-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kon+NK3gDbZ2IMFiXErnAanKgjP2vifRCr+X5Gw4YBjuVwmZ91SX3rBcY20CSqmx mnujn5wad4CIGIjXfl5+Pw== 0000893816-01-000003.txt : 20010130 0000893816-01-000003.hdr.sgml : 20010130 ACCESSION NUMBER: 0000893816-01-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20001031 FILED AS OF DATE: 20010129 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INFOCROSSING INC CENTRAL INDEX KEY: 0000893816 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 133252333 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20824 FILM NUMBER: 1518112 BUSINESS ADDRESS: STREET 1: 2 CHRISTIE HEIGHTS STREET CITY: LEONIA STATE: NJ ZIP: 07605 BUSINESS PHONE: 2018404700 MAIL ADDRESS: STREET 1: 2 CHRISTIE HEIGHTS STREET CITY: LEONIA STATE: NJ ZIP: 07605 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTER OUTSOURCING SERVICES INC DATE OF NAME CHANGE: 19930328 10-K 1 0001.txt 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 fiscal year ended: October 31, 2000 Commission file number: 0-20824 INFOCROSSING, INC. ------------------------------------ (Exact name of registrant as specified in its Charter) Delaware 13-3252333 -------------------------------- ---------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 2 Christie Heights Street Leonia, NJ 07605 ------------------------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (201) 840-4700 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 --------------------------------------- (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 [ ]. On January 12, 2001, the aggregate market value of the outstanding shares of voting stock held by non-affiliates of the registrant was approximately $21,069,000. On January 12, 2001, 5,855,782 shares of the registrant's Common Stock, $0.01 par value, were outstanding. Part III of this document incorporates by reference a Definitive Proxy Statement to be filed by the Company on or before February 28, 2001 Page - 1 PART I Item 1. Description of Business General Infocrossing, Inc. (together with its subsidiaries, the "Company"), was organized as a New York corporation in October 1984 and reincorporated in Delaware as of August 31, 1999. On June 5, 2000, the Company changed its name from Computer Outsourcing Services, Inc. to highlight its expanded business base that now includes Internet Data Centers and automated integrated managed services. The Company provides data system outsourcing services in the following areas (1) Internet Data Center and server-hosting services; (2) a full suite of automated integrated managed services that assure optimal performance, security, reliability, and scalability of a customer's computer systems operations; (3) information technology ("IT") hosting services; and (4) systems infrastructure and operations consulting. The Company expects greater future growth potential from the activities described in (1) and (2) above, although such activities were not significant in the fiscal year ended October 31, 2000. Its customers include commercial enterprises, institutions, and government agencies. The Company has grown through strategic acquisitions as well as business development. The Company's core activity has been providing infrastructure, systems, and managed network services to large- and medium-size enterprises. Due to rapid changes and increasing complexities in information technology, outsourcing is an efficient solution for many businesses. Private Sale of Securities On April 7, 2000, the Company entered into a Securities Purchase Agreement providing for a group of investors to purchase $60 million of the Company's securities in a private placement. The transaction was approved by the Company's stockholders at the Annual Meeting of Stockholders held on May 8, 2000. The private placement transaction closed on May 10, 2000. The Company issued 157,377 shares of redeemable 8% Series A Cumulative Convertible Participating Preferred Stock (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 Company received $58,430,596 after payment of issuance costs and related legal fees. The Company primarily will use the net proceeds from this transaction to pursue its business plan of expanding its managed services activities through its own Internet Data Centers (each of which shall be referred to as an "IDC") and Managed Service Centers (each of which shall be referred to as an "MSC"), as well as at customer locations connected to an IDC or MSC. The Company also repaid debt having an aggregate principal balance of $5 million from these proceeds. Page - 2 The Data Systems Outsourcing Industry The outsourcing of data systems services, whereby a client company obtains all or part of its information processing requirements (including systems design, software management and hardware, network communications, training, maintenance, and support) from providers such as the Company, continues to be a growing trend. The Company believes that it is generally 10% to 50% more cost-effective and efficient for its clients to outsource information processing services to the Company than it would be to provide equivalent services for themselves by purchasing or leasing in-house systems and hiring or contracting for service and support personnel. Outsourcing provides clients with the following benefits: o The refocus of personnel, financial, and technological resources on core business and client-related activities; o Access to highly skilled personnel and technology resources; o Access to resources that support technological reengineering; o Access to experienced resources to perform selected information processing functions; o Reduction of operating costs; and o Reduction of future investment in infrastructure not directly related to the core business activity. Business Objectives The Company's objective is to provide a comprehensive alternative to meet all or part of its clients' information technology and mission-critical Internet requirements. Typically, the Company enters into contracts with clients providing for automatic renewal unless prior written notice is given. The contracts have varying terms typically ranging from one to five years. The rates for the Company's services vary according to factors such as the volume and types of services used by a particular client. Industry-specific outsourcing applications and services are developed, so that the Company's in-depth knowledge of a particular industry can be applied to servicing multiple clients in that field. The Company currently provides outsourcing services to approximately 485 clients in such diverse fields as financial services, publishing, home health care, apparel, and consumer products. The Company's services include the following: Page - 3 Internet Data Center and Server-Hosting Services The Company began offering Internet Data Center services in the first quarter of fiscal 2000 by retooling a portion of its state-of-the-art mainframe data center into an IDC. At its IDCs, the Company offers server- hosting, Internet access, and a full suite of automated integrated managed services (the "AIMS System") to enterprises with mission-critical Internet requirements. Hosting Internet systems demands many of the same skills, procedures, and physical requirements as for mainframe and midrange environments. In November 2000, the Company opened its second IDC in a 52,000 square foot facility in metropolitan Atlanta. It also has begun development of a 54,000 square foot IDC in the Northern Virginia high-technology corridor. The Company's IDCs are networked to allow centralized remote management from a Command Center. Currently, the Company has a single Command Center in Leonia, NJ, but plans to build a second one for redundancy. The Company's IDCs feature state-of-the-art physical and network infrastructure including: o Multi-layered security with 24x7 guard station, video surveillance, and restricted physical and network access. o Redundant power systems with two tiers of back-up to ensure continuous operation in the event of a power outage. o Leading edge fire suppression as well as smoke and fire detection systems. o Redundant climate control systems in a raised floor environment. o Multiple, high bandwidth, network access points with physically diverse connections into the IDC. The Company will supplement its IDCs with Managed Service Centers. MSCs are points of presence in colocation facilities offering sufficient power and network bandwidth to allow the Company to deliver managed services to customers remotely. The Company announced its plans to focus development on MSCs and remote delivery of the AIMS System in January 2001. With this strategy, the Company will be able to maximize its potential managed services revenue without the high capital investment of developing fully-equipped IDCs. Previously, the Company had announced plans to develop 20 IDCs and emphasized that its IDCs would be differentiated from those of competitors because of the availability of a high level of automated managed services. Since the AIMS System has been designed for portability, the Company has modified its strategy to deploy these services remotely thereby reducing the capital requirements of building numerous IDCs. Automated Integrated Managed Services Page - 4 The Company's current AIMS System includes: o Client Access Services consisting of Web-based tools that allow customers to view, manage, and update their systems in real-time through ultra-secure Web interfaces. o Monitoring Services ranging from simple pinging of hardware to check availability to the building and maintenance of customized scripts that proactively monitor and report on status and performance of all critical components of a customer's systems and network. o Security Services covering physical and logical components of a customer's systems to ensure the ultimate integrity and security of customers' data assets. o Technical Support Services providing a comprehensive suite of tools available on a 24x7 basis to handle asset management, change management, incident management, and problem resolution. o Storage Services which take advantage of the latest data mirroring technology enable instant access to incremental storage, enterprise disaster protection, and non-disruptive data backups, restorations, migrations, and testing. The Company has designed and built its AIMS System for portability, accessibility, reliability, and scalability. These offerings thereby deliver mainframe dependability to the open systems and Internet computing operations of both traditional enterprises and Internet businesses. The Company will enhance and expand its AIMS System to satisfy changes in technology and customer requirements. Portability means that these managed services can be delivered directly to customers' systems whether they are housed in an Infocrossing IDC, in another colocation facility, or on the customers' own premises. Remote delivery of managed services is limited only by the availability of network connectivity to the remote location. The Company's managed services, with the exception of remote Storage Services, require limited network bandwidth which is readily available at most customer sites. Although remote Storage Services require higher bandwidth network connections, these are also generally available where target customers for such services house and run their computers. Both the Internet and private networks are used to provide customers accessibility to the Company's automated integrated managed services. This feature gives the customer's and Infocrossing's technical support staff greater flexibility in managing and monitoring the customer's systems from anywhere at any time. It is essential that the AIMS System platform is always up and running and critical data is never lost. Reliability is ensured by running the managed services on highly available systems, eliminating single points of failure through system redundancy, and maintaining back-up copies of all critical data. Page - 5 Scalability is an attribute of the AIMS System platform that enables it to support efficiently any number of customers. A relatively small system can be set up in a new region to serve the initial customer base. As the number of customers grows, the regional systems can be gradually expanded to handle increased processing and storage needs. The Company's existing Command Center is designed to handle multiple regional systems and can be expanded as necessary to support many more. The redundant Command Center will be built to the same exacting standards. IT Hosting Services The Company's IT Hosting Services allow clients to process and manage core business applications typically run on large enterprise