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: SEPTEMBER 30, 2002
Commission file number: 0-20824
INFOCROSSING, INC.
-------------------------------------------------------------
(Exact name of registrant 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, 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 5,371,311 shares of the registrant's Common Stock, $0.01 par value,
outstanding as of November 6, 2002.
Transitional Small Business Disclosure Form (check one): Yes [ ] No [X]
PAGE 1 OF 21
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 DECEMBER 31, 2001
--------------------- --------------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and equivalents $ 5,163,915 $ 24,343,819
Accounts receivable, net of allowances of
$1,020,605 and $1,008,942 5,188,622 2,410,556
Other current assets 2,516,052 2,012,997
----------------- ----------------
12,868,589 28,767,372
PROPERTY and EQUIPMENT, net 20,017,379 17,173,134
DEFERRED SOFTWARE, NET 1,841,802 2,197,070
SECURITY DEPOSITS AND OTHER NON-CURRENT ASSETS 1,075,427 2,525,531
OTHER INTANGIBLE ASSETS, NET 1,142,068 374,114
GOODWILL 29,454,381 7,736,773
----------------- ----------------
TOTAL ASSETS $ 66,399,646 $ 58,773,994
================= ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 4,478,477 $ 2,039,424
Current portion of long-term debt 26,610 1,000,000
Current portion of capitalized lease obligations 1,989,517 893,683
Accrued expenses 5,453,137 6,120,923
Income taxes payable 67,400 -
Other current liabilities 687,424 3,764,447
----------------- ----------------
12,702,565 13,818,477
----------------- ----------------
LONG-TERM DEBT 9,258,543 1,761,728
----------------- ----------------
CAPITALIZED LEASE OBLIGATIONS 1,696,032 1,870,718
----------------- ----------------
OTHER LONG-TERM LIABILITIES 2,325,482 3,398,492
----------------- ----------------
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 $72,536,489 at
September 30, 2002) 50,855,340 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 of 5,965,801 and 5,912,416 at September 30, 2002
and December 31, 2001, respectively 59,658 59,124
Additional paid-in capital 61,066,378 59,053,570
Accumulated deficit (68,713,633) (62,392,549)
----------------- ----------------
(7,587,597) (3,279,855)
Less 594,990 and 578,623 shares at September 30, 2002 and December 31,
2001, respectively, of common stock held in treasury, at cost (2,850,719) (2,756,200)
----------------- ----------------
TOTAL STOCKHOLDERS' DEFICIT (10,438,316) (6,036,055)
----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 66,399,646 $ 58,773,994
================= ================
See Notes to Consolidated Interim Financial Statements (Unaudited).
PAGE 2 OF 21
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- ----------------------------------
2002 2001 2002 2001
--------------- -------------- --------------- ---------------
REVENUES $ 12,905,577 $ 7,354,307 $ 37,379,821 $ 19,477,824
----------- ----------- ----------- -----------
COSTS and EXPENSES:
Operating costs 8,631,513 7,353,396 23,214,253 22,600,333
Selling and promotion expenses 740,528 784,637 2,367,303 3,061,006
General and administrative expenses 1,743,566 2,364,593 5,512,014 7,806,820
Leased facilities and office closings (289,860) - (289,860) -
Amortization of restricted stock award - 718,750 - 2,156,250
Amortization of goodwill - 161,021 - 483,067
Other depreciation and amortization 1,473,911 896,995 4,415,900 2,399,289
----------- ----------- ----------- -----------
12,299,658 12,279,392 35,219,610 38,506,765
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 605,919 (4,925,085) 2,160,211 (19,028,941)
----------- ----------- ----------- -----------
OTHER (INCOME) EXPENSE:
Interest income (36,304) (269,252) (172,949) (1,225,030)
Interest expense 604,848 144,071 1,692,138 323,773
----------- ----------- ----------- -----------
568,544 (125,181) 1,519,189 (901,257)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 37,375 (4,799,904) 641,022 (18,127,684)
Income tax expense 67,400 - 67,400 697,000
----------- ----------- ----------- -----------
NET INCOME (LOSS) (30,025) (4,799,904) 573,622 (18,824,684)
Accretion of redeemable preferred stock (925,847) (839,557) (2,710,970) (2,458,307)
Accrued dividends on redeemable
preferred stock (1,422,285) (1,313,971) (4,183,736) (3,865,125)
----------- ----------- ----------- -----------
NET LOSS TO COMMON STOCKHOLDERS $ (2,378,157) $ (6,953,432) $ (6,321,084) $ (25,148,116)
=========== =========== =========== ===========
BASIC AND DILUTED EARNINGS PER SHARE:
Net loss to common stockholders $ (0.44) $ (1.18) $ (1.18) $ (4.28)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding 5,353,633 5,870,282 5,346,171 5,871,472
=========== =========== =========== ===========
See Notes to Consolidated Interim Financial Statements (Unaudited).
PAGE 3 OF 21
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
2002 2001
------------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ 573,622 $ (18,824,684)
Adjustments to reconcile net income/(loss) to cash used in operating
activities:
Depreciation and amortization 4,415,900 2,882,355
Amortization of debenture discount 354,672 -
Amortization of restricted stock award - 2,156,250
Leased facilities and office closings (289,860) -
Decrease/(increase) in:
Accounts receivable (1,209,844) (1,328,051)
Other current assets (289,844) 3,722,089
Increase/(decrease) in:
Accounts payable 307,438 341,559
Income taxes payable 67,400 697,000
Accrued expenses (1,974,735) 2,280,490
Other current and long-term liabilities (2,826,125) 1,168,614
---------------- --------------
Net cash used in operating activities (871,376) (6,904,378)
---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,237,824) (8,692,359)
Purchase of AmQUEST, Inc. (20,746,257) -
Redemptions at maturity of investments in marketable debt securities - 3,413,069
Purchases of treasury stock - (66,567)
Increase in deferred software costs (101,244) (267,255)
Decrease in security deposits and other non-current assets 69,444 23,111
---------------- --------------
Net cash used in investing activities (24,015,881) (5,590,001)
---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debentures and other debt 10,000,000 3,011,659
Repayment of debt and capitalized leases (4,436,617) (705,024)
Stock option exercises and other stock transaction 198,817 -
Advances to related parties, net (16,173) (469,338)
---------------- --------------
Net cash provided by/(used in) financing activities 5,746,027 1,837,297
---------------- --------------
Net cash used in continuing operations (19,141,230) (10,657,082)
---------------- --------------
CASH FLOW FROM DISCONTINUED OPERATION:
Payments on accrued loss on leased facilities relating to
discontinued operation (38,674) (50,958)
---------------- --------------
Net decrease in cash and equivalents (19,179,904) (10,708,040)
Cash and equivalents, beginning of the period 24,343,819 36,763,831
---------------- --------------
Cash and equivalents, end of the period $ 5,163,915 $ 26,055,791
================ ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash interest paid $ 529,676 $ 292,076
================ ==============
Income taxes paid $ 6,500 $ 38,082
================ ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH OPERATING ACTIVITY:
Forfeiture of security deposit in partial settlement of lease $ 1,460,000 $ -
================ ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITY:
Fees and other costs accrued in connection with the purchase
of AmQUEST $ 406,515 $ -
================ ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITY:
Equipment purchased subject to capital leases $ 1,244,895 $ 57,500
================ ==============
Debentures issued in lieu of an interest payment $ 600,000 $ -
================ ==============
Treasury shares received in payment of a stock option exercise $ 94,525 $ 117,000
================ ==============
See Notes to Consolidated Interim Financial Statements (Unaudited).
PAGE 4 OF 21
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(UNAUDITED)
ADDITIONAL
COMMON PAID IN ACCUMULATED TREASURY
SHARES PAR VALUE CAPITAL DEFICIT STOCK AT 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 - (94,519) 6
Accretion and
accrued dividends
on redeemable
preferred stock - - - (6,894,706) - (6,894,706)
Value of warrants
given in connection
with a debenture
issuance - - 1,720,000 - - 1,720,000
Exercises of options 28,385 284 191,574 - - 191,858
Miscellaneous - - 6,959 - - 6,959
Net income - - - 573,622 - 573,622
---------- -------- ----------- ----------- ----------- ------------
Balances,
September 30, 2002 5,965,801 $ 59,658 $ 61,066,378 $ (68,713,633) $ (2,850,719) $ (10,438,316)
========== ======== =========== =========== =========== ============
See Notes to Consolidated Interim Financial Statements (Unaudited).
PAGE 5 OF 21
INFOCROSSING, INC. AND SUBSIDIAIRES
NOTES TO THE CONSOLIDATED INTERIM
FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated balance sheet as of September 30, 2002; the consolidated
statements of operations for the three and nine months ended September 30, 2002
and 2001; the consolidated statement of stockholders' deficit for the nine
months ended September 30, 2002; and the consolidated statements of cash flows
for the nine months ended September 30, 2002 and 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, 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 purchased all of the outstanding capital stock
of AmQUEST, Inc. ("AmQUEST"), a Georgia corporation, from its former parent
company American Software, Inc. ("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 related to the acquisition.
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.
The Company acquired client contracts valued at $1,200,000. This intangible
asset is being amortized over five years using an accelerated method to
approximate the anticipated decline in the revenues of the acquired contracts as
they expire over that time. The acquisition also generated approximately
$21,718,000 in goodwill.
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 each of the years
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 STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------ -------------------------------
2002 2001 2002 2001
------------- ------------- ------------- --------------
Revenues $ 12,906 $ 11,863 $ 38,855 $ 33,445
--------- --------- ---------- ----------
Net income (loss) (30) (4,969) 449 (21,724)
========= ========= ========== ==========
Net loss to common stockholders $ (2,378) $ (7,123) $ (6,445) $ (28,048)
========= ========= ========== ==========
Net loss to common stockholders
per basic and diluted share $ (0.44) $ (1.21) $ (1.21) $ (4.78)
========= ========= ========== ==========
PAGE 6 OF 21
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 $10,000,000. Pursuant to the
SPA, the proceeds of the sale of the Debentures were used to fund a portion of
the cost of 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 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 from February 1, 2005. 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. 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.
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 a Warrant Agreement dated as
of February 1, 2002 by and between the Company and the Investors (the "Warrant
Agreement") and are subject to certain customary anti-dilution adjustments. The
exercise price of the Initial Warrants is $5.86. The Warrants expire on January
31, 2007 and may be cancelled, in part, upon the prepayment of the Debentures as
more fully described in the Warrant Agreement.
On July 31, 2002, the Company made the interest payment then due by issuing
additional Debentures totaling $600,000. The additional Debentures are subject
to the same interest rates and other terms as the original Debentures. If any
Debentures are outstanding at February 1, 2004, the Company will be required to
issue Additional Warrants to purchase 60,000 shares of common stock.
Repayment of Bank Loan
At the time of the AmQUEST Acquisition, the Company repaid the $2,660,000
balance outstanding on a bank loan.
4. SETTLEMENTS
CREDITS GRANTED
In January 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 toward certain future purchases (the "Credits").
Additionally, support fees of $1,136,000 under the software and support
agreement, including $522,000 of past due amounts, were waived by the Licensor.
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.
PAGE 7 OF 21
The Company expected that it would 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 September 30, 2002, all of the Credits had been used.
RENEGOTIATED LEASES
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, to an annual
base rent of $525,000. The base rent is subject to future escalations of
approximately 2.5% per lease year. In addition, the Company is responsible for a
pro rata share of the building's operating expenses and real estate taxes. The
total estimated savings under the renegotiated lease approximate $5 million over
the remaining term of the lease. The Company is relocating the operations of
AmQUEST to the facility.
Also in May 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 required 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. During
the current quarter, approximately $290,000 of the provision relating to
estimated settlement costs was eliminated.
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 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
(IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
--------------------------------------- ---------------------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------------ ----------------- ----------------- ------------------
Net loss $ (4,800,000) $ (4,639,000) $ (18,825,000) $ (18,342,000)
-------------- -------------- -------------- --------------
Net loss to common
stockholders $ (6,953,000) $ (6,792,000) $ (25,148,000) $ (24,665,000)
============== ============== ============== ==============
Net loss to common
stockholders per
diluted share $ (1.18) $ (1.16) $ (4.28) $ (4.20)
============== ============== ============== ==============
PAGE 8 OF 21
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. Common stock equivalents that are
antidilutive are excluded from the computation of weighted average shares
outstanding. Certain common stock equivalents that are currently antidilutive
may be dilutive in the future. In determining the diluted loss per common share
for the three and nine-month periods ended September 30, 2002 and 2001, common
stock equivalents are ignored since the effect of including such equivalents
would have been antidilutive.
PAGE 9 OF 21
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Infocrossing is a premier provider of a full range of IT outsourcing services,
including mainframe and open systems 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.
On February 5, 2002, the Company purchased all of the outstanding capital stock
of AmQUEST, Inc. ("AmQUEST"), from American Software, Inc. ("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.
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
For the three months ended September 30, 2002 (the "Current Quarter"), revenues
increased 5,552,000 (75%) to $12,906,000 from $7,354,000 for the three months
ended September 30, 2001 (the "Prior Quarter"). Revenues from AmQUEST
contributed $4,604,000 of this increase. Revenues grew by 13%, excluding growth
contributed by AmQUEST. This organic revenue growth is primarily attributable to
a significant new IT managed services contract, signed in 2001, with an initial
term of four years. The contract is subject to three automatic annual renewals
beginning in September 2005. Revenues from this significant customer were
$1,024,000 in the Prior Quarter compared with $3,778,000 in the Current Quarter,
representing 14% and 29% of total revenues in the respective periods. The
increase in revenues from this customer reflects a higher level of services
provided in the Current Quarter.
Operating costs increased $1,278,000 (17%) to $8,631,000 during the Current
Quarter compared with $7,353,000 for the Prior Quarter. With the additional
operating costs of AmQUEST excluded, operating costs declined by $1,689,000
(23%). The reduced level of operating costs reflects actions the Company took in
2001 to minimize its costs through staff reductions. In addition, in 2001 the
Company suspended operations at its metropolitan Atlanta data center and the
further development of a Northern Virginia data center. Operating costs as a
percentage of revenues decreased to 67% in the Current Quarter from 100% in the
Prior Quarter. The Company expects that its operating costs will continue to
decrease, as a percentage of revenues, to approximately 62% by December 2002.
In April 2002, the Company renegotiated the lease of its metropolitan Atlanta
data center. The renegotiated lease, which is payable through December 2015,
reduces the leased space by more than 20,000 square feet and increases the base
rent by $2.00 per square foot, to an annual base rent of $525,000. The base rent
is subject to future escalations of approximately 2.5% per lease year. In
addition, the Company is responsible for a pro rata share of the building's
operating expenses and real estate taxes. The total estimated savings under the
renegotiated lease approximate $5 million over the remaining term of the lease.
Included in operating costs in the Current and Prior Quarters are expenses for
this facility of $171,000 and $271,000, respectively. The Company previously
announced its plan to relocate most of the operations of AmQUEST to this data
center. On September 23, 2002, the Company announced that all mainframe clients
had been migrated to the Atlanta data center. The Company is in the process of
completing the relocation plan with respect to the non-mainframe clients. This
relocation is expected to be completed by February 2003.
PAGE 10 OF 21
Also in May 2002, the Company reached an agreement with the landlord of the
Northern Virginia data center. The agreement releases the Company from the
future payments under its lease, which amounted to approximately $30 million
through November 2015. The agreement also required a cash payment of
approximately $1,515,000 and the forfeiture of a $1,460,000 deposit. As of
December 31, 2001, 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. During the current quarter, approximately
$290,000 of the provision relating to estimated settlement costs was eliminated.
Included in operating costs in the Prior Quarter are expenses for this facility
of $569,000.
Selling and promotion costs decreased $44,000 (6%) to $741,000 in the Current
Quarter from $785,000 in the Prior Quarter. Selling and promotion costs as a
percentage of revenues decreased to 6% from 11% in the Prior Quarter, due to
decreased costs and increased revenues.
General and administrative expenses decreased $621,000 (26%) to $1,744,000 for
the Current Quarter from $2,365,000 for the Prior Quarter. With the effect of
AmQUEST excluded, general and administrative expense declined by $795,000 (34%),
reflecting in large part cost savings initiatives and staff reductions commenced
in 2001.
Amortization related to a restricted stock award to a former executive was
$719,000 in the Prior Quarter. The former executive 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 $161,000.
Other depreciation and amortization for fixed assets and other intangibles
increased $577,000 (64%), from $897,000 in the Prior Quarter to $1,474,000 in
the Current Quarter. Without the effect of AmQUEST, other depreciation and
amortization increased $232,000 (26%), primarily as a result of fixed asset
purchases since December 31, 2001.
The Company recorded net interest expense of $569,000 in the Current Quarter,
compared with net interest income of $125,000 in the Prior Quarter. The net
change of $694,000 reflects a decrease in interest income of $233,000 from a
lower average balance of interest-earning assets during the Current Quarter.
Also, to a lesser extent, the decrease in interest income results from lower
interest rates. The net change also includes an increase of $461,000 in interest
expense on a larger average outstanding debt balance than in the Prior Quarter.
In February 2002, the Company issued $10,000,000 of Senior Subordinated
Debentures in connection with the AmQUEST Acquisition, bearing interest at an
effective rate of 12.3%. Amortization of debt issuance costs and amortization of
the debt discount also contributed to the increased interest expense in the
Current Quarter.
In the Current Quarter, the Company recorded income tax expense of $67,000,
related to estimated state income tax obligations. No tax expense was recorded
in the Prior Quarter. The cumulative tax benefit recorded by the Company prior
to December 31, 2001 was limited to the refund of taxes paid in prior years that
the Company 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. At September 30,
2002, the Company has net operating loss carry-forwards of approximately $33
million for Federal tax purposes that begin to expire in 2019. The deferred tax
asset associated with carrying forward cumulative pre-tax losses has been fully
offset by a valuation allowance due to the uncertainty of realizing such tax
benefits.
The Company had a net loss of $30,000 for the Current Quarter versus a net loss
of $4,800,000 for the Prior Quarter. Net loss to common stockholders after
accretion and accrued dividends on preferred stock was $2,378,000 for the
Current Quarter compared to a net loss of $6,953,000 in the Prior Quarter. The
loss per common share was $0.44 for the Current Quarter compared with a loss per
common share of $1.18 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.
PAGE 11 OF 21
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
For the nine months ended September 30, 2002 (the "Current Period"), revenues
increased $17,902,000 (92%) to $37,380,000 from $19,478,000 for the nine months
ended September 30, 2001 (the "Prior Period"). Revenues from AmQUEST contributed
$12,395,000 of this increase. Revenues grew by 28%, excluding growth contributed
by AmQUEST. This organic revenue growth is primarily attributable to a
significant new IT managed services contract, signed in 2001, with an initial
term of four years. The contract is subject to three automatic annual renewals
beginning in September 2005. Revenues from this significant customer were
$1,919,000 in the Prior Period compared with $11,116,000 in the Current Period,
representing 10% and 30% of total revenues in the respective periods. The
increase in revenue from this customer reflects a higher level of service
provided in the Current Period.
Operating costs increased $614,000 (3%) to $23,214,000 during the Current
Period compared with $22,600,000 for the Prior Period. With the additional
operating costs of AmQUEST excluded, operating costs declined by $7,654,000
(34%). The reduced level of operating costs reflects actions the Company took in
2001 to minimize its costs through staff reductions. In addition, in 2001 the
Company suspended operations at its metropolitan Atlanta data center and the
further development of the Northern Virginia data center. Operating costs as a
percentage of revenues decreased to 62% in the Current Period from 116% in the
Prior Period. Operating costs in the Current Period reflect the benefit from the
settlement with a software licensor described below. The Company expects that
its recurring operating costs will continue to decrease, as a percentage of
revenues, to approximately 62% by December 2002.
In April 2002, the Company renegotiated the lease of its metropolitan Atlanta
data center. The renegotiated lease, which is payable through December 2015,
reduces the leased space by more than 20,000 square feet and increases the base
rent by $2.00 per square foot, to an annual base rent of $525,000. The base rent
is subject to future escalations of approximately 2.5% per lease year. In
addition, the Company is responsible for a pro rata share of the building's
operating expenses and real estate taxes. The total estimated savings under the
renegotiated lease approximate $5 million over the remaining term of the lease.
Included in operating costs in the Current and Prior Periods are expenses for
this facility of $364,000 and $824,000, respectively. The Company previously
announced its plan to relocate most of the operations of AmQUEST to this data
center. On September 23, 2002, the Company announced that all mainframe clients
had been migrated to the Atlanta data center. The Company is in the process of
completing the relocation plan with respect to the non-mainframe clients. This
relocation is expected to be completed by February 2003.
Also in May 2002, the Company reached an agreement with the landlord of the
Northern Virginia data center. The agreement releases the Company from the
future payments under its lease, which amounted to approximately $30 million
through November 2015. The agreement also required a cash payment of
approximately $1,515,000 and the forfeiture of a $1,460,000 deposit. As of
December 31, 2001, 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. During the current quarter, approximately
$290,000 of the provision relating to estimated settlement costs was eliminated.
Included in operating costs in the Current Period and Prior Period are costs for
this facility of $217,000 and $1,709,000, respectively.
In January 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 toward certain future purchases (the "Credits"). The
entire value of the Credits has been recorded in the Current Period, and as of
September 30, 2002, all the Credits have been applied against certain software
license fees. Additionally, the Company reversed accrued expenses of $796,000
for software support and maintenance fees in the Current Period in connection
with the settlement of the dispute.
Selling and promotion costs decreased $694,000 (23%) to $2,367,000 for the
Current Period from $3,061,000 for the Prior Period. Selling and promotion costs
as a percentage of revenues decreased to 6% from 16% in the Prior Period, due to
decreased costs and increased revenues.
PAGE 12 OF 21
General and administrative expenses decreased $2,295,000 (29%) to $5,512,000 for
the Current Period from $7,807,000 for the Prior Period. With the effect of
AmQUEST excluded, general and administrative expenses declined $2,746,000 (35%),
reflecting in large part the cost savings initiatives and staff reductions
commenced in 2001.
Amortization related to a restricted stock award to a former executive was
$2,156,000 in the Prior Period. The former executive 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 Period, goodwill
amortization was $483,000.
Other depreciation and amortization for fixed assets and other intangibles rose
$2,017,000 (84%), from $2,399,000 for the Prior Period to $4,416,000 for the
Current Period. Without the effect of AmQUEST, other depreciation and
amortization increased $839,000 (35%), primarily as a result of fixed asset
purchases since December 31, 2001.
The Company recorded net interest expense of $1,519,000 in the Current Period,
compared with net interest income of $901,000 in the Prior Period. The net
change of $2,420,000 reflects a decrease in interest income of $1,052,000 from a
lower average balance of interest-earning assets during the Current Period.
Also, to a lesser extent, the decrease in interest income results from lower
interest rates. The net change also includes an increase of $1,368,000 in
interest expense on a larger average outstanding debt balance than in the Prior
Period. In February 2002, the Company issued $10,000,000 of Senior Subordinated
Debentures in connection with the AmQUEST Acquisition, bearing interest at an
effective rate of 12.3%. Amortization of debt issuance costs and amortization of
the debt discount also contributed to the increased interest expense in the
Current Period.
In the Current Period, the Company recorded income tax expense of $67,000,
representing estimated state income taxes. Tax expense of $697,000 was recorded
in the Prior Period, representing the reconciliation between the estimated
benefit reported in the period ended December 31, 2000 and the amount recognized
in the Company's income tax return. The cumulative tax benefit recorded by the
Company prior to December 31, 2001 was 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 has net operating loss carry-forwards of approximately $33
million for Federal income tax purposes that begin to expire in 2019. The
deferred tax asset associated with carrying forward cumulative pre-tax losses
has been fully offset by a valuation allowance due to the uncertainty of
realizing such tax benefits.
The Company had net income of $574,000 for the Current Period versus a net loss
of $18,825,000 for the Prior Period. Net loss to common stockholders after
accretion and accrued dividends on preferred stock was $6,321,000 for the
Current Period compared with a net loss of $25,148,000 in the Prior Period. The
loss per common share was $1.18 for the Current Period compared with a loss per
common share of $4.28 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 antidilutive.
PAGE 13 OF 21
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2002, the Company's operating
activities used cash of approximately $871,000. The Company had net income of
$574,000 and non-cash expenses of $4,416,000 in depreciation and amortization,
$355,000 in debenture discount amortization, and the elimination of a $290,000
provision for estimated settlement costs recorded during the fourth quarter of
2001 related to a leased facility closing. Uses of cash included an increase in
accounts receivable of $1,210,000 and payments from accrued expenses and other
liabilities of $4,801,000, including $1,282,000 for payments of liabilities
assumed in connection with the AmQUEST acquisition, $1,515,000 in settlement of
a building lease in the Northern Virginia high tech corridor, and rent payments
related to closed offices of $2,139,000. The building lease settlement
agreement, which also involved the forfeiture of a $1,460,000 deposit, releases
the Company from the future payments under the lease, which amounted to
approximately $30 million through November 2015. The settlement was accrued as
of December 31, 2001.
The Company purchased all the outstanding shares of AmQUEST, which, with other
transaction-related costs, used approximately $20,746,000 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
$3,238,000 for the purchase of property and equipment, excluding $1,245,000 that
was acquired pursuant to capital leases.
Principal financing activities included proceeds of $10,000,000 from the
issuance of debentures (more fully described below). Cash used in financing
activities included $4,437,000 in payments of principal with respect to debt and
capital lease obligations.
On February 5, 2002, the Company purchased all of the outstanding capital stock
of AmQUEST, Inc. As consideration for the purchase of AmQUEST's shares, the
Company paid the seller $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 related to the acquisition.
On February 1, 2002, in connection with the acquisition of AmQUEST, 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 $10,000,000. Pursuant to the
SPA, the proceeds from the sale of the Debentures were used to fund a portion of
the cost of 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 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 from February 1, 2005. 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. 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.
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 and may be cancelled upon the prepayment of the Debentures, as more fully
described in the Warrant Agreement.
PAGE 14 OF 21
On July 31, 2002, the Company made the interest payment then due by issuing
additional Debentures totaling $600,000. The additional Debentures are subject
to the same interest rates and other terms as the original Debentures. If the
Debentures remain unpaid at February 1, 2004, the Company will be required to
issue Additional Warrants to purchase 60,000 shares of common stock.
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 nine months ended September 30, 2002, the Company's EBITDA was $6,576,000
compared to an EBITDA loss of $13,990,000 in the Prior Period. EBITDA for the
Current Period includes $2,796,000 related to the settlement of a dispute with 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. EBITDA for
the Current Quarter was $2,080,000 compared with an EBITDA loss of $3,148,000
for the Prior Quarter. The settlement with the software licensor did not affect
EBITDA in the Current Quarter as it was recognized in the first quarter of 2002.
In April 2002 the Company renegotiated the lease of its data center in
metropolitan Atlanta. The renegotiated lease, which is payable through December
2015, reduces the leased space by more than 20,000 square feet and increases the
base rent by $2.00 per square foot, to an annual base rent of $525,000. The base
rent is subject to future escalations of approximately 2.5% per lease year. In
addition, the Company is responsible for a pro rata share of the building's
operating expenses and real estate taxes. The total estimated savings under the
renegotiated lease approximate $5 million over the remaining term of the lease.
The Company previously announced its plan to relocate most of the operations of
AmQUEST to this data center. On September 23, 2002, the Company announced that
all mainframe clients had been migrated to the Atlanta data center. The Company
is in the process of completing the relocation plan with respect to the
non-mainframe clients. This relocation is expected to be completed by February
2003.
Also, in May 2002 the Company reached an agreement with the landlord to
terminate the lease of its partially developed data center in Northern Virginia.
In the Prior Quarter and Prior Period, costs associated with the Northern
Virginia data center were $569,000 and $1,690,000, respectively.
As of September 30, 2002, the Company had cash and equivalents of $5,164,000. In
the Current Quarter the Company's operating activities generated cash of
approximately $692,000. The Company expects that its operating activities will
continue to generate cash. The Company believes that its cash, current assets,
and cash generated from future operating activities will provide adequate
resources to fund its ongoing operating requirements.
EBITDA
"EBITDA" is defined as earnings before income taxes, depreciation, amortization,
amortization of a restricted stock award, interest, exchange gains, exchange
losses and, when applicable, loss on excess office space, restructuring costs,
impairment of assets, and other income and expenses. The issuance of purchase
credits by a software licensor in connection with the settlement of a dispute
has been treated as an operating item and is included in EBITDA. EBITDA should
not be considered as an alternative to operating income, as defined by
accounting principles generally accepted in the United States, as an indicator
of our operating performance, or to cash flows, as a measure of liquidity.
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.
PAGE 15 OF 21
The Company applied SFAS 142 beginning January 1, 2002. The Company performed
the 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 adoption of this statement did not
have a material impact on its financial position, results of operations, and
cash flows.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146"). SFAS 146 provides guidance on the timing of the recognition of costs
associated with exit or disposal activities, requiring such costs to be
recognized when incurred. Previous guidance required the recognition of costs at
the date of commitment to an exit or disposal plan. The provisions of SFAS 146
are to be adopted prospectively after December 31, 2002. Although SFAS 146 may
impact the accounting for costs related to exit or disposal activities the
Company may enter into in the future, particularly the timing of the recognition
of these costs, the adoption of the statement will not have an impact on the
Company's current financial condition or results of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which requires the selection
and application of significant accounting policies, and which requires
management to make significant estimates and assumptions. The Company believes
that the following are some of the more critical judgment areas in the
application of its accounting polices.
Revenue Recognition
The majority of revenues are invoiced on a monthly recurring basis under
long-term contracts, typically ranging from one to five years in length,
providing for either fixed monthly fees or time and material billings. Revenue
is recognized under these contracts when the Company processes the agreed upon
transactions in accordance with the contractual performance standards, or
performs the services, and collection is reasonably assured. Application of
these standards can involve management's judgments, including judgment as to the
collection of invoiced amounts.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
Tangible and Intangible Assets
The Company has significant tangible and intangible assets on its balance sheet,
primarily property and equipment, deferred software costs, and intangible
assets, primarily goodwill, related to acquisitions. The assignment of useful
lives to these assets and the valuation and classification of intangible assets
involves significant judgments and the use of estimates. The testing of these
tangible and intangibles under established accounting guidelines for impairment
also requires significant use of judgment and assumptions. The Company's assets
are tested and reviewed for impairment on an ongoing basis under the established
accounting guidelines. Changes in business conditions or changes in the
decisions of management as to how assets will be deployed in the Company's
operations could potentially require future adjustments to asset valuations.
PAGE 16 OF 21
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 material 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 September 30, 2002, the Company's outstanding fixed rate debt approximated
$14,336,000. 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 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.
ITEM 4 - CONTROLS AND PROCEDURES
During the quarter ended September 30, 2002, an evaluation was performed under
the supervision and with the participation of the Company's management,
including the Chief Executive Officer and Vice President of Finance, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Company's management, including
the Chief Executive Officer and the Vice President of Finance, concluded that
the Company's disclosure controls and procedures were effective as of September
30, 2002. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to September 30, 2002.
PART II - OTHER INFORMATION
ITEM 1 -LEGAL PROCEEDINGS
None.
PAGE 17 OF 21
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.1 Stock Purchase Agreement dated as of February 5, 2002 by 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.
10.1 First Amendment to Lease dated as of April 1, 2002 by and between
Crocker Realty Trust, L.P. and the Company, incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for March 31, 2002.
10.2 Lease Termination Agreement dated as of April 19, 2002 by and
between Beco-Terminal LLC and the Company, incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for March 31, 2002.
(b) Reports on Form 8-K:
None.
PAGE 18 OF 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
INFOCROSSING, INC.
November 8, 2002 /s/
------------------------------------------
Zach Lonstein
Chairman & Chief Executive Officer
November 8, 2002 /s/
------------------------------------------
William J. McHale
Vice President of Finance
PAGE 19 OF 21
CERTIFICATIONS
I, Zach Lonstein, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Infocrossing, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of the quarterly report (the "Evaluation
Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of the Registrant's Board of Directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 8, 2002 /s/
-----------------------------------------
Zach Lonstein
Chairman and Chief Executive Officer
PAGE 20 OF 21
CERTIFICATIONS (CONTINUED)
I, William J. McHale, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Infocrossing, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of the quarterly report (the "Evaluation
Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of the Registrant's Board of Directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 8, 2002 /s/
-----------------------------------------
William J. McHale
Vice President of Finance
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