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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2003
Commission file number: 0-20824
INFOCROSSING, INC.
-------------------------------------------------------------
(Exact name of registrant as specified in its Charter)
Delaware 13-3252333
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2 Christie Heights Street Leonia, NJ 07605
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 840-4700
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): [ ] Yes [X] No.
There were 5,386,016 shares of the registrant's Common Stock, $0.01 par value,
outstanding as of August 12, 2003.
Page 1
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share
and per share amounts)
June 30, December 31,
2003 2002
--------------- --------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 8,083 $ 7,026
Trade accounts receivable, net of allowances for
doubtful accounts of $518 and $1,051 2,819 4,369
Due from related parties 221 216
Prepaid license fees 567 827
Other current assets 1,976 1,308
----------- -----------
13,666 13,746
----------- -----------
PROPERTY and EQUIPMENT, net 19,760 19,437
----------- -----------
OTHER ASSETS:
Deferred software, net 1,501 1,742
Goodwill, net 28,361 28,451
Other intangible assets, net 951 1,142
Security deposits and other non-current assets 1,083 977
----------- -----------
31,896 32,312
----------- -----------
TOTAL ASSETS $ 65,322 $ 65,495
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 3,738 $ 4,093
Current portion of long-term debt and capitalized lease obligations 2,155 1,741
Current portion of accrued loss on leased facilities 204 208
Accrued expenses 2,743 4,093
Income taxes payable 125 96
Customer deposits, deferred revenue, and other current liabilities 1,286 1,381
----------- -----------
10,251 11,612
----------- -----------
LONG-TERM LIABILITES:
Debentures due in 2005, net of unaccreted discount 10,288 9,372
Long-term debt and capitalized lease obligations 1,555 1,506
Accrued loss on leased facilities 829 925
Deferred revenue and other long-term liabilities 996 1,096
----------- -----------
13,668 12,899
----------- -----------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE 8% SERIES A CUMULATIVE CONVERTIBLE PARTICIPATING PREFERRED STOCK;
$0.01 par value; 300,000 shares authorized; 157,115 shares issued and
outstanding (liquidation preference
of $76,870 at June 30, 2003) 58,138 53,189
----------- -----------
STOCKHOLDERS' DEFICIT:
Preferred stock; $0.01 par value; 2,700,000 shares authorized; none issued - -
Common stock; $0.01 par value; 50,000,000 shares authorized; shares issued
of 5,981,006 at June 30, 2003 and 5,973,506 at December 31, 2002 60 60
Additional paid-in capital 61,179 61,135
Accumulated deficit (75,123) (70,549)
----------- -----------
(13,884) (9,354)
Less 594,990 shares of common stock held in treasury, at cost (2,851) (2,851)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIT (16,735) (12,205)
----------- -----------
TOTAL LIABILITES AND STOCKHOLDERS' DEFICIT $ 65,322 $ 65,495
=========== ===========
See Notes to Consolidated Financial Statements (Unaudited).
Page 2
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands,
except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ---------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- --------------
REVENUES $ 13,582 $ 13,242 $ 26,711 $ 24,474
---------- ---------- ---------- ----------
COSTS and EXPENSES:
Operating costs 8,647 9,165 16,957 14,583
Selling and promotion costs 840 854 1,646 1,627
General and administrative expenses 1,889 1,800 3,623 3,768
Depreciation and amortization 1,473 1,579 2,889 2,942
---------- ---------- ---------- ----------
12,849 13,398 25,115 22,920
---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS 733 (156) 1,596 1,554
---------- ---------- ---------- ----------
Interest income (17) (52) (37) (137)
Interest expense 637 622 1,230 1,087
---------- ---------- ---------- ----------
620 570 1,193 950
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 113 (726) 403 604
Income tax expense 8 - 28 -
---------- ---------- ---------- ---------
NET INCOME (LOSS) 105 (726) 375 604
Accretion and dividends on redeemable
preferred stock (2,501) (2,298) (4,949) (4,547)
---------- ---------- ---------- ----------
NET LOSS TO COMMON STOCKHOLDERS $ (2,396) $ (3,024) $ (4,574) $ (3,943)
========== ========== ========== ==========
BASIC AND DILUTED EARNINGS PER SHARE:
Net loss to common stockholders $ (0.45) $ (0.57) $ (0.85) $ (0.74)
========== ========== ========== ==========
Weighted average number of common
shares outstanding 5,383 5,342 5,381 5,342
========== ========== ========== ==========
See Notes to Consolidated Financial Statements (Unaudited).