servers. The Company provides skilled personnel, secure processing environments, high service levels, and state-of-the art and emerging technologies to meet client information processing requirements. Clients utilize the Company's services in order to focus on their core business and customer related activities while significantly reducing their operating costs. The Company has developed industry specific experience in markets which include publishing, financial services, apparel, consumer products, and healthcare. Its clients in these markets rely on the Company to combine its in-depth industry knowledge with information technology solutions that meet their business objectives and information processing requirements. The Company provides Computer Facilities Management Services either at its state-of-the-art data centers or at a client's location for medium and large enterprises that outsource all or part of their Information Processing functions. These services include the Company's core Information Processing and Communications/Network Management Services which operate 24 hours per day, each day of the year. Such services are provided from a secure environment with critical back-up and safeguard systems. The Company provides a variety of customized IT services designed to specific client requirements. These services include the development of proprietary software utilized by the Company to meet the IT processing requirements of particular clients. The Company manages the software application and retains ownership of the software it develops. The Company is developing managed services for business-to-business interchanges. An example is a Web-enabled extranet to replace an antiquated EDI subsystem that allows a vendor to receive orders and floor selling information from a retailer electronically; transmit invoices to a retailer electronically; maintain an electronic product catalog accessible to a retailer; provide reports and on-line inquiries of orders and shipments, along with comprehensive floor selling reports; and generate automated advance ship notices. The Company's extranet allows a small vendor or importer to conform to the requirements of various large retailers and to continue as an approved vendor of those retailers without a substantial investment in hardware and technical personnel. Page - 6 Systems Infrastructure and Operations Consulting The Company has unique expertise in analyzing data center operations to maximize operating performance and to minimize operating costs. Consulting services include hardware selection; automation; disaster recovery planning; systems management; storage management; and performance reporting. The Company concentrates on aligning a client's information systems with such client's business objectives to strengthen the client's technology infrastructure to enable it to be more competitive and to focus on its core business. After performing analytical studies to identify areas of improvement, the Company's professionals develop a transformation plan, manage the implementation process, and monitor the results. The Company has applied its expertise in infrastructure and operations to managing its own Internet Data Centers and in creating and delivering its automated integrated managed services. Customer Service and Support The Company believes that close attention to customer service and support has been, and will continue to be, crucial to its success. The Company provides a high degree of customer service and support, including customized training and rapid response to client needs, which the Company believes generally exceeds industry standards. Because of its attention to customer service, many of the Company's client relationships have tended to be long-term. Marketing and Sales The Company currently targets its marketing efforts to a broad range of large and medium-size enterprises as well as including Internet-centric business. The Company's traditional customer base had been concentrated in specific industries such as financial services, publishing, apparel, and health care, where it has developed industry specific services and a reputation for technical expertise and excellent service. For the year ended October 31, 2000, Alicomp, a division of Alicare, Inc. and International Masters Publishers, Inc. accounted for 14% and 13%, respectively, of the Company's revenues. In the two prior years, no client accounted for 10% or more of revenues. Initial contact is made by a variety of methods, including seminars, mailings, telemarketing, referrals, and attendance at industry conventions and trade shows. The Company's sales representatives and marketing support staff analyze clients' requirements and prepare product demonstrations. In addition to internal marketing efforts, the Company has formed strategic alliances to generate additional sales. The Company also entered into agreements with certain enterprises and individuals that would be entitled to receive compensation for their assistance in procuring sales. Page - 7 Product Development Since the computer industry is characterized by rapid change in hardware and software technology, the Company continually enhances its services to meet client requirements. The Company is committed to maintaining its product offerings at a very high level of technological proficiency and believes that it has developed a reputation for providing innovative solutions to client requirements. Where possible, the Company seeks to develop product offerings characterized by a high degree of recurring usage, so that clients come to depend on the Company's services. Product development is performed by the Company's employees and in limited instances by outside consultants. Capitalized expenditures for enhancements to existing products approximated $1,011,000, $905,000, and $892,000 in the years ended October 31, 2000, 1999, and 1998, respectively. Competition Although the Company is not aware of other companies that provide as wide a range of services and customer support as the Company does, other companies do provide one or more of the Company's services. The Company's current and potential competition includes other independent computer service companies and divisions of diversified enterprises, as well as the internal IT departments of existing and potential customers. The Company knows of no reliable statistic by which it can determine the number of competitors. Among the best known of the Company's competitors are Exodus Communications, Inc.; Digex Inc.; Globix Corp.; IBM Corporation; Electronic Data Systems Corporation; Affiliated Computer Services, Inc.; Computer Sciences Corp.; and Level 3 Communications, Inc. The Company also competes with smaller, start-up companies that provide managed services such as Loudcloud, Inc.; SilverBack Technologies; and NOCPulse Inc. Aside from the larger competitors, the outsourcing service industry is fragmented, with numerous companies offering services in limited geographic areas, vertical markets, or product categories. Many of the Company's competitors have substantially greater financial and other resources than the Company, and there can be no assurance that the Company will be able to compete effectively in the future. Technological Changes Although the Company is not aware of any pending or prospective technological changes that would adversely affect its business, new developments in technology could have a material adverse effect on the development or sales of some or all of the Company's services or could render its services noncompetitive or obsolete. There can be no assurance that the Company will be able to develop or acquire new and improved services or systems which may be required in order for it to remain competitive. The Company believes, however, that technological changes do not present a material risk to the Company's business because the Company expects to be able to adapt to and acquire any new technology more easily than its 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 the Company's services, thus potentially creating selling opportunities for the Company. Page - 8 Intellectual Property Matters The Company's systems and processes are not protected by patents nor any registered copyrights, trademarks, trade names, or service marks. To protect its proprietary services and software from illegal reproduction, the Company relies on certain mechanical techniques in addition to trade secret laws, restrictions in certain of its customer agreements with respect to use of the Company's services and disclosure to third parties, and internal non-disclosure safeguards, including confidentiality restrictions with certain employees. Despite the Company's efforts, it may be possible for competitors or clients to copy aspects of the Company's trade secrets. The Company believes that because of the rapid pace of technological change in the computer industry, copyright and other forms of intellectual property protection are of less significance than factors such as the knowledge and experience of the Company's management and other personnel, and the Company's ability to develop, enhance, market, and acquire new systems and services. The Company is experienced in handling confidential and sensitive client information, and maintains numerous security procedures to help ensure that the confidentiality of client data is maintained. Compliance with Environmental Laws The Company has incurred no significant expense in its compliance with Federal, state, and local environmental laws. Employees As of October 31, 2000, the Company had 262 full-time and 13 part-time employees. None of the Company's employees is represented by a labor organization and the Company is not aware of any activities seeking such organization. The Company considers its relationship with its employees to be satisfactory. Insurance The Company maintains insurance coverage that management believes is reasonable, including errors and omissions coverage, business interruption insurance to fund its operations in the event of catastrophic damage to any of its operations centers, and insurance for the loss and reconstruction of its computer systems. The Company also maintains extensive data backup procedures to protect both client and Company data. Financial Information about Geographic Areas Substantially all of the Company's revenues are derived from U.S. sources. Item 2. Description of Property The Company leases a facility of approximately 67,000 square feet in Leonia, NJ for its headquarters and data center operations. The lease expires on December 31, 2014. Page - 9 On June 6, 2000, the Company announced the signing of a lease for a 52,000 square foot building located in metropolitan Atlanta. The Company redeveloped a portion of this building into its second IDC, which opened in November 2000. The lease expires on June 30, 2015. On July 25, 2000, the Company announced the signing of a lease for a 54,000 square foot building that was under construction in the Northern Virginia high tech corridor. The Company is evaluating design alternatives for this building as its third IDC. The lease expires on December 31, 2015. The two IDC leases required the Company to provide security deposits aggregating approximately $2,086,000 in the form of standby letters of credit, which the Company collateralizes by means of restricted cash funds invested in certificates of deposit. The amounts of these letters of credit may be reduced, at various times and subject to various conditions, to an aggregate of approximately $725,000 by 2010. In July 2000, the Company closed a sales office in Charlotte, NC. The activities of this office have been consolidated with those in Leonia, NJ, and the Company is actively seeking a subtenant for the space. The space is not suitable for conversion into an IDC or MSC. The Company accrued approximately $514,000 for future lease payments on this facility through the end of the lease on December 31, 2002. The Company also leases 17,257 square feet of office space as follows: Location Square Feet Lease Expiration Date -------------- ----------- --------------------- Aberdeen, NJ 5,700 June 30, 2001 New York, NY 5,700 December 31, 2009 Secaucus, NJ 3,950 September 30, 2001 Glendale, CA 1,907 May 31, 2005 The Company generally leases its equipment under standard commercial leases, in some cases with purchase options, which the Company exercises from time to time. The Company's equipment is generally covered by standard commercial maintenance agreements. The Company believes its current facilities are in good condition and are adequate to accommodate its current volume of business as well as anticipated increases. Item 3. Legal Proceedings Atlas Business Service Corp. ("Atlas") vs. Infocrossing, Inc. - ------------------------------------------------------------- In June 2000, the Company commenced an action against Atlas, a former customer, in the Supreme Court of New York, New York County (Index No. 00/602461) to collect approximately $45,000 in outstanding data processing invoices. Atlas filed an answer in which it asserted certain affirmative defenses alleging that the services were deficient. Discovery is proceeding in this action. Page - 10 In September 2000, the Company was served with a complaint in connection with a lawsuit commenced by Atlas in August 2000 in Federal District Court for the Southern District of New York (00 CIV. 6521). Atlas alleges that a breach of contract by the Company in providing data processing services resulted in the loss of three customers and annual revenue of $700,000. The Company filed an answer denying all of the material allegations and asserting several affirmative defenses. Pursuant to a Scheduling Order, discovery must be completed by June 21, 2001. It is premature to give a proper evaluation of the probability of a favorable or unfavorable outcome. While it is again premature to give a proper evaluation of the potential liability, Atlas has demanded damages of not less than $5 million. Management believes that the above matters will be resolved without any material adverse impact to the Company's financial position, results of operations, or cash flows. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters The Company's common stock is traded on the NASDAQ Stock Market under the symbol IFOX. Prior to June 5, 2000, the date on which the Company changed its name from Computer Outsourcing Services, Inc., the Company's 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 October 31, 1999: 1st Quarter (November 1, 1998 - January 31, 1999) 16.000 8.750 2nd Quarter (February 1, 1999 - April 30, 1999) 12.125 7.000 3rd Quarter (May 1, 1999 - July 31, 1999) 12.250 8.500 4th Quarter (August 1, 1999 - October 31, 1999) 10.750 7.125 For the year ended October 31, 2000: 1st Quarter (November 1, 1999 - January 31, 2000) 37.325 9.188 2nd Quarter (February 1, 2000 - April 30, 2000) 54.875 14.250 3rd Quarter (May 1, 2000 - July 31, 2000) 25.250 13.250 4th Quarter (August 1, 2000 - October 31, 2000) 24.125 11.313 Page - 11 The closing price of the Company's common stock on NASDAQ-NMS on January 12, 2001 was $6-5/8 per share. The Company has approximately 94 stockholders of record. In addition, the Company believes that there are approximately 1,000 beneficial owners holding their shares in "street name." Private Sale of Securities On April 7, 2000, the Company entered into a Securities Purchase Agreement providing for a group of investors (the "Purchasers") to purchase $60 million of the Company's securities in a private placement. The transaction was approved by the Company's stockholders at the Annual Meeting of Stockholders held on May 8, 2000. The private placement transaction closed on May 10, 2000. The Company issued 157,377 shares of redeemable 8% Series A Cumulative Convertible Participating Preferred Stock (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 Company received $58,430,596 after payment of issuance costs and related legal fees. The Company primarily will use the net proceeds from this transaction to pursue its business plan of expanding its managed services activities through its own IDCs, MSCs, and at customer locations connected to an IDC or MSC. The Company also repaid debt having a principal balance of $5 million from these proceeds. Each share of Series A Preferred Stock maintains a liquidation preference of $381.25 per share, or an aggregate of $60 million for all 157,377 shares, plus accumulated and accrued dividends. Each share of Series A Preferred Stock bears dividends at the rate 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 is 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. 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 holders 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. Page - 12 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. 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 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 warrants issued in connection with this transaction must be exercised before May 11, 2007. The sale of shares of Series A Preferred Stock, the warrants, and the shares of common stock issuable upon conversion of the Series A Preferred Stock or exercise of the 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 investors, 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. Dividends The Company has not paid dividends to holders of its common stock since inception and does not plan to pay dividends on its common stock in the foreseeable future. The Company intends to retain earnings to finance growth. Repurchase of Securities On November 16, 2000, the Company announced that its Board of Directors approved a repurchase of up to 500,000 shares of the Company's common stock. All repurchases are to be made in open market transactions at prevailing market prices, subject to applicable securities laws. The Company may repurchase stock pursuant to this program at any time. Page - 13 Recent Issuances of Unregistered Securities During the three years ended October 31, 2000, the Company sold or issued its common stock, exempt from registration as private placements pursuant to Section 4(2) of the Securities Act of 1933, as shown in the following table. AMOUNT OF NUMBER OF CASH OR OTHER COMMON TRANSACTION EXPLANATION OF THE CONSIDERATION TO WHOM ISSUED SHARES DATE(S) TRANSACTION RECEIVED NON-CASH ISSUANCES: Seller of assets 36,472 2/00 Settlement of to the Company a portion of consideration as called for in the Agreement of sale Settlement President & CEO 800,000 6/00 Issued per an employment agreement, vest at various times over four years For services ISSUANCES FOR CASH: President & CEO 68,446 6/00 Sold per an employment agreement $ 999,996 Page - 14 Item 6. Selected Financial Data (In Thousands Except For Per Share Amounts) ------------------------------------------------------------------- Years ended October 31: -------------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- Revenues $ 24,471 $ 34,265 $ 30,403 $ 24,396 $ 21,222 -------- -------- -------- -------- -------- Net income/(loss) from continuing operations (14,983) 1,661 1,079 688 498 -------- -------- -------- -------- -------- Loss on discontinued operation, net of income tax benefit - - (76) (127) (165) -------- -------- -------- -------- -------- Gain on sale of discontinued operation, net of income tax provision - - 1,696 - - -------- -------- -------- -------- -------- Net income/(loss) to common stockholders $(18,819) $ 1,661 $ 2,699 $ 561 $ 333 ======== ======== ======== ======== ======== Net Income/(Loss) to common stock- holders per diluted common share $ (3.58) $ 0.34 $ 0.61 $ 0.14 $ 0.08 ======== ======== ======== ======== ======== Total assets $ 78,844 $ 27,554 $ 26,949 $ 19,143 $ 17,859 ======== ======== ======== ======== ======== Long term obligations and (in 2000) redeemable preferred stock $ 34,146 $ - $ 12 $ 272 $ 1,648 -------- -------- -------- -------- -------- Page - 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Fiscal Year 2000 as Compared to Fiscal Year 1999 On December 18, 1998, the Company, through a wholly-owned subsidiary, acquired certain assets and the business of Enterprise Technology Group, Incorporated (the "Enterprise Purchase"). The Company's subsidiary, ETG, Inc. ("ETG"), provides information technology consulting services with a focus on infrastructure management solutions. During 1999, with the rapid growth of eCommerce and iBusiness, the Company focused on meeting the exploding requirements of enterprises to outsource their Internet activities. The Company retooled a portion of its state-of-the-art data center into an Internet Data Center ("IDC") from which the Company now offers server-hosting as well as systems and network management services to companies with mission-critical Internet requirements. The Company differentiates itself from competitors by offering a comprehensive suite of automated integrated managed services (the "AIMS System") to enhance the efficiency, reliability, and security of a customer's online activities. In June 2000, the Company announced the signing of a lease on a 52,000 square foot building located in metropolitan Atlanta. The Company redeveloped approximately half of this building as its second IDC. In July 2000, the Company announced the signing of a lease for a 54,000 square foot building that was under construction as its third IDC. This facility, located in the Northern Virginia high tech corridor, was turned over to the Company in November 2000 for development as an IDC. The Company is presently evaluating design alternatives with respect to the development of this facility. The capital requirements of developing and equipping IDCs are demanding. In January 2001, as a result of the successful development of the AIMS System that could be remotely delivered and accessed, the Company announced that it would develop Managed Service Centers ("MSCs") in colocation facilities from which it could offer automated integrated managed services to users of such facilities as well as others through remote delivery. The Company will add offsite customer locations to the network covering the Company's IDCs and MSCs. This strategy allows the Company to broaden its customer base for the AIMS System while controlling its capital costs. By automating the services and developing them with an architecture permitting remote delivery and access, the services are scalable without significant infrastructure costs. Initially, subject to the availability of financing, the Company planned to develop a total of 20 IDCs. Depending on financing and specific geographic conditions, the Company may develop additional IDCs on a selective basis. Its strategy of developing MSCs and remotely delivering automated managed services should foster growth without excessive capital requirements. As described in Liquidity and Capital Resources, the Company completed the sale of $60 million of securities in a private placement on May 10, 2000. The Company will require additional financing to effect its full plan of accelerating the growth of a network of IDCs, MSCs, and the AIMS System nodes on customer premises. Page - 16 During fiscal 2000, revenues decreased $9,794,000 (28.6%) to $24,471,000 from $34,265,000 for the year ended October 31, 1999. This fall-off in revenue was due primarily to two factors: a temporary shift in IT contract spending to Year 2000 compliance and management's decision to redirect consulting staff to the development of the Company's AIMS System. Since Year 2000 compliance was of paramount concern, many companies were reluctant to make any changes with respect to their information technology functions. There was a pronounced decline in requests for proposals for major outsourcing contracts. With Year 2000 concerns alleviated, there was renewed interest in outsourcing. The potential effect of this renewed interest was not realized, until late in fiscal 2000, due to the lengthy sales cycle of a major outsourcing assignment. The Company has entered into three multi-year, outsourcing engagements that are anticipated to generate in excess of $6,000,000 in revenue during the terms of the contracts. Revenues also were impacted negatively as a result of the redeployment of consultants from providing services for fees to developing a comprehensive suite of automated integrated managed services to attract clients requiring mission-critical Internet solutions. The decline in revenue also reflects the loss of a major publishing client, the absence of Year-2000 related revenues, and income received in fiscal 1999 from a covenant not to compete. As previously reported, the publishing client had given notice in 1997 of its intention to exercise an option to cancel its contract after June 30, 1999 by paying a cash penalty. The decline also reflects the Company's decision to discontinue certain low margin activities that are inconsistent with its current business strategy. Operating costs increased $2,879,000 (12.2%) to $26,512,000 during fiscal 2000 compared with $23,633,000 in fiscal 1999. The increase primarily consists of IDC operating costs and the development of automated managed services to be offered throughout the planned network of IDCs, MSCs, and other locations of customers' hardware. Selling and promotion costs increased $1,153,000 (56.1%) to $3,209,000 during fiscal 2000 compared with $2,056,000 