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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended: DECEMBER 31, 2002
Commission file number: 0-20824
INFOCROSSING, INC.
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(Exact name of registrant as specified in its Charter)
DELAWARE 13-3252333
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2 CHRISTIE HEIGHTS STREET LEONIA, NJ 07605
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 840-4700
Securities registered pursuant to Section 12(b)
of the Exchange Act: NONE Securities registered
pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days: [X] Yes [ ] No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in a definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act): [ ] Yes [X] No.
On June 30, 2002, the aggregate market value of the outstanding shares of voting
stock held by non-affiliates of the registrant was approximately $26,018,000.
On March 24, 2003, 5,378,516 shares of the registrant's Common Stock, $0.01 par
value, were outstanding.
Part III, Items 10-13 of this document are incorporated by reference from a
Definitive Proxy Statement to be filed by the Company on or before April 30,
2003.
-1-
FORWARD LOOKING STATEMENTS
Statements made in this Annual Report, including the accompanying
financial statements and notes, other than statements of historical fact, are
forward-looking statements that involve risks and uncertainties. These
statements relate to future events or our future financial performance,
including statements relating to products, customers, suppliers, business
prospects and effects of acquisitions. In some cases, forward-looking statements
can be identified by terminology such as "may," "will," "should," "expect,"
"anticipate," "intend," "plan," "believe," "estimate," "potential," or
"continue," the negative of these terms or other comparable terminology. These
statements involve a number of risks and uncertainties, including incomplete or
preliminary information; changes in government regulations and policies;
continued acceptance of our products and services in the marketplace;
competitive factors; technological changes; our dependence upon third-party
suppliers; intellectual property rights; business and economic conditions
generally; and other risks and uncertainties including those set forth below
that could cause actual events or results to differ materially from any
forward-looking statement.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Annual Report on Form 10-K
and are based on information currently and reasonably known to us. We undertake
no obligation to release any revisions to or update these forward-looking
statements to reflect events or circumstances that occur after the date of this
Annual Report on Form 10-K or to reflect the occurrence or effect of anticipated
or unanticipated events.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Unless stated otherwise, references in this report to "Infocrossing," "Company,"
"we," "our" or "us" refer to Infocrossing, Inc., a Delaware corporation, and its
subsidiaries. Each trademark, trade name or service mark of any other company
appearing in this Annual Report on Form 10-K belongs to its holder.
We are a leading provider of information technology ("IT") and business process
outsourcing services to enterprise clients. We were organized as a New York
corporation in October 1984 and reincorporated in Delaware as of August 31,
1999. On June 5, 2000, we changed our name from Computer Outsourcing Services,
Inc. to highlight our expanded business base. 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 assure the optimal performance, security,
reliability, and scalability of our clients' mainframes, distributed servers,
and networks, irrespective of where the systems' components are located.
Strategic acquisitions have contributed significantly to our historical growth
and acquisitions remain an integral component of our long-term growth strategy.
We offer IT outsourcing services across a broad range of IT functions, bundled
into a customized, long-term contractual arrangement, whereby we assume
responsibility for managing all or part of a client's information systems
infrastructure and operations. Our IT outsourcing agreements center on data
center operations (including mainframes, AS/400 or mid-range computing, and
NT/UNIX platforms) and extend to the infrastructure that facilitates the
transmission of information across a client's enterprise. Our services are
organized into six "solution" areas - (1) Mainframe Outsourcing, (2) Business
Process Outsourcing, (3) Open Systems Management, (4) AS/400 Management, (5)
Business Continuity, and (6) IT Consulting.
-2-
On February 5, 2002, we completed the acquisition of AmQUEST, Inc., an
Atlanta-based IT outsourcing company, for approximately $19.6 million in cash
(the "AmQUEST Acquisition"). This acquisition combined two highly complementary
businesses and enabled us to benefit from increased scale, enhanced services,
and expanded geographic reach. We believe the combination strengthens our
position as one of the leading providers of IT outsourcing solutions for large
and mid-size companies.
THE IT OUTSOURCING INDUSTRY
According to International Data Corporation ("IDC"), revenue growth for IT
outsourcing services is expected to remain strong over the next several years
due to steady customer demand for broad, multi-service IT outsourcing
engagements that improve clients' operating efficiencies and reduce their
ongoing IT costs. IDC reports that spending on IT outsourcing services in the
United States reached over $29 billion in 2001 - nearly a 13% increase over 2000
- - and is expected to exceed $47 billion by 2006, representing an average 10.5%
compound annual growth rate ("CAGR") through the period.
The growth of the IT outsourcing market is expected to continue for the
following reasons:
o The need for companies to reduce costs and improve operating margins;
o A slowdown in capital spending on existing IT infrastructure;
o The increasing complexity of information technology systems and the need to
connect electronically with clients, suppliers and other internal systems;
o The increasing requirements for rapid processing of information and the
instantaneous communication of large amounts of data to multiple locations;
o The desire of business and government organizations to focus on their core
competencies;
o The desire by business and government organizations to take advantage of
the latest advances in technology without the cost and resource commitment
required to maintain an in-house system;
o The need to provide alternative or back-up locations for mission critical
information; and
o The proliferation of web-based and wireless technologies.
Growth in IT outsourcing spending is expected to be particularly strong in our
core target market of mid-sized enterprise companies whose aggregate spending
growth is forecasted to outpace the overall industry. IDC predicts medium-sized
companies with 1,000 to 10,000 employees will demonstrate a 13.2% CAGR through
2006, compared to an industry-wide CAGR of 10.5%.
BENEFITS OF IT OUTSOURCING
Companies traditionally outsource to reduce operational and capital expenses,
improve service delivery, implement new technologies, and/or free their internal
resources to focus on strategic initiatives.
o REDUCE COSTS
We believe our clients typically recognize a significant savings by using
our services over their current internal costs. We leverage our 24x7
redundant infrastructure, personnel, processes, and tools across multiple
clients to gain economies of scale that we believe translate into reduced
costs for our customers.
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o IMPROVE SERVICE DELIVERY
Companies that outsource their IT and processing functions with us often
recognize significant improvement in service delivery. We believe our focus
on operations and economies of scale translate into improved service levels
for our clients.
o RE-DEPLOY RESOURCES
By turning over non-core activities to us, our clients can concentrate on
activities central to their value proposition and increase their
competitive position.
o ACCESS TO TECHNOLOGY
We believe outsourcing with us enables our clients to take advantage of new
technologies and best practices without the costs and risks associated with
implementing these solutions in-house.
o INCREASED FLEXIBILITY
We believe that outsourcing enables our clients to respond rapidly to
changing markets, mergers and acquisitions, and major organizational
changes by providing a flexible, multi-platform infrastructure that can
scale or transition to accommodate change.
BUSINESS MODEL
Our business model is based on leveraging our IT data center infrastructure,
skilled operations team, and management tools across multiple clients to gain
economies of scale that improve clients' operations and dramatically reduce
their IT costs. We endeavor to achieve this by establishing consistent processes
throughout the organization, leveraging a fully secure and redundant data-center
infrastructure, sharing operational resources across multiple computing
platforms, and investing in administration tools that enable the efficient
monitoring and management of clients' systems regardless of where they are
located.
DATA CENTER INFRASTRUCTURE
Delivering high-availability IT outsourcing solutions to the enterprise client
requires a significant investment in a secure data center infrastructure. We
have fully constructed two data centers designed to meet the stringent
environmental and security requirements of enterprise clients. Our data centers
are raised-floor facilities that feature state-of-the-art physical components
and redundant network offerings, including high standards for security and
reliability. Our data centers have fully redundant power supply systems,
redundant ingress and egress Internet access across multiple providers, multiple
power feeds, N+1 fire suppression systems, and 24-hour security services.
TECHNOLOGY INFRASTRUCTURE
The aggregated scale of the existing client base enables us to deploy shared
equipment and technology to improve margins by reducing operating costs and
streamlining service delivery. We have fully deployed mainframe, mid-range, and
open system processing; data storage systems; printing equipment; and networking
hardware across our two data center facilities. By managing the scheduling and
production of clients' processing, we gain significant economies of scale by
effectively "sharing" technology resources across multiple clients.
We utilize technologies such as IBM's Virtual Tape Subsystem (VTS) to reduce
operational overhead by automating processes. While these technologies are often
cost-prohibitive for individual companies, we make the technology accessible to
our clients by distributing the costs- over multiple entities.
-4-
OPERATIONS
Supporting a 24 x 7 computing environment requires significant operational
resources skilled across a number of technology areas including operating
systems, computing, networking, and applications. Few companies have the
financial and human resources to support a 24-hour, multi-platform computing
environment. Our operations team is a highly skilled, process driven
organization that is trained across multiple computing platforms and operating
systems. As a result of our technical competency and broad customer base, we
believe our labor costs per client typically are substantially lower than the
costs our clients would incur by having internal IT departments deliver the same
service levels. We believe our highly scalable operation allows our clients to
enjoy reduced IT costs. Most of our computer hardware is manufactured by IBM. We
also rely heavily on system software licensed from IBM or Computer Associates.
MANAGEMENT TOOLS
With the growth of IP networking as a low-cost method for transmitting
information, we have invested in the development of a proprietary suite of
management tools that enables us to monitor and manage clients' systems and
components from a centralized network operations center. The management platform
enables the monitoring and management of clients' systems located in our data
centers, at the clients' site, or at a third-party facility. The strategic
investment provides us with the ability to expand our services portfolio beyond
solutions delivered within our own data centers, and enables us to grow our
data-center infrastructure without having to replicate the network operations
center at each site.
SERVICES
Our services are organized into six solution areas, including:
o MAINFRAME OUTSOURCING. We believe our mainframe outsourcing solution
provides clients with a cost-effective, operationally superior alternative
to running and managing a mainframe infrastructure in-house. We combine the
scalability and reliability of mainframe systems with the world-class
management of, and access to, hardware, systems software, and
communications. We offer the latest technologies - including Virtual Tape
Subsystems, IBM's zSeries technology, and Linux on the mainframe - to
provide greater uptime and more efficiency for our customers. We have
experience in operating multiple computer systems running on different
operating and complex enterprise environments. We provide high capacity in
processing speed, connectivity, and storage management.
o BUSINESS PROCESS OUTSOURCING. Business process outsourcing involves clients
contracting with us to perform functions that support their business, but
are not their core competency. These functions, commonly called
"back-office" processes, include services such as payroll, accounts
receivable management, payment processing, logistics, data entry and
customer care services. Back-office processes are often supported by an
extensive IT infrastructure. By contracting with us, companies can improve
their processes, reduce their costs, and concentrate on their core
business.
We provide a variety of customized IT services designed to specific client
requirements. These services include the development of proprietary
software we utilize to meet the IT processing requirements of particular
clients. We manage the software application and retain ownership of the
software we develop.
-5-
o OPEN SYSTEMS MANAGEMENT. We provide on-site hosting and remote management
of customers' hardware and software running on Unix and Windows servers for
both Internet based and other applications. Clients can choose from a wide
range of options for their open systems - starting with basic on-site
hosting all the way up to fully customized, fully managed services. This
highly flexible approach makes it easy to support a variety of systems -
from a simple website or database application to a full-scale,
multinational Enterprise Resource Plan system. With our IFOXcenter
management tools, we can remotely manage systems located at our customers'
own data centers or at a third-party location.
o AS/400 AND ISERIES MANAGEMENT. We provide specialized support and
outsourcing resources for companies that rely on midrange computers. With
an experienced staff and infrastructure resources, we operate, administer,
and maintain a client's midrange systems. Additionally, we have the
expertise and flexibility to manage a client's system the way the client
chooses to have it managed. With our IFOXcenter management tools, we can
take full responsibility for managing a customer's systems even if the
hardware is located outside of one of our data centers.
o BUSINESS CONTINUITY. Our business continuity solutions help assure clients
that their operations can proceed in the face of disaster. We offer 24 x 7,
high-availability services - including disaster-planning assistance. The
disaster recovery solutions are integrated into a client's overall IT
infrastructure, with the opportunity to balance IT processing between their
own data center and dedicated systems at either of our production data
centers. We provide a full alternate office site, including desktop
workstations, phone systems, and conventional office infrastructure such as
fax and copier machines, networked printers, and conferencing facilities.
o CONSULTING SERVICES. We provide review and implementation services for the
underlying infrastructure of an enterprise's IT operations, with a view to
reducing costs and improving services to the enterprise and end-user. Our
extensive knowledge base and highly trained and experienced staff can
assist with design through implementation and on-going support in the areas
of network architecture, infrastructure integration, automation process
control, operating systems, database administration, and system stress
testing.
CLIENT SERVICE AND SUPPORT
We believe that close attention to client service and support has been, and will
continue to be, crucial to our success. We utilize client service as a key
competitive differentiator and as the foundation of our revenue retention
strategy. We provide a high degree of client service and support, including
customized training and rapid response to client needs, which we believe
generally exceeds industry standards. We believe that because of our attention
to client service, many of our client relationships have been long-term,
extending well beyond the initial contract term.
MARKETING AND SALES
We currently target our marketing efforts to a broad range of large and
medium-size enterprises. Although we have developed industry specific services
in several industries including financial services, publishing, manufacturing,
consumer products, and health care, we believe our reputation for technical
expertise and quality service extends across all industries.
For the years ended December 31, 2002 and 2001, clients accounting for in excess
of 10% of our consolidated revenues were ADT Security Services, Inc. and
Alicomp, a division of Alicare, Inc. ("Alicomp"). For the two-month period ended
December 31, 2000 and the fiscal year ended October 31, 2000, clients accounting
for in excess of 10% of consolidated revenues were Alicomp and International
Masters Publishers, Inc. We also have had a joint marketing agreement with
Alicomp throughout the foregoing periods.
Initial contact with a prospective customer is made by a variety of methods,
including seminars, mailings, telemarketing, referrals, and attendance at
industry conventions and trade shows. Our sales representatives and marketing
support staff analyze a prospective client's requirements and prepare service
demonstrations. In addition to internal marketing efforts, we have formed
strategic alliances to generate new sales. In some cases, we have entered into
agreements with certain enterprises and individuals that would be entitled to
receive compensation for their assistance in procuring sales.