Page 3
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(Unaudited, in thousands)
Additional Treasury
Paid in Accumulated Stock at
Common Shares Par Value Capital Deficit Cost Total
-------------- ------------- ------------- --------------- ------------- -------------
Balances,
December 31, 2002 5,974 $ 60 $ 61,135 $ (70,549) $ (2,851) $ (12,205)
Exercises of stock options 7 - 44 - - 44
Accretion and dividends on
Redeemable preferred stock - - - (4,949) - (4,949)
Net income - - - 375 - 375
----------- ---------- ---------- ----------- ---------- ----------
Balances,
June 30, 2003 5,981 $ 60 $ 61,179 $ (75,123) $ (2,851) $ (16,735)
=========== ========== ========== =========== ========== ==========
See Notes to Consolidated Financial Statements (Unaudited).
Page 4
INFOCROSSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
-------------------------------------
2003 2002
---------------- -----------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 375 $ 604
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization 2,889 2,942
Accretion of discounted Debentures 280 220
Decrease (increase) in:
Trade accounts receivable 1,550 (390)
Prepaid license fees and other current assets (408) (191)
Security deposits and other non-current assets (111) 52
Increase (decrease) in:
Accounts payable (355) (789)
Income taxes payable 29 -
Accrued expenses (274) (1,667)
Payments on accrued loss on leased facilities (74) (1,694)
Customer deposits, deferred revenue, and other liabilities (195) (598)
----------- -----------
Net cash provided by (used in) operating activities 3,706 (1,511)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,202) (2,141)
Purchase of the outstanding stock of AmQUEST, Inc. and payments
of related costs (350) (20,414)
Increase in deferred software costs (61) (64)
----------- -----------
Net cash used in investing activities (1,613) (22,619)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Debentures - 10,000
Repayment of debt and capitalized leases (1,049) (3,718)
Exercises of stock options and warrants 44 7
Advances to related parties, net (5) (6)
------------ -----------
Net cash (used in) provided by financing activities (1,010) 6,283
----------- -----------
Net cash provided by (used in) continuing operations 1,083 (17,847)
----------- -----------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Payments on portion of accrued loss on leased facilities relating to
discontinued operations (26) (26)
----------- -----------
Net increase (decrease) in cash and equivalents 1,057 (17,873)
Cash and equivalents, beginning of period 7,026 24,344
----------- -----------
Cash and equivalents, end of the period $ 8,083 $ 6,471
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 220 $ 357
=========== ===========
Income taxes $ 103 $ 5
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITY:
Fees and other costs accrued in connection with the purchase
Of AmQUEST, Inc. $ - $ 407
=========== ===========
Equipment acquired subject to a capital lease $ 1,512 $ 901
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Treasury shares received in payment of a stock option exercise $ - $ 95
=========== ===========
Additional Debentures issued in lieu of a cash payment of interest $ 636 $ -
=========== ===========
See Notes to Consolidated Financial Statements (Unaudited).
Page 5
INFOCROSSING, INC. AND SUBSIDIAIRES
NOTES TO THE CONSOLIDATED INTERIM
FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated balance sheets as of June 30, 2003, the consolidated statements
of operations for the three and six months ended June 30, 2003 and 2002, the
consolidated statement of stockholders' deficit for the six months ended June
30, 2003, and the consolidated statements of cash flows for the six months ended
June 30, 2003 and 2002 have not been audited. In the opinion of management, all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position, results of operations, and cash flows for
the periods indicated have been made. The results of operations for the periods
ended June 30, 2003 and 2002 are not necessarily indicative of the operating
results for the full years.
Certain reclassifications have been made to the prior periods to conform to the
current presentation.
Certain disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted. These consolidated interim financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended December 31, 2002.
The consolidated financial statements include the accounts of Infocrossing, Inc.
and its wholly owned subsidiaries, including, subsequent to its acquisition on
February 5, 2002, the accounts of AmQUEST, Inc. (collectively, the "Company").
All significant intercompany balances and transactions have been eliminated.
2. ACQUISITION
On February 5, 2002, the Company purchased all of the outstanding capital stock
of AmQUEST, a Georgia corporation, from its former parent company American
Software, Inc. ("ASI")(the "AmQUEST Acquisition"). As consideration for the
purchase of AmQUEST's shares, the Company paid ASI approximately $19,634,000 in
cash, after finalizing certain post closing adjustments. In addition, the
Company incurred approximately $612,000 in professional fees and other costs
related to the acquisition.
The Company financed the AmQUEST Acquisition through the application of the
proceeds of the financing described in Note 3 and cash on hand.
The Company acquired client contracts valued at $1,200,000. This intangible
asset is being amortized over five years using an accelerated method to
approximate the anticipated decline in the revenues of the acquired contracts as
they expire over that time. The acquisition also generated $20,624,000 in
goodwill. This goodwill is not amortizable for tax purposes.
Page 6
The following unaudited condensed consolidated pro forma financial statement of
operations is presented to illustrate the effects of the acquisition of AmQUEST
as if such transaction had occurred on the first day of January, 2002. The pro
forma statement of operations may not be indicative of the results that actually
would have occurred had the combination been in effect on the date indicated,
nor does it purport to indicate the results that may be obtained in the future.
Condensed Consolidated Pro Forma Statement of Operations
(In Thousands except Per Share Data)
Six Months Ended June
30, 2002
----------------------
Revenues $ 25,949
====================
Net income $ 478
====================
Net loss to common stockholders $ (4,068)
====================
Net loss to common stockholders per
basic and diluted share $ (0.76)
====================
3. DEBENTURES
On February 1, 2002, the Company entered into a Securities Purchase Agreement
(the "SPA") with a group of private investors (the "Investors") whereby the
Company issued Senior Subordinated Debentures (the "Debentures") and warrants to
purchase, initially, 2,000,000 shares of the common stock of the Company (the
"Initial Camden Warrants") in exchange for $10,000,000. Pursuant to the SPA, the
proceeds of the sale of the Debentures were used to fund a portion of the cost
of the AmQUEST Acquisition.
The Debentures were issued at an aggregate face value of $10,000,000 with a
maturity of three years from February 1, 2002 (the "Issuance Date"), with the
right to extend the term of the Debentures for one additional year at the
Company's sole option. Pursuant to the terms of the Debentures, the Company is
required to make semi-annual interest payments of 12% per annum for the first
two years, 13% per annum for the period commencing on February 1, 2004 and
ending on February 1, 2005, and (if the Company elects to extend the maturity
date as described above), 14% per annum from February 1, 2005. The Company has
the option to pay interest in the form of (a) cash, (b) additional Debentures,
or (c) a combination of cash and additional Debentures. If the Company chooses
to make interest payments using additional Debentures, the Company may be
required to issue additional warrants (the "Additional Camden Warrants")
pursuant to the terms of the Debentures. Additional Camden Warrants will not be
subject to cancellation. The fair market value of Additional Camden Warrants
issued, if any, will be recorded as deferred financing costs and amortized over
the remaining term of the Debentures.
The initial carrying values of the Debentures ($8,280,000) and Initial Camden
Warrants ($1,720,000) were determined by apportioning an amount equal to the
proceeds from the private sale multiplied by the relative value of each item as
of the Issuance Date. The difference between the carrying value and the face
value of the Debentures is being recorded as additional interest expense through
February 1, 2005 (the initial maturity date of the Debentures) using the
interest method.
The Initial Camden Warrants have been issued pursuant to a Warrant Agreement
dated as of February 1, 2002 by and between the Company and the Investors (the
"Warrant Agreement") and are subject to certain customary anti-dilution
adjustments. The exercise price of the Initial Camden Warrants is $5.86. The
Camden Warrants expire on January 31, 2007 and may be cancelled, in part, upon
the prepayment of the Debentures as more fully described in the Warrant
Agreement.
Page 7
On July 31, 2002, January 31, 2003, and July 31, 2003, the Company made the
interest payment then due by issuing additional Debentures totaling $600,000,
$636,000, and $674,160, 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 191,016 shares of common stock. The
exercise price of the Additional Camden Warrants, if issued, will equal the
average daily closing bid price for the Company's common stock for the period
consisting of the thirty business days immediately before February 1, 2004. Any
Additional Camden Warrants will expire after the five-year anniversary of
issuance of such warrants.
4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146"). SFAS 146 provides guidance on the timing of the recognition of costs
associated with exit or disposal activities, requiring such costs to be
recognized when incurred. Previous guidance required the recognition of costs at
the date of commitment to an exit or disposal plan. The provisions of SFAS 146
are to be adopted prospectively after December 31, 2002. Although SFAS 146 may
impact the accounting for costs related to exit or disposal activities the
Company may enter into in the future, particularly the timing of the recognition
of these costs, the adoption of the statement did not have an impact on the
Company's current financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123," which amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. The
transition and annual disclosure provisions of SFAS No. 148 are effective for
fiscal years ending after December 15, 2002. In addition, SFAS No. 148 amends
the disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company has adopted the disclosure provisions of SFAS No. 148 and
continues to account for stock-based compensation to employees under APB Opinion
No. 25 and related interpretations.
In April 2003, FASB issued SFAS 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities", which amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement is effective for contracts entered into or modified
and for hedging relationships designated after June 30, 2003. The Company does
not expect the adoption of this statement to have a material impact on its
operating results or financial position.
In May 2003, the Financial Accounting Standards Board, or FASB, issued SFAS 150,
"Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity". The statement improves the accounting for three types
of financial instruments that were previously accounted for as equity -
mandatory redeemable shares, instruments that may require the issuer to buy back
shares and certain obligations that can be settled with shares. The statement
requires that those instruments be accounted for as liabilities in the statement
of financial position. The statement is effective for all financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
does not expect the adoption of this statement to have a material impact on its
operating results or financial position.
Page 8
5. STOCK-BASED COMPENSATION
The Company accounts for stock options granted to employees and directors under
the Plan in accordance with Accounting Principles Board Opinion No. 25 and
related Interpretations. Accordingly, no compensation cost has been recognized
for stock option awards. Had compensation cost been determined in accordance
with Statement of Financial Accounting Standard No. 123 "Accounting for
Stock-Based Compensation", the Company's income (loss) in thousands of dollars
and income (loss) per common share for the three and six months ended June 31,
2003 and 2002 would have been as follows:
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
-------------- --------------- -------------- ---------------
Net loss to common stockholders:
As reported $ (2,396) $ (3,024) $ (4,574) $ (3,943)
Deduct: stock-based
employee compensation,
net of taxes (704) (730) (1,434) (1,453)
----------- ----------- ----------- -----------
Pro forma $ (3,100) $ (3,754) $ (6,008) $ (5,396)
=========== =========== =========== ===========
Net loss to common stockholders per share:
As reported $ (0.45) $ (0.57) $ (0.85) $ (0.74)
=========== =========== =========== ===========
Pro forma $ (0.58) $ (0.70) $ (1.12) $ (1.01)
=========== =========== =========== ===========
6. BASIC AND DILUTED EARNINGS PER COMMON SHARE
Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS
128") requires the presentation of basic and diluted earnings per share ("EPS").
Basic EPS is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding during each period. Diluted
EPS is computed using the weighted average number of common shares plus the
dilutive effect of common stock equivalents. Common stock equivalents that are
antidilutive are excluded from the computation of weighted average shares
outstanding. Certain common stock equivalents that are currently antidilutive
may be dilutive in the future. In determining the diluted loss per common share
for the three and six month periods ended June 30, 2003 and 2002, common stock
equivalents have been ignored since the effect of including such equivalents
would have been antidilutive.
Page 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Infocrossing is a leading provider of information technology and business
process outsourcing services to enterprise clients. We deliver a full suite of
managed and outsourced solutions that enable clients to leverage our
infrastructure and process expertise to improve their efficiency and reduce
their operating costs. We have gained significant expertise in managing complex
computing environments, beginning with traditional data center outsourcing
services and evolving to a comprehensive set of managed solutions. We support a
variety of clients, including Global 2000 companies, and help assure the optimal
performance, security, reliability, and scalability of our clients' mainframes,
distributed servers, and networks, irrespective of where the systems' components
are located. Due to rapid changes and increasing complexities in information
technology, we believe outsourcing is an efficient solution for many businesses
and continues to be a growing trend. We have grown through strategic
acquisitions as well as organic growth.
On February 5, 2002, we completed the acquisition of AmQUEST, Inc., an
Atlanta-based IT outsourcing company, for approximately $19.6 million in cash
after certain post-closing adjustments (the "AmQUEST Acquisition"). This
acquisition combined two highly complementary businesses and enabled us to
benefit from increased scale, enhanced services, and expanded geographic reach.
The combination strengthens our position as one of the leading providers of IT
outsourcing solutions for large and mid-size companies enterprises across a
broad range of industries including financial services, security, publishing,
healthcare, telecommunications and manufacturing.
THREE MONTHS ENDED JUNE 30, 2003 and 2002
For the three months ended June 30, 2003 (the "Current Quarter"), revenues
increased $340,000 (3%) to $13,582,000 from $13,242,000 for the three months
ended June 30, 2002 (the "Prior Quarter"). This growth is primarily attributable
to new customer contracts added during the past twelve months.
Operating costs decreased $518,000 (6%) to $8,647,000 during the Current Quarter
compared with $9,165,000 for the Prior Quarter, primarily from productivity
gains and expense reductions from our integration of AmQUEST.
Selling and promotion costs decreased $14,000 (2%) to $840,000 in the Current
Quarter from $854,000 for the Prior Quarter.
General and administrative expenses increased $89,000 (5%) to $1,889,000 for the
Current Quarter from $1,800,000 for the Prior Quarter. Included in the Current
Quarter are $264,000 of non-recurring professional fees related to strategic
corporate activities. Excluding these non-recurring charges, general and
administrative expenses decreased $159,000 (9%), primarily due to continued cost
savings initiatives.
Depreciation and amortization of fixed assets and other intangibles decreased
$106,000 (7%), from $1,579,000 for the Prior Quarter to $1,473,000 for the
Current Quarter, primarily as a result of lower expense for the amortization of
customer lists.
We recorded net interest expense of $620,000 for the Current Quarter compared
with $570,000 for the Prior Quarter. The net change of $50,000 reflects an
increase of $15,000 in interest expense on a larger average outstanding debt
balance than in the Prior Quarter and a decrease in interest income of $35,000,
primarily due to a lower average balance of interest-earning assets during the
Current Quarter. Also, to a lesser extent the decrease in interest income
results from lower interest rates.
In the Current Quarter, we recorded income tax expense of $8,000 related to
estimated state income tax obligations. No tax expense was recorded in the Prior
Quarter. At June 30, 2003, we have net operating loss carryforwards of
approximately $44.1 million for federal income tax purposes that begin to expire
in 2019. The net operating loss carryforwards include approximately $8.1 million
acquired in the AmQUEST Acquisition. The use of the net operating loss
carryforwards from the AmQUEST Acquisition may be restricted under current tax
rules. Any future tax benefit generated by the use of the net operating loss
acquired in the AmQUEST Acquisition will be treated as a reduction of goodwill.
The deferred tax asset associated with carrying forward cumulative pre-tax
losses has been fully offset by a valuation allowance due to the uncertainty of
realizing such tax benefits.
Page 10
We had net income of $105,000 for the Current Quarter compared with a loss of
$726,000 for the Prior Quarter. Net loss to common stockholders after accretion
and accrued dividends on preferred stock was $2,396,000 for the Current Quarter
compared with $3,024,000 for the Prior Quarter. The loss per common share was
$0.45 for the Current Quarter compared with $0.57 for the Prior Quarter, on both
a basic and diluted basis. Common stock equivalents were ignored in determining
the net loss per share for both periods, since the inclusion of such equivalents
would be antidilutive.
SIX MONTHS ENDED JUNE 30, 2003 and 2002
For the six months ended June 30, 2003 (the "Current Period"), revenues
increased $2,237,000 (9%) to $26,711,000 from $24,474,000 for the six months
ended June 30, 2002 (the "Prior Period"). This revenue growth is primarily
attributable to new customer contracts added during the past twelve months.
Operating costs increased $2,374,000 (16%) to $16,957,000 during the Current
Period compared with $14,583,000 for the Prior Period. Operating costs for the
Prior Period reflect a settlement of certain claims with a software licensor
whereby we received benefits of $2,796,000 consisting of $2,000,000 in credits
that were applied against the cost of future purchases and $796,000 in the
reversal of accrued expenses relating to maintenance and support. Excluding
these benefits, operating costs decreased by $422,000 (2%) during the Current
Period compared with the Prior Period.
Selling and promotion costs increased $19,000 (1%) to $1,646,000 in the Current
Period from $1,627,000 in the Prior Period.
General and administrative expenses decreased $145,000 (4%) to $3,623,000 for
the Current Period from $3,768,000 for the Prior Period. Included in the Current
Period are $264,000 of non-recurring professional fees related to strategic
corporate activities. Excluding these non-recurring charges, general and
administrative expenses decreased $393,000 (10%), primarily due to continued
cost savings initiatives.
Depreciation and amortization for fixed assets and other intangibles decreased
$53,000 (2%), from $2,942,000 for the Prior Period to $2,889,000 for the Current
Period, primarily as a result of lower expense from amortization of customer
lists.
We recorded net interest expense of $1,193,000 for the Current Period compared
with $950,000 for the Prior Period. The net change of $243,000 reflects an
increase of $143,000 in interest expense on a larger average outstanding debt
balance than in the Prior Period and a decrease in interest income of $100,000,
primarily due to a lower average balance of interest-earning assets during the
Current Period. Also, to a lesser extent the decrease in interest income results
from lower interest rates.
In the Current Period, we recorded income tax expense of $28,000, related to
estimated state income tax obligations. No tax expense was recorded in the Prior
Period. At June 30, 2003, we have net operating loss carryforwards of
approximately $44.1 million for federal income tax purposes that begin to expire
in 2019. The net operating loss carryforwards include approximately $8.1 million
acquired in the AmQUEST Acquisition. The use of the net operating loss
carryforwards from the AmQUEST Acquisition may be restricted under current tax
rules. Any future tax benefit generated by the use of the net operating loss
acquired in the AmQUEST Acquisition will be treated as a reduction of goodwill.
The deferred tax asset associated with carrying forward cumulative pre-tax
losses has been fully offset by a valuation allowance due to the uncertainty of
realizing such tax benefits.
We had net income of $375,000 for the Current Period compared with $604,000 for
the Prior Period. Net income for the Prior Period includes $2,796,000 related to
the settlement of a dispute with a software licensor, as previously described.
Excluding the settlement of the dispute in the Prior Period, net income
increased by $2,567,000. Net loss to common stockholders after accretion and
accrued dividends on preferred stock was $4,574,000 for the Current Period
compared with $3,943,000 for the Prior Period. The loss per common share was
$0.85 for the Current Period compared with $0.74 for the Prior Period, on both a
basic and diluted basis. Common stock equivalents were ignored in determining
the net loss per share for both periods, since the inclusion of such equivalents
would be antidilutive.
Page 11
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately $3,706,000 for the
six months ended June 30, 2003. During the Current Period, we had $375,000 of
net income, $2,889,000 of depreciation and amortization, and $280,000 of
debenture discount amortization. Among other operating items, the decrease in
accounts receivable was offset by increases in other current and non-current
assets and decreases in accounts payable, accrued expenses and other
liabilities.
Principal investing activities include $1,202,000 for the purchase of property
and equipment. During the first six months of 2003, we also entered into capital
leases having a carrying value of approximately $1,512,000.
Financing activities included $1,049,000 in payments of principal with respect
to debt and capital lease obligations.
On February 1, 2002, the Company entered into a Securities Purchase Agreement
(the "SPA") with a group of private investors (the "Investors") whereby the
Company issued Senior Subordinated Debentures (the "Debentures") and warrants to
purchase, initially, 2,000,000 shares of the common stock of the Company (the
"Initial Camden Warrants") in exchange for $10,000,000.
The Debentures were issued at an aggregate face value of $10,000,000 with a
maturity of three years from February 1, 2002 (the "Issuance Date"), with the
right to extend the term of the Debentures for one additional year at the
Company's sole option. Pursuant to the terms of the Debentures, the Company is
required to make semi-annual interest payments of 12% per annum for the first
two years, 13% per annum for the period commencing on February 1, 2004 and
ending on February 1, 2005, and (if the Company elects to extend the maturity
date as described above), 14% per annum from February 1, 2005. The Company has
the option to pay interest in the form of (a) cash, (b) additional Debentures,
or (c) a combination of cash and additional Debentures. If the Company chooses
to make interest payments using additional Debentures, the Company may be
required to issue additional warrants (the "Additional Camden Warrants")
pursuant to the terms of the Debentures. Additional Camden Warrants will not be
subject to cancellation. The fair market value of Additional Camden Warrants
issued, if any, will be recorded as deferred financing costs and amortized over
the remaining term of the Debentures.
On July 31, 2002, January 31, 2003, and July 31, 2003, the Company made the
interest payment then due by issuing additional Debentures totaling $600,000,
$636,000, and $674,160, 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 191,016 shares of common stock. The
exercise price of the Additional Camden Warrants, if issued, will equal the
average daily closing bid price for the Company's common stock for the period
consisting of the thirty business days immediately before February 1, 2004. Any
Additional Camden Warrants will expire after the five-year anniversary of
issuance of such warrants.
As of June 30, 2003, we had cash and equivalents of $8,083,000. We believe that
our cash, current assets, and cash generated from future operating activities
will provide adequate resources to fund our ongoing operating requirements. We
would need to obtain additional financing to fund any significant acquisitions
or other substantial investments.
Another measure of a company's ability to generate cash from its operations is
earnings before interest, taxes, depreciation, and amortization ("EBITDA"). For
the six months ended June 30, 2003, our EBITDA was $4,485,000 compared with
$4,496,000 in the Prior Period. EBITDA for the Prior Period includes $2,796,000
related to the settlement of a dispute with a software licensor, as previously
described. Excluding the settlement of the dispute in the Prior Period, the
significant improvement in EBITDA reflects the contribution of AmQUEST to our
operations along with organic revenue growth and the additional cost savings
noted above.
Page 12
The following table reconciles EBITDA to net income for the Current and Prior
Periods.
Reconciliation - in Thousands
Six Months Ended June 30,
2003 2002
----------------- -----------------
NET INCOME $ 375 $ 604
Add back:
Tax expense 28 -
Net interest expense 1,193 950
Depreciation and amortization 2,889 2,942
----------- -----------
EBITDA $ 4,485 $ 4,496
=========== ===========
EBITDA should not be considered as an alternative to operating income, as
defined by accounting principles generally accepted in the United States, as an
indicator of our operating performance, or to cash flows, as a measure of
liquidity.
NEW FINANCIAL ACCOUNTING STANDARDS
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146"). SFAS 146 provides guidance on the timing of the recognition of costs
associated with exit or disposal activities, requiring such costs to be
recognized when incurred. Previous guidance required the recognition of costs at
the date of commitment to an exit or disposal plan. The provisions of SFAS 146
are to be adopted prospectively after December 31, 2002. Although SFAS 146 may
impact the accounting for costs related to exit or disposal activities the
Company may enter into in the future, particularly the timing of the recognition
of these costs, the adoption of the statement will not have an impact on the
Company's current financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123," which amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. The
transition and annual disclosure provisions of SFAS No. 148 are effective for
fiscal years ending after December 15, 2002. In addition, SFAS No. 148 amends
the disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company has adopted the disclosure provisions of SFAS No. 148 and
continues to account for stock-based compensation to employees under APB Opinion
No. 25 and related interpretations.
In April 2003, FASB issued SFAS 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities", which amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement is effective for contracts entered into or modified
and for hedging relationships designated after June 30, 2003. The Company does
not expect the adoption of this statement to have a material impact on its
operating results or financial position.
In May 2003, the Financial Accounting Standards Board, or FASB, issued SFAS 150,
"Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity". The statement improves the accounting for three types
of financial instruments that were previously accounted for as equity -
mandatory redeemable shares, instruments that may require the issuer to buy back
shares and certain obligations that can be settled with shares. The statement
requires that those instruments be accounted for as liabilities in the statement
of financial position. The statement is effective for all financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
does not expect the adoption of this statement to have a material impact on its
operating results or financial position.
Page 13
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 our 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 our 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 our balance sheet,
primarily property and equipment, deferred software costs, and intangible
assets, primarily goodwill, related to acquisitions. The assignment of useful
lives to these assets and the valuation and classification of intangible assets
involves significant judgments and the use of estimates. The testing of these
tangible and intangibles under established accounting guidelines for impairment
also requires significant use of judgment and assumptions. Our assets are tested
and reviewed for impairment on an ongoing basis under the established accounting
guidelines. Changes in business conditions or changes in the decisions of
management as to how assets will be deployed in our operations could potentially
require future adjustments to asset valuations.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. As such, final results
could differ from estimates or expectations due to risks and uncertainties
including, but not limited to: incomplete or preliminary information; changes in
government regulations and policies; continued acceptance of the Company's
products and services in the marketplace; competitive factors; new products;
technological changes; the Company's dependence on third party suppliers;
intellectual property rights; and other risks. For any of these factors, the
Company claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995, as amended.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company is not exposed to material gains or losses related to the impact of
interest rate changes, foreign currency fluctuations, or changes in the market
values of its investments. The Company generally invests in fixed income
securities - typically commercial paper, certificates of deposit, and money
market accounts issued only by major corporations and financial institutions of
recognized strength and security - and holds all investments to maturity.
