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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended: DECEMBER 31, 2003
Commission file number: 0-20824
INFOCROSSING, INC.
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(Exact name of registrant as specified in its Charter)
DELAWARE 13-3252333
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2 CHRISTIE HEIGHTS STREET LEONIA, NJ 07605
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 840-4700
Securities registered pursuant to Section 12(b) of the
Exchange Act: NONE Securities registered pursuant to
Section 12(g) of the Exchange Act:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days: [X] Yes [ ] No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in a definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act): [ ] Yes [X] No.
On June 30, 2003, the last day of the registrant's most recently completed
second quarter, the aggregate market value of the outstanding shares of voting
stock held by non-affiliates of the registrant was approximately $27,568,000.
On March 24, 2004, there were 15,266,874 shares of the registrant's Common
Stock, $0.01 par value, outstanding.
Part III, Items 10-14 of this document are incorporated by reference from a
Definitive Proxy Statement to be filed by the Company on or before April 29,
2004.
PAGE 1
FORWARD LOOKING STATEMENTS
Statements made in this Annual Report, including the accompanying financial
statements and notes, other than statements of historical fact, are
forward-looking statements that involve risks and uncertainties. These
statements relate to future events or our future financial performance,
including statements relating to products, customers, suppliers, business
prospects and effects of acquisitions. In some cases, forward-looking statements
can be identified by terminology such as "may," "will," "should," "expect,"
"anticipate," "intend," "plan," "believe," "estimate," "potential," or
"continue," the negative of these terms or other comparable terminology. These
statements involve a number of risks and uncertainties, including incomplete or
preliminary information; changes in government regulations and policies;
continued acceptance of our products and services in the marketplace;
competitive factors; technological changes; our dependence upon third-party
suppliers; intellectual property rights; business and economic conditions
generally; and other risks and uncertainties including those set forth below
that could cause actual events or results to differ materially from any
forward-looking statement.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Annual Report on Form 10-K
and are based on information currently and reasonably known to us. We undertake
no obligation to release any revisions to or update these forward-looking
statements to reflect events or circumstances that occur after the date of this
Annual Report on Form 10-K or to reflect the occurrence or effect of anticipated
or unanticipated events.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Unless stated otherwise, references in this report to "Infocrossing," "Company,"
"we," "our" or "us" refer to Infocrossing, Inc., a Delaware corporation, and its
subsidiaries. Each trademark, trade name or service mark of any other company
appearing in this Annual Report on Form 10-K belongs to its holder.
Management believes that we are a leading provider of information technology
("IT") and business process outsourcing services to enterprise clients. We were
organized as a New York corporation in October 1984 and reincorporated in
Delaware as of August 31, 1999. On June 5, 2000, we changed our name from
Computer Outsourcing Services, Inc. to highlight our expanded business base. We
deliver a full suite of managed and outsourced solutions that enable clients to
leverage our infrastructure and process expertise to improve their efficiency
and reduce their operating costs. During our nearly twenty year history, we have
developed significant expertise in managing complex computing environments,
beginning with traditional data center outsourcing services and evolving to a
comprehensive set of managed solutions. We support a variety of clients and
assure the optimal performance, security, reliability, and scalability of our
clients' mainframes, distributed servers, and networks, irrespective of where
the systems' components are located. Strategic acquisitions have contributed
significantly to our historical growth and acquisitions remain an integral
component of our long-term growth strategy.
We offer IT outsourcing services across a range of IT functions, bundled into a
customized, long-term contractual arrangement, whereby we assume responsibility
for managing all or part of a client's information systems infrastructure and
operations. Our IT outsourcing agreements center on data center operations
(including mainframes, AS/400 or mid-range computing, and NT/UNIX platforms) and
extend to the infrastructure that facilitates the transmission of information
across a client's enterprise. Our services are organized into six "solution"
areas - (1) Mainframe Outsourcing, (2) Business Process Outsourcing, (3) Open
Systems Management, (4) AS/400 Management, (5) Business Continuity, and (6) IT
Consulting.
PAGE 2
On February 5, 2002, we completed the acquisition of AmQUEST, Inc., an
Atlanta-based IT outsourcing company, for approximately $19.6 million in cash
(the "AmQUEST Acquisition"). This acquisition combined two highly complementary
businesses and enabled us to benefit from increased scale, enhanced services,
and expanded geographic reach. We believe the combination strengthens our
position as one of the leading providers of IT outsourcing solutions for large
and mid-size companies.
THE IT OUTSOURCING INDUSTRY
We believe that the IT outsourcing market will grow for the following reasons:
o The need for companies to reduce costs and improve operating margins;
o A slowdown in capital spending on existing IT infrastructure;
o The increasing complexity of information technology systems and the
need to connect electronically with clients, suppliers and other
internal systems;
o The increasing requirements for rapid processing of information and
the instantaneous communication of large amounts of data to multiple
locations;
o The desire of business and government organizations to focus on their
core competencies;
o The desire by business and government organizations to take advantage
of the latest advances in technology without the cost and resource
commitment required to maintain an in-house system;
o The need to provide alternative or back-up locations for mission
critical information; and
o The proliferation of web-based and wireless technologies.
BENEFITS OF IT OUTSOURCING
Companies traditionally outsource to reduce operational and capital expenses,
improve service delivery, implement new technologies, and/or free their internal
resources to focus on strategic initiatives.
o REDUCE COSTS
We believe our clients realize significant savings by using our
services over their current internal costs. We leverage our 24x7
redundant infrastructure, personnel, processes, and tools across
multiple clients to gain economies of scale that we believe translate
into reduced costs for our customers.
o IMPROVE SERVICE DELIVERY
We believe that our customers enjoy improvement in service delivery
because of our focus on operations and economies of scale.
o RE-DEPLOY RESOURCES
By turning over non-core activities to us, our clients can concentrate
on activities central to their value proposition and increase their
competitive position.
o ACCESS TO TECHNOLOGY
We believe outsourcing with us enables our clients to take advantage
of new technologies and best practices without the costs and risks
associated with implementing these solutions in-house.
o INCREASED FLEXIBILITY
We believe that outsourcing enables our clients to respond rapidly to
changing markets, mergers and acquisitions, and major organizational
changes by providing a flexible, multi-platform infrastructure that
can scale or transition to accommodate change.
PAGE 3
BUSINESS MODEL
Our business model is based on leveraging our IT data center infrastructure,
skilled operations team, and management tools across multiple clients to gain
economies of scale that improve clients' operations and dramatically reduce
their IT costs. We endeavor to achieve this by establishing consistent processes
throughout the organization, leveraging a fully secure and redundant data-center
infrastructure, sharing operational resources across multiple computing
platforms, and investing in administration tools that enable the efficient
monitoring and management of clients' systems regardless of where they are
located.
DATA CENTER INFRASTRUCTURE
Delivering high-availability IT outsourcing solutions to the enterprise client
requires a significant investment in a secure data center infrastructure. We
have fully constructed two data centers designed to meet the stringent
environmental and security requirements of enterprise clients. Our data centers
are raised-floor facilities that feature state-of-the-art physical components
and redundant network offerings, including high standards for security and
reliability. Our data centers have fully redundant power supply systems,
redundant ingress and egress Internet access across multiple providers, multiple
power feeds, N+1 fire suppression systems, and 24-hour security services.
TECHNOLOGY INFRASTRUCTURE
The aggregated scale of the existing client base enables us to deploy shared
equipment and technology to improve margins by reducing operating costs and
streamlining service delivery. We have fully deployed mainframe, mid-range, and
open system processing; data storage systems; printing equipment; and networking
hardware across our two data center facilities. By managing the scheduling and
production of clients' processing, we gain significant economies of scale by
effectively "sharing" technology resources across multiple clients.
We utilize technologies such as IBM's Virtual Tape Subsystem (VTS) to reduce
operational overhead by automating processes. The VTS is a system of hardware
and software licensed from IBM that eliminates the need for personnel to
manually loan and unload tapes containing client data. While VTS and other
technologies we use are commercially available to any willing purchaser, they
are often cost-prohibitive for individual companies. Without such technologies,
we would not be as cost-efficient. We make the technology accessible to our
clients by distributing the costs over multiple entities.
OPERATIONS
Supporting a 24 x 7 computing environment requires significant operational
resources skilled across a number of technology areas including operating
systems, computing, networking, and applications. Few companies have the
financial and human resources to support a 24-hour, multi-platform computing
environment. Our operations team is a highly skilled, process driven
organization that is trained across multiple computing platforms and operating
systems. As a result of our technical competency and broad customer base, we
believe our labor costs per client typically are lower than the costs our
clients would incur by having internal IT departments deliver the same service
levels. We believe our highly scalable operation allows our clients to enjoy
reduced IT costs. Most of our computer hardware is manufactured by IBM. We also
rely heavily on system software licensed from IBM or Computer Associates.
MANAGEMENT TOOLS
With the growth of IP networking as a low-cost method for transmitting
information, we have invested in the development of a proprietary suite of
management tools that enables us to monitor and manage clients' systems and
components from a centralized network operations center. The management platform
enables the monitoring and management of clients' systems located in our data
centers, at the clients' site, or at a third-party facility. The strategic
investment provides us with the ability to expand our services portfolio beyond
solutions delivered within our own data centers, and enables us to grow our
data-center infrastructure without having to replicate the network operations
center at each site.
PAGE 4
SERVICES
Our services are organized into six solution areas, including:
o MAINFRAME OUTSOURCING. We believe our mainframe outsourcing solution
provides clients with a cost-effective, operationally superior
alternative to running and managing a mainframe infrastructure
in-house. We combine the scalability and reliability of mainframe
systems with the world-class management of, and access to, hardware,
systems software, and communications. We offer the latest technologies
- including Virtual Tape Subsystems, IBM's zSeries technology, and
Linux on the mainframe - to provide greater uptime and more efficiency
for our customers. We have experience in operating multiple computer
systems running on different operating and complex enterprise
environments. We provide high capacity in processing speed,
connectivity, and storage management.
o BUSINESS PROCESS OUTSOURCING. Business process outsourcing involves
clients contracting with us to perform functions that support their
business, but are not their core competency. These functions, commonly
called "back-office" processes, include services such as payroll,
accounts receivable management, payment processing, logistics, data
entry and customer care services. Back-office processes are often
supported by an extensive IT infrastructure. By contracting with us,
companies can improve their processes, reduce their costs, and
concentrate on their core business.
We provide a variety of customized IT services designed to specific
client requirements. These services include the development of
proprietary software we utilize to meet the IT processing requirements
of particular clients. We manage the software application and retain
ownership of the software we develop.
o OPEN SYSTEMS MANAGEMENT. We provide on-site hosting and remote
management of customers' hardware and software running on Unix and
Windows servers for both Internet based and other applications.
Clients can choose from a wide range of options for their open systems
- starting with basic on-site hosting all the way up to fully
customized, fully managed services. This highly flexible approach
makes it easy to support a variety of systems - from a simple website
or database application to a full-scale, multinational Enterprise
Resource Plan system. With our IFOXcenter management tools, we can
remotely manage systems located at our customers' own data centers or
at a third-party location.
o AS/400 AND ISERIES MANAGEMENT. We provide specialized support and
outsourcing resources for companies that rely on midrange computers.
With an experienced staff and infrastructure resources, we operate,
administer, and maintain a client's midrange systems. Additionally, we
have the expertise and flexibility to manage a client's system the way
the client chooses to have it managed. With our IFOXcenter management
tools, we can take full responsibility for managing a customer's
systems even if the hardware is located outside of one of our data
centers.
o BUSINESS CONTINUITY. Our business continuity solutions help assure
clients that their operations can proceed in the face of disaster. We
offer 24 x 7, high-availability services - including disaster-planning
assistance. The disaster recovery solutions are integrated into a
client's overall IT infrastructure, with the opportunity to balance IT
processing between their own data center and dedicated systems at
either of our production data centers. We provide a full alternate
office site, including desktop workstations, phone systems, and
conventional office infrastructure such as fax and copier machines,
networked printers, and conferencing facilities.
o CONSULTING SERVICES. We provide review and implementation services for
the underlying infrastructure of an enterprise's IT operations, with a
view to reducing costs and improving services to the enterprise and
end-user. Our expertise developed over our nearly twenty year history
coupled with our highly trained and experienced staff can assist with
design through implementation and on-going support in the areas of
network architecture, infrastructure integration, automation process
control, operating systems, database administration, and system stress
testing.
PAGE 5
CLIENT SERVICE AND SUPPORT
We believe that close attention to client service and support has been, and will
continue to be, critical to our business plan and vital to our success in the IT
outsourcing industry. We utilize client service as a key competitive
differentiator and as the foundation of our revenue retention strategy. We
provide a high degree of client service and support, including customized
training and rapid response to client needs, which we believe generally exceeds
industry standards. As a provider of services, virtually our entire organization
is dedicated to client support and service. We believe that because of our
attention to client service, many of our client relationships have been
long-term, extending well beyond the initial contract term. Of our 257
employees, 232 devote substantially all of their time to direct client service
and support. In addition, because of our compact size we can provide direct
access to our senior executives.
MARKETING AND SALES
We currently target our marketing efforts to a broad range of large and
medium-size enterprises. Although we have developed industry specific services
in several industries including financial services, publishing, manufacturing,
consumer products, and health care, we believe our reputation for technical
expertise and quality service extends across all industries.
For the year ended December 31, 2003, one client, ADT Security Services, Inc.,
accounted for in excess of 10% of our consolidated revenues. For the years ended
December 31, 2002 and 2001, clients accounting for in excess of 10% of our
consolidated revenues were ADT Security Services, Inc. and Alicomp, a division
of Alicare, Inc. ("Alicomp"). We also have had a joint marketing agreement with
Alicomp throughout the foregoing periods.
