UNITED STATES 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: MARCH 31, 2002
Commission file number: 0-20824
INFOCROSSING, INC.
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(Exact name of registrant as specified in its Charter)
DELAWARE 13-3252333
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2 CHRISTIE HEIGHTS STREET LEONIA, NJ 07605
-----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 840-4700
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 5,342,426 shares of the registrant's Common Stock, $0.01 par value,
outstanding as of May 10, 2002.
Transitional Small Business Disclosure Form (check one): Yes [ ] No [X]
PAGE 1 of 22
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2002 2001
-------------- --------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 9,956,870 $ 24,343,819
Trade accounts receivable, net of
allowances for doubtful accounts of
$1,061,279 and $1,008,942 4,429,625 2,410,556
Prepaid and refundable income taxes 141,987 139,488
Due from related parties 209,793 205,106
Prepaid license fees 700,518 682,342
Other current assets 1,966,801 986,061
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17,405,594 28,767,372
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PROPERTY and EQUIPMENT, net 19,421,162 17,173,134
-------------- --------------
OTHER ASSETS:
Deferred software, net 2,081,657 2,197,070
Goodwill, net 29,122,580 7,736,773
Other intangible assets, net 1,447,418 374,114
Security deposits and other
non-current assets 2,743,081 2,525,531
-------------- --------------
35,394,736 12,833,488
-------------- --------------
TOTAL ASSETS $ 72,221,492 $ 58,773,994
============== ==============
Continued on next page.
See Notes to Consolidated Interim Financial Statements (Unaudited).
PAGE 2 of 22
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
MARCH 31, DECEMBER 31,
2002 2001
-------------- --------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 4,239,982 $ 1,914,682
Current portion of long-term debt 59,790 1,000,000
Current portion of capitalized
lease obligations 1,936,481 893,683
Current portion of accrued
loss on leased facilities 3,219,952 3,313,806
Accrued expenses 7,637,021 6,245,665
Customer deposits, current deferred
revenue, and other
current liabilities 483,456 450,641
-------------- --------------
17,576,682 13,818,477
-------------- --------------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion 8,401,597 1,761,728
Capitalized lease obligations,
net of current portion 1,817,536 1,870,718
Accrued loss on leased facilities,
net of current portion 1,077,052 1,127,770
Deferred revenue, net of current portion,
and other long-term liabilities 2,374,321 2,270,722
-------------- --------------
13,670,506 7,030,938
-------------- --------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE 8% SERIES A CUMULATIVE
CONVERTIBLE PARTICIPATING PREFERRED
STOCK; $0.01 par value; 300,000 shares
authorized; 157,377 shares issued and
outstanding (liquidation preference of
$69,719,808 at March 31, 2002) 46,209,337 43,960,634
-------------- --------------
STOCKHOLDERS' DEFICIT:
Preferred stock; $0.01 par value;
2,700,000 shares authorized; none issued - -
Common stock; $0.01 par value;
50,000,000 shares authorized; shares
issued and outstanding of 5,937,416 and
5,912,416 at March 31, 2002 and
December 31, 2001, respectively 59,374 59,124
Additional paid-in capital 60,867,845 59,053,570
Accumulated deficit (63,311,531) (62,392,549)
-------------- --------------
(2,384,312) (3,279,855)
Less 594,990 and 578,623 shares at
March 31, 2002 and December 31, 2001,
respectively, of common stock held
in treasury, at cost (2,850,721) (2,756,200)
-------------- --------------
TOTAL STOCKHOLDERS' DEFICIT (5,235,033) (6,036,055)
-------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 72,221,492 $ 58,773,994
============== ==============
See Notes to Consolidated Interim Financial Statements (Unaudited).
