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: SEPTEMBER 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 November 12, 2001.
Transitional Small Business Disclosure Form (check one): Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INFOCROSSING, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------ -----------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and equivalents $26,055,791 $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 $637,219 and $525,957 4,683,964 3,355,914
Prepaid and refundable income taxes 135,248 3,648,228
Prepaid license fees 357,916 766,135
Prepaid expenses and other
current assets 805,834 1,303,724
----------- -----------
32,038,753 49,250,901
----------- -----------
PROPERTY and EQUIPMENT, net 20,357,557 13,411,113
----------- -----------
OTHER ASSETS:
Deferred software, net 2,445,135 2,665,714
Goodwill and intangibles, net 8,305,482 8,889,271
Due from related parties 2,135,026 1,665,688
Security deposits and other
non-current assets 2,536,300 2,566,728
----------- -----------
15,421,943 15,787,401
----------- -----------
TOTAL ASSETS $ 67,818,253 $ 78,449,415
=========== ===========
See Notes to Consolidated Interim Financial Statements (Unaudited).
INFOCROSSING, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------ -----------------
(UNAUDITED)
LIABILITIES and STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,710,961 $ 1,369,402
Current portion of long-term debt and
capitalized lease obligations 1,828,701 846,083
Current portion of accrued losses on
office leases 433,813 510,112
Accrued expenses 6,486,009 4,205,520
Customer deposits and current
deferred revenue 762,973 125,488
----------- -----------
11,222,457 7,056,605
----------- -----------
LONG-TERM LIABILITIES:
Long-term debt and capitalized lease
obligations, net of current portion 4,158,926 2,777,409
Deferred revenue 874,995 -
Accrued losses on office leases 1,219,430 1,537,955
----------- -----------
6,253,351 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
$67,012,504 at September 30, 2001) 41,760,040 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 (7,666,667) (9,822,917)
Accumulated deficit (42,492,642) (17,344,526)
----------- -----------
8,953,385 31,828,251
Less 43,029 and 12,508 shares,
respectively, of common stock held
in treasury, at cost (370,980) (187,413)
----------- -----------
8,582,405 31,640,838
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $ 67,818,253 $ 78,449,415
=========== ===========
See Notes to Consolidated Interim Financial Statements (Unaudited).
INFOCROSSING, INC. & SUBSIDIAIRES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
REVENUES $ 7,354,307 $ 5,267,641 $ 19,477,824 $ 17,808,265
------------ ------------ ------------ ------------
COSTS and EXPENSES:
Operating costs 8,164,744 7,141,743 24,746,855 20,283,845
Selling and promotion
costs 784,637 785,378 3,061,006 2,300,502
Amortization of
restricted
stock award 718,750 718,750 2,156,250 958,333
Loss on office closing - 514,371 - 514,371
General and
administrative
expenses 2,611,261 2,958,708 8,542,654 8,538,860
------------ ------------ ------------ ------------
12,279,392 12,118,950 38,506,765 32,595,911
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (4,925,085) (6,851,309) (19,028,941) (14,787,646)
Interest income (269,253) (1,020,541) (1,225,030) (1,989,957)
Interest expense 144,072 117,126 323,773 643,750
------------ ------------ ------------ ------------
(125,181) (903,415) (901,257) (1,346,207)
------------ ------------ ------------ ------------
Loss before INCOME
TAXES (4,799,904) (5,947,894) (18,127,684) (13,441,439)
Income tax
expense/(benefit) - (942,253) 697,000 (1,707,063)
------------ ------------ ------------ ------------
Net loss (4,799,904) (5,005,641) (18,824,684) (11,734,376)
Accretion and
dividends on
redeemable
preferred stock (2,153,528) (1,975,217) (6,323,432) (3,167,799)
------------ ------------ ------------ ------------
NET LOSS TO COMMON
STOCKHOLDERS $ (6,953,432) $ (6,980,858) $(25,148,116) $(14,902,175)
============ ============ ============ ============
Basic and diluted
loss to common
stockholders per
common share $ (1.18) $ (1.19) $ (4.28) $ (2.81)
============ ============ ============ ============
Weighted average
number of common
shares outstanding 5,870,282 5,884,958 5,871,472 5,294,728
============ ============ ============ ============
See Notes to Consolidated Interim Financial Statements (Unaudited).