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. Our sales representatives and marketing
support staff analyze a prospective client's requirements and prepare service
demonstrations. In some cases, we have entered into agreements with certain
enterprises and individuals that would be entitled to receive compensation for
their assistance in procuring sales.
DEVELOPMENT OF NEW SERVICES
Since the IT services industry is characterized by rapid changes in hardware and
software technology, we continually refine our IT infrastructure and systems
management services to encompass new computing platforms. To meet our clients'
exacting requirements, we are committed to maintaining service offerings at a
very high level of technological proficiency and we believe that we have
developed a reputation for providing innovative solutions to satisfy our
clients' requirements.
We maintain an extensive infrastructure that serves as the underlying foundation
across our IT solutions. These capabilities are augmented by strategic
partnerships and key investments to provide clients with a full suite of IT
outsourcing solutions. Where possible, we endeavor to develop offerings that can
be easily replicated across multiple clients and give rise to a high degree of
recurring revenue. Development of new services is focused on applying our
expertise in infrastructure and systems management to evolving hardware and
software environments. Recent examples of new services include AS/400 and
iSeries Management and Business Continuity Services described above. The costs
to develop these services were expensed as incurred. Development is performed by
our Company's employees and in limited instances by outside consultants.
Capitalized expenditures for enhancement to existing products are for the
Business Process Outsourcing Services described above. Capitalized expenditures
for enhancements to existing products approximated $138,000, $135,000, and
$285,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
PAGE 6
COMPETITION
We operate in highly competitive markets. Our current and potential competitors
include other independent computer service companies and divisions of
diversified enterprises, as well as the internal IT departments of existing and
potential customers. Among the most significant of our competitors are IBM
Corporation; Electronic Data Systems Corporation; Affiliated Computer Services,
Inc.; Computer Sciences Corp.; and SunGard Data Systems, Inc.
In general, the outsourcing services industry is fragmented, with numerous
companies offering services in limited geographic areas, vertical markets, or
product categories. Many of our larger competitors have substantially greater
financial and other resources than we do. We compete on the basis of a number of
factors, including price, quality of service, technological innovation, breadth
of services offered and responsiveness. Some of these factors are beyond our
control.
We cannot be sure that we will be able to compete successfully against our
competitors in the future. If we fail to compete successfully against our
current or future competitors with respect to these or other factors, our
business, financial condition, and results of operations will be materially and
adversely affected.
While our larger competitors seek to outsource entire IT departments, we often
selectively target core IT functions such as computer processing and storage
solutions. In doing so, we position ourselves as a partner of the client's IT
organization, rather than as a competitive threat.
We believe that our services are particularly attractive to mid-tier companies
that need substantial infrastructure to support their business environment, but
are considered "small" compared to the multi-billion dollar engagements signed
by our largest competitors. Many mid-market companies perceive, we believe,
larger outsourcers as "inflexible" and "unresponsive" to their smaller-scale
requirements. We believe that selective outsourcing enables them to maintain
overall control over their IT environment, while benefiting from the scale and
efficiency of an outsourcing provider.
TECHNOLOGICAL CHANGES
Although we are not aware of any pending or prospective technological changes
that would adversely affect our business, new developments in technology could
have a material adverse effect on the development or sales of some or all of our
services or could render our services noncompetitive or obsolete. There can be
no assurance that we will be able to develop or acquire new and improved
services or systems that may be required in order for it to remain competitive.
We believe, however, that technological changes do not present a material risk
to our business because we expect to be able to adapt to and acquire any new
technology more easily than our 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 our
services, thus potentially creating selling opportunities for us.
INTELLECTUAL PROPERTY MATTERS
Due to the rapid pace of technological change in the computer industry, we
believe that copyright and other forms of intellectual property protection are
of less significance than factors such as the knowledge and experience of
management and other personnel, and our ability to develop, enhance, market, and
acquire new systems and services. As a result, our systems and processes are not
protected by patents or by registered copyrights, trademarks, trade names, or
service marks. To protect our proprietary services and software from illegal
reproduction, we rely on certain mechanical techniques in addition to trade
secret laws, restrictions in certain of our customer agreements with respect to
use of our services and disclosure to third parties, and internal non-disclosure
safeguards, including confidentiality restrictions with certain employees.
Despite these efforts, it may be possible for our competitors or clients to copy
aspects of our trade secrets. We are experienced in handling confidential and
sensitive information for our clients, and we maintain numerous security
procedures to help ensure that the confidentiality of our client's data is
maintained.
COMPLIANCE WITH ENVIRONMENTAL LAWS
We have not incurred any significant expense in our compliance with Federal,
state, and local environmental laws.
PAGE 7
EMPLOYEES
As of December 31, 2003, we had 252 full-time and 5 part-time employees. None of
our employees is represented by a labor organization and we are not aware of any
activities seeking such organization. We consider our relationship with our
employees to be satisfactory.
INSURANCE
We maintain insurance coverage we believe is reasonable, including errors and
omissions coverage, business interruption, and directors and officers insurance
to fund our operations in the event of catastrophic damage to any of our
operations centers, and insurance for the loss and reconstruction of our
computer systems. We also maintain extensive data backup procedures to protect
our data and our clients' data.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
Substantially all of our revenues are derived from U.S. sources.
AVAILABLE INFORMATION
We maintain a website with the address www.infocrossing.com. We are not
including the information contained on our website as part of, or incorporating
it by reference into, this Annual Report on Form 10-K. We make available, free
of charge, through a link from our website to the EDGAR database at www.sec.gov
our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current
Reports on Form 8-K, and amendments to such reports, as soon as reasonably
practicable after we file such material with the Securities and Exchange
Commission.
ITEM 2. DESCRIPTION OF PROPERTY
We lease a facility of approximately 67,000 square feet in Leonia, NJ for our
headquarters and data center operations. The lease expires on December 31, 2014.
We lease 30,600 square feet in a building located in the Atlanta metropolitan
area for data center operations. The lease expires on July 31, 2015.
We lease 5,700 square feet of office space in New York, NY. The lease expires on
December 31, 2009.
We lease space in buildings owned by the former owner of AmQUEST (the "Buckhead
Facility"). At the date of the AmQUEST Acquisition, we occupied approximately
33,400 square feet. Our lease agreement permits us to return space to the lessor
without penalty for a pro-rata reduction in rent. We have moved most of the
operations of AmQUEST to our facility in the Atlanta metropolitan area, however
we continue to provide open systems and AS400 systems management services to
certain clients (including the former owner of AmQUEST) from the Buckhead
facility. We occupy approximately 11,100 square feet in the Buckhead Facility as
of December 31, 2003. This lease agreement expires on January 31, 2006, unless
we reduce our use of the space to zero at an earlier date.
We generally lease our equipment under standard commercial leases, in some cases
with purchase options, which we exercise from time to time. Our equipment is
generally covered by standard commercial maintenance agreements.
We believe our facilities are in good condition and are adequate to accommodate
our 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 8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the NASDAQ Stock Market under the symbol IFOX.
Prior to June 5, 2000, the date on which we changed our name from Computer
Outsourcing Services, Inc., our 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, 2002:
1st Quarter ended March 31, 2002 $7.000 $5.050
2nd Quarter ended June 30, 2002 6.890 4.555
3rd Quarter ended September 30, 2002 10.050 5.607
4th Quarter ended December 31, 2002 8.100 5.990
FOR THE YEAR ENDED DECEMBER 31, 2003:
1st Quarter ended March 31, 2003 7.150 5.890
2nd Quarter ended June 30, 2003 7.300 6.220
3rd Quarter ended September 30, 2003 8.500 7.040
4th Quarter ended December 31, 2003 12.130 7.280
The closing price of our common stock on NASDAQ-NMS on March 24, 2004 was $12.48
per share. We have approximately 115 stockholders of record. In addition, we
believe that there are approximately 500 beneficial owners holding their shares
in "street name."
DIVIDENDS
We have not paid dividends to holders of our common stock since inception.
Certain provisions of a Term Loan Agreement to which we are a party do not
permit us to pay cash dividends on our common stock.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table presents information regarding securities authorized for
issuance under equity compensation plans approved September 1992 and June 2002.
NUMBER OF SECURITIES TO WEIGHTED AVERAGE NUMBER OF SECURITIES
BE ISSUED UPON EXERCISE EXERCISE PRICE OF REMAINING AVAILABLE FOR
OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS FUTURE ISSUANCE
------------------------- -------------------------- --------------------------
Two qualified Stock Option Plans - 1,530,754 $8.735 737,833
previously approved by stockholders
For a complete discussion of these plans, please see Note 11 of the Notes to
Financial Statements accompanying this report.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER OUTSTANDING WARRANTS
At December 31, 2003, wehave reserved 4,566,189 common shares for issuance upon
exercise of the following warrants: (i) 1,062,500 shares exercisable at $5.86
per share expiring January 31, 2007; (ii) 65,000 shares exercisable at $18.00
per share expiring September 16, 2010; (iii) 30,000 shares exercisable at $19.25
per share expiring June 5, 2004; and (iv) 3,408,689 shares (see below)
exercisable at $7.86 per share expiring October 20, 2008.
PAGE 9
RECENT ISSUANCES OF UNREGISTERED SECURITIES
On October 21, 2003, we sold 9,739,111 shares of our common stock and warrants
to purchase 3,408,689 shares of our common stock to investors in a private
offering at an aggregate offering price of $76,549,403. The warrants have an
exercise price of $7.86 per share and expire in October 2008. This transaction
is exempt from registration pursuant to Section 4(2) of the Securities Act of
1933. Roth Capital Partners acted as placement agent for this offering. Total
fees and expenses of the offering were approximately $6,607,000.
The following is a listing of the investors that purchased shares and warrants
in the offering.
NAME OF INVESTOR INVESTMENT
Atlas Capital (Q.P.), L.P. $1,293,750
Atlas Capital Master Fund, L.P. 4,456,250
Baron Small Cap Fund, a series of Baron Asset Fund 4,998,400
Benchmark Partners, L.P. 781,000
Bonanza Master Fund Ltd. 2,000,000
Brookbend & Co., Nominee for Janus Investment Fund
on behalf of its series Janus Venture Fund 11,715,000
BTG Investments, LLC 2,000,000
Cahill, Warnock Strategic Partners Fund, L.P. 2,368,752
Corsair Capital Partners, L.P. 1,500.000
Crestwood Capital International, Ltd. 482,658
Crestwood Capital Partners II, LP 215,556
Crestwood Capital Partners, LP 1,644,786
Federated Kaufmann Fund, a Portfolio of Federated Equity Funds 8,000,000
Federated Kaufmann Small-Cap Fund,
a Portfolio of Federated Equity Funds 2,000,000
Gruber & McBaine International 400,000
J Patterson McBaine 150,000
Jon D. Gruber & Linda W. Gruber 150,000
Lagunitas Partners LP 1,300,000
Neal Goldman IRA Rollover 499,996
Neptune Partners, L.P. 300,000
Pequot Navigator Onshore Fund, L.P. 750,000
Pequot Scout Fund, L.P. 750,000
Pleiades Investment Partners - R, L.P. 648,230
Potomac Capital International Ltd. 184,863
Potomac Capital Partners, LP 866,910
Precept Capital Master Fund, G.P. 1,400,000
Sherleigh Associates Inc. Profit Sharing Plan 3,128,000
Southwell Partners, L.P. 4,999,998
Strategic Associates, L.P. 131,254
The Pinnacle Fund, L.P. 7,810,000
TRUSTMAN c/o STI Classic Small Cap Growth Fund 3,124,000
Walker Smith Capital Master Fund 1,530,000
Walker Smith International Fund, Ltd. 1,470,000
Westpark Capital, L.P. 1,500,000
WS Opportunity Fund International, Ltd. 639,000
WS Opportunity Master Fund 1,361,000
On February 12, 2004, a Registration Statement on Form S-3, filed by us on
behalf of the private placement investors as selling shareholders, was declared
effective. We will not receive any proceeds from any sales of stock under this
registration statement.
On March 26, 2004, we announced that a definitive agreement had been reached to
sell 2,917,000 shares of our common stock in a private offering at an aggregate
offering price of $30.6 million. Approval from the Nasdaq Stock Market, Inc. has
been received, and the transaction is expected to close during the week of March
29, 2004. This transaction is expected to be exempt from registration pursuant
to Section 4(2) of the Securities Act of 1933.
PAGE 10
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
CONSOLIDATED OPERATING DATA
- --------------------------------------------------------------------------------------------------------------------------------
FISCAL YEARS ENDED TWO MONTH PERIODS ENDED
YEARS ENDED DECEMBER 31, OCTOBER 31, DECEMBER 31,
------------------------------------------- --------------------------- ------------------------
2003 2002 (a) 2001 (b) 2000 1999 2000 1999
----------- ----------- ----------- ----------- ----------- ---------- ----------
(UNAUDITED)
Revenues $ 55,228 $ 50,774 $ 26,987 $ 24,471 $ 34,265 $ 3,521 $ 4,874
========= ========= ========= ========= ========= ======== ========
Net income (loss)
from continuing
operations 1,356 1,137 (36,524) (14,983) 1,661 (4,440) (343)
========= ========= ========= ========= ========= ======== ========
Accretion and dividends
on redeemable
preferred stock (c) (6,877) (9,293) (8,524) (3,836) - (1,350) -
========= ========= ========= ========= ========= ======== ========
Net income (loss)
to common
stockholders $ (5,521) $ (8,156) $ (45,048) $ (18,819) $ 1,661 $ (5,790) (343)
========= ========= ========= ========= ========= ======== ========
Net income (loss)
to common
stockholders
per diluted
common share $ (0.76) $ (1.52) $ (7.77) $ (3.58) $ 0.34 $ (0.98) (0.07)
========= ========= ========= ========= ========= ======== ========
================================================================================================================================
CONSOLIDATED BALANCE SHEET DATA
- --------------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, AS OF OCTOBER 31, AS OF DECEMBER 31,
------------------------------------------- --------------------------- ------------------------
2003 2002 (a) 2001 (b) 2000 1999 2000 1999
----------- ----------- ----------- ----------- ----------- ---------- ----------
(UNAUDITED)
Total assets $ 66,662 $ 65,495 $ 58,774 $ 78,844 $ 27,554 $ 78,449 $ 30,597
========= ========= ========= ========= ========= ======== ========
Long-term obligations
and (from May 2000
through October 2003),
redeemable preferred
stock (c) $ 25,731 $ 64,066 $ 47,593 $ 34,146 $ - $ 38,214 $ 2,014
========= ========= ========= ========= ========= ======== ========
No cash dividends have been declared (See Item 5, above).
