1999 1998
------------ ----------- -----------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Loss from discontinued operations $ - $ - $ (76,464)
Adjustments to reconcile loss from
discontinued operation to cash used
in discontinued operation:
Depreciation and amortization - - 151,118
Increase in net assets of
discontinued operations - - (246,961)
Payment of taxes and other expenses
related to sale of the Payroll
Division - (2,556,693) (2,239,367)
Payments on portion of accrued loss
on office sublease relating to
discontinued operation (48,111) (145,880) (116,120)
------------ ----------- -----------
Net cash used in discontinued
operations (48,111) (2,702,573) (2,527,794)
------------ ----------- -----------
Net increase/(decrease) in cash
and equivalents 38,994,834 (7,812,783) 8,430,547
Cash and equivalents, beginning
of the year 1,590,223 9,403,006 972,459
------------ ----------- -----------
Cash and equivalents, end
of the year $ 40,585,057 $ 1,590,223 $ 9,403,006
============ =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense $ 114,004 $ 23,270 $ 129,635
============ =========== ===========
Income taxes $ 67,139 $ 3,917,926 $ 1,092,061
============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING ACTIVITIES:
Common stock issued for the purchase
of software $ - $ - $ 180,000
============ =========== ===========
Common stock issued for the
Enterprise Purchase $ 1,135,160 $ 2,677,500 $ -
============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES:
Tax benefit associated with the
exercise of non-qualified options $ - $ 234,000 $ 450,593
============ =========== ===========
Treasury shares received in payment
of a stock option exercise $ 111,744 $ - $ -
============ =========== ===========
See Notes to Consolidated Financial Statements.
F-16
INFOCROSSING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. Summary of Business and Significant Accounting Policies
Business - Infocrossing, Inc. and its wholly-owned subsidiaries (formerly
Computer Outsourcing Services, Inc. and subsidiaries)(collectively, the
"Company") provides comprehensive information technology and mission-critical
Internet data systems services to companies, institutions, and government
agencies.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany
balances and significant intercompany transactions have been eliminated.
Interim Financial Statements - The financial statements for the two months ended
December 31, 1999 have been prepared by the Company without audit. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the results of operations and cash
flows for the two months ended December 31, 1999 have been made.
Cash and Equivalents and Marketable Debt Securities - Cash and equivalents
include all cash, demand deposits, money market accounts, and debt instruments
purchased with an original maturity of three months or less. Marketable debt
securities are debt instruments purchased with maturities of between three and
six months. The Company's investments in debt securities, including those
included in cash equivalents, are classified as securities held-to-maturity and
are carried at cost, which approximates market value.
Concentration of Credit Risk - Financial instruments that potentially subject
the Company to concentration of credit risk consist primarily of temporary cash
investments and trade receivables. The Company restricts investment of temporary
cash investments to financial institutions with high credit standing. Credit
risk on trade receivables is minimized as a result of the large and diverse
nature of the Company's customer base. Ongoing credit evaluations of customers'
financial condition are performed. The Company maintains reserves for potential
credit losses and such losses, in the aggregate, have not exceeded management's
expectations.
Property and Equipment - Property and equipment is stated at cost except for
assets acquired under capital leases, which are recorded at the lesser of their
fair market value at the date of the lease or the net present value of the
minimum lease commitments. Depreciation is provided using the straight-line
method over the estimated useful lives. Leasehold improvements and assets
acquired under capital leases are amortized over the shorter of the lease term
or the estimated useful lives. Construction in progress at December 31, 2000 and
October 31, 1999 relate to the Company's Internet Data Centers under
construction at Sterling, VA and Leonia, NJ facilities, respectively. (See Notes
3 and 10)
Software - Software that has been purchased is included in Property and
Equipment and is amortized using the straight-line method over five years. The
cost of internally developed software and product enhancements, not reimbursed
by customers, is capitalized as Deferred Software Costs. Such costs are
amortized using the straight-line method over the life of the related customer
contract or three to five years, whichever is shorter.
F-17
Intangible Assets - The excess of cost over net assets of acquired businesses
("goodwill") is amortized using the straight-line method over the estimated
lives, typically no more than twenty years. Other intangible assets, primarily
acquired customer lists, are amortized using the straight-line method over the
estimated lives, typically no more than ten years. The carrying value of
intangibles is evaluated periodically in relation to the operating performance
and future undiscounted cash flows of the underlying businesses.
Revenue Recognition - The Company's services are provided under a combination of
fixed monthly fees and time and materials billings. Contracts with clients
typically range from one to five years. Revenues are recognized monthly as
incurred, and costs are expensed monthly as incurred.
Income Taxes - Income tax expense or benefit is based on pre-tax accounting
income. Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts. Deferred tax benefits are recognized to
the extent that realization of such benefits is more likely than not. The
cumulative tax benefit recorded by the Company is limited to the anticipated
refund the Company will receive as a result of carrying back a portion of the
pretax loss to prior years.
Earnings per Share - The Company calculates earnings per share as required by
Statement of Accounting Standards No. 128 - "Earnings per Share" ("EPS"). Basic
EPS is computed by dividing income to common stockholders by the weighted
average number of common shares outstanding during each period. Diluted EPS is
computed using the weighted average number of common shares plus the dilutive
effect of common stock equivalents. Stock options and warrants that are
anti-dilutive are excluded from the computation of weighted average shares
outstanding. Certain options and warrants that are currently anti-dilutive may
be dilutive in the future.
Segments - The Company discloses information regarding segments in accordance
with Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
establishes standards for reporting of financial information about operating
segments in annual financial statements and requires reporting selected
information about operating segments in interim financial reports. The
disclosure of segment information was not required since the Company operates
only one business segment.
Comprehensive Income - The Company has adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). The Company
did not have any comprehensive income within the scope of SFAS 130.
Derivatives - In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), the effective date of which was deferred for all
fiscal quarters of fiscal years beginning after June 15, 2000 by SFAS 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
Effective Date of SFAS 133. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts and for hedging activities. This statement did not have a
significant impact on the Company's financial position or results of operations.