in fiscal 1999. The increase is attributable to a larger staff needed to market the Company's IDCs and automated managed services. General and administrative expenses increased $6,878,000 (111.8%) to $13,032,000 for fiscal 2000 from $6,154,000 for fiscal 1999, reflecting higher costs associated with the Company's server-hosting and managed services activities. Current period expenses also include: $1,198,000 of amortization of a restricted stock award; $457,000 of search and other professional fees incurred in connection with entering into an employment agreement with a new CEO; and $120,000 representing the value of warrants issued to settle certain rights held by investors in a financing arrangement. Amortization of intangibles acquired in connection with the Enterprise Purchase were $526,000 in fiscal 2000 versus $381,000 for fiscal 1999. In fiscal 2000, the Company accrued $514,000 of future lease costs related to a closed sales office. The Company recorded net interest income of $1,640,000 in fiscal 2000, compared with net interest income of $286,000 in fiscal 1999. The increase of $1,354,000 reflects interest income from a significantly higher average balance of interest-earning assets during fiscal 2000, offset by interest expense on a larger average outstanding debt balance than in fiscal 1999. Page - 17 The Company recorded a tax benefit of $2,173,000 for fiscal 2000 versus a tax provision of $1,046,000 for fiscal 1999. The potential tax benefit for fiscal 2000 was reduced by a valuation allowance against net tax benefits. The valuation allowance was necessitated by the expectation of continued losses while the Company develops IDCs, MSCs, and additional automated managed service offerings. The Company recorded a net loss of $14,983,000 in fiscal 2000 versus net income of $1,661,000 for fiscal 1999. Net loss to common stockholders after accretion, accumulated dividends, and accrued dividends on preferred stock was $18,819,000 for fiscal 2000. The loss per common share was $3.58 for fiscal 2000 on both a basic and diluted basis. For fiscal 1999, earnings per share were $0.36 and $0.34 for basic and diluted common shares, respectively. Common stock equivalents were ignored in determining the net loss per share for fiscal 2000, since the inclusion of such equivalents would be anti-dilutive. Fiscal Year 1999 as Compared to Fiscal Year 1998 On December 18, 1998, the Company acquired certain assets and the business of Enterprise Technology Group, Inc. (the "Enterprise Purchase"). Enterprise Technology Group provided information technology consulting services with a focus on infrastructure management solutions. For the year ended October 31, 1999, revenues increased $3,862,000 (12.7%) to $34,265,000 from $30,403,000 recorded in the year ended October 31, 1998. The Company's Year-2000 consulting revenues declined by approximately $1,665,000 from $1,972,000 for fiscal year 1998 to $307,000 for fiscal year 1999. Revenue from a covenant not to compete was $1,000,000 in fiscal 1999 versus $440,000 for fiscal 1998 as a result in an amendment to the non-compete agreement. Increased revenues from other activities substantially exceeded the decline in Year-2000 consulting revenues. Data processing costs increased $3,651,000 to $23,633,000 (69.0% of revenues) during the current year, compared to $19,981,000 (65.7% of revenues) in the prior year. Data processing costs rose as a result of higher sales and upgrades in the Company's data center. Selling and promotion costs increased $867,000 to $2,056,000, (6.0% of revenues) during the current year compared to $1,189,000 (3.9% of revenues) in the prior year. The increase is attributable to additional sales staff and increased marketing initiatives. General and administrative expenses increased $147,000 to $6,154,000 (18.0% of revenues) in the current year as compared to $6,007,000 (19.8% of revenues) in the prior year. Certain savings achieved by the Company were offset by expenses related to the Enterprise Purchase and to the new offices in Charlotte, North Carolina and New Haven, Connecticut. Net interest income exceeded expense by $286,000 in fiscal 1999, and by $548,000 in fiscal 1998. The decrease in net interest income of $262,000 resulted from lower cash balances after the Enterprise Purchase and the payment of income taxes and costs related to the Sale of the Payroll Division. Page - 18 The effective tax rate on income from continuing operations rose to 38.6% for fiscal 1999 from 30% for fiscal 1998. The rate was lower in fiscal 1998 in part because of tax credits that were utilized in such year. After the provision for income taxes, the Company recorded a 54% increase in income from continuing operations, from $1,079,000 ($0.24 per diluted share) for the year ended October 31, 1998, to $1,661,000 ($0.34 per diluted share) for the year ended October 31, 1999. Liquidity and Capital Resources During the year ended October 31, 2000, the Company used net cash of $7,857,000 in operations, primarily as a result of a pretax loss of $14,983,000, offset by $2,810,000 in net receipts on accounts receivable, the accrual of a lease abandonment loss approximating $514,000, an increase in accrued expenses of $1,801,000 and $3,506,000 in depreciation and amortization. The Company invested $6,564,000 for the purchase of equipment and fixed assets as well as IDC construction; $2,073,000 in real estate security deposits (in the form of fully-collateralized standby letters of credit); and $1,011,000 for product development and enhancement. The Company also increased short-term investments by $4,108,000. The principal financing activities were (1) a private placement of $60 million of convertible preferred stock and common stock warrants, (2) borrowings and repayments of $3,000,000 in convertible notes and $2,000,000 from a line of credit with a bank, and (3) sales proceeds of $2,163,000 from common stock issuances. A private placement of the Company's securities closed on May 10, 2000. The Company issued 157,377 shares of redeemable 8% Series A Cumulative Convertible Participating Preferred Stock (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 net proceeds to the Company were approximately $58,431,000 after transaction costs. Each share of Series A Preferred Stock maintains a liquidation preference of $381.25 per share, or an aggregate of $60 million for all 157,377 shares, plus accumulated and accrued dividends. Each share of Series A Preferred Stock bears dividends at the rate 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 is 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. On October 29, 1999, the Company entered into an agreement with a bank for a line of credit of up to $5,000,000. Amounts drawn under this line were payable upon demand and accrued interest (at the Company's option) at either the Prime Rate or 1.25% over the 30, 60, or 90 day LIBOR rate. The line of credit did not have a fixed term, and was secured by a first lien on the Company's accounts receivable and certain general intangibles. Page - 19 On December 27, 1999, the Company borrowed $2,000,000 under the 90-day LIBOR rate option. On March 28, 2000, the Company renewed this note utilizing the 90-day LIBOR rate option. In light of the private placement of securities discussed above, the Company repaid the advance when it became due on June 27, 2000 and cancelled the line. On February 23, 2000, a subsidiary of the Company closed a transaction with three investors (the "Lenders") providing for a series of short-term convertible notes coupled with certain rights to receive equity interests in either the subsidiary or the parent. The Lenders advanced $3 million at the closing. The proceeds were to be used to develop and operate Internet Data Centers. Each note, regardless of when funded, had a maturity of February 25, 2001 and would have borne interest at 6% for the first six months. Thereafter, interest would have increased to 13% in the seventh month and would have risen 1% for each subsequent month that the applicable note remained outstanding. At the option of a Lender, a note outstanding for more than 180 days could have been exchanged for the Company's common stock. An exchanging note holder would have received shares valued at 90% of the average closing price for the ten trading days prior to the exchange. Any or all of the outstanding notes could have been prepaid by the Company without penalty. On May 10, 2000, in connection with the private placement of securities discussed above, the Company repaid the outstanding $3 million plus accrued interest. On June 5, 2000, the Company issued warrants to the Lenders 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 either the parent or the subsidiary held by the Lenders. The warrants expire on June 5, 2004. The fair value of the warrants, calculated using the Black-Scholes pricing model, is included in the statements of operations for the periods ended October 31, 2000. In June 2000, the Company hired a new Chief Executive Officer. The employment agreement with the Company's new CEO provided for an award of 800,000 restricted shares of common stock. In connection with this award, the Company agreed to loan the CEO 50 percent of any tax payable with respect to the restricted shares. Any such loan will bear interest at the statutory rate and shall be payable when the Executive sells or otherwise transfers the restricted shares. In connection with this provision, on December 21, 2000 the Company loaned $1,291,000 to the CEO. As of October 31, 2000, the Company had cash and equivalents and highly-liquid short-term investments aggregating approximately $46,367,000. The Company believes that the combination of its cash and other liquid assets will provide adequate resources to fund its ongoing operating requirements. The Company has announced plans to develop IDCs and MSCs in the United States and abroad. The Company will require additional financing to effect its accelerated growth plans. As of October 31, 2000, the Company had commitments of approximately $3,728,000 in connection with constructing and equipping its IDCs in Atlanta and Northern Virginia. Page - 20 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. New Financial Accounting Standards Derivatives - In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), the effective date of which was deferred for all fiscal quarters of fiscal years beginning after June 15, 2000 by SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of Effective Date of SFAS No. 133. SFAS 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. This statement is not expected to have a significant impact on the Company's financial position or results of operations. Item 7a. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk The Company is not significantly exposed to the impact of interest rate changes, foreign currency fluctuations, or changes in the market values of its investments. The Company primarily invests in certificates of deposit and commercial paper issued only by major corporations and financial institutions of recognized strength and security, and (with very few exceptions) holds all investments to term. The Company generally invests in instruments of no more than 60 days maturity. Market Risk The Company's accounts receivable are subject, in the normal course of business, to collection risks. It regularly assesses these risks and has established policies and business practices to protect against the adverse effects of collection risks. As a result, the Company does not anticipate any material losses in this area. Foreign Currency Risks The Company bills foreign customers in U.S. dollars only. Page - 21 Item 8. Financial Statements The 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 regulation 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 Item 13. Certain Relationships and Related Transactions The contents of Part III are incorporated by reference to a Definitive Proxy Statement to be filed by the Company on or before February 28, 2001. Page - 22 PART IV Item 14. 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 which appears as page F-1 of this report. 2. The exhibits required to be filed as a part of this Annual Report are listed below. The exhibits marked with an asterisk (*) are incorporated by reference to the Company's Registration Statement on Form SB-2 (No. 33-53888NY). Exhibit No. Description 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 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 the Company'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 the Company'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 the Company'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 the Company's Proxy Statement for the Annual Meeting held on May 8, 2000. 