Back to GetFilings.com
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 year ended: DECEMBER 31, 2001
Commission file number: 0-20824
INFOCROSSING, INC.
-------------------------------------------------------------
(Exact name of registrant as specified in its Charter)
DELAWARE 13-3252333
------------------------------------- ---------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2 CHRISTIE HEIGHTS STREET LEONIA, NJ 07605
-----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 840-4700
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
-------------------------------------------------------
(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 March 15, 2002, the aggregate market value of the outstanding shares of
voting stock held by non-affiliates of the registrant was approximately
$21,762,000.
On March 15, 2002, 5,342,426 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, 2002.
PAGE 1
This Annual Report, including the accompanying financial statements and notes,
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.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Infocrossing, Inc. (together with its subsidiaries: "Infocrossing" or 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. The Company provides information technology ("IT")
outsourcing services in the following areas: (1) Mainframe Outsourcing; (2)
Midrange Systems Management including both managed hosting and remote management
of IBM AS400 and iSeries computers; (3) Business Process Outsourcing; (4) Open
Systems Management including hosting and a full suite of managed services for
servers running various Microsoft and Unix operating systems as well as remote
systems management for these platforms; (5) Systems Infrastructure and
Operations Consulting; and (6) Business Continuity Solutions to ensure
continuous operations for customers who experience unexpected interruptions at
their primary business locations. The Company's customers include commercial
enterprises, institutions, and government agencies. The Company's core activity
has been providing outsourcing solutions, which includes 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 and continues to be a
growing trend.
On February 5, 2002, the Company completed the acquisition of AmQUEST, Inc., an
Atlanta-based IT outsourcing company, for approximately $20.3 million in cash.
The acquisition combines two highly complimentary businesses and is intended to
allow Infocrossing and its customers to benefit from increased scale, enhanced
services, and expanded geographic reach. The combination strengthens
Infocrossing's position as one of the leading providers of IT outsourcing
solutions for large and mid-size companies. The combined entity is anticipated
to have projected 2002 revenue of approximately $50 million and will offer a
broad array of high-availability mainframe, midrange and open system outsourcing
solutions.
PAGE 2
THE IT OUTSOURCING INDUSTRY
The outsourcing of IT services, whereby a client company obtains all or part of
its information processing requirements (including systems design, hardware,
software management, 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 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.
The Company has developed industry-specific knowledge and has developed
processes so that the Company's in-depth knowledge of a particular industry can
be applied to servicing clients in that field. The Company currently provides
outsourcing services to approximately 400 clients in such diverse fields as
financial services, security services, manufacturing, retail, publishing, health
care, apparel, and consumer products.
PAGE 3
SERVICES
The Company's services include the following:
Mainframe Outsourcing
The Company's Mainframe Outsourcing services allow clients to process
and manage core business applications that run on large enterprise
servers, traditionally called "mainframes." The Company provides
skilled personnel, secure processing environments, high service levels,
and state-of-the art technologies to meet clients' mainframe processing
requirements. Clients use the Company's Mainframe Outsourcing services
to focus on their core business and customer related activities while
significantly reducing their operating costs.
The Company takes full advantage of the economies of scale of mainframe
management to reduce operating costs for its clients. For example, the
Company uses advanced operating system software to share common
processing and data storage resources across multiple customers,
reducing the complexity and costs of managing dedicated equipment. The
Company also employs automation such as storage tape robots, which
generates significant costs savings over manual processes. Typically,
automation is economical only in large computing environments such as
those managed by the Company.
Midrange Systems Management
With the acquisition of AmQUEST, Inc., in February 2002, the Company
significantly expanded its business of managing midrange computers for
customers. The Company defines midrange systems as non-mainframe
computers running proprietary operating systems (excludes Unix and
Microsoft operating systems), which are used primarily for business
applications with ten or more simultaneous users. Midrange computers
are typically smaller than mainframes, and often serve as the central
computing resource for running mission critical applications of
mid-sized companies or divisions of large enterprises. The Company
specializes in hosting and managing IBM's line of iSeries midrange
systems, formerly marketed by IBM as the AS/400 line. The IBM iSeries
and AS/400s comprise the vast majority of both installed base and new
sales of midrange computers, making a very large potential market for
midrange systems management services.
The Company provides both outsourcing and remote management of midrange
systems. The Company delivers a full suite of services including
physical space, power, and network connectivity as well as
comprehensive systems management services to operate and maintain the
customer's midrange systems and data. The Company also offers remote
management of midrange systems whereby the Company's midrange systems
experts use a secure network to monitor and manage computers located at
either a customer's site or another vendor's data center.
PAGE 4
Customers choose to outsource the management of their midrange systems
to Infocrossing primarily to reduce costs, but also to improve service
levels to their own end users. The principal source of costs savings
for customers is from a reduction in systems administrators who are
specially trained to manage midrange systems. Infocrossing's staff of
midrange systems experts use sophisticated systems management tools and
economies of scale to manage many midrange systems simultaneously at a
much lower cost per system than can be attained by any single customer.
Business Process Outsourcing
The Company has developed industry specific experience in markets that
include publishing, financial services, manufacturing, 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 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.
Open Systems Management
The Company began offering Open Systems Management services in January
2000 by retooling a portion of its state-of-the-art mainframe data
center at the headquarters in Leonia, New Jersey. Since it's opening,
the new data center has attracted customers with a wide range of
applications, typically running on Unix or a Microsoft operating
system, together referred to as "Open Systems."
Open Systems Management includes a number of services that are sold
both individually and as a package, allowing the Company to tailor an
offering to a customer's unique requirements:
o Facilities Services comprise the base offering for most Open
Systems Management customers. These services include secure
physical space for a customer's equipment in either locked cages
or cabinets in an environmentally controlled, raised-floor data
center, as well as fully redundant, filtered power.
o Network Services enable customers to connect their equipment to a
broad array of networks including the public Internet, intranets,
and other packet networks such as frame relay, private lines, and
dark fiber. The Company provides its own highly available Internet
access service, but also permits customers to contract directly
with third party network service providers.
o Storage Services give customers access to Infocrossing's leading
edge storage systems for both primary disk storage and tape
backup. These services provide advanced storage capabilities on a
subscription basis that would be very expensive for customers to
acquire and manage on their own.
PAGE 5
o Systems and Network Management is a suite of automated, integrated
managed services that includes monitoring, reporting, and problem
management for a customer's entire open systems infrastructure.
The Company uses a combination of state-of-the-art enterprise
class management tools to provide a highly automated management
service that can be efficiently tailored for each customer's
computing and networking environment. The system has also been
designed for portability, enabling the Company to serve customers
regardless of where their open systems are located. Infocrossing's
Systems and Network Management services enable customers to
maximize the availability of their open systems infrastructure at
a far lower cost than implementing and operating their own
management systems.
o Professional Services give customers access to Infocrossing's
highly trained technical specialists to help design, administer,
and trouble-shoot their computing and networking devices hosted by
the Company. Professional Services are particularly attractive to
customers with complex systems, who do not have sufficient
internal resources and skills to manage these systems.
o Managed Services combines all of the above services to deliver a
complete packaged offering whereby the Company takes full
responsibility for hosting, managing, and maintaining systems. The
Company takes full advantage of automation and scale to manage
systems for multiple clients in a cost effective manner without
compromising service level requirements.
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.
Business Continuity
In January 2002, the Company launched its Business Continuity Solutions
offering. Business Continuity provides customers with access to backup
data center space, computing equipment, and office facilities to be
used in the event of an emergency or disaster. Customers pay a monthly
subscription fee based on the type and quantity of Business Continuity
resources they reserve, as well as a daily usage fee for using these
resources in an emergency.
PAGE 6
The Company entered the Business Continuity field with a minimal
capital investment by leveraging assets and personnel used in its other
outsourcing activities. The Company is well positioned to compete in
Business Continuity because of its experience in data center management
as well as the strategic location of its data centers. Unlike many of
its competitors, the Company provides Business Continuity in full
production facilities, which offers several advantages including access
to the facility and to skilled professionals 24 hours a day, every day
of the year.
The Company's Business Continuity Solutions include three primary
services:
Standby Workstations give customers emergency access to fully
equipped office facilities including workstations with
personal computers and call-center capable phones, conference
rooms, break rooms, and office machines such as copiers,
printers and fax machines. The workstations are networked for
Internet access as well as connectivity to backup servers.
Backup Open Systems provide either shared or dedicated data
center resources for backup open systems such as servers and
network equipment. The Company offers dedicated space and
related services for open systems on the same terms as its
Open Systems Management offering, giving customers complete
flexibility to use the services interchangeably for primary
production, backup or both.
Mainframe Recovery takes advantage of the Company's fully
equipped and staffed mainframe data centers to provide
customers shared or dedicated access to backup mainframe
processing and storage capacity. The Company's Mainframe
Recovery offering is well-suited for large customers needing a
dedicated solution for guaranteed access to backup resources,
or for small customers that may need additional personnel in
an emergency.
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 exceed
industry standards. Because of its attention to customer service, many of the
Company's client relationships have been long-term.
MARKETING AND SALES
The Company currently targets its marketing efforts to a broad range of large
and medium-size enterprises. The Company's customer base is 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. The Company has
certain clients that individually account for 10% or more of consolidated
revenues. For the year ended December 31, 2001, these clients were: ADT Security
Services, Inc. and Alicomp, a division of Alicare, Inc. ("Alicomp").
PAGE 7
For the two-month period ended December 31, 2000 and the fiscal year ended
October 31, 2000, clients accounting for in excess of 10% of consolidated
revenues were Alicomp and International Masters Publishers, Inc. In the fiscal
year ended October 31, 1999, no client accounted for 10% or more of revenues.
The Company also has a joint marketing agreement with Alicomp.
Initial contact with a prospective customer 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 has
entered into agreements with certain enterprises and individuals that would be
entitled to receive compensation for their assistance in procuring sales.
PRODUCT DEVELOPMENT
Since the IT services 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 satisfy 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. Expenses on
software development activities totaled $486,000, $178,000, and $384,000 for the
year ended December 31, 2001, the two months ended December 31, 2000, and the
fiscal year ended October 31, 2000, respectively. Capitalized expenditures for
enhancements to existing products approximated $285,000, $119,000, $1,011,000,
and $905,000 for the year ended December 31, 2001, the two months ended December
31, 2000, and the fiscal years ended October 31, 2000 and 1999, respectively.
COMPETITION
Although the Company is not aware of other companies that offer all of the same
services 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
IBM Corporation; Electronic Data Systems Corporation; Affiliated Computer
Services, Inc.; Computer Sciences Corp.; and Sungard Data Systems, Inc. The
Company also competes with smaller companies that provide a subset of the
Company's services.
In general, the outsourcing services industry is fragmented, with numerous
companies offering services in limited geographic areas, vertical markets, or
product categories. Many of the Company's larger 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.
PAGE 8
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 uncompetitive 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.
INTELLECTUAL PROPERTY MATTERS
The Company's systems and processes are not protected by patents nor by 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, 2001, the Company had 204 full-time and 9 part-time
employees. The acquisition of AmQUEST, noted above, adds an additional 47
full-time employees as of February 5, 2002. 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.
PAGE 9
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.
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 lease expires on June
30, 2015. The Company redeveloped a portion of this building into its second
data center and IDC, which opened in November 2000. In 2001, the Company
temporarily suspended operations at the site and is presently evaluating
alternatives with respect to this facility.
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 lease expires on December 31, 2015. In 2001 the Company
suspended its development of the facility as a third IDC. The Company is
presently evaluating alternatives with respect to this facility.