F-18
Fair Value of Financial Instruments - The following disclosure of the estimated
fair value of financial instruments is made in accordance with the requirements
of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments". The estimated fair values of financial
instruments have been determined by the Company using available market
information and appropriate valuation methodologies. Considerable judgment is
required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that the Company could realize in a sale.
The carrying amounts and estimated fair values of financial instruments at the
end of the respective years are summarized as follows:
December 31, 2000 October 31, 2000 October 31, 1999
------------------------ ------------------------ ------------------------
Carrying Estimated Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value Amount Fair Value
------------------------ ------------------------ ------------------------
Assets:
Cash and equivalents $36,763,831 $36,763,831 $40,585,057 $40,585,057 $ 1,590,223 $ 1,590,223
Marketable debt
securities (Note 2) 3,413,069 3,415,899 5,781,808 5,782,598 1,673,441 1,674,166
Trade accounts
receivable, net 3,355,914 3,355,914 3,200,078 3,200,078 6,010,366 6,010,366
Liabilities:
Accounts payable, accrued
expenses, accrued office
sublease loss, customer
deposits and other
current liabilities 7,748,477 7,748,477 7,767,072 7,767,072 4,710,222 4,710,222
Capital lease obligations 3,510,609 3,510,609 - - - -
Other borrowings 112,883 112,883 117,360 117,360 11,004 11,039
The following methods and assumptions were used to estimate the fair value of
the financial instruments presented above:
Cash and equivalents - The carrying amount is a reasonable
approximation of fair value.
Marketable debt securities - Fair value is based upon quoted market
prices, including accrued interest, and approximates their carrying
value due to their short maturities. Securities are classified as
held-to-maturity and are accordingly not marked to market.
Trade accounts receivable, accounts payable, accrued expenses, accrued
sublease loss, and customer deposits and other current liabilities -
The fair value of receivables and payables are assumed to equal their
carrying value because of their short maturities.
F-19
Capital lease obligations and other borrowings - Interest rates that
are currently available to the Company for issuance of debt with
similar terms and remaining maturities are used to estimate fair value
for those debt issues for which no market quotes are available.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the periods. Actual results could differ from those estimates.
Reclassifications - Certain reclassifications were made to the prior years'
financial statements to conform with the current year presentation.
Major Customers - For the two-month period ended December 31, 2000, two clients
accounted for 17% and 16%, respectively, of the Company's revenues. For the year
ended October 31, 2000, these two clients accounted for 13% and 14%,
respectively, of the Company's revenues. In the two prior years, no client
accounted for 10% or more of revenues.
2. Cash Equivalents and Marketable Debt Securities
The following is a summary of the Company's held-to-maturity securities at
December 31, 2000 and October 31, 2000 and 1999, which are classified as either
cash equivalents or marketable debt securities based on a maturity of less than
or more than three months, respectively (Note 1):
December 31, 2000
--------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
Cash equivalents:
Commercial paper $36,603,261 $ - $ - $36,603,261
----------- ----------- ----------- -----------
Marketable debt
securities:
Commercial paper 2,417,309 - - 2,417,309
Corporate obligations 995,760 2,830 - 998,590
----------- ----------- ----------- -----------
Subtotal 3,413,069 2,830 - 3,415,899
----------- ----------- ----------- -----------
Total $40,016,330 $ 2,830 $ - $40,019,160
=========== =========== =========== ===========
F-20
2. Cash Equivalents and Marketable Debt Securities (Continued)
October 31, 2000
--------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
Cash equivalents:
Commercial paper $33,513,202 $ - $ - $33,513,202
----------- ----------- ----------- -----------
Marketable debt
securities:
Commercial paper 4,786,048 - - 4,786,048
Corporate obligations 995,760 790 - 996,550
----------- ----------- ----------- -----------
Subtotal 5,781,808 790 - 5,782,598
----------- ----------- ----------- -----------
Total $39,295,010 $ 790 $ - $39,295,800
=========== =========== =========== ===========
October 31, 1999
--------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
Cash equivalents:
Commercial paper $ 789,032 $ - $ - $ 789,032
----------- ----------- ----------- -----------
Marketable debt
securities:
Commercial paper 1,124,124 - - 1,124,124
Corporate obligations 549,317 725 - 550,042
----------- ----------- ----------- -----------
Subtotal 1,673,441 725 - 1,674,166
----------- ----------- ----------- -----------
Total $ 2,462,473 $ 725 $ - $ 2,463,198
=========== =========== =========== ===========
F-21
3. Property and Equipment
Property and equipment consists of the following:
October 31, Depreciable
December ------------------------ Lives
31, 2000 2000 1999 (Years)
----------- ----------- ----------- -----------
Computer equipment $ 5,313,353 $ 4,989,246 $ 4,017,472 5
Computer equipment held
under capital leases
(Note 7) 4,881,487 1,278,669 1,278,669 *
Furniture and office
equipment 1,335,866 1,309,264 970,842 7
Leasehold improvements 6,753,848 6,615,275 568,192 *
Construction in progress 302,064 - 1,206,052
Purchased software 1,514,036 1,466,206 1,120,377 5
Vehicles 84,460 84,460 39,741 3
----------- ----------- -----------
20,185,114 15,743,120 9,201,345
Less accumulated
depreciation and
amortization,
including $1,313,108
at December 31, 2000,
$1,248,964 at October
31, 2000 and $1,211,534
at October 31, 1999
attributable to capital
leases (6,774,001) (6,490,984) (5,562,352)
----------- ----------- -----------
$13,411,113 $ 9,252,136 $ 3,638,993
=========== =========== ===========
* Shorter of the useful life or the length of the lease.
Depreciation and amortization in continuing operations was $283,017, $126,528,
$948,164, $782,721, and $768,753 for the two-month periods ended December 31,
2000 and 1999 (unaudited) and the fiscal years ended October 31, 2000, 1999, and
1998, respectively.