(a) On February 5, 2002, we acquired AmQUEST, Inc., which contributed
approximately $17,148,000 of revenue in 2002 subsequent to the
acquisition, and approximately $18,747,000 in 2003. We paid $19,896,000
for the acquisition and related costs during 2002, and recorded
$25,692,000 in assets, including $20,624,000 in goodwill. In connection
with this acquisition, we incurred $10,000,000 of new debt, recorded as
discounted Debentures and Warrants. The book value of the Debentures at
December 31, 2002 was approximately $9,372,000. On October 21, 2003, we
repaid the debentures, including accrued interest thereon, from a
portion of the proceeds from the private offering described in (c).
PAGE 11
(b) Included in the net loss to common stockholders in 2001 was $9,823,000
in amortization of a restricted stock award and a $5,650,000 loss on
leased facilities and office closings.
(c) In May 2000, we raised $60 million through a private placement of
redeemable preferred stock and warrants to purchase 2.7 million shares
of common stock. The redeemable preferred stock was initially recorded
net of a discount representing that portion of the proceeds assigned to
the warrants. The difference between the face value and the book value
of the redeemable preferred stock being accreted over a seven-year
period through a charge to retained earnings. In addition, dividends
accrued on the redeemable preferred stock at an 8% annual rate,
compounded quarterly. On October 21, 2003, we exchanged all outstanding
redeemable preferred stock (including the rights to all unpaid
dividends) and warrants issued in the May 2000 private placement for
$55 million in cash and notes for $25 million. We obtained the cash for
this transaction from a private offering of 9.7 million shares of
common stock and warrants to purchase 3.4 million shares of common
stock that also closed on October 21, 2003. The redemption of the
redeemable preferred stock ended the accretion and accrual of dividends
as of the redemption date. Had the redemption not taken place,
accretion and the accrual of dividends would have been approximately
$10.1 million in 2003.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Infocrossing believes it is a leading provider of information technology and
business process outsourcing services to enterprise clients. We deliver a full
suite of managed and outsourced solutions that enable clients to leverage our
infrastructure and process expertise to improve their efficiency and reduce
their operating costs. We have gained significant expertise in managing complex
computing environments, beginning with traditional data center outsourcing
services and evolving to a comprehensive set of managed solutions. We support a
variety of clients, including Global 2000 companies, and help assure the optimal
performance, security, reliability, and scalability of our clients' mainframes,
distributed servers, and networks, irrespective of where the systems' components
are located. Due to rapid changes and increasing complexities in information
technology, we believe outsourcing is an efficient solution for many businesses
and continues to be a growing trend. We have grown through strategic
acquisitions as well as organic growth.
On February 5, 2002, we completed the acquisition of AmQUEST, Inc., an
Atlanta-based IT outsourcing company, for approximately $19.6 million in cash
after certain post-closing adjustments (the "AmQUEST Acquisition"). This
acquisition combined two highly complementary businesses and enabled us to
benefit from increased scale, enhanced services, and expanded geographic reach.
This combination strengthened our position as one of the leading providers of IT
outsourcing solutions for large and mid-size companies across a broad range of
industries including financial services, security, publishing, healthcare,
telecommunications and manufacturing.
The AmQUEST Acquisition was recorded as a purchase in accordance with the
Financial Accounting Standards Board ("FASB"), Statements of Financial
Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), which
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. 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.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 142 prohibits the amortization of goodwill
and intangible assets with indefinite useful lives. SFAS 142 requires that
goodwill be reviewed for impairment at least annually. Intangible assets with
finite lives will continue to be amortized over their estimated useful lives. We
applied SFAS 142 beginning in the first quarter of 2002 and accordingly have not
recorded goodwill amortization since. We tested goodwill for impairment using
processes described in SFAS 142, and had no impairment to record in 2003 or
2002.
PAGE 12
On October 21, 2003 we closed a private placement and issued 9,739,111 shares of
common stock and five year warrants to purchase 3,408,689 shares of common stock
for $7.86 per share in exchange for $76,549,405. The proceeds of the private
placement were used to fund repayment of all outstanding Debentures and the
redemption of all outstanding shares of our redeemable Series A Preferred Stock
and series A warrants to purchase approximately 2.7 million common shares in
exchange for $25.0 million in aggregate principal amount of new senior secured
term loans and $55.0 million in cash. The new senior secured loans bear interest
at 9% per year, payable quarterly, and mature in October 2008. The remainder of
the amount raised was used for the payment of fees and expenses of the offering
and recapitalization transactions and for working capital purposes.
On February 13, 2004, a new lender purchased all the senior secured loans from
the original holders without significantly altering the terms and conditions of
the loans. The original loan agreement provided for the issuance, if required by
a new lender, of warrant to purchase up to 250,000 shares of our common stock.
The new lender did not require us to issue such warrant.
On March 4, 2004, we announced a definitive agreement to acquire all of the
outstanding stock of ITO Acquisition Corp, a data center outsourcing company
doing business as Systems Management Specialists ("SMS"), for $36.5 million in
cash and Infocrossing stock. SMS, headquartered in Orange County, California,
provides computing operations, business process outsourcing and managed
application services to nearly forty clients primarily in the western United
States. SMS is expected to add approximately $33 million to our gross revenue
during the first twelve months following the close of the transaction.
Synergistic benefits are expected to be realized throughout 2004 and the
acquisition is expected to be accretive on an earnings per share basis in 2004.
We have received a waiver from the holder of the senior secured loans granting
us permission to make such an acquisition, as required by the loan agreement.
The transaction is expected to close within sixty days of the announcement, and
is contingent upon our securing financing and other customary closing
conditions. We proposed debt and equity financings of approximately $35 million
in connection with the pending acquisition.
On March 26, 2004, we announced that a definitive agreement had been reached to
sell 2,917,000 shares of our common stock in a private offering at an aggregate
offering price of $30.6 million. Approval from the Nasdaq Stock Market, Inc. has
been received, and the transaction is expected to close during the week of March
29, 2004. We intend to use the net proceeds of this private placement to fund a
portion of the cash component of the pending acquisition of SMS. We also intend
to fund the balance of the cash component and related fees and expenses with the
proceeds from a proposed debt financing, with any remaining funds to be used for
working capital and other general corporate purposes.
The exact timing and terms of the remainder of the financing will depend upon
market conditions and other factors. There can be no assurance that such
financing will occur.
YEAR ENDED DECEMBER 31, 2003 AS
COMPARED TO THE YEAR ENDED DECEMBER 31, 2002
For the year ended December 31, 2003 (the "Current Year"), revenues increased
$4,454,000 (8.8%) to $55,228,000 from $50,774,000 for the year ended December
31, 2002 (the "Prior Year"). Revenues from AmQUEST, which had only 11 months of
operations in the Prior Year, contributed $1,599,000 of this increase. Revenues
grew by 8.5%, excluding growth contributed by AmQUEST. This organic revenue
growth was net of a decline in the revenue from our largest client, ADT Security
Services, Inc. Revenues from this significant customer were $14,977,000 in the
Prior Year compared with $12,804,000 in the Current Year, representing 29.5% and
23.2% of total revenues in the respective periods. The decrease in revenue from
this customer reflects the impact of special processing provided in the Prior
Year, but not in the Current, Year. Other organic revenue growth totaled 27.0%
Costs of revenues increased $3,374,000 (10.1%) to $36,706,000 (66.5% of
revenues) during the Current Year compared with $33,332,000 (65.6% of revenues)
for the Prior Year. Costs of revenues in the Prior Year reflect the benefit from
the settlement with a software licensor described below. Without the benefit of
that settlement, costs of revenues in the Prior Year would have been $36,128,000
(71.2% of revenues). The improvement in margin is related to the successful
integration of the AmQUEST operations.
PAGE 13
In January 2002, we settled a dispute of claims with a software licensor.
Pursuant to the settlement, we received credits totaling $2,000,000 to be used
toward future purchases (the "Credits"). The entire value of the Credits were
recorded in the Prior Year, and as of December 31, 2002, all the Credits had
been applied against certain software license fees. Additionally, we reversed
accrued expenses of $796,000 for software support and maintenance fees in the
Prior Year in connection with the settlement of the dispute.
Selling and promotion costs increased due to higher compensation costs by
$192,000 (6.9%) to $2,978,000 for the Current Year from $2,786,000 for the Prior
Year, but decreased as a percentage of revenues to 5.4% from 5.5% in the Prior
Year.
General and administrative expenses decreased $527,000 (8.6%) to $5,587,000 for
the Current Year from $6,114,000 for the Prior Year. Contributing to the
improvement was a reduction of $269,000 in provision for bonuses and $195,000 in
salary cost reductions, as well as a reduction of $51,000 in provision for
doubtful accounts.
Depreciation and amortization for fixed assets and other intangibles rose
$123,000 (2.1%), to $6,061,000 for the Current Year from $5,938,000 for the
Prior Year.
We recorded net interest expense of $2,498,000 in the Current Year, compared
with $1,965,000 in the Prior Year. The net increase of $533,000 reflects (i) a
decrease in interest income of $68,000 from a lower average balance of
interest-earning assets during the Current Year and, to a lesser extent, lower
interest rates, and (ii) an increase of $465,000 in interest expense on a larger
average outstanding debt balance than in the Prior Year. In February 2002, we
issued $10,000,000 of Senior Subordinated Debentures (the "Debentures") in
connection with the AmQUEST Acquisition, bearing interest at an effective rate
of 12.3%. We took advantage of a provision of the Debentures and paid the
interest payments due July 2002, February 2003 and July 2003 by issuing a total
of $1,190,000 in Additional Debentures, which bore the same effective interest
rate. In October 2003 we repaid the Debentures and Additional Debentures from
the proceeds of a private offering of common stock. Also in October 2003, in
connection with the redemption of all outstanding Redeemable Preferred Stock, we
issued $25,000,000 of five-year 9% term loans. Amortization of debt issuance
costs and amortization of the Debenture discount also contributed to the
increased interest expense in the Current Year.
In the Current Year, we recorded income tax expense of $42,000 representing
estimated state income taxes. In the Prior Year, a net income tax benefit of
$208,000 was recorded, representing the carryback of $250,000 of Federal income
tax credits net of estimated state income tax expense of $42,000 . Cumulative
pre-tax losses that cannot be carried back can be carried forward for a period
of 20 taxable years for Federal income tax purposes. We have net operating loss
carry-forwards of approximately $37.3 million for Federal income tax purposes
that begin to expire in 2019. The use of these net operating loss carry-forwards
may be restricted in amount in future years pursuant to Section 382 of the
Internal Revenue Code. 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.
We have net income of $1,356,000 for the Current Year versus $1,137,000 for the
Prior Year. Net loss to common stockholders after accretion and accrued
dividends on preferred stock was $5,521,000 for the Current Year compared with a
net loss of $8,156,000 in the Prior Year. The net loss to common stockholders
included an decrease in non-cash charges for accretion and accrued dividends on
preferred stock of $2,416,000 to $6,877,000 in the Current Year from $9,293,000
in the Prior Year. The loss per common share was $0.76 for the Current Year
compared with a loss per common share of $1.52 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.
PAGE 14
YEAR ENDED DECEMBER 31, 2002 AS
COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
For the year ended December 31, 2002 ("2002"), revenues increased $23,787,000
(88%) to $50,774,000 from $26,987,000 for the year ended December 31, 2001
("2001"). Revenues from AmQUEST contributed $17,148,000 of this increase.
Revenues grew by 25%, excluding growth contributed by AmQUEST. This organic
revenue growth is primarily attributable to a significant new IT managed
services contract with ADT Security Services, Inc., signed in 2001, with an
initial term of four years. Unless the customer provides notice of non-renewal,
the contract will renew annually for three annual years. Revenues from this
significant customer were $4,672,000 in 2001 compared with $14,977,000 in 2002,
representing 17% and 29% of total revenues in the respective periods. The
increase in revenue from this customer reflects a higher level of service
provided in 2002.
Costs of revenues increased $1,012,000 (3%) to $33,332,000 during 2002 compared
with $32,320,000 for 2001. With the additional costs of revenues of AmQUEST
excluded, costs of revenues declined by $9,839,000 (31%). The reduced level of
costs of revenues reflects the actions we took in 2001 to minimize costs through
staff reductions. During 2001, management planned and executed without
significant modification four reductions in its workforce, whereby it reduced
total operating staff by 45 persons amounting to approximately $4 million in
annualized salaries and benefits. Severance of approximately $151,000 was paid
to employees and expensed in the month each of the planned reductions in the
workforce was planned and executed. All severance was paid by December 31, 2001.
In addition, in 2001 we suspended operations at our metropolitan Atlanta data
center and the further development of the Northern Virginia data center. Costs
of revenues as a percentage of revenues decreased to 66% in 2002 from 120% in
2001. Costs of revenues in 2002 reflect the benefit from the settlement with a
software licensor described below.
