U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: April 30, 2000
Commission file number: 0-20824
INFOCROSSING, INC.
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(Exact name of issuer 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, New Jersey 07605
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(Address of principal executive offices)
(201) 840-4700
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(Issuer's telephone number)
COMPUTER OUTSOURCING SERVICES, INC.
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Former Name, if Changed Since Last Report
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
There were 5,007,429 shares of the registrant's Common Stock, $0.01 par value,
outstanding as of June 12, 2000.
Transitional Small Business Disclosure Form (check one): Yes [ ] No [X]
Page 1 of 20
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
INFOCROSSING, INC. & SUBSIDIARIES
(Formerly known as Computer Outsourcing Services, Inc.)
CONSOLIDATED BALANCE SHEETS
April 30, 2000 October 31, 1999
---------------- ----------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 3,117,217 $ 1,590,223
Marketable debt securities, at cost
which approximates market value - 1,673,441
Trade accounts receivable, net of
allowance for doubtful accounts of
$501,685 and $350,939 5,070,887 6,010,366
Prepaid and refundable income taxes 2,825,509 961,196
Deferred income taxes - current - 591,178
Prepaid license fees 1,498,534 915,935
Prepaid expenses and other
current assets 1,094,146 587,264
----------- -----------
13,606,293 12,329,603
----------- -----------
PROPERTY and EQUIPMENT, net 5,630,757 3,638,993
----------- -----------
OTHER ASSETS:
Deferred software, net 2,565,845 2,223,823
Intangibles, net 9,249,840 8,484,564
Due from related parties, net 166,237 132,314
Deferred income taxes - 235,986
Security deposits and other
non-current assets 501,171 508,800
----------- -----------
12,483,093 11,585,487
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TOTAL ASSETS $ 31,720,143 $ 27,554,083
=========== ===========
See Notes to Consolidated Interim Financial Statements (Unaudited).
Page 2 of 20
INFOCROSSING, INC. & SUBSIDIARIES
(Formerly known as Computer Outsourcing Services, Inc.)
CONSOLIDATED BALANCE SHEETS
April 30, 2000 October 31, 1999
---------------- ----------------
(Unaudited)
LIABILITIES and STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,517,812 $ 1,237,479
Current portion of long-term debt and
capitalized lease obligations 5,039,941 19,017
Current portion of accrued loss on
office sublease 258,565 256,429
Accrued expenses 1,955,851 1,514,514
Customer deposits and other current
liabilities 92,767 137,208
----------- -----------
8,864,936 3,164,647
----------- -----------
OTHER LIABILITIES:
Accrued loss on office sublease 1,507,906 1,564,592
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value;
1,000,000 shares authorized,
none issued - -
Common stock, $0.01 par value;
10,000,000 shares authorized;
shares issued 5,013,037 and
4,737,915, respectively 50,130 47,379
Additional paid-in capital 17,910,585 15,519,826
Retained earnings 3,505,643 7,264,952
----------- -----------
21,466,358 22,832,157
Less 5,608 and 1,000 shares of
common stock held in treasury
at April 30, 2000 and October
31, 1999, respectively, at cost (119,057) (7,313)
----------- -----------
21,347,301 22,824,844
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $ 31,720,143 $ 27,554,083
=========== ===========
See Notes to Consolidated Interim Financial Statements (Unaudited).
Page 3 of 20
INFOCROSSING, INC. & SUBSIDIAIRES
(Formerly known as Computer Outsourcing Services, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months ended Three Months ended
April 30, April 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
REVENUES $13,697,745 $17,303,281 $ 6,582,942 $ 9,022,203
----------- ----------- ----------- -----------
COSTS and EXPENSES:
Processing costs 12,488,534 11,791,699 6,635,147 6,097,132
Selling and promotion costs 1,733,636 1,102,617 866,102 633,714
General and administrative
expenses 4,234,449 2,328,157 2,407,265 1,035,033
Interest (income)/expense,
net (15,316) (178,815) 19,764 (57,458)
----------- ----------- ----------- -----------
18,441,303 15,043,658 9,928,278 7,708,421
----------- ----------- ----------- -----------
Income/(loss) from
operations before
provision/(benefit)
for income taxes (4,743,558) 2,259,623 (3,345,336) 1,313,782
Provision/(benefit)
for income taxes (984,249) 926,400 (438,942) 538,605
----------- ----------- ----------- -----------
NET INCOME/(LOSS) $(3,759,309) $ 1,333,223 $(2,906,394) $ 775,177
=========== =========== =========== ===========
Basic earnings/(loss)
per share $ (0.78) $ 0.29 $ (0.59) $ 0.17
=========== =========== =========== ===========
Weighted average number
of shares outstanding 4,833,216 4,544,525 4,910,201 4,661,680
=========== =========== =========== ===========
Diluted earnings/(loss)
per share $ (0.78) $ 0.27 $ (0.59) $ 0.16
=========== =========== =========== ===========
Weighted average number
of shares and
equivalents outstanding
(Note 4) 4,833,216 4,892,069 4,910,201 4,998,159
=========== =========== =========== ===========
See Notes to Consolidated Interim Financial Statements (Unaudited).