4. Deferred Software Costs
Deferred software costs consist of the following:
October 31,
December ---------------------------
31, 2000 2000 1999
------------ ------------ ------------
Costs of internally-developed
software and enhancements,
including software under
development $ 5,658,496 $ 5,539,669 $ 4,528,438
Accumulated amortization (2,992,782) (2,901,091) (2,304,615)
------------ ------------ ------------
$ 2,665,714 $ 2,638,578 $ 2,223,823
============ ============ ============
F-22
Amortization of deferred software costs charged to continuing operations for the
two months ended December 31, 2000 and 1999 (unaudited) and the fiscal years
ended October 31, 2000, 1999, and 1998 were $91,691, $94,357, $596,476,
$484,260, and $634,932, respectively.
5. Intangibles
Intangible assets consist of the following:
October 31,
December ---------------------------
31, 2000 2000 1999
------------ ------------ ------------
Excess of cost of
investments over
net assets acquired
(goodwill) $ 9,978,490 $ 9,831,590 $ 8,692,554
Customer lists 1,180,488 1,180,488 1,180,488
------------ ------------ ------------
11,158,978 11,012,078 9,873,042
Less accumulated
amortization (2,269,707) (2,141,858) (1,388,478)
------------ ------------ ------------
$ 8,889,271 $ 8,870,220 $ 8,484,564
============ ============ ============
Amortization charged to continuing operations was $127,849, $114,286, $753,381,
$608,907, and $249,489 for the two months ended December 31, 2000 and 1999
(unaudited) and the fiscal years ended October 31, 2000, 1999, and 1998,
respectively. The increase in goodwill arose from contingent purchase price
payments made in connection with a prior acquisition (Note 12).
6. Related Party Transactions
In June 2000, the Company hired a new Chief Executive Officer. The employment
agreement with the Company's new CEO provided for an award of 800,000 restricted
shares of common stock. Such award vests at various times during the period
ending June 15, 2004. The value of these restricted shares ($11,500,000 on the
grant date of June 15, 2000) is being amortized ratably over the four-year
vesting schedule. In connection with this award, the Company agreed to loan the
CEO 50 percent of any tax payable with respect to the restricted shares. Any
such loan will bear interest at the statutory rate and shall be payable when the
Executive sells or otherwise transfers the restricted shares. In connection with
this provision, on December 21, 2000 the Company loaned $1,291,000 to the CEO.
Also, in June 2000 the CEO purchased 68,446 shares of common stock from the
Company at $14.61 per share. As a result of the foregoing, the CEO now owns
approximately 15% of the outstanding shares of the Company's common stock.
The Company is the beneficiary of a $1,000,000 life insurance policy which it
maintains on its Chairman of the Board.
F-23
Due from related parties consists of the following:
October 31,
December -----------------------
31, 2000 2000 1999
---------- ---------- ----------
Due from the Chairman, bearing interest
at prime (9.50% at December 31, 2000)
plus 1% per annum, repayable on demand $ 69,538 $ 67,804 $ 58,241
Due from the CEO, bearing interest at the
monthly interest rate specified by
IRS code Section 1274, (5.94% at
December 31, 2000) 1,293,130 - -
Short term cash advance to the CEO,
made December 28, 2000, repaid by
the CEO on January 3, 2001 198,000 - -
Due from other officers, bearing
interest at prime, repayable on demand 105,020 102,805 60,955
Due from consultant (Note 10) - - 13,118
---------- ---------- ----------
$1,665,688 $ 170,609 $ 132,314
========== ========== ==========
7. Long-term Debt and Capitalized Lease Obligations
Long-term debt consists of the following:
October 31,
December -------------------------
31, 2000 2000 1999
---------- ----------- -----------
Notes payable, other $ 112,883 $ 117,360 $ 11,004
Less current portion (57,992) (57,323) (11,004)
---------- ----------- -----------
$ 54,891 $ 60,037 $ -
========== =========== ===========
On October 23, 2000, the Company entered into two agreements to purchase certain
equipment. The agreements call for twenty-four payments of $5,847 per month.
Capital Lease Obligations
Assets subject to capital lease agreements are reflected in property and
equipment as capital leases. In November 2000, the Company entered into a
capital lease for equipment. A liability was recorded at the net present value
of the payments, approximately $3,562,000, which approximates the aggregate fair
value of the equipment. Forty-eight payments of approximately $88,800 per month
are due. In December 2000, the Company entered into a capital lease for
equipment having a net present value of approximately $41,000. This lease will
be repaid in 24 monthly payments of $1,882.