In April 2002, we renegotiated the lease of our metropolitan Atlanta data
center. The renegotiated lease, which is payable through December 2015, reduces
the leased space by more than 20,000 square feet and increases the base rent by
$2.00 per square foot, to an annual base rent of $525,000. The base rent is
subject to future escalations of approximately 2.5% per lease year. In addition,
we are responsible for a pro rata share of the building's operating expenses and
real estate taxes. The total estimated savings under the renegotiated lease
approximate $5 million over the remaining term of the lease. Included in costs
of revenues in 2002 and 2001 are expenses for this facility of $556,000 and
$1,095,000, respectively. During 2002, we relocated most of the operations of
AmQUEST to the metropolitan Atlanta data center.
Also in May 2002, we reached an agreement with the landlord of the Northern
Virginia data center. The agreement releases us from the future payments under
the lease, which amounted to approximately $30 million through November 2015.
The agreement also required a cash payment of approximately $1,515,000 and the
forfeiture of a $1,460,000 deposit. As of December 31, 2001, we recorded a
provision of $5,650,000 for this expected result, including the write-off of
approximately $2,742,000 of construction-in-progress costs. During 2002,
approximately $290,000 of the provision relating to estimated settlement costs
was reversed. Included in costs of revenues in 2002 and 2001 are costs for this
facility of $378,000 and $2,254,000, respectively.
In January 2002, we settled a dispute of claims with a software licensor.
Pursuant to the settlement, we received credits totaling $2,000,000 to be used
toward future purchases (the "Credits"). The entire value of the Credits was
recorded in 2002, and as of December 31, 2002, all the Credits have been applied
against software license fees. Additionally, we reversed accrued expenses of
$796,000 for software support and maintenance fees in 2002 in connection with
the settlement of the dispute.
Selling and promotion costs decreased $287,000 (9%) to $2,786,000 for 2002 from
$3,073,000 for 2001, solely due to staff reductions in 2001 as part of the
reductions in workforce noted above. Selling and promotion costs as a percentage
of revenues decreased to 5% from 11% in 2001, due to decreased costs and
increased revenues.
General and administrative expenses decreased $2,615,000 (30%) to $6,114,000 for
2002 from $8,729,000 for 2001. With the effect of AmQUEST excluded, general and
administrative expenses declined $3,244,000 (37%). Several factors contributed
to the improvement: a reduction of $700,000 in bad debt provision from that
required in 2001; $395,000 less in professional fees; $318,000 less in
recruiting expenses; and staff reductions amounting to approximately $300,000 in
salaries and benefits as part of the reductions in force noted above.
PAGE 15
Amortization related to a restricted stock award to a former executive was
$9,823,000 in 2001. The former executive resigned in November 2001, and the
remaining unamortized balance of the award was charged to expense at that time.
In accordance with Statement of Financial Accounting Standards No. 142,
effective January 1, 2002 goodwill is no longer subject to amortization. In
2001, goodwill amortization was $644,000.
Other depreciation and amortization of fixed assets and other intangibles rose
$2,477,000 (72%), to $5,938,000 for 2002 from $3,461,000 for 2001. Without the
effect of AmQUEST, other depreciation and amortization increased $1,325,000
(38%) as a result of fixed asset purchases since December 31, 2001.
We recorded net interest expense of $1,965,000 in 2002, compared with net
interest income of $886,000 in 2001. The net change of $2,851,000 reflects a
decrease in interest income of $1,205,000 from a lower average balance of
interest-earning assets during 2002. Also, to a lesser extent, the decrease in
interest income results from lower interest rates. The net change also includes
an increase of $1,646,000 in interest expense on a larger average outstanding
debt balance than in 2001. In February 2002, we issued $10,000,000 of Senior
Subordinated Debentures in connection with the AmQUEST Acquisition, bearing
interest at an effective rate of 12.3%. Amortization of debt issuance costs and
amortization of the debt discount also contributed to the increased interest
expense in 2002.
In 2002, we recorded an income tax benefit representing the carryback of
$250,000 of Federal income tax credits net of income tax expense of $42,000,
representing estimated state income taxes. Tax expense of $697,000 was recorded
in 2001, representing the reconciliation between the estimated benefits reported
in the period ended December 31, 2000 and the amount recognized in our income
tax return. The cumulative tax benefit we recorded prior to December 31, 2001
was limited to the refund of taxes paid in prior years that were received as a
result of carrying back a portion of its pre-tax loss.
Cumulative pre-tax losses that cannot be carried back can be carried forward for
a period of 20 taxable years for Federal income tax purposes. We have net
operating loss carry-forwards at December 31, 2002 of approximately $36 million
for Federal income tax purposes that begin to expire in 2019. 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.
We had net income of $1,137,000 for 2002 versus a net loss of $36,524,000 for
2001. Net loss to common stockholders after accretion and accrued dividends on
preferred stock was $8,156,000 for 2002 compared with a net loss of $45,048,000
in 2001. The net loss to common stockholders included an increase in non-cash
charges for accretion and accrued dividends on preferred stock of $769,000 to
$9,293,000 in 2002 from $8,524,000 in 2001. The loss per common share was $1.52
for 2002 compared with a loss per common share of $7.77 in 2001, 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately $5,946,000 for the
year ended December 31, 2003. During the Current Year, we had $1,356,000 of net
income, $6,061,000 of depreciation and amortization, and $422,000 of debenture
discount amortization. There was also a $40,000 non-cash charge for the issuance
of a non-qualified option to a consultant. Uses of cash during 2003 included
$1,325,000 of net payments of accounts payable and $148,000 in payments on
previously accrued amounts for closed locations. Prepaid expenses and other
current assets increased $590,000, including $492,000 in increases in prepaid
hardware and software costs and $113,000 in miscellaneous receivables. Accrued
expenses declined $510,000 resulting from payments of $746,000 in accrued
compensation, net of a $236,000 increase in other accruals. We recognized
$207,000 from deferred revenue, net of an increase in long-term deferred rent
expense by $82,000. Net collections on accounts receivable provided $777,000 in
operating cash.
PAGE 16
On October 21, 2003, we sold 9,739,111 shares of our common stock and warrants
to purchase 3,408,689 shares of common stock to investors in a private offering
for net aggregate proceeds, after payment of fees and costs, of $69,942,000. The
warrants have an exercise price of $7.86 per share and expire in October 2008.
The proceeds were used for the repurchase of the Series A Preferred Stock, the
repayment of debentures, and for working capital purposes.
On October 21, 2003, we purchased all the outstanding Series A Preferred Stock
and all the outstanding Investor Warrants for a net price of $80,000,000, using
$56,321,000, including fees and costs of the transaction, in cash from the
proceeds of the private stock offering discussed below and issuing $25,000,000
of senior secured term loans. The fair value of the Series A Preferred Stock and
dividends payable was estimated at approximately $60,066,000, and the $630,000
difference between the current accreted book value and the computed fair value
was recorded as an adjustment to accretion expense in the income statement in
our fourth quarter. We determined the fair values of the Series A Preferred
Stock and the warrants in the following manner. We calculated the Company's fair
value (our "Enterprise Value") using a discounted future cash flow model
(ignoring the effects of the private placement and this recapitalization) at
approximately $128 million. Using the Black-Scholes method and assuming a seven
year life, a risk-free interest rate of 3.13%, and volatility of 54.23%, we
calculated the fair value of the warrants to be approximately $21 million. The
market value of our common stock outstanding immediately prior to the private
offering was approximately $42 million. The residual Enterprise Value of $65
million was attributed to the Series A Preferred Stock. The fair values of the
warrants and the Series A Preferred Stock were then proportionally allocated to
the $80 million consideration resulting in final fair values for the warrants
and the Series A Preferred Stock of $19.9 million and $60.1 million,
respectively.
The senior secured term loans mature in October 2008 and bear an interest rate
of 9% per annum payable, along with a minimum principal payment of 0.25% of the
outstanding loan balance, on last day of March, June, September and December of
each year, beginning on December 31, 2003. The term loans provide for a default
interest rate of 3% on the unpaid principal of the term loans and overdue
interest. The new term loans are guaranteed by all of our subsidiaries. The term
loans and guarantees are secured by a first-priority interest on substantially
all of our assets, including the capital stock of our subsidiaries, and the
assets of our subsidiaries.
At the end of each year beginning with the year ending December 31, 2004, we are
required to prepay the term loans with an amount equal to 75% of our Excess Cash
Flow (as this and other capitalized terms in this section are defined in the
term loan agreement) for such year. We are also required to prepay the new term
loans with all net proceeds from:
o certain sales, transfers or other dispositions of property or assets if the
aggregate amount of such sales, transfers or other dispositions is equal to
or greater than $250,000 in any year;
o casualty or insured damage if the aggregate amount of such casualty or
insured damage is equal to or greater than $250,000 in any year; and
o the receipt of unscheduled payments in connection with the termination of a
customer contract in excess of $1,000,000 during any fiscal year; provided
that we have the right to reinvest within 180 days of the receipt of any
such proceeds: (a) all proceeds from casualty events and (b) up to
$5,000,000 of proceeds from asset sales.
We are also required to prepay the new term loans with 50% of the net proceeds
from a sale of capital stock or other equity securities. Upon a change of
control event, we are required to prepay the new term loans at 101% of the then
outstanding aggregate principal amount, plus unpaid interest.
The notes contain certain covenants including, but not limited to: a maximum
leverage ratio; minimum consolidated earnings before interest, taxes,
depreciation, and amortization; a minimum debt coverage ratio; and limitations
on indebtedness, capital expenditures, investments, loans, mergers and
acquisitions, stock issuances, and transactions with affiliates. In addition,
the terms of the notes limit our ability to pay dividends. We were in compliance
with such loan covenants at December 31, 2003.
Other investing activities included the purchase of $1,419,000 in fixed assets,
the payment of $350,000 of costs relating to the AmQUEST Acquisition, and the
investment of $138,000 in enhancements to our internally-developed software.
On February 1, 2002, in connection with the AmQUEST Acquisition, we issued
Senior Subordinated Debentures (the "Debentures") for $10,000,000. The
Debentures had a maturity of three years from February 1, 2002 (the "Issuance
Date"). Pursuant to the terms of the Debentures, we were required to make
semi-annual interest payments of 12% per annum. We had the option to pay
interest in the form of (a) cash; (b) additional Debentures; or (c) a
combination of cash and additional Debentures. On July 31, 2002, January 31,
2003 and July 31, 2003, we made the interest payments then due by issuing
additional Debentures totaling $600,000, $636,000 and $674,000, respectively.
The additional Debentures were subject to the same terms as the original
Debentures. On October 21, 2003, we repaid all the outstanding Debentures
and interest accrued through that date in the amount of $12,227,000.
Financing activities also included the repayment of $2,428,000 of capital leases
and other debts and the receipt of $106,000 from employee stock option
exercises.
PAGE 17
The following table summarizes information about our contractual obligations as
of December 31, 2003 and the periods in which payments are due. Certain of these
amounts are not required to be included in our consolidated balance sheet:
PAYMENTS DUE BY PERIOD (IN THOUSANDS)
------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1-3 4 - 5 AFTER
1 YEAR YEARS YEARS 5 YEARS
--------------- -------------- --------------- -------------- ---------------
Long-Term Debt (1) $ 24,956 $ 267 $ 490 $ 24,199 $ -
Operating Leases and
Software Licenses 30,801 4,930 7,384 6,886 11,601
Capital Lease Obligations 3,393 2,335 1,058 - -
Other Long-Term
Liabilities Reflected on
the Company's Balance
Sheet under GAAP (2) 934 202 377 355 -
--------------- -------------- --------------- -------------- ---------------
Total Contractual Cash
Obligations $ 60,084 $ 7,734 $ 9,309 $ 31,440 $ 11,601
=============== ============== =============== ============== ===============
(1) Does not give effect to the potential acceleration of payments based on
future performance.
(2) Payments of Accrued Loss on Leased Facilities. Excludes Deferred Revenue,
as it is a non-cash item, and Deferred Rent, as payments are included under
Operating Leases.
As of December 31, 2003, we had cash and equivalents of $10,073,000. We expect
that our operating activities will continue to generate cash. On March 26, 2004,
we announced that a definitive agreement had been reached to sell 2,917,000
shares of our common stock in a private offering at an aggregate offering price
of $30.6 million. Approval from the Nasdaq Stock Market, Inc. has been received,
and the transaction is expected to close during the week of March 29, 2004. We
intend to use the net proceeds of this private placement to fund a portion of
the cash component of the pending acquisition of SMS. We also intend to fund the
balance of the cash component and related fees and expenses with the proceeds
from a proposed debt financing, with any remaining funds to be used for working
capital and other general corporate purposes. The exact timing and terms of the
remainder of the financing will depend upon market conditions and other factors.
There can be no assurance that such financing will occur.
We believe that our cash, current assets, and cash generated from future
operating activities will provide adequate resources to fund our ongoing
operating requirements for the next 12 months. Aside from the pending
acquisition of SMS, we would need to obtain additional financing to fund any
significant acquisitions or other substantial investments.
EBITDA
EBITDA represents net income before interest, taxes, depreciation and
amortization. We present EBITDA because it considers such information an
important supplemental measure of our performance and believe it is frequently
used by securities analysts, investors and other interested parties in the
evaluation of companies with comparable market capitalization to us, many of
which present EBITDA when reporting their results. We also use EBITDA for the
following purposes. EBITDA is one of the factors used to determine the total
amount of bonuses available to be awarded to executive officers and other
employees. Our credit agreement uses EBITDA (with additional adjustments) to
measure compliance with covenants such as interest coverage and debt incurrence.
EBITDA is also used by prospective and current lessors as well as potential
lenders to evaluate potential transactions with us. EBITDA is also widely used
by the Company and other buyers to evaluate and price potential acquisition
candidates.
For the year ended December 31, 2003, our EBITDA was $9,957,000 compared to
$8,832,000 in the Prior Year. Also, please note that EBITDA for the Prior Year
includes credits of $2,796,000 related to the settlement of a dispute with a
software licensor. Management believes the improvement in EBITDA reflects
organic revenue growth combined with the contribution of AmQUEST to our
operations for all of 2003.
EBITDA has limitations as an analytical tool, and you should not consider it in
isolation, or as a substitute for analysis of our results as reported under
GAAP. Some of these limitations are: (a) EBITDA does not reflect changes in, or
cash requirements for, our working capital needs; (b) EBITDA does not reflect
the significant interest expense, or the cash requirements necessary to service
interest or principal payments, on our debts; and (c) Although depreciation and
amortization are non-cash charges, the assets being depreciated and amortized
may have to be replaced in the future, and EBITDA does not reflect any cash
requirements for such capital expenditures. Because of these limitations, EBITDA
should not be considered as a principal indicator of our performance. We
compensate for these limitations by relying primarily on its GAAP results and
using EBITDA only supplementally.
PAGE 18
The following table reconciles EBITDA to net income for the Current and Prior
Year.
RECONCILIATION - IN THOUSANDS
- -------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------
2003 2002
-------------------- --------------------
NET INCOME $ 1,356 $ 1,137
Add back (deduct):
Tax expense (benefit) 42 (208)
Interest expense 2,498 1,965
Depreciation and amortization 6,061 5,938
---------------- ----------------
EBITDA $ 9,957 $ 8,832
================ ================
EBITDA is a measure of our performance that is not required by, or presented in
accordance with, GAAP. EBITDA is not a measurement of our financial performance
under GAAP and should not be considered as an alternative to net income, income
(loss) from operating activities or any other performance measures derived in
accordance with GAAP.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
The Consolidated Financial Statements are prepared in accordance with accounting
principles generally accepted in the U. S., which require the selection and
application of significant accounting policies, and which require management to
make significant estimates and assumptions. We believe that the following are
some of the more critical judgment areas in the application of its accounting
polices.
Revenue Recognition
Our 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. Revenue is recognized (1) after we have obtained an executed service
contract from the customer (2) as the services are rendered (3) when the price
is fixed as per the service contract and (4) when we believe that collectibility
is reasonably assured based on the credit risk policies and procedures that we
employ.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from
the inability of its customers to make required payments. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
Tangible and Intangible Assets
We have significant tangible and intangible assets on our balance sheet,
primarily property and equipment, deferred software costs, and intangible
assets, primarily goodwill, related to acquisitions. The assignment of useful
lives to these assets and the valuation and classification of intangible assets
involves significant judgments and the use of estimates. The testing of these
tangible and intangibles under established accounting guidelines for impairment
also requires significant use of judgment and assumptions. Our assets are tested
and reviewed for impairment on an ongoing basis under the established accounting
guidelines. Changes in business conditions or changes in the decisions of
management as to how assets will be deployed in our operations could potentially
require future adjustments to asset valuations.
PAGE 19
NEW FINANCIAL ACCOUNTING STANDARDS
In April 2003, FASB issued SFAS 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities", which amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement is effective for contracts entered into or modified
and for hedging relationships designated after June 30, 2003. The adoption of
this statement had no effect on our operating results or financial position.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". The statement
improves the accounting for three types of financial instruments that were
previously accounted for as equity - mandatory redeemable shares, instruments
that may require the issuer to buy back shares and certain obligations that can
be settled with shares. The statement requires that those instruments be
accounted for as liabilities in the statement of financial position. The
statement is effective for all financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of this statement had
no affect on our operating results or financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
We are not significantly exposed to the impact of interest rate changes, foreign
currency fluctuations, or changes in the market values of our investments. We
primarily invest in money market mutual funds or certificates of deposit and
commercial paper issued only by major corporations and financial institutions of
recognized strength and security, and hold all such investments to term. We
generally invest in instruments of no more than 30 days maturity. Our debt is at
a fixed rate of interest, and the carrying amount of long-term debt approximates
fair value based on interest rates that are currently available to us with
similar terms and remaining maturities.
MARKET RISK
Our accounts receivable are subject, in the normal course of business, to
collection risks. We regularly assess these risks and have established policies
and business practices to protect against the adverse effects of collection
risks. As a result, we do not anticipate any material losses in this area.
FOREIGN CURRENCY RISKS
We have no significant foreign-source income, and bill foreign customers in U.S.
dollars only.
ITEM 8. FINANCIAL STATEMENTS
The Consolidated 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
regulations 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 20
ITEM 9A. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
our management, including the Chief Executive Officer and Senior Vice President
of Finance, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, our management, including the
Chief Executive Officer and the Senior Vice President of Finance, concluded that
our disclosure controls and procedures were effective as of December 31, 2003.
There have been no changes in our internal controls over financial reporting
that occurred during our last fiscal year that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
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
The information required by Item 201(d) of Regulation S-K is included above in
Part II, Item 5 of this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The contents of Items 10 through 14 are incorporated by reference to a
Definitive Proxy Statement to be filed on or before April 29, 2004.
PAGE 21
PART IV
ITEM 16. 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 that appears as page F-1 of this report. Schedules
not required have been omitted
2. The exhibits required to be filed as a part of this Annual Report are
listed below.
EXHIBIT NO. DESCRIPTION
3.1A Restated Certificate of Incorporation, incorporated by
reference to Exhibit 3.1 to Infocrossing's Form 10-KSB for
the period ended October 31, 1999.
3.1B Certificate of Amendment to Infocrossing'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 Infocrossing's
Form 10-Q for the period ended April 30, 2000.
3.1C Certificate of Amendment to the Company's Certificate of
Incorporation, filed as of June 5, 2000, to change the name
of the Company to Infocrossing, Inc., incorporated by
reference to Exhibit 3.1C to Infocrossing'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 Infocrossing's Form 10-KSB for the period
ended October 31, 1999.
4.1A Amended and Restated 1992 Stock Option and Stock Appreciation
Rights Plan, incorporated by reference to Appendix A to the
Definitive Proxy for Infocrossing's Annual Meeting held on
May 8, 2000, as subsequently amended as referenced in the
Definitive Proxy for Infocrossing's Annual Meeting held June
22, 2001.
4.1B 2002 Stock Option and Stock Appreciation Rights Plan,
incorporated by reference to Appendix B to the Definitive
Proxy for Infocrossing's
Annual Meeting held on June 25, 2002.
4.2 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.
4.3 Warrant Agreement dated as of February 1, 2002 by and between
Infocrossing, Inc. as Issuer and the Purchasers named
therein, incorporated by reference to Exhibit 4.3 to the
Current Report on Form 8-K filed February 5, 2002.
4.4 Securities Purchase Agreement dated as of October 16, 2003 by
and among the Company and certain purchasers of common stock
and warrants, incorporated by reference to Exhibit 4.1 to a
Current Report on Form 8-K filed October 22, 2003.
PAGE 22
EXHIBIT NO. DESCRIPTION
4.5 Registration Rights Agreement dated as of October 16, 2003 by
and among the Company and certain purchasers of common stock
and warrants, incorporated by reference to Exhibit 4.2 to a
Current Report on Form 8-K filed October 22, 2003.
4.6 Exchange Agreement dated as of October 16, 2003 by and among
the Company and holders of the Series A Preferred Stock and
Series A warrants, incorporated by reference to Exhibit 4.3
to a Current Report on Form 8-K filed October 22, 2003.
4.7 Second Amended and Restated Registration Rights Agreement
dated as of October 21, 2003 by and among the Company and
certain stockholders of the Company, incorporated by
reference to Exhibit 4.4 to a Current Report on Form 8-K
filed October 22, 2003.
10.1 Employment Agreement, dated as of November 1, 1999, between
Infocrossing and Zach Lonstein, incorporated by reference to
Exhibit 10.4 to the Company's Form 10-Q for the period ended
July 31, 2000.
10.2 Employment Agreement, dated as of November 1, 1999, between
Infocrossing and Robert Wallach, incorporated by reference to
Exhibit 10.5 to the Company's Form 10-Q for the period ended
July 31, 2000.
10.3 Term Loan Agreement dated as of October 21, 2003 by and among
the Company, Infocrossing Agent, Inc., and the lenders named
therein, incorporated by reference to Exhibit 10.1 to a
Current Report on Form 8-K filed October 22, 2003.
10.4 Guarantee and Security Agreement dated as of October 21, 2003
by and among the Company, Infocrossing Agent, Inc., and the
Company's subsidiaries, incorporated by reference to Exhibit
10.2 to a Current Report on Form 8-K filed October 22, 2003.
21 List of Subsidiaries of Infocrossing
23 Consent of Ernst & Young LLP
31 Certifications required by Rule 13a-14(a) to be filed.
32 Certifications required by Rule 13a-14(b) to be furnished but
not filed.
(b) Reports on Form 8-K
Pursuant to Item 5 of Form 8-K, on October 17, 2003 we announced the pricing of
a private placement of common stock and warrants to purchase common stock and
also announced an agreement for the recapitalization of its series A preferred
stock and series A warrants.
Pursuant to Item 5 of Form 8-K, on October 22, 2003 we reported the completion
of the previously announced private placement of common stock and warrants to
purchase common stock on October 21, 2003, and also reported the completion of
the previously announced recapitalization of its series A preferred stock and
series A warrants on October 21, 2003 and related matters.
On November 13, 2003, we reported our results for the third quarter ended
September 30, 2003 pursuant to Item 12 of Form 8-K.
PAGE 23
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
INFOCROSSING, INC.
March 30, 2004 /s/ ZACH LONSTEIN
----------------------------------------------
Zach Lonstein - Chief Executive Officer
March 30, 2004 /s/ WILLIAM J. McHALE
----------------------------------------------
William J. McHale - Senior Vice President of Finance
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 30, 2004 /s/ ZACH LONSTEIN
----------------------------------------------
Zach Lonstein - Chairman of the Board of Directors
March 30, 2004 /s/ PETER DaPUZZO
----------------------------------------------
Peter DaPuzzo - Director
March 30, 2004 /s/ KATHLEEN A. PERONE
----------------------------------------------
Kathleen A. Perone - Director
March 30, 2004 /s/ MICHAEL B. TARGOFF
----------------------------------------------
Michael B. Targoff - Director
March 30, 2004 /s/ ROBERT B. WALLACH
----------------------------------------------
Robert B. Wallach - Director
PAGE 24
INFOCROSSING, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
Page No.
-----------
Report of Independent Auditors F-2
Consolidated Balance Sheets -
December 31, 2003 and 2002 F-3
Consolidated Statements of Operations -
Years ended December 31, 2003, 2002, and 2001 F-4
Consolidated Statements of Stockholders' Equity (Deficit) -
Years ended December 31, 2003, 2002, and 2001 F-5
Consolidated Statements of Cash Flows -
Years ended December 31, 2003, 2002, and 2001 F-6
Notes to Consolidated Financial Statements F-8
Schedule II: Valuation and Qualifying Accounts S-1
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Infocrossing, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Infocrossing,
Inc. and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 2003. Our
audits also included the financial statement schedule listed in the Index at
Item 16(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, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003 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.
As discussed in Notes 1 and 6 to the consolidated financial statements, on
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Intangible Assets".
/s/ ERNST & YOUNG, LLP
-------------------------
ERNST & YOUNG, LLP
New York, New York
February 13, 2004
F-2
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
DECEMBER 31,
----------------------------------
ASSETS 2003 2002
--------------- ---------------
CURRENT ASSETS:
Cash and equivalents $ 10,073 $ 7,026
Trade accounts receivable, net of allowances for doubtful accounts of $570 and
$1,051, respectively 3,592 4,369
Due from related parties 226 216
Prepaid license fees 945 827
Other current assets 1,780 1,308
------------ ------------
16,616 13,746
------------ ------------
PROPERTY and EQUIPMENT, net 18,249 19,437
------------ ------------
OTHER ASSETS:
Deferred software, net 1,264 1,742
Goodwill, net 28,361 28,451
Other intangible assets, net 788 1,142
Security deposits and other non-current assets 1,384 977
------------ ------------
31,797 32,312
------------ ------------
TOTAL ASSETS $ 66,662 $ 65,495
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 2,768 $ 4,093
Current portion of notes payable, long-term debt and capitalized lease obligations 2,559 1,741
Current portion of accrued loss on leased facilities 202 208
Accrued expenses 1,516 4,093
Income taxes payable - 96
Current deferred revenue 1,356 1,381
------------ ------------
8,401 11,612
LONG-TERM LIABILITIES:
Notes payable, long-term debt and capitalized lease obligations, net of current
portion 25,732 10,878
Accrued loss on leased facilities, net of current portion 732 925
Deferred revenue, net of current portion 42 224
Other long-term liabilities 954 872
------------ ------------
TOTAL LIABILITIES 35,861 24,511
------------ ------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE 8% SERIES A CUMULATIVE CONVERTIBLE PARTICIPATING PREFERRED STOCK;
$0.01 par value; 300,000 shares authorized; 157,115 shares issued and
outstanding at December 31, 2002. None at December 31,
2003. - 53,189
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock; $0.01 par value; 3,000,000 shares authorized (2,700,000 in
2002); none issued - -
Common stock; $0.01 par value; 50,000,000 shares authorized; shares issued of
15,732,038
and 5,973,506 at December 31, 2003 and 2002, respectively 157 60
Additional paid-in capital 109,565 61,135
Accumulated deficit (76,070) (70,549)
------------ ------------
33,652 (9,354)
Less 594,990 shares at December 31, 2003 and 2002,
respectively, of common stock held in treasury, at cost (2,851) (2,851)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 30,801 (12,205)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 66,662 $ 65,495
============ ============
See Notes to Consolidated Financial Statements.
F-3
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-------------------------------------------------
2003 2002 2001
-------------- -------------- -------------
REVENUES $ 55,228 $ 50,774 $ 26,987
----------- ----------- ----------
COSTS and EXPENSES:
Costs of revenues, excluding
depreciation shown below 36,706 33,332 32,320
Selling and promotion costs 2,978 2,786 3,073
General and administrative
expenses 5,587 6,114 8,729
Leased facilities and office
closings - (290) 5,650
Amortization of restricted stock
award - - 9,823
Amortization of goodwill - - 644
Other depreciation and
amortization 6,061 5,938 3,461
----------- ----------- ----------
51,332 47,880 63,700
----------- ----------- ----------
INCOME (LOSS) FROM OPERATIONS 3,896 2,894 (36,713)
----------- ----------- ----------
Interest income (103) (172) (1,377)
Interest expense 2,601 2,137 491
----------- ----------- ----------
2,498 1,965 (886)
----------- ----------- ----------
INCOME (LOSS) BEFORE 1,398 929 (35,827)
INCOME TAXES
Income tax expense (benefit) 42 (208) 697
----------- ----------- ----------
NET INCOME (LOSS) 1,356 1,137 (36,524)
Accretion and dividends on
redeemable
preferred stock (6,877) (9,293) (8,524)
----------- ----------- ----------
NET LOSS TO COMMON
STOCKHOLDERS $ (5,521) $ (8,156) $ (45,048)
=========== =========== ==========
BASIC AND DILUTED
EARNINGS PER SHARE:
Net loss to common stockholders $ (0.76) $ (1.52) $ (7.77)
=========== =========== ==========
Weighted average number of
common shares outstanding 7,279,786 5,352,757 5,801,312
=========== =========== ==========
See Notes to Consolidated Financial Statements.
F-4
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
ADDITIONAL RETAINED UNAMORTIZED TREASURY
COMMON PAR PAID IN EARNINGS RESTRICTED STOCK AT
SHARES VALUE CAPITAL (DEFICIT) STOCK AWARD COST TOTAL
-------- ------- ----------- ------------ ------------ ------------ ------------
Balances,
December 31, 2000 5,888 $ 59 $ 58,937 $ (17,345) $ (9,823) $ (187) $ 31,641
Exercise of stock
options by
the surrender of
20,021 shares 25 - 117 - - (117) -
Cancellation of shares
previously issued in
error (1) - - - - - -
Purchase 546,094 shares for
treasury, at cost - - - - - (2,452) (2,452)
Accretion and dividends
on redeemable
preferred stock - - - (8,524) - - (8,524)
Amortization of
restricted
stock award - - - - 9,823 - 9,823
Net loss - - - (36,524) - - (36,524)
-------- ------- ----------- ------------ ------------ ------------ ------------
Balances,
December 31, 2001 5,912 $ 59 $ 59,054 $ (62,393) $ - $ (2,756) $ (6,036)
Exercises of stock
options 54 1 289 - - - 290
Accretion and dividends
on redeemable
preferred stock - - - (9,293) - - (9,293)
Conversion of preferred
stock and exercise of
warrants 7 - 65 - - - 65
Purchase 16,367 shares
for treasury, at cost - - - - - (95) (95)
Warrants issued - - 1,720 - - - 1,720
Other - - 7 - - - 7
Net income - - - 1,137 - - 1,137
-------- ------- ----------- ------------ ------------ ------------ ------------
Balances,
December 31, 2002 5,973 $ 60 $ 61,135 $ (70,549) $ - $ (2,851) $ (12,205)
Exercises of stock
options 20 - 106 - - - 106
Accretion and dividends
on redeemable preferred
stock - - - (8,091) - - (8,091)
Vesting of a
non-qualified
stock option - - 40 - - - 40
Private stock offering 9,739 97 69,845 - - - 69,942
Recapitalization of
preferred
stock and warrants - - (20,755) 1,214 - - (19,541)
Cancellation of warrants
on repayment of
debentures - - (806) - - - (806)
Net income - - - 1,356 - - 1,356
-------- ------- ----------- ------------ ------------ ------------ ------------
Balances,
December 31, 2003 15,732 $ 157 $ 109,565 $ (76,070) $ - $ (2,851) $ 30,801
======== ======= =========== ============ ============ ============ ============
See Notes to Consolidated Financial Statements.
F-5
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
2003 2002 2001
------------------- ----------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,356 $ 1,137 $ (36,524)
Adjustments to reconcile net income (loss)
to cash provided by (used in) operating
activities:
Depreciation and amortization 6,061 5,938 4,105
Accretion of discounted Debentures 422 491 -
Amortization of restricted stock award - - 9,823
Non-employee option issued for services 40 - -
Accrued loss (reduction of accrued
loss) on leased facilities - (290) 5,650
Decrease (increase) in:
Trade accounts receivable 777 (322) 945
Prepaid license fees and other current
assets (590) (122) 3,910
Security deposits and other non-
current assets 84 1,539 31
Increase (decrease) in:
Accounts payable (1,325) 2,179 545
Income taxes payable (96) 96 -
Accrued expenses (510) (5,956) 2,634
Payments on accrued loss on leased
facilities (148) (3,257) (464)
Deferred revenue and other liabilities (125) (178) 2,003
--------------- -------------- ----------------
Net cash provided by (used in)
operating activities 5,946 1,255 (7,342)
--------------- -------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,419) (3,955) (9,009)
Redemptions of investments
in marketable debt securities - - 3,413
Purchase of the outstanding stock of
AmQUEST, Inc. (350) (19,896) -
Purchases of treasury stock - - (517)
Increase in deferred software costs (138) (135) (285)
--------------- -------------- ----------------
Net cash used in investing activities (1,907) (23,986) (6,398)
--------------- -------------- ----------------
Continued on next page.
F-6
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
2003 2002 2001
------------------- ----------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from a private equity
placement $ 69,942 $ - $ -
Proceeds from issuance of Debentures - 10,000 -
Proceeds from debt financing and a line
of credit - - 3,062
Redemption of preferred stock and
warrants (56,321) - -
Repayment of debentures and interest
accrued (12,227) - -
Repayments of debt and capitalized leases (2,431) (4,726) (1,217)
Advances to related parties, net (10) (11) (474)
Exercises of stock options and warrants 106 202 -
--------------- -------------- ---------------
Net cash (used in) provided by financing
activities (941) 5,465 1,371
--------------- -------------- ---------------
Net cash provided by (used in)
continuing operations 3,098 (17,266) (12,369)
CASH FLOWS FROM
DISCONTINUED OPERATION:
Payments on portion of accrued loss on
leased facilities relating to
discontinued operation (51) (52) (51)
--------------- -------------- ---------------
Net increase (decrease)
in cash and equivalents 3,047 (17,318) (12,420)
Cash and equivalents, beginning of year 7,026 24,344 36,764
--------------- -------------- ---------------
Cash and equivalents, end of year $ 10,073 $ 7,026 $ 24,344
=============== ============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 981 $ 422 $ 491
=============== ============== ===============
Income taxes $ 132 $ 22 $ 42
=============== ============== ===============
SUPPLEMENTAL DISCLOSURE OF
NON-CASH INVESTING ACTIVITIES:
Fees and other costs accrued in
connection
with the purchase of AmQUEST, Inc. $ - $ 350 $ -
=============== ============== ===============
Term loans issued for a portion of the
redemption of the preferred stock
and warrants $ 25,000 $ - $ -
=============== ============== ===============
Equipment acquired subject
to a capital lease $ 2,475 $ 1,278 $ 58
=============== ============== ===============
SUPPLEMENTAL DISCLOSURE OF
NON-CASH FINANCING ACTIVITIES:
Treasury shares received in payment of
an amount due from a related party - $ - $ 1,935
=============== ============== ===============
Treasury shares received in
payment of a stock option exercise - $ 95 $ 117
=============== ============== ===============
Preferred shares converted to common - $ 65 $ -
=============== ============== ===============
Additional Debentures issued in lieu
of a cash payment of interest 1,310 $ 600 $ -
=============== ============== ===============
See Notes to Consolidated Financial Statements.
F-7
INFOCROSSING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business - Infocrossing, Inc. and its wholly-owned subsidiaries (collectively,
the "Company") provides 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.
Cash and Equivalents - Cash and equivalents include all cash, demand deposits,
money market accounts, and debt instruments purchased with an original maturity
of three months or less.
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 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.
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 assets are
internal-use software, accounted for in accordance with Statement of Position
98-1, "Accounting of the Costs of Computer Software Developed or Obtained for
Internal Use." The estimated useful lives of such assets vary between three and
five years, based upon the estimated useful life of each particular software
product. If the software has been developed for a particular client, the useful
life equals the term of the related customer contract.
Intangible Assets - The excess of cost over net assets of acquired businesses
("goodwill") was amortized during the year ended December 31, 2001 using the
straight-line method over the estimated lives. In accordance with Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"), goodwill has not been amortized since January 1, 2002.
Other intangible assets, primarily acquired customer lists, are amortized using
the straight-line method over the estimated lives of between five and ten years.
The carrying value of indefinite lived intangibles is evaluated annually for
impairment in accordance with SFAS 142. No impairment losses were recorded in
2003 or 2002.
Revenue Recognition - The Company's services are provided under a combination of
fixed monthly fees and time and materials billings. Contracts with clients range
from one to five years. Revenue is recognized (1) after the Company has obtained
an executed service contract from the customer (2) as the services are rendered
(3) when the price is fixed as per the service contract and (4) when the Company
believes that collectibility is reasonably assured based on the credit risk
policies and procedures that the Company employs.
F-8
Deferred Revenue - The Company records deferred revenue for amounts billed for
which the services have not yet been provided. Deferred revenue amounts are
recorded as revenue 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.
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 are 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.
Fair Value of Financial Instruments - At December 31, 2003 and 2002, 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 years ended December 31, 2003, 2002 and 2001, one
client accounted for 23%, 29%, and 17%, respectively, of the Company's revenues.
Also, for the years ended December 31, 2002 and 2001, another client accounted
for 11% and 17%, respectively, of the Company's revenues.
Stock-based Compensation - The Company accounts for stock options granted to
employees and directors under the its stock option plans in accordance with
Accounting Principles Board Opinion No. 25 and related Interpretations.
Accordingly, no compensation cost has been recognized for stock option awards
granted to employees and directors.
F-9
Had compensation cost been determined in accordance with Statement of Financial
Accounting Standard No. 123 "Accounting for Stock-Based Compensation", the
Company's loss in thousands of dollars and diluted loss per common share for the
years ended December 31, 2003, 2002, and 2001, respectively, would have been as
follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2003 2002 2001
----------------- ---------------- -----------------
Net loss to common stockholders:
As reported $ (5,521) $ (8,156) $ (45,048)
Stock compensation expense 2,894 2,915 2,837
-------------- ------------- --------------
Pro forma $ (8,415) $ (11,071) $ (47,885)
============== ============= ==============
Net loss to common stockholders per share:
As reported $ (0.76) $ (1.52) $ (7.77)
Stock compensation expense (0.40) (0.55) (0.48)
-------------- ------------- --------------
Pro forma $ (1.16) $ (2.07) $ (8.25)
============== ============= ==============
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 years ended December 31, 2003, 2002 and 2001 was $1,465,000,
$689,000, and $889,000, respectively. 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 2003: a
risk-free interest rate of 2.625%; expected lives of three years; and expected
volatility of 41.13%. The assumptions used in 2002 and 2001 included risk-free
interest rates of 3.69% and 4.72%, respectively, expected lives ranging from six
months to five years, and expected volatilities of 54.7% and 65.5%,
respectively.
Recently Issued Accounting Pronouncements - In April 2003, FASB issued SFAS 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities",
which amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement is effective for
contracts entered into or modified and for hedging relationships designated
after June 30, 2003. The adoption of this statement had no effect on the
Company's operating results or financial position.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". The statement
improves the accounting for three types of financial instruments that were
previously accounted for as equity - mandatory redeemable shares, instruments
that may require the issuer to buy back shares and certain obligations that can
be settled with shares. The statement requires that those instruments be
accounted for as liabilities in the statement of financial position. The
statement is effective for all financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of this statement had
no affect on the Company's operating results or financial position.
2. ACQUISITION
On February 5, 2002, the Company purchased all of the outstanding capital stock
of AmQUEST, a Georgia corporation, from its former parent company American
Software, Inc. ("ASI"). As consideration for the purchase of AmQUEST's shares,
the Company paid ASI approximately $19,634,000 in cash, after finalizing certain
post closing adjustments. In addition, the Company incurred approximately
$612,000 in professional fees and other costs related to the acquisition of
which $350,000 was paid in 2003.
The Company financed the AmQUEST Acquisition through the application of the
proceeds of the financing described in Note 9 and cash held by the Company.
The Company acquired client contracts valued at $1,200,000. This intangible
asset is being amortized over five years using an accelerated method to
approximate the anticipated decline in the revenues of the acquired contracts as
they expire over that time. The acquisition also generated $20,624,000 in
goodwill. This goodwill is not currently deductible for tax purposes.
F-10
The fair value of the assets and liabilities acquired is as follows (in
thousands):
ASSETS:
Accounts receivable $ 1,637
Other current assets 204
Equipment and other fixed assets 1,936
Customer list 1,200
Goodwill 20,624
----------
Total assets 25,601
----------
LIABILITIES:
Accrued expenses (3,963)
Current capital leases (802)
Other current liabilities (56)
Capital leases (366)
Other long term liabilities (168)
----------
Total liabilities (5,355)
----------
PURCHASE PRICE $ 20,246
==========
The following unaudited condensed consolidated pro forma information is
presented to illustrate the effects of the acquisition of AmQUEST as if such
transaction had occurred on the first day of each of the periods presented
(January 1, 2002 and 2001). The pro forma statements of operations may not be
indicative of the results that actually would have occurred had the combination
been in effect on the date indicated, nor does it purport to indicate the
results that may be obtained in the future.
PRO FORMA INFORMATION
(IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
------------------------------------
2002 2001
---------------- ----------------
Revenues $ 52,249 $ 45,228
============= =============
Net income (loss) $ 1,012 $ (38,387)
============= =============
Net loss to common stockholders $ (8,280) $ (46,911)
============= =============
Net loss to common stockholders per
basic and diluted share $ (1.55) $ (8.09)
============= =============
F-11
3. SETTLEMENT
On January 10, 2002, the Company and a software licensor (the "Licensor")
entered into an Agreement (the "Agreement") in settlement of 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 future purchases (the "Credits"). 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.
The Company recognized all of the Credits in its statement of operations in
2002. Additionally, accrued expenses related to the unpaid support fees totaling
$796,000 were reversed in connection with the Agreement. As of December 31,
2002, all of the Credits were used.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
DECEMBER 31, DEPRECIABLE
LIVES (YEARS)
------------------------------------------ --------------
2003 2002
-------------------- ------------------ --------------
Computer equipment $ 11,220 $ 10,917 5
Computer equipment held under capital leases (Note 9) 10,118 7,485 *
Furniture and office equipment 1,271 1,261 7
Leasehold improvements 8,074 8,023 *
Purchased software 6,736 5,839 5
Vehicles 132 132 3
---------------- --------------
37,551 33,657
Less accumulated depreciation and amortization, including
$5,011 and $2,893 attributable to assets under capital leases
at December 31, 2003 and 2002, respectively (19,302) (14,220)
---------------- --------------
$ 18,249 $ 19,437
================ ==============
* Shorter of the useful life or the length of the lease.
In connection with the AmQUEST Acquisition, the Company added $2,073,000 of
fixed assets, including $1,305,000 of assets under capitalized leases.
Depreciation and amortization charged to operations was $5,082,000, $4,906,000
and $2,563,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.
5. DEFERRED SOFTWARE COSTS
Deferred software costs consist of the following (in thousands):
DECEMBER 31,
-----------------------------------
2003 2002
--------------- ----------------
Cost of internally-developed software
and enhancements, including software
under development $ 6,094 $ 5,956
Accumulated amortization (4,830) (4,214)
----------- ------------
$ 1,264 $ 1,742
=========== ============
Amortization of deferred software costs charged to operations was $616,000,
$590,000 and $754,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.
F-12
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill consists of $28,361,000, including $20,624,000 incurred in connection
with the AmQUEST Acquisition. During the first quarter of 2003, the Company
finalized its initial purchase price allocation for the AmQUEST Acquisition
resulting in a decrease of $90,000 in both accrued liabilities and goodwill.
As noted above, SFAS 142 prohibits the amortization of goodwill, and also
requires that the Company report, on a pro forma basis the amount of net income
or loss, for the period presented prior to January 1, 2002, as if SFAS 142 were
implemented at January 1, 2001 and goodwill had not been amortized.
CONSOLIDATED PRO FORMA STATEMENT OF NET LOSS
(IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED
DECEMBER 31, 2001
----------------------------------
AS REPORTED PRO FORMA
--------------- ---------------
Net loss $ (36,524) $ (35,880)
=============== ===============
Net loss to common stockholders $ (45,048) $ (44,404)
=============== ===============
Net loss to common stockholders per basic and diluted share $ (7.77) $ (7.65)
=============== ===============
Amortization of goodwill charged to operations for the year ended December 31,
2001 was $644,000.
Other intangible assets consist of the following (in thousands):
DECEMBER 31,
-------------------------------------
2003 2002
---------------- -----------------
Acquired customer lists $ 2,380 $ 2,380
Accumulated amortization (1,592) (1,238)
------------ -------------
$ 788 $ 1,142
============ =============
Amortization charged to operations was $354,000, $432,000 and $134,000 for the
years ended December 31, 2003, 2002 and 2001, respectively. Amortization expense
related to customer lists is estimated to be $277,000, $214,000, $171,000, and
$126,000 for the years ended December 31, 2004, 2005, 2006 and 2007,
respectively.
7. ACCRUED EXPENSES
Accrued Expenses consists of the following (in thousands):
DECEMBER 31,
--------------------------------
2003 2002
-------------- --------------
Salaries and Bonuses $ 24 $ 770
Interest 67 588
Other 1,425 2,735
---------- ----------
$ 1,516 $ 4,093
========== ==========
F-13
8. RELATED PARTY TRANSACTIONS
Due from related parties consists of the following (in thousands):
DECEMBER 31,
---------------------------
2003 2002
----------- ------------
Due from the Chairman, bearing interest
at the Prime Rate (4% at December 31, 2003)
plus 1% per annum, repayable,
including accrued interest, on demand $ 89 $ 85
Due from other officers, bearing interest at
the Prime Rate, repayable, including
accrued interest, on demand 137 131
------- --------
Total due from related parties $ 226 $ 216
======= ========
In accordance with the Sarbanes-Oxley Act of 2002, no further advances are being
made to the Company's officers.
In June 2000, the Company hired a Chief Executive Officer (the "Executive"). The
employment agreement with the Executive provided, among other things, for an
award of 800,000 restricted shares of common stock. 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. 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 a 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 noncash
charge of approximately $7,427,000 for the remaining unamortized balance of the
original grant. Total amortization of the restricted stock award including the
charge was $9,823,000 for the year ended December 31, 2001.
9. NOTES PAYABLE, LONG-TERM DEBT, AND CAPITALIZED LEASE OBLIGATIONS
Long-Term Debt consists of the following (in thousands):
DECEMBER 31,
------------------------------------
2003 2002
--------------- ----------------
Notes payable $ 24,937 $ -
Debentures - 10,600
Unamortized discount - (1,228)
Other loans 19 39
----------- -------------
24,956 9,411
Less current portion (267) (21)
----------- -------------
$ 24,689 $ 9,390
=========== =============
F-14
NOTES PAYABLE
On October 21, 2003, in connection with the redemption of the Company's
Redeemable Preferred Stock (see Note 11), the Company issued $25,000,000 of
senior secured term loans maturing in October, 2008. The new term loans bear an
interest rate of 9% per annum, payable, along with a minimum principal payment
of 0.25% of the outstanding loan balance, on last day of March, June, September
and December of each year, beginning on December 31, 2003. The term loans
provide for a default interest rate of 3% on the unpaid principal of the term
loans and overdue interest. The new term loans are guaranteed by all of the
Company's subsidiaries. The term loans and guarantees are secured by a
first-priority interest on substantially all of the Company's assets, including
the capital stock and assets of the subsidiaries.
At the end of each year beginning with the year ending December 31, 2004, the
Company is required to prepay the term loans with an amount equal to 75% of its
Excess Cash Flow, as defined, for such year. The Company is also required to
prepay the new term loans with all net proceeds from:
o certain sales, transfers or other dispositions of property or
assets if the aggregate amount of such sales, transfers or other
dispositions is equal to or greater than $250,000 in any year;
o casualty or insured damage if the aggregate amount of such
casualty or insured damage is equal to or greater than $250,000
in any year; and
o the receipt of unscheduled payments in connection with the
termination of a customer contract in excess of $1,000,000 during
any fiscal year; provided that the Company has the right to
reinvest within 180 days of the receipt of any such proceeds: (a)
all proceeds from casualty events and (b) up to $5,000,000 of
proceeds from asset sales.
The Company is also required to prepay the new term loans with 50% of the net
proceeds from a sale of capital stock or other equity securities. Upon a change
of control event, the Company is required to prepay the new term loans at 101%
of the then outstanding aggregate principal amount, plus unpaid interest.
The notes contain certain covenants including, but not limited to: a maximum
leverage ratio; minimum consolidated earnings before interest, taxes,
depreciation, and amortization; a minimum debt coverage ratio; and limitations
on indebtedness, capital expenditures, investments, loans, mergers and
acquisitions, stock issuances, and transactions with affiliates. In addition,
the terms of the notes limit the Company's ability to pay dividends. The Company
was in compliance with such loan covenants at December 31, 2003.
DEBENTURES
On February 1, 2002, the Company issued Senior Subordinated Debentures (the
"Debentures") and warrants to purchase, initially, 2,000,000 shares of the
common stock of the Company (the "Initial Camden Warrants") (subject to
adjustments as discussed below) to certain investors (the "Investors") in
exchange for $10,000,000. The proceeds of the sale of the Debentures and
warrants were used to fund a portion of the cost of the AmQUEST Acquisition.
The Company had the option to pay interest in the form of (a) cash, (b)
additional Debentures, or (c) a combination of cash and additional Debentures.
The Company chose to make the interest payments due July 31, 2002, January 31,
2003, and July 31, 2003 using an aggregate of $1,910,160 of additional
Debentures.
The initial carrying values of the Debentures ($8,280,000) and Initial Camden
Warrants ($1,720,000) were determined by apportioning an amount equal to the
proceeds from the private sale multiplied by the relative value of each item as
of the Issuance Date. The difference between the carrying value and the face
value of the Debentures was recorded as additional interest expense through
October 21, 2003 (the date the Debentures were repaid) using the interest
method.
The Initial Camden Warrants were issued pursuant to a Warrant Agreement dated as
of February 1, 2002 by and between the Company and the Investors (the "Warrant
Agreement") and are subject to certain customary anti-dilution adjustments. The
exercise price of the Initial Camden Warrants is $5.86 per share and they expire
on January 31, 2007.
Initial Camden Warrants could be cancelled, in part, upon the prepayment of the
Debentures as more fully described in Note 11 below. On October 21, 2003, the
Company repaid the all the Debentures and interest accrued through that date in
the amount of $12,227,000, and also cancelled 937,500 of the Initial Camden
Warrants (See Note 11).
F-15
OTHER LOANS
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 a zero interest promotion. The aggregate monthly payment for
these loans is $1,762.
CAPITAL LEASE OBLIGATIONS
Assets subject to capital lease agreements are reflected in property and
equipment as capital leases. During the years ended December 31, 2003, 2002, and
2001, the Company entered into capital leases aggregating approximately
$2,475,000, $1,278,000, and $57,500, respectively.
The following is a schedule of future minimum lease payments under capital
leases, together with the present value of the net minimum lease payments
(amounts in thousands):
Years ending December 31:
2004 $ 2,335
2005 885
2006 173
--------------
Total minimum lease payments 3,393
Less amount representing interest (58)
--------------
Present value of net minimum lease payments 3,335
Less current portion of obligations under capital leases 2,292
--------------
Long-term portion $ 1,043
==============
10. INCOME TAXES
The provision (benefit) for income taxes consists of (in thousands):
YEARS ENDED DECEMBER 31,
------------------------------------------------
2003 2002 2001
------------- ------------- --------------
Current tax (benefit):
Federal $ - $ (250) $ 697
State and local 42 42 -
Deferred provision (benefit) - - -
--------- --------- ----------
$ 42 $ (208) $ 697
========= ========= ==========
F-16
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 (in thousands):
YEARS ENDED DECEMBER 31,
-------------------------------------------------
2003 2002 2001
------------- ------------- --------------
Tax provision computed at the statutory rate $ 468 $ 316 $ (12,539)
Increase (decrease) in taxes resulting from:
State and local income taxes,
net of federal income taxes 28 28 -
Non-deductible expenses 17 14 3,438
Benefit of tax credits (471) (315) -
Losses for which no benefit has been provided - - 9,101
Other, net - (251) 697
---------- --------- ----------
$ 42 $ (208) $ 697
========== ========= ==========
Temporary differences that give rise to net deferred tax assets (liabilities)
are as follows (in thousands):
DECEMBER 31,
---------------------------------------
2003 2002
----------------- ------------------
Deferred tax assets:
Accrued loss on leased facilities and office closings $ - $ 470
Accrued liabilities 292 759
Allowance for doubtful accounts 149 375
Deferred rent 404 359
Net operating loss 15,835 14,957
Other 132 108
------------- --------------
16,812 17,028
------------- --------------
Deferred tax liabilities:
Depreciation and amortization (1080) (506)
Deferred software costs (525) (723)
------------- --------------
(1,605) (1,229)
------------- --------------
Net tax assets 15,207 15,799
Valuation allowance (15,207) (15,799)
------------- --------------
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, 2003, the Company had net operating loss carryforwards of
approximately $37.3 million for federal income tax purposes, that begin to
expire in 2019. The use of these net operating loss carryforwards may be
restricted under Section 382 of the Internal Revenue Code.
F-17
11. 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
legally available funds, and upon the liquidation, dissolution, or winding up of
the Company, are entitled to share ratably in all assets remaining after the
payment of liabilities, and payment of accrued dividends and liquidation
preferences on the preferred stock outstanding, if any.
Holders of common stock have no preemptive rights, and have no rights to convert
their common stock into any other security.
PRIVATE STOCK OFFERING
On October 21, 2003, the Company sold 9,739,111 shares of common stock and five
year warrants to purchase 3,408,689 shares of common stock for a net aggregate
amount of approximately $69,942,000. The warrants have an exercise price of
$7.86 per share and expire in October 2008. The private stock offering was made
only to accredited investors in a transaction exempt from the registration
requirements of the Securities Act of 1933. The net proceeds of the private
stock offering were principally used to fund the redemption of preferred stock
and warrants discussed below, the repayment of Debentures discussed in Note 9
and to pay related fees and expenses. The remainder of the proceeds has been
used for working capital purposes. On February 12, 2004, a Registration
Statement on Form S-3, filed by the Company on behalf of the private stock
offering investors as selling shareholders, was declared effective. The Company
will not receive any proceeds from any sales of stock under this registration
statement.