Page 4 of 20
INFOCROSSING, INC. & SUBSIDIARIES
(Formerly known as Computer Outsourcing Services, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Six Months ended April 30,
-------------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $(3,759,309) $ 1,333,223
Adjustments to reconcile net income to cash
used in operating activities:
Depreciation and amortization 1,096,194 953,358
Income from a non-competition,
confidentiality, and conduct of
business agreement - (240,000)
Reduction in deferred income taxes 827,164 212,199
Decrease/(increase) in:
Trade accounts receivable 939,479 (1,413,713)
Prepaid and refundable taxes (1,864,313) -
Prepaid license fees, expenses and
other current assets (1,089,481) (515,453)
Security deposits and other non-current
assets 2,751 -
Increase/(decrease) in:
Accounts payable 280,333 425,844
Income taxes payable - (337,382)
Accrued expenses 473,264 (838,065)
Payments on accrued loss on office
sublease (40,367) -
Customer deposits and other current
liabilities (44,441) 4,092
----------- -----------
Net cash used in
operating activities (3,178,726) (415,897)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,438,989) (352,735)
Disposal of property and equipment 2,750 -
Redemption of investments in marketable
debt securities 1,673,441 1,289,738
Payment for the purchase of certain assets
and the business of Enterprise Technology
Group, Inc. (the "Enterprise Purchase") - (4,000,000)
Payment of expenses related to the
Enterprise Purchase - (175,553)
Payments received for Assets Held for Sale - 82,696
Increase in deferred software costs (618,978) (391,181)
----------- -----------
Net cash used in investing activities $(1,381,776) $(3,547,035)
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Continued on next page.
See Notes to Consolidated Interim Financial Statements (Unaudited).
Page 5 of 20
INFOCROSSING, INC. & SUBSIDIARIES
(Formerly known as Computer Outsourcing Services, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited - Continued)
Six Months ended April 30,
-------------------------------
2000 1999
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt financing and a
line of credit $ 7,000,000 $ -
Repayment of debt and capital leases (2,011,004) (236,835)
(Advances to)/repayments by
related parties, net (33,923) (17,396)
Purchase of treasury stock - (7,313)
Proceeds from the exercises of stock
options and warrants 1,146,606 566,136
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Net cash provided by financing activities 6,101,679 304,592
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CASH FLOWS FROM DISCONTINUED
OPERATION:
Payment of taxes on gain and other
expenses related to sale of the
Payroll Division - (2,397,300)
Payments on portion of accrued loss
on office sublease relating to
discontinued operation (14,183) -
----------- -----------
Net cash used in discontinued operation (14,183) (2,397,300)
----------- -----------
Net increase/(decrease) in cash
and equivalents 1,526,994 (6,055,640)
Cash and equivalents at the
beginning of the period 1,590,223 9,403,006
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Cash and equivalents at the end
of the period $ 3,117,217 $ 3,347,366
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense $ 38,348 $ 22,405
=========== ===========
Income taxes $ 52,900 $ 3,254,330
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING ACTIVITIES:
Stock issued for a portion of the
Enterprise Purchase $ 1,135,160 $ 2,677,500
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES:
Treasury shares received in payment
of a stock option exercise $ 111,744 -
=========== ===========
See Notes to Consolidated Interim Financial Statements (Unaudited).