F-24
The following is a schedule of future minimum lease payments under capital
leases, together with the present value of the net minimum lease payments:
Year Ending December 31:
2001 $ 1,087,644
2002 1,083,880
2003 1,065,060
2004 973,005
-----------
Total minimum lease payments 4,209,589
Less amount representing
interest (698,980)
-----------
Present value of net minimum
lease payments 3,510,609
Less current portion of
obligations under capital
leases (788,091)
-----------
Obligations under capital
leases, net of current
portion $ 2,722,518
===========
8. Income Taxes
The provision/(benefit) for income taxes on continuing operations consists of:
Two Months
Ended December 31, Years ended October 31,
-------------------------- ----------------------------------------
2000 1999 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(Unaudited)
Current:
Federal $ - $ (202,355) $ (2,857,672) $ 486,753 $ 1,119,789
State and local - - - 64,816 576,424
Deferred (benefit)/
provision - (17,084) 684,229 494,804 (1,238,592)
------------ ------------ ------------ ------------ ------------
$ - $ (219,439) $ (2,173,443) $ 1,046,373 $ 457,621
============ ============ ============ ============ ============
F-25
A reconciliation of income taxes computed at the Federal statutory rate to
amounts provided is as follows:
Two Months
Ended December 31, Years ended October 31,
-------------------------- ----------------------------------------
2000 1999 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(Unaudited)
Tax provision computed
at the statutory
rate $ (1,509,610) $ (191,305) $ (5,833,295) $ 920,606 $ 522,434
Increase/(decrease)
in taxes resulting
from:
State and local
income taxes,
net of federal
income taxes - - - 143,977 38,851
Non-deductible
expenses 170,221 8,205 159,405 41,343 44,076
Benefit of tax
credits - - - (57,981) (179,960)
Losses for which no
benefit has been
provided 1,366,890 - 3,500,447 - -
Other, net (27,502) (36,339) - (1,572) 32,220
------------ ------------ ------------ ------------ ------------
$ - $ (219,439) $ (2,173,443) $ 1,046,373 $ 457,621
============ ============ ============ ============ ============
F-26
Temporary differences which give rise to net deferred tax assets/(liabilities)
are as follows:
October 31,
December ---------------------------
31, 2000 2000 1999
------------ ------------ ------------
Deferred tax assets:
Accrued loss on office sublease $ 1,037,726 $ 1,072,503 $ 956,891
Accrued liabilities 388,007 388,007 459,146
Allowance for doubtful accounts 225,243 215,698 152,457
Deferred rent 243,808 211,177 121,612
Intangibles 66,940 75,204 75,128
Lease transactions 36,832 36,832 36,794
Net operating loss 5,961,475 4,035,160 -
Other 229,623 229,623 300,921
------------ ------------ ------------
8,189,654 6,264,204 2,102,949
------------ ------------ ------------
Deferred tax liabilities:
Depreciation and amortization (219,714) (188,884) (126,957)
Deferred software costs (1,147,965) (1,136,704) (947,805)
Other (201,227) (201,227) (201,023)
------------ ------------ ------------
(1,568,906) (1,526,815) (1,275,785)
Valuation allowance (6,620,748) (4,737,389) -
------------ ------------ ------------
Net deferred taxes $ - $ - $ 827,164
============ ============ ============
The deferred tax assets have been fully offset by a valuation allowance due to
the uncertainty of realizing such tax benefits.
At December 31, 2000, the Company had net operating loss carryforwards of
approximately $ 14 million for federal income tax purposes that begin to expire
in 2020.
9. Stockholders' Equity
Common Stock - The Company is authorized to issue up to 50,000,000 shares of
common stock, $0.01 par value. The holders of common stock are entitled to one
vote per share. There is no cumulative voting for the election of directors.
Subject to the prior rights of any series of preferred stock which may from time
to time be outstanding, holders of common stock are entitled to receive ratably
any dividends as may be declared by the Board of Directors of the Company out of
funds legally available therefor, and upon the liquidation, dissolution, or
winding up of the Company, are entitled to share ratably in all assets remaining
after the payment of liabilities, and payment of accrued dividends and
liquidation preferences on the preferred stock outstanding, if any.
Holders of common stock have no preemptive rights, and have no rights to convert
their common stock into any other security.
F-27
Preferred Stock - The Company is authorized to issue up to 3,000,000 shares of
preferred stock, $0.01 par value. The preferred stock may be issued in one or
more series, the terms of which may be determined by the Board of Directors
without further action by the stockholders, and may include voting rights
(including the right to vote as a series on certain matters), preferences as to
dividends and liquidation conversion, redemption rights, and sinking fund
provisions. In connection with the private placement of securities discussed
below, the Board of Directors reserved 300,000 shares of preferred stock for
initial and future issuances as Series A.
Private Placement of Securities - On April 7, 2000, the Company entered into a
Securities Purchase Agreement providing for a group of investors (the
"Purchasers") to purchase $60 million of the Company's securities in a private
placement, which closed on May 10, 2000. The Company issued 157,377 shares of
redeemable 8% Series A Cumulative Convertible Participating Preferred Stock (the
"Series A Preferred Stock") and warrants to purchase 2,531,926 shares of the
Company's common stock at an exercise price of $0.01 per share.
The Company primarily will use the net proceeds of $58,430,596, after giving
effect to issuance costs and related legal fees, from this transaction to pursue
its business plan of expanding its managed services activities through its own
Internet Data Centers (each of which shall be known as an "IDC") and Managed
Service Centers (each of which shall be known as an "MSC") as well as at
customer locations connected to an IDC or MSC.
The initial carrying values of the warrants ($28,180,132) and Series A Preferred
Stock ($30,250,464) were determined by apportioning an amount equal to the
proceeds from the private placement multiplied by the relative value of each
class of security as of the commitment date. The difference between the carrying
value and the face value of the Series A Preferred Stock is being accreted as a
charge against retained earnings through May 31, 2007 (the Purchasers' earliest
redemption date) using the interest method. Accumulated dividends (dividends not
paid on a dividend date) and dividends accruing prior to a dividend payment date
also increase the carrying value of the Series A Preferred Stock through a
charge to retained earnings.
The significant provisions of the Series A Preferred Stock are as follows:
Each share of Series A Preferred Stock maintains a liquidation
preference of $381.25 per share, or an aggregate of $60 million for all
157,377 shares, plus accumulated and accrued dividends. Each share of
Series A Preferred Stock bears a quarterly dividend of $7.625 payable
on March 1, June 1, September 1, and December 1 of each year. Such
dividends will accumulate and compound quarterly at a rate of 8% per
annum for approximately the first three years. Thereafter, dividends
may be accumulated and compounded quarterly at 8% per annum or paid in
cash, at the option of the Company. Each share of Series A Preferred
Stock is convertible initially into ten shares of common stock of the
Company at the option of the Purchasers, subject to adjustment provided
in the Certificate of Designation.
F-28
The conversion price of the Series A Preferred Stock shall be adjusted
from time to time if the Company: (i) pays a stock dividend; (ii)
except in certain instances, issues or sells any shares of common stock
or convertible securities at a price per share less than $14.61, as
adjusted; (iii) subdivides or reclassifies its common stock; (iv)
distributes assets to holders of common stock; or (v) makes a tender
offer for all or any portion of its common stock. The Company has the
option to redeem the Series A Preferred Stock at any time following
five years from the closing date at the greater of (x) $381.25 per
share plus all accrued and unpaid dividends or (y) the market value per
share at the date of redemption of the common stock into which shares
of the Series A Preferred Stock are convertible. The Purchasers have a
one-year right to require the Company to redeem shares of Series A
Preferred Stock after seven years from the closing date for $381.25 per
share, plus all accrued and unpaid dividends thereon, in certain
circumstances.