4.3 Warrant Agreement between Computer Outsourcing Services, Inc. and the Warrantholders Party thereto, incorporated by reference to the Company's Proxy Statement for the Annual Meeting held on May 8, 2000. 4.4 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 the Company's Proxy Statement for the Annual Meeting held on May 8, 2000. 10.1 Employment Agreement, dated as of June 15, 2000, between the Company and Charles F. Auster, incorporated by reference to Exhibit 10.3 to the Company's Form 10-Q for the period ended July 31, 2000. Page - 23 Exhibit No. Description 10.2 Employment Agreement, dated as of November 1, 1999, between the Company and Zach Lonstein, incorporated by reference to Exhibit 10.4 to the Company's Form 10-Q for the period ended July 31, 2000. 10.3 Employment Agreement, dated as of November 1, 1999, between the Company and Robert Wallach, incorporated by reference to Exhibit 10.5 to the Company's Form 10-Q for the period ended July 31, 2000. 10.4 Employment Agreement dated as of December 18, 1998 between the COSI Acquisition Corp ("ETG") and Warren E. Ousley, incorporated by reference to Form 8-K filed January 14, 1999. 10.5A * Consulting Agreement dated November 1, 1992 between the Company and Stanley Berger ("Berger"). 10.5B Consulting Agreement Amendment dated as of October 31, 1994 between the Company and Berger. 10.6A Tenth Floor Option Agreement between the Company, G-H-G Realty Company ("GHG"), and RSL Com USA, Inc. ("RSL"), dated as of November 30, 1999, with related notice of exercise dated February 14, 2000. 10.6B Eleventh Floor Option Agreement between the Company, GHG, and RSL, dated as of November 30, 1999, with related notice of exercise dated December 2, 1999. 10.7A Lease dated June 2, 1997 between the Company and Leonia Associates, LLC, incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended October 31, 1997. 10.7B First Amendment of Lease between Leonia Associates, LLC and the Company, dated January 16, 1998, incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended October 31, 1998. 10.7C Second Amendment of Lease between Leonia Associates, LLC and the Company, dated as of September 9, 1999, incorporated by reference to Exhibit 10.8C to the Company's Form 10-KSB for the period ended October 31, 1999. 10.7D Third Amendment of Lease between Leonia Associates, LLC and the Company, dated as of August 28, 2000. 10.8 Office Lease Agreement dated May 22, 2000 between the Company and Crocker Realty Trust, incorporated by reference to Exhibit 10.6 to the Company's Form 10-Q for the period ended July 31, 2000. Page - 24 Exhibit No. Description 10.9 Deed of Lease dated July 21, 2000 between the Company and Beco-Terminal, LLC, incorporated by reference to Exhibit 10.7 to the Company's Form 10-Q for the period ended July 31, 2000. 10.10 Amended and Restated 1992 Stock Option and Stock Appreciation Rights Plan, incorporated by reference to Appendix A to the Definitive Proxy for the Company's Annual Meeting held on May 8, 2000. 10.11 Asset Purchase Agreement dated as of December 16, 1998, by and among the Company, COSI Acquisition Corp, Enterprise Technology Group, Inc.("Enterprise"), and certain stock- holders of Enterprise, incorporated by reference to a Form 8-K on January 4, 1999. 10.12 Non-Competition and Non Solicitation Agreements dated as of December 18, 1998 between COSI Acquisition Corp ("ETG") and Enterprise, between ETG and Warren E. Ousley, and between ETG and M. Peter Miller, incorporated by reference to a Current Report on Form 8-K filed by the Company on January 4, 1999. 21 List of Subsidiaries of the Company 23 Consent of Ernst & Young LLP (b) Reports on Form 8-K On September 29, 2000, the Company filed a Current Report on Form 8-K announcing the adoption of a resolution by its Board of Directors changing the Company's year end from October 31 to December 31. Page - 25 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INFOCROSSING, INC. January 29, 2001 /s/ --------------------------------------------- Charles F. Auster - Chief Executive Officer January 29, 2001 /s/ --------------------------------------------- Nicholas J. Letizia - Chief Financial Officer 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. January 29, 2001 /s/ -------------------------------------------- Zach Lonstein - Chairman of the Board of Directors January 29, 2001 /s/ -------------------------------------------- Charles F. Auster - Director January 29, 2001 /s/ -------------------------------------------- David C. Lee - Director January 29, 2001 /s/ -------------------------------------------- Samantha McCuen - Director January 29,2001 -------------------------------------------- Warren E. Ousley - Director January 29,2001 /s/ -------------------------------------------- Kathleen Perone - Director January 29, 2001 /s/ -------------------------------------------- Frank L. Schiff - Director January 29, 2001 /s/ -------------------------------------------- Tyler T. Zachem - Director Page - 26 INFOCROSSING, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE Page No. ------- Report of Independent Auditors F-2 Consolidated Balance Sheets - October 31, 2000 and 1999 F-3 Consolidated Statements of Operations - Years ended October 31, 2000, 1999 and 1998 F-5 Consolidated Statements of Stockholders' Equity - Years ended October 31, 2000, 1999 and 1998 F-7 Consolidated Statements of Cash Flows - Years ended October 31, 2000, 1999 and 1998 F-9 Notes to Consolidated Financial Statements F-12 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 (formerly Computer Outsourcing Services, Inc. and subsidiaries) as of October 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended October 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(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 October 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period 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, present fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG, LLP - ---------------------------- ERNST & YOUNG, LLP New York, New York December 26, 2000 F- 2 INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 31, ------------------------- 2000 1999 ----------- ----------- ASSETS CURRENT ASSETS: Cash and equivalents $40,585,057 $ 1,590,223 Marketable debt securities, at cost which approximates market value 5,781,808 1,673,441 Trade accounts receivable, net of allowance for doubtful accounts of $502,957 and $350,939 3,200,078 6,010,366 Prepaid and refundable income taxes 3,667,755 961,196 Deferred income taxes - current - 591,178 Prepaid license fees 674,999 915,935 Prepaid expenses and other current assets 1,434,603 587,264 ----------- ----------- 55,344,300 12,329,603 ----------- ----------- PROPERTY and EQUIPMENT, net 9,252,136 3,638,993 ----------- ----------- OTHER ASSETS: Deferred software, net 2,638,578 2,223,823 Intangibles, net 8,870,220 8,484,564 Due from related parties 170,609 132,314 Deferred income taxes - 235,986 Security deposits and other non-current assets 2,568,352 508,800 ----------- ----------- 14,247,759 11,585,487 ----------- ----------- TOTAL ASSETS $78,844,195 $27,554,083 =========== =========== See Notes to Consolidated Financial Statements. F- 3 INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 31, ------------------------- 2000 1999 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,262,836 $ 1,237,479 Current portion of long-term debt and capitalized lease obligations 57,323 19,017 Current portion of accrued loss on office subleases 474,699 256,429 Accrued expenses 3,315,126 1,514,514 Customer deposits and other current liabilities 91,843 137,208 ----------- ----------- 6,201,827 3,164,647 ----------- ----------- LONG-TERM LIABILITIES: Long-term debt and capitalized lease obligations 60,037 - Accrued loss on office subleases 1,622,568 1,564,592 ----------- ----------- 1,682,605 1,564,592 ----------- ----------- COMMITMENTS AND CONTINGENCIES Redeemable 8% Series A Cumulative Convertible Participating Preferred Stock; $0.01 par value; 300,000 shares authorized; 157,377 shares issued and outstanding (liquidation preference $62,319,189 at October 31, 2000) 34,086,194 - ----------- ----------- STOCKHOLDERS' EQUITY: 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 5,888,311 and 4,737,915 in 2000 and 1999, respectively 58,882 47,379 Additional paid-in capital 58,789,912 15,519,826 Unamortized restricted stock award (10,302,083) - Retained earnings/(deficit) (11,554,085) 7,264,952 ----------- ----------- 36,992,626 22,832,157 Less 5,608 shares in 2000 and 1,000 shares in 1999 of common stock held in treasury, at cost (119,057) (7,313) ----------- ----------- 36,873,569 22,824,844 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $78,844,195 $27,554,083 =========== =========== See Notes to Consolidated Financial Statements. F- 4 INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED OCTOBER 31, ---------------------------------------- 2000 1999 1998 ------------ ----------- ----------- REVENUES $ 24,471,450 $34,264,966 $30,403,381 ------------ ----------- ----------- COSTS and EXPENSES: Operating costs 26,512,325 23,632,609 19,981,231 Selling and promotion costs 3,209,302 2,056,260 1,189,424 General and administrative costs 13,032,061 6,154,404 6,007,071 Charge for loss on office subleases 514,371 - 2,236,583 Interest income, net (1,639,859) (285,973) (547,499) ------------ ----------- ----------- 41,628,200 31,557,300 28,866,810 ------------ ----------- ----------- Income/(loss) from continuing operations before income taxes (17,156,750) 2,707,666 1,536,571 Income tax provision/(benefit) (2,173,443) 1,046,373 457,621 ------------ ----------- ----------- Income/(loss) from continuing operations (14,983,307) 1,661,293 1,078,950 Loss on discontinued operation, net of income tax benefit of $60,079 - - (76,464) Gain on sale of discontinued operation, net of income tax provision of $1,399,569 - - 1,696,160 ------------ ----------- ----------- NET INCOME/(LOSS) $(14,983,307) $ 1,661,293 $ 2,698,646 Accretion and dividends on redeemable preferred stock (3,835,730) - - ------------ ----------- ----------- NET INCOME/(LOSS) TO COMMON STOCKHOLDERS $(18,819,037) $ 1,661,293 $ 2,698,646 ============ =========== =========== Continued on next page. See Notes to Consolidated Financial Statements. F- 5 INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Continued) YEARS ENDED OCTOBER 31, --------------------------------------- 2000 1999 1998 ----------- ----------- ----------- BASIC EARNINGS PER SHARE: Income/(loss) from continuing operations to common shareholders $ (3.58) $ 0.36 $ 0.27 Loss from discontinued operation - - (0.02) Gain on sale of discontinued operation - - 0.42 ----------- ----------- ----------- Net income/(loss) to common stockholders $ (3.58) $ 0.36 $ 0.67 =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 5,251,457 4,636,525 4,058,376 =========== =========== =========== DILUTED EARNINGS PER SHARE: Income/(loss) from continuing operations to common shareholders $ (3.58) $ 0.34 $ 0.24 Loss from discontinued operation - - (0.01) Gain on sale of discontinued operation - - 0.38 ----------- ----------- ----------- Net income/(loss) to Common stockholders $ (3.58) $ 0.34 $ 0.61 =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND EQUIVALENTS OUTSTANDING 5,251,457 4,950,050 4,427,921 =========== =========== =========== See Notes to Consolidated Financial Statements. F- 6 INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Unamortized Common Par Paid in Retained Restricted Treasury Shares Value Capital Earnings Stock Award Stock Total ----------- ---------- ----------- ----------- ----------- ----------- ----------- Balances, October 31, 1997 3,826,102 $ 38,261 $ 9,595,789 $ 2,905,013 - - $12,539,063 Stock issued to purchase assets 20,000 200 179,800 - - - 180,000 Exercises of stock options and warrants 439,613 4,396 1,720,659 - - - 1,725,055 Tax benefit associated with the exercise of nonqualified options - - 450,589 - - - 450,589 Net income - - - 2,698,646 - - 2,698,646 ----------- ---------- ----------- ----------- ----------- ----------- ----------- Balances, October 31, 1998 4,285,715 $ 42,857 $11,946,837 $ 5,603,659 - - $17,593,353 Stock issued for the Enterprise Purchase 300,000 3,000 2,674,500 - - - 2,677,500 Exercises of stock options 152,200 1,522 664,489 - - - 666,011 Purchased 1,000 shares for treasury, at cost - - - - - (7,313) (7,313) Tax benefit associated with the exercise of nonqualified options - - 234,000 - - - 234,000 Net income - - - 1,661,293 - - 1,661,293 ----------- ---------- ----------- ----------- ----------- ----------- ----------- Balances, October 31, 1999 4,737,915 $ 47,379 $15,519,826 $ 7,264,952 $ - $ (7,313) $22,824,844 ----------- ---------- ----------- ----------- ----------- ----------- -----------