Page 6 of 20
INFOCROSSING, INC. & SUBSIDIARIES
(Formerly known as Computer Outsourcing Services, Inc.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Par Paid in Retained Treasury
Shares Value Capital Earnings Stock Total
--------- ------- ----------- ---------- --------- -----------
Balance,
October
31, 1999 4,737,915 $47,379 $15,519,826 $7,264,952 $ (7,313) $22,824,844
Exercises
of stock
options 163,650 1,636 881,714 883,350
4,608 shares
surrendered
for stock
option
exercise (111,744) (111,744)
Contingent
payment
relating to
purchase of
assets
(Note 2) 36,472 365 1,134,795 1,135,160
Exercise of
warrants 75,000 750 374,250 375,000
Net loss (3,759,309) (3,759,309)
--------- ------- ----------- ---------- --------- -----------
Balance,
April
30, 2000 5,013,037 $50,130 $17,910,585 $3,505,643 $(119,057) $21,347,301
========= ======= =========== ========== ========= ===========
See Notes to Consolidated Interim Financial Statements (Unaudited).
Page 7 of 20
INFOCROSSING, INC. & SUBSIDIAIRES
(Formerly known as Computer Outsourcing Services, Inc.)
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated balance sheet as of April 30, 2000 and the consolidated
statements of operations and cash flows for the six and three-month periods
ended April 30, 2000 and 1999 have not been audited. In the opinion of
management, all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position, results of operations, and
cash flows for the periods indicated have been made. The results of operations
for the periods ended April 2000 and 1999 are not necessarily indicative of the
operating results for the full fiscal years.
Certain reclassifications have been made to the prior periods to conform to the
current presentation.
Certain disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. These consolidated interim financial statements should be read in
conjunction with the Company's Annual Report on Form 10-KSB for the fiscal year
ended October 31, 1999.
The consolidated financial statements include the accounts of Infocrossing, Inc.
(formerly Computer Outsourcing Services, Inc.) and its wholly-owned subsidiaries
(collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated.
2. CONTINGENT PAYMENT
On December 18, 1998, a subsidiary of the Company purchased certain assets and
the business of Enterprise Technology Group, Incorporated ("Enterprise") for
$4,000,000 in cash and 300,000 shares of the Company's common stock. Certain
additional consideration in the form of cash and common stock may be payable, at
various times, based upon the future performance of the acquired business (and
certain other events) over the period ending December 31, 2001. Effective as of
December 31, 1999, $1,135,160 in additional consideration became payable in the
form of shares of the Company's common stock. This amount was added to
intangible assets (goodwill), and is being amortized over the remaining life
assigned to this asset (168 months at December 31, 1999). On February 17, 2000,
36,472 shares of the Company's common stock were issued in payment of the
additional consideration due.
3. DEBT
On October 29, 1999, the Company entered into an agreement with a bank for a
line of credit of up to $5,000,000. Amounts drawn under this line, payable upon
demand, accrue interest (at the Company's option) at either the Prime Rate or
1.25% over the 30, 60, or 90 day LIBOR rate. The interest rate is then fixed
during the period corresponding to the particular LIBOR rate selected. The line
of credit does not have a fixed term, and it is secured by a first lien on the
Company's accounts receivable and certain general intangibles.
Page 8 of 20
On December 27, 1999, the Company borrowed $2,000,000 under the 90-day LIBOR
rate option. On March 28, 2000, the Company renewed this note utilizing the
90-day LIBOR rate option. The interest rate at April 30, 2000 on the current
LIBOR contract is 7.505% on an annualized basis. In light of a $60 million
private placement (see Note 6), the Company plans to repay the advance when it
becomes due on June 27, 2000 and cancel the line.
On February 23, 2000, a subsidiary of the Company closed a transaction with
three investors (the "Lenders") providing for a series of short-term convertible
notes coupled with certain rights to receive equity interests in either the
subsidiary or the parent. The Lenders advanced $3 million at the closing. The
proceeds would be used to develop and operate Internet Data Centers. Each note,
regardless of when funded, matures on February 25, 2001 and bears interest at 6%
for the first six months. Thereafter, interest increases to 13% in the seventh
month and rises 1% for each subsequent month that the applicable note remains
outstanding. At the option of the holder, a note outstanding for more than 180
days may be exchanged for the Company's common stock. An exchanging note holder
would receive shares valued at 90% of the average closing price for the ten
trading days prior to the exchange. Any or all of the outstanding notes may be
prepaid by the Company without penalty.
On May 10, 2000, in connection with a sale of securities discussed in Note 6,
the Company repaid the outstanding $3 million plus accrued interest. The Company
also issued warrants to the Lenders to purchase 30,000 shares of the Company's
common stock at $19.25 per share as consideration for the termination of all
other potential equity interests in either the parent or the subsidiary held by
the Lenders.
4. BASIC AND DILUTED EARNINGS PER COMMON SHARE
Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS
128") requires the presentation of basic and diluted earnings per share ("EPS").