Page 14
At June 30, 2003, the Company's outstanding fixed rate debt was approximately
$14,946,000. If market rates decline, the Company runs the risk that the related
required payments on the fixed rate debt will exceed those that would be paid
based on current market rates.
Market Risk
The Company's accounts receivable are subject, in the normal course of business,
to collection risks. The Company regularly assesses these risks and has policies
and business practices to mitigate the adverse effects of collection risks. As a
result, the Company does not anticipate any material losses in this area in
excess of the recorded allowance for doubtful accounts.
Foreign Currency Risks
The Company has no material foreign operations.
ITEM 4 - CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and Senior Vice
President of Finance, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Company's management, including the Chief Executive Officer and the Senior Vice
President of Finance, concluded that the Company's disclosure controls and
procedures were effective as of June 30, 2003. There have been no changes in the
Company's internal controls over financial reporting that occurred during the
Company's last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company's internal controls over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on June 24, 2003, the stockholders
elected three directors for a three-year term. The votes were as follows:
FOR WITHHELD
Peter J. DaPuzzo 7,270,500 1,980
Richard A. Keller 7,270,500 1,980
Tyler T. Zachem 7,270,500 1,980
Ms. Kathleen A. Perone, Ms. Samantha McCuen, and Messrs. Zach Lonstein, Robert
B. Wallach, Timothy W. Billings, and Michael B. Targoff have terms expiring in
2004 and beyond and continue as directors of the Company.
Page 15
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
2.1 Stock Purchase Agreement dated as of February 5, 2002 by and
between the Company and American Software, Inc., incorporated by
reference to Exhibit 2.1 to a Current Report on Form 8-K filed
February 5, 2002.
3.1A Restated Certificate of Incorporation, incorporated by reference
to Exhibit 3.1 to the Company's Form 10-KSB for the period ended
October 31, 1999.
3.1B Certificate of Amendment to the Company's Certificate of
Incorporation, filed May 8, 2000, to increase the authorized
shares and to remove Article 11, incorporated by reference to the
Company's report on Form 10-Q for the period ended April 30, 2000.
3.1C Certificate of Amendment to the Company's Certificate of
Incorporation, filed as of June 5, 2000, to change the name of the
Company to Infocrossing, Inc., incorporated by reference to the
Company's report on Form 10-Q for the period ended April 30, 2000.
3.2 Amended and Restated By-Laws, incorporated by reference to Exhibit
3.2 to the Company's Form 10-KSB for the period ended October 31,
1999.
4.1 Securities Purchase Agreement dated as of February 1, 2002 by and
between the Company and the Purchasers named therein, incorporated
by reference to Exhibit 4.1 to a Current Report on Form 8-K filed
February 5, 2002.
4.2 Warrant Agreement dated as of February 1, 2002 by and between the
Company and the Warrantholders party thereto, incorporated by
reference to Exhibit 4.3 to a Current Report on Form 8-K filed
February 5, 2002.
4.3 Amended and Restated Registration Rights Agreement by and between
the Company, and the Holders named therein, incorporated by
reference to Exhibit 99.4 to a Current Report on Form 8-K filed
February 5, 2002.
4.4 Second Amended and Restated Stockholders Agreement dated as of
February 1, 2002 by and between the Company and the Stockholders
named therein, incorporated by reference to Exhibit 99.5 to a
Current Report on Form 8-K filed February 5, 2002.
4.5 Management Rights Letter dated as of February 1, 2002 between the
Company and the Purchasers named therein, incorporated by
reference to Exhibit 99.3 to a Current Report on Form 8-K filed
February 5, 2002.
4.6 Agreement Letter dated as of February 1, 2002 between the Company,
the Warrantholders named therein, and the Camden Entities named
therein, incorporated by reference to Exhibit 99.6 to a Current
Report on Form 8-K filed February 5, 2002.
10.1 Lease Termination Agreement dated as of April 19, 2002 by and
between Beco-Terminal LLC and the Company, incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for March 31, 2002.
31 Certifications required by Rule 13a-14(a) to be filed.
32 Certifications required by Rule 13a-14(b) to be furnished but not
filed.
(b) Reports on Form 8-K:
On May 7, 2003, the Company reported the results for the quarter ended
March 31, 2003 under Item 12 of Form 8-K.
Page 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
INFOCROSSING, INC.
August 13, 2003 /s/
------------------------------------------
Zach Lonstein
Chairman & Chief Executive Officer
August 13, 2003 /s/
------------------------------------------
William J. McHale
Senior Vice President of Finance
Page 17