INFOCROSSING, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(18,824,684) $(11,734,376)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 2,882,355 1,791,690
Amortization of restricted stock award 2,156,250 958,333
Warrants issued - 120,000
Accrued loss on office closing - 514,371
Decrease/(increase) in:
Trade accounts receivable (1,328,051) 1,267,498
Prepaid and refundable taxes 3,512,980 (1,516,422)
Prepaid license fees, prepaid
expenses and other current assets 906,109 (828,746)
Increase/(decrease) in:
Accounts payable 341,559 465,228
Accrued expenses 2,280,490 535,877
Payments on accrued losses on
office leases (343,866) (145,799)
Customer deposits and
deferred revenue 1,512,480 (83,019)
------------ ------------
Net cash used in
operating activities (6,904,378) (8,655,365)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (8,692,359) (4,658,821)
Disposal of equipment - 2,750
Investment in/(redemption at maturity
of) investments in marketable
fixed income securities 3,413,069 (6,147,630)
Decrease/(increase) in other assets 23,111 (2,031,957)
Purchase of treasury stock (66,567) -
Increase in deferred software costs (267,255) (832,086)
------------ ------------
Net cash used in
investing activities $ (5,590,001) $(13,667,744)
------------ ------------
Continued on next page.
See Notes to Consolidated Interim Financial Statements (Unaudited).
INFOCROSSING, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED - CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt and capital leases $ (705,024) $ (5,013,554)
Proceeds from debt 3,011,659 3,000,000
Proceeds from a private equity placement - 58,430,596
Advances to related parties, net (469,338) (37,362)
Proceeds from the sale of common stock - 999,996
Proceeds from the exercises of stock
options and warrants - 1,015,155
------------ ------------
Net cash provided by financing activities 1,837,297 58,394,831
------------ ------------
CASH FLOWS FROM DISCONTINUED
OPERATION:
Payments on portion of accrued loss
on office sublease relating to
discontinued operation (50,958) (56,699)
------------ ------------
Net change in cash and equivalents (10,708,040) 36,015,023
Cash and equivalents at the
beginning of the period 36,763,831 4,391,048
------------ ------------
Cash and equivalents at the end
of the period $ 26,055,791 $ 40,406,071
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense $ 292,076 $ 112,222
============ ============
Income taxes $ 38,082 $ 79,139
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES:
Treasury shares received in payment
of a stock option exercise $ 117,000 111,744
============ ============
Equipment acquired subject to a
capital lease $ 57,500 -
============ ============
See Notes to Consolidated Interim Financial Statements (Unaudited).
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 - - - 2,156,250 - - 2,156,250
Accretion on
redeemable
preferred stock - - - - (2,458,307) - (2,458,307)
Accrued
dividends on
redeemable
preferred stock - - - - (3,865,125) - (3,865,125)
Purchase of
treasury
shares - - - - - (66,567) (66,567)
Net loss - - - - (18,824,684) - (18,824,684)
--------- ------- ----------- ------------ ------------ --------- -----------
Balances,
September
30, 2001 5,913,311 $59,133 $59,053,561 $ (7,666,667) $(42,492,642) $(370,980) $ 8,582,405
========= ======= =========== ============ ============ ========= ===========
See Notes to Consolidated Interim Financial Statements (Unaudited).
INFOCROSSING, INC. & SUBSIDIAIRES
NOTES TO THE CONSOLIDATED INTERIM
FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated balance sheet as of September 30, 2001, the consolidated
statements of operations for the three and nine months ended September 30, 2001
and 2000, the consolidated statements of cash flows for the nine months ended
September 30, 2001 and 2000, and the consolidated statement of stockholders'
equity for the nine months ended September 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 September 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 stockholders by the
weighted average number of common shares outstanding during each period. Diluted
EPS is computed using the weighted average number of common shares plus the
dilutive effect of common stock equivalents. Stock options and warrants 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 nine month periods ended September 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.
3. PRIVATE PLACEMENT OF SECURITIES
A private placement of $60 million of securities closed on May 10, 2000. The
Company issued 157,377 shares of redeemable 8% Series A Cumulative Convertible
Participating Preferred Stock (the "Series A Preferred Stock") and warrants to
purchase 2,531,926 shares of the Company's common stock at an exercise price of
$0.01 per share.
The 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 subsequent 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 ($60,000,000) and any accrued and accumulated dividends due on any given
date equals the "Liquidation Preference", which amount is 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 ("CEO")
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 September 30, 2001, the CEO had borrowed $1,877,832. Also, the CEO had
purchased 68,446 shares of common stock from the Company for $1,000,000.
In November 2001, the CEO resigned 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 shares of the 868,446 shares of
common stock held by the CEO for $2,385,000. The CEO used $1,935,000 of the
proceeds to satisfy notes receivable due to the Company. In the fourth quarter,
the Company will recognize a charge of approximately $7,667,000, representing
the unamortized balance of the restricted stock award as of September 30, 2001.