Basic EPS is computed by dividing income available to common stock-holders by
the weighted average number of common shares outstanding during each period.
Diluted EPS is computed using the weighted average number of common shares plus
the dilutive effect of common stock equivalents. Stock options and warrants
which are anti-dilutive are excluded from the computation of weighted average
shares outstanding. Certain options which are currently anti-dilutive may be
dilutive in the future. In determining the diluted loss per common share for the
six and three months ended April 30, 2000, common stock equivalents were ignored
since the effect of including such equivalents would have been anti-dilutive.
Page 9 of 20
5. STOCK OPTIONS
The Company accounts for options granted under the 1992 Stock Option and Stock
Appreciation Rights Plan, as amended, (the "Plan") in accordance with Accounting
Principles Board Opinion No. 25 and related Interpretations in accounting for
its stock options. Accordingly, no compensation cost has been recognized for
stock option awards. Had the compensation cost been determined in accordance
with Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," the Company's pro forma income/(loss) and pro forma
income/(loss) per common share for the six-month periods ended April 30, 2000
and 1999 would be as follows:
2000 1999
------------------------ -----------------------
Historical Pro Forma Historical Pro Forma
----------- ----------- ---------- ----------
Net income/(loss) $(3,759,000) $(4,295,000) $1,333,000 $1,155,000
=========== =========== ========== ==========
Net income/(loss)
per diluted common share $ (0.78) $ (0.89) $ 0.27 $ 0.24
=========== =========== ========== ==========
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. Non-qualified options issued under the Plan have all been
granted at fair market value, although the Plan permits issuance of
non-qualified options at less than fair market value. The weighted average fair
value of the stock options granted during the six-month periods ended April 30,
2000 and 1999 was $1,368,700 and $507,569, 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 2000: a risk-free interest rate of 5.50%; expected lives of between
six-months and three and one-half years; and expected volatility of 49.5%. The
following weighted average assumptions were used for grants in 1999: a risk-free
interest rate of between 4.65% and 5.44%; expected lives of between six months
and six years; and expected volatility of 48.5%.
6. SUBSEQUENT EVENTS
On June 5, 2000, the Company changed its name to Infocrossing, Inc. This name
change had been approved by the Company's Stockholders at the Annual Meeting of
Stockholders held on May 8, 2000. In connection with this change, the Company's
trading symbol on the Nasdaq National Market System changed from COSI to IFOX.
On April 7, 2000, the Company entered into a Securities Purchase Agreement
providing for a group of investors (the "Purchasers") to purchase $60 million of
the Company's securities in a private placement. The closing was subject to the
satisfaction of certain conditions including approval by the Company's
stockholders. The transaction was approved by the Company's Stockholders at the
Annual Meeting of Stockholders held on May 8, 2000.
Page 10 of 20
Since all closing conditions were satisfied, the private placement of $60
million of securities closed on May 10, 2000. The Company issued 157,377 shares
of Series A 8% Cumulative Convertible Participating Preferred Stock (the "Series
A Preferred Stock") and warrants to purchase 2,531,926 shares of the Company's
common stock at an exercise price of $0.01 per share.
The Company primarily will use the proceeds from this transaction to pursue its
business plan of developing and operating Internet Data Centers. The Company
also repaid debt from these proceeds as described in Note 3.