Each share of Series A Preferred Stock is entitled to vote on all
matters on which holders of common stock are entitled to vote, with
each share of Series A Preferred Stock having a number of votes equal
to the number of shares of common stock into which the Series A
Preferred Stock is convertible.
The approval of the holders of two-thirds of the shares of Series A
Preferred Stock is required for the Company to: (i) amend its charter
or by-laws so as to adversely effect the rights or preferences of the
Series A Preferred Stock; (ii) merge or transfer all or substantially
of its assets, reorganize, or take any action that is expected to
result in a change of control of the Company or a planned liquidation;
(iii) impose material restrictions on the Company's ability to honor
the rights of the holders of the Series A Preferred Stock; (iv)
authorize or sell any class or series of equity securities (other than
stock options pursuant to existing plans or upon the conversion of the
Series A Preferred Stock or the exercise of the warrants) which ranks
senior to, or pari passu with, the Series A Preferred Stock; (v)
subdivide or modify any outstanding shares of the Company if the rights
of the holders of the Series A Preferred Stock are impaired; or (vi)
pay any dividends on any class of stock (other than the Series A
Preferred Stock) or redeem or repurchase any equity securities of the
Company or its subsidiaries.
The sale of shares of Series A Preferred Stock, the warrants, and the shares of
common stock issuable upon conversion of the Series A Preferred Stock or
exercise of the Warrants are not registered under the Securities Act. The
Company has entered into a Registration Rights Agreement providing for certain
demand registration and unlimited piggyback registrations, subject to certain
limitations.
The Purchasers, the Company and certain specified officers of the Company (the
"Management Stockholders") entered into a Stockholders Agreement. Among other
things, the Stockholders Agreement provides: (i) limitations on transfers of the
Company's securities; (ii) the agreement of the parties to vote all securities
to elect certain designees to the Company's Board of Directors; and (iii) that
certain acts may not be taken without the prior written approval of the
F-29
directors nominated by the investors. Those acts include (i) hiring or
terminating any senior manager of the Company or any subsidiary; (ii) approval
of the Company's annual business plan, operating budget and capital budget;
(iii) any capital expenditure not reflected in the Company's annual capital
budget which would cause the capital budget to be exceeded by $250,000; (iv)
consolidation or merger of the Company, sale of all or substantially all of its
assets, recapitalization or liquidation of the Company or other acts that could
result in a change of control of the Company; (v) authorizing or issuing
additional equity securities of the Company, (vi) an acquisition or divestiture
in excess of $5,000,000; (vii) incurring indebtedness in excess of $2,500,000;
(viii) entering into a transaction with an affiliate; or (ix) increasing the
securities available under an employee benefit plan.
The warrants issued to the Purchasers are subject to adjustment provisions that
are similar to those of the Series A Preferred Stock. The warrants must be
exercised before May 11, 2007.
Other Warrants - The Company issued a warrant to purchase 65,000 shares of the
Company's common stock at $18.00 per share in settlement of any future
contingent consideration payable under an agreement to purchase the assets of a
business (See Note 12). This warrant has a ten year life and vests as to 21,667
shares on September 16, 2001, with the remaining 43,333 shares vesting in
approximately equal amounts over the following 24 months. The fair value of the
warrant of $146,900, calculated using the Black-Scholes pricing model, has been
recorded as additional goodwill.
On June 5, 2000, the Company issued warrants to former debt holders to purchase
30,000 shares of the Company's common stock at $19.25 per share as consideration
for the settlement of all other potential equity interests in the Company held
by them. The warrants are immediately exercisable and expire on June 5, 2004.
The fair value of the warrants of $120,000, calculated using the Black-Scholes
pricing model, is included in the statements of operations.
In connection with a consulting agreement in June 1995, the Company issued a
warrant to purchase 75,000 shares of common stock for $5.00 per share. The
warrant grants the holder certain "piggyback registration" and other rights.
This warrant was exercised during the year ended October 31, 2000.
Stock Option Plan - Prior to its initial public offering, the Company adopted
the 1992 Stock Option and Stock Appreciation Rights Plan ("the Plan") which
provides for the granting of options to employees, officers, directors, and
consultants for the purchase of common stock. On May 8, 2000, the Company's
shareholders approved an amendment to the Plan increasing the maximum number of
shares issuable subject to the Plan to 2,700,000. Options granted may be either
"incentive stock options" within the meaning of Section 422 of the United States
Internal Revenue Code of 1986, as amended ("the Code"), or non-qualified
options. Incentive stock options may be granted only to employees and officers
of the Company, while non-qualified options may be issued to directors and
consultants, as well as to officers and employees of the Company.
The Company's Board of Directors or a committee of the Board consisting of four
non-employee directors determine those individuals to whom options will be
granted, the number of shares of common stock which may be purchased under each
option, and (when necessary) the option exercise price. The Board or the
committee also determines the expiration date of the options (typically 10
years, except for 10% shareholders, which expire in 5 years), and the vesting
schedule of the options.
F-30
The per share exercise price of an incentive stock option may not be less than
the fair market value of the common stock on the date the option is granted. The
per share exercise price of a non-qualified option shall be determined by the
committee, except that the Company will not grant non-qualified options with an
exercise price lower than 50% of the fair market value of common stock on the
day the option is granted. In addition, any person who, on the date of the
grant, already owns, directly or indirectly, 10% or more of the total combined
voting power of all classes of stock outstanding, may only be granted an option
if the exercise price of such option is at least 110% of the fair market value
of the common stock on the date of the grant.
The Board or the committee may also grant "stock appreciation rights" ("SARs")
in connection with specific options granted under the plan. Each SAR entitles
the holder to either: (a) cash (in an amount equal to the excess of the fair
value of a share of common stock over the exercise price of the related
options); or (b) common stock (the number of shares of which is to be determined
by dividing the SARs cash value by the fair market value of a share of common
stock on the SAR exercise date); or (c) a combination of cash and stock. SARs
may be granted along with options granted under the Plan, and to holders of
previously granted options. No SARs have been granted under the Plan.