Continued on next page. See Notes to Consolidated Financial Statements. F- 7 INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
Additional Retained Unamortized Common Par Paid in Earnings/ Restricted Treasury Shares Value Capital (Deficit) Stock Award Stock 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 1,704 969,597 - - - 971,301 4,608 shares surrendered for stock option exercise - - - - - (111,744) (111,744) Contingent payment relating to purchase of assets 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 settlement 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 a private placement - - 28,180,132 - - - 28,180,132 Net loss - - - (14,983,307) - - (14,983,307) ----------- ---------- ----------- ----------- ------------ ----------- ----------- Balances, October 31, 2000 5,888,311 $ 58,882 $58,789,912 $(11,554,085) $(10,302,083) $ (119,057) $36,873,569 =========== ========== =========== =========== ============ =========== ===========
See Notes to Consolidated Financial Statements F- 8 INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW YEARS ENDED OCTOBER 31, ---------------------------------------- 2000 1999 1998 ------------ ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Income/(loss) from continuing operations $(14,983,307) $ 1,661,293 $ 1,078,950 Adjustments to reconcile net income to cash provided by/(used in) operating activities: Depreciation and amortization 2,307,777 1,893,081 1,707,072 Amortization of restricted stock award 1,197,917 - - Stock-based compensation 71,266 - - Warrants issued in connection with termination of a credit agreement 120,000 - - Income from a non-competition agreement - (1,000,000) (440,000) Accrued loss on office sublease 514,371 - 2,236,581 Deferred income taxes - 494,804 (1,962,378) Decrease/(increase) in: Trade accounts receivable 2,810,288 (1,558,248) (461,488) Prepaid and refundable income taxes (1,879,395) - - Prepaid license fees, prepaid expenses and other current assets (606,403) (323,660) 44,220 Increase/(decrease) in: Accounts payable 1,025,357 208,073 (217,110) Income taxes payable - (999,929) 1,276,429 Accrued expenses 1,800,612 (3,568) (213,383) Payments on accrued loss on office subleases (190,014) (415,200) (330,492) Customer deposits and other current liabilities (45,365) (65,579) (28,912) ------------ ----------- ----------- Net cash (used in)/provided by operating activities (7,856,896) (108,933) 2,689,489 ------------ ----------- ----------- Continued on next page. See Notes to Consolidated Financial Statements. F- 9 INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (Continued) YEARS ENDED OCTOBER 31, ---------------------------------------- 2000 1999 1998 ------------ ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment $ (6,564,057) $(1,848,267) $(1,500,680) Disposal of equipment 2,750 - 14,960 Redemptions/(purchases) of investments in marketable debt securities (4,108,367) 1,544,729 (3,218,170) Proceeds from sale of the Payroll Division - - 14,400,000 Amounts received from buyer for assets held for sale - 82,695 25,000 Payment for the purchase of certain Assets and the business of Enterprise Technology Group, Inc. (the "Enterprise Purchase") - (4,000,000) - Payment of expenses related to the Enterprise Purchase - (283,701) - Purchase of treasury stock - (7,313) - Increase in deferred software costs (1,011,231) (905,070) (892,010) Security deposits and other noncurrent assets (2,073,185) 45,410 (51,505) ------------ ----------- ----------- Net cash (used in)/provided by investing activities (13,754,090) $(5,371,517) $ 8,777,595 ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from a private equity placement 58,430,596 - - Proceeds from debt financing and a line of credit 5,140,336 - - Repayment of debt and capitalized leases (5,041,993) (252,770) (2,320,780) (Advances to)/repayments by related parties, net (38,295) (43,001) 86,982 Proceeds from sale of common stock 999,996 - - Exercises of stock options and warrants 1,163,291 666,011 1,725,055 ------------ ----------- ----------- Net cash provided by/(used in) financing activities 60,653,931 370,240 (508,743) ------------ ----------- ----------- Net cash provided by/(used in) continuing operations 39,042,945 (5,110,210) 10,958,341 ------------ ----------- ----------- Continued on next page. See Notes to Consolidated Financial Statements. F- 10 INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (Continued) YEARS ENDED OCTOBER 31, --------------------------------------- 2000 1999 1998 ----------- ----------- ----------- CASH FLOWS FROM DISCONTINUED OPERATIONS: Loss from discontinued operations $ - $ - $ (76,464) Adjustments to reconcile loss from discontinued operation to cash used in discontinued operation: Depreciation and amortization - - 151,118 Increase in net assets of discontinued operations - - (246,961) Payment of taxes and other expenses related to sale of the Payroll Division - (2,556,693) (2,239,367) Payments on portion of accrued loss on office sublease relating to discontinued operation (48,111) (145,880) (116,120) ------------ ----------- ----------- Net cash used in discontinued operations (48,111) (2,702,573) (2,527,794) ------------ ----------- ----------- Net increase/(decrease) in cash and equivalents 38,994,834 (7,812,783) 8,430,547 Cash and equivalents, beginning of the year 1,590,223 9,403,006 972,459 ------------ ----------- ----------- Cash and equivalents, end of the year $ 40,585,057 $ 1,590,223 $ 9,403,006 ============ =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest expense $ 114,004 $ 23,270 $ 129,635 ============ =========== =========== Income taxes $ 67,139 $ 3,917,926 $ 1,092,061 ============ =========== =========== SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES: Common stock issued for the purchase of software $ - $ - $ 180,000 ============ =========== =========== Common stock issued for the Enterprise Purchase $ 1,135,160 $ 2,677,500 $ - ============ =========== =========== SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: Tax benefit associated with the exercise of non-qualified options $ - $ 234,000 $ 450,593 ============ =========== =========== Treasury shares received in payment of a stock option exercise $ 111,744 $ - $ - ============ =========== =========== See Notes to Consolidated Financial Statements F- 11 INFOCROSSING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Business and Significant Accounting Policies Business - Infocrossing, Inc. and its wholly-owned subsidiaries (formerly Computer Outsourcing Services, Inc. and subsidiaries)(collectively, the "Company") provides comprehensive information technology and mission-critical Internet data systems 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. Cash and Equivalents and Marketable Debt Securities - Cash and equivalents include all cash, demand deposits, money market accounts, and debt instruments purchased with an original maturity of three months or less. Marketable debt securities are debt instruments purchased with maturities of between three and six months. The Company's investments in debt securities, including those included in cash equivalents, are classified as securities held-to-maturity and are carried at cost, which approximates market value. 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. 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. Construction in progress at October 31, 1999 relates to the portion of the Company's Internet Data Center constructed in its Leonia, NJ facility. (See Notes 3 and 10) 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") is amortized using the straight-line method over the estimated lives, typically no more than twenty years. 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 in relation to the operating performance and future undiscounted cash flows of the underlying businesses. F- 12 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 incurred, and costs (principally salaries) are expensed monthly as incurred. Income Taxes - Income tax expense 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. For the year ended October 31, 2000, the tax benefit is limited to the anticipated refund the Company will receive as a result of carrying back a portion of the pretax loss to prior years. Earnings per Share - The Company calculates earnings per share as required by Statement of Accounting Standards No. 128 - "Earnings per Share" ("EPS"). Basic EPS is computed by dividing income to common stockholders by the weighted average number of common shares outstanding during each period. Diluted EPS is computed using the weighted average number of common shares plus the dilutive effect of common stock equivalents. Stock options and warrants that are anti-dilutive are excluded from the computation of weighted average shares outstanding. Certain options and warrants that are currently anti-dilutive may be dilutive in the future. Segments - The Company discloses information regarding segments in accordance with Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for reporting of financial information about operating segments in annual financial statements and requires reporting selected information about operating segments in interim financial reports. The disclosure of segment information was not required since the Company operates only one business segment. Comprehensive Income - The Company has adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). The Company did not have any comprehensive income within the scope of SFAS 130. Derivatives - In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), the effective date of which was deferred for all fiscal quarters of fiscal years beginning after June 15, 2000 by SFAS 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of Effective Date of SFAS 133. SFAS 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts and for hedging activities. This statement is not expected to have a significant impact on the Company's financial position or results of operations. Fair Value of Financial Instruments - The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments". The estimated fair values of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. F- 13 Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a sale. The carrying amounts and estimated fair values of financial instruments at the end of the respective years are summarized as follows: October 31, 2000 October 31, 1999 ------------------------ ------------------------ Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------------------------ ------------------------ Assets: Cash and equivalents $40,585,057 $40,585,057 $ 1,590,223 $ 1,590,223 Marketable debt securities (Note 2) 5,781,808 5,782,598 1,673,441 1,674,166 Trade accounts receivable, net 3,200,078 3,200,078 6,010,366 6,010,366 Liabilities: Accounts payable, accrued expenses, accrued office sublease loss, customer deposits and other current liabilities 7,767,072 7,767,072 4,710,222 4,710,222 Other borrowings 117,360 117,360 11,004 11,039 The following methods and assumptions were used to estimate the fair value of the financial instruments presented above: Cash and equivalents - The carrying amount is a reasonable approximation of fair value. Marketable debt securities - Fair value is based upon quoted market prices, including accrued interest, and approximate their carrying value due to their short maturities. Securities are classified as held-to-maturity and are accordingly not marked to market. Trade accounts receivable, accounts payable, accrued expenses, accrued sublease loss, and customer deposits and other current liabilities - The fair value of receivables and payables are assumed to equal their carrying value because of their short maturities. Other borrowings - Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for those debt issues for which no market quotes are available. 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- 14 Reclassifications - Certain reclassifications were made to the prior years' financial statements to conform with the current year presentation. Major Customers - For the year ended October 31, 2000, two clients accounted for 14% and 13%, respectively, of the Company's revenues. In the two prior years, no client accounted for 10% or more of revenues. 