The rights and preferences of the Series A Preferred Stock are as follows:
o Each share of Series A Preferred Stock maintains a liquidation
preference of $381.25 per share, or an aggregate of $60 million;
o Each share of Series A Preferred Stock bears dividends at the rate
of $7.625 per quarter, which will accumulate and compound
quarterly at a rate of 8% per annum for the first three years and
thereafter may be accumulated and compounded or paid in cash, at
the option of the Company;
o Each share of Series A Preferred Stock is convertible initially
into ten shares of common stock of the Company at the option of
the Purchasers, subject to adjustment provided in the Certificate
of Organization;
o The Company has the option to redeem the Series A Preferred Stock
at any time following five years from the closing date at the
greater of (x) $381.25 per share plus all accrued and unpaid
dividends or (y) the market value per share at the date of
redemption of the common stock into which shares of the Series A
Preferred Stock are convertible;
o The holders have a one-year right to require the Company to redeem
shares of Series A Preferred Stock after seven years from the
closing date for $381.25 per share, plus all accrued and unpaid
dividends thereon, in certain circumstances;
o Each share of Series A Preferred Stock is entitled to vote on all
matters on which holders of common stock are entitled to vote,
with each share of Series A Preferred Stock having a number of
votes equal to the number of shares of common stock into which the
Series A Preferred Stock is convertible;
o The approval of the holders of two-third of the shares of Series A
Preferred Stock is required for the Company to: (i) amend its
charter or by-laws so as to adversely effect the rights or
preferences of the Series A Preferred Stock; (ii) merge or
transfer all or substantially of its assets, reorganize, or take
any action that is expected to result in a change of control of
the Company or a planned liquidation; (iii) impose material
restrictions on the Company's ability to honor the rights of the
holders of the Series A Preferred Stock; (iv) authorize or sell
any class or series of equity securities (other than stock options
pursuant to existing plans or upon the conversion of the Series A
Preferred Stock or the exercise of the warrants which ranks senior
to, or pari passu with, the Series A Preferred Stock);
---- -----
(v) subdivide or modify any outstanding shares of the Company if
the rights of the holders of the Series A Preferred Stock are
impaired; or (vi) pay any dividends on any class of stock (other
than the Series A Preferred Stock) or redeem or repurchase any
equity securities of the Company or its subsidiaries; and
Page 11 of 20
o The conversion price of the Series A Preferred Stock shall be
adjusted from time to time if the Company: (i) pays a stock
dividend; (ii) issues or sells any shares of common stock or
convertible securities at a price per share less than $14.61, as
adjusted; (iii) subdivides or reclassifies its common stock; (iv)
distributes assets to holders of common stock; or (v) makes a
tender offer for all or any portion of its common stock.
Warrant Agreement
The warrants are subject to adjustment provisions that are similar to those of
the Series A Preferred Stock. The warrants must be exercised before May 11,
2007.
Registration Rights Agreement
The shares of Series A Preferred Stock, the warrants, and the shares of common
stock issuable upon conversion of the Series A Preferred Stock or exercise of
the Warrants are not registered under the Securities Act. The Company has
entered into a Registration Rights Agreement providing for certain demand
registration and unlimited piggy-back registrations, subject to certain
limitations.
Stockholders Agreement
The investors, the Company and certain specified officers of the Company (the
"Management Stockholders") entered into a Stockholders Agreement. Among other
things, the Stockholders Agreement provides: (i) limitations on transfers of the
Company's securities; (ii) the agreement of the parties to vote all securities
to elect certain designees to the Company's Board of Directors; and (iii) that
certain acts may not be taken without the prior written approval of the
directors nominated by the investors.
Those acts include (i) hiring or terminating any senior manager of the Company
or any subsidiary; (ii) approval of the Company's annual business plan,
operating budget and capital budget; (iii) any capital expenditure not reflected
in the Company's annual capital budget which would cause the capital budget to
be exceeded by $250,000; (iv) consolidation or merger of the Company, sale of
all or substantially all of its assets, recapitalization or liquidation of the
Company or other acts that could result in a change of control of the Company;
(v) authorizing or issuing additional equity securities of the Company, (vi) an
acquisition or divestiture in excess of $5,000,000; (vii) incurring indebtedness
in excess of $2,500,000; (viii) entering into a transaction with an affiliate;
or (ix) increasing the securities available under an employee benefit plan.
Page 12 of 20
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS, SIX-MONTH PERIODS ENDED APRIL 30, 2000 and 1999
On December 18, 1998, the Company, through a wholly-owned subsidiary, acquired
certain assets and the business of Enterprise Technology Group, Incorporated
(the "Enterprise Purchase"). The Company's subsidiary, ETG, Inc. ("ETG"),
provides information technology consulting services with a focus on
infra-structure management solutions.
With the rapid growth of the Internet, the Company formed a subsidiary during
the fiscal year ended October 31, 1999 to meet the exploding requirements of
enterprises to outsource their Internet activities into facilities that provide
the highest degree of availability and security. The Company retooled a portion
of its state-of-the-art data center into an Internet Data Center ("IDC") from
which the Company will offer colocation as well as systems and network
management services (collectively, the "IDC Services") to companies with
mission-critical Internet requirements. On June 6, 2000, the Company announced
the signing of a lease on a 52,000 square foot building located in metropolitan
Atlanta. The Company will redevelop this building into its second IDC. Subject
to the availability of financing, the Company plans to develop 20 IDCs over the
next two years. As described in Liquidity and Capital Resources, the Company
completed the sale of $60 million of securities in a private placement on May
10, 2000. The Company will require additional financing to effect its full plan
of developing 20 IDCs over the next two years.