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. At
December 31, 2003, no preferred shares are outstanding.
SERIES A PREFERRED STOCK
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 was accreted as a
charge against retained earnings using the interest method. Accumulated
dividends (dividends not paid on a dividend date) and dividends accruing prior
to a dividend payment date also increased the carrying value of the Series A
Preferred Stock through a charge to retained earnings.
On December 18, 2002, 262.3 shares of Series A Preferred, with a face value of
$100,000, were converted into 2,764 shares of the Company's common stock. In
addition, the same holder exercised his Series A Warrants, receiving an
additional 4,441 common shares.
F-18
On October 21, 2003, the Company purchased and retired all the outstanding
Series A Preferred Stock and all the Investor Warrants for $80,000,000, using
$55,000,000 in cash from the proceeds of the private stock offering discussed
above and issuing $25,000,000 in term loans (See Note 9). The fair value of the
Series A Preferred Stock and dividends payable thereon was estimated at
approximately $60,066,000, and a $630,000 adjustment was recorded to accretion
expense in the fourth quarter. The fair values of the Series A Preferred Stock
and the warrants was determined in the following manner. The Company's fair
value ("Enterprise Value") was calculated using a discounted future cash flow
model (ignoring the effects of the private placement and the recapitalization)
at approximately $128 million. Using the Black-Scholes method and assuming a
seven year life, a risk-free interest rate of 3.13%, and volatility of 54.23%,
the fair value of the warrants was calculated to be approximately $21 million.
The market value of our common stock outstanding immediately prior to the
private stock offering was approximately $42 million. The residual Enterprise
Value of $65 million was attributed to the Series A Preferred Stock. The fair
values of the warrants and the Series A Preferred Stock were then proportionally
allocated to the $80 million consideration, resulting in final fair values for
the warrants and the Series A Preferred Stock of $19.9 million and $60.1
million, respectively. In connection with this transaction, the four members of
the Company's board of directors, representing the holders of the Series A
Preferred Stock, resigned on the closing date.
PRIVATE SALE OF DEBENTURES WITH WARRANTS
In connection with the issuance of Debentures discussed in Note 9 above, the
Company issued the Camden Warrants to purchase up to 2,000,000 shares of the
common stock of the Company. The Camden Warrants have an exercise price of $5.86
per share and expire on January 31, 2007. Camden Warrants to purchase 62,500
shares of common stock could be cancelled by the Company for each full month
between the date the Debentures were repaid and February 1, 2004. On October 21,
2003, the Company repaid the Debentures (see Note 9) and cancelled the Camden
Warrants to purchase 937,500 shares of common stock. The remaining 1,062,500
Camden Warrants have not been exercised.
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. This warrant has a ten year life. The fair value of the warrant of
$146,900, calculated using the Black-Scholes pricing model, was recorded as
additional goodwill relating to the related acquisition.
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 were immediately exercisable and expire on June 5, 2004.
The fair value of the warrants of $120,000, calculated using the Black-Scholes
pricing model, was recorded as an expense in the statement of operations for the
fiscal year ended October 31, 2000.
STOCK OPTION PLANS
On June 25, 2002, the stockholders approved a Board of Directors resolution
establishing the Company's 2002 Stock Option and Stock Appreciation Rights Plan
(the "2002 Plan"). In September 1992, the Company had adopted the 1992 Stock
Option and Stock Appreciation Rights Plan (as subsequently amended and restated,
"the 1992 Plan") that provided for the granting of options to employees,
officers, directors, and consultants for the purchase of common stock. The
material features of the 1992 Plan and the 2002 Plan are substantially the same.
Incentive stock options 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.
Upon adoption of the 2002 Plan, the resolution of the Board of Directors
stipulated that no further grants be made pursuant to the 1992 Plan. The grants
previously made under the 1992 Plan will not be affected. The Board initially
authorized 1,000,000 shares for grant under the 2002 Plan. Both plans provide a
maximum exercise period of ten years. Qualified options granted to a 10% or
greater stockholder shall have a maximum term of five years under Federal tax
rules. As a matter of practice, except with respect to a 10% or greater
stockholder, the typical exercise period for options granted under the existing
plan has been ten years from the date of grant.
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.
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.
F-19
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 2002 Plan, and to holders of
previously granted options. No SARs have been granted under the either plan.
Activity in the Plan during the periods from January 1, 2001 through December
31, 2003 is as follows:
NUMBER OF EXERCISE PRICE RANGE WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------------- -------------------------- --------------------
Options outstanding, January 1, 2001 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
Options granted 252,100 $ 4.95 - $ 8.63 $ 6.37
Options exercised (53,885) $ 3.78 - $ 7.14 $ 5.38
Options cancelled (195,051) $ 4.38 - $27.25 $12.64
---------------
Options outstanding, December 31, 2002 1,406,935 $ 3.25 - $37.78 $ 8.93
Options granted 228,750 $ 6.27 - $ 9.91 $ 8.34
Options exercised (19,034) $ 4.50 - $ 7.71 $ 5.57
Options cancelled (85,897) $ 4.63 - $27.25 $11.64
---------------
Options outstanding, December 31, 2003 1,530,754 $ 3.25 - $37.78 $ 8.73
===============
F-20
ADDITIONAL INFORMATION REGARDING EXERCISE PRICE RANGES OF OPTIONS OUTSTANDING:
- ------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
WEIGHTED CONTRACTUAL EXERCISE
NUMBER OF AVERAGE LIFE NUMBER OF PRICE OF
EXERCISE PRICE OPTIONS EXERCISE REMAINING OPTIONS EXERCISABLE
RANGE OUTSTANDING PRICES (YEARS) EXERCISABLE OPTIONS
- -------------------- ---------------- ------------- --------------- -------------- ---------------
$ 3.25 - $ 4.86 183,928 $ 3.59 2.6 182,950 $ 3.59
$ 5.00 - $ 7.30 408,581 $ 6.06 6.7 273,439 $ 5.83
$ 7.42 - $10.86 783,045 $ 9.45 6.2 651,383 $ 9.46
$11.48 - $15.42 34,000 $12.48 1.7 34,000 $12.48
$17.00 - $23.13 104,500 $18.14 6.5 104,500 $18.14
$27.25 - $31.81 12,950 $28.61 5.9 12,950 $28.61
$37.78 - $37.78 3,750 $37.78 6.4 3,750 $37.78
---------------- --------------
1,530,754 1,262,972
================ ==============
There were 1,262,972, 1,130,906, and 1,094,647 options exercisable at December
31, 2003, 2002, and 2001, respectively. At December 31, 2003, there are 737,833
options available for future grant.
At December 31, 2003, the Company has reserved 4,566,189 common shares for
issuance upon exercise of the following warrants: (i) 1,062,500 shares
exercisable at $5.86 per share expiring January 31, 2007; (ii) 65,000 shares
exercisable at $18.00 per share expiring September 16, 2010; (iii) 30,000 shares
exercisable at $19.25 per share expiring June 5, 2004; and (iv) 3,408,689 shares
exercisable at $7.86 per share expiring October 20, 2008. Total shares reserved
for warrants and options (including options available for grant) is 6,834,776.
12. COMMITMENTS AND CONTINGENCIES
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.
Substantially all of this liability is long-term since the accrued amounts will
not be paid until the mid-point of the leases. The Company leases space in
buildings owned by the former parent of AmQUEST (the "Buckhead Facility"). At
February 5, 2002, the Company occupied approximately 33,400 square feet. The
lease agreement permits the Company to reduce its use of this space for a
pro-rata reduction in rent. The Company has moved most of the operations of
AmQUEST to its own facility in the Atlanta metropolitan area, and occupies
approximately 11,100 square feet in the Buckhead Facility as of December 31,
2003. This lease agreement expires on January 31, 2006, unless the Company
reduces its use of this space to zero at an earlier date.
The Company's obligation under certain of these leases are secured by a cash
deposit or a standby letter of credit, aggregating $548,000 at both December 31,
2003 and 2002. The standby letter of credit is collateralized by a cash
investment that has been classified, along with the cash deposit, as long-term
assets. Total expense for occupancy costs was approximately $2,492,000,
$2,264,000 and $5,364,000 for the years ended December 31, 2003, 2002 and 2001.
The Company leases certain of its data center equipment, various items of office
equipment, and vehicles under standard commercial operating leases. The Company
also has fixed-term obligations for software licenses.
F-21
Approximate minimum future lease payments for real estate and other operating
leases are as follows (in thousands):
Years ending December 31,
2004 $ 4,930
2005 3,879
2006 3,505
2007 3,359
2008 3,527
Thereafter 11,601
------------
$ 30,801
============
13. RETIREMENT PLANS
The Company maintains a 401(k) Savings Plan covering all eligible employees who
have attained the age of 21 years and worked at least 1,000 hours in a one-year
period. Plan participants may elect to contribute up to 100% of covered
compensation each year, to the IRS maximum. 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.
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2003 and 2002 (in thousands except per share data):
THREE MONTHS ENDED:
------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, 2003 DECEMBER 31, 2003
2003 2003
------------------ ------------------ ------------------- ------------------
Revenues $ 13,129 $ 13,582 $ 14,114 $ 14,403
============== ============== =============== ==============
Net income $ 270 $ 105 $ 451 $ 530
============== ============== =============== ==============
Net income (loss) to common
stockholders $ (2,178) $ (2,396) $ (2,105) $ 1,158
============== ============== =============== ==============
Net income (loss) to common
stockholders per basic
common share $ (0.40) $ (0.45) $ (0.39) $ 0.09
============== ============== =============== ==============
Net income (loss) to common
stockholders per
diluted common share $ (0.40) $ (0.45) $ (0.39) $ 0.08
============== ============== =============== ==============
THREE MONTHS ENDED:
------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, 2002 DECEMBER 31, 2002
2002 2002
------------------ ------------------ ------------------- ------------------
Revenues $ 11,233 $ 13,241 $ 12,906 $ 13,394
============== ============== =============== ==============
Net income (loss) $ 1,330 $ (726) $ (30) $ 563
============== ============== =============== ==============
Net loss to common
stockholders $ (919) $ (3,024) $ (2,378) $ (1,835)
============== ============== =============== ==============
Net loss to common
stockholders per basic and
diluted common share $ (0.17) $ (0.57) $ (0.44) $ (0.34)
============== ============== =============== ==============
F-22
15. SUBSEQUENT EVENTS (UNAUDITED)
On February 13, 2004, a new lender purchased all the term loans from the October
21st holders without significantly altering the terms and conditions. The
original term loan agreement provided for the issuance, if required by a new
lender, of a warrant to purchase up to 250,000 shares of our common stock. The
new lender did not require the Company to issue such warrant.
On March 4, 2004, the Company entered into a definitive agreement to acquire all
of the outstanding stock of ITO Acquisition Corp, a data center outsourcing
company doing business as Systems Management Specialists ("SMS"), for $36.5
million in cash and the Company's common stock. SMS, headquartered in Orange
County, California, provides computing operations, business process outsourcing
and managed application services to nearly forty clients primarily in the
western United States. The Company has received a waiver from the holder of the
senior secured term loans granting the Company permission to make such an
acquisition, as required by the term loan agreement.
Management believes that the transaction will close no later than the second
quarter of 2004 and is contingent upon the Company securing financing and other
customary closing conditions. The Company proposed debt and equity financings of
approximately $35 million in connection with the pending acquisition.
On March 26, 2004, the Company announced that a definitive agreement had been
reached to sell 2,917,000 shares of the Company's common stock in a private
offering at an aggregate offering price of $30.6 million. Approval from the
Nasdaq Stock Market, Inc. has been received, and the transaction is expected to
close during the week of March 29, 2004. The Company intends to use the net
proceeds of this private placement to fund a portion of the cash component of
the pending acquisition of SMS. The Company also intends to fund the balance of
the cash component and related fees and expenses with the proceeds from a
proposed debt financing, with any remaining funds to be used for working capital
and other general corporate purposes.
The exact timing and terms of the remainder of the financing will depend upon
market conditions and other factors. There can be no assurance that such
financing will occur.
F-23
INFOCROSSING, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND CHARGED TO BALANCE AT END
PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS OF PERIOD
----------------- ---------------- --------------- ---------------- -----------------
ALLOWANCE FOR
DOUBTFUL ACCOUNTS:
Year ended
December 31, 2003 $ 1,051 $ 144 $ - $ 625 (a) $ 570
============= ============ =========== ============ =============
Year ended
December 31, 2002 $ 1,009 $ 228 $ - $ 186 (a) $ 1,051
============= ============ =========== ============ =============
Year ended
December 31,2001 $ 526 $ 776 $ - $ 293 (a) $ 1,009
============= ============ =========== ============ =============
VALUATION ALLOWANCE
OFFSETTING NET
DEFERRED TAX ASSETS
Year ended
December 31, 2003 $ 15,799 $ - $ - $ 592 $ 15,207
============= ============ =========== ============ =============
Year ended
December 31, 2002 $ 15,681 $ 118 $ - $ - $ 15,799
============= ============ =========== ============ =============
Year ended
December 31,2001 $ 6,621 $ 9,060 $ - $ - $ 15,681
============= ============ =========== ============ =============
(a) Uncollectible accounts written off, net of recoveries.
S-1
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
21 List of Subsidiaries of Infocrossing
23 Consent of Ernst & Young LLP
31 Certifications required by Rule 13a-14(a) to be filed.
32 Certifications required by Rule 13a-14(b) to be furnished
but not filed.