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: JUNE 30, 2001
Commission file number: 0-20824
INFOCROSSING, INC.
-------------------------------------------------
(Exact name of issuer as specified in its charter)
DELAWARE 13-3252333
-------------------------------- ----------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2 CHRISTIE HEIGHTS STREET LEONIA, NEW JERSEY 07605
-----------------------------------------------------
(Address of principal executive offices)
(201) 840-4700
--------------------------
(Issuer's telephone number)
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 5,870,282 shares of the registrant's Common Stock, $0.01 par value,
outstanding as of August 10, 2001.
Transitional Small Business Disclosure Form (check one): Yes [ ] No [X]
Page 1 of 17
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INFOCROSSING, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 DECEMBER 31, 2000
---------------- -----------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and equivalents $27,139,100 $36,763,831
Marketable debt securities, at cost
which approximates market value - 3,413,069
Trade accounts receivable, net of
allowances for doubtful accounts
of $534,169 and $525,957 2,836,768 3,355,914
Prepaid and refundable income taxes 2,793,473 3,648,228
Prepaid license fees 380,138 766,135
Prepaid expenses and other
current assets 1,051,251 1,303,724
----------- -----------
34,200,730 49,250,901
----------- -----------
PROPERTY and EQUIPMENT, net 15,702,206 13,411,113
----------- -----------
OTHER ASSETS:
Deferred software, net 2,557,037 2,665,714
Goodwill and intangibles, net 8,500,079 8,889,271
Due from related parties 2,102,458 1,665,688
Security deposits and other
non-current assets 2,558,177 2,566,728
----------- -----------
15,717,751 15,787,401
----------- -----------
TOTAL ASSETS $ 65,620,687 $ 78,449,415
=========== ===========
See Notes to Consolidated Interim Financial Statements (Unaudited).
Page 2 of 17
INFOCROSSING, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 DECEMBER 31, 2000
---------------- -----------------
(UNAUDITED)
LIABILITIES and STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 934,784 $ 1,369,402
Current portion of long-term debt and
capitalized lease obligations 919,476 846,083
Current portion of accrued loss on
office subleases 447,712 510,112
Accrued expenses 4,603,013 4,205,520
Customer deposits and other current
liabilities 609,693 125,488
----------- -----------
7,514,678 7,056,605
----------- -----------
LONG-TERM LIABILITIES:
Long-term debt and capitalized lease
obligations, net of current portion 2,357,781 2,777,409
Accrued loss on office subleases 1,324,629 1,537,955
----------- -----------
3,682,410 4,315,364
----------- -----------
COMMITMENTS AND CONTINGENCIES - -
REDEEMABLE 8% SERIES A CUMULATIVE CONVERTIBLE PARTICIPATING PREFERRED STOCK;
$0.01 par value; 300,000 shares authorized; 157,377 issued and outstanding
(liquidation preference
$65,698,533 at June 30, 2001) 39,606,512 35,436,608
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value;
2,700,000 shares authorized,
none issued - -
Common stock, $0.01 par value;
50,000,000 shares authorized;
5,913,311 and 5,888,311 shares
issued, respectively 59,133 58,882
Additional paid-in capital 59,053,561 58,936,812
Unamortized restricted stock award (8,385,417) (9,822,917)
Accumulated deficit (35,539,210) (17,344,526)
----------- -----------
15,188,067 31,828,251
Less 43,029 and 12,508 shares,
respectively, of common stock held
in treasury, at cost (370,980) (187,413)
----------- -----------
14,817,087 31,640,838
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 65,620,687 $ 78,449,415
=========== ===========
See Notes to Consolidated Interim Financial Statements (Unaudited).