5. DEBT
In August 2001, the Company borrowed $3 million from a financial institution,
the proceeds of which were used to purchase computer hardware equipment in
connection with the signing of a four-year contract with a significant new
managed services customer. 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.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS, THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
For the three months ended September 30, 2001 (the "Current Quarter") revenues
increased $2,086,000 (40%), to $7,354,000 from $5,268,000 for the three months
ended September 30, 2000 (the "Prior Year Quarter"), due to greater business
volume. Revenues from a significant new customer contributed to the increase.
The Company recently announced the signing of a significant new managed services
contract with this customer that by its terms is expected to generate $40
million in revenues over the four-year life of its initial term.
The Company's loss from operations improved 28%, dropping to $4,925,000 in the
Current Quarter from $6,851,000 in the Prior Year Quarter. Substantially all of
the incremental expenses associated with the Company's increase in revenues were
offset by cost savings initiated in the second quarter of the year and that were
more fully realized in the Current Quarter. Total costs and expenses increased
in the Current Quarter compared to the Prior Quarter by only $160,000, or 1%, to
$12,279,000.
As previously reported, due to excess supply of server-hosting space, the
Company has taken steps to minimize its costs by temporarily suspending
operations at its Atlanta Internet Data Center ("IDC") and the further
development of the Northern Virginia IDC. The Company is evaluating alternatives
with respect to the two facilities. The ongoing costs of these facilities are
included in operating costs for the Current Quarter.
Operating costs increased $1,023,000 (14%) to $8,165,000 during the Current
Quarter compared with $7,142,000 in the Prior Year Quarter. Operating costs
include $811,000 and $389,000 of depreciation and amortization for the Current
Quarter and Prior Year Quarter, respectively. The remaining increase primarily
consists of IDC operating costs and costs of related managed services.
Selling and promotion costs were $785,000 in both the Current Quarter and the
Prior Year Quarter.
Amortization related to a restricted stock award was $719,000 in both periods.
In the Prior Quarter the Company recorded a loss of $514,000 relating to the
closing of a sales office in Charlotte, NC.
General and administrative expenses decreased $348,000 (12%) to $2,611,000 for
the Current Quarter from $2,959,000 for the Prior Year Quarter, largely
reflecting cost reductions in IDC managed services area. Included in general and
administrative expenses is depreciation of $247,000 and $266,000 in the Current
Quarter and Prior Year Quarter, respectively.
The Company recorded net interest income of $125,000 in the Current Quarter,
compared with net interest income of $903,000 in the Prior Year Quarter. The net
reduction of $778,000 reflects a decrease in interest income of $751,000 from
lower interest rates on investments and a lower average balance of
interest-earning assets during the Current Quarter. The net reduction also
includes an increase of $27,000 in interest expense on a larger average
outstanding debt balance than in the Prior Year Quarter.
In the Current Quarter, the Company recorded no additional income tax benefit. A
tax benefit of $942,000 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 refund of taxes paid in prior years that the Company has received as a
result of carrying back a portion of its pre-tax loss. 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 $4,800,000 in the Current Quarter versus a net
loss of $5,006,000 in the Prior Year Quarter. Net loss to common stockholders
after accretion and accrued dividends on preferred stock was $6,953,000 for the
Current Quarter versus a loss of $6,981,000 in the Prior Year Quarter. The loss
per common share was $1.18 for the Current Quarter compared with a loss per
common share of $1.19 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.
RESULTS OF OPERATIONS, NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
For the nine months ended September 30, 2001 (the "Current Period"), revenues
increased $1,669,000 (9%) to $19,477,000 from $17,808,000 for the nine months
ended September 30, 2000 (the "Prior Period"). The increase is largely
attributable to increased business volume in managed services, which included
revenues generated from the significant new customer discussed above. The loss
from operations increased $4,241,000 (29%), reflecting an increase of $5,911,000
in total costs and expenses to $38,507,000 in the Current Period. The increased
spending is largely attributable to increased personnel related costs in the
first half of the year which have since been reduced through staff reductions,
primarily in the server-hosting and other IDC related functions.
As previously discussed, the ongoing costs of the Atlanta and the Northern
Virginia facilities are included in operating costs for the Current Period.
Operating costs increased $4,463,000 (22%) to $24,747,000 during the Current
Period compared with $20,284,000 in the Prior Period. Operating costs include
depreciation and amortization of $2,047,000 and $1,034,000 in the Current Period
and Prior Period, respectively. The remaining increases primarily consist of IDC
and related managed services operating and development costs earlier in the
Current Period.
Selling and promotion costs increased $761,000 (33%) to $3,061,000 during the
Current Period compared with $2,301,000 in the Prior Period. The selling and
promotion cost increase is attributable to payroll and other expenses incurred
in earlier quarters to market IDC related services and to improve the brand
identity of the Company.
Amortization related to a restricted stock award was $2,156,000 and $958,000 in
the Current Period and Prior Period, respectively.