During the six-month period ended April 30, 2000, revenues decreased $3,605,000
(21%) to $13,698,000 from $17,303,000 for the six-month period ended April 30,
1999. Since Year 2000 compliance was of paramount concern, many companies were
reluctant to make any changes with respect to their information technology
functions. There was a pronounced decline in requests for proposals ("RFPs") for
major outsourcing contracts. With Year 2000 concerns alleviated, there appears
to be renewed interest in outsourcing. The potential effect of this renewed
interest may not be realized, if at all, until later in the current fiscal year,
due to the lengthy sales cycle of a major outsourcing contract. Revenues also
were impacted negatively as a result of the redeployment of consultants from
providing services for fees to developing a comprehensive suite of IDC Services
to attract clients requiring mission-critical Internet solutions. The decline in
revenue also reflects the loss of a major publishing client, the absence of
Year-2000 related revenues, and income received in fiscal 1999 from a covenant
not to compete. As previously reported, the publishing client had given notice
in 1997 of its intention to exercise an option to cancel its contract after June
30, 1999 by paying a cash penalty. The decline also reflects the Company's
decision to discontinue certain low margin activities that are inconsistent with
its current business strategy.
Data processing costs increased $697,000 to $12,489,000 (91% of revenues) during
the period ended April 30, 2000 compared with $11,792,000 (68% of revenues) in
the period ended April 30, 1999. The increase primarily consists of operating
costs of the new IDC and the development of IDC Services to be offered
throughout the planned network of IDCs.
Page 13 of 20
Selling and promotion costs increased $631,000 to $1,734,000 (13% of revenues)
during the period ended April 30, 2000 compared with $1,103,000 (6% of revenues)
in the period ended April 30, 1999. The increase is attributable to a larger
staff needed to market the Company's IDC Services.
General and administrative expenses increased $1,906,000 to $4,234,000 (31% of
revenues) for the period ended April 30, 2000 from $2,328,000 (13% of revenues)
for the six months ended April 30, 1999, reflecting higher costs associated with
the Company's IDC Services activities. Amortization of intangibles acquired in
connection with the Enterprise Purchase was $256,000 in the current period
versus $152,000 for the six months ended April 30, 1999.
The Company recorded net interest income of $15,000 in the current period,
compared with net interest income of $179,000 in the prior period. The decrease
of $164,000 reflects the reduction of interest income arising from a lower
average balance of interest earning assets during the period ended April 30,
2000 as well as interest expense on a considerably larger, average outstanding
debt balance than in the period ended April 30, 1999.
The Company recorded a tax benefit of $984,000 for the six months ended April
30, 2000 versus a tax provision of $926,000 for the six months ended April 30,
1999. The potential tax benefit for the period ended April 30, 2000 was reduced
by a valuation allowance against net tax benefits recorded in prior periods. The
valuation allowance was necessitated by the expectation of continued losses
while the Company develops IDCs and related services.
The Company recorded a net loss of $3,759,000 in the period ended April 30, 2000
(($0.78) per share for both basic and diluted shares) versus net income of
$1,333,000 ($0.29 and $0.27 per share for basic and diluted shares,
respectively) for the period ended April 30, 1999. Common stock equivalents were
ignored in determining the net loss per share for fiscal 2000, since the
inclusion of such equivalents would be anti-dilutive.
RESULTS OF OPERATIONS, THREE-MONTH PERIODS ENDED APRIL 30, 2000 and 1999
Revenues declined and expenses increased during the three months ended April 30,
2000 versus the three months ended April 30, 1999 for substantially the same
reasons as noted above for the changes between the six-month periods ending on
such dates.
During the quarter ended April 30, 2000, revenues decreased $2,439,000 (27%) to
$6,583,000 from $9,022,000 for the quarter ended April 30, 1999. Data processing
costs increased $538,000 (9%) to $6,635,000 during the quarter ended April 30,
2000 compared with $6,097,000 in the quarter ended April 30, 1999. Selling and
promotion costs increased $232,000 (37%) to $866,000 during the quarter ended
April 30, 2000 compared with $634,000 in the quarter ended April 30, 1999.
General and administrative expenses increased $1,372,000 to $2,407,000 (37% of
revenues) for the quarter ended April 30, 2000 from $1,035,000 (11% of revenues)
for the three months ended April 30, 1999. Amortization of intangibles acquired
in connection with the Enterprise Purchase was $135,000 in the current quarter
versus $114,000 for the three months ended April 30, 1999.
Page 14 of 20
The Company recorded net interest expense of $20,000 in the current quarter,
compared with net interest income of $57,000 in the prior period. The decrease
of $77,000 reflects the reduction of interest income arising from a lower
average balance of interest earning assets during the quarter ended April 30,
2000 as well as interest expense on a considerably larger, average outstanding
debt balance than in the quarter ended April 30, 1999.
The Company recorded a tax benefit of $439,000 for the quarter ended April 30,
2000 versus a tax provision of $539,000 for the quarter ended April 30, 1999.
The potential tax benefit for the period ended April 30, 2000 was reduced by a
valuation allowance against net tax benefits recorded in prior periods. The
valuation allowance was necessitated by the expectation of continued losses
while the Company develops IDCs and related services.
The Company recorded a net loss of $2,906,000 for the quarter ended April 30,
2000 (($0.59) per share for both basic and diluted shares) versus net income of
$775,000 ($0.17 and $0.16 per share for basic and diluted shares, respectively)
for the quarter ended April 30, 1999. Common stock equivalents were ignored in
determining the net loss per share for the current quarter, since the inclusion
of such equivalents would be anti-dilutive.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended April 30, 2000, the Company used net cash of
approximately $3,179,000, primarily as a result of a pretax loss of $4,743,000,
offset by $1,096,000 in depreciation and amortization.
The Company invested $2,439,000 for the purchase of equipment, construction of
an IDC, and other fixed assets, and $619,000 for product development and
enhancement. The Company also reduced short-term investments by $1,673,000.
The principal financing activities were (1) the Company's borrowing of
$3,000,000 in convertible notes and $2,000,000 from its line of credit with a
bank and (2) receiving proceeds of $1,147,000 from exercises of a warrant and
employee stock options.
On October 29, 1999, the Company entered into an agreement with a bank for a
line of credit of up to $5,000,000. Amounts drawn under this line, payable upon
demand, accrue interest (at the Company's option) at either the Prime Rate or
1.25% over the 30, 60, or 90 day LIBOR rate. The interest rate is then fixed
during the period corresponding to the particular LIBOR rate selected. The line
of credit does not have a fixed term, and it is secured by a first lien on the
Company's accounts receivable and certain general intangibles. On December 27,
1999, the Company borrowed $2,000,000 under the 90-day LIBOR rate option. On
March 28, 2000, the Company renewed this note utilizing the 90-day LIBOR rate
option. The interest rate on the current LIBOR contract is 7.505% on an
annualized basis. In light of a $60 million private placement described below,
the Company plans to repay the advance when it becomes due on June 27, 2000 and
cancel the line.
Page 15 of 20
On February 23, 2000, a subsidiary of the Company closed a transaction with
three investors (the "Lenders") providing for a series of short-term convertible
notes coupled with certain rights to receive equity interests in either the
subsidiary or the parent. The Lenders advanced $3 million at the closing. The
proceeds would be used to develop and operate Internet Data Centers. Each note,
regardless of when funded, matures on February 25, 2001 and bears interest at 6%
for the first six months. Thereafter, interest increases to 13% in the seventh
month and rises 1% for each subsequent month that the applicable note remains
outstanding. At the option of the holder, a note outstanding for more than 180
days may be exchanged for the Company's common stock. An exchanging note holder
would receive shares valued at 90% of the average closing price for the ten
trading days prior to the exchange. Any or all of the outstanding notes may be
prepaid by the Company without penalty.
On May 10, 2000, in connection with the sale of securities discussed below, the
Company repaid the outstanding $3 million plus accrued interest. The Company
also issued warrants to the Lenders to purchase 30,000 shares of the Company's
common stock at $19.25 per share as consideration for the termination of all
other potential equity interests in either the parent or the subsidiary held by
the Lenders.
As of April 30, 2000, the Company had cash and equivalents aggregating
approximately $3,117,000.
A $60 million private placement of the Company's securities closed on May 10,
2000. The Company issued 157,377 shares of Series A 8% Cumulative Convertible
Participating Preferred Stock (the "Series A Preferred Stock") and warrants to
purchase 2,531,926 shares of the Company's common stock at an exercise price of
$0.01 per share. Each share of the Series A Preferred Stock bears dividends at
the rate of $7.625 per quarter, which will accumulate and compound quarterly at
8% per annum for the first three years and thereafter may be accumulated and
compounded or paid in cash, at the option of the Company.
The Company believes that the combination of its cash and other liquid assets
will provide adequate resources to fund its ongoing operating requirements. The
Company has announced plans to develop twenty IDCs in the United States and
abroad over the next two years. The Company will require additional financing to
effect this plan.
OTHER MATTERS
Certain of the Company's computer systems were reprogrammed to correct what is
known as the Year 2000 Problem ("Y2K"). This is a condition whereby a program
does not properly interpret a two-digit year, reading "00" as 1900 rather than
2000. As a result, nearly all computer systems, except for the most recent
software and hardware versions, may have produced computing errors or failed to
function after December 31, 1999.
During December 1999, the Company completed its Y2K remediation compliance
procedures. Following December 31, 1999, the Company did not encounter any
significant problems due to Y2K. The problems that were encountered were few and
minor in nature, and were resolved quickly with minimal or no impact on the
Company.
Page 16 of 20
Internal and external costs specifically associated with Y2K modifications for
internal purposes were expensed when incurred. The cost for this activity was
approximately $300,000.
NEW FINANCIAL ACCOUNTING STANDARDS
Derivatives - In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), the effective date of which was deferred for all
fiscal quarters of fiscal years beginning after June 15, 2000 by SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
Effective Date of SFAS No. 133. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. This statement is not expected
to have a significant impact on the Company's financial position or results of
operations.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. As such, final results
could differ from estimates or expectations due to risks and uncertainties
including, but not limited to: incomplete or preliminary information; changes in
government regulations and policies; continued acceptance of the Company's
products and services in the marketplace; competitive factors; new products;
technological changes; the Company's dependence on third party suppliers;
intellectual property rights; and other risks. For any of these factors, the
Company claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995, as amended.
Page 17 of 20
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1A Restated Certificate of Incorporation, incorporated by
reference to Exhibit 3.1 to the Company's Form 10-KSB for
the period ended October 31, 1999.
3.1B Certificate of Amendment to the Company's Certificate of
Incorporation, filed May 8, 2000, to increase the authorized
shares and to remove Article 11.
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.
3.2 Amended and Restated By-Laws, incorporated by reference to Exhibit
3.2 to the Company's Form 10-KSB for the period ended October 31,
1999.
4.1 Certificate of Designation of the Powers, Preferences and other
Special Rights of Series A Cumulative Convertible Participating
Preferred Stock, incorporated by reference to the Company's Proxy
Statement for the Annual Meeting held on May 8, 2000.
4.2 Registration Rights Agreement by and among Computer Outsourcing
Services, Inc.; DB Capital Investors, LP; the `Initial
Sandler Holders' as defined in the agreement ("Sandler
Holders"); and Zach Lonstein, incorporated by reference to
the Company's Proxy Statement for the Annual Meeting held
on May 8, 2000.
4.3 Warrant Agreement between Computer Outsourcing Services, Inc. and
the Warrantholders Party thereto, incorporated by reference
to the Company's Proxy Statement for the Annual Meeting
held on May 8, 2000.
4.4 Stockholders Agreement by and among Computer Outsourcing Services,
Inc.; DB Capital Investors, LP; the Sandler Holders; and the
Management and Non-Management Stockholders listed therein,
incorporated by reference to the Company's Proxy Statement for the
Annual Meeting held on May 8, 2000.
10.1 Loan and Security Agreement by and among Infocrossing, Inc.;
Computer Outsourcing Services, Inc.; Kennedy-Wilson, Inc.;
Cahill, Warnock Strategic Partners Fund, LP; and Strategic
Associates, LP, incorporated by reference to Exhibit C-1
included in and 8-K filed on April 24, 2000.
Page 18 of 20
(a) Exhibits (continued):
10.2 Securities Purchase Agreement dated as of April 7, 2000 by and
between Computer Outsourcing Services, Inc.; DB Capital
Investors, LP; and certain other purchasers as named
therein, incorporated by reference to the Company's Proxy
Statement for the Annual Meeting held on May 8, 2000.
27 Financial Data Schedule, filed electronically only.
(b) Reports on Form 8-K:
A report on Form 8-k was filed on April 24, 2000 to report the signing
of a Securities Purchase Agreement dated as of April 7, 2000 by and
between Computer Outsourcing Services, Inc.; DB Capital Investors, LP;
and certain other purchasers as named therein.
Page 19 of 20
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INFOCROSSING, INC.
/s/
June 14, 2000 ------------------------------------
Zach Lonstein
Chief Executive Officer
/s/
June 14, 2000 -------------------------------------
Nicholas J. Letizia
Chief Financial Officer
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