Page 3 of 17
INFOCROSSING, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
REVENUES $ 6,609,766 $ 6,012,909 $ 12,123,517 $ 12,540,624
------------ ------------ ------------ ------------
COSTS and EXPENSES:
Operating costs 8,217,793 6,671,314 16,582,111 13,142,102
Selling and promotion
costs 1,050,524 763,746 2,276,369 1,515,124
General and
administrative
expenses 3,380,359 3,525,459 7,368,893 5,819,735
Interest income, net (298,042) (423,322) (776,076) (442,792)
------------ ------------ ------------ ------------
12,350,634 10,537,197 25,451,297 20,034,169
------------ ------------ ------------ ------------
Loss from operations
before INCOME TAX
EXPENSE/(benefit) (5,740,868) (4,524,288) (13,327,780) (7,493,545)
Income tax
expense/(benefit) 502,000 (277,865) 697,000 (764,810)
------------ ------------ ------------ ------------
Net loss (6,242,868) (4,246,423) (14,024,780) (6,728,735)
Accretion and
dividends on
redeemable
preferred stock (2,107,479) (1,192,583) (4,169,904) (1,192,583)
------------ ------------ ------------ ------------
NET LOSS TO COMMON
STOCKHOLDERS $ (8,350,347) $ (5,439,006) $(18,194,684) $ (7,921,318)
============ ============ ============ ============
Basic and diluted
loss to common
stockholders per
common share $ (1.42) $ (1.06) $ (3.10) $ (1.59)
============ ============ ============ ============
Weighted average
number of common
shares outstanding 5,870,282 5,152,542 5,872,079 4,994,745
============ ============ ============ ============
See Notes to Consolidated Interim Financial Statements (Unaudited).
Page 4 of 17
INFOCROSSING, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(14,024,780) $ (6,728,735)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 1,824,342 1,135,965
Amortization of restricted stock award 1,437,500 239,583
Warrants issued in connection with
a termination of credit arrangement - 120,000
Decrease/(increase) in:
Trade accounts receivable 519,146 655,006
Prepaid and refundable taxes 854,755 (817,709)
Prepaid license fees, prepaid
expenses and other current assets 638,470 153,329
Increase/(decrease) in:
Accounts payable (434,618) 85,842
Accrued expenses 397,491 (508,002)
Payments on accrued loss on
office subleases (241,755) (73,380)
Customer deposits and other
current liabilities 484,205 (50,741)
------------ ------------
Net cash used in
operating activities (8,545,244) (5,788,842)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,338,618) (1,507,264)
Redemption at maturity of investments
in marketable fixed income securities 3,413,069 940,006
Decrease in other assets 3,673 (622,084)
Purchase of treasury stock (66,567) -
Increase in deferred software costs (216,568) (640,246)
------------ ------------
Net cash used in
investing activities $ (205,011) $ (1,829,588)
------------ ------------
Continued on next page.
See Notes to Consolidated Interim Financial Statements (Unaudited).
Page 5 of 17
INFOCROSSING, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED - CONTINUED)
SIX MONTHS ENDED JUNE 30,
-------------------------------
2001 2000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt and capital leases $ (415,394) $ (5,013,554)
Proceeds from debt 11,659 3,000,000
Proceeds from a private equity placement - 58,430,596
Advances to related parties, net (436,770) (34,983)
Proceeds from the sale of common stock - 999,996
Proceeds from the exercises of stock
options and warrants - 132,897
------------ ------------
Net cash (used in)/provided by
financing activities (840,505) 57,514,952
------------ ------------
CASH FLOWS FROM DISCONTINUED
OPERATION:
Payments on portion of accrued loss
on office sublease relating to
discontinued operation (33,971) (28,536)
------------ ------------
Net change in cash and equivalents (9,624,731) 49,867,986
Cash and equivalents at the
beginning of the period 36,763,831 4,391,048
------------ ------------
Cash and equivalents at the end
of the period $ 27,139,100 $ 54,259,034
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense $ 200,955 $ 112,222
============ ============
Income taxes $ 32,655 $ 45,900
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES:
Treasury shares received in payment
of a stock option exercise $ 117,000 111,744
============ ============
Equipment purchased subject to a
capital lease $ 57,500 -
============ ============
See Notes to Consolidated Interim Financial Statements (Unaudited).