The Atlanta and Northern Virginia 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 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. The Company accrued approximately $514,000 for future
lease payments on this facility through the end of the lease term on December
31, 2002.
The Company also leases 5,700 square feet of office space in New York, NY. The
lease expires on December 31, 2009.
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.
PAGE 10
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.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PAGE 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
For the year ended December 31, 2000:
1st Quarter ended March 31, 2000 54.750 25.750
2nd Quarter ended June 30, 2000 44.000 13.250
3rd Quarter ended September 30, 2000 25.250 15.125
4th Quarter ended December 31, 2000 11.125 5.125
For the year ended December 31, 2001:
1st Quarter ended March 31, 2001 8.938 5.000
2nd Quarter ended June 30, 2001 9.300 4.110
3rd Quarter ended September 30, 2001 7.150 4.000
4th Quarter ended December 31, 2001 6.200 3.750
The closing price of the Company's common stock on NASDAQ-NMS on March 15, 2002
was $5.48 per share. The Company has approximately 95 stockholders of record. In
addition, the Company believes that there are approximately 500 beneficial
owners holding their shares in "street name."
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.
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, 2001, the
Company had repurchased 18,400 shares for approximately $142,000.
RECENT ISSUANCES OF UNREGISTERED SECURITIES
During the year ended December 31, 2001, the Company did not sell or issue its
common stock in any transaction exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
PAGE 12
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
-------------------------------------------------------------------
YEAR ENDED TWO MONTH PERIODS ENDED
DECEMBER 31, FISCAL YEARS ENDED OCTOBER 31, DECEMBER 31,
------------ ------------------------------------------------------------- ----------------------------
2001 2000 1999 1998 1997 2000 1999
------------ ------------ ------------ ------------- ------------ ------------ ------------
(UNAUDITED)
CONSOLIDATED
STATEMENTS
OF OPERATIONS
Revenues $ 26,986 $ 24,471 $ 34,265 $ 30,403 $ 24,396 $ 3,521 $ 4,874
============ ============ ============ ============= ============ ============ ============
Net income/(loss)
from
continuing
operations (36,524) (14,983) 1,661 1,079 688 (4,440) (343)
============ ============ ============ ============= ============ ============ ============
Loss on
discontinued
operation, net
of income tax
benefit - - - (76) (127) - -
============ ============ ============ ============= ============ ============ ============
Gain on sale of
discontinued
operation, net
of income tax
provision - - - 1,696 - - -
============ ============ ============ ============= ============ ============ ============
Net income/(loss)
to common
stockholders $ (45,048) $ (18,819) $ 1,661 $ 2,699 $ 561 $ (5,790) $ (343)
============ ============ ============ ============= ============ ============ ============
Net income/(loss)
to common
stockholders
per diluted
common share $ (7.77) $ (3.58) $ 0.34 $ 0.61 $ 0.14 $ (0.98) $ (0.07)
============ ============ ============ ============= ============ ============ ============
CONSOLIDATED
BALANCE SHEETS
Total assets $ 58,774 $ 78,844 $ 27,554 $ 26,949 $ 19,143 $ 78,449 $ 30,597
============ ============ ============ ============= ============ ============ ============
Long-term
obligations and
(beginning in
fiscal 2000)
redeemable
preferred stock $ 47,593 $ 34,146 $ - $ 12 $ 272 $ 38,214 $ 2,014
============ ============ ============ ============= ============ ============ ============
PAGE 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Infocrossing is a premier provider of a full range of IT outsourcing services,
including mainframe and open system outsourcing, business process outsourcing,
IT infrastructure consulting and business continuity services. Due to rapid
changes and increasing complexities in information technology, outsourcing is an
efficient solution for many businesses and continues to be a growing trend. The
Company has grown through strategic acquisitions as well as organic growth.
During the year, the Company announced the signing of a significant new IT
managed services contract with a new customer that by its terms, and as
subsequently amended, is expected to generate $50 million in revenues over the
four-year life of its initial term.
On February 5, 2002, the Company completed the acquisition of AmQUEST, Inc., an
Atlanta-based IT outsourcing company, for approximately $20.3 million in cash.
The acquisition combines two highly complimentary businesses and is intended to
allow the Company and its customers to benefit from increased scale, enhanced
services, and expanded geographic reach. Infocrossing and AmQUEST both serve
similar customers - large and mid-sized enterprises across a broad range of
industries including financial services, security, publishing, healthcare,
telecommunications and manufacturing. The combined entity is anticipated to have
projected 2002 revenue of approximately $50 million and will offer a broad array
of high-availability mainframe, midrange and open system outsourcing solutions.
On September 15, 2000, the Company changed its year ending date from October
31st to December 31st. This change required the Company to prepare financial
statements for the two-month period ended December 31, 2000 and the comparable
two-month period of 1999. Financial statements for the fiscal year ended October
31, 2000 and prior are not restated to conform to the calendar year reporting
period of 2001.
YEAR ENDED DECEMBER 31, 2001 AS
COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
The Company has a lease for a 52,000 square foot building located in
metropolitan Atlanta expiring on June 30, 2015. The Company had redeveloped a
portion of the metropolitan Atlanta facility and opened it as an IDC in November
2000. The Company has a lease for a 54,000 square foot building located in the
Northern Virginia high tech corridor expiring on December 31, 2015. This lease
commitment is above current market rates.
PAGE 14
In 2001, in response to excess supply of Internet server hosting capacity, the
Company suspended operations at the metropolitan Atlanta facility and suspended
the further development of the Northern Virginia facility. The Company is
evaluating options with respect to the use of these facilities. The Company is
reviewing potential use or disposition strategies including, but not limited to,
alternate uses of each facility in non-colocation outsourcing activities;
subleasing all or a part of each facility either for the remaining lease term or
some shorter period; renegotiating the terms of a lease, and negotiating the
termination of a lease. In conducting its assessment, the Company has reviewed
many factors including, but not limited to, its projected operating plans;
prevailing real estate market conditions; supply and demand estimates for
colocation space; and alternate uses of each facility either by the Company or
to another potential tenant or subtenant. The Company also assessed whether the
prevailing conditions with respect to each factor were temporary or permanent.
If the Company decides to sublease all or part of a facility, the Company must
determine if it will incur a loss in connection therewith. If the estimated
future cash inflows are exceeded by the sum of (i) estimated future cash
outflows and (ii) unamortized capitalized costs related to the subleased portion
of a facility, the Company will recognize a loss. Similarly, costs incurred in
connection with a termination of a lease, as well as the abandonment of
unamortized capital costs related to the facility subject to such lease, will
result in a loss. Finally, any amount of unamortized capitalized costs related
to a facility or lease that are not recoverable from future cash flows either
from the Company's use or subleasing of a facility must be recognized as a loss.
Based on its analysis and estimates of the options available to the Company,
management has recorded a loss of $5,650,000 as of December 31, 2001.
Approximately one-half of the loss relates to the write-off of capitalized
costs. The amount of the loss may increase in future periods if the conditions
or assumptions impacting the Company's current assessment adversely change or
the Company commits to a course of action that would result in a larger
estimated loss. The amount of the loss is reflected in the Company's results of
operations for 2001.
PAGE 15
As previously described, the financial statements included in this Annual Report
of Form 10-K do not include financial statements for the year ended December 31,
2000. For the purposes of this Management's Discussion and Analysis, the
following table presents the Company's results for the year ended December 31,
2001 in comparison with the comparable unaudited results for the year ended
December 31, 2000.
YEAR ENDED DECEMBER 31,
--------------------------------
2001 2000
-------------- --------------
(UNAUDITED)
Revenues $ 26,986,466 $ 23,118,665
-------------- --------------
Costs and expenses:
Operating costs 33,349,309 28,162,322
Selling and promotion costs 3,597,153 3,540,262
Amortization of restricted stock award 9,822,917 1,677,083
Amortization of goodwill 644,090 632,648
Loss on leased facilities
and office closings 5,650,000 548,972
General and administrative expenses 10,636,397 11,701,998
-------------- --------------
Total costs and expenses 63,699,866 46,263,285
-------------- --------------
Loss from operations (36,713,400) (23,144,620)
Net interest income (886,403) (2,110,505)
-------------- --------------
Pretax loss (35,826,997) (21,034,115)
Income tax provision/(benefit) 697,000 (1,954,004)
-------------- --------------
Net loss (36,523,997) (19,080,111)
Accretion and dividends on
redeemable preferred stock (8,524,026) (5,186,143)
-------------- --------------
Net loss to common stockholders $ (45,048,023) $ (24,266,254)
============== ==============
For the calendar year ended December 31, 2001 (the "Current Year"), revenues
increased $3,868,000 (16.7%) to $26,986,000 from $23,119,000 for the calendar
year ended December 31, 2000 (unaudited) (the "Prior Year"). Revenues from a
significant new customer contributed to the increase. During the year, the
Company announced the signing of a significant new IT managed services contract
with a new customer that by its terms, and as subsequently amended, is expected
to generate $50 million in revenues over the four-year life of its initial term.
PAGE 16
Operating costs increased $5,187,000 (18.4%) to $33,349,000 during the Current
Year compared with $28,162,000 in the Prior Year. Operating costs include
depreciation and amortization of $2,928,000 and $1,504,000 in the Current Year
and Prior Year, respectively. The remaining increases primarily consist of IDC
and related managed services operating and development costs mostly occurring
earlier in the Current Year. As previously reported, due to excess supply of
server-hosting space, the Company has taken steps to minimize its costs by
suspending the operations at its metropolitan Atlanta data center and IDC and
the further development of the Northern Virginia IDC. Included in operating
costs in the Current Year are $4,477,000 of costs for these facilities.
Selling and promotion costs increased only $57,000 (1.6%) to $3,597,000 during
the Current Year compared with $3,540,000 in the Prior Year.
In June 2000, the Company hired a Chief Executive Officer (the "Executive") who
served with the Company until November 2001. The employment agreement with the
Executive provided for an award of 800,000 restricted shares of common stock.
The value of the 800,000 restricted shares, $11,500,000 on the date of grant,
was being amortized ratably over a four year vesting schedule. Effective
November 14, 2001, the Executive resigned and entered into a settlement
agreement with the Company to terminate the employment contract. As part of the
settlement, the Company accelerated the vesting of the stock award resulting in
a nonrecurring, noncash charge of approximately $7,427,000. Total amortization
related to the restricted shares in the Current Year was $9,823,000. In the
Prior Year the Company amortized $1,677,000 of the restricted stock award. (See
Liquidity and Capital Resources below).
As previously described, the Company recorded a loss in the Current Year of
$5,650,000 related to one of its leased data center facilities. The Company
recorded a loss provision of $549,000 in the Prior Year relating to the closing
of office locations.
General and administrative expenses decreased $1,066,000 (9.1%) to $10,636,000
for the Current Year from $11,702,000 for the Prior Year. General and
administrative expenses include $533,000 and $366,000 of depreciation and
amortization other than goodwill for the Current Year and Prior Year,
respectively. The remaining decrease primarily consists of IDC and related
administrative expenses that have been reduced during the Current Year.
The Company recorded net interest income of $886,000 in the Current Year,
compared with net interest income of $2,111,000 in the Prior Year. The net
reduction of $1,225,000 reflects a decrease in interest income of $1,408,000
from a lower average balance of interest-earning assets during the Current Year
and lower interest rates. The reduction in interest income was partially offset
by a decrease of $183,000 in interest expense arising from a larger average
outstanding debt and capital lease obligation balance in the Prior Year.