-6-
DEVELOPMENT OF NEW SERVICES
Since the IT services industry is characterized by rapid changes in hardware and
software technology, we continually enhance our services to meet each client's
exacting requirements. We are committed to maintaining service offerings at a
very high level of technological proficiency and we believe that we have
developed a reputation for providing innovative solutions to satisfy a client's
requirements.
We maintain an extensive infrastructure that serves as the underlying foundation
across our IT solutions. These capabilities are augmented by strategic
partnerships and key investments to provide clients with a full suite of IT
outsourcing solutions. Where possible, we endeavor to develop offerings that can
be easily replicated across multiple clients and give rise to a high degree of
recurring revenue. Development is performed by our Company's employees and in
limited instances by outside consultants. Expenses for development of new
software used to offer our services were $486,000, $178,000, and $384,000 for
the year ended December 31, 2001, the two months ended December 31, 2000, and
the fiscal year ended October 31, 2000, respectively. Capitalized expenditures
for enhancements to existing products approximated $135,000, $285,000, $119,000,
and $1,011,000 for the years ended December 31, 2002 and 2001, the two months
ended December 31, 2000, and the fiscal year ended October 31, 2000,
respectively.
COMPETITION
We operate in highly competitive markets. Our current and potential competitors
include other independent computer service companies and divisions of
diversified enterprises, as well as the internal IT departments of existing and
potential customers. Among the most significant of our competitors are IBM
Corporation; Electronic Data Systems Corporation; Affiliated Computer Services,
Inc.; Computer Sciences Corp.; and SunGard Data Systems, Inc.
In general, the outsourcing services industry is fragmented, with numerous
companies offering services in limited geographic areas, vertical markets, or
product categories. Many of our larger competitors have substantially greater
financial and other resources than we do. We compete on the basis of a number of
factors, including price, quality of service, technological innovation, breadth
of services offered and responsiveness. Some of these factors are beyond our
control.
We cannot be sure that we will be able to compete successfully against our
competitors in the future. If we fail to compete successfully against our
current or future competitors with respect to these or other factors, our
business, financial condition, and results of operations will be materially and
adversely affected.
While our larger competitors seek to outsource entire IT departments, we often
selectively target core IT functions such as computer processing and storage
solutions. In doing so, we position ourselves as a partner of the client's IT
organization, rather than as a competitive threat.
We believe that our services are particularly attractive to mid-tier companies
that need substantial infrastructure to support their business environment, but
are considered "small" compared to the multi-billion dollar engagements signed
by our largest competitors. Many mid-market companies perceive larger
outsourcers as "inflexible" and "unresponsive" to their smaller-scale
requirements. We believe that selective outsourcing enables them to maintain
overall control over their IT environment, while benefiting from the scale and
efficiency of an outsourcing provider.
TECHNOLOGICAL CHANGES
Although we are not aware of any pending or prospective technological changes
that would adversely affect our business, new developments in technology could
have a material adverse effect on the development or sales of some or all of our
services or could render our services noncompetitive or obsolete. There can be
no assurance that we will be able to develop or acquire new and improved
services or systems that may be required in order for it to remain competitive.
We believe, however, that technological changes do not present a material risk
to our business because we expect to be able to adapt to and acquire any new
technology more easily than our existing and potential clients. In addition,
technological change increases the risk of obsolescence to potential clients
that might otherwise choose to maintain in-house systems rather than use our
services, thus potentially creating selling opportunities for us.
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INTELLECTUAL PROPERTY MATTERS
Due to the rapid pace of technological change in the computer industry, we
believe that copyright and other forms of intellectual property protection are
of less significance than factors such as the knowledge and experience of
management and other personnel, and our ability to develop, enhance, market, and
acquire new systems and services. As a result, our systems and processes are not
protected by patents or by registered copyrights, trademarks, trade names, or
service marks. To protect our proprietary services and software from illegal
reproduction, we rely on certain mechanical techniques in addition to trade
secret laws, restrictions in certain of our customer agreements with respect to
use of our services and disclosure to third parties, and internal non-disclosure
safeguards, including confidentiality restrictions with certain employees.
Despite these efforts, it may be possible for our competitors or clients to copy
aspects of our trade secrets. We are experienced in handling confidential and
sensitive information for our clients, and we maintain numerous security
procedures to help ensure that the confidentiality of our client's data is
maintained.
COMPLIANCE WITH ENVIRONMENTAL LAWS
We have not incurred any significant expense in our compliance with Federal,
state, and local environmental laws.
EMPLOYEES
As of December 31, 2002, we had 227 full-time and 9 part-time employees. None of
our employees is represented by a labor organization and we are not aware of any
activities seeking such organization. We consider our relationship with our
employees to be satisfactory.
INSURANCE
We maintain insurance coverage we believe is reasonable, including errors and
omissions coverage, business interruption, and directors and officers insurance
to fund our operations in the event of catastrophic damage to any of our
operations centers, and insurance for the loss and reconstruction of our
computer systems. We also maintain extensive data backup procedures to protect
our data and our clients' data.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
Substantially all of our revenues are derived from U.S. sources.
AVAILABLE INFORMATION
We maintain a website with the address www.infocrossing.com. We are not
including the information contained on our website as part of, or incorporating
it by reference into, this Annual Report on Form 10-K. We make available, free
of charge, through a link from our website to the EDGAR database at www.sec.gov
our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current
Reports on Form 8-K, and amendments to such reports, as soon as reasonably
practicable after we file such material with the Securities and Exchange
Commission.
ITEM 2. DESCRIPTION OF PROPERTY
We lease a facility of approximately 67,000 square feet in Leonia, NJ for our
headquarters and data center operations. The lease expires on December 31, 2014.
We lease 30,600 square feet in a building located in the Atlanta metropolitan
area for data center operations. The lease expires on July 31, 2015.
We lease 5,700 square feet of office space in New York, NY. The lease expires on
December 31, 2009.
-8-
We lease space in buildings owned by the former parent of AmQUEST. At February
5, 2002, we occupied approximately 33,400 square feet. Our lease agreement
permits us to reduce our use of this space for a pro-rata reduction in rent. We
have moved most of the operations of AmQUEST to our facility in the Atlanta
metropolitan area, and occupy approximately 11,400 square feet at December 31,
2002. We intend to further reduce our use of this space during 2003. This lease
agreement expires on January 31, 2006, unless we reduce our use of the space to
zero at an earlier date.
We generally lease our equipment under standard commercial leases, in some cases
with purchase options, which we exercise from time to time. Our equipment is
generally covered by standard commercial maintenance agreements.
We believe our facilities are in good condition and are adequate to accommodate
our current volume of business as well as anticipated increases.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the NASDAQ Stock Market under the symbol IFOX.
Prior to June 5, 2000, the date on which we changed our name from Computer
Outsourcing Services, Inc., our symbol was COSI. For the periods reported below,
the following table sets forth the high and low bid quotations for the common
stock as reported by NASDAQ-NMS.
BID
HIGH LOW
FOR THE YEAR ENDED DECEMBER 31, 2001:
1st Quarter ended March 31, 2001 8.938 5.000
2nd Quarter ended June 30, 2001 9.300 4.110
3rd Quarter ended September 30, 2001 7.150 4.000
4th Quarter ended December 31, 2001 6.200 3.750
FOR THE YEAR ENDED DECEMBER 31, 2002:
1st Quarter ended March 31, 2002 7.000 5.050
2nd Quarter ended June 30, 2002 6.890 4.555
3rd Quarter ended September 30, 2002 10.050 5.607
4th Quarter ended December 31, 2002 8.100 5.990
The closing price of the Company's common stock on NASDAQ-NMS on March 24, 2003
was $6.71 per share. We have approximately 75 stockholders of record. In
addition, we believe that there are approximately 500 beneficial owners holding
their shares in "street name."
DIVIDENDS
We have not paid dividends to holders of its common stock since inception.
Certain terms of our Series A Preferred Stock restrict our ability to pay
dividends on our common stock, and no common dividends may be paid so long as
the Camden Debentures are outstanding.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
NUMBER OF SECURITIES TO WEIGHTED AVERAGE NUMBER OF SECURITIES
BE ISSUED UPON EXERCISE EXERCISE PRICE OF REMAINING AVAILABLE FOR
OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS FUTURE ISSUANCE
------------------------- -------------------------- --------------------------
Two qualified Stock Option Plans -
previously approved by stockholders 1,406,935 $8.93 954,250
For a complete discussion of these plans, please see Note 11 of the Notes to
Financial Statements accompanying this report.
RECENT ISSUANCES OF UNREGISTERED SECURITIES
During the year ended December 31, 2002, a holder of 262.3 shares of our Series
A Preferred Stock converted them into 2,764 shares of our common stock. In
addition, the same holder exercised its Series A Warrants, receiving an
additional 4,441 common shares. The common shares were issued in transactions
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.
-10-
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
TWO MONTH PERIODS
YEARS ENDED DECEMBER 31, FISCAL YEARS ENDED OCTOBER 31, ENDED DECEMBER 31,
----------------------------- ----------------------------------------- --------------------------
2002 (A) 2001 2000 1999 1998 2000 1999
------------- ------------- ------------ ----------- ------------ ----------- ------------
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Revenues $ 50,774 $ 26,986 $ 24,471 $ 34,265 $ 30,403 $ 21 $ 4,874
========== ========== ========= ========= ========== ========= =========
Net income (loss)
from continuing
operations 1,137 (36,524) (14,983) 1,661 1,079 (4,440) (343)
========== ========== ========= ========= ========== ========= =========
Loss on discontinued
operation, net of
income tax benefit - - - - (76) - -
========== ========== ========= ========= ========== ========= =========
Gain on sale of
discontinued
operation, net of
income tax provision - - - - 1,696 - -
========== ========== ========= ========= ========== ========= =========
Net income (loss)
to common
stockholders $ (8,156) $ (45,048) $ (18,819) $ 1,661 $ 2,699 $ (5,790) $ (343)
========== ========== ========= ========= ========== ========= =========
Net income (loss)
to common
stockholders
per diluted
common share $ (1.52) $ (7.77) $ (3.58) $ 0.34 $ 0.61 $ (0.98) $ (0.07)
========== ========== ========= ========= ========== ========= =========
CONSOLIDATED
BALANCE SHEETS
Total assets $ 65,495 $ 58,774 $ 78,844 $ 27,554 $ 26,949 $ 78,449 $ 30,597
========== ========== ========= ========= ========== ========= =========
Long-term
obligations and
(beginning in fiscal
2000), redeemable
preferred stock $ 64,066 $ 47,593 $ 34,146 $ - $ 12 $ 38,214 $ 2,014
========== ========== ========= ========= ========== ========= =========
No cash dividends have been declared (See Item 5, above).
(a) On February 5, 2002, we acquired AmQUEST, Inc., which contributed
approximately $17,148,000 of revenue subsequent to the acquisition. We paid
$19,896,000 for the acquisition and related costs during 2002, and recorded
$25,692,000 in assets, including $20,714,000 in goodwill. In connection with
this acquisition, we incurred $10,000,000 of new debt, recorded as
discounted Debentures and Warrants. The book value of the Debentures at
December 31, 2002 is $9,372,000.
-11-
ITEM 7. 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.
The AmQUEST Acquisition was recorded as a purchase in accordance with the
Financial Accounting Standards Board ("FASB"), Statements of Financial
Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), which
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS 141 also includes guidance on
the initial recognition and measurement of goodwill and other intangible assets
arising from business combinations completed after June 30, 2001.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements 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. SFAS 142 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. We
applied SFAS 142 beginning in the first quarter of 2002 and accordingly have not
recorded goodwill amortization in 2002. We tested goodwill for impairment using
processes described in SFAS 142, and have no impairment to record in 2002.
On September 15, 2000, we changed our year ending date from October 31st to
December 31st. This change required the preparation of financial statements for
the two-month period ended December 31, 2000. Financial statements for the
fiscal year ended October 31, 2000 and prior are not restated to conform to the
calendar year reporting period of 2002.
YEAR ENDED DECEMBER 31, 2002 AS
COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
For the year ended December 31, 2002 (the "Current Year"), revenues increased
$23,788,000 (88%) to $50,774,000 from $26,986,000 for the year ended December
31, 2001 (the "Prior Year"). Revenues from AmQUEST contributed $17,148,000 of
this increase. Revenues grew by 25%, 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.
Unless the customer provides notice of non-renewal, the contract will renew
annually for three annual years. Revenues from this significant customer were
$4,672,000 in the Prior Year compared with $14,977,000 in the Current Year,
representing 17% and 29% of total revenues in the respective periods. The
increase in revenue from this customer reflects a higher level of service
provided in the Current Year.
Operating costs increased $1,049,000 (3%) to $31,472,000 during the Current Year
compared with $30,423,000 for the Prior Year. With the additional operating
costs of AmQUEST excluded, operating costs declined by $9,802,000 (32%). The
reduced level of operating costs reflects the actions we took in 2001 to
minimize costs through staff reductions. In addition, in 2001 we suspended
operations at our 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 Year from 113% in the Prior Year.
Operating costs in the Current Year reflect the benefit from the settlement with
a software licensor described below.
-12-
In April 2002, we renegotiated the lease of our 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,
we are 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 Years are expenses for this facility of
$556,000 and $1,095,000, respectively. During 2002, we relocated most of the
operations of AmQUEST to the metropolitan Atlanta data center.
Also in May 2002, we reached an agreement with the landlord of the Northern
Virginia data center. The agreement releases us from the future payments under
the 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, we 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 2002,
approximately $290,000 of the provision relating to estimated settlement costs
was reversed. Included in operating costs in the Current Year and Prior Year are
costs for this facility of $378,000 and $2,254,000, respectively.
In January 2002, we settled a dispute of certain claims with a software
licensor. Pursuant to the settlement, we 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 Year, and as of December 31, 2002, all
the Credits have been applied against certain software license fees.
Additionally, we reversed accrued expenses of $796,000 for software support and
maintenance fees in the Current Year in connection with the settlement of the
dispute.
Selling and promotion costs decreased $457,000 (13%) to $3,140,000 for the
Current Year from $3,597,000 for the Prior Year. Selling and promotion costs as
a percentage of revenues decreased to 6% from 13% in the Prior Year, due to
decreased costs and increased revenues.
General and administrative expenses decreased $2,482,000 (25%) to $7,619,000 for
the Current Year from $10,101,000 for the Prior Year. With the effect of AmQUEST
excluded, general and administrative expenses declined $3,112,000 (31%),
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
$9,823,000 in the Prior Year. 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 Year, goodwill amortization
was $644,000.