Activity in the Plan during the past three years and
two months is as follows: Weighted
Exercise Average
Number of Price Exercise
Options Range Price
--------- -------------- ----------
Options outstanding, October 31, 1997 849,898 $3.25 - $7.88 $4.42
Options granted 216,400 $8.25 - $10.86 $8.79
Options exercised (197,648) $3.63 - $7.88 $4.52
Options cancelled (63,650) $3.88 - $9.56 $4.83
---------
Options outstanding, October 31, 1998 805,000 $3.25 - $10.86 $4.41
Options granted 152,750 $8.00 - $11.48 $10.03
Options exercised (152,200) $3.25 - $7.88 $4.38
Options cancelled (17,150) $4.50 - $9.56 $8.82
---------
Options outstanding, October 31, 1999 788,400 $3.25 - $11.48 $6.56
Options granted 1,407,350 $8.81 - $45.00 $16.18
Options exercised (170,478) $3.25 - $27.25 $5.53
Options cancelled (54,422) $4.38 - $27.25 $13.38
---------
Options outstanding, October 31, 2000 1,970,850 $3.25 - $45.00 $12.89
Options cancelled (183,916) $8.81 - $27.25 $13.74
---------
Options outstanding, December 31, 2000 1,786,934 $3.25 - $45.00 $12.65
=========
F-31
Additional information regarding options
outstanding: 207,000 $3.25 - $4.68 $3.60
153,800 $5.25 - $7.88 $5.83
815,500 $8.00 - $12.00 $10.17
60,750 $14.33 - $17.69 $16.68
505,034 $18.06 - $23.81 $19.74
22,350 $27.25 - $37.78 $30.60
22,500 $42.38 - $45.00 $44.71
---------
1,786,934
=========
There were 950,997, 884,612, 471,060 and 466,133 options exercisable at December
31, 2000 and October 31, 2000, 1999 and 1998, respectively. At December 31,
2000, there are 363,486 options available for future grant.
At December 31, 2000, the weighted average remaining contractual life of all
options outstanding, whether vested or not, is approximately 7.2 years.
The Company accounts for options granted under the Plan in accordance with
Accounting Principles Board Opinion No. 25 and related Interpretations.
Accordingly, no compensation cost has been recognized for stock option awards.
Had compensation cost been determined in accordance with Statement of Financial
Accounting Standard No. 123 "Accounting for Stock-Based Compensation", the
Company's income/(loss) in thousands of dollars and income/(loss) per common
share for the two months ended December 31, 2000 and 1999 and for fiscal 2000,
1999, and 1998, respectively, would have been as follows:
Two Months Ended December 31,
------------------------------------------
2000 1999 (Unaudited)
-------------------- --------------------
Reported Proforma Reported Pro Forma
--------- --------- --------- ---------
Net loss to
common
stockholders $ (5,790) $ (6,247) $ (343) $ (691)
========= ========= ========= =========
Income/(loss) per diluted common share:
Net loss to
common
stockholders $ (0.98) $ (1.06) $ (0.07) $ (0.15)
========= ========= ========= =========
F-32
Fiscal Years Ended October 31:
----------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- --------------------
Reported Pro Forma Reported Pro Forma Reported Pro Forma
--------- --------- --------- --------- --------- ---------
Gain on sale, net
of loss from
discontinued
operation - - - - $ 1,620 $ 1,620
========= ========= ========= ========= ========= =========
Net income to
common
stockholders $ (18,819) $ (20,336) $ 1,661 $ 1,278 $ 2,699 $ 2,435
========= ========= ========= ========= ========= =========
Income/(loss) per
diluted common
share:
Gain on sale, net
of loss from
discontinued
operation - - - - $ 0.37 $ 0.37
========= ========= ========= ========= ========= =========
Net income to
common
stockholders $ (3.58) $ (3.87) $ 0.34 $ 0.26 $ 0.61 $ 0.55
========= ========= ========= ========= ========= =========
All incentive stock options under the Plan, other than those granted to any
person holding more than 10% of the total combined voting power of all classes
of outstanding stock, are granted at the fair market value of the common stock
at the grant date. The weighted average fair value of the stock options granted
during fiscal 2000, 1999 and 1998 was $12,122,000, $563,569 and $704,176,
respectively. No grants were made during the two months ended December 31, 2000.
The fair value of each stock option grant 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 2000: a risk-free interest rate of between 5.32%
and 6.73%; expected lives ranging from six months to four years; and expected
volatility of 85.9%. The assumptions used in 1999 and 1998 included risk-free
interest rates of 5.75% and 6.5%, expected lives ranging from six months to five
years, and expected volatilities of 49.5% and 48.6%
In addition to options granted under the Plan, two non-qualified options
aggregating 290,000 shares were granted prior to the Company's initial public
offering of which 150,000 shares were exercised prior to October 31, 1996,
40,000 were exercised during the year ended October 31, 1997, and 100,000 were
exercised during the year ended October 31, 1998.
F-33
10. Commitments and Contingencies
Construction Obligation:
During fiscal 2000, the Company began construction of an Internet Data Center in
the Atlanta metropolitan area. A major portion of this construction was
represented by a construction contract aggregating approximately $3,121,000. As
of December 31, 2000, there were payments of approximately $538,000 remaining to
be made on this contract. In addition, equipment for this facility in the amount
of $172,000 was on order. In July 2000, the Company announced the signing of a
lease for a 54,000 square foot building, that was under construction, as its
third IDC. This facility, located in the Northern Virginia high technology
corridor, was turned over to the Company in November 2000 for development as an
IDC. As of the date of this report, approximately $333,000 has been completed
from a construction contract in the amount of $1,565,000, and equipment totaling
$888,000 has been delivered. The Company is presently evaluating design
alternatives with respect to the further development of this facility.
Employment Agreements:
The Company is obligated under certain employment agreements which expire at
various times through October 31, 2002. Pursuant to such agreements, the
approximate annual minimum salary amounts payable are as follows:
Years Ending
December 31,
------------
2001 1,254,896
2002 883,229
Consulting and Non-competition:
In connection with an acquisition, the Company entered into an agreement with
the former owner of the acquired company. This agreement, as amended in October
1994, expires on September 30, 2001, and provides for annual payments of
$267,500 through that date. As a partial incentive to enter into the amended
agreement, the Company agreed to forgive, on each anniversary date of the
agreement, 12.5% of the consultant's existing indebtedness to the Company
($13,118 at October 31, 1999, see Note 6). The consulting agreement imposes
certain non-competition restrictions on the consultant. The existing
indebtedness to the Company was amortized ratably over the term of the amended
agreement.
Litigation:
In June 2000, the Company commenced an action against Atlas Business Services
Corp. ("Atlas"), a former customer, in the Supreme Court of New York to collect
approximately $45,000 in outstanding data processing invoices. Atlas filed an
answer in which it asserted certain affirmative defenses alleging that the
services were deficient. Discovery is proceeding in this action.
F-34
In September 2000, the Company was served with a complaint in connection with a
lawsuit commenced by Atlas in August 2000 in the Federal District Court for the
Southern District of New York. Atlas alleges that a breach of contract by the
Company in providing data processing services resulted in the loss of three
customers and annual revenue of $700,000. The Company filed an answer denying
all of the material allegations and asserting several affirmative defenses.
Pursuant to a Scheduling Order, discovery must be completed by June 21, 2001.
It is premature to give a proper evaluation of the probability of a favorable or
unfavorable outcome. While it is again premature to give a proper evaluation of
the potential liability, Atlas has demanded damages of not less than $5 million.
Management believes that the above matters will be resolved without any material
adverse impact to the Company's financial position, results of operations or
cash flows.
Lease Obligations:
Operating leases for facilities extend through December 31, 2015. The Company's
obligations under certain of these leases are secured by cash deposits or
standby letters of credit, aggregating $2,096,000. Total expense for occupancy
costs, net of sublease income, was approximately $607,000, $292,000, $2,104,000,
$1,587,000 and $1,872,000 for the two months ended December 31, 2000 and 1999
and for fiscal 2000, 1999 and 1998, respectively.
During the fourth quarter of fiscal 1998, the Company completed the
consolidation of its data center and administrative functions into its Leonia NJ
facility. Effective as of August 1, 1998, the Company sublet approximately
31,500 square feet in its New York City location. This sublease and the related
primary lease expire in 2008. Because the amount to be received under the
sublease (aggregating approximately $6,211,000) is less than the amount the
Company must pay under the primary lease, a charge was taken of approximately
$3,022,000. The charge represents the total amount of the shortfall over the
life of the lease, and also includes the value of leasehold improvements
abandoned. Since the sale of the Payroll Division also permitted the Company to
reduce substantially its New York City space requirements, approximately
$786,000 was charged against the gain on sale of the Payroll Division.
During fiscal 2000, the landlord, the subtenant, and the Company executed
agreements terminating both the primary lease and the sublease. Under the terms
of these agreements, the Company must pay the landlord monthly amounts equal to
the excess of the sum due under the primary lease over the amount due under the
sublease.
Effective July 31, 2000, the Company closed its Charlotte, NC sales office, and
recorded a charge of approximately $514,000 representing the total amount of
future payments. A subtenant is being sought for this space, but as of October
31, 2000, one has not been found. The lease for this facility expires on
December 31, 2002.
The Company leases certain of its data center equipment, various items of office
equipment, and vehicles under standard commercial operating leases. The Company
also has fixed-term obligations for software licenses.
F-35
Approximate minimum future lease payments for real estate and other operating
leases, net of sublease income, are as follows:
Years Ending
December 31,
------------
2001 11,787,000
2002 9,590,000
2003 6,457,000
2004 5,703,000
2005 5,525,000
Thereafter 46,166,000
---------------
$ 85,228,000
===============
11. Sale of the Payroll Division
On December 19, 1997, the Company consummated the sale (the "Sale") of all the
capital stock of four wholly-owned subsidiaries of the Company, together
comprising the Payroll Division ("Pay USA"), to Zurich Payroll Solutions, Ltd.
("Zurich" or the "Buyer"). At closing, the Company received $11,460,000, of
which $10,710,000 was in cash and $750,000 was in the form of a note from the
Buyer which was subsequently repaid by Zurich. The terms of the Sale also
provided for an additional payment by the Buyer of up to $1,500,000, which was
received in full in June 1998. The Company recognized a gain, net of tax, of
approximately $1,700,000 in its fiscal year ended October 31, 1998, as a result
of the Sale.
For the period beginning on November 1, 1997 through the date of the Sale, the
net operating losses (net of related tax benefits) of Pay USA were recorded as a
discontinued operation. For such period, revenue from the discontinued operation
approximated $1,117,000 and pretax operating losses approximated $136,500.
Pursuant to the terms of the sale, the Company agreed to provide the Buyer with
processing services in connection with the continuing operations of Pay USA. The
Company provided these services through December 31, 1999 for an initial payment
of $500,000, and fixed and other monthly fees based on the level of services
provided. The Buyer also paid the Company $1,440,000 at closing for the
Company's agreement to refrain from directly or indirectly competing with Pay
USA, except as permitted in the agreement and to refrain from certain other
specified activities. In May 1999, Zurich and the Company amended the agreement
to provide that the Company's obligations thereunder would terminate on October
31, 1999. The $1,440,000 was amortized over the term of the amended agreement.
The amortization of such income was included in income from continuing
operations for fiscal 1999.
12. Acquisition
On December 18, 1998, a subsidiary of the Company purchased certain assets and
the business of Enterprise Technology Group, Incorporated ("Enterprise") for
$4,000,000 in cash and 300,000 shares of the Company's common stock valued at
$2,677,500.
F-36
In connection with the acquisition, Enterprise and its principal shareholders
entered into non-competition and non-solicitation agreements with the Company. A
value of $50,000 was assigned to these agreements. The Company also recorded
$6,852,928 in excess of cost over net assets acquired (goodwill). The goodwill
is being amortized on a straight-line basis over 15 years, the two agreements
are being amortized over the terms of such agreements (approximately 61 months).
Certain additional consideration in the form of cash and common stock (up to
$4,872,000 and 242,857 shares) would have been payable, at various times, based
upon the future performance of the acquired business over the period ending
December 31, 2001. Effective as of December 31, 1999, $1,135,160 in additional
consideration became payable in the form of shares of the Company's common
stock. This amount was recorded as an increase in the value of goodwill. The
Company paid this consideration in the form of 36,472 shares of its common stock
on February 22, 2000.
The Asset Purchase Agreement was amended to provide for the issuance of a
warrant to purchase 65,000 shares of the Company's common stock to settle any
future contingent payments (see Note 9).
The Enterprise Acquisition was accounted for using the purchase method of
accounting. Accordingly, the purchase price has been allocated to the assets
acquired based on their fair values at the date of acquisition. The assets
acquired consist predominately of intangibles associated with the business of
providing information technology infrastructure management solutions to large
companies and institutions. No liabilities were assumed. The results of
operations of the subsidiary have been included in the Company's consolidated
results of operations from the date of the acquisition.
F-37
The following pro forma financial information shows the results of operations
for the fiscal years ended October 31, 1999 and 1998, assuming the acquisition
of certain assets and the business of Enterprise had occurred at the beginning
of each period presented:
Fiscal Years ended October 31,
------------------------------
1999 1998
----------- -----------
Revenues $34,716,000 $35,435,000
=========== ===========
Income from continuing operations $ 2,765,000 $ 1,149,000
Loss from discontinued operation - (76,000)
Gain on sale of discontinued operation - 1,696,000
----------- -----------
Net income $ 1,695,000 $ 2,769,000
=========== ===========
Basic earnings per share:
Income from continuing operations $ 0.36 $ 0.26
Loss from discontinued operation - (0.02)
Gain on sale of discontinued operation - 0.39
----------- -----------
Net income $ 0.36 $ 0.63
=========== ===========
Diluted earnings per share:
Income from continuing operations $ 0.34 $ 0.24
Loss from discontinued operation - (0.01)
Gain on sale of discontinued operation - 0.36
----------- -----------
Net income $ 0.34 $ 0.59
=========== ===========
13. Retirement Plans
The Company maintains a 401(k) Savings Plan covering all eligible employees who
have attained the age of 21 years and worked at least 1,000 hours in a one-year
period. Plan participants may elect to contribute from 2% to 15% of covered
compensation each year. The Company may make matching contributions at the
discretion of the Board of Directors. For the two months ended December 31, 2000
and 1999, and the fiscal years ended October 31, 2000, 1999 and 1998, the
Company did not make any matching contributions. The administrative costs of the
Plans are borne by the Company. Asset management costs are deducted pro rata
from the participants' accounts.
F-38
14. Quarterly Financial Information (Unaudited)
The following is a summary of the quarterly results of operations for the two
years ended October 31, 2000 (in thousands except per share data):
THREE MONTHS ENDED:
--------------------------------------------
JANUARY APRIL JULY OCTOBER
31, 2000 30, 2000 31, 2000 31, 2000
-------- -------- -------- --------
Revenues $ 7,115 $ 6,583 $ 5,359 $ 5,414
-------- -------- -------- --------
Net income/(loss) from
continuing operations (853) (2,906) (5,671) (5,553)
-------- -------- -------- --------
Net income/(loss) to
common stockholders $ (853) $ (2,906) $ (7,529) $ (7,531)
======== ======== ======== ========
Net income/(loss) to
common stockholders
per basic common share $ (0.18) $ (0.59) $ (1.38) $ (1.28)
======== ======== ======== ========
Net income/(loss) to
common stockholders
per diluted common share $ (0.18) $ (0.59) $ (1.38) $ (1.28)
======== ======== ======== ========
THREE MONTHS ENDED:
--------------------------------------------
JANUARY APRIL JULY OCTOBER
31, 1999 30, 1999 31, 1999 31, 1999
-------- -------- -------- --------
Revenues $ 8,281 $ 9,022 $ 9,072 $ 7,890
-------- -------- -------- --------
Net income/(loss) from
continuing operations 558 775 636 (308)
-------- -------- -------- --------
Net income/(loss) to
common stockholders $ 558 $ 775 $ 636 $ (308)
======== ======== ======== ========
Net income/(loss) to
common stockholders
per basic common share $ 0.13 $ 0.17 $ 0.13 $ (0.07)
======== ======== ======== ========
Net income/(loss) to
common stockholders
per diluted common share $ 0.12 $ 0.16 $ 0.13 $ (0.07)
======== ======== ======== ========
F-39
INFOCROSSING, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged Charged Balance
Beginning of to Costs to Other at End of
Description Period and Expenses Accounts Deductions Period
(a)
Two-month
period ended
December 31,
2000 $502,957 $23,000 - - $525,957
Year ended
October 31,
2000 350,939 175,838 - $ 23,820 $502,957
Year ended
October 31,
1999 216,659 158,000 - 23,720 350,939
Year ended
October 31,
1998 111,577 115,429 - 10,347 216,659
(a) Uncollectible accounts written off, net of recoveries.
S-1
INFOCROSSING, INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE No.
10.9B First Amendment of Lease dated as of December
18, 2000 between the Company and BECO-Terminal
LLC. X-2
10.11B Amendment Asset Purchase Agreement dated
as of February 1, 2001, by and among the
Company, ETG, Inc., Enterprise, and certain
stockholders of Enterprise. X-5
10.11C Warrant to purchase 65,000 shares of the
Company's common stock, dated February 1,
2001, issued to Enterprise. X-10
21 Subsidiaries of the Company X-18
23 Consent of Ernst & Young, LLP X-19
X-1