PAGE 3 of 22
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------------
2002 2001
-------------- --------------
REVENUES $ 11,232,692 $ 5,513,751
-------------- --------------
COSTS and EXPENSES:
Operating costs 6,592,579 8,364,318
Selling and promotion costs 773,303 1,225,845
Amortization of restricted
stock award - 718,750
Amortization of goodwill - 158,198
General and administrative costs 2,156,331 3,111,586
-------------- --------------
9,522,213 13,578,697
-------------- --------------
INCOME (LOSS) FROM OPERATIONS 1,710,479 (8,064,946)
-------------- --------------
Interest income (84,533) (569,874)
Interest expense 465,291 91,840
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380,758 (478,034)
-------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES 1,329,721 (7,586,912)
Income tax expense - 195,000
-------------- --------------
NET INCOME (LOSS) 1,329,721 (7,781,912)
Accretion and accrued dividends on
redeemable preferred stock (2,248,703) (2,062,425)
-------------- --------------
NET LOSS TO COMMON STOCKHOLDERS $ (918,982) $ (9,844,337)
============== ==============
BASIC AND DILUTED EARNINGS PER SHARE:
Net loss to common stockholders $ (0.17) $ (1.68)
============== ==============
Weighted average number of common
shares outstanding 5,342,330 5,873,892
============== ==============
See Notes to Consolidated Interim Financial Statements (Unaudited).
PAGE 4 of 22
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
ADDITIONAL TREASURY
COMMON PAID IN ACCUMULATED STOCK AT
SHARES PAR VALUE CAPITAL DEFICIT COST TOTAL
--------- ---------- -------------- --------------- ------------- --------------
Balances,
December 31, 2001 5.912,416 $ 59,124 $ 59,053,570 $ (62,392,549) $ (2,756,200) $ (6,036,055)
Exercise of stock
option by the
surrender of
16,367 shares 25,000 250 94,275 - (94,521) 4
Accretion and
accrued dividends
on redeemable
preferred stock - - - (2,248,703) - (2,248,703)
Value of warrants
given in connection
with a debenture
issuance - - 1,720,000 - - 1,720,000
Net income - - - 1,329,721 - 1,329,721
--------- ---------- -------------- --------------- ------------- --------------
Balances,
March 31, 2002 5,937,416 $ 59,374 $ 60,867,845 $ (63,311,531) $ (2,850,721) $ (5,235,033)
--------- ---------- -------------- --------------- ------------- --------------
See Notes to Consolidated Interim Financial Statements (Unaudited).
PAGE 5 of 22
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------------
2002 2001
-------------- --------------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income/(loss) $ 1,329,721 $ (7,781,912)
Adjustments to reconcile net income/
(loss) to cash provided by/(used in)
operating activities:
Depreciation and amortization 1,362,522 879,735
Amortization of debenture
discount 87,278 -
Amortization of restricted
stock award - 718,750
Credits granted by a software
licensor, net of amounts used (882,969) -
Decrease/(increase) in:
Trade accounts receivable (450,847) 140,173
Prepaid and refundable taxes - 219,459
Prepaid license fees
and other current assets 81,091 456,844
Increase/(decrease) in:
Accounts payable 2,325,300 1,104,507
Accrued expenses (2,691,270) (211,735)
Accrued loss on leased
facilities and office
closings (131,681) (138,664)
Customer deposits, deferred
revenues, and other
liabilities (328,218) (6,570)
-------------- --------------
Net cash provided by/ (used in) operating
activities 700,927 (4,619,413)
-------------- --------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of property and equipment (1,441,564) (1,583,583)
Purchase of the outstanding shares
of AmQUEST, Inc. and certain
related costs (20,372,891) -
Redemptions at maturity of investments
in marketable debt securities - 2,417,309
Purchases of treasury stock - (66,569)
Increase in deferred software costs (42,889) (133,771)
Decrease/(increase) in security
deposits and other non-current
assets (133,332) 2,291
-------------- --------------
Net cash (used in)/provided by
investing activities (21,990,676) 635,677
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Continued on next page.
See Notes to Consolidated Interim Financial Statements (Unaudited).
PAGE 6 of 22
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED - CONTINUED)
THREE MONTHS ENDED MARCH 31,
------------------------------------
2002 2001
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debentures $ 10,000,000 $ -
Proceeds from other debt - 11,659
Repayment of debt (2,667,619) (13,750)
Repayment of capitalized leases (412,007) (185,303)
Repayments from/(advances to)
related parties (4,683) 175,653
-------------- --------------
Net cash provided by/(used in)
financing activities 6,915,691 (11,740)
-------------- --------------
Net cash used in continuing operations (14,374,058) (3,995,476)
-------------- --------------
CASH FLOW FROM DISCONTINUED OPERATION:
Payments on portion of accrued loss
on leased facilities relating
to discontinued operation (12,891) (16,985)
-------------- --------------
Net decrease in cash and equivalents (14,386,949) (4,012,461)
Cash and equivalents, beginning of the
period 24,343,819 36,763,831
-------------- --------------
Cash and equivalents, end of the period $ 9,956,870 $ 32,751,370
============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 170,639 $ 84,811
============== ==============
Income taxes $ - $ 32,655
============== ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING ACTIVITY:
Fees and other costs accrued in
connection with the purchase
of AmQUEST $ 448,080 $ -
============== ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITY:
Treasury shares received in
payment of a stock option
exercise $ 94,521 $ 117,000
=============== ==============
See Notes to Consolidated Interim Financial Statements (Unaudited).
PAGE 7 of 22
INFOCROSSING, INC. & SUBSIDIAIRES
NOTES TO THE CONSOLIDATED INTERIM
FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated balance sheet as of March 31, 2002, the consolidated statements
of operations, the consolidated statement of stockholders' deficit, and the
consolidated statements of cash flows for the three months ended March 31, 2002
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 March 31, 2002 and
2001 are not necessarily indicative of the operating results for the full 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 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 year ended December 31, 2001.
The consolidated financial statements include the accounts of Infocrossing, Inc.
and its wholly owned subsidiaries, including, subsequent to its acquisition in
February, the accounts of AmQUEST, Inc. (collectively, the "Company"). All
significant intercompany balances and transactions have been eliminated.
2. PURCHASE OF AMQUEST, INC.
On February 5, 2002, the Company entered into a Stock Purchase Agreement with
American Software, Inc. ("ASI"), a Georgia corporation, whereby the Company
purchased all of the outstanding capital stock of AmQUEST, Inc. ("AmQUEST"), a
Georgia corporation, from its former parent company ASI (the "AmQUEST
Acquisition"). As consideration for the purchase of AmQUEST's shares, the
Company paid ASI $20,284,000 in cash, subject to finalizing certain post closing
adjustments. In addition, the Company incurred an estimated $537,000 in
professional fees and other costs.
The Company financed the AmQUEST Acquisition through the application of the
proceeds of the financing described in Note 3 and cash held by the Company.
PAGE 8 of 22
The following unaudited condensed consolidated pro forma financial statement of
operations is presented to illustrate the effects of the acquisition of AmQUEST
as if such transaction had occurred on the first day of the periods presented
(January 1, 2002 and 2001). The pro forma statement of operations may not be
indicative of the results that actually would have occurred had the combination
been in effect on the date indicated, nor does it purport to indicate the
results that may be obtained in the future.
CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
---------------------------------
2002 2001
-------------- ---------------
Revenues $ 12,708 $ 10,443
-------------- ---------------
Net income/(loss) $ 1,115 $ (9,483)
============== ===============
Net loss to common stockholders $ (1,134) $ (11,545)
============== ===============
Net loss to common stockholders per
basic and diluted share $ (0.21) $ (1.97)
============== ===============
3. DEBT
Private Sale of Debentures with Warrants
On February 1, 2002, in anticipation of the AmQUEST Acquisition, the Company
entered into a Securities Purchase Agreement (the "SPA") with a group of private
investors (the "Investors") whereby the Company issued Senior Subordinated
Debentures (the "Debentures") and warrants to purchase, initially, 2,000,000
shares of the common stock of the Company (the "Initial Warrants") (subject to
adjustments as discussed below) in exchange for an investment of $10,000,000.
Pursuant to the SPA, the proceeds of the sale of the Debentures were used to
partially fund the AmQUEST Acquisition.
The Debentures were issued at an aggregate face value of $10,000,000 with a
maturity of three years from February 1, 2002 (the "Issuance Date"), with the
right to extend the term of the Debentures for one additional year to February
1, 2006 at the Company's sole option. Pursuant to the terms of the Debenture,
the Company is required to make semi-annual interest payments of 12% per annum
for the first two years, 13% per annum for the period commencing on February 1,
2004 and ending on February 1, 2005, and (if the Company elects to extend the
maturity date as described above), 14% per annum. The Company has the option to
pay interest in the form of (a) cash; (b) additional Debentures, or (c) a
combination of cash and additional Debentures. If the Company chooses to make
interest payments using additional Debentures, the Company may be required to
issue additional warrants (the "Additional Warrants") pursuant to the terms of
the Debentures.
PAGE 9 of 22
The initial carrying values of the Debentures ($8,280,000) and Initial Warrants
($1,720,000) were determined by apportioning an amount equal to the proceeds
from the private sale multiplied by the relative value of each item as of the
Issuance Date. The difference between the carrying value and the face value of
the Debentures is being recorded as additional interest expense through February
1, 2005 (the initial maturity date of the Debentures) using the interest method.
The Initial Warrants have been issued pursuant to that certain Warrant Agreement
dated as of February 1, 2002 by and between the Company and the Investors (the
"Warrant Agreement") and are subject to certain customary anti-dilution
adjustments. The exercise price of the Initial Warrants is $5.86. The Warrants
expire on January 31, 2007. In addition, up to 1,500,000 of the Initial Warrants
may be cancelled upon the prepayment of the Debentures. Cancellation of the
Initial Warrants may take place as follows:
(i) If the Debentures are repaid in full during the first year,
1,500,000 Initial Warrants will be immediately cancelled.
(ii) If the Debentures are repaid in full after February 1, 2003 and
before February 1, 2005, Initial Warrants will be cancelled according to the
following formula: 62,500 shares multiplied by the number of full months between
the prepayment and February 1, 2005.
(iii) The Company is entitled to make, at any time, one (and only one)
partial prepayment of the Debentures in the amount of at least 50% of the total
outstanding indebtedness. In the event of such a partial prepayment, the number
of Initial Warrants to be cancelled shall be equal to the product of (a) the
number of Initial Warrants that would be cancelled pursuant to items (i) and
(ii) as if full repayment had been made, and (b) the ratio of the amount of
Debentures actually prepaid and the aggregate principal amount of Debentures
outstanding on the date of such partial prepayment (the "Prepayment Fraction");
and
(iv) If the Company makes a partial prepayment as described in (iii)
and then, before February 1, 2005, repays all the remaining aggregate principal
amount of Debentures outstanding, the number of Initial Warrants to be cancelled
shall be equal to the product of (x) the number of Initial Warrants that would
be cancelled pursuant to items (i) and (ii) as if full repayment had been made,
and (y) 1 minus the Prepayment Fraction.
Additional Warrants, may be issued if the Company chooses to make interest
payments using additional Debentures. Additional warrants will not be subject to
cancellation. The fair market value of Additional Warrants issued, if any, will
be recorded as deferred financing costs and amortized over the remaining term of
the Debentures.
Repayment of Bank Loan
At the time of the AmQUEST Acquisition, the Company repaid the $2,660,000
balance outstanding on a bank loan.
PAGE 10 of 22
4. CREDITS GRANTED
On January 10, 2002, the Company and a software licensor (the "Licensor")
entered into a Release Agreement (the "Agreement") in settlement of a dispute of
certain claims the Company had sought against the Licensor under a software
license and support agreement. Pursuant to the Agreement, the Company received
credits totaling $2,000,000 to be used towards certain future purchases (the
"Credits"). The Credits are subject to restrictions and expire on December 31,
2002 if unused. Additionally, support fees of $1,136,000 under the software and
support agreement, including $522,000 of past due amounts, were waived by the
Licensor. Pursuant to the Agreement, the Company agreed to release and hold
harmless the Licensor and its subsidiaries from any and all claims, damages,
actions or causes of action of any kind arising prior to the date of the
Agreement.
The Company expects that it will fully utilize the Credits in 2002 and,
accordingly, recognized the Credits in its statement of operations in the three
months ended March 31, 2002. Additionally, accrued expenses related to the
unpaid support fees totaling $796,000 were reversed in connection with the
Agreement. As of March 31, 2002, unused Credits totaling approximately $883,000
are recorded as current assets.
5. GOODWILL
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
("SFAS 142"). SFAS 142 prohibits the amortization of goodwill and intangible
assets with indefinite useful lives and requires that these assets be reviewed
for impairment at least annually. Intangible assets with finite lives will
continue to be amortized over their estimated useful lives. The Company applied
SFAS 142 beginning January 1, 2002. The Company has performed the first of the
required impairment tests of goodwill and indefinite lived intangible assets as
of January 1, 2002, with no resulting impairment charge.
SFAS 142 also requires that the Company report, on a pro forma basis, the amount
of net income or loss for periods presented prior to January 1, 2002 as if SFAS
142 were implemented on January 1, 2001 and goodwill had not been amortized.
CONSOLIDATED PRO FORMA STATEMENT OF NET LOSS
THREE MONTHS ENDED MARCH 31, 2001
AS REPORTED PRO FORMA
---------------- -----------------
Net loss to common stockholders $ (9,844,337) $ (9,686,139)
================ =================
Net loss to common stockholders per
basic and diluted share $ (1.68) $ (1.65)
================ =================
PAGE 11 of 22
6. 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 antidilutive are excluded from the computation of weighted average shares
outstanding. Certain options which are currently antidilutive may be dilutive in
the future. In determining the diluted loss per common share for the three-month
periods ended March 31, 2002 and 2001, common stock equivalents are ignored
since the effect of including such equivalents would have been antidilutive.
7. SUBSEQUENT EVENTS
In April 2002, the Company renegotiated its lease with respect to a data center
in the Atlanta, Georgia, metropolitan area. The renegotiated lease, which is
payable through December 2015, reduces the leased space by more than 20,000
square feet and increases the base rent by $2.00 per square foot, subject to
future escalations of approximately 2.5% per lease year. The total estimated
savings under the renegotiated lease approximate $5 million. The Company is
relocating the operations of AmQUEST to the facility.
Also, on May 6, 2002, the Company reached an agreement with the landlord of a
facility the Company had been developing in the Northern Virginia high tech
corridor. The agreement releases the Company from the future payments under its
lease, which amounted to approximately $30 million through November 2015. The
agreement also requires a cash payment of approximately $1,515,000 and the
forfeiture of a $1,460,000 deposit. As of December 31, 2001, the Company had
recorded a provision of $5,650,000 for this expected result, including the
write-off of approximately $2,742,000 of construction-in-progress costs.
PAGE 12 of 22
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE-MONTH PERIODS ENDED MARCH 31, 2002 AND 2001
RESULTS OF OPERATIONS
Infocrossing is a premier provider of a full range of IT outsourcing services,
including mainframe and open system outsourcing, business process outsourcing,
IT infrastructure consulting and business continuity services. Due to rapid
changes and increasing complexities in information technology, outsourcing is an
efficient solution for many businesses and continues to be a growing trend. The
Company has grown through strategic acquisitions as well as organic growth.
During 2001, the Company signed a significant new IT managed services contract
with a new customer that by its terms, and as subsequently amended, is expected
to generate $50 million in revenues over the four-year life of its initial term.
On February 5, 2002, the Company entered into a Stock Purchase Agreement with
American Software, Inc. ("ASI"),whereby the Company purchased all of the
outstanding capital stock of AmQUEST, Inc. ("AmQUEST"), from ASI (the "AmQUEST
Acquisition"). As consideration for the purchase of AmQUEST's shares, the
Company paid ASI $20,284,000 in cash, subject to certain post closing
adjustments. In addition, the Company has incurred an estimated $537,000 in
other acquisition related costs. The acquisition combines two highly
complementary businesses and allows Infocrossing and its customers to benefit
from increased scale, enhanced services and expanded geographic reach.
Consistent with the Company's historical revenue base, AmQUEST's revenues are
derived primarily from multi-year service contracts. The combination strengthens
Infocrossing's position as one of the leading providers of IT outsourcing
solutions for large and mid-size companies.
For the three months ended March 31, 2002 (the "Current Quarter"), revenues
increased $5,719,000 (104%) to $11,233,000 from $5,514,000 for the three months
ended March 31, 2001 (the "Prior Quarter"). Revenues from AmQUEST contributed
$3,142,000 of this increase. Revenues grew by 47%, excluding growth contributed
by AmQUEST. This organic revenue growth is attributable to a significant
customer that began using the Company's services in 2001. This significant IT
managed services contract, as subsequently amended, is expected to generate $50
million in revenues over the four-year life of its initial term. There were no
revenues from this customer in the Prior Quarter.
Operating costs decreased $1,772,000 (21%) to $6,593,000 during the Current
Quarter compared with $8,364,000 in the Prior Quarter. Operating costs include
depreciation and amortization of $1,175,000 and $639,000 in the Current Quarter
and Prior Quarter, respectively. With additional operating costs of AmQUEST
excluded, operating costs declined by $3,986,000 (48%).
PAGE 13 of 22
On January 10, 2002, the Company settled a dispute of certain claims with a
software licensor. Pursuant to the settlement, the Company received credits
totaling $2,000,000 to be used towards certain future purchases. The entire
value of these credits has been recorded in the Current Quarter. As of March 31,
2002, credits totaling $1,117,000 had been applied against certain software
license fees. The remaining credits are expected to be used by June 30, 2002.
Additionally, the Company reversed accrued expenses of $796,000 for software
support and maintenance fees in the Current Quarter in connection with the
settlement of the dispute.
Beginning in the second quarter of 2001, the Company took steps to minimize its
costs through staff reductions and by suspending the operations at its
metropolitan Atlanta data center and the further development of the Northern
Virginia data center. Included in operating costs in the Current and Prior
Quarters are costs for these facilities of $565,000 and $1,404,000,
respectively.
Selling and promotion costs decreased $453,000 (37%) to $773,000 in the Current
Quarter from $1,226,000 in the Prior Quarter. With the effect of AmQUEST
excluded, selling costs declined $698,000 (57%).
Amortization related to a restricted stock award to a former executive was
$719,000 in the Prior Quarter. The former executive had resigned in November
2001, and the remaining unamortized balance of the award was written off at that
time.
In accordance with Statement of Financial Accounting Standards No. 142, goodwill
is no longer subject to amortization. In the Prior Quarter, goodwill
amortization was $158,000.
General and administrative expense decreased $955,000 (31%) to $2,156,000 for
the Current Quarter from $3,112,000 for the Prior Quarter. With the effect of
AmQUEST excluded, general administration expense declined $1,129,000 (36%),
reflecting in large part the cost savings initiatives and staff reductions
during 2001. Included in general and administrative expense is depreciation and
amortization (excluding goodwill amortization) of $188,000 and $83,000 in the
Current Quarter and Prior Quarter, respectively.
The Company recorded net interest expense of $381,000 in the Current Quarter,
compared with net interest income of $478,000 in the Prior Quarter. The net
reduction of $859,000 reflects a decrease in interest income of $485,000 from a
lower average balance of interest-earning assets during the Current Quarter and,
to a lesser extent, lower interest rates. The net reduction also includes an
increase of $373,000 in interest expense on a larger average outstanding debt
balance than in the Prior Quarter. In the Current Quarter, the Company issued
$10,000,000 of Senior Subordinated Debentures in connection with the AmQUEST
Acquisition, currently bearing interest at a rate of 12%. Amortization of debt
issuance costs, comprised primarily of amortization of the value ascribed to
warrants issued in connection with the debt, also contributed to the increased
interest expense in the Current Quarter.
PAGE 14 of 22
In the Current Quarter, the Company recorded no income tax benefit. Tax expense
of $195,000 was recorded in the Prior Quarter representing the difference
between the estimated benefit as previously reported in the period ended
December 31, 2000 compared with the amount recognized in the Company's income
tax return. 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
for Federal income tax purposes. The Company's net operating loss carry-forwards
begin to expire in 2020. The deferred tax asset associated with carrying forward
cumulative pre-tax losses has been fully offset by a valuation allowance due to
the uncertainty of realizing such tax benefits.
The Company had net income of $1,330,000 in the Current Quarter versus a net
loss of $7,782,000 in the Prior Quarter. Net loss to common stockholders after
accretion and accrued dividends on preferred stock was $919,000 for the Current
Quarter versus a loss of $9,844,000 in the Prior Quarter. The loss per common
share was $0.17 for the Current Quarter compared with a loss per common share of
$1.68 in the Prior 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 antidilutive.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2002, the Company's operating activities
provided cash of approximately $701,000, primarily as a result of net income of
$1,330,000. Non-cash expenses of $1,363,000 in depreciation and amortization and
$87,000 in debenture discount amortization were partially offset by $883,000 of
non-cash income composed of credits granted by a software licensor (net of
amounts used). As previously described, of $2,000,000 of credits issued by a
software licensor, the Company applied credits totaling $1,117,000 against
certain software license fees in the Current Quarter. Cash generated by
operating activities was partially reduced by several working capital
requirements. The Company had an increase in accounts receivable of $451,000; a
net decrease of $366,000 in accounts payable and accrued expenses; a decrease of
$328,000 in customer deposits, deferred revenue and other liabilities; and
payments against the accrued loss on leased facilities of $132,000.
The Company purchased all the outstanding shares of AmQUEST, Inc., which, with
other transaction-related costs, used approximately $20,373,000 of cash in the
current period. This transaction and the related issuance of debentures are more
fully described below. Additional uses of cash in investing activities included
$1,442,000 for the purchase of equipment, software, and other fixed assets and
$43,000 for product development and enhancements. In addition, there was an
increase in other assets related to fees for the issuance of the debentures.
Principal financing activities included proceeds of $10,000,000 from the
issuance of debentures (more fully described below); and $3,080,000 in payments
of principal with respect to debt and capital lease obligations.
PAGE 15 of 22
On February 1, 2002, in anticipation of the AmQUEST Acquisition, the Company
entered into a Securities Purchase Agreement (the "SPA") with a group of private
investors (the "Investors") whereby the Company issued Senior Subordinated
Debentures (the "Debentures") and warrants to purchase, initially, 2,000,000
shares of the common stock of the Company (the "Initial Warrants") (subject to
adjustments as discussed below) in exchange for an investment of $10,000,000.
Pursuant to the SPA, the proceeds of the sale of the Debentures were used to
partially fund the acquisition of AmQUEST.
The Debentures were issued at an aggregate face value of $10,000,000 with a
maturity of three years from February 1, 2002 (the "Issuance Date"), with the
right to extend the term of the Debentures for one additional year to February
1, 2006 at the Company's sole option. Pursuant to the terms of the Debenture,
the Company is required to make semi-annual interest payments of 12% per annum
for the first two years, 13% per annum for the period commencing on February 1,
2004 and ending on February 1, 2005, and (if the Company elects to extend the
maturity date for one year), 14% per annum. The Company has the option to pay
interest in the form of (a) cash; (b) additional Debentures, or (c) a
combination of cash and additional Debentures. If the Company chooses to make
interest payments using additional Debentures, the Company may be required to
issue additional warrants (the "Additional Warrants") pursuant to the terms of
the Debentures.
The Initial Warrants have been issued pursuant to a warrant agreement and are
subject to certain customary anti-dilution adjustments. The exercise price of
the Initial Warrants is $5.86. The Warrants expire if unexercised by January 31,
2007. In addition, up to 1,500,000 of the Initial Warrants may be cancelled upon
the prepayment of the Debentures. Cancellation of the Initial Warrants may take
place as follows:
(i) If the Debentures are repaid in full during the first year,
1,500,000 Initial Warrants will be cancelled.
(ii) If the Debentures are repaid in full after February 1, 2003 and
before February 1, 2005, Initial Warrants will be cancelled according to the
following formula: 62,500 shares multiplied by the number of full months between
the prepayment and February 1, 2005.
(iii) The Company is entitled to make, at any time, one (and only one)
partial prepayment of the Debentures in the amount of at least 50% of the total
outstanding indebtedness. In the event of such a partial prepayment, the number
of Initial Warrants to be cancelled shall be equal to the product of (a) the
number of Initial Warrants that would be cancelled pursuant to items (i) and
(ii) as if full repayment had been made, and (b) the ratio of the amount of
Debentures actually prepaid and the aggregate principal amount of Debentures
outstanding on the date of such partial prepayment (the "Prepayment Fraction").
(iv) If the Company makes a partial prepayment as described in (iii)
and then, before February 1, 2005, repays all the remaining aggregate principal
amount of Debentures outstanding, the number of Initial Warrants to be cancelled
shall be equal to the product of (x) the number of Initial Warrants that would
be cancelled pursuant to items (i) and (ii) as if full repayment had been made,
and (y) 1 minus the Prepayment Fraction.
PAGE 16 of 22
Additional Warrants, may be issued if the Company chooses to make interest
payments using additional Debentures. Additional warrants will not be subject to
cancellation. The fair market value of Additional Warrants issued, if any, will
be recorded as deferred financing costs and amortized over the remaining term of
the Debentures.
In addition to net cash provided by 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 three months ended March 31, 2002, the Company's EBITDA was $3,160,000
compared to an EBITDA loss of $6,466,000 in the Prior Quarter. EBITDA in the
Current Quarter includes $2,000,000 of Credits issued by a software licensor, as
previously described. Moreover, the significant improvement in EBITDA reflects
organic revenue growth combined with the cost savings and the contribution of
AmQUEST to the Company's operations.
In April 2002, the Company renegotiated the lease of its data center in
metropolitan Atlanta and, separately, on May 6, 2002, the Company reached an
agreement with the landlord of its partially developed data center in Northern
Virginia to terminate the lease. Savings under the renegotiated and terminated
leases are expected to add to EBITDA prospectively by approximately $600,000 per
quarter.
As of March 30, 2002, the Company had cash and equivalents of $9,957,000. The
Company believes that the combination of its cash and other current assets will
provide adequate resources to fund its ongoing operating requirements.
NEW FINANCIAL ACCOUNTING STANDARDS
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 applied SFAS 142 beginning January 1, 2002. The Company has
performed the first of the required impairment tests of goodwill and indefinite
lived intangible assets as of January 1, 2002, with no resulting impairment
charge.
In October 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 adopted
SFAS 144 in the first quarter of 2002. The Company believes that the adoption of
this statement will not have a material impact on its financial position,
results of operations, and cash flows.
PAGE 17 of 22
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 18 of 22
PART II - OTHER INFORMATION
ITEM 1 -LEGAL PROCEEDINGS
None.
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.
At March 31, 2002, the Company's outstanding fixed rate debt approximated
$12,215,000. If market rates decline, the Company runs the risk that the related
required payments on the fixed rate debt will exceed those that would be paid
based on current market rates.
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.
PAGE 19 of 22
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.1 Stock Purchase Agreement dated as of February 5, 2002by and
between the Company and American Software, Inc., incorporated by
reference to Exhibit 2.1 to a Current Report on Form 8-K filed
February 5, 2002.
3.1A Restated Certificate of Incorporation, incorporated by reference
to Exhibit 3.1 to the Company's Form 10-KSB for the period ended
October 31, 1999.
3.1B Certificate of Amendment to the Company's 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 Securities Purchase Agreement dated as of February 1, 2002 by and
between the Company and the Purchasers named therein, incorporated
by reference to Exhibit 4.1 to a Current Report on Form 8-K filed
February 5, 2002.
4.2 Warrant Agreement dated as of February 1, 2002 by and between the
Company and the Warrantholders party thereto, incorporated by
reference to Exhibit 4.3 to a Current Report on Form 8-K filed
February 5, 2002.
4.3 Amended and Restated Registration Rights Agreement by and between
the Company, and the Holders named therein, incorporated by
reference to Exhibit 99.4 to a Current Report on Form 8-K filed
February 5, 2002.
4.4 Second Amended and Restated Stockholders Agreement dated as of
February 1, 2002 by and between the Company and the Stockholders
named therein, incorporated by reference to Exhibit 99.5 to a
Current Report on Form 8-K filed February 5, 2002.
4.5 Management Rights Letter dated as of February 1, 2002 between the
Company and the Purchasers named therein, incorporated by
reference to Exhibit 99.3 to a Current Report on Form 8-K filed
February 5, 2002
4.6 Agreement Letter dated as of February 1, 2002 between the Company,
the Warrantholders named therein, and the Camden Entities named
therein, incorporated by reference to Exhibit 99.6 to a Current
Report on Form 8-K filed February 5, 2002
PAGE 20 of 22
(a) Exhibits (Continued):
10.1 First Amendment to Lease dated as of April 1, 2002 by and between
Crocker Realty Trust, L.P. and the Company.
10.2 Lease Termination Agreement dated as of April 19, 2002 by and
between Beco-Terminal LLC and the Company.
(b) Reports on Form 8-K:
A Current Report on Form 8-K was filed on February 5, 2002,
covering the acquisition of AmQUEST, Inc. on February 5, 2002 and
a related financing arrangement which closed on February 1, 2002.
PAGE 21 of 22
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/
May 14, 2002 ------------------------------------
Zach Lonstein
Chairman & Chief Executive Officer
/s/
May 14, 2002 ------------------------------------
William B. Fischer
Senior Vice President &
Chief Financial Officer
PAGE 22 of 22