Page 6 of 17
INFOCROSSING, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
UNAMORTIZED
COMMON PAR PAID IN RESTRICTED ACCUMULATED TREASURY
SHARES VALUE CAPITAL STOCK AWARD DEFICIT STOCK TOTAL
--------- ------- ----------- ------------ ------------ --------- -----------
Balances,
December
31, 2000 5,888,311 $58,882 $58,936,812 $ (9,822,917) $(17,344,526) $(187,413) $31,640,838
Exercise
of stock
option 25,000 251 116,749 - - - 117,000
Surrendered
20,021 shares
for exercise
of stock
option - - - - - (117,000) (117,000)
Amortization
of restricted
stock award - - - 1,437,500 - - 1,437,500
Accretion on
redeemable
preferred stock - - - - (1,618,750) - (1,618,750)
Accrued
dividends on
redeemable
preferred stock - - - - (2,551,154) - (2,551,154)
Purchase of
treasury
shares - - - - - (66,567) (66,567)
Net loss - - - - (14,024,780) - (14,024,780)
--------- ------- ----------- ------------ ------------ --------- -----------
Balances,
June 30,
2001 5,913,311 $59,133 $59,053,561 $ (8,385,417) $(35,539,210) $(370,980) $14,817,087
========= ======= =========== ============ ============ ========= ===========
See Notes to Consolidated Interim Financial Statements (Unaudited).
Page 7 of 17
INFOCROSSING, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM
FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated balance sheet as of June 30, 2001, the consolidated statements
of operations for the three and six months ended June 30, 2001 and 2000, and the
consolidated statements of cash flows and stockholders' equity for the six
months ended June 30, 2001 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 June 30, 2001 and 2000 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. After the filing of Form 10-K for the fiscal year ended
October 31, 2000, the Company changed its year end from October 31 to December
31. The Company effected this change by filing a new Form 10-K for the two-month
period ended December 31, 2000.
Certain disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted. These consolidated interim financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K for
the two-month period ended December 31, 2000.
The consolidated financial statements include the accounts of Infocrossing, Inc.
and its wholly-owned subsidiaries (collectively, the "Company"). All significant
intercompany balances and transactions have been eliminated.
2. 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
three and six month periods ended June 30, 2001 and 2000, common stock
equivalents are ignored since the effect of including such equivalents would
have been anti-dilutive. Accordingly, the basic loss and the diluted loss per
common share are equal.
Page 8 of 17
3. PRIVATE PLACEMENT OF SECURITIES
A private placement of $60 million of securities closed on May 10, 2000, having
been approved by the stockholders of the Company on May 8, 2000. The Company
issued 157,377 shares of redeemable 8% Series A Cumulative Convertible
Participating Preferred Stock (the "Series A Preferred Stock") and warrants to
purchase 2,531,926 shares of the Company's common stock at an exercise price of
$0.01 per share.
The original carrying value of the warrants ($28,180,132) and Series A Preferred
Stock ($30,250,464) were determined by apportioning an amount equal to the
proceeds from the private placement multiplied by the relative value of each
class of security as of the commitment date. The difference between the carrying
value and the face value of the Series A Preferred Stock is being accreted as a
charge against retained earnings through May 31, 2007 (the Purchasers' earliest
redemption date) using the interest method. Accumulated dividends (dividends not
paid on a dividend date) and dividends accruing prior to a dividend payment date
also increase the carrying value of the Series A Preferred Stock through a
charge to retained earnings. The sum of the face value of the Series A Preferred
Stock and any accrued and accumulated dividends due on any given date equals the
"Liquidation Preference", which amounts are also shown on the Balance Sheet. For
the periods presented in the Statements of Operations, the combined accretion
and accrued and accumulated dividends are shown as a component of Net Loss to
Common Stockholders.