2. Cash Equivalents and Marketable Debt Securities The following is a summary of the Company's held-to-maturity securities at October 31, 2000 and 1999, which are classified as either cash equivalents or marketable debt securities based on a maturity of less than or more than three months, respectively (Note 1): As of October 31, 2000 -------------------------------------------------- Gross Gross Estimated Unrealized Unrealized Market Cost Gains Losses Value ----------- ----------- ----------- ----------- Cash equivalents: Commercial paper $33,513,202 $ - $ - $33,513,202 ----------- ----------- ----------- ----------- Marketable debt securities: Commercial paper 4,786,048 - - 4,786,048 Corporate obligations 995,760 790 - 996,550 ----------- ----------- ----------- ----------- Subtotal 5,781,808 790 - 5,782,598 ----------- ----------- ----------- ----------- Total $39,295,010 $ 790 $ - $39,295,800 =========== =========== =========== =========== As of October 31, 1999 -------------------------------------------------- Gross Gross Estimated Unrealized Unrealized Market Cost Gains Losses Value ----------- ----------- ----------- ----------- Cash equivalents: Commercial paper $ 789,032 $ - $ - $ 789,032 ----------- ----------- ----------- ----------- Marketable debt securities: Commercial paper 1,124,124 - - 1,124,124 Corporate obligations 549,317 725 - 550,042 ----------- ----------- ----------- ----------- Subtotal 1,673,441 725 - 1,674,166 ----------- ----------- ----------- ----------- Total $ 2,462,473 $ 725 $ - $ 2,463,198 =========== =========== =========== =========== F- 15 3. Property and Equipment Property and equipment consists of the following: October 31, Depreciable ------------------------ Lives 2000 1999 (Years) ----------- ----------- ----------- Computer equipment $ 4,989,246 $ 4,017,472 5 Computer equipment held under capital leases (Note 7) 1,278,669 1,278,669 * Furniture and office equipment 1,309,264 970,842 7 Leasehold improvements 6,615,275 568,192 * Construction in progress - 1,206,052 Purchased software 1,466,206 1,120,377 5 Vehicles 84,460 39,741 3 ----------- ----------- 15,743,120 9,201,345 Less accumulated depreciation and amortization, including $1,248,964 in 2000 and $1,211,534 in 1999 attributable to capital leases (6,490,984) (5,562,352) ----------- ----------- $ 9,252,136 $ 3,638,993 =========== =========== * Shorter of the useful life or the length of the lease. Depreciation and amortization in continuing operations was $948,164, $782,721, and $768,753 for the years ended October 31, 2000, 1999, and 1998, respectively. 4. Deferred Software Costs Deferred software costs consist of the following: October 31, --------------------------- 2000 1999 ------------ ------------ Costs of internally-developed software and enhancements, including software under development $ 5,539,669 $ 4,528,438 Accumulated amortization (2,901,091) (2,304,615) ------------ ------------ $ 2,638,578 $ 2,223,823 ============ ============ Amortization of deferred software costs charged to continuing operations for the years ended October 31, 2000, 1999, and 1998 were $596,476, $484,260, and $634,932, respectively. F- 16 5. Intangibles Intangible assets consist of the following: October 31, --------------------------- 2000 1999 ------------ ------------ Excess of cost of investments over net assets acquired (goodwill) $ 9,831,590 $ 8,692,554 Customer lists 1,180,488 1,180,488 ------------ ------------ 11,012,078 9,873,042 Less accumulated amortization (2,141,858) (1,388,478) ------------ ------------ $ 8,870,220 $ 8,484,564 ============ ============ Amortization charged to continuing operations was $753,381, $608,907, and $249,489 for the years ended October 31, 2000, 1999, and 1998, respectively. The increase in goodwill arose from a contingent payment made in connection with a prior acquisition (Note 12). 6. Related Party Transactions In June 2000, the Company hired a new Chief Executive Officer. The employment agreement with the Company's new CEO provided for an award of 800,000 restricted shares of common stock. Such award vests at various times during the period ending June 15, 2004. The value of these restricted shares ($11,500,000 on the grant date of June 15, 2000) is being amortized ratably over the four-year vesting schedule. In connection with this award, the Company agreed to loan the CEO 50 percent of any tax payable with respect to the restricted shares. Any such loan will bear interest at the statutory rate and shall be payable when the Executive sells or otherwise transfers the restricted shares. In connection with this provision, on December 21, 2000 the Company loaned $1,291,000 to the CEO. At the same time, the CEO also purchased 68,446 shares of common stock from the Company at $14.61 per share. As a result of the foregoing, the CEO now owns approximately 15% of the outstanding shares of the Company's common stock. The Company is the beneficiary of a $1,000,000 life insurance policy which it maintains on its Chairman of the Board. F- 17 Due from related parties consists of the following: October 31, ----------------------- 2000 1999 ---------- ---------- Due from the Chairman, bearing interest at prime (9.50% and 8.25% at October 31, 2000 and 1999, respectively) plus 1% per annum, repayable on demand $ 67,804 $ 58,241 Due from consultant (Note 10) - 13,118 Due from other officers, bearing interest at prime, repayable on demand 102,805 60,955 ---------- ---------- $ 170,609 $ 132,314 ========== ========== 7. Long-term Debt and Capitalized Lease Obligations Long-term debt consists of the following: October 31, ------------------------- 2000 1999 ----------- ----------- Notes payable, other 117,360 11,004 Less current portion (57,323) (11,004) ----------- ----------- $ 60,037 $ - =========== =========== On October 23, 2000, the Company entered into two agreements to purchase certain equipment. The agreements call for twenty-four payments of $5,847 per month. Capitalized Lease Obligations The Company generally leases its equipment under standard commercial leases with purchase options which the Company exercises from time to time. Assets held under capitalized lease agreements are reflected in property and equipment as capital leases. At October 31, 1999, there were $8,013 of payments remaining on capitalized lease obligations. F- 18 8. Income Taxes The provision/(benefit) for income taxes on continuing operations consists of: October 31, ---------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Current: Federal $ (2,857,672) $ 486,753 $ 1,119,789 State and local - 64,816 576,424 Deferred (benefit)/provision 684,229 494,804 (1,238,592) ------------ ------------ ------------ $ (2,173,443) $ 1,046,373 $ 457,621 ============ ============ ============ A reconciliation of income taxes computed at the Federal statutory rate to amounts provided is as follows: October 31, ---------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Tax provision computed at the statutory rate $ (5,833,295) $ 920,606 $ 522,434 Increase/(decrease) in taxes resulting from: State and local income taxes, net of federal income taxes - 143,977 38,851 Non-deductible expenses 159,405 41,343 44,076 Benefit of tax credits - (57,981) (179,960) Losses for which no benefit has been provided 3,500,447 - - Other, net - (1,572) 32,220 ------------ ------------ ------------ $ (2,173,443) $ 1,046,373 $ 457,621 ============ ============ ============ F- 19 Temporary differences which give rise to net deferred tax assets/(liabilities) are as follows: October 31, --------------------------- 2000 1999 ------------ ------------ Deferred tax assets: Accrued loss on office sublease $ 1,072,503 $ 956,891 Accrued liabilities 388,007 459,146 Allowance for doubtful accounts 215,698 152,457 Deferred rent 211,177 121,612 Intangibles 75,204 75,128 Lease transactions 36,832 36,794 Net operating loss 4,035,160 - Other 229,623 300,921 ------------ ------------ 6,264,204 2,102,949 ------------ ------------ Deferred tax liabilities: Depreciation and amortization (188,884) (126,957) Deferred software costs (1,136,704) (947,805) Other (201,227) (201,023) ------------ ------------ (1,526,815) (1,275,785) Valuation allowance (4,737,389) - ------------ ------------ Net deferred taxes $ - $ 827,164 ============ ============ The deferred tax assets have been fully offset by a valuation allowance due to the uncertainty of realizing such tax benefits. At October 31, 2000, the Company had net operating loss carryforwards of approximately $8.2 million for federal income tax purposes that begin to expire in 2020. 9. 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 funds legally available therefor, 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. F- 20 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. Private Placement of Securities - On April 7, 2000, the Company entered into a Securities Purchase Agreement providing for a group of investors (the "Purchasers") to purchase $60 million of the Company's securities in a private placement, which closed on May 10, 2000. The Company issued 157,377 shares of redeemable 8% Series A Cumulative Convertible Participating Preferred Stock (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 Company primarily will use the net proceeds of $58,430,596, after giving effect to issuance costs and related legal fees, from this transaction to pursue its business plan of expanding its managed services activities through its own Internet Data Centers (each of which shall be known as an "IDC") and Managed Service Centers (each of which shall be known as an "MSC") as well as at customer locations connected to an IDC or MSC. The initial carrying values of the 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. 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 $60 million for all 157,377 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 is 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. F- 21 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. 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. 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 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 warrants, and the shares of common stock issuable upon conversion of the Series A Preferred Stock or exercise of the 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. F- 22 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 warrants issued to the Purchasers are subject to adjustment provisions that are similar to those of the Series A Preferred Stock. The warrants must be exercised before May 11, 2007. 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 are immediately exercisable and expire on June 5, 2004. The fair value of the warrants of $120,000, calculated using the Black-Scholes pricing model, is included in the statements of operations. Previously Issued Warrants - The Underwriters of the Company's initial public offering were issued warrants to purchase an aggregate of 100,000 shares of the Company's common stock, at an exercise price per share of $6.30. During fiscal 1998, 66,725 of these warrants were exercised. The remaining 33,275 warrants expired without being exercised. In connection with a consulting arrangement, the Company had issued warrants to purchase, after giving effect to certain anti-dilutive provisions, 50,000 shares at $5.00 per share and 25,240 shares at $6.24 per share. These warrants were exercised in March 1998. In connection with a consulting agreement in June 1995, the Company issued a warrant to purchase 75,000 shares of common stock for $5.00 per share. The warrant grants the holder certain "piggyback registration" and other rights. This warrant was exercised during the year ended October 31, 2000. F- 23 Stock Option Plan - Prior to its initial public offering, the Company adopted the 1992 Stock Option and Stock Appreciation Rights Plan ("the Plan") which provides for the granting of options to employees, officers, directors, and consultants for the purchase of common stock. On May 8, 2000, the Company's shareholders approved an amendment to the Plan increasing the maximum number of shares issuable subject to the Plan to 2,700,000. Options granted may be either "incentive stock options" within the meaning of Section 422 of the United States Internal Revenue Code of 1986, as amended ("the Code"), or non-qualified options. 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. The Company's Board of Directors or a committee of the Board consisting of four 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 Plan, and to holders of previously granted options. No SARs have been granted under the Plan. F- 24 Activity in the Plan during the past three years is as follows: Weighted Exercise Average Number of Price Exercise Options Range Price --------- -------------- ---------- Options outstanding, October 31, 1997 849,898 $3.25 - $7.88 $4.42 Options granted 216,400 $8.25 - $10.86 $8.79 Options exercised (197,648) $3.63 - $7.88 $4.52 Options cancelled (63,650) $3.88 - $9.56 $4.83 --------- Options outstanding, October 31, 1998 805,000 $3.25 - $10.86 $4.41 Options granted 152,750 $8.00 - $11.48 $10.03 Options exercised (152,200) $3.25 - $7.88 $4.38 Options cancelled (17,150) $4.50 - $9.56 $8.82 --------- Options outstanding, October 31, 1999 788,400 $3.25 - $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 ========= Additional information regarding options outstanding: 207,000 $3.25 - $4.68 $3.60 153,800 $5.25 - $7.88 $5.83 748,500 $8.00 - $12.00 $9.98 62,500 $14.33 - $17.69 $16.65 753,950 $18.06 - $23.81 $19.24 22,600 $27.25 - $37.78 $30.56 22,500 $42.38 - $45.00 $44.71 --------- 1,970,850 ========= There were 884,612, 471,060 and 466,133 options exercisable at October 31, 2000, 1999 and 1998, respectively. At October 31, 2000, there are 179,570 options available for future grant. At October 31, 2000, the weighted average remaining contractual life of all options outstanding, whether vested or not, is approximately 8.2 years. The Company accounts for options granted 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. F- 25 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 fiscal 2000, 1999, and 1998, respectively, would have been as follows:
2000 1999 1998 ------------------------ ------------------------ ------------------------ Historical Pro Forma Historical Pro Forma Historical Pro Forma ----------- ----------- ----------- ----------- ----------- ----------- Income/(loss) per basic common share: Gain on sale, net of loss from discontinued operation - - - - $ 1,620 $ 1,620 =========== =========== =========== =========== =========== =========== Net income to common stockholders $ (18,819) $ (20,336) $ 1,661 $ 1,278 $ 2,699 $ 2,435 =========== =========== =========== =========== =========== =========== Income/(loss) per diluted common share: Gain on sale, net of loss from discontinued operation - - - - $ 0.37 $ 0.37 =========== =========== =========== =========== =========== =========== Net income to common stockholders $ (3.58) $ (3.87) $ 0.34 $ 0.26 $ 0.61 $ 0.55 =========== =========== =========== =========== =========== ===========
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 fiscal 2000, 1999 and 1998 was $12,122,000, $563,569 and $704,176, respectively. 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 2000: a risk-free interest rate of between 5.32% and 6.73%; expected lives ranging from six months to four years; and expected volatility of 85.9%. The assumptions used in 1999 and 1998 included risk-free interest rates of 5.75% and 6.5%, expected lives ranging from six months to five years, and expected volatilities of 49.5% and 48.6% In addition to options granted under the Plan, two non-qualified options aggregating 290,000 shares were granted prior to the Company's initial public offering of which 150,000 shares were exercised prior to October 31, 1996, 40,000 were exercised during the year ended October 31, 1997, and 100,000 were exercised during the year ended October 31, 1998. F- 26 10. Commitments and Contingencies Construction Obligation: During fiscal 2000, the Company began construction of an Internet Data Center in the Atlanta metropolitan area. A major portion of this construction was represented by a construction contract aggregating approximately $3,121,000. As of October 31, 2000, there were payments of approximately $807,000 remaining to be made on this contract. In addition, equipment for this facility in the amount of $468,000 was on order. In July 2000, the Company announced the signing of a lease for a 54,000 square foot building, that was under construction, as its third IDC. This facility, located in the Northern Virginia high tech corridor, was turned over to the Company in November 2000 for development as an IDC. As of the date of this report, approximately $333,000 has been completed from a construction contract in the amount of $1,565,000, and equipment totaling $888,000 has been delivered. The Company is presently evaluating design alternatives with respect to the development of the Virginia facility. Employment Agreements: The Company is obligated under certain employment agreements which expire at various times through October 31, 2002. Pursuant to such agreements, the approximate annual minimum salary amounts payable are as follows: Years Ending October 31, ------------ 2001 1,528,000 2002 1,119,208 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 in October 1994, expires on September 30, 2001, and provides for annual payments of $267,500 through that date. As a partial incentive to enter into the amended agreement, the Company agreed to forgive, on each anniversary date of the agreement, 12.5% of the consultant's existing indebtedness to the Company ($13,118 at October 31, 1999 (Note 6)). The consulting agreement imposes certain non-competition restrictions on the consultant. The existing indebtedness to the Company was amortized ratably over the term of the amended agreement. Litigation: In June 2000, the Company commenced an action against Atlas Business Services Corp. ("Atlas"), a former customer, in the Supreme Court of New York to collect approximately $45,000 in outstanding data processing invoices. Atlas filed an answer in which it asserted certain affirmative defenses alleging that the services were deficient. Discovery is proceeding in this action. F- 27 In September 2000, the Company was served with a complaint in connection with a lawsuit commenced by Atlas in August 2000 in the Federal District Court for the Southern District of New York. Atlas alleges that a breach of contract by the Company in providing data processing services resulted in the loss of three customers and annual revenue of $700,000. The Company filed an answer denying all of the material allegations and asserting several affirmative defenses. Pursuant to a Scheduling Order, discovery must be completed by June 21, 2001. It is premature to give a proper evaluation of the probability of a favorable or unfavorable outcome. While it is again premature to give a proper evaluation of the potential liability, Atlas has demanded damages of not less than $5 million. Management believes that the above matters will be resolved without any material adverse impact to the Company's financial position, results of operations or cash flows. Lease Obligations: Operating leases for facilities extend through December 31, 2015. The Company's obligations under certain of these leases are secured by cash deposits or standby letters of credit, aggregating $2,096,000. Total expense for occupancy costs, net of sublease income, was approximately $2,104,000, $1,587,000 and $1,872,000 during fiscal 2000, 1999 and 1998, respectively. During the fourth quarter of fiscal 1998, the Company completed the consolidation of its data center and administrative functions into its Leonia NJ facility. Effective as of August 1, 1998, the Company sublet approximately 31,500 square feet in its New York City location. This sublease and the related primary lease expire in 2008. Because the amount to be received under the sublease (aggregating approximately $6,211,000) is less than the amount the Company must pay under the primary lease, a charge was taken of approximately $3,022,000. The charge represents the total amount of the shortfall over the life of the lease, and also includes the value of leasehold improvements abandoned. Since the sale of the Payroll Division also permitted the Company to reduce substantially its New York City space requirements, approximately $786,000 was charged against the gain on sale of the Payroll Division. 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. A subtenant is being sought for this space, but as of October 31, 2000, one has not been found. The lease for this facility expires 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. F- 28 Approximate minimum future lease payments for real estate and other leases, net of sublease income, are as follows: Years Ending October 31, ------------ 2001 11,501,000 2002 10,452,000 2003 7,463,000 2004 6,577,000 2005 5,525,000 Thereafter 48,886,000 --------------- $ 90,404,000 =============== 11. Sale of the Payroll Division On December 19, 1997, the Company consummated the sale (the "Sale") of all the capital stock of four wholly-owned subsidiaries of the Company, together comprising the Payroll Division ("Pay USA"), to Zurich Payroll Solutions, Ltd. ("Zurich" or the "Buyer"). At closing, the Company received $11,460,000, of which $10,710,000 was in cash and $750,000 was in the form of a note from the Buyer which was subsequently repaid by Zurich. The terms of the Sale also provided for an additional payment by the Buyer of up to $1,500,000, which was received in full in June 1998. The Company recognized a gain, net of tax, of approximately $1,700,000 in its fiscal year ended October 31, 1998, as a result of the Sale. For the period beginning on November 1, 1997 through the date of the Sale, the net operating losses (net of related tax benefits) of Pay USA were recorded as a discontinued operation. For such period, revenue from the discontinued operation approximated $1,117,000 and pretax operating losses approximated $136,500. Pursuant to the terms of the sale, the Company agreed to provide the Buyer with processing services in connection with the continuing operations of Pay USA. The Company provided these services through December 31, 1999 for an initial payment of $500,000, and fixed and other monthly fees based on the level of services provided. The Buyer also paid the Company $1,440,000 at closing for the Company's agreement to refrain from directly or indirectly competing with Pay USA, except as permitted in the agreement and to refrain from certain other specified activities. In May 1999, Zurich and the Company amended the agreement to provide that the Company's obligations thereunder would terminate on October 31, 1999. The $1,440,000 was amortized over the term of the amended agreement. The amortization of such income was included in income from continuing operations for fiscal 1999. 12. Acquisition 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. F- 29 In connection with the acquisition, Enterprise and its principal shareholders entered into non-competition and non-solicitation agreements with the Company. A value of $50,000 was assigned to these agreements. The Company also recorded $6,852,928 in excess of cost over net assets acquired (goodwill). The goodwill is being amortized on a straight-line basis over 15 years, the two agreements are being amortized over the terms of such agreements (approximately 61 months). Certain additional consideration in the form of cash and common stock (up to $4,872,000 and 242,857 shares) may be 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. The Enterprise Acquisition was accounted for using the purchase method of accounting. Accordingly, the purchase price has been allocated to the assets acquired based on their fair values at the date of acquisition. The assets acquired consist predominately of intangibles associated with the business of providing information technology infrastructure management solutions to large companies and institutions. No liabilities were assumed. The results of operations of the subsidiary have been included in the Company's consolidated results of operations from the date of the acquisition. The following pro forma financial information shows the results of operations for the fiscal years ended October 31, 1999 and 1998, assuming the acquisition of certain assets and the business of Enterprise had occurred at the beginning of each period presented: Fiscal Years ended October 31, ------------------------------ 1999 1998 ----------- ----------- Revenues $34,716,000 $35,435,000 =========== =========== Income from continuing operations $ 2,765,000 $ 1,149,000 Loss from discontinued operation - (76,000) Gain on sale of discontinued operation - 1,696,000 ----------- ----------- Net income $ 1,695,000 $ 2,769,000 =========== =========== Basic earnings per share: Income from continuing operations $ 0.36 $ 0.26 Loss from discontinued operation - (0.02) Gain on sale of discontinued operation - 0.39 ----------- ----------- Net income $ 0.36 $ 0.63 =========== =========== Diluted earnings per share: Income from continuing operations $ 0.34 $ 0.24 Loss from discontinued operation - (0.01) Gain on sale of discontinued operation - 0.36 ----------- ----------- Net income $ 0.34 $ 0.59 =========== =========== F- 30 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 from 2% to 15% of covered compensation each year. The Company may make matching contributions at the discretion of the Board of Directