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, 2003
Commission file number: 0-20824
INFOCROSSING, INC.
-------------------------------------------------------------
(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
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(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act): [ ] Yes [X] No.
There were 5,3784,516 shares of the registrant's Common Stock, $0.01 par value,
outstanding as of May 9, 2003.
Transitional Small Business Disclosure Form (check one): Yes [ ] No [X]
-1-
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
2003 2002
---------------- --------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 7,137 $ 7,026
Trade accounts receivable, net of allowances for
doubtful accounts of $625 and $1,051 3,407 4,369
Due from related parties 218 216
Prepaid license fees 697 827
Other current assets 1,388 1,308
----------- -----------
12,847 13,746
----------- -----------
PROPERTY and EQUIPMENT, net 20,509 19,437
----------- -----------
OTHER ASSETS:
Deferred software, net 1,619 1,742
Goodwill, net 28,361 28,451
Other intangible assets, net 1,038 1,142
Security deposits and other non-current assets 1,127 977
----------- -----------
32,145 32,312
----------- -----------
TOTAL ASSETS $ 65,501 $ 65,495
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 3,503 $ 4,093
Current portion of long-term debt and capitalized lease obligations 2,129 1,741
Current portion of accrued loss on leased facilities 206 208
Accrued expenses 4,001 4,093
Income taxes payable 117 96
Customer deposits, deferred revenue, and other current liabilities 304 1,381
----------- -----------
10,260 11,612
----------- -----------
LONG-TERM LIABILITES:
Debentures due in 2005, net of unaccreted discount 10,147 9,372
Long-term debt and capitalized lease obligations 1,918 1,506
Accrued loss on leased facilities 877 925
Deferred revenue and other long-term liabilities 1,045 1,096
----------- -----------
13,987 12,899
----------- -----------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE 8% SERIES A CUMULATIVE CONVERTIBLE PARTICIPATING PREFERRED STOCK;
$0.01 par value; 300,000 shares authorized; 157,115 shares issued and
outstanding (liquidation preference
of $75,364 at March 31, 2003) 55,637 53,189
----------- -----------
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 5,973,506 at March 31, 2003 and December 31, 2002 60 60
Additional paid-in capital 61,135 61,135
Accumulated deficit (72,727) (70,549)
----------- -----------
(11,532) (9,354)
Less 594,990 shares of common stock held in treasury, at cost (2,851) (2,851)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIT (14,383) (12,205)
----------- -----------
TOTAL LIABILITES AND STOCKHOLDERS' DEFICIT $ 65,501 $ 65,495
=========== ===========
See Notes to Consolidated Financial Statements (Unaudited).
-2-
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2003 2002
---------------- ----------------
(UNAUDITED)
REVENUES $ 13,129 $ 11,233
----------- -----------
COSTS and EXPENSES:
Operating costs 8,310 5,418
Selling and promotion costs 806 773
General and administrative expenses 1,734 1,969
Depreciation and amortization 1,416 1,362
----------- -----------
12,266 9,522
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INCOME FROM OPERATIONS 863 1,711
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Interest income (20) (84)
Interest expense 593 465
----------- -----------
573 381
----------- -----------
INCOME BEFORE INCOME TAXES 290 1,330
Income tax expense 20 -
----------- -----------
NET INCOME 270 1,330
Accretion and dividends on redeemable preferred stock (2,448) (2,249)
----------- -----------
NET LOSS TO COMMON STOCKHOLDERS $ (2,178) $ (919)
=========== ===========
BASIC AND DILUTED EARNINGS PER SHARE:
Net loss to common stockholders $ (0.40) $ (0.17)
=========== ===========
Weighted average number of common shares outstanding 5,379 5,342
=========== ===========
See Notes to Consolidated Financial Statements (Unaudited).
-3-
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(UNAUDITED, IN THOUSANDS)
ADDITIONAL TREASURY
PAID IN ACCUMULATED STOCK AT
COMMON SHARES PAR VALUE CAPITAL DEFICIT COST TOTAL
-------------- ------------- ------------- --------------- ------------- -------------
Balances, 5,974 $ 60 $ 61,135 $ (70,549) $ (2,851) $ (12,205)
December 31, 2002
Accretion and dividends on
Redeemable preferred stock - - - (2,448) - (2,448)
Net income - - - 270 - 270
-------------- ------------- ------------- --------------- ------------- -------------
Balances,
March 31, 2003 5,974 $ 60 $ 61,135 $ (72,727) $ (2,851) $ (14,383)
============== ============= ============= =============== ============= =============
See Notes to Consolidated Financial Statements (Unaudited).
-4-
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2003 2002
----------------- ----------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 270 $ 1,330
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 1,416 1,362
Accretion of discounted Debentures 139 87
Credits granted by a software licensor, net of amounts used - (883)
Decrease (increase) in:
Trade accounts receivable 962 (451)
Prepaid license fees and other current assets 50 81
Security deposits and other non-current assets (152) (133)
Increase (decrease) in:
Accounts payable (590) 2,325
Income taxes payable 21 -
Accrued expenses 834 (2,691)
Payments on accrued loss on leased facilities (37) (131)
Customer deposits, deferred revenue, and other liabilities (1,128) (328)
----------- -----------
Net cash provided by operating activities 1,785 568
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (969) (1,441)
Purchase of the outstanding stock of AmQUEST, Inc. and payments
of related costs (200) (20,373)
Increase in deferred software costs (28) (43)
----------- -----------
Net cash used in investing activities (1,197) (21,857)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Debentures - 10,000
Repayment of debt and capitalized leases (462) (3,080)
Advances to related parties, net (2) (5)
----------- -----------
Net cash (used in) provided by financing activities (464) 6,915
----------- -----------
Net cash provided by (used in) continuing operations 124 (14,374)
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Payments on portion of accrued loss on leased facilities relating to
discontinued operations (13) (13)
----------- -----------
Net increase (decrease) in cash and equivalents 111 (14,387)
Cash and equivalents, beginning of period 7,026 24,344
----------- -----------
Cash and equivalents, end of the period $ 7,137 $ 9,957
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 85 $ 171
=========== ===========
Income taxes $ 51 $ -
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
ACTIVITY:
Fees and other costs accrued in connection with the purchase
Of AmQUEST, Inc. $ - $ 448
=========== ===========
Equipment acquired subject to a capital lease $ 1,262 $ -
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
ACTIVITIES:
Treasury shares received in payment of a stock option exercise $ - $ 95
=========== ===========
Additional Debentures issued in lieu of a cash payment of interest $ 636 $ -
=========== ===========
See Notes to Consolidated Financial Statements (Unaudited).
-5-
INFOCROSSING, INC. AND SUBSIDIAIRES
NOTES TO THE CONSOLIDATED INTERIM
FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated balance sheet as of March 31, 2003, the consolidated statements
of operations and the consolidated statements of cash flows for the three months
ended March 31, 2003 and 2002, and the consolidated statement of stockholders'
deficit for the three months ended March 31, 2003 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, 2003 and 2002 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, 2002.
The consolidated financial statements include the accounts of Infocrossing, Inc.
and its wholly owned subsidiaries, including, subsequent to its acquisition on
February 5, 2002, the accounts of AmQUEST, Inc. (collectively, the "Company").
All significant intercompany balances and transactions have been eliminated.
2. ACQUISITION
On February 5, 2002, the Company purchased all of the outstanding capital stock
of 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 approximately $19,634,000 in
cash, after finalizing certain post closing adjustments. In addition, the
Company incurred approximately $612,000 in professional fees and other costs
related to the acquisition of which $150,000 remains unpaid at March 31, 2003.
The Company financed the AmQUEST Acquisition through the application of the
proceeds of the financing described in Note 3 and cash on hand.
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 $20,624,000 in
goodwill. This goodwill is not amortizable for tax purposes.
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 January 1, 2002. 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
------------------------
Revenues $ 12,708
====================
Net income $ 1,115
====================
Net loss to common stockholders $ (1,134)
====================
Net loss to common stockholders per
basic and diluted share $ (0.21)
====================
-6-
3. DEBENTURES
On February 1, 2002, 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 Camden Warrants") 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 Debentures, 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 Camden Warrants")
pursuant to the terms of the Debentures. Additional Camden Warrants will not be
subject to cancellation. The fair market value of Additional Camden 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 Camden
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 Camden 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 Camden Warrants is $5.86. The
Camden 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 and January 31, 2003, the Company made the interest payment
then due by issuing additional Debentures totaling $600,000 and $636,000,
respectively. 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 Camden
Warrants to purchase 123,600 shares of common stock.
4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 did not have an impact on the
Company's current financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123," which amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. The
transition and annual disclosure provisions of SFAS No. 148 are effective for
fiscal years ending after December 15, 2002. In addition, SFAS No. 148 amends
the disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company has adopted the disclosure provisions of SFAS No. 148 and
continues to account for stock-based compensation to employees under APB Opinion
No. 25 and related interpretations.
-7-
5. STOCK-BASED COMPENSATION
The Company accounts for stock options granted to employees and directors under
the Plan in accordance with Accounting Principles Board Opinion No. 25 and
related Interpretations. Accordingly, no compensation cost has been recognized
for stock option awards. Had compensation cost been determined in accordance
with Statement of Financial Accounting Standard No. 123 "Accounting for
Stock-Based Compensation", the Company's income (loss) in thousands of dollars
and income (loss) per common share for the three months ended March 31, 2003 and
2002 would have been as follows:
2003 2002
---------------- -----------------
Net loss to common stockholders:
As reported $ (2,178) $ (919)
=========== ===========
Pro forma $ (2,908) $ (1,642)
=========== ===========
Net loss to common stockholders per share:
As reported $ (0.40) $ (0.17)
=========== ===========
Pro forma $ (0.54) $ (0.31)
=========== ===========
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 months ended March 31, 2003 and 2002, common stock equivalents are
ignored since the effect of including such equivalents would have been
antidilutive.
-8-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Infocrossing is a leading provider of information technology and business
process outsourcing services to enterprise clients. We deliver a full suite of
managed and outsourced solutions that enable clients to leverage our
infrastructure and process expertise to improve their efficiency and reduce
their operating costs. We have gained significant expertise in managing complex
computing environments, beginning with traditional data center outsourcing
services and evolving to a comprehensive set of managed solutions. We support a
variety of clients, including Global 2000 companies, and help assure the optimal
performance, security, reliability, and scalability of our clients' mainframes,
distributed servers, and networks, irrespective of where the systems' components
are located. Due to rapid changes and increasing complexities in information
technology, we believe outsourcing is an efficient solution for many businesses
and continues to be a growing trend. We have grown through strategic
acquisitions as well as organic growth.
On February 5, 2002, we completed the acquisition of AmQUEST, Inc., an
Atlanta-based IT outsourcing company, for approximately $19.6 million in cash
after certain post-closing adjustments (the "AmQUEST Acquisition"). This
acquisition combined two highly complementary businesses and enabled us to
benefit from increased scale, enhanced services, and expanded geographic reach.
The combination strengthens our position as one of the leading providers of IT
outsourcing solutions for large and mid-size companies enterprises across a
broad range of industries including financial services, security, publishing,
healthcare, telecommunications and manufacturing.
THREE-MONTHS ENDED MARCH 31, 2003 AND 2002
For the three months ended March 31, 2003 (the "Current Quarter"), revenues
increased $1,896,000 (17%) to $13,129,000 from $11,233,000 for the three months
ended March 31, 2002 (the "Prior Quarter"). This revenue growth is primarily
attributable to new customer contracts added in 2002.
Operating costs increased $2,892,000 (53%) to $8,310,000 during the Current
Quarter compared with $5,418,000 for the Prior Quarter. Operating costs in the
Prior Quarter reflect a settlement of certain claims with a software licensor
whereby we received credits totaling $2,000,000 to be used toward certain future
purchases (the "Credits"). The entire value of the Credits was recorded in the
Prior Quarter, and we also reversed accrued expenses of $796,000 for software
support and maintenance fees in the Prior Quarter in connection with the
settlement of the dispute.
Selling and promotion costs increased $33,000 (4%) to $806,000 in the Current
Quarter from $773,000 in the Prior Quarter.
General and administrative expenses decreased $235,000 (12%) to $1,734,000 for
the Current Quarter from $1,969,000 for the Prior Quarter, primarily due to
continued cost savings initiatives.
Depreciation and amortization for fixed assets and other intangibles increased
$54,000 (4%), from $1,362,000 in the Prior Quarter to $1,416,000 in the Current
Quarter, primarily as a result of fixed asset additions since March 31, 2002.
We recorded net interest expense of $573,000 in the Current Quarter, compared
with $381,000 in the Prior Quarter. The net change of $192,000 reflects an
increase of $128,000 in interest expense on a larger average outstanding debt
balance than in the Prior Quarter and a decrease in interest income of $64,000,
primarily due to 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.
In the Current Quarter, we recorded income tax expense of $20,000, related to
estimated state income tax obligations. No tax expense was recorded in the Prior
Quarter. At March 31, 2003, we have net operating loss carryforwards of
approximately $44.1 million for federal income tax purposes, including
approximately $8.1 million acquired in the AmQUEST Acquisition, that begin to
expire in 2019. The use of the acquired net operating loss acquired in the
AmQUEST Acquisition may be restricted under current tax rules. Any future tax
benefit generated by the use of the net operating loss acquired in the AmQUEST
Acquisition will be treated as a reduction of goodwill. 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.
-9-
We had net income of $270,000 for the Current Quarter compared with $1,330,000
for the Prior Quarter. Net income for the Prior Quarter includes $2,796,000
related to the settlement of a dispute with a software licensor, as previously
described. Excluding the settlement of the dispute in the Prior Quarter, net
income increased by $1,736,000. Net loss to common stockholders after accretion
and accrued dividends on preferred stock was $2,178,000 for the Current Quarter
compared with $919,000 in the Prior Quarter. The loss per common share was $0.40
for the Current Quarter compared with $0.17 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
Net cash provided by operating activities was approximately $1,785,000 for the
three months ended March 31, 2003. During the Current Quarter, we had $270,000
of net income, $1,416,000 of depreciation and amortization, and $139,000 of
debenture discount amortization. Among other operating items, the decrease in
accounts receivable was offset by a decrease in customer deposits, and the
increase in accrued expenses was largely offset by a decrease in accounts
payable and an increase in non-current assets.
Principal investing activities include $969,000 for the purchase of property and
equipment. During the first quarter of 2003, we also incurred capital leases of
approximately $1,262,000.
Principal financing activities included $462,000 in payments of principal with
respect to debt and capital lease obligations.
On February 1, 2002, 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 Camden Warrants") in exchange for $10,000,000.
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 Debentures, 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 Camden Warrants")
pursuant to the terms of the Debentures. Additional Camden Warrants will not be
subject to cancellation. The fair market value of Additional Camden Warrants
issued, if any, will be recorded as deferred financing costs and amortized over
the remaining term of the Debentures.
On July 31, 2002 and January 31, 2003, the Company made the interest payment
then due by issuing additional Debentures totaling $600,000 and $636,000,
respectively. 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 Camden
Warrants to purchase 123,600 shares of common stock.
-10-
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, 2003, our EBITDA was $2,279,000 compared with
$3,073,000 in the Prior Quarter. EBITDA for the Prior Quarter includes
$2,796,000 related to the settlement of a dispute with a software licensor, as
previously described. Excluding the settlement of the dispute in the Prior
Quarter, the significant improvement in EBITDA reflects the contribution of
AmQUEST to our operations along with organic revenue growth and the additional
cost savings noted above. The following table reconciles EBITDA to net income
for the Current and Prior Quarter.
RECONCILIATION - IN THOUSANDS
THREE MONTHS ENDED MARCH 31,
2003 2002
----------------- -----------------
NET INCOME $ 270 $ 1,330
Add back:
Tax expense 20 -
Net interest expense 573 381
Depreciation and amortization 1,416 1,362
----------- -----------
EBITDA $ 2,279 $ 3,073
=========== ===========
As of March 31, 2003, we had cash and equivalents of $7,137,000. We believe that
our cash, current assets, and cash generated from future operating activities
will provide adequate resources to fund our ongoing operating requirements for
the next 12 months. We would need to obtain additional financing to fund any
significant acquisitions or other substantial investments.
EBITDA
"EBITDA" is defined as earnings before income taxes, depreciation, amortization,
amortization of a restricted stock award, interest and, when applicable,
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 and leased facilities and office closing costs have been
treated as operating items and are 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 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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123," which amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. The
transition and annual disclosure provisions of SFAS No. 148 are effective for
fiscal years ending after December 15, 2002. In addition, SFAS No. 148 amends
the disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company has adopted the disclosure provisions of SFAS No. 148 and
continues to account for stock-based compensation to employees under APB Opinion
No. 25 and related interpretations.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
The Consolidated Financial Statements are prepared in accordance with accounting
principles generally accepted in the U. S., which require the selection and
application of significant accounting policies, and which require management to
make significant estimates and assumptions. We believe 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 we process the agreed upon transactions
in accordance with the contractual performance standards, or perform 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
We maintain allowances for doubtful accounts for estimated losses resulting from
the inability of its customers to make required payments. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
Tangible and Intangible Assets
We have 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. Our 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 our operations could potentially
require future adjustments to asset valuations.
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.
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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 March 31, 2003, the Company's outstanding fixed rate debt was approximately
$15,283,000. 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 March 31, 2003, an evaluation was performed under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and Senior 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 Senior Vice President of Finance, concluded
that the Company's disclosure controls and procedures were effective as of March
31, 2003. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to March 31, 2003.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None.
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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 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.
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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.
May 12, 2003 /s/
------------------------------------------
Zach Lonstein
Chairman & Chief Executive Officer
May 12, 2003 /s/
------------------------------------------
William J. McHale
Senior Vice President of Finance
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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.
May 12, 2003 /s/
-----------------------------------------
Zach Lonstein
Chairman and Chief Executive Officer
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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.
May 12, 2003 /s/
-----------------------------------------
William J. McHale
Senior Vice President of Finance
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