4. DUE FROM RELATED PARTIES
In accordance with an employment agreement, the Chief Executive Officer of the
Company received a grant of 800,000 restricted shares of the Company's common
stock on June 15, 2000. Such award vests at various times during the period
ending June 15, 2004. The Company agreed to lend an amount to the CEO equal to
50% of the related Federal income tax liability on this grant. This obligation
is repayable from proceeds arising from the disposition of any of the 800,000
shares and bears interest at the Applicable Federal Rate as defined in and
published from time to time in accordance with the Internal Revenue Code. As of
December 31, 2000, the CEO had borrowed $1,291,000. On April 12, 2001, the CEO
borrowed an additional $586,832.
Page 9 of 17
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
With the rapid growth of the commercial use of the Internet, the Company has
supplemented its traditional service offerings in enterprise systems management
and infrastructure outsourcing solutions with new services to meet the growing
requirements of enterprises to outsource their Internet activities. In 1999, the
Company retooled a portion of its state-of-the-art data center into an Internet
Data Center ("IDC") from which the Company now offers server-hosting as well as
systems and network management services to enterprises with mission-critical
Internet requirements. The Company differentiates itself from competitors by
offering a comprehensive suite of automated integrated managed services (the
"AIMS System") to enhance the efficiency, reliability, and security of a
customer's online activities.
Beginning in June 2000, the Company began the redevelopment of a 52,000 square
foot building located in metropolitan Atlanta as its second IDC. The Company has
completed development of approximately half of this facility. In July 2000, the
Company announced the signing of a lease for a 54,000 square foot building that
was under construction in the Northern Virginia high tech corridor. The building
was turned over to the Company in November 2000 for development as its third
IDC. Due to excess supply of server-hosting space, the Company has taken steps
to minimize its costs by suspending operations at its Atlanta facility and the
further development of the Northern Virginia facility. The Company is evaluating
alternatives with respect to the two facilities.
The capital requirements of developing and equipping IDCs are demanding. In
January 2001, as a result of the successful development of the AIMS System that
could be remotely delivered and accessed, the Company announced that it would
develop Managed Service Centers ("MSCs") in colocation facilities from which it
could offer automated integrated managed services to users of such facilities as
well as others through remote delivery. To minimize capital expenditures, the
Company has deferred the development of MSCs. The Company is concentrating on
remote delivery of managed services for customer equipment housed on the
customers' premises or in an IDC owned by another company. This strategy allows
the Company to broaden its customer base for the AIMS System while controlling
its capital costs. By automating the services and developing them with an
architecture permitting remote delivery and access, the services are scalable
without significant infrastructure costs.
RESULTS OF OPERATIONS, THREE-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
For the three months ended June 30, 2001 (the "Current Quarter"), revenues
increased $597,000 (10%) to $6,610,000 from $6,013,000 for the three months
ended June 30, 2000 (the "Prior Year Quarter"). Revenues from the Company's IT
managed services grew approximately $700,000, partially offset by a reduction of
$200,000 in consulting fees and approximately $400,000 from the loss of an
apparel manufacturer as a client. As previously reported, this former client
ceased outsourcing its information technology operations in October 2000. The
Company assisted the apparel manufacturer in implementing the necessary systems
to allow the former client to satisfy its information technology operations
internally. The Company also recorded an increase of approximately $400,000 from
server-hosting and systems and network management services.
Page 10 of 17
Operating costs increased $1,547,000 (23%) to $8,218,000 during the Current
Quarter compared with $6,671,000 in the Prior Year Quarter. Operating costs
include $697,000 and $321,000 of depreciation and amortization for the Current
Quarter and Prior Year Quarter, respectively. The remaining increase primarily
consists of IDC operating costs and the development of the AIMS System.