Other depreciation and amortization for fixed assets and other intangibles rose
$2,477,000 (72%), to $5,938,000 for the Current Year from $3,461,000 for the
Prior Year. Without the effect of AmQUEST, other depreciation and amortization
increased $1,325,000 (38%), primarily as a result of fixed asset purchases since
December 31, 2001.
We recorded net interest expense of $1,965,000 in the Current Year, compared
with net interest income of $886,000 in the Prior Year. The net change of
$2,851,000 reflects a decrease in interest income of $1,205,000 from a lower
average balance of interest-earning assets during the Current Year. Also, to a
lesser extent, the decrease in interest income results from lower interest
rates. The net change also includes an increase of $1,646,000 in interest
expense on a larger average outstanding debt balance than in the Prior Year. In
February 2002, we 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 Year.
In the Current Year, we recorded an income tax benefit representing the
carryback of $251,000 of Federal income tax credits net of income tax expense of
$42,000, representing estimated state income taxes. Tax expense of $697,000 was
recorded in the Prior Year, representing the reconciliation between the
estimated benefits reported in the period ended December 31, 2000 and the amount
recognized in our income tax return. The cumulative tax benefit we recorded
prior to December 31, 2001 was limited to the refund of taxes paid in prior
years that were received as a result of carrying back a portion of its pre-tax
loss.
-13-
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. We have net
operating loss carry-forwards of approximately $36 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.
We have net income of $1,137,000 for the Current Year versus a net loss of
$36,524,000 for the Prior Year. Net loss to common stockholders after accretion
and accrued dividends on preferred stock was $8,156,000 for the Current Year
compared with a net loss of $45,048,000 in the Prior Year. The net loss to
common stockholders included an increase in non-cash charges for accretion and
accrued dividends on preferred stock of $769,000 to $9,293,000 in the Current
Year from $8,524,000 in the Prior Year. The loss per common share was $1.52 for
the Current Year compared with a loss per common share of $7.77 in the Prior
Year, on both a basic and diluted basis. Common stock equivalents were ignored
in determining the net loss per share for both periods, since the inclusion of
such equivalents would be anti-dilutive.
YEAR ENDED DECEMBER 31, 2001 AS
COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
The financial statements included in this Annual Report on Form 10-K do not
include financial statements for the year ended December 31, 2000. For the
purposes of this Management's Discussion and Analysis, the following table
presents our results for the year ended December 31, 2001 in comparison with the
comparable unaudited results for the year ended December 31, 2000.
YEAR ENDED DECEMBER 31,
-------------------------------
2001 2000
------------- -------------
(UNAUDITED)
Revenues $ 26,986,466 $ 23,118,665
------------- -------------
Costs and expenses:
Operating costs 30,423,324 26,657,987
Selling and promotion costs 3,597,153 3,540,262
General and administrative expenses 10,101,468 11,336,066
Leased facilities and office closings 5,650,000 548,972
Amortization of restricted stock award 9,822,917 1,677,083
Amortization of goodwill 644,090 632,648
Other depreciation and amortization 3,460,914 1,870,267
------------- -------------
Total costs and expenses 63,699,866 46,263,285
------------- -------------
Loss from operations (36,713,400) (23,144,620)
Net interest income (886,403) (2,110,505)
------------- -------------
Pretax loss (35,826,997) (21,034,115)
Income tax provision (benefit) 697,000 (1,954,004)
------------- -------------
Net loss (36,523,997) (19,080,111)
Accretion and dividends on
redeemable preferred stock (8,524,026) (5,186,143)
------------- -------------
Net loss to common stockholders $ (45,048,023) $ (24,266,254)
============= =============
-14-
For the calendar year ended December 31, 2001 ("Calendar 2001"), revenues
increased $3,868,000 (16.7%) to $26,986,000 from $23,119,000 for the calendar
year ended December 31, 2000 (unaudited) ("Calendar 2000"). Revenues from a
significant new customer contributed to the increase. During the year, we
announced the signing of a significant new IT managed services contract with a
new customer that by its terms, and as subsequently amended, is expected to
generate $50 million in revenues over the four-year life of its initial term.
Operating costs increased $3,765,000 (14.1%) to $30,423,000 during Calendar 2001
compared with $26,658,000 in Calendar 2000. The increases primarily consist of
IDC and related managed services operating and development costs mostly
occurring earlier in Calendar 2001. Due to excess supply of server-hosting
space, we have taken steps to minimize costs by suspending the operations at the
metropolitan Atlanta data center and IDC and the further development of the
Northern Virginia IDC. Included in operating costs in Calendar 2001 is
$4,477,000 of costs for these facilities.
Selling and promotion costs increased only $57,000 (1.6%) to $3,597,000 during
Calendar 2001 compared with $3,540,000 in Calendar 2000.
General and administrative expenses decreased $1,235,000 (10.9%) to $10,101,000
for Calendar 2001 from $11,336,000 for Calendar 2000. The decrease primarily
consists of IDC and related administrative expenses that have been reduced
during Calendar 2001.
During Calendar 2001 we recorded a provision of $5,650,000 related to the
suspension of the development of our Northern Virginia data center, including
the write-off of approximately $2,742,000 of construction-in-process costs. We
recorded a loss provision of $549,000 in Calendar 2000 relating to the closing
of office locations.
In June 2000, we hired a Chief Executive Officer (the "Executive") who served
until November 2001. The employment agreement with the Executive provided for an
award of 800,000 restricted shares of common stock. The value of the 800,000
restricted shares, $11,500,000 on the date of grant, was being amortized ratably
over a four year vesting schedule. Effective November 14, 2001, the Executive
resigned and entered into a settlement agreement with us to terminate the
employment contract. As part of the settlement, we accelerated the vesting of
the stock award resulting in a nonrecurring, noncash charge of approximately
$7,427,000. Total amortization related to the restricted shares in Calendar 2001
was $9,823,000. In Calendar 2000 we amortized $1,677,000 of the restricted stock
award.
Other depreciation and amortization for fixed assets and other intangibles rose
$1,591,000 (85.1%), to $3,461,000 for the Calendar 2001 from $1,870,000 for the
Calendar 2000. The increase is primarily the result of fixed asset purchases
during 2000 and 2001.
We recorded net interest income of $886,000 in Calendar 2001, compared with net
interest income of $2,111,000 in Calendar 2000. The net reduction of $1,225,000
reflects a decrease in interest income of $1,408,000 from a lower average
balance of interest-earning assets during Calendar 2001 and lower interest
rates. The reduction in interest income was partially offset by a decrease of
$183,000 in interest expense arising from a larger average outstanding debt and
capital lease obligation balance in Calendar 2000.
In Calendar 2001, we recorded income tax expense of $697,000, representing the
difference between the estimated benefit as previously reported and the amount
recognized in our income tax return. A tax benefit of $1,954,000 was recorded in
Calendar 2000 based on an estimate of the availability of carrying back the
pre-tax loss for such period to a prior taxable year. The cumulative tax benefit
we recorded was limited to the refund of taxes paid in prior years that were
received as a result of carrying back a portion of its pre-tax loss. At December
31, 2001, we had net operating loss carryforwards of approximately $29 million
for federal income tax purposes that begin to expire in 2020. The deferred tax
asset associated with carrying forward cumulative pre-tax losses has been fully
offset by a valuation allowance due to the uncertainty of realizing such tax
benefits.
-15-
Our net loss in Calendar 2001 increased $17,444,000 (91%) to $36,524,000 from
$19,080,000 in Calendar 2000 reflecting an increase of $17,437,000 in total
costs and expenses, largely due to a $5,650,000 loss on leased facilities and an
increase of $8,146,000 in amortization for the restricted stock award on which
the amortization was accelerated. Net loss to common stockholders after
accretion and accrued dividends on preferred stock was $45,048,000 for Calendar
2001 and $24,266,000 for Calendar 2000. In addition to the increased loss
related to the nonrecurring, noncash charge for the restricted stock award, the
net loss to common stockholders included an increase in the year in noncash
charges for accretion and accrued dividends on preferred stock of $3,338,000,
which increased to $8,524,000 in Calendar 2001 from $5,186,000 in Calendar 2000.
The loss per common share was $7.77 for Calendar 2001 compared with a loss per
common share of $4.46 in Calendar 2000, on both a basic and diluted basis.
Common stock equivalents were ignored in determining the net loss per share for
both periods, since the inclusion of such equivalents would be anti-dilutive.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately $1,256,000 for the
year ended December 31, 2002. During the Current Year, we had $1,137,000 of net
income, $5,938,000 of depreciation and amortization, $492,000 of debenture
discount amortization and a reversal of $290,000 provision of estimated
settlement costs. Uses of cash during 2002 included $1,515,000 in settlement of
a building lease in the Northern Virginia high tech corridor and $409,000 of
rent payments related to other closed offices. In addition to the cash payment
relating to the building lease settlement agreement, we forfeited a $1,460,000
security deposit and were released from all future payments under the lease,
amounting to approximately $30 million through November 2015. We had accrued the
settlement as of December 31, 2001. Other payments of amounts expensed and
accrued in prior years included approximately $800,000 of payroll taxes withheld
at the end of 2001 related to the restricted stock award granted to a former
executive, $473,000 related to software purchases made in 2001 and approximately
$279,000 in settlement of certain telecommunication agreements for unused
circuits. Uses of cash also included a net increase in accounts receivable of
$322,000, the reversal of $796,000 of accrued software maintenance fees waived
as part of a settlement with a software vendor, and $1,122,000 of payments of
liabilities assumed as part of the AmQUEST Acquisition.
On February 5, 2002, we purchased all the outstanding shares of AmQUEST, which,
after certain post-closing adjustments of the selling price and including other
transaction-related costs, used approximately $19,896,000 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
$3,955,000 for the purchase of property and equipment, excluding $1,278,000 that
was acquired pursuant to capital leases.
The following table includes aggregate information about our contractual
obligations as of December 31, 2002 and the periods in which payments are due.
Certain of these amounts are not required to be included in our consolidated
balance sheet:
PAYMENTS DUE BY PERIOD (IN THOUSANDS)
------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1-3 4 - 5 AFTER
1 YEAR YEARS YEARS 5 YEARS
----------- ------------ ------------ --------- ----------
Long-Term Debt (1) $ 9,411 $ 21 $ 9,390 $ - $ -
Operating Leases 59,535 8,668 11,745 10,466 28,656
Capital Lease Obligations 3,454 1,982 1,451 21 -
Other Liabilities (2) 1,133 208 421 325 179
----------- ------------ ------------ --------- ----------
Total Contractual Cash
Obligations (3) $ 73,533 $ 10,879 $ 23,007 $ 10,812 $ 28,835
=========== ============ ============ ========= ==========
(1) Net of unamortized discount of $1,228,000.
(2) Excluded from Other Liabilities are Deferred Revenue, as it is a non-cash
item, and Deferred Rent, as payments are included under Operating Leases.
(3) Excludes Redeemable Preferred Stock. On June 1, 2007, if the market price
of our common stock is not 110% or more than the per-share value of the
Redeemable Preferred Stock, the Preferred Stockholders shall have the
right, but not the obligation, to require us to redeem their shares for
$59,900,000 plus any then-outstanding dividends due.
-16-
Principal financing activities included proceeds of $10,000,000 from the
issuance of debentures (more fully described below). Cash used in financing
activities included $4,726,000 in payments of principal with respect to debt and
capital lease obligations.
On February 1, 2002, in connection with the acquisition of AmQUEST, we entered
into a Securities Purchase Agreement (the "SPA") with a group of private
investors (the "Investors") whereby we issued Senior Subordinated Debentures
(the "Debentures") and warrants to purchase, initially, 2,000,000 shares of our
common stock (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 our sole
option. Pursuant to the terms of the Debentures, we are 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 we elect to extend the maturity date for one year, 14% per annum
from February 1, 2005. We have the option to pay interest in the form of (a)
cash; (b) additional Debentures; or (c) a combination of cash and additional
Debentures. If we choose to make interest payments using additional Debentures,
we 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, including adjustments
that increase the number of shares issuable upon exercise of the warrants in
certain events where we issue shares of common stock or securities exercisable
for or convertible into shares of our common stock at an effective purchase
price of less than the exercise price of the warrants then in effect. 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.
On July 31, 2002 and January 31, 2003, we made the interest payments 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 the Debentures remain unpaid at February 1, 2004, we
will be required to issue Additional Warrants to purchase 123,600 shares of
common stock.
Another measure of a company's ability to generate cash from its operations is
earnings before interest, taxes, depreciation, and amortization ("EBITDA"). For
the year ended December 31, 2002, our EBITDA was $8,832,000 compared to an
EBITDA loss of $22,785,000 in the Prior Year. EBITDA for the Current Year
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 our operations. The following table reconciles EBITDA
to net income for the Current and Prior Year.
RECONCILIATION - IN THOUSANDS
- --------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------
2002 2001
---------- ----------
NET INCOME (LOSS) $ 1,137 $ (36,524)
Add back (deduct):
Tax expense (benefit) (208) 697
Interest expense (income) 1,965 (886)
Depreciation and amortization 5,938 4,105
Amortization of restricted stock award - 9,823
---------- ----------
EBITDA $ 8,832 $ (22,785)
========== ==========
In April 2002 we renegotiated the lease of our 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,
we are 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. During 2002, we
relocated most of the operations of AmQUEST to the metropolitan Atlanta data
center.
-17-
Also, in May 2002 we reached an agreement with the landlord to terminate the
lease of our partially developed data center in Northern Virginia. In the Prior
Year, costs associated with the Northern Virginia data center were $2,280,000.
As of December 31, 2002, we had cash and equivalents of $7,026,000. We expect
that our operating activities will continue to generate cash. 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.
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.
-18-
NEW FINANCIAL ACCOUNTING STANDARDS
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of", and
the accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations for a Disposal of a Segment of a Business." SFAS 144 is
effective for fiscal years beginning after December 15, 2001, with earlier
application encouraged. We adopted SFAS 144 as of January 1, 2002, with no
effect on our financial position, results of operations, or 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 we 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 our 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. We will continue to account for stock-based compensation to employees
under APB Opinion No. 25 and related interpretations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
We are not significantly exposed to the impact of interest rate changes, foreign
currency fluctuations, or changes in the market values of our investments. We
primarily invest in money market mutual funds or certificates of deposit and
commercial paper issued only by major corporations and financial institutions of
recognized strength and security, and hold all such investments to term. We
generally invest in instruments of no more than 30 days maturity.
MARKET RISK
Our accounts receivable are subject, in the normal course of business, to
collection risks. We regularly assess these risks and have established policies
and business practices to protect against the adverse effects of collection
risks. As a result, we do not anticipate any material losses in this area.
FOREIGN CURRENCY RISKS
We have no significant foreign-source income, and bill foreign customers in U.S.
dollars only.
-19-
ITEM 8. FINANCIAL STATEMENTS
The Consolidated Financial Statements and Notes thereto are set forth beginning
at page F-1 of this Report. Also included is Schedule II, Valuation and
Qualifying Accounts, which schedule is set forth at page S-1 of this report. All
other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are inapplicable and
therefore have been omitted.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 201(d) of Regulation S-K is included above in
Part II, Item 5 of this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The contents of Items 10 through 13 are incorporated by reference to a
Definitive Proxy Statement to be filed on or before April 30, 2003.
ITEM 14. CONTROLS AND PROCEDURES
During the quarter ended December 31, 2002, an evaluation was performed under
the supervision and with the participation of our management, including the
Chief Executive Officer and Senior Vice President of Finance, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, our management, including the Chief
Executive Officer and the Senior Vice President of Finance, concluded that our
disclosure controls and procedures were effective as of December 31, 2002. There
have been no significant changes in our internal controls, or in other factors
that could significantly affect our internal controls, after the date of our
most recent evaluation.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
2002 2001
----------------- -----------------
AUDIT FEES $ 248,000 $ 198,250
AUDIT-RELATED FEES - PRIMARILY FOR
DUE DILIGENCE RELATED TO THE
AMQUEST ACQUISITION AND BENEFIT
PLAN AUDITS 44,795 64,280
TAX FEES FOR PREPARATION AND
TAX AUDIT SUPPORT 86,135 145,815
-------------- -------------
$ 378,930 $ 408,345
============== =============
-20-
PART IV
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The financial statements and schedule required to be filed in
satisfaction of Item 8 are listed in the Index to Consolidated Financial
Statements and Schedule that appears as page F-1 of this report. Schedules
not required have been omitted.
2. The exhibits required to be filed as a part of this Annual Report are
listed below.
EXHIBIT NO. DESCRIPTION
2.1 Stock Purchase Agreement dated as of February 5, 2002 by and
between Infocrossing Inc. and American Software, Inc.,
incorporated by reference to Exhibit 2.1 to the Current
Report on Form 8-K filed February 5, 2002.
3.1A Restated Certificate of Incorporation, incorporated by
reference to Exhibit 3.1 to Infocrossing's Form 10-KSB for
the period ended October 31, 1999.
3.1B Certificate of Amendment to Infocrossing's Restated
Certificate of Incorporation, filed May 8, 2000 to increase
the number of authorized shares and to remove Article 11,
incorporated by reference to Exhibit 3.1B to Infocrossing's
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 Infocrossing's Form 10-KSB for the period
ended October 31, 1999.
4.1 Certificate of Designation of the Powers, Preferences and
other Special Rights of Series A Cumulative Convertible
Participating Preferred Stock, incorporated by reference to
Infocrossing's Proxy Statement for the Annual Meeting held
on May 8, 2000.
4.2 Registration Rights Agreement by and among Computer
Outsourcing Services, Inc.; DB Capital Investors, LP; the
'Initial Sandler Holders' as defined in the agreement
("Sandler Holders"); and Zach Lonstein, incorporated by
reference to Infocrossing's Proxy Statement for the Annual
Meeting held on May 8, 2000.
-21-
EXHIBIT NO. DESCRIPTION
4.3 Warrant Agreement between Computer Outsourcing Services,
Inc. and the Warrantholders Party thereto, incorporated by
reference to Infocrossing's Proxy Statement for the Annual
Meeting held on May 8, 2000.
4.4A Stockholders Agreement by and among Computer Outsourcing
Services, Inc.; DB Capital Investors, LP; the Sandler
Holders; and the Management and Non-Management Stockholders
listed therein, incorporated by reference to Infocrossing's
Proxy Statement for the Annual Meeting held on May 8, 2000.
4.4B Second Amended and Restated Stockholders Agreement dated as
of February 1, 2002 by and among Infocrossing, Inc. and the
Stockholders named therein, incorporated by reference to
Exhibit 99.5 to the Current Report on Form 8-K filed
February 5, 2002.
4.5A Amended and Restated 1992 Stock Option and Stock
Appreciation Rights Plan, incorporated by reference to
Appendix A to the Definitive Proxy for Infocrossing's Annual
Meeting held on May 8, 2000, as subsequently amended as
referenced in the Definitive Proxy for Infocrossing's Annual
Meeting held June 22, 2001.
4.5B 2002 Stock Option and Stock Appreciation Rights Plan,
incorporated by reference to Appendix B to the Definitive
Proxy for Infocrossing's Annual Meeting held on June 25,
2002.
4.6 Securities Purchase Agreement dated as of February 1, 2002
by and between Infocrossing, Inc. and the Purchasers named
therein, incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K filed February 5, 2002.
4.7 Warrant Agreement dated as of February 1, 2002 by and
between Infocrossing, Inc. as Issuer and the Purchasers
named therein, incorporated by reference to Exhibit 4.3 to
the Current Report on Form 8-K filed February 5, 2002.
10.1 Employment Agreement, dated as of June 15, 2000, between the
Company and Charles F. Auster ("Auster), incorporated by
reference to Exhibit 10.3 to Infocrossing's Form 10-Q for
the period ended July 31, 2000.
10.2 Settlement and Release Agreement between Infocrossing and
Auster, incorporated by reference to a Report on Form 8-K
filed November 16, 2001.
10.3 Employment Agreement, dated as of November 1, 1999, between
Infocrossing and Zach Lonstein, incorporated by reference to
Exhibit 10.4 to Infocrossing's Form 10-Q for the period
ended July 31, 2000.
-22-
EXHIBIT NO. DESCRIPTION
10.4 Employment Agreement, dated as of November 1, 1999, between
Infocrossing and Robert Wallach, incorporated by reference
to Exhibit 10.5 to Infocrossing's Form 10-Q for the period
ended July 31, 2000.
10.5 Office Lease Agreement dated May 22, 2000 between
Infocrossing and Crocker Realty Trust, incorporated by
reference to Exhibit 10.6 to Infocrossing's Form 10-Q for
the period ended July 31, 2000.
10.6 First Amendment to Lease dated as of April 1, 2002 by and
between Crocker Realty Trust, L.P. and Infocrossing,
incorporated by reference to Exhibit 10.1 to Infocrossing's
Quarterly Report on Form 10-Q for March 31, 2002.
10.7 Deed of Lease dated July 21, 2000 between Infocrossing and
Beco-Terminal, LLC, ("BECO") incorporated by reference to
Exhibit 10.7 to Infocrossing's Form 10-Q for the period
ended July 31, 2000.
10.8 Lease Termination Agreement dated as of April 19, 2002 by
and between Beco-Terminal LLC and Infocrossing, incorporated
by reference to Exhibit 10.1 to Infocrossing's Quarterly
Report on Form 10-Q for March 31, 2002.
10.9 Amendment to the Asset Purchase Agreement dated as of
February 1, 2001, by and among Infocrossing, ETG, Inc.,
Enterprise Technology Group, Inc. ("Enterprise"), and
certain stockholders of Enterprise, incorporated by
reference to Exhibit 10.11B to Infocrossing's Annual Report
on Form 10-K for December 31, 2000.
10.10 Warrant to purchase 65,000 shares of Infocrossing's common
stock, dated February 1, 2001, issued to Enterprise,
incorporated by reference to Exhibit 10.11C to
Infocrossing's Annual Report on Form 10-K for December 31,
2000.
10.11 Master Loan and Security Agreement No. 85043 by and among
Infocrossing, Inc. and ETG, Inc. as co-Debtors and Wells
Fargo Equipment Finance, Inc., dated as of July 19, 2001,
with accompanying Riders and Schedules, incorporated by
reference to Infocrossing's Quarterly Report on Form 10-Q
for September 30, 2001.
21 List of Subsidiaries of Infocrossing
23 Consent of Ernst & Young LLP
(b) Reports on Form 8-K
On November 11, 2002, Infocrossing made public certain forward-looking
financial information pursuant to Item 9 of Form 8-K
-23-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
INFOCROSSING, INC.
March 31, 2003 /s/
----------------------------------------------------------
Zach Lonstein - Chief Executive Officer
March 31, 2003 /s/
----------------------------------------------------------
William J. McHale - Senior Vice President of Finance
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
March 31, 2003 /s/
----------------------------------------------------------
Zach Lonstein - Chairman of the Board of Directors
March 31, 2003 /s/
----------------------------------------------------------
Timothy Billings - Director
March 26, 2003 /s/
----------------------------------------------------------
Peter DaPuzzo - Director
March 31, 2003 /s/
----------------------------------------------------------
Richard A. Keller - Director
March 31, 2003 /s/
----------------------------------------------------------
Samantha McCuen - Director
March 31, 2003 /s/
----------------------------------------------------------
Kathleen A. Perone - Director
March 31, 2003 /s/
----------------------------------------------------------
Michael B. Targoff - Director
March 31, 2003 /s/
----------------------------------------------------------
Robert B. Wallach - Director
March 31, 2003 /s/
----------------------------------------------------------
Tyler T. Zachem - Director
-24-
CERTIFICATIONS
I, Zach Lonstein, certify that:
1. I have reviewed this annual report on Form 10-K of Infocrossing, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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
this annual report (the "Evaluation Date"); and
c) Presented in this annual 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
annual 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.
March 31, 2003 /s/
-----------------------------------------
Zach Lonstein
Chairman and Chief Executive Officer
-25-
CERTIFICATIONS (CONTINUED)
I, William J. McHale, certify that:
1. I have reviewed this annual report on Form 10-K of Infocrossing, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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
this annual report (the "Evaluation Date"); and
c) Presented in this annual 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
annual 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.
March 31, 2003 /s/
-----------------------------------------
William J. McHale
Senior Vice President of Finance
-26-
INFOCROSSING, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
Page No.
-----------
Report of Independent Auditors F-2
Consolidated Balance Sheets -
December 31, 2002 and 2001 F-3
Consolidated Statements of Operations -
Years ended December 31, 2002 and 2001, the Two-Month
Period ended December 31, 2000, and the Fiscal Year
ended October 31, 2000 F-4
Consolidated Statements of Stockholders' Equity (Deficit) -
Years ended December 31, 2002 and 2001, Two-Month Period
ended December 31, 2000 and Fiscal Year ended October
31, 2000 F-5
Consolidated Statements of Cash Flows -
Years ended December 31, 2002 and 2001, the Two-Month
Period ended December 31, 2000, and the Fiscal Year
ended October 31, 2000 F-8
Notes to Consolidated Financial Statements F-10
Schedule II: Valuation and Qualifying Accounts S-1
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Infocrossing, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Infocrossing,
Inc. and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years ended December 31, 2002 and 2001, the two month period ended
December 31, 2000 and the year ended October 31, 2000. Our audits also included
the financial statement schedule listed in the Index at Item 16(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Infocrossing, Inc. and subsidiaries at December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 2002 and 2001, the two month period ended December 31, 2000
and the year ended October 31, 2000, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Notes 1 and 6 to the consolidated financial statements, on
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Intangible Assets".
/s/
ERNST & YOUNG, LLP
New York, New York
February 19, 2003
F-2
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------------------
ASSETS 2002 2001
------------------ ------------------
CURRENT ASSETS:
Cash and equivalents $ 7,026,407 $ 24,343,819
Trade accounts receivable, net of allowances
for doubtful accounts of $1,050,892 and $1,008,942 4,369,346 2,410,556
Due from related parties 216,340 205,106
Prepaid license fees 826,848 682,342
Other current assets 1,307,664 1,125,549
-------------- ---------------
13,746,605 28,767,372
-------------- ---------------
PROPERTY and EQUIPMENT, net 19,436,768 17,173,134
-------------- ---------------
OTHER ASSETS:
Deferred software, net 1,742,061 2,197,070
Goodwill, net 28,451,209 7,736,773
Other intangible assets, net 1,141,640 374,114
Security deposits and other non-current assets 976,890 2,525,531
-------------- ---------------
32,311,800 12,833,488
-------------- ---------------
TOTAL ASSETS $ 65,495,173 $ 58,773,994
============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 4,093,285 $ 1,914,682
Current portion of long-term debt and capitalized lease obligations 1,740,863 1,893,683
Current portion of accrued loss on leased facilities 207,727 3,313,806
Accrued expenses 4,093,345 6,245,665
Income taxes payable 96,248 -
Customer deposits, current deferred revenue, and other current liabilities 1,380,630 450,641
-------------- ---------------
11,612,098 13,818,477
-------------- ---------------
LONG-TERM LIABILITIES:
Debentures due in 2005, net of unaccreted discount 9,371,556 -
Long-term debt and capitalized lease obligations, net of current portion 1,505,833 3,632,446
Accrued loss on leased facilities, net of current portion 925,046 1,127,770
Deferred revenue, net of current portion, and other long-term liabilities 1,096,590 2,270,722
-------------- ---------------
12,899,025 7,030,938
-------------- ---------------
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 $73,863,906 at
December 31, 2002) 53,188,577 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
5,973,506 and 5,912,416 at December 31, 2002 and 2001, respectively 59,735 59,124
Additional paid-in capital 61,135,317 59,053,570
Accumulated deficit (70,548,859) (62,392,549)
-------------- ---------------
(9,353,807) (3,279,855)
Less 594,990 and 578,623 shares at December 31, 2002 and 2001,
respectively, of common stock held in treasury, at cost (2,850,720) (2,756,200)
-------------- ---------------
TOTAL STOCKHOLDERS' DEFICIT (12,204,527) (6,036,055)
-------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 65,495,173 $ 58,773,994
============== ===============
See Notes to Consolidated Financial Statements.
F-3
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
TWO MONTH PERIOD FISCAL YEAR ENDED
YEARS ENDED DECEMBER 31, ENDED DECEMBER 31, OCTOBER 31,
---------------------------------------- ------------------- ------------------
2002 2001 2000 2000
------------------- ------------------ ------------------- ------------------
REVENUES $ 50,773,742 $ 26,986,466 $ 3,520,937 $ 24,471,450
--------------- -------------- ---------------- ---------------
COSTS and EXPENSES:
Operating costs 31,472,274 30,423,324 5,042,253 25,316,973
Selling and promotion costs 3,140,217 3,597,153 829,806 3,103,485
General and administrative
expenses 7,619,148 10,101,468 1.562.382 10,827,536
Leased facilities and office
closings (289,860) 5,650,000 34,601 514,371
Amortization of restricted stock
award - 9,822,917 479,166 1,197,917
Amortization of goodwill - 644,090 105,466 619,085
Other depreciation and
amortization 5,938,340 3,460,914 398,717 1,688,692
--------------- -------------- ---------------- ---------------
47,880,119 63,699,866 8,452,391 43,268,059
--------------- -------------- ---------------- ---------------
INCOME (LOSS) FROM OPERATIONS 2,893,623 (36,713,400) (4,931,454) (18,796,609)
--------------- -------------- ---------------- ---------------
Interest income (171,555) (1,377,093) (520,288) (1,753,863)
Interest expense 2,136,494 490,690 28,862 114,004
--------------- -------------- ---------------- ---------------
1,964,939 (886,403) (491,426) (1,639,859)
--------------- -------------- ---------------- ---------------
INCOME (LOSS) BEFORE 928,684 (35,826,997) (4,440,028) (17,156,750)
INCOME TAXES
Income tax (benefit) expense (208,395) 697,000 - (2,173,443)
--------------- -------------- ---------------- ---------------
NET INCOME (LOSS) 1,137,079 (36,523,997) (4,440,028) (14,983,307)
Accretion and dividends on redeemable
preferred stock (9,293,389) (8,524,026) (1,350,413) (3,835,730)
--------------- -------------- ---------------- ---------------
NET LOSS TO COMMON
STOCKHOLDERS $ (8,156,310) $ (45,048,023) $ (5,790,441) $ (18,819,037)
=============== ============== ================ ===============
BASIC AND DILUTED
EARNINGS PER SHARE:
Net loss to common stockholders $ (1.52) $ (7.77) $ (0.98) $ (3.58)
=============== ============== ================ ===============
Weighted average number of
common shares outstanding 5,352,757 5,801,312 5,888,311 5,251,457
=============== ============== ================ ===============
See Notes to Consolidated Financial Statements.
F-4
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
ADDITIONAL RETAINED UNAMORTIZED TREASURY
COMMON PAID EARNINGS RESTRICTED STOCK AT
SHARES PAR VALUE IN CAPITAL (DEFICIT) STOCK AWARD COST TOTAL
---------- ---------- -------------- ------------- ------------ ------------ --------------
Balances,
October 31, 1999 4,737,915 $ 47,379 $ 15,519,826 $ 7,264,952 $ - $ (7,313) $ 22,824,844
Exercises of stock
options 170,478 1,705 969,596 - - - 971,301
4,608 shares
surrendered
for stock
option exercise - - - - - (111,744) (111,744)
Contingent payment
related to an
acquisition 36,472 365 1,134,795 - - - 1,135,160
Exercise of warrants 75,000 750 374,250 - - - 375,000
Sale of restricted
shares by
the Company 68,446 684 999,312 - - - 999,996
Restricted
stock award 800,000 8,000 11,492,000 - (11,500,000) - -
Amortization of
restricted
stock award - - - - 1,197,917 - 1,197,917
Issuance of
warrants in
connection with
termination of
a financing
arrangement - - 120,000 - - - 120,000
Accretion and
dividends on
redeemable
preferred stock - - - (3,835,730) - - (3,835,730)
Issuance of
warrants in
connection
with a
private
placement - - 28,180,132 - - - 28,180,132
Net loss - - - (14,983,307) - - (14,983,307)
---------- ------- ----------- ----------- ----------- --------- -----------
Balances,
October 31, 2000 5,888,311 $ 58,883 $ 58,789,911 $ (11,554,085) $ (10,302,083) $ (119,057) $ 36,873,569
---------- ------- ----------- ----------- ----------- --------- -----------
Continued on next page.
F-5
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Continued)
ADDITIONAL RETAINED UNAMORTIZED TREASURY
COMMON PAID EARNINGS RESTRICTED STOCK AT
SHARES PAR VALUE IN CAPITAL (DEFICIT) STOCK AWARD COST TOTAL
--------- ----------- -------------- -------------- -------------- ------------ -------------
Balances,
October 31, 2000 5,888,311 $ 58,883 $ 58,789,911 $ (11,554,085) $ (10,302,083) $ (119,057) $ 36,873,569
Amortization of
restricted stock
award - - - - 479,166 - 479,166
Purchased 6,900
shares for
treasury, at cost - - - - - (68,356) (68,356)
Issuance of a
warrant in
settlement of
contingent
purchase price - - 146,900 - - - 146,900
Accretion and
dividends
on redeemable
preferred stock - - - (1,350,413) - - (1,350,413)
Net loss - - - (4,440,028) - - (4,440,028)
--------- ------- ---------- ----------- ----------- ---------- -----------
Balances,
December 31, 2000 5,888,311 $ 58,883 $ 58,936,811 $ (17,344,526) $ (9,822,917) $ (187,413) $ 31,640,838
Exercise of stock
options by the
surrender of
20,021 shares 25,000 250 116,750 - - (117,000) -
Cancellation of
shares
previously
issued in
error (895) (9) 9 - - - -
Purchase 546,094
shares for
treasury, at
cost - - - - - (2,451,787) (2,451,787)
Accretion and
dividends
on redeemable
preferred stock - - - (8,524,026) - - (8,524,026)
Amortization of
restricted
stock award - - - - 9,822,917 - 9,822,917
Net loss - - - (36,523,997) - - (36,523,997)
--------- ------- ---------- ----------- ----------- ---------- -----------
Balances,
December 31, 2001 5,912,416 $ 59,124 $ 59,053,570 $ (62,392,549) $ - $(2,756,200) $ (6,036,055)
--------- ------- ---------- ----------- ----------- ---------- -----------
Continued on next page.
F-6
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Continued)
ADDITIONAL RETAINED UNAMORTIZED TREASURY
COMMON PAID EARNINGS RESTRICTED STOCK AT
SHARES PAR VALUE IN CAPITAL (DEFICIT) STOCK AWARD COST TOTAL
---------- ----------- -------------- --------------- -------------- ------------- --------------
Balances,
December 31, 2001 5,912,416 $ 59,124 $ 59,053,570 $ (62,392,549) $ - $(2,756,200) $ (6,036,055)
Exercises of stock
options 53,885 539 289,413 - - - 289,952
Accretion and
dividends on
redeemable
preferred
stock - - - (9,293,389) - - (9,293,389)
Conversion of
preferred
stock and
exercise of
warrants 7,205 72 65,374 - - - 65,446
Purchase 16,367
shares for
treasury, at
cost - - - - - (94,520) (94,520)
Warrants issued - - 1,720,000 - - - 1,720,000
Other - - 6,960 - - - 6,960
Net income - - - 1,137,079 - - 1,137,079
---------- -------- ----------- ----------- ---------- ---------- ----------
Balances,
December 31, 2002 5,973,506 $ 59,735 $ 61,135,317 $ (70,548,859) $ - $(2,850,720) $ (12,204,527)
========== ======== =========== =========== ========== ========== ==========
See Notes to Consolidated Financial Statements.
F-7
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, TWO MONTH PERIOD FISCAL YEAR ENDED
--------------------------------------- ENDED DECEMBER 31, OCTOBER 31,
2002 2001 2000 2000
------------------- ----------------- -------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,137,079 $ (36,523,997) $ (4,440,028) $ (14,983,307)
Adjustments to reconcile net income (loss)
to cash provided by (used
in) operating
activities:
Depreciation and amortization 5,938,340 4,105,004 504,183 2,307,777
Accretion of discounted Debentures 491,556 - - -
Amortization of restricted stock award - 9,822,917 479,166 1,197,917
Stock-based compensation - - - 71,266
Warrants issued in connection with
termination of a credit
agreement - - - 120,000
Accrued loss (reduction of accrued
loss) on leased facilities (289,860) 5,650,000 34,601 514,371
Decrease (increase) in:
Trade accounts receivable (321,896) 945,358 (155,836) 2,810,288
Prepaid license fees and other
current assets (122,356) 3,910,196 63,697 (2,485,798)
Increase (decrease) in:
Accounts payable 2,178,603 545,280 (893,434) 1,025,357
Income taxes payable 96,248 - - -
Accrued expenses (5,955,849) 2,633,445 811,765 1,585,089
Security deposits and other non-
current assets 1,538,885 31,441 - (2,073,185)
Payments on accrued loss on leased
facilities (3,257,237) (463,943) (72,477) (190,014)
Customer deposits, deferred
revenue, and other liabilities (177,907) 2,002,575 112,274 170,158
--------------- -------------- ---------------- ---------------
Net cash provided by (used in)
operating activities 1,255,606 (7,341,724) (3,556,089) (9,930,081)
--------------- -------------- ---------------- ---------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of property and equipment (3,955,491) (9,009,097) (839,177) (6,564,057)
Disposal of equipment - - - 2,750
Redemptions (purchases) of investments
in marketable debt securities - 3,413,069 2,368,739 (4,108,367)
Purchase of the outstanding stock of
AmQUEST, Inc. (19,895,971) - - -
Purchases of treasury stock - (516,567) (68,356) -
Increase in deferred software costs (134,799) (285,235) (118,828) (1,011,231)
--------------- -------------- ---------------- ---------------
Net cash (used in) provided by
investing activities (23,986,261) (6,397,830) 1,342,378 (11,680,905)
--------------- -------------- ---------------- ---------------
Continued on next page.
F-8
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
YEARS ENDED DECEMBER 31, TWO MONTH PERIOD FISCAL YEAR ENDED
--------------------------------------- ENDED DECEMBER 31, OCTOBER 31,
2002 2001 2000 2000
------------------ ------------------ ------------------ -------------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from a private equity placement $ - $ - $ - $ 58,430,596
Proceeds from issuance of Debentures 10,000,000 - - -
Proceeds from debt financing and a line
of credit - 3,062,252 - 5,140,336
Repayments of debt and capitalized leases (4,726,349) (1,217,115) (101,112) (5,041,993)
Advances to related parties, net (11,234) (474,638) (1,495,079) (38,295)
Proceeds from a sale of common stock - - - 999,996
Exercises of stock options and warrants 202,392 - - 1,163,291
--------------- -------------- --------------- ----------------
Net cash provided by (used in) financing
activities 5,464,809 1,370,499 (1,596,191) 60,653,931
--------------- -------------- --------------- ----------------
Net cash (used in) provided by (17,265,846) (12,369,055) (3,809,902) 39,042,945
continuing operations
CASH FLOWS FROM
DISCONTINUED OPERATION:
Payments on portion of accrued loss on
leased facilities relating to
discontinued operation (51,566) (50,957) (11,324) (48,111)
--------------- -------------- --------------- ----------------
Net (decrease) increase (17,317,412) (12,420,012) (3,821,226) 38,994,834
in cash and equivalents
Cash and equivalents, beginning of year 24,343,819 36,763,831 40,585,057 1,590,223
--------------- -------------- --------------- ----------------
Cash and equivalents, end of year $ 7,026,407 $ 24,343,819 $ 36,763,831 $ 40,585,057
=============== ============== =============== ================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 422,329 $ 491,385 $ 1,369 $ 114,004
=============== ============== =============== ================
Income taxes $ 21,900 $ 42,082 $ - $ 67,139
=============== ============== =============== ================
SUPPLEMENTAL DISCLOSURE OF
NON-CASH INVESTING ACTIVITIES:
Fees and other costs accrued in
connection
with the purchase of AmQUEST, Inc. $ 350,000 $ - $ - $ -
=============== ============== =============== ================
Common stock issued for the
Enterprise Purchase $ - $ - $ - $ 1,135,160
=============== ============== =============== ================
Equipment acquired subject
to a capital lease $ 1,278,474 $ 57,500 $ 3,602,817 $ -
=============== ============== =============== ================
Warrants issued for the settlement
of contingent purchase price $ - $ - $ 146,900 $ -
=============== ============== =============== ================
SUPPLEMENTAL DISCLOSURE OF
NON-CASH FINANCING ACTIVITIES:
Treasury shares received in payment of
an amount due from a related party $ - $ 1,935,220 $ - $ -
=============== ============== =============== ================
Treasury shares received in
payment of a stock option exercise $ 94,525 $ 117,000 $ - $ 111,744
=============== ============== =============== ================
Preferred shares converted to common $ 65,446 $ - $ - $ -
=============== ============== =============== ================
Additional Debentures issued in lieu
of a cash payment of interest $ 600,000 $ - $ - $ -
=============== ============== =============== ================
See Notes to Consolidated Financial Statements.
F-9
INFOCROSSING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business - Infocrossing, Inc. and its wholly-owned subsidiaries (collectively,
the "Company") provides comprehensive information technology outsourcing
services to companies, institutions, and government agencies.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany
balances and significant intercompany transactions have been eliminated.
On February 5, 2002, the Company purchased all of the outstanding capital stock
of AmQUEST, Inc. ("AmQUEST"), from a corporate seller (the "AmQUEST
Acquisition"). As consideration for the purchase of AmQUEST's shares, the
Company paid the seller $19,634,000 in cash, after certain post closing
adjustments. In addition, the Company has incurred an estimated $612,000 in
other acquisition related costs of which $350,000 remains unpaid at December 31,
2002. The accounts and results of operations of AmQUEST are consolidated with
the Company as of and after February 5, 2002.
On September 15, 2000, the Company's Board of Directors voted to change the
Company's year ending date from October 31st to December 31st. Accordingly, the
audited financial information presented is on the basis of fiscal years ended on
October 31st through October 31, 2000, the two-month period ended December 31,
2000, and the calendar years ended December 31, 2001 and December 31, 2002.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141, "Business Combinations",
("SFAS 141"), and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets arising from business combinations completed after June 30,
2001. SFAS 142 prohibits the amortization of goodwill and intangible assets with
indefinite useful lives. SFAS 142 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.
In accordance with SFAS 141, the AmQUEST Acquisition was recorded as a purchase.
The Company applied SFAS 142 beginning in the first quarter of 2002 and
accordingly has not recorded any goodwill amortization in 2002 (See Note 6). The
Company has tested goodwill for impairment using processes described in SFAS
142, and has no impairment to record in 2002.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of", and
the accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations for a Disposal of a Segment of a Business." SFAS 144 is
effective for fiscal years beginning after December 15, 2001, with earlier
application encouraged. The Company adopted SFAS 144 as of January 1, 2002, with
no effect on the Company's financial position, results of operations, or cash
flows.
Cash and Equivalents - Cash and equivalents include all cash, demand deposits,
money market accounts, and debt instruments purchased with an original maturity
of three months or less.
Concentration of Credit Risk - Financial instruments that potentially subject
the Company to concentration of credit risk consist primarily of temporary cash
investments and trade receivables. The Company restricts investment of temporary
cash investments to financial institutions with high credit standing. Credit
risk on trade receivables is minimized as a result of the large and diverse
nature of the Company's customer base. Ongoing credit evaluations of customers'
financial condition are performed. The Company maintains reserves for potential
credit losses and such losses, in the aggregate, have not exceeded management's
expectations.
F-10
Property and Equipment - Property and equipment is stated at cost except for
assets acquired under capital leases, which are recorded at the lesser of their
fair market value at the date of the lease or the net present value of the
minimum lease commitments. Depreciation is provided using the straight-line
method over the estimated useful lives. Leasehold improvements and assets
acquired under capital leases are amortized over the shorter of the lease term
or the estimated useful lives.
Software - Software that has been purchased is included in Property and
Equipment and is amortized using the straight-line method over five years. The
cost of internally developed software and product enhancements, not reimbursed
by customers, is capitalized as Deferred Software Costs. Such costs are
amortized using the straight-line method over the life of the related customer
contract or three to five years, whichever is shorter.
Intangible Assets - The excess of cost over net assets of acquired businesses
("goodwill") was amortized during the periods ending December 31, 2001 using the
straight-line method over the estimated lives, typically no more than fifteen
years. In accordance with SFAS 142, goodwill was not amortized in 2002. Other
intangible assets, primarily acquired customer lists, are amortized using the
straight-line method over the estimated lives, typically no more than ten years.
The carrying value of intangibles is evaluated periodically for impairment in
accordance with Statement of Financial Accounting Standards No. 142.
Revenue Recognition - The Company's services are provided under a combination of
fixed monthly fees and time and materials billings. Contracts with clients
typically range from one to five years. Revenues are recognized monthly as
earned, and costs are expensed monthly as incurred.
Deferred Revenue - The Company records deferred revenue for amounts billed for
which the services have not yet been provided. Deferred revenue amounts are
recorded to income as the services are rendered.
Income Taxes - Income tax expense or benefit is based on pre-tax accounting
income. Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts. Deferred tax benefits are recognized to
the extent that realization of such benefits is more likely than not. In 2002, a
net tax benefit was recognized for the carry-back of certain 2000 alternative
minimum tax losses to prior years. The cumulative tax benefit recorded by the
Company in October 2000 was limited to the refund the Company received as a
result of carrying back a portion of the pretax loss to prior years.
Earnings per Share - Basic earnings per share is computed by dividing income to
common stockholders by the weighted average number of common shares outstanding
during each period. Diluted earnings per share are computed using the weighted
average number of common shares plus the potentially dilutive effect of common
stock equivalents. Stock options, warrants, and convertible preferred stock that
are anti-dilutive are excluded from the computation of weighted average shares
outstanding. Certain options, warrants, and convertible preferred stock that are
currently anti-dilutive may be dilutive in the future.
Segments - The Company and its subsidiaries operate in one reportable segment of
providing information technology outsourcing services.
Derivatives - The Company does not invest in derivatives for trading purposes
nor does it use derivative financial instruments to manage risks associated with
fluctuating interest rates.
Fair Value of Financial Instruments - At December 31, 2002 and 2001, the
carrying amounts of cash and equivalents, trade accounts receivable, accounts
payable, accrued expenses, accrued loss on leased facilities, customer deposits,
deferred revenue and other current liabilities approximate fair value due to the
short-term nature of these instruments. The carrying amounts of long-term debt
approximate fair value based on interest rates that are currently available to
the Company with similar terms and remaining maturities.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the periods. Actual results could differ from those estimates.
F-11
Reclassifications - Certain reclassifications were made to the prior years'
financial statements to conform to the current year presentation.
Major Customers - For the years ended December 31, 2002 and 2001, the two month
period ended December 31, 2000, and the fiscal year ended October 31, 2000, one
client accounted for 11%, 17%, 16% and 14%, respectively, of the Company's
revenues. In addition, during the years ended December 2002 and 2001, a new
client accounted for 29% and 17%, respectively, of the Company's revenues, and
in the two month period ended December 31, 2000 and the fiscal year ended
October 31, 2000, a former client accounted for 17% and 13% of the Company's
revenues.
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 years ended December 31, 2002, and 2001, the two month period
ended December 31, 2000, and the fiscal year ended October 31, 2000,
respectively, would have been as follows:
YEAR ENDED DECEMBER 31, FISCAL YEAR TWO MONTH PERIOD
--------------------------- ENDED OCTOBER ENDED DECEMBER
2002 2001 31, 2000 31, 2000
------------ ------------- ------------- --------------
Net loss to
common
stockholders:
As reported $ (8,156) $ (45,048) $ (18,819) $ (5,790)
=========== =========== =========== ===========
Pro forma $ (11,071) $ (47,885) $ (20,336) $ (6,247)
=========== =========== =========== ===========
Net loss to
common
stockholders
per share:
As reported $ (1.52) $ (7.77) $ (3.58) $ (0.98)
=========== =========== =========== ===========
Pro forma $ (2.07) $ (8.25) $ (3.87) $ (1.06)
=========== =========== =========== ===========
All incentive stock options under the Plan, other than those granted to any
person holding more than 10% of the total combined voting power of all classes
of outstanding stock, are granted at the fair market value of the common stock
at the grant date. The weighted average fair value of the stock options granted
during the years ended December 31, 2002 and 2001 and the fiscal year ended
October 31, 2000 was $689,431; $888,724; and $12,122,000, respectively. No
grants were made during the two months ended December 31, 2000. The fair value
of each stock option grant is estimated on the date of the grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2002: a risk-free interest rate of 3.69%;
expected lives of three and a half years; and expected volatility of 54.7%. The
assumptions used in 2001 and fiscal 2000 included risk-free interest rates of
4.72% and 6.28%, respectively, expected lives ranging from six months to five
years, and expected volatilities of 65.5% and 85.9%, respectively.
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 we 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 our current financial
condition or results of operations.
F-12
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. We will continue to account for stock-based compensation to employees
under APB Opinion No. 25 and related interpretations.
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"). 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 $350,000 remains unpaid at December 31, 2002.
The Company financed the AmQUEST Acquisition through the application of the
proceeds of the financing described in Note 9 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 $20,714,436 in
goodwill. This goodwill is not currently deductible for tax purposes.
The balance sheet of AmQUEST as of the date of the acquisition has been valued
as follows:
CONSOLIDATED BALANCE SHEET OF AMQUEST, INC.
AS OF FEBRUARY 5, 2002
(IN THOUSANDS)
ASSETS:
Accounts receivable $ 1,637
Other current assets 204
-----------
Total current assets 1,841
Equipment and other fixed assets 1,936
Customer list 1,200
Goodwill 20,714
-----------
$ 25,691
===========
LIABILITIES AND EQUITY:
Accrued expenses $ 4,053
Current capital leases 802
Other current liabilities 56
-----------
Total current liabilities 4,911
Capital leases due 366
Other liabilities 168
-----------
Total liabilities 5,445
Parent's equity 20,246
-----------
$ 25,691
===========
F-13
The following unaudited condensed consolidated pro forma financial statements 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 periods
presented (January 1, 2002 and 2001). The pro forma statements 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)
YEARS ENDED DECEMBER 31,
-------------------------------------
2002 2001
---------------- -----------------
Revenues $ 52,249 $ 45,228
------------ -------------
Net income (loss) 1,012 (38,387)
============ =============
Net loss to common stockholders $ (8,280) $ (46,911)
============ =============
Net loss to common stockholders
per basic and diluted share $ (1.55) $ (8.09)
============ =============
3. SETTLEMENT
On January 10, 2002, the Company and a software licensor (the "Licensor")
entered into a Release Agreement (the "Agreement") in settlement of a dispute of
certain claims the Company had sought against the Licensor under a software
license and support agreement. Pursuant to the Agreement, the Company received
credits totaling $2,000,000 to be used towards certain future purchases (the
"Credits"). The Credits were subject to restrictions and were to expire on
December 31, 2002 if unused. Additionally, support fees of $1,136,000 under the
software and support agreement, including $522,000 of past due amounts, were
waived by the Licensor. Pursuant to the Agreement, the Company agreed to release
and hold harmless the Licensor and its subsidiaries from any and all claims,
damages, actions or causes of action of any kind arising prior to the date of
the Agreement.
The Company recognized all of the Credits in its statement of operations in
2002. Additionally, accrued expenses related to the unpaid support fees totaling
$796,000 were reversed in connection with the Agreement. As of December 31,
2002, all of the Credits had been used.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DEPRECIABLE
DECEMBER 31, LIVES (YEARS)
------------------------------------------ --------------
2002 2001
-------------------- ------------------
Computer equipment $ 10,916,395 $ 8,836,460 5
Computer equipment held under capital leases (Note 9) 7,485,394 4,938,987 *
Furniture and office equipment 1,261,716 1,343,842 7
Leasehold improvements 8,022,889 7,941,703 *
Purchased software 5,838,603 3,294,070 5
Vehicles 131,711 155,058 3
---------------- --------------
33,656,708 26,510,120
Less accumulated depreciation and amortization, including
$2,893,080 and $2,062,025 attributable to capital leases
at December 31, 2002 and 2001, respectively (14,219,940) (9,336,986)
---------------- --------------
$ 19,436,768 $ 17,173,134
================ ==============
* Shorter of the useful life or the length of the lease.
F-14
In connection with the AmQUEST Acquisition, the Company added $1,935,970 of
fixed assets, including $1,168,442 of capitalized leases
Depreciation and amortization charged to operations was $4,906,301 and
$2,562,985 for the years ended December 31, 2002 and 2001; $948,164 for the
fiscal year ended October 31, 2000, and $283,017 for the two-month period ended
December 31, 2000.
In connection with the recording of a loss of on leased facilities at December
31, 2001, approximately $2,742,000 of capitalized costs were written off. (See
Note 10)
5. DEFERRED SOFTWARE COSTS
Deferred software costs consist of the following:
DECEMBER 31,
----------------------------------------------
2002 2001
--------------------- ---------------------
Cost of internally-developed software
and enhancements, including software
under development $ 5,956,159 $ 5,821,360
Accumulated amortization (4,214,098) (3,624,290)
----------------- -----------------
$ 1,742,061 $ 2,197,070
================= =================
Amortization of deferred software costs charged to operations was $589,808 and
$753,879 for the years ended December 31, 2002 and 2001; $596,476 for the fiscal
year ended October 31, 2000, and $91,691 for the two months ended December 31,
2000.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill consists of the following:
DECEMBER 31,
----------------------------------------------
2002 2001
--------------------- ---------------------
Excess cost of investments
over net assets acquired $ 30,692,926 $ 9,978,490
Accumulated amortization (2,241,717) (2,241,717)
----------------- -----------------
$ 28,451,209 $ 7,736,773
================= =================
In connection with the AmQUEST Acquisition, the Company incurred $20,714,436 of
new goodwill.
Amortization charged to operations was $644,090 for the year ended December 31,
2001; $619,085 for the fiscal year ended October 31, 2000, and $105,464 for the
two months ended December 31, 2000.
F-15
As noted above, SFAS 142 prohibits the amortization of goodwill, and 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 at the beginning of the earliest period presented and goodwill had
not been amortized.
CONSOLIDATED PRO FORMA STATEMENT OF NET LOSS
(IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED FOR THE TWO MONTH PERIOD ENDED FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000 OCTOBER 31, 2000
--------------------------------- ----------------------------------- --------------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
--------------- --------------- ---------------- --------------- --------------- ---------------
Net loss $ (36,524) $ (35,880) $ (4,440) $ (4,335) $ (14,983) $ (14,364)
Net loss to
common stockholders $ (45,048) $ (44,404) $ (5,790) $ (5,685) $ (18,819) $ (18,200)
Net loss to common
stockholders per
diluted share $ (7.77) $ (7.65) $ (0.98) $ (0.97) $ (3.58) $ (3.47)
Other intangible assets consist of the following:
DECEMBER 31,
----------------------------------------------
2002 2001
--------------------- ---------------------
Acquired customer lists $ 2,380,488 $ 1,180,488
Accumulated amortization (1,238,848) (806,374)
----------------- -----------------
$ 1,141,640 $ 374,114
================= =================
In connection with the acquisition of AmQUEST, Inc., the Company added customer
contracts worth $1,200,000.
Amortization charged to operations was $432,474 and $134,294 for the years ended
December 31, 2002 and 2001; $134,296 for the fiscal year ended October 31, 2000,
and $22,384 for the two-month period ended December 31, 2000. Amortization
expense related to customer lists is estimated to be $353,000, $277,000,
$217,000, $170,000, and $17,000 for the years ended December 31, 2003, 2004,
2005, 2006 and 2007, respectively.
7. ACCRUED EXPENSES
Accrued Expenses consists of the following:
DECEMBER 31,
----------------------------------------------
2002 2001
--------------------- ---------------------
Salaries and Bonuses $ 769,889 $ 1,214,107
Interest 588,302 26,794
Other 2,735,154 5,004,764
----------------- -----------------
$ 4,093,345 $ 6,245,665
================= =================
8. RELATED PARTY TRANSACTIONS
The Company is the beneficiary of a $1,000,000 life insurance policy that it
maintains on its Chairman of the Board.
F-16
In June 2000, the Company hired a Chief Executive Officer (the "Executive"). The
employment agreement with the Executive provided, among other things, for an
award of 800,000 restricted shares of common stock and an agreement that the
Company would loan the Executive an amount equal to 50 percent of the related
Federal income tax liability on such grant. The Executive also purchased 68,446
shares of common stock from the Company at $14.61 per share. The value of the
800,000 restricted shares ($11,500,000 on the grant date of June 15, 2000) was
being amortized ratably over the four-year vesting schedule. The Executive's
obligation to the Company was repayable from, among other things, the proceeds
arising from the disposition of any of the 800,000 shares. As of November 14,
2001, the Executive had borrowed, including accrued interest, a total of
$1,935,000.
Effective as of November 14, 2001, the Executive resigned his positions as CEO
and Director, and entered into a settlement agreement with the Company to
terminate the employment contract. The Company accelerated the vesting of the
stock award and purchased 535,594 of the 868,446 common shares held by the
Executive for consideration of $2,385,000, consisting of $450,000 in cash plus
the repayment of the balance due on his loan from the Company of $1,935,000.
These shares are held in the Company's treasury. Accelerating the vesting of the
stock award resulted in a nonrecurring, noncash charge of approximately
$7,427,000 for the remaining unamortized balance of the original grant. Total
amortization of the restricted stock award was $9,822,917 for the year ended
December 31, 2001; $1,197,917 for the fiscal year ended October 31, 2000, and
$479,166 for the two-month period ended December 31, 2000.
Due from related parties consists of the following:
DECEMBER 31,
---------------------------------------
2002 2001
------------------ -----------------
Due from the Chairman, bearing interest
at the Prime Rate (4.25% at December
31, 2002) plus 1% per annum, repayable
on demand $ 84,645 $ 78,177
Due from other officers, bearing interest at
the Prime Rate, repayable on demand 131,695 126,929
-------------- -------------
Total due from related parties $ 216,340 $ 205,106
============== =============
In accordance with the Sarbanes-Oxley Act of 2002, no further advances are being
made to the Company's officers.
9. LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS
Long-Term Debt
DECEMBER 31,
----------------------------------------------
2002 2001
--------------------- ---------------------
Debentures $ 10,600,000 $ -
Unamortized discount (1,228,444) -
Loan payable - financial institution - 2,646,679
Vehicle loans 39,517 60,159
Notes payable - other - 54,890
----------------- -----------------
9,411,073 2,761,728
Less current portion (20,895) (1,000,000)
----------------- -----------------
$ 9,390,178 $ 1,761,728
================= =================
F-17
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 Camden 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 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 payments
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.
In August 2001, the Company borrowed $3 million from a financial institution to
purchase computer equipment; bearing interest at 12.55% and repayable in 36
monthly payments of approximately $100,400. On February 1, 2002, in connection
with the issuance of the debentures described above, the Company repaid this
loan including a 3% penalty.
During 2001, the Company borrowed an aggregate of $62,252 from two lending
institutions to finance the purchase of three vehicles. Two of these loans were
entered into during the zero interest promotion. The aggregate monthly payment
for these loans is $1,762.
On October 23, 2000, the Company entered into two agreements to purchase certain
equipment. The agreements called for twenty-four payments of $5,847 per month.
These obligations were paid as of December 31, 2002.
Capital Lease Obligations
Assets subject to capital lease agreements are reflected in property and
equipment as capital leases. During the year ended December 31, 2002, the
Company entered into four capital leases aggregating approximately $1,278,000.
During 2001, the Company entered into a capital lease for equipment having a net
present value of $57,500. For the two-month period ended December 31, 2000, the
Company entered into two capital leases aggregating approximately $3,603,000.
F-18
The following is a schedule of future minimum lease payments under capital
leases, together with the present value of the net minimum lease payments:
Years ending December 31:
2003 $ 1,982,327
2004 1,415,197
2005 35,914
2006 21,366
----------------
Total minimum lease payments 3,454,804
Less amount representing interest (247,625)
----------------
Present value of net minimum lease payments 3,207,179
Less current portion of obligations under capital leases (1,719,968)
----------------
Long-term portion $ 1,487,211
================
10. INCOME TAXES
The provision (benefit) for income taxes on continuing operations consists of:
YEAR ENDED DECEMBER 31, TWO MONTH PERIOD FISCAL YEAR
-------------------------------------- ENDED DECEMBER ENDED OCTOBER
2002 2001 31, 2000 31, 2000
----------------- ---------------- ------------------- ------------------
Current tax (benefit):
Federal $ (250,628) $ 697,000 $ - $ (2,857,672)
State and local 42,233 - - -
Deferred
provision
(benefit) - - - 684,229
-------------- ------------- --------------- ---------------
$ (208,395) $ 697,000 $ - $ (2,173,443)
============== ============= =============== ===============
F-19
Income tax expense represents the difference between the estimated tax expense
or benefit as provided and as realized in the Company's income tax returns. A
reconciliation of income taxes computed at the Federal statutory rate to amounts
provided is as follows:
TWO MONTH
YEARS ENDED DECEMBER 31, PERIOD ENDED FISCAL YEAR
--------------------------------------- DECEMBER 31, ENDED OCTOBER
2002 2001 2000 31, 2000
----------------- ------------------- ----------------- ------------------
Tax provision
computed at the
statutory rate $ 315,753 $ (12,539,449) $ (1,509,610) $ (5,833,295)
Increase (decrease)
in taxes resulting
from:
State and local
income taxes,
net of federal
income taxes 27,874 - - -
Non-deductible
expenses 13,715 3,438,021 170,221 159,405
Benefit of tax
credits (315,109) - - -
Losses for which
no benefit has
been provided - 9,101,428 1,366,890 3,500,447
Other, net (250,628) 697,000 (27,501) -
------------- --------------- ------------- --------------
$ (208,395) $ 697,000 $ - $ (2,173,443)
============= =============== ============= ==============
F-20
Temporary differences that give rise to net deferred tax assets (liabilities)
are as follows:
DECEMBER 31,
----------------------------------------------
2002 2001
--------------------- ---------------------
Deferred tax assets:
Accrued loss on leased facilities and
office closings $ 470,101 $ 2,980,931
Accrued liabilities 758,896 612,342
Allowance for doubtful accounts 375,183 418,711
Deferred rent 358,980 542,713
Net operating loss 18,311,420 11,939,586
Other 107,950 -
----------------- -----------------
20,382,530 16,494,283
----------------- -----------------
Deferred tax liabilities:
Depreciation and amortization (506,245) 22,234
Deferred software costs (722,955) (835,105)
Other - -
----------------- -----------------
(1,229,200) (812,871)
----------------- -----------------
Net tax assets 19,153,330 15,681,412
Valuation allowance (19,153,330) (15,681,412)
----------------- -----------------
Net deferred taxes $ - $ -
================= =================
The deferred tax assets have been fully offset by a valuation allowance due to
the uncertainty of realizing such tax benefits.
At December 31, 2002, the Company had 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 may be restricted
under Section 382 of the Internal Revenue Code.
11. STOCKHOLDERS' EQUITY
COMMON STOCK - The Company is authorized to issue up to 50,000,000 shares of
common stock, $0.01 par value. The holders of common stock are entitled to one
vote per share. There is no cumulative voting for the election of directors.
Subject to the prior rights of any series of preferred stock which may from time
to time be outstanding, holders of common stock are entitled to receive ratably
any dividends as may be declared by the Board of Directors of the Company out of
legally available funds, and upon the liquidation, dissolution, or winding up of
the Company, are entitled to share ratably in all assets remaining after the
payment of liabilities, and payment of accrued dividends and liquidation
preferences on the preferred stock outstanding, if any.
Holders of common stock have no preemptive rights, and have no rights to convert
their common stock into any other security.
PREFERRED STOCK - The Company is authorized to issue up to 3,000,000 shares of
preferred stock, $0.01 par value. The preferred stock may be issued in one or
more series, the terms of which may be determined by the Board of Directors
without further action by the stockholders, and may include voting rights
(including the right to vote as a series on certain matters), preferences as to
dividends and liquidation conversion, redemption rights, and sinking fund
provisions. In connection with the private placement of securities discussed
below, the Board of Directors reserved 300,000 shares of preferred stock for
initial and future issuances as Series A.
F-21
PRIVATE PLACEMENT OF SECURITIES - On May 10, 2000, in a private placement with a
group of investors (the "Purchasers"), the Company issued 157,377 shares of
redeemable 8% Series A Cumulative Convertible Participating Preferred Stock with
an aggregate face value of $60 million (the "Series A Preferred Stock") and
warrants to purchase 2,531,926 shares of the Company's common stock at an
exercise price of $0.01 per share (the "Investor Warrants"). The Company
received $58,430,596 after payment of issuance costs and related legal fees.
The initial carrying values of the Investor Warrants ($28,180,132) and Series A
Preferred Stock ($30,250,464) were determined by apportioning an amount equal to
the proceeds from the private placement multiplied by the relative value of each
class of security as of the commitment date. The difference between the carrying
value and the face value of the Series A Preferred Stock is being accreted as a
charge against retained earnings through May 31, 2007 (the Purchasers' earliest
redemption date) using the interest method. Accumulated dividends (dividends not
paid on a dividend date) and dividends accruing prior to a dividend payment date
also increase the carrying value of the Series A Preferred Stock through a
charge to retained earnings.
On December 18, 2002, 262.3 shares of Series A Preferred, with a face value of
$100,000, were converted into 2,764 shares of the Company's common stock. In
addition, the same holder exercised his Series A Warrants, receiving an
additional 4,441 common shares.
The significant provisions of the Series A Preferred Stock are as follows:
Each share of Series A Preferred Stock maintains a liquidation
preference of $381.25 per share, or an aggregate of $59.9 million for
all 157,115 shares, plus accumulated and accrued dividends. Each share
of Series A Preferred Stock bears a quarterly dividend of $7.625
payable on March 1, June 1, September 1, and December 1 of each year.
Such dividends will accumulate and compound quarterly at a rate of 8%
per annum for approximately the first three years. Thereafter,
dividends may be accumulated and compounded quarterly at 8% per annum
or paid in cash, at the option of the Company. Each share of Series A
Preferred Stock was convertible initially into ten shares of common
stock of the Company at the option of the Purchasers, subject to
adjustment provided in the Certificate of Designation.
The conversion price of the Series A Preferred Stock shall be adjusted
from time to time if the Company: (i) pays a stock dividend; (ii)
except in certain instances, issues or sells any shares of common stock
or convertible securities at a price per share less than $14.61, as
adjusted; (iii) subdivides or reclassifies its common stock; (iv)
distributes assets to holders of common stock; or (v) makes a tender
offer for all or any portion of its common stock. On February 1, 2002,
in connection with the issuance of the Camden Warrants described below,
each share of Series A Preferred became convertible into approximately
10.54 shares of common stock.
The Company has the option to redeem the Series A Preferred Stock at
any time following five years from the closing date at the greater of
(x) $381.25 per share plus all accrued and unpaid dividends or (y) the
market value per share at the date of redemption of the common stock
into which shares of the Series A Preferred Stock are convertible. The
Purchasers have a one-year right to require the Company to redeem
shares of Series A Preferred Stock after seven years from the closing
date for $381.25 per share, plus all accrued and unpaid dividends
thereon, in certain circumstances.
Each share of Series A Preferred Stock is entitled to vote on all
matters on which holders of common stock are entitled to vote, with
each share of Series A Preferred Stock having a number of votes equal
to the number of shares of common stock into which the Series A
Preferred Stock is convertible.
F-22
The approval of the holders of two-thirds of the shares of Series A
Preferred Stock is required for the Company to: (i) amend its charter
or by-laws so as to adversely effect the rights or preferences of the
Series A Preferred Stock; (ii) merge or transfer all or substantially
of its assets, reorganize, or take any action that is expected to
result in a change of control of the Company or a planned liquidation;
(iii) impose material restrictions on the Company's ability to honor
the rights of the holders of the Series A Preferred Stock; (iv)
authorize or sell any class or series of equity securities (other than
stock options pursuant to existing plans or upon the conversion of the
Series A Preferred Stock or the exercise of the Investor Warrants)
which ranks senior to, or pari passu with, the Series A Preferred
Stock; (v) subdivide or modify any outstanding shares of the Company if
the rights of the holders of the Series A Preferred Stock are impaired;
or (vi) pay any dividends on any class of stock (other than the Series
A Preferred Stock) or redeem or repurchase any equity securities of the
Company or its subsidiaries.
The sale of shares of Series A Preferred Stock, the Investor Warrants, and the
shares of common stock issuable upon conversion of the Series A Preferred Stock
or exercise of the Investor Warrants are not registered under the Securities
Act. The Company has entered into a Registration Rights Agreement providing for
certain demand registration and unlimited piggyback registrations, subject to
certain limitations.
The Purchasers, the Company and certain specified officers of the Company (the
"Management Stockholders") entered into a Stockholders Agreement. Among other
things, the Stockholders Agreement provides: (i) limitations on transfers of the
Company's securities; (ii) the agreement of the parties to vote all securities
to elect certain designees to the Company's Board of Directors; and (iii) that
certain acts may not be taken without the prior written approval of the
directors nominated by the investors. Those acts include (i) hiring or
terminating any senior manager of the Company or any subsidiary; (ii) approval
of the Company's annual business plan, operating budget and capital budget;
(iii) any capital expenditure not reflected in the Company's annual capital
budget which would cause the capital budget to be exceeded by $250,000; (iv)
consolidation or merger of the Company, sale of all or substantially all of its
assets, recapitalization or liquidation of the Company or other acts that could
result in a change of control of the Company; (v) authorizing or issuing
additional equity securities of the Company, (vi) an acquisition or divestiture
in excess of $5,000,000; (vii) incurring indebtedness in excess of $2,500,000;
(viii) entering into a transaction with an affiliate; or (ix) increasing the
securities available under an employee benefit plan.
The Investor Warrants issued to the Purchasers are subject to adjustment
provisions that are similar to those of the Series A Preferred Stock. The
Investor Warrants must be exercised before May 11, 2007.
On February 5, 2002, in connection with the issuance of the Initial Camden
Warrants discussed below, the number of common shares issuable for the Investor
Warrants was increased from 2,531,926 to 2,668,710 and the exercise price was
adjusted to $0.00949.
PRIVATE SALE OF DEBENTURES WITH WARRANTS - In connection with the SPA discussed
in Note 9 above, the Company issued the Debentures and the Initial Camden
Warrants to purchase 2,000,000 shares of the common stock of the Company
(subject to adjustments as discussed below) in exchange for $10,000,000.
OTHER WARRANTS - In February 2001, the Company issued a warrant to purchase
65,000 shares of the Company's common stock at $18.00 per share in settlement of
any future contingent consideration payable under an agreement to purchase the
assets of a business. This warrant has a ten year life and vests as to 21,667
shares on September 16, 2001, with the remaining 43,333 shares vesting in
approximately equal amounts over the following 24 months. The fair value of the
warrant of $146,900, calculated using the Black-Scholes pricing model, was
recorded as additional goodwill relating to the related acquisition.
On June 5, 2000, the Company issued warrants to former debt holders to purchase
30,000 shares of the Company's common stock at $19.25 per share as consideration
for the settlement of all other potential equity interests in the Company held
by them. The warrants were immediately exercisable and expire on June 5, 2004.
The fair value of the warrants of $120,000, calculated using the Black-Scholes
pricing model, was included in the statement of operations for the fiscal year
ended October 31, 2000.
F-23
STOCK OPTION PLANS - On June 25, 2002, the stockholders approved a Board of
Directors resolution establishing the Company's 2002 Stock Option and Stock
Appreciation Rights Plan (the "2002 Plan"). The principal reason for adopting
the 2002 Plan is the Federal income tax requirement that Incentive Stock Options
must be granted within ten years from the earlier of the date of adoption of a
qualified plan or approval of the plan by the stockholders. Prior to its initial
public offering in September 1992, the Company had adopted the 1992 Stock Option
and Stock Appreciation Rights Plan (as subsequently amended and restated, "the
1992 Plan") that provided for the granting of options to employees, officers,
directors, and consultants for the purchase of common stock. The material
features of the 1992 Plan and the 2002 Plan are substantially the same.
Incentive stock options may be granted only to employees and officers of the
Company, while non-qualified options may be issued to directors and consultants,
as well as to officers and employees of the Company.
Upon adoption of the 2002 Plan, the resolution of the Board of Directors
stipulates that no further grants will be made pursuant to the 1992 Plan. The
grants previously made under the 1992 Plan will not be affected. The Board's
resolution provides that 1,000,000 shares will be authorized as available for
grant under the 2002 Plan. Both plans provide a maximum exercise period of ten
years. Qualified options granted to a 10% or greater stockholder shall have a
maximum term of five years under Federal tax rules. As a matter of practice,
except with respect to a 10% or greater stockholder, the typical exercise period
for options granted under the existing plan has been ten years from the date of
grant.
The Company's Board of Directors or a committee of the Board consisting of at
least two non-employee directors determine those individuals to whom options
will be granted, the number of shares of common stock which may be purchased
under each option, and (when necessary) the option exercise price. The Board or
the committee also determines the expiration date of the options (typically 10
years, except for 10% shareholders, which expire in 5 years), and the vesting
schedule of the options.
The per share exercise price of an incentive stock option may not be less than
the fair market value of the common stock on the date the option is granted. The
per share exercise price of a non-qualified option shall be determined by the
committee, except that the Company will not grant non-qualified options with an
exercise price lower than 50% of the fair market value of common stock on the
day the option is granted.
In addition, any person who, on the date of the grant, already owns, directly or
indirectly, 10% or more of the total combined voting power of all classes of
stock outstanding, may only be granted an option if the exercise price of such
option is at least 110% of the fair market value of the common stock on the date
of the grant.
The Board or the committee may also grant "stock appreciation rights" ("SARs")
in connection with specific options granted under the plan. Each SAR entitles
the holder to either: (a) cash (in an amount equal to the excess of the fair
value of a share of common stock over the exercise price of the related
options); or (b) common stock (the number of shares of which is to be determined
by dividing the SARs cash value by the fair market value of a share of common
stock on the SAR exercise date); or (c) a combination of cash and stock. SARs
may be granted along with options granted under the 2002 Plan, and to holders of
previously granted options. No SARs have been granted under the either plan.
F-24
Activity in the Plan during the periods from October 31, 1999 through December
31, 2002 is as follows:
NUMBER OF EXERCISE PRICE RANGE WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------------- -------------------------- --------------------
Options outstanding, October 31, 1999 788,400 $ 3.55 - $11.48 $ 6.56
Options granted 1,407,350 $ 8.81 - $45.00 $16.18
Options exercised (170,478) $ 3.25 - $27.25 $ 5.53
Options cancelled (54,422) $ 4.38 - $27.25 $13.38
---------------
Options outstanding, October 31, 2000 1,970,850 $ 3.25 - $45.00 $12.89
Options cancelled (183,916) $ 8.81 - $27.25 $13.74
---------------
Options outstanding, December 31, 2000 1,786,934 $ 3.25 - $45.00 $12.65
Options granted 235,400 $ 4.58 - $14.61 $ 8.09
Options exercised (25,000) $ 4.68 - $ 4.68 $ 4.68
Options cancelled (593,563) $ 4.64 - $45.00 $17.99
---------------
Options outstanding, December 31, 2001 1,403,771 $ 3.25 - $37.78 $ 9.77
Options granted 252,100 $ 4.95 - $ 8.63 $ 6.37
Options exercised (53,885) $ 3.78 - $ 7.14 $ 5.38
Options cancelled (195,051) $ 4.38 - $27.25 $12.64
---------------
Options outstanding, December 31, 2002 1,406,935 $ 3.25 - $37.78 $ 8.93
===============
ADDITIONAL INFORMATION REGARDING EXERCISE PRICE RANGES OF OPTIONS OUTSTANDING:
- ------------------------------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE
WEIGHTED WEIGHTED EXERCISE
NUMBER OF AVERAGE AVERAGE NUMBER OF PRICE OF
EXERCISE PRICE OPTIONS EXERCISE CONTRACTUAL OPTIONS EXERCISABLE
RANGE OUTSTANDING PRICES LIFE (YEARS) EXERCISABLE OPTIONS
- -------------------- ---------------- ------------- --------------- -------------- ---------------
$ 3.25 - $ 4.86 186,250 $ 3.61 3.6 184,163 $ 3.59
$ 5.15 - $ 7.14 354,463 $ 5.88 7.3 163,538 $ 5.52
$ 7.30 - $10.47 659,250 $ 9.41 6.5 597,949 $ 9.47
$10.86 - $15.42 67,062 $11.81 1.5 59,078 $11.67
$17.00 - $23.13 122,860 $18.72 6.4 109,128 $18.80
$27.25 - $31.81 13,300 $28.58 6.9 13,300 $28.58
$37.78 - $37.78 3,750 $37.78 7.4 3,750 $37.78
---------------- --------------
1,406,935 1,130,906
================ ==============
There were 1,130,906, 1,094,647, 950,997, and 884,612 options exercisable at
December 31, 2002, 2001 and 2000 and October 31, 2000, respectively. At December
31, 2002, there are 954,250 options available for future grant.
F-25
12. COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company is obligated under two employment agreements that were to expire on
October 31, 2002. A provision of these agreements provides that, in the absence
of any written notice to the contrary, each agreement is extended such that
there shall always be an unexpired term of one year. This provision is currently
in force. In connection with the AmQUEST Acquisition discussed in Note 2, an
additional employment agreement was entered into as of February 5, 2002 with a
one year minimum term. Pursuant to such agreements, the total annual minimum
salary payable in 2003 is $844,375.
Consulting and Non-competition
In connection with an acquisition, the Company entered into an agreement with
the former owner of the acquired company. This agreement, as amended, expires on
February 1, 2003, and provides for remaining payments totaling $46,000 through
that date.
Lease Obligations
Operating leases for facilities extend through December 31, 2015. Several of
these leases contain escalation clauses, which cause the amounts paid each year
to increase by a stated amount or percentage. The Company records as expense,
however, a fixed amount representing the average of these varying payments. The
difference between the cash payments and the expense recorded is accrued. This
liability is long-term since the accrued amounts will not be paid until the
mid-point of the 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.
The Company leases space in a building owned by the former parent of AmQUEST. At
February 5, 2002, the Company occupied approximately 33,400 square feet. The
lease agreement permits the Company to reduce its use of this space for a
pro-rata reduction in rent. The Company has moved most of the operations of
AmQUEST to the facility in the Atlanta metropolitan area, and occupies
approximately 11,400 square feet at December 31, 2002. It is the Company's
intention to further reduce its use of this space during 2003. This lease
agreement expires on January 31, 2006, unless the Company reduces its use of
this space to zero at an earlier date. During 2002, the lease expense for this
facility totaled $362,000.
The Company's obligations under certain of these leases are secured by cash
deposits or standby letters of credit, aggregating $735,000 and $2,086,000 at
December 31, 2002 and 2001, respectively. The standby letters of credit are
collateralized by certain cash investments that have been classified as
long-term assets. Total expense for occupancy costs, was approximately
$2,264,000; $5,364,000; $607,000; and $2,104,000 for the years ended December
31, 2002 and 2001, the two months ended December 31, 2000, and for the fiscal
year ended October 31, 2000, respectively.
Loss on Leased Facilities
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. In 2002,
approximately $290,000 of the provision relating to estimated settlement costs
was reversed.
F-26
Effective as of August 1, 1998, the Company sublet approximately 31,500 square
feet in its New York City location. The sublease and the related primary lease
expire in 2008. A charge was taken of approximately $3,022,000 representing the
total amount of the shortfall between the amounts to be received and paid out
over the life of the lease, and also including the value of leasehold
improvements abandoned. Since a sale of certain operations also permitted the
Company to reduce substantially its New York City space requirements, a portion
of the original accrual and the subsequent net cash flows are charged to the
discontinued operation.
During fiscal 2000, the landlord, the subtenant, and the Company executed
agreements terminating both the primary lease and the sublease. Under the terms
of these agreements, the Company must pay the landlord monthly amounts equal to
the excess of the sum due under the primary lease over the amount due under the
sublease.
Effective July 31, 2000, the Company closed its Charlotte, NC sales office, and
recorded a charge of approximately $514,000 representing the total amount of
future payments. The lease for this facility expired on December 31, 2002.
The Company leases certain of its data center equipment, various items of office
equipment, and vehicles under standard commercial operating leases. The Company
also has fixed-term obligations for software licenses.
Approximate minimum future lease payments for real estate and other operating
leases are as follows:
Years ending December 31,
2003 $ 8,668,000
2004 6,264,000
2005 5,481,000
2006 5,350,000
2007 5,116,000
Thereafter 28,656,000
-------------------
$ 59,535,000
===================
Settlement of Acquisition Contingency
On December 18, 1998, a subsidiary of the Company purchased certain assets and
the business of Enterprise Technology Group, Incorporated ("Enterprise") for
$4,000,000 in cash and 300,000 shares of the Company's common stock valued at
$2,677,500. The Company also recorded $6,852,928 in excess of cost over net
assets acquired (goodwill).
Certain additional consideration in the form of cash and common stock (up to
$4,872,000 and 242,857 shares) would have been payable, at various times, based
upon the future performance of the acquired business over the period ending
December 31, 2001. Effective as of December 31, 1999, $1,135,160 in additional
consideration became payable in the form of shares of the Company's common
stock. This amount was recorded as an increase in the value of goodwill. The
Company paid this consideration in the form of 36,472 shares of its common stock
on February 22, 2000.
In February 2001, the Asset Purchase Agreement was amended to provide for the
issuance of a warrant to purchase 65,000 shares of the Company's common stock to
settle any future contingent payments (see Note 12).
13. RETIREMENT PLANS
The Company maintains a 401(k) Savings Plan covering all eligible employees who
have attained the age of 21 years and worked at least 1,000 hours in a one-year
period. Plan participants may elect to contribute up to 100% of covered
compensation each year, to the IRS maximum of $11,000. Per the Economic Growth
and Tax Reconciliation Act of 2001, employees who reached 50 years of age were
allowed to contribute an additional $1,000. The Company may make matching
contributions at the discretion of the Board of Directors. The Company has not
made any matching contributions. The administrative costs of the Plans are borne
by the Company. Asset management costs are deducted pro rata from the
participants' accounts.
F-27
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2002 and 2001 (in thousands except per share data):
THREE MONTHS ENDED:
------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2002 2002 2002 2002
------------------ ------------------ ------------------- ------------------
Revenues $ 11,233 $ 13,241 $ 12,906 $ 13,394
============== ============== =============== ==============
Net income (loss) $ 1,330 $ (726) $ (30) $ 563
============== ============== =============== ==============
Net loss to common
Stockholders $ (919) $ (3,024) $ (2,378) $ (1,835)
============== ============== =============== ==============
Net loss to common
stockholders per basic or
diluted common shares $ (0.17) $ (0.57) $ (0.44) $ (0.34)
============== ============== =============== ==============
THREE MONTHS ENDED:
------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2001 2001 2001 2001
------------------ ------------------ ------------------- ------------------
Revenues $ 5,514 $ 6,610 $ 7,354 $ 7,508
============== ============== =============== ==============
Net loss $ (7,782) $ (6,243) $ (4,800) $ (17,699)
============== ============== =============== ==============
Net loss to common
stockholders $ (9,844) $ (8,350) $ (6,953) $ (19,901)
============== ============== =============== ==============
Net loss to common
stockholders per basic or
diluted common shares $ (1.68) $ (1.42) $ (1.18) $ (3.49)
============== ============== =============== ==============
F-28
INFOCROSSING, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND CHARGED TO BALANCE AT END
PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS (a) OF PERIOD
----------------- ---------------- --------------- ---------------- ----------------
Allowance for
Doubtful Accounts:
Year ended
December 31, 2002 $ 1,008,942 $ 227,784 $ - $ 185,834 $ 1,050,892
============= ============ =========== ============ ============
Year ended
December 31,2001 $ 525,957 $ 776,228 $ - $ 293,243 $ 1,008,942
============= ============ =========== ============ ============
Two-month period
Ended December
31, 2000 $ 502,957 $ 23,000 $ - $ - $ 525,957
============= ============ =========== ============ ============
Fiscal year ended
October 31, 2000 $ 350,939 $ 175,838 $ - $ 23,820 $ 502,957
============= ============ =========== ============ ============
(a) Uncollectible accounts written off, net of recoveries.
S-1