General and administrative expenses increased only $4,000 to $8,543,000 for the
Current Period from $8,539,000 for the Prior Period. General and administrative
expenses include $736,000 and $758,000 of depreciation and amortization for the
Current Period and Prior Period, respectively.
The Company recorded net interest income of $901,000 in the Current Period,
compared with net interest income of $1,346,000 in the Prior Period. The net
reduction of $445,000 reflects a decrease in interest income of $765,000 from a
lower average balance of interest-earning assets during the Current Period,
lower interest rates on interest-earning assets. The net reduction was partially
offset by a decrease of $320,000 in interest expense arising from a larger
average outstanding debt and capital lease obligation balance in the Prior
Period.
In the Current Period, the Company recorded income tax expense of $697,000,
representing the difference between the estimated benefit as previously reported
compared with the amount recognized in its income tax return. A tax benefit of
$1,707,000 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 refund of taxes paid in prior years that the Company has received as a
result of carrying back a portion of its pre-tax loss. 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 $18,825,000 in the Current Period versus a net
loss of $11,734,000 in the Prior Period. Net loss to common stockholders after
accretion and accrued dividends on preferred stock was $25,148,000 for the
Current Period and $14,902,000 for the Prior Period. The loss per common share
was $4.28 for the Current Period compared with a loss per common share of $2.81
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 nine months ended September 30, 2001, the Company used net cash in
operating activities of approximately $6,904,000, primarily as a result of a net
loss of $18,825,000, offset by non-cash expenses of $5,039,000 in depreciation
and amortization, an increase in customer deposits and deferred revenue of
$1,512,000, a decrease of $3,513,000 in prepaid and refundable taxes and an
increase of $2,622,000 in accounts payable and accrued expenses.
The Company received $3,413,000 in proceeds from matured marketable fixed income
securities; invested $8,692,000 for the purchase of equipment, software, and
other fixed assets; and spent $267,000 for product development and enhancements.
The Company also purchased 10,500 shares of its common stock in the open market
for approximately $66,600. 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 through September 30, 2001. No shares were purchased in the
quarter ended September 30, 2001.
Principal financing activities included proceeds from the loan described below
and $705,000 in payments of principal with respect to debt and capital lease
obligations. Included in related party borrowings of $469,000 is an advance of
$389,000 to an officer in accordance with an employment agreement, net of a
repayment by that officer.
In August 2001, the Company borrowed $3 million from a financial institution,
the proceeds of which were used to purchase computer hardware equipment in
connection with the signing of a four-year contract with a significant new
managed services customer, as previously described. 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.
In addition to net cash used in operating activities described above, another
measure of a company's ability to generate cash from its operations is earnings
before interest, taxes, depreciation, and amortization ("EBITDA"). For the nine
months ended September 30, 2001 and 2000, the Company's EBITDA loss was
$13,993,000 and $12,038,000, respectively. The Company's EBITDA improved to a
loss of $3,148,000 in the Current Quarter, compared to losses of $4,376,000,
$6,466,000, and $6,930,000 in the second and first quarters for 2001 and the
fourth quarter of 2000, respectively.
As of September 30, 2001, the Company had cash and equivalents of $26,056,000.
The Company believes that the combination of its cash and other liquid assets
will provide adequate resources to fund its ongoing operating requirements until
it returns to positive cash flow from operations.
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", effective for all combinations initiated after
June 30, 2001, 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 as required by SFAS 142.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 establishes a single accounting model, based upon the framework
established in SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed of", for long-lived assets to be disposed
of by sale and to address significant implementation issues. The Company is
required to adopt SFAS 144 in the first quarter of 2002. The Company is in the
process of assessing the impact of the adoption of this statement on its
financial position, results of operations, and cash flows.
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 exposed to gains or losses related to the impact of interest
rate changes, foreign currency fluctuations, or changes in the market values of
its investments. The Company generally invests in fixed income securities -
typically commercial paper, certificates of deposit and money market accounts
issued only by major corporations and financial institutions of recognized
strength and security - and holds all investments to maturity.
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.
A tentative settlement has been rendered pursuant to which Atlas will receive
$40,000 and a release from Infocrossing in satisfaction of all claims. The
monetary portion of the settlement will be satisfied by insurance.
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.
10.1 Master Loan and Security Agreement No. 85043 by and among
Infocrossing, Inc. and ETG, Inc. as co-Debtors and Wells Fargo
Equipment Finance, Inc., dated as of July 19, 2001, with
accompanying Riders and Schedules.
(b) Reports on Form 8-K:
None.
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/
November 14, 2001 ------------------------------------
Zach Lonstein
Chairman & Chief Executive Officer
/s/
November 14, 2001 ------------------------------------
William B. Fischer
Senior Vice President &
Chief Financial Officer