Selling and promotion costs increased $287,000 (38%) to $1,051,000 during the
Current Quarter compared with $764,000 in the Prior Year Quarter. The increase
is attributable to payroll and other expenses associated with the larger staff
needed to market the AIMS System and other Company services and to improve the
brand identity of the Company.
General and administrative expenses decreased $145,000 (4%) to $3,380,000 for
the Current Quarter from $3,525,000 for the Prior Year Quarter. Included in
general and administrative expenses is depreciation of $248,000 and $252,000 in
the Current Quarter and Prior Year Quarter, respectively, and amortization
related to a restricted stock award of $718,000 and $240,000. The increase of
$478,000 of amortization relating to the restricted stock award largely offsets
cost reductions in professional fees and recruiting expenses.
The Company recorded net interest income of $298,000 in the Current Quarter,
compared with net interest income of $423,000 in the Prior Year Quarter. The net
decrease of $125,000 reflects a decrease in interest income of $74,000 from
lower interest rates on investments and a lower average balance of
interest-earning assets during the Current Quarter, plus an increase of $51,000
in interest expense on a larger average outstanding debt balance than in the
Prior Year Quarter.
In the Current Quarter, the Company recorded income tax expense of $502,000,
representing the difference between the estimated tax expense or benefit as
previously provided and as realized in its income tax returns. A tax benefit of
$278,000 was recorded in the Prior Year Quarter based on the availability of
carrying back the pre-tax loss for such period to a prior taxable year. The
cumulative tax benefit recorded by the Company is limited to the anticipated
refund of taxes paid in prior years that the Company will receive 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.
The deferred tax asset associated with carrying forward cumulative pre-tax
losses has been fully offset by a valuation allowance due to the uncertainty of
realizing such tax benefits.
The Company had a net loss of $6,243,000 in the Current Quarter versus a net
loss of $4,246,000 in the Prior Year Quarter. Net loss to common stockholders
after accretion and accrued dividends on preferred stock was $8,350,000 for the
Current Quarter versus a loss of $5,439,000 in the Prior Year Quarter. The loss
per common share was $1.42 for the Current Quarter compared with a loss per
common share of $1.06 in the Prior Year Quarter, 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 11 of 17
RESULTS OF OPERATIONS, SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
For the six months ended June 30, 2001 (the "Current Period"), revenues
decreased $417,000 (3%) to $12,124,000 from $12,541,000 for the six months ended
June 30, 2000 (the "Prior Period"). IT consulting revenues declined by
approximately $1,000,000, largely as a result of the redeployment of consultants
from providing services for fees to developing the AIMS System to attract
clients requiring mission-critical Internet solutions. The decline in revenue
also reflects approximately $900,000 from the loss (as noted in the discussion
above) of an apparel manufacturer as a client. The foregoing declines in revenue
were partially offset by approximately $800,000 of increases in the Company's IT
managed services and $700,000 of increases in server-hosting and systems and
network management services.
Operating costs increased $3,440,000 (26%) to $16,582,000 during the Current
Period compared with $13,142,000 in the Prior Period. Selling and promotion
costs increased $761,000 (50%) to $2,276,000 during the Current Period compared
with $1,515,000 in the Prior Period. Operating costs include depreciation and
amortization of $1,335,000 and $645,000 in the Current Period and Prior Period,
respectively. The remaining increases primarily consist of IDC operating costs,
the development of the AIMS System, and payroll and other expenses associated
with the larger staff needed to market the AIMS System and other Company
services as discussed above.
General and administrative expenses increased $1,549,000 (27%) to $7,369,000 for
the Current Period from $5,820,000 for the Prior Period. General and
administrative expenses include $489,000 and $492,000 of depreciation and
amortization for the Current Period and Prior Period, respectively, and
amortization related to a restricted stock award of $1,438,000 and $240,000 in
the Current Period and Prior Period, respectively. The remaining increases are
associated with the Company's increased server-hosting and managed services
activities.
The Company recorded net interest income of $776,000 in the Current Period,
compared with net interest income of $443,000 in the Prior Period. The net
increase of $333,000 reflects an increase in interest income of $437,000 from a
higher average balance of interest-earning assets during the Current Period,
partially offset by an increase of $104,000 in interest expense on a larger
average outstanding debt and capital lease obligation balance than in the Prior
Period.
In the Current Period, the Company recorded income tax expense of $697,000,
representing the difference between the estimated tax expense or benefit as
previously provided and as realized in its income tax returns. A tax benefit of
$765,000 was recorded in the Prior Period based on an estimate of the
availability of carrying back the pre-tax loss for such period to a prior
taxable year. The cumulative tax benefit recorded by the Company is limited to
the anticipated refund of taxes paid in prior years that the Company will
receive 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. 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.
Page 12 of 17
The Company had a net loss of $14,025,000 in the Current Period versus a net
loss of $6,729,000 in the Prior Period. Net loss to common stockholders after
accretion and accrued dividends on preferred stock was $18,195,000 for the
Current Period and $7,921,000 for the Prior Period. The loss per common share
was $3.10 for the Current Period compared with a loss per common share of $1.59
in the Prior Period, on both a basic and diluted basis. Common stock equivalents
were ignored in determining the net loss per share for both periods, since the
inclusion of such equivalents would be anti-dilutive.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2001, the Company used net cash in
operating activities of approximately $8,545,000, primarily as a result of a net
loss of $14,025,000, offset by several items including a decrease in accounts
receivable of $519,000, a decrease of $638,000 in prepaid expenses, a decrease
of $855,000 in prepaid and refundable taxes, an increase of $484,000 in customer
deposits, and non-cash expenses of $3,262,000 in depreciation and amortization.
The Company received approximately $3,413,000 in proceeds from matured
marketable fixed income securities; invested $3,339,000 for the purchase of
equipment, IDC construction, and other fixed assets; and spent $217,000 for
product development and enhancements. The Company also purchased 10,500 shares
of its common stock in the open market for approximately $66,500. The Company is
currently authorized by its Board of Directors to purchase up to 500,000 shares
of its common stock, of which 18,400 have been purchased to date. No shares
have been repurchased since March 2001.
Principal financing activities included $415,000 in payments of principal with
respect to debt and capital lease obligations. Included in related party
borrowings of $437,000 is an advance of $389,000 to an officer in accordance
with an employment agreement, net of a repayment by that officer.
As of June 30, 2001, the Company had outstanding commitments of approximately
$5.8 million. These commitments will be satisfied with billings of approximately
$2 million; the Company's cash; and the proceeds from the loan detailed below.
In August 2001, the Company borrowed $3 million from a financial institution.
The loan bears interest at 12.55% and is repayable in 36 monthly payments of
approximately $100,500. The loan may be prepaid in the first year with a penalty
of 5% of the outstanding principal balance. After the first twelve months, the
prepayment penalty declines by one percentage point for each subsequent
six-month period. The loan is secured by a first lien on certain computer
equipment. If the Company's unrestricted cash declines below $13 million, the
Company must either (1) post a letter of credit equal to the present value of
the remaining payments or (2) prepay the loan with the applicable prepayment
penalty.
The Company initiated certain cost saving strategies, including staff
reductions, since the end of the first quarter of 2001. These cost savings
coupled with revenue increases resulted in a $694,000 improvement in the net
cash used in operating activities compared to the $4,619,000 cash usage in the
first quarter. The full impact of these cost savings will not be realized until
subsequent periods.
As of June 30, 2001, the Company had cash and equivalents of $27,139,000. The
Company believes that its cash and other liquid assets, combined with cash
saving strategies that have been identified and initiated, will provide adequate
resources to fund its ongoing operating requirements until it returns to
positive cash flow from operations and without the need for additional
financing.
Page 13 of 17
NEW FINANCIAL ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), the effective date of which
was deferred for all fiscal quarters of fiscal years beginning after June 15,
2000 by SFAS No. 137 "Accounting for Derivative Instruments and Hedging
Activities - Deferral of Effective Date of SFAS No. 133". SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
This statement did not have a significant impact on the Company's financial
position or results of operations.
In June 2001, the FASB issued Statements of Financial Accounting Standards No.
141, "Business Combinations", and No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"), effective for fiscal years beginning after December 15,
2001. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of SFAS 142 is expected to result in a decrease in
amortization expense of approximately $650,000 ($0.11 per share) per year.
During 2002, the Company will perform the first of the required impairment tests
of goodwill and other intangible assets, and has not yet determined what the
effect of these tests will be on the earnings and financial position of the
Company.
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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company is not significantly exposed to the impact of interest rate changes,
foreign currency fluctuations, or changes in the market values of its
investments. The Company primarily invests in fixed income securities, typically
commercial paper, certificates of deposit, and mutual funds issued only by major
corporations and financial institutions of recognized strength and security, and
holds all investments to term. The Company generally invests in money market
accounts.
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Market Risk
The Company's accounts receivable are subject, in the normal course of business,
to collection risks. The Company regularly assesses these risks and has
established policies and business practices to mitigate the adverse effects of
collection risks. As a result, the Company does not anticipate any material
losses in this area in excess of the recorded allowance for doubtful accounts.
Foreign Currency Risks
The Company has no material foreign operations.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Atlas Business Service Corp. ("Atlas") vs. Infocrossing, Inc.
- --------------------------------------------------------------
As previously reported, the Company commenced an action against Atlas, a former
customer, in the Supreme Court of New York, New York County (Index No.
00/602461) to collect approximately $45,000 in outstanding data processing
invoices. Atlas filed an answer in which it alleged that the services were
deficient. Discovery is proceeding in this action.
Also as previously reported, the Company was served with a complaint in
connection with a lawsuit commenced by Atlas in Federal District Court for the
Southern District of New York (00 CIV. 6521) alleging a breach of contract by
the Company in providing data processing services resulting in the loss to Atlas
of approximately $700,000. Atlas has demanded damages of not less than $5
million. The Company filed an answer denying all of the material allegations and
asserting several affirmative defenses.
It is premature to estimate the outcome of this litigation. Management believes
that the above matters will be resolved without any material adverse impact on
the Company's financial position, results of operations, or cash flows.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders (the "Meeting") held on June 22, 2001, a
vote was held to elect Ms. Kathleen A. Perone and Messrs. Charles F. Auster and
Michael B. Targoff as Directors of the Company. Each received a vote of
7,350,436 for election with 185,940 votes against.
Ms. Samantha McCuen and Messrs. Zach Lonstein, Frank L. Schiff, Richard A.
Keller, and Tyler T. Zachem have terms expiring in 2002 and beyond and continue
as Directors of the Company.
The Stockholders also approved, by a vote of 5,133,229 for and 590,409 against
with 1,812,738 abstentions and broker non-votes, an amendment to the Amended and
Restated 1992 Stock Option and Stock Appreciation Rights Plan to limit the form
of cashless exercise and to increase the total number of shares of common stock
for which options may be granted from 2,700,000 to 3,100,000.
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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, incorporated by reference to the
Company's report on Form 10-Q for the period ended April 30, 2000.
3.1C Certificate of Amendment to the Company's Certificate of
Incorporation, filed as of June 5, 2000, to change the name of the
Company to Infocrossing, Inc., incorporated by reference to the
Company's report on Form 10-Q for the period ended April 30, 2000.
3.2 Amended and Restated 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; 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 Initial 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.
(b) Reports on Form 8-K:
None.
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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/
August 14, 2001 ------------------------------------
Charles F. Auster
President & Chief Executive Officer
/s/
August 14, 2001 -------------------------------------
William B. Fischer
Senior Vice President &
Chief Financial Officer
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