PAGE 17
In the Current Year, the Company recorded income tax expense of $697,000,
representing the difference between the estimated benefit as previously reported
compared with the amount recognized in the Company's income tax return. A tax
benefit of $1,954,000 was recorded in the Prior Year based on an estimate of the
availability of carrying back the pre-tax loss for such period to a prior
taxable year. The cumulative tax benefit recorded by the Company is limited to
the refund of taxes paid in prior years that the Company has received as a
result of carrying back a portion of its pre-tax loss. At December 31, 2001, the
Company had net operating loss carryforwards of approximately $29 million for
federal income tax purposes that begin to expire in 2020. The deferred tax asset
associated with carrying forward cumulative pre-tax losses has been fully offset
by a valuation allowance due to the uncertainty of realizing such tax benefits.
The Company's net loss increased $17,444,000 (91%) reflecting an increase of
$17,437,000 in total costs and expenses, largely due to a $5,650,000 loss on
leased facilities and an increase of $8,146,000 in amortization for the
restricted stock award on which the amortization was accelerated. Net loss to
common stockholders after accretion and accrued dividends on preferred stock was
$45,048,000 for the Current Year and $24,266,000 for the Prior Year. In addition
to the increased loss related to the nonrecurring, noncash charge for the
restricted stock award, the net loss to common stockholders included an increase
in the year in noncash charges for accretion and accrued dividends on preferred
stock of $3,338,000, which increased to $8,524,000 in the Current Year from
$5,186,000 in the Prior Year. The loss per common share was $7.77 for the
Current Year compared with a loss per common share of $4.46 in the Prior Year,
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.
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.
PAGE 18
Operating costs increased $1,509,000 (39%) to $5,376,000 during the Current
Period compared with $3,868,000 in the Prior Period. Operating costs include
depreciation and amortization of $334,000 and $194,000 in the Current Period and
the Prior Period, respectively. The remainder of the increase primarily consists
of IDC operating costs and the development of automated managed services.
Selling and promotion costs increased $437,000 (111%) to $830,000 during the
Current Period compared with $393,000 in the Prior Period. The increase is
attributable to a larger staff that was needed to market the Company's IDCs and
automated managed services.
Current Period expenses include $479,000 of amortization of a restricted stock
award. The restricted stock award was granted in June 2000, so there were no
comparable charges in the Prior Period.
General and administrative expenses increased $522,000 (47%) to $1,627,000 for
the Current Period from $1,105,000 for the Prior Period, reflecting higher costs
associated with the Company's server hosting and managed services activities.
General and administrative expenses include depreciation and amortization other
than goodwill of $63,000 for the Current Period versus $51,000 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.
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.
PAGE 19
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.
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. 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 $3,021,000 (12.8%) to $26,654,000 during fiscal 2000
compared with $23,633,000 in fiscal 1999. Operating costs include depreciation
and amortization of $1,337,000 and $1,105,000 in fiscal 2000 and fiscal 1999,
respectively. The remaining increase primarily consists of IDC operating costs
and activities related to the development of automated managed services.
Selling and promotion costs increased $1,047,000 (50.9%) to $3,103,000 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 services.
Amortization of a restricted stock award was $1,198,000 in fiscal 2000. The
restricted stock award was granted in June 2000, thus there was no comparable
charge in fiscal 1999.
In fiscal 2000, the Company accrued $514,000 of future lease costs related to a
closed sales office.
General and administrative expenses increased $5,500,000 (96.8%) to $11,180,000
for fiscal 2000 from $5,680,000 for fiscal 1999, reflecting higher costs
associated with the Company's server hosting and managed services activities.
Current period expenses also include $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. General and administrative
expenses include depreciation and amortization other than for goodwill of
$352,000 in fiscal 2000 versus $314,000 for fiscal 1999.
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.
PAGE 20
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.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 2001, the Company used net cash of $7,373,000
in operations. The Company recorded a loss of $36,524,000, which included
noncash charges of $4,105,000 of depreciation and amortization, $9,823,000 of
amortization related to a restricted stock award, and a loss on leased
facilities of $5,650,000. Changes in working capital accounts also partially
offset the operating loss including an increase in accounts payable and accrued
expenses of $3,179,000; an increase in customer deposits and deferred revenues
of $2,003,000; refunds and other reductions in income taxes receivable of
$3,509,000, and a decrease of $945,000 in accounts receivable.
The Company invested $9,009,000 for the purchase of property and equipment,
including data center construction, and $285,000 for product development and
enhancement. The Company also purchased 10,500 shares of its common stock in the
open market for $67,000, and 139,535 shares from the Company's former Chief
Executive Officer (the "Executive) for $450,000, as part of a settlement
agreement reached in connection with his separation from the Company, as
previously described. The principal source of investment cash was the redemption
of maturing marketable debt securities totaling $3,413,000.
The principal financing activities were net borrowings by the Company of
$1,845,000 and net related party borrowings from the Company of $475,000,
principally by the Executive. The Company settled its employment agreement with
the Executive in November 2001. As part of the settlement, the Company purchased
535,594 shares of the 868,446 shares of common stock held by the Executive for
$2,385,000. These shares are in the Company's Treasury. The Executive used
$1,935,000 of the proceeds to satisfy notes receivable due to the Company. (See
Results of Operations - Year Ended December 31, 2001 as Compared to the Year
Ended December 31, 2000).
As of December 31, 2001, the Company had working capital of approximately
$14,949,000 including cash and equivalents aggregating approximately
$24,344,000.
The Company believes that the combination of its cash and other liquid assets
will provide adequate resources to fund its ongoing operating requirements.
PAGE 21
SUBSEQUENT EVENTS
Release Agreement
On January 10, 2002, the Company and a software licensor (the "Licensor")
entered into a Release Agreement (the "Agreement") in settlement of a dispute of
certain claims the Company had made against the Licensor under a software
license and support agreement. Pursuant to the Agreement, the Company received
credits totaling $2,000,000 to be used towards certain future purchases (the
"Credits"). The Credits are subject to restrictions and expire on December 31,
2002 if unused. Additionally, support fees of $1,136,000 under the software and
support agreement, including $522,000 of past due amounts, were waived by the
Licensor. Pursuant to the Agreement, the Company agreed to release and hold
harmless the Licensor and its subsidiaries from any and all claims, damages,
actions or causes of action of any kind arising prior to the date of the
Agreement.
The Company expects that it will fully utilize the Credits in 2002 and record
them along with the accruals related to the unpaid support fees totaling
$796,000 at December 31, 2001 as income in 2002.
Acquisition of Amquest
On February 5, 2002, the Company entered into a Stock Purchase Agreement with
American Software, Inc., a Georgia corporation ("ASI") whereby the Company
purchased all of the outstanding capital stock of AmQUEST, Inc., a Georgia
corporation ("AmQUEST"), from its former parent company ASI (the "AmQUEST
Acquisition"). As consideration for the purchase of AmQUEST's shares, the
Company paid ASI $20,284,000 in cash, which amount will be adjusted upon final
determination of the working capital of AmQUEST as of January 31, 2002.
The Company financed the AmQUEST Acquisition through (i) the application of the
proceeds of the financing described below and (ii) cash held by the Company.
AmQUEST is a managed services provider that delivers technology infrastructure
management services to enterprise clients including mainframe and open systems
outsourcing, business continuity services, and systems and network management.
AmQUEST and Infocrossing serve similar customers - large and mid-sized
enterprises across a broad range of industries including financial services,
security, publishing, healthcare, telecommunications and manufacturing. From and
after the AmQUEST Acquisition, AmQUEST will continue to operate its business as
a wholly-owned subsidiary of the Company.
PAGE 22
Securities Purchase Agreement
In a related transaction, on February 1, 2002, in anticipation of the
consummation of the AmQUEST Acquisition, the Company entered into a Securities
Purchase Agreement (the "SPA") with Cahill, Warnock Strategic Partners Fund,
L.P.: Strategic Associates, L.P.: Camden Partners Strategic Fund II-A, L.P., and
Camden Partners Strategic Fund II-B, L.P. (collectively known as "Camden")
whereby the Company issued Senior Subordinated Debentures (the "Debentures") and
warrants (the "Initial Warrant") to purchase, initially, 2,000,000 shares of the
common stock of the Company (subject to adjustments as discussed below) in
exchange for an investment of $10,000,000 from Camden. Pursuant to the SPA, the
proceeds of the sale of the Debentures to Camden were used to partially fund the
AmQUEST Acquisition.
The Debentures have been issued in an aggregate principal amount of $10,000,000
with a maturity of three (3) years (the "Initial Maturity Date") from February
1, 2002 (the "Closing Date"), the date of their issuance (the "Issuance Date"),
with an option to extend the term of the Debentures for one additional year
beyond the Initial Maturity Date to February 1, 2006 at the Company's sole
discretion. Pursuant to the terms of the Debenture, the Company is required to
make semi-annual interest payments of (i) 12% per annum commencing on the
Issuance Date and ending on February 1, 2004, (ii) 13% per annum for the period
commencing on February 1, 2004 and ending on February 1, 2005, and (iii) if the
Company elects to extend the maturity date pursuant to the terms of the
Debentures, 14% per annum thereafter. The Company has the option to pay interest
in the form of (a) cash; (b) additional Debentures, or (c) a combination of cash
and additional Debentures. If the Company chooses to make interest payments
using additional Debentures, the Company may be required to issue additional
warrants (the "Additional Warrants") pursuant to the terms of the Debentures.
The Initial Warrants have been issued pursuant to a Warrant Agreement dated as
of February 1, 2002 by and between the Company and Camden (the "Warrant
Agreement") and are subject to certain customary anti-dilution adjustments. The
exercise price of the Initial Warrants is $5.86. The Warrants expire five (5)
years from the Closing Date. In addition, up to 1,500,000 of the Initial
Warrants may be cancelled upon the prepayment of the Debentures. Cancellation of
the Initial Warrants may take place in the following manner:
(i) Upon prepayment of the Debentures in full during the first year,
1,500,000 Initial Warrants will be immediately canceled;
(ii) Upon prepayment of the Debentures in full after the first
anniversary and before the third anniversary of the Closing Date, Initial
Warrants will be canceled according to the following formula: 62,500 shares
multiplied by the number of full months between the prepayment and the third
anniversary of the Closing Date;
(iii) Notwithstanding the foregoing, the Company will be entitled, at
any time, to make one (and only one) partial prepayment of the Debentures in the
amount of at least 50% of the total outstanding indebtedness (the "Partial
Prepayment"). In the event of a Partial Prepayment, the number of Initial
Warrants to be canceled shall be equal to the product of (x) the number of
Warrants to be canceled pursuant to subsections (i) and (ii) above assuming full
repayment of the Debentures, and (y) a fraction, the numerator of which shall be
the aggregate principal amount of Debentures actually prepaid and the
denominator of which shall be equal to the aggregate principal amount of
Debentures outstanding on the date of such Partial Prepayment (the "Prepayment
Fraction"); and
PAGE 23
(iv) In the event of full repayment of the Debentures that is both (A)
after a Partial Prepayment; and (B) before the third anniversary of the Closing
Date, the number of Initial Warrants to be canceled shall be equal to the
product of (x) the number of Initial Warrants to be canceled pursuant to
subsections (i) and (ii) above assuming full repayment of the Debentures, and
(y) 1 minus the Prepayment Fraction.
Additional Warrants, when issued, will not be subject to cancellation. The fair
market value of the warrants will be recorded as deferred financing costs and
amortized over three years.
Repayment of Bank Loan
Also at that time of the AmQUEST Acquisition, the Company repaid the $2,660,000
balance outstanding on a bank loan.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the U. S., which requires the selection and
application of significant accounting policies, and which requires management to
make significant estimates and assumptions. The Company believes that the
following are some of the more critical judgment areas in the application of its
accounting polices.
Revenue Recognition
The majority of revenues are invoiced on a monthly recurring basis under
long-term contracts, typically ranging from one to five years in length,
providing for either fixed monthly fees or time and material billings. Revenue
is recognized under these contracts when the Company processes the agreed upon
transactions in accordance with the contractual performance standards, or
performs the services, and collection is reasonably assured. Application of
these standards can involve management's judgments, including judgment as to the
collection of invoiced amounts.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
PAGE 24
Tangible and Intangible Assets
The Company has significant tangible and intangible assets on its balance sheet,
primarily property and equipment, deferred software costs, and intangible
assets, primarily goodwill, related to acquisitions. The assignment of useful
lives to these assets and the valuation and classification of intangible assets
involves significant judgments and the use of estimates. The testing of these
tangible and intangibles under established accounting guidelines for impairment
also requires significant use of judgment and assumptions. The Company's assets
are tested and reviewed for impairment on an ongoing basis under the established
accounting guidelines. Changes in business conditions or changes in the
decisions of management as to how assets will be deployed in the Company's
operations could potentially require future adjustments to asset valuations.
NEW FINANCIAL ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets. Statement 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. Statement 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets arising from business
combinations completed after June 30, 2001. Statement 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives.
Statement 142 requires that these assets be reviewed for impairment at least
annually. Intangible assets with finite lives will continue to be amortized over
their estimated useful lives.
The Company will apply Statement 142 beginning in the first quarter of 2002.
Application of the non-amortization provisions of Statement 142 is expected to
result in an increase in net income of $644,000 ($0.11 per share) in 2002. The
Company will test goodwill for impairment using the two-step process prescribed
in Statement 142. The first step is a screen for potential impairment, while the
second step measures the amount of the impairment, if any. The Company expects
to perform the first of the required impairment tests of goodwill and indefinite
lived intangible assets as of January 1, 2002 in the first half of 2002. Any
impairment charge resulting from these transitional impairment tests will be
reflected as the cumulative effect of a change in accounting principle in the
first quarter of 2002. The Company has not yet determined what the effect of
these tests will be on the earnings and financial position of the Company.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations for a Disposal of a
Segment of a Business. FAS144 is effective for fiscal years beginning after
December 15, 2001, with earlier application encouraged. The Company expects to
adopt FAS 144 as of January 1, 2002 and it has not determined the effect, if
any, the adoption of FAS 144 will have on the Company's financial position,
results of operations or cash flows.
PAGE 25
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 money market mutual funds or
certificates of deposit and commercial paper issued only by major corporations
and financial institutions of recognized strength and security, and holds all
such investments to term. The Company generally invests in instruments of no
more than 30 days maturity.
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 has no significant foreign-source income, and bills foreign
customers in U.S. dollars only.
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
PAGE 26
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, 2002.
PAGE 27
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
2.1 Stock Purchase Agreement dated as of February 5, 2002 by and
between Infocrossing Inc. and American Software, Inc.,
incorporated by reference to Exhibit 2.1 to the Current
Report on Form 8-K filed February 5, 2002.
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.
PAGE 28
EXHIBIT NO. DESCRIPTION
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.
4.4A 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.
4.4B Second Amended and Restated Stockholders Agreement dated as
of February 1, 2002 by and among Infocrossing, Inc. and the
Stockholders named therein, incorporated by reference to
Exhibit 99.5 to the Current Report on Form 8-K filed
February 5, 2002.
4.5 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.
4.6 Securities Purchase Agreement dated as of February 1, 2002
by and between Infocrossing, Inc. and the Purchasers named
therein, incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K filed February 5, 2002.
4.7 Warrant Agreement dated as of February 1, 2002 by and
between Infocrossing, Inc. as Issuaer and the Purchasers
named therein, incorporated by reference to Exhibit 4.3 to
the Current Report on Form 8-K filed February 5, 2002.
10.1 Employment Agreement, dated as of June 15, 2000, between the
Company and Charles F. Auster ("Auster), incorporated by
reference to Exhibit 10.3 to the Company's Form 10-Q for the
period ended July 31, 2000.
10.2 Settlement and Release Agreement between the Company and
Auster, incorporated by reference to a Report on Form 8-K
filed November 16, 2001.
10.3 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.
PAGE 29
EXHIBIT NO. DESCRIPTION
10.4 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.
10.5 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.
10.6 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.
10.7 First Amendment of Lease dated as of December 18, 2000
between the Company and BECO, incorporated by reference to
Exhibit 10.9B to the Company's Annual Report on Form 10-K
for December 31, 2000.
10.8 Amendment to the Asset Purchase Agreement dated as of
February 1, 2001, by and among the Company, ETG, Inc.,
Enterprise Technology Group, Inc. ("Enterprise"), and
certain stockholders of Enterprise, incorporated by
reference to Exhibit 10.11B to the Company's Annual Report
on Form 10-K for December 31, 2000.
10.9 Warrant to purchase 65,000 shares of the Company's common
stock, dated February 1, 2001, issued to Enterprise,
incorporated by reference to Exhibit 10.11C to the Company's
Annual Report on Form 10-K for December 31, 2000.
10.10 Master Loan and Security Agreement No. 85043 by and among
Infocrossing, Inc. and ETG, Inc. as co-Debtors and Wells
Fargo Equipment Finance, Inc., dated as of July 19, 2001,
with accompanying Riders and Schedules, incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
September 30, 2001.
21 List of Subsidiaries of the Company
23 Consent of Ernst & Young LLP
(b) Reports on Form 8-K
A Report was filed on November 14, 2001, announcing the resignation of the
Company's then Chief Executive Officer, and the settlement of various matters
between him and the Company.
PAGE 30
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.
March 29, 2002 /s/
----------------------------------------------------------
Zach Lonstein - Chief Executive Officer
March 29, 2002 /s/
----------------------------------------------------------
William B. Fischer - 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.
March 29, 2002 /s/
----------------------------------------------------------
Zach Lonstein - Chairman of the Board of Directors
March 29, 2002 /s/
----------------------------------------------------------
Peter DaPuzzo - Director
March 29, 2002 /s/
----------------------------------------------------------
Richard A. Keller - Director
by Zach Lonstein, Attorney-in-Fact
March 29, 2002 /s/
----------------------------------------------------------
Samantha McCuen - Director
March 29, 2002 /s/
----------------------------------------------------------
Kathleen A. Perone - Director
March 29, 2002 /s/
----------------------------------------------------------
Frank L. Schiff - Director
March 29, 2002 /s/
----------------------------------------------------------
Michael B. Targoff - Director
March 29, 2002 /s/
----------------------------------------------------------
Robert B. Wallach - Director
March 29, 2002 /s/
----------------------------------------------------------
Tyler T. Zachem - Director
PAGE 31
INFOCROSSING, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
Page No.
-----------
Report of Independent Auditors F-2
Consolidated Balance Sheets -
December 31, 2001 and 2000 F-3
Consolidated Statements of Operations -
Year ended December 31, 2001 and Fiscal
Years ended October 31, 2000 and 1999 F-5
Consolidated Statements of Operations -
Two Month Periods ended December 31, 2000 and 1999
(Unaudited) F-6
Consolidated Statements of Stockholders' Equity
(Deficit) - Year ended December 31, 2001, Two-Month
Period ended December 31, 2000 and Fiscal Years ended
October 31, 2000 and 1999 F-7
Consolidated Statements of Cash Flows -
Year ended December 31, 2001 and Fiscal
Years ended October 31, 2000 and 1999 F-10
Consolidated Statements of Cash Flows -
Two-month Periods Ended December 31, 2000
and December 31, 1999 (Unaudited) F-13
Notes to Consolidated Financial Statements F-15
Schedule II: Valuation and Qualifying Accounts S-1
PAGE 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, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
year ended December 31, 2001, the two month period ended December 31, 2000
and for each of the two 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, 2001 and 2000, and the
consolidated results of their operations and their cash flows for the year ended
December 31, 2001, the two month period ended December 31, 2000 and for each
of the two 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 15, 2002
PAGE F-2
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------------
2001 2000
--------------- --------------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 24,343,819 $ 36,763,831
Marketable debt securities, at cost
which approximates market value - 3,413,069
Trade accounts receivable, net of allowances for
doubtful accounts of $1,008,942 and $525,957 2,410,556 3,355,914
Prepaid and refundable income taxes 139,488 3,648,228
Due from related parties 205,106 372,558
Prepaid license fees 682,342 766,135
Other current assets 986,061 1,303,724
--------------- --------------
28,767,372 49,623,459
--------------- --------------
PROPERTY and EQUIPMENT, net 17,173,134 13,411,113
--------------- --------------
OTHER ASSETS:
Deferred software, net 2,197,070 2,665,714
Goodwill, net 7,736,773 8,380,863
Other intangible assets, net 374,114 508,408
Due from related parties - 1,293,130
Security deposits and other non-current assets 2,525,531 2,566,728
--------------- --------------
12,833,488 15,414,843
--------------- --------------
TOTAL ASSETS $ 58,773,994 $ 78,449,415
=============== ==============
Continued on next page.
PAGE F-3
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
DECEMBER 31,
---------------------------------
2001 2000
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 1,914,682 $ 1,369,402
Current portion of long-term debt and capitalized lease obligations 1,893,683 846,083
Current portion of accrued loss on leased facilities 3,313,806 510,112
Accrued expenses 6,245,665 3,612,220
Customer deposits, current deferred revenue,
and other current liabilities 450,641 125,488
--------------- --------------
13,818,477 6,463,305
--------------- --------------
LONG-TERM LIABILITIES:
Long-term debt and capitalized lease
obligations, net of current portion 3,632,446 2,777,409
Accrued loss on leased facilities, net of current portion 1,127,770 1,537,955
Deferred revenue, net of current portion,
and other long-term liabilities 2,270,722 593,300
--------------- --------------
7,030,938 4,908,664
--------------- --------------
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 of $68,352,753 at December 31, 2001) 43,960,634 35,436,608
--------------- --------------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock; $0.01 par value; 2,700,000
shares authorized; none issued - -
Common stock; $0.01 par value; 50,000,000 shares authorized; shares
issued and outstanding of 5,912,416 and 5,888,311 at December
31, 2001 and 2000, respectively 59,124 58,883
Additional paid-in capital 59,053,570 58,936,811
Unamortized restricted stock award - (9,822,917)
Accumulated deficit (62,392,549) (17,344,526)
--------------- --------------
(3,279,855) 31,828,251
Less 578,623 and 12,508 shares at December 31, 2001 and 2000,
respectively, of common stock held in treasury, at cost (2,756,200) (187,413)
--------------- --------------
TOTAL STOCKHOLDERS' EQUITY/(DEFICIT) (6,036,055) 31,640,838
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT) $ 58,773,994 $ 78,449,415
=============== ==============
See Notes to Consolidated Financial Statements.
PAGE F-4
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER FISCAL YEARS ENDED
31, OCTOBER 31,
--------------------- -----------------------------------------------
2001 2000 1999
--------------------- --------------------- --------------------
REVENUES $ 26,986,466 $ 24,471,450 $ 34,264,966
--------------------- --------------------- --------------------
COSTS and EXPENSES:
Operating costs 33,349,309 26,653,612 23,632,609
Selling and promotion costs 3,597,153 3,103,485 2,056,260
Amortization of restricted stock award 9,822,917 1,197,917 -
Amortization of goodwill 644,090 619,085 474,612
Loss on leased facilities
and office closings 5,650,000 514,371 -
General and administrative costs 10,636,397 11,179,589 5,679,792
--------------------- --------------------- --------------------
63,699,866 43,268,059 31,843,273
--------------------- --------------------- --------------------
INCOME/(LOSS) FROM OPERATIONS (36,713,400) (18,796,609) 2,421,693
--------------------- --------------------- --------------------
Interest income (1,377,093) (1,753,863) (305,270)
Interest expense 490,690 114,004 19,297
--------------------- --------------------- --------------------
(886,403) (1,639,859) (285,973)
--------------------- --------------------- --------------------
INCOME/(LOSS) BEFORE INCOME TAXES (35,826,997) (17,156,750) 2,707,666
Income tax expense/(benefit) 697,000 (2,173,443) 1,046,373
--------------------- --------------------- --------------------
NET INCOME/(LOSS) (36,523,997) (14,983,307) 1,661,293
Accretion and dividends on redeemable
preferred stock (8,524,026) (3,835,730) -
--------------------- --------------------- --------------------
NET INCOME/(LOSS) TO COMMON STOCKHOLDERS $ (45,048,023) $ (18,819,037) $ 1,661,293
===================== ==================== ====================
BASIC EARNINGS PER SHARE:
Net income/(loss) to common stockholders $ (7.77) $ (3.58) $ 0.36
===================== ==================== ====================
Weighted average number of
common shares outstanding 5,801,312 5,251,457 4,636,525
===================== ==================== ====================
DILUTED EARNINGS PER SHARE
Net income/(loss) to common stockholders $ (7.77) $ (3.58) $ 0.34
===================== ==================== ====================
Weighted average number of common
shares and share equivalents outstanding 5,801,312 5,251,457 4,950,050
===================== ==================== ====================
See Notes to Consolidated Financial Statements.
PAGE F-5
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)
TWO MONTHS ENDED
DECEMBER 31,
---------------------------------------
2000 1999
----------------- ----------------
(UNAUDITED)
REVENUES $ 3,520,937 $ 4,873,722
----------------- ----------------
COSTS and EXPENSES:
Operating costs 5,376,414 3,867,704
Selling and promotion costs 829,806 393,029
Amortization of restricted stock award 479,166 -
Amortization of goodwill 105,466 91,903
Loss on leased facilities and office closings 34,601 -
General and administrative costs 1,626,938 1,104,529
----------------- ----------------
8,452,391 5,457,165
----------------- ----------------
LOSS FROM OPERATIONS (4,931,454) (583,443)
----------------- ----------------
Interest income (520,288) (91,562)
Interest expense 28,862 70,782
----------------- ----------------
(491,426) (20,780)
----------------- ----------------
LOSS BEFORE INCOME TAXES (4,440,028) (562,663)
Income tax expense/(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 AND DILUTED 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
================= ================
See Notes to Consolidated Financial Statements.
PAGE F-6
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
ADDITIONAL RETAINED UNAMORTIZED TREASURY
COMMON PAID IN EARNINGS/ RESTRICTED STOCK AT
SHARES PAR VALUE CAPITAL (DEFICIT) STOCK AWARD COST TOTAL
--------- ---------- ------------- ------------- ------------- ----------- -------------
Balances,
October
31, 1998 4,285,715 $ 42,857 $ 11,946,837 $ 5,603,659 $ - $ - $ 17,593,353
Stock issued
for an
acquisition 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.
PAGE F-7
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
ADDITIONAL RETAINED UNAMORTIZED TREASURY
COMMON PAID IN EARNINGS/ RESTRICTED STOCK AT
SHARES PAR VALUE CAPITAL (DEFICIT) STOCK AWARD COST TOTAL
--------- ---------- ------------- ------------- ------------- ----------- -------------
Balances, 4,737,915 $ 47,379 $ 15,519,826 $ 7,264,952 $ - $ (7,313) $ 22,824,844
October
31, 1999
Exercises
of stock
options 170,478 1,705 969,596 - - - 971,301
4,608 shares
surrendered
for stock option
exercise - - - - - (111,744) (111,744)
Contingent payment
related to an
acquisition 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
connection
with a private
placement - - 28,180,132 - - - 28,180,132
Net loss - - - (14,983,307) - - (14,983,307)
--------- ---------- ------------- ------------- ------------- ----------- -------------
Balances,
October
31, 2000 5,888,311 $ 58,883 $ 58,789,911 $ (11,554,085) $ (10,302,083) $ (119,057) $ 36,873,569
--------- ---------- ------------- ------------- ------------- ----------- -------------
Continued on next page.
PAGE F-8
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
ADDITIONAL RETAINED UNAMORTIZED TREASURY
COMMON PAID IN EARNINGS/ RESTRICTED STOCK AT
SHARES PAR VALUE CAPITAL (DEFICIT) STOCK AWARD COST TOTAL
--------- ---------- ------------- ------------- ------------- ----------- -------------
Balances, October
31, 2000 5,888,311 $ 58,883 $ 58,789,911 $ (11,554,085) $ (10,302,083) $ (119,057) $ 36,873,569
Amortization of
restricted
stock award - - - - 479,166 - 479,166
Purchased
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 $ 58,883 $ 58,936,811 $ (17,344,526) $ (9,822,917) $ (187,413) $ 31,640,838
Exercise of stock
options by the
surrender of
20,021 shares 25,000 250 116,750 - - (117,000) -
Cancellation
of shares
previously
issued in error (895) (9) 9 - - - -
Purchase 546,094
shares for
treasury, at
cost - - - - - (2,451,787) (2,451,787)
Accretion and
dividends on
redeemable
preferred stock - - - (8,524,026) - - (8,524,026)
Amortization of
restricted
stock award - - - - 9,822,917 - 9,822,917
Net loss - - - (36,523,997) - - (36,523,997)
--------- ---------- ------------- ------------- ------------- ----------- -------------
Balances, December
31, 2001 5,912,416 $ 59,124 $ 59,053,570 $ (62,392,549) $ - $(2,756,200) $ (6,036,055)
========= ========== ============= ============= ============= =========== =============
See Notes to Consolidated Financial Statements.
PAGE F-9
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEAR ENDED DECEMBER FISCAL YEARS ENDED
31, OCTOBER 31,
--------------------- -----------------------------------------------
2001 2000 1999
--------------------- --------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (36,523,997) $ (14,983,307) $ 1,661,293
Adjustments to reconcile net income (loss)
to cash used in operating activities:
Depreciation and amortization 4,105,004 2,307,777 1,893,081
Amortization of restricted stock award 9,822,917 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)
Accrued write-off of capitalized
costs and other losses on leased
facilities 5,650,000 514,371 -
Deferred income taxes - - 494,804
Decrease/(increase) in:
Trade accounts receivable 945,358 2,810,288 (1,558,248)
Prepaid and refundable taxes 3,508,740 (1,879,395) -
Prepaid license fees, and other current
assets 401,456 (606,403) (323,660)
Increase/(decrease) in:
Accounts payable 545,280 1,025,357 208,073
Income taxes payable - - (999,929)
Accrued expenses 2,633,445 1,585,089 (144,021)
Payments on accrued loss on
leased facilities (463,943) (190,014) (415,200)
Customer deposits, deferred
revenue, and other liabilities 2,002,575 170,158 74,874
--------------------- --------------------- --------------------
Net cash used in operating activities (7,373,165) (7,856,896) (108,933)
--------------------- --------------------- --------------------
Continued on next page.
PAGE F-10
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(CONTINUED)
YEAR ENDED DECEMBER FISCAL YEARS ENDED
31, OCTOBER 31,
--------------------- -----------------------------------------------
2001 2000 1999
--------------------- --------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment $ (9,009,097) $ (6,564,057) $ (1,848,267)
Disposal of equipment - 2,750 -
Redemptions/(purchases) of investments
in marketable debt securities 3,413,069 (4,108,367) 1,544,729
Amounts received from a buyer
for assets held for sale - - 82,695
Payment for the purchase of
certain assets and the business of
Enterprise Technology Group and
related expenses (the "Enterprise
Purchase") - - (4,283,701)
Purchases of treasury stock (516,567) - (7,313)
Increase in deferred software costs (285,235) (1,011,231) (905,070)
Decrease/(increase) in security
deposits and other non-current assets 31,441 (2,073,185) 45,410
--------------------- --------------------- --------------------
Net cash used in investing activities (6,366,389) (13,754,090) (5,371,517)
--------------------- --------------------- --------------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from a private equity placement - 58,430,596 -
Proceeds from debt financing and a
line of credit 3,062,252 5,140,336 -
Repayments of debt and capitalized leases (1,217,115) (5,041,993) (252,770)
Advances to related parties, net (474,638) (38,295) (43,001)
Proceeds from a sale of common stock - 999,996 -
Exercises of stock options and warrants - 1,163,291 666,011
--------------------- --------------------- --------------------
Net cash provided by financing activities 1,370,499 60,653,931 370,240
--------------------- --------------------- --------------------
Net cash provided by/(used in)
continuing operations (12,369,055) 39,042,945 (5,110,210)
--------------------- --------------------- --------------------
Continued on next page.
PAGE F-11
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(CONTINUED)
YEAR ENDED DECEMBER FISCAL YEARS ENDED
31, OCTOBER 31,
--------------------- -----------------------------------------------
2001 2000 1999
--------------------- --------------------- --------------------
CASH FLOWS FROM DISCONTINUED OPERATION:
Payments of taxes and other
expenses related to the sale of the
Payroll Division $ - $ - $ (2,556,693)
Payments on portion of accrued
loss on leased facilities relating to
discontinued operation (50,957) (48,111) (145,880)
--------------------- --------------------- --------------------
Net cash used in discontinued operation (50,957) (48,111) (2,702,573)
--------------------- --------------------- --------------------
Net increase/(decrease) (12,420,012) 38,994,834 (7,812,783)
in cash and equivalents
Cash and equivalents, beginning of year 36,763,831 1,590,223 9,403,006
--------------------- --------------------- --------------------
Cash and equivalents, end of year $ 24,343,819 $ 40,585,057 $ 1,590,223
===================== ===================== ====================
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 491,385 $ 114,004 $ 23,270
===================== ===================== ====================
Income taxes $ 42,082 $ 67,139 $ 3,917,926
===================== ===================== ====================
SUPPLEMENTAL DISCLOSURE OF
NON-CASH INVESTING ACTIVITIES:
Common stock issued for the
Enterprise Purchase $ - $ 1,135,160 $ 2,677,500
===================== ===================== ====================
Equipment acquired subject
to a capital lease $ 57,500 $ - $ -
===================== ===================== ====================
SUPPLEMENTAL DISCLOSURE OF
NON-CASH FINANCING ACTIVITIES:
Treasury shares received in payment of
an amount due from a related party $ 1,935,220 $ - $ -
===================== ===================== ====================
Treasury shares received in
payment of a stock option exercise $ 117,000 $ 111,744 $ -
===================== ===================== ====================
Tax benefit associated with the
exercise of non-qualified options $ - $ - $ 234,000
===================== ===================== ====================
See Notes to Consolidated Financial Statements.
PAGE F-12
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(CONTINUED)
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 (used in)/provided by 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 taxes 19,527 -
Prepaid license fees
and other current assets 44,170 805,150
Increase/(decrease) in:
Accounts payable (893,434) (123,284)
Income taxes payable - (219,439)
Accrued expenses 811,767 (599,264)
Accrued loss on leased facilities and office closings (37,876) 14,647
Customer deposits, deferred
revenues, and other liabilities 112,274 26,698
----------------- ----------------
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 at maturity of investments
in marketable debt securities 2,368,739 733,435
Purchases of treasury stock (68,356) -
Increase in deferred software costs (118,828) (171,398)
Decrease/(increase) in security
deposits and other non-current assets 1,624 (224)
----------------- ----------------
Net cash provided by (used in) investing activities 1,344,002 (518,759)
----------------- ----------------
Continued on next page.
PAGE F-13
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 FLOW FROM DISCONTINUED OPERATION:
Payments on portion of accrued loss on leased facilities relating
to 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 $ 1,369 $ 136
================= ================
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING ACTIVITY:
Warrants issued for the settlement of continent purchase price $ 146,900 $ -
================= ================
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITY:
Equipment acquired subject to capital leases $ 3,602,817 $ -
================= ================
See Notes to Consolidated Financial Statements.
PAGE F-14
INFOCROSSING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
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 outsourcing 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.
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. Accordingly, the
audited financial information presented is on the basis of fiscal years ended on
October 31st through October 31, 2000, the two-month period ended December 31,
2000, and the calendar year ended December 31, 2001.
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.
PAGE F-15
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.
Intangible Assets - The excess of cost over net assets of acquired businesses
("goodwill") has been amortized using the straight-line method over the
estimated lives, typically no more than fifteen 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
earned, and costs are expensed monthly as incurred.
Deferred Revenue - The Company records deferred revenue for amounts billed for
which the services have not yet been provided. Deferred revenue amounts are
recorded to income as the services are rendered.
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 was limited to the refund the
Company received as a result of carrying back a portion of the pretax loss to
prior years.
Earnings per Share - Basic earnings per share is computed by dividing income to
common stockholders by the weighted average number of common shares outstanding
during each period. Diluted earnings per share is computed using the weighted
average number of common shares plus the potentially dilutive effect of common
stock equivalents. Stock options, warrants, and convertible preferred stock that
are anti-dilutive are excluded from the computation of weighted average shares
outstanding. Certain options, warrants, and convertible preferred stock that are
currently anti-dilutive may be dilutive in the future.
Segments - The Company and its subsidiaries operate in one reportable segment of
providing information technology outsourcing services.
Derivatives - The Company does not invest in derivatives for trading purposes
nor does it use derivative financial instruments to manage risks associated with
fluctuating interest rates.
Recently Issued Accounting Pronouncements - In June 2001, the Financial
Accounting Standards Board ("FASB") issued Statements of Financial Accounting
Standards No. 141, "Business Combinations", ("SFAS 141"), and No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142").
PAGE F-16
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets arising from business combinations completed after June 30,
2001. SFAS 142 prohibits the amortization of goodwill and intangible assets with
indefinite useful lives. SFAS 142 requires that these assets be reviewed for
impairment at least annually. Intangible assets with finite lives will continue
to be amortized over their estimated useful lives.
The Company will apply SFAS 142 beginning in the first quarter of 2002.
Application of the non-amortization provisions of SFAS 142 is expected to result
in an increase in net income of approximately $644,000 ($0.11 per share) in
2002. The Company will test goodwill for impairment using the two-step process
described in SFAS 142. The first step is a screen for potential impairment,
while the second step measures the amount of the impairment, if any. The Company
expects to perform the first of the required impairment tests of goodwill and
indefinite-lived intangible assets as of January 1, 2002 in the first half of
2002. Any impairment charge resulting from transitional impairment tests will be
reflected as the cumulative effect of a change in accounting principle in the
first quarter of 2002. The Company has not yet determined what the effect of
these tests will be on the earnings and financial position of the Company.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of", and
the accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations for a Disposal of a Segment of a Business." SFAS 144 is
effective for fiscal years beginning after December 15, 2001, with earlier
application encouraged. The Company expects to adopt SFAS 144 as of January 1,
2002, and has not determined the effect, if any, such adoption of SFAS 144 will
have on the Company's financial position, results of operations, or cash flows.
Fair Value of Financial Instruments - At December 31, 2001 and 2000, the
carrying amounts of cash and equivalents, trade accounts receivable, accounts
payable, accrued expenses, accrued loss on leased facilities, customer deposits,
deferred revenue and other current liabilities approximate fair value due to the
short-term nature of these instruments. The carrying amounts of long-term debt
approximate fair value based on interest rates that are currently available to
the Company with similar terms and remaining maturities.
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 to the current year presentation.
Major Customers - For the year ended December 31, 2001, two significant clients
accounted for 24% and 16%, respectively, of the Company's revenues. For the
two-month period ended December 31, 2000, two clients accounted for 16% and 17%,
respectively, of the Company's revenues. In fiscal 2000, the same two clients
accounted for 14% and 13%, respectively of the Company's revenues. In the prior
fiscal year, no client accounted for 10% or more of the Company's revenues.
PAGE F-17
2. CASH EQUIVALENTS AND MARKETABLE DEBT SECURITIES
There were no held-to-maturity securities at December 31, 2001. The following is
a summary of the Company's held-to-maturity securities at December 31, 2000 that
are classified as either cash equivalents or marketable debt securities based on
a maturity of less than or more than three months, respectively:
DECEMBER 31, 2000
-----------------------------------------------------------------------------------------
COST GROSS UNREALIZED GROSS UNREALIZED ESTIMATED MARKET
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
=================== =================== ================= ==================
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
---------------------------------------- DEPRECIABLE
2001 2000 LIVES (YEARS)
------------------ ---------------- ----------------
Computer equipment $ 8,836,460 $ 5,313,353 5
Computer equipment held under capital leases (Note 7) 4,938,987 4,881,487 *
Furniture & office equipment 1,343,842 1,335,866 7
Leasehold improvements 7,941,703 7,055,912 *
Purchased software 3,294,070 1,514,036 5
Vehicles 155,058 84,460 3
------------------ ----------------
26,510,120 20,185,114
Less accumulated depreciation and amortization,
including $2,062,025 and $1,313,108 attributable
to capital leases at December 31, 2001 and 2000,
respectively (9,336,986) (6,774,001)
------------------ ----------------
$ 17,173,134 $ 13,411,113
================== ================
* Shorter of the useful life or the length of the lease.
Depreciation and amortization charged to operations was $2,562,985 for the year
ended December 31, 2001; $948,164 and $782,721 for the fiscal years ended
October 31, 2000 and 1999, and $283,017 and $126,528 (unaudited) for the
two-month periods ended December 31, 2000 and 1999.
PAGE F-18
In 2001, the Company recorded a loss of $5,650,000 on leased facilities,
approximately one-half of which relates to the write off of capitalized costs.
(See Note 10)
4. DEFERRED SOFTWARE COSTS
Deferred software costs consist of the following:
DECEMBER 31,
-------------------------------------
2001 2000
--------------- ---------------
Cost of internally-developed software
and enhancements, including software
under development $ 5,821,360 $ 5,658,496
Accumulated amortization (3,624,290) (2,992,782)
--------------- ---------------
$ 2,197,070 $ 2,665,714
=============== ===============
Amortization of deferred software costs charged to operations was $753,879 for
the year ended December 31, 2001; $596,476 and $484,260 for the fiscal years
ended October 31, 2000 and 1999, and $91,691 and $94,357 (unaudited) for the two
months ended December 31, 2000 and 1999.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill consists of the following:
DECEMBER 31,
-------------------------------------
2001 2000
--------------- ---------------
Excess cost of investments
over net assets acquired $ 9,978,490 $ 9,978,490
Accumulated amortization (2,241,717) (1,597,627)
--------------- ---------------
$ 7,736,773 $ 8,380,863
=============== ===============
Amortization charged to operations was $644,090 for the year ended December 31,
2001; $619,085 and $474,612 for the fiscal years ended October 31, 2000 and
1999, and $105,464 and $92,084 (unaudited) for the two months ended December 31,
2000 and 1999.
Other intangible assets consist of the following:
DECEMBER 31,
-------------------------------------
2001 2000
--------------- ---------------
Acquired customer lists $ 1,180,488 $ 1,180,488
Accumulated amortization (806,374) (672,080)
--------------- ---------------
$ 374,114 $ 508,408
=============== ===============
PAGE F-19
Amortization charged to operations was $134,294 for the year ended December 31,
2001, $134,296 for each of the fiscal years ended October 31, 2000 and 1999, and
$22,384 for the two-month period ended December 31, 2000 and $22, 383 for the
unaudited two-month period ended December 31, 1999.
6. RELATED PARTY TRANSACTIONS
In June 2000, the Company hired a Chief Executive Officer (the "Executive"). The
employment agreement with the Executive provided for a seat on the Company's
Board of Directors; an award of 800,000 restricted shares of common stock and an
agreement that the Company would loan the Executive an amount equal to 50
percent of the related Federal income tax liability on such grant. In June 2000,
the Executive also purchased 68,446 shares of common stock from the Company at
$14.61 per share. The value of the 800,000 restricted shares ($11,500,000 on the
grant date of June 15, 2000) was being amortized ratably over the four-year
vesting schedule. The Executive's obligation to the Company was repayable from,
among other things, the proceeds arising from the disposition of any of the
800,000 shares. As of November 14, 2001, the Executive had borrowed, including
accrued interest, a total of $1,935,000.
Effective as of November 14, 2001, the Executive resigned his positions as CEO
and Director, and entered into a settlement agreement with the Company to
terminate the employment contract. The Company accelerated the vesting of the
stock award and purchased 535,594 of the 868,446 common shares held by the
Executive for consideration of $2,385,000, consisting of $450,000 in cash plus
the repayment of the balance due on his loan from the Company of $1,935,000.
These shares are held in the Company's treasury. Accelerating the vesting of the
stock award resulted in a nonrecurring, noncash charge of approximately
$7,427,000 for the remaining unamortized balance of the original grant. Total
amortization of the restricted stock award was $9,822,917 for the year ended
December 31, 2001; $1,197,917 for the fiscal year ended October 31, 2000, and
$479,166 for the two-month period ended December 31, 2000.
The Company is the beneficiary of a $1,000,000 life insurance policy that it
maintains on its Chairman of the Board.
PAGE F-20
Due from related parties consists of the following:
DECEMBER 31,
-------------------------------------
2001 2000
--------------- ---------------
Due from the Chairman, bearing interest
at the Prime Rate (4.75% at December
31, 2001) plus 1% per annum, repayable
on demand $ 78,177 $ 69,538
Short term cash advance to the Executive,
made December 28, 2000 and repaid on
January 3, 2001 - 198,000
Due from other officers, bearing interest
at the Prime Rate, repayable on demand 126,929 105,020
--------------- ---------------
Due from related parties - current 205,106 372,558
--------------- ---------------
Due from the Executive, bearing interest
at the monthly interest rate specified
by IRS Code Section 1274 (repaid on
November 14, 2001) - 1,293,130
--------------- ---------------
Total due from related parties $ 205,106 $ 1,665,688
=============== ===============
7. LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS
Long-Term Debt
DECEMBER 31,
-------------------------------------
2001 2000
--------------- ---------------
Loan payable - financial institution $ 2,646,679 $ -
Vehicle loans 60,159 -
Notes payable - other 54,890 112,883
--------------- ---------------
2,761,728 112,883
Less current portion (1,000,000) (57,992)
--------------- ---------------
$ 1,761,728 $ 54,891
=============== ===============
In August 2001, the Company borrowed $3 million from a financial institution to
purchase computer equipment; bearing interest at 12.55% and repayable in 36
monthly payments of approximately $100,400. On February 3, 2001, in connection
with the transaction described in Note 12, the Company repaid this loan
including a 3% penalty.
During 2001, the Company borrowed an aggregate of $62,252 from two lending
institutions to finance the purchase of three vehicles. Two of these loans were
entered into during the zero interest promotion. The aggregate monthly payment
for these loans is $1,762.
PAGE F-21
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. At December 31, 2001, thirty-five 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. At December 31, 2001, 13 monthly
payments of $1,882 remain due.
In April 2001, the Company entered into a capital lease for equipment having a
net present value of approximately $57,500. At December 31, 2001, there are 16
monthly payments of $2,760 remaining.
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:
2002 $ 1,117,226
2003 1,076,326
2004 887,738
---------------
Total minimum lease payments 3,081,290
Less amount representing interest (316,889)
---------------
Present value of net minimum lease 2,764,401
Payment
Less current portion of obligations under
capital leases (893,683)
---------------
Long-term portion $ 1,870,718
===============
PAGE F-22
8. INCOME TAXES
The provision/(benefit) for income taxes on continuing operations consists of:
YEAR ENDED FISCAL YEARS ENDED OCTOBER 31, TWO MONTH PERIODS ENDED DECEMBER 31,
DECEMBER 31, ------------------------------------- -------------------------------------
2001 2000 1999 2000 1999
---------------- ---------------- --------------- -------------- -----------------
(UNAUDITED)
Current tax:
Federal $ 697,000 $ (2,857,672) $ 486,753 $ - $ (202,355)
State and local - - 64,816 - -
Deferred provision/
(benefit) - 684,229 494,804 - (17,084)
---------------- ---------------- --------------- -------------- -----------------
$ 697,000 $ (2,173,443) $ ,046,373 $ - $ (219,439)
================ ================ =============== ============== ==================
Income tax expense represents the difference between the estimated tax expense
or benefit as provided and as realized in the Company's income tax returns. A
reconciliation of income taxes computed at the Federal statutory rate to amounts
provided is as follows:
YEAR ENDED FISCAL YEARS ENDED OCTOBER 31, TWO MONTH PERIODS ENDED DECEMBER 31,
DECEMBER 31, ------------------------------------- -------------------------------------
2001 2000 1999 2000 1999
---------------- ---------------- --------------- -------------- -----------------
(UNAUDITED)
Tax provision
computed at the
statutory rate $ (12,539,449) $ (5,833,295) $ 920,606 $ (1,509,610) $ (191,305)
Increase/(decrease)
in taxes
resulting from:
State and local
income taxes,
net of federal
income taxes - - 143,977 - -
Non-deductible
expenses 3,438,021 159,405 41,343 170,221 8,205
Benefit of tax
credits - - (57,981) - -
Losses for which
no benefit has
been provided 9,101,428 3,500,447 - 1,366,890 -
Other, net 697,000 - (1,572) (27,502) (36,339)
---------------- ---------------- --------------- -------------- -----------------
$ 697,000 $ (2,173,443) $ 1,046,373 $ - $ (219,439)
================ ================ =============== ============== =================
PAGE F-23
Temporary differences which give rise to net deferred tax assets/(liabilities)
are as follows:
DECEMBER 31,
-------------------------------------
2001 2000
--------------- ---------------
Deferred tax assets:
Accrued loss on leased facilities and
office closings $ 2,980,931 $ 1,037,726
Accrued liabilities 612,342 388,007
Allowance for doubtful accounts 418,711 225,243
Deferred rent 542,713 243,808
Intangibles - 66,940
Lease transactions - 36,832
Net operating loss 11,939,586 5,961,475
Other - 229,623
--------------- ---------------
16,494,283 8,189,654
--------------- ---------------
Deferred tax liabilities:
Depreciation and amortization 22,234 (219,714)
Deferred software costs (835,105) (1,147,965)
Other - (201,227)
--------------- ---------------
(812,871) (1,568,906)
--------------- ---------------
Net tax assets 15,681,412 6,620,748
Valuation allowance (15,681,412) (6,620,748)
--------------- ---------------
Net deferred taxes $ - $ -
=============== ===============
The deferred tax assets have been fully offset by a valuation allowance due to
the uncertainty of realizing such tax benefits.
At December 31, 2001, the Company had net operating loss carryforwards of
approximately $ 29 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.
PAGE F-24
Holders of common stock have no preemptive rights, and have no rights to convert
their common stock into any other security.
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 May 10, 2000, in a private placement with a
group of investors (the "Purchasers"), the Company issued 157,377 shares of
redeemable 8% Series A Cumulative Convertible Participating Preferred Stock with
an aggregate face value of $60 million (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 "Investor Warrants"). The Company
received $58,430,596 after payment of issuance costs and related legal fees.
The initial carrying values of the Investor 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.
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
PAGE F-25
(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 Investor 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 Investor Warrants, and the
shares of common stock issuable upon conversion of the Series A Preferred Stock
or exercise of the Investor 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
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.
PAGE F-26
The Investor Warrants issued to the Purchasers are subject to adjustment
provisions that are similar to those of the Series A Preferred Stock. The
Investor Warrants must be exercised before May 11, 2007.
On February 5, 2002, in connection with the warrant grant discussed in Note 12,
the conversion price of the Series A Preferred Stock and any accrued and
accumulated dividends payable was adjusted from $38.125 to $31.905 and the
number of common shares issuable for the Investor Warrants was increased from
2,531,926 to 3,025,652. In addition, as more fully described in Note 12, a new
series of warrants to purchase up to 2,000,000 common shares was issued to a new
group of investors.
OTHER WARRANTS - In February 2001, 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.
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 June 22, 2001, the Company's
shareholders approved an amendment to the Plan increasing the maximum number of
shares issuable subject to the Plan to 3,100,000. 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 at
least two 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.
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.
PAGE F-27
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:
NUMBER OF EXERCISE PRICE RANGE WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------------- ------------------------ --------------------
Options outstanding, November 1, 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 $ 3.55 - $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
Options granted 235,400 $ 4.58 - $14.61 $ 8.09
Options exercised (25,000) $ 4.68 - $ 4.68 $ 4.68
Options cancelled (593,563) $ 4.64 - 45.00 $17.99
-------------
Options outstanding, December 31, 2001 1,403,771 $ 3.25 - $37.78 $ 9.77
=============
PAGE F-28
ADDITIONAL INFORMATION REGARDING EXERCISE PRICE RANGES OF
OPTIONS OUTSTANDING:
- ------------------------------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE
WEIGHTED WEIGHTED EXERCISE
NUMBER OF AVERAGE AVERAGE NUMBER OF PRICE OF
EXERCISE PRICE OPTIONS EXERCISE CONTRACTUAL OPTIONS EXERCISABLE
RANGE OUTSTANDING PRICES LIFE (YEARS) EXERCISABLE OPTIONS
- -------------------- ---------------- ------------- --------------- -------------- ---------------
$ 3.25 - $ 4.86 217,350 $ 3.65 4.1 211,050 $3.62
$ 5.15 - $ 7.14 223,600 $ 6.01 7.0 132,200 $5.40
$ 7.44 - $10.47 673,200 $ 9.56 7.2 570,747 $9.61
$10.86 - $15.42 83,223 $12.07 4.4 44,517 $11.54
$17.00 - $23.13 189,198 $19.11 8.2 118,933 $18.90
$27.25 - $31.81 13,450 $28.56 7.9 13,450 $28.56
$37.78 - $37.78 3,750 $37.78 8.3 3,750 $37.78
-------------- ------------
1,403,771 1,094,647
============== ============
There were 1,094,647; 950,997; 884,612, and 471,060 options exercisable at
December 31, 2001 and 2000 and October 31, 2000 and 1999, respectively. At
December 31, 2001, there are 1,122,544 options available for future grant.
The Company accounts for stock options granted to employees and directors 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 year ended December 31, 2001 and the two fiscal years ended
October 31, 2000 and 1999, and for the two month periods ended December 31, 2000
and 1999, respectively, would have been as follows:
YEAR ENDED DECEMBER 31, 2001 FISCAL YEARS ENDED OCTOBER 31,
---------------------------------------------------------------------
2000 1999
-------------------------------- --------------------------------- --------------------------------
REPORTED PRO FORMA REPORTED PRO FORMA REPORTED PRO FORMA
-------------- -------------- -------------- --------------- -------------- --------------
Net income/(loss)
to common
stockholders $ (45,048) $ (47,885) $ (18,819) $ (20,336) $ 1,661 $ 1,278
============ =========== =========== ============ =========== ===========
Income/(loss) to
common stockholders
per common share $ (7.77) $ (8.25) $ (3.58) $ (3.87) $ 0.34 $ 0.26
============ =========== =========== ============ =========== ===========
PAGE F-29
TWO MONTHS ENDED DECEMBER 31,
----------------------------------------------------------------------
2000 1999
--------------------------------- --------------------------------
REPORTED PRO FORMA REPORTED PRO FORMA
-------------- --------------- -------------- ---------------
Net loss to common
stockholders $ (5,790) $ (6,247) $ (343) $ (691)
============ ============= ============ =============
Loss to common
stockholders
per common share $ (0.98) $ (1.06) $ (0.07) $ (0.15)
============ ============= ============ =============
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 the year ended December 31, 2001 and the fiscal years ended October 31,
2000 and 1999 was $888,724; $12,122,000 and $563,569, 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 2001: a risk-free interest rate of between 3.17% and 5.47%; expected
lives ranging from three and a half to five years; and expected volatility of
65.5%. The assumptions used in fiscal 2000 and 1999 included risk-free interest
rates of between 5.32% and 6.73%, expected lives ranging from six months to five
years, and expected volatilities of 85.9% and 49.5%, respectively.
10. COMMITMENTS AND CONTINGENCIES
Employment Agreements:
The Company is obligated under certain employment agreements that expire on
October 31, 2002. A provision of these agreements provides that, in the absence
of any written notice to the contrary, each agreement is extended such that
there shall always be an unexpired term of one year. In connection with the
acquisition discussed in Note 12, an additional employment agreement was entered
into as of February 5, 2002. Pursuant to such agreements, the total annual
minimum salary payable in 2002 is $1,077,078.
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, expires on
February 1, 2003, and provides for remaining payments totaling $322,000 through
that date.
PAGE F-30
Lease Obligations:
Operating leases for facilities extend through December 31, 2015. Several of
these leases contain escalation clauses, which cause the amounts paid each year
to increase by a stated amount or percentage. The Company records as expense,
however, a fixed amount representing the average of these varying payments. The
difference between the cash payments and the expense recorded is accrued. This
liability is long-term since the accrued amounts will not be paid until the
mid-point of the leases.
The Company's obligations under certain of these leases are secured by cash
deposits or standby letters of credit, aggregating $2,086,000 and $2,096,000 at
December 31, 2001 and 2000, respectively. The standby letters of credit are
collateralized by certain cash investments that have been classified as
long-term assets. Total expense for occupancy costs, was approximately
$5,364,000; $2,104,000 and $1,587,000 for the year ended December 31, 2001 and
for the fiscal years ended October 31, 2000 and 1999, respectively, and $607,000
and $292,000 (unaudited) for the two months ended December 31, 2000 and 1999,
respectively.
Effective as of August 1, 1998, the Company sublet approximately 31,500 square
feet in its New York City location. The sublease and the related primary lease
expire in 2008. A charge was taken of approximately $3,022,000 representing the
total amount of the shortfall between the amounts to be received and paid out
over the life of the lease, and also including the value of leasehold
improvements abandoned. Since a sale of certain operations also permitted the
Company to reduce substantially its New York City space requirements, a portion
of the original accrual and the subsequent net cash flows are charged to the
discontinued operation.
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 December
31, 2001, 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.
PAGE F-31
Approximate minimum future lease payments for real estate and other operating
leases, net of sublease income, are as follows:
Years ending December 31,
2002 $ 10,006,000
2003 7,297,000
2004 6,177,000
2005 5,907,000
2006 5,962,000
Thereafter 42,875,000
------------------
$ 78,224,000
==================
Loss on Leased Facilities
In June 2000, the Company signed a lease for a 52,000 square foot building
located in metropolitan Atlanta expiring on June 30, 2015. The Company
redeveloped a portion of the metropolitan Atlanta facility and opened it as an
IDC in November 2000. In July 2000, the Company signed a lease for a 54,000
square foot building located in the Northern Virginia high tech corridor
expiring on December 31, 2015. This lease commitment is above current market
rates.
In 2001, in response to excess supply of Internet server hosting capacity, the
Company suspended operations at the metropolitan Atlanta facility and suspended
the further development of the Northern Virginia facility. The Company is
evaluating options with respect to the use of these facilities. The Company is
reviewing potential use or disposition strategies including, but not limited to,
alternate uses of a facility in non-colocation outsourcing activities;
subleasing all or a part of each facility either for the remaining lease term or
some shorter period; renegotiating the terms of a lease; and negotiating the
termination of a lease. In conducting its assessment, the Company has reviewed
many factors including, but not limited to, its projected operating plans;
prevailing real estate market conditions; supply and demand estimates for
colocation space; and alternate uses of each facility either by the Company or
to another potential tenant or subtenant. The Company also assessed whether the
prevailing conditions with respect to each factor were temporary or permanent.
If the Company decides to sublease all or part of a facility, the Company must
determine if it will incur a loss in connection therewith. If the estimated
future cash inflows are exceeded by the sum of (i) estimated future cash
outflows and (ii) unamortized capitalized costs related to the subleased portion
of a facility, the Company will recognize a loss. Similarly, costs incurred in
connection with a termination of a lease, as well as the abandonment of
unamortized capital costs related to the facility subject to such lease, will
result in a loss. Finally, any amount of unamortized capitalized costs related
to a facility or lease that are not recoverable from future cash flows either
from the Company's use or subleasing of a facility must be recognized as a loss.
Based on its analysis and estimates of the options available to the Company,
management has recorded a loss of $5,650,000 as of December 31, 2001.
Approximately one-half of the loss relates to the write-off of capitalized
costs. The amount of the loss may increase in future periods if the conditions
or assumptions impacting the Company's current assessment adversely change or
the Company commits to a course of action that would result in a larger
estimated loss. The amount of the loss is reflected in the Company's results of
operations for 2001.
PAGE F-32
Settlement of Acquisition Contingency
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. The Company also recorded $6,852,928 in excess of cost over net
assets acquired (goodwill).
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.
In February 2001, 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).
11. 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. The Company has not made 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.
12. SUBSEQUENT EVENTS
Release Agreement
On January 10, 2002, the Company and a software licensor (the "Licensor")
entered into a Release Agreement (the "Agreement") in settlement of a dispute of
certain claims the Company had sought against the Licensor under a software
license and support agreement. Pursuant to the Agreement, the Company received
credits totaling $2,000,000 to be used towards certain future purchases (the
"Credits"). The Credits are subject to restrictions and expire on December 31,
2002 if unused. Additionally, support fees of $1,136,000 under the software and
support agreement, including $522,000 of past due amounts, were waived by the
Licensor. Pursuant to the Agreement, the Company agreed to release and hold
harmless the Licensor and its subsidiaries from any and all claims, damages,
actions or causes of action of any kind arising prior to the date of the
Agreement.
The Company expects that it will fully utilize the Credits in 2002 and record
them along with the accruals related to the unpaid support fees totaling
$796,000 at December 31, 2001 as income in 2002.
PAGE F-33
Acquisition of AmQuest
On February 5, 2002, the Company entered into a Stock Purchase Agreement with
American Software, Inc., a Georgia corporation ("ASI") whereby the Company
purchased all of the outstanding capital stock of AmQUEST, Inc., a Georgia
corporation ("AmQUEST"), from its former parent company ASI (the "AmQUEST
Acquisition"). As consideration for the purchase of AmQUEST's shares, the
Company paid ASI $20,284,000 in cash, which amount will be adjusted upon final
determination of the working capital of AmQUEST as of January 31, 2002.
The Company financed the AmQUEST Acquisition through (i) the application of the
proceeds of the financing described below and (ii) cash held by the Company.
AmQUEST, a managed services provider that delivers technology infrastructure
management services to enterprise clients, will continue to operate its business
as a wholly-owned subsidiary of the Company.
Securities Purchase Agreement
In a related transaction, on February 1, 2002, in anticipation of the
consummation of the AmQUEST Acquisition, the Company entered into a Securities
Purchase Agreement (the "SPA") with Cahill, Warnock Strategic Partners Fund,
L.P.: Strategic Associates, L.P.: Camden Partners Strategic Fund II-A, L.P., and
Camden Partners Strategic Fund II-B, L.P. (collectively known as "Camden")
whereby the Company issued Senior Subordinated Debentures (the "Debentures") and
warrants (the "Initial Warrant") to purchase, initially, 2,000,000 shares of the
common stock of the Company (subject to adjustments as discussed below) in
exchange for an investment of $10,000,000 from Camden. Pursuant to the SPA, the
proceeds of the sale of the Debentures to Camden were used to partially fund the
AmQUEST Acquisition.
The Debentures have been issued in an aggregate principal amount of $10,000,000
with a maturity of three (3) years (the "Initial Maturity Date") from February
1, 2002 (the "Closing Date"), the date of their issuance (the "Issuance Date"),
with an option to extend the term of the Debentures for one additional year
beyond the Initial Maturity Date to February 1, 2006 at the Company's sole
option. Pursuant to the terms of the Debenture, the Company is required to make
semi-annual interest payments of (i) 12% per annum commencing on the Issuance
Date and ending on February 1, 2004, (ii) 13% per annum for the period
commencing on February 1, 2004 and ending on February 1, 2005, and (iii) if the
Company elects to extend the maturity date pursuant to the terms of the
Debentures, 14% per annum. The company has the option to pay interest in the
form of (a) cash; (b) additional Debentures, or (c) a combination of cash and
additional Debentures. If the Company chooses to make interest payments using
additional Debentures, the Company may be required to issue additional warrants
(the "Additional Warrants") pursuant to the terms of the Debentures.
PAGE F-34
The Initial Warrants have been issued pursuant to that certain Warrant Agreement
dated as of February 1, 2002 by and between the Company and Camden (the "Warrant
Agreement") and are subject to certain customary anti-dilution adjustments. The
exercise price of the Initial Warrants is $5.86. The Warrants expire five (5)
years from the Closing Date. In addition, up to 1,500,000 of the Initial
Warrants may be cancelled upon the prepayment of the Debentures. Cancellation of
the Initial Warrants may take place in the following manner:
(i) Upon prepayment of the Debentures in full during the first year,
1,500,000 Initial Warrants will be immediately canceled;
(ii) Upon prepayment of the Debentures in full after the first
anniversary and before the third anniversary of the Closing Date, Initial
Warrants will be canceled according to the following formula: 62,500 shares
multiplied by the number of full months between the prepayment and the third
anniversary of the Closing Date;
(iii) Notwithstanding the foregoing, the Company will be entitled, at
any time, to make one (and only one) partial prepayment of the Debentures in the
amount of at least 50% of the total outstanding indebtedness (the "Partial
Prepayment"). In the event of a Partial Prepayment, the number of Initial
Warrants to be canceled shall be equal to the product of (x) the number of
Warrants to be canceled pursuant to subsections (i) and (ii) above assuming full
repayment of the Debentures, and (y) a fraction, the numerator of which shall be
the aggregate principal amount of Debentures actually prepaid and the
denominator of which shall be equal to the aggregate principal amount of
Debentures outstanding on the date of such Partial Prepayment (the "Prepayment
Fraction"); and
(iv) In the event of full repayment of the Debentures that is both (A)
after a Partial Prepayment; and (B) before the third anniversary of the Closing
Date, the number of Initial Warrants to be canceled shall be equal to the
product of (x) the number of Initial Warrants to be canceled pursuant to
subsections (i) and (ii) above assuming full repayment of the Debentures, and
(y) 1 minus the Prepayment Fraction.
Additional Warrants, when issued, will not be subject to cancellation. The fair
market value of the warrants will be recorded as deferred financing costs and
amortized over three years.
Repayment of Bank Loan
Also at that time of the AmQUEST Acquisition, the Company repaid the $2,660,000
balance outstanding on a bank loan.
PAGE F-35
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the quarterly results of operations for the year
ended December 31, 2001 and the fiscal year ended October 31, 2000 (in thousands
except per share data):
THREE MONTHS ENDED:
------------------------------------------------------------------------------------
MARCH 31, 2001 JUNE 30, 2001 SEPTEMBER 30, 2001 DECEMBER 31, 2001
------------------ ------------------ ------------------- ------------------
Revenues $ 5,514 $ 6,610 $ 7,354 $ 7,508
=============== =============== ================ ===============
Net loss $ (7,782) $ (6,243) $ (4,800) $ (17,699)
=============== =============== ================ ===============
Net loss to common stockholders $ (9,844) $ (8,350) $ (6,953) $ (19,901)
=============== =============== ================ ===============
Net loss to common stockholders
per basic or diluted common
shares $ (1.68) $ (1.42) $ (1.18) $ (3.56)
=============== =============== ================ ===============
THREE MONTHS ENDED:
------------------------------------------------------------------------------------
JANUARY 31, 2000 APRIL 30, JULY 31, OCTOBER 31, 2000
2000 2000
------------------ ------------------ ------------------- ------------------
Revenues $ 7,115 $ 6,583 $ 5,359 $ 5,414
=============== =============== ================ ===============
Net loss $ (853) $ (2,906) $ (5,671) $ (5,553)
=============== =============== ================ ===============
Net loss to common stockholders $ (853) $ (2,906) $ (7,529) $ (7,531)
=============== =============== ================ ===============
Net loss to common stockholders
per basic or diluted common
shares $ (0.18) $ (0.59) $ (1.38) $ (1.28)
=============== =============== ================ ===============
PAGE F-36
INFOCROSSING, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND CHARGED TO BALANCE AT END
PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS (A) OF PERIOD
----------------- ---------------- --------------- ---------------- ----------------
Allowance for
Doubtful Accounts:
Year ended
December 31, 2001 $ 525,957 $ 776,228 $ - $ 293,243 $ 1,008,942
=============== ============== ============= ============== ==============
Two-month period
ended December
31, 2000 $ 502,957 $ 23,000 $ - $ - $ 525,957
=============== ============== ============= ============== ==============
Fiscal year ended
October 31, 2000 $ 350,939 $ 175,838 $ - $ 23,820 $ 502,957
=============== ============== ============= ============== ==============
Fiscal year ended
October 31, 1999 $ 216,659 $ 158,000 $ - $ 23,720 $ 350,939
=============== ============== ============= ============== ==============
(a) Uncollectible accounts written off, net of recoveries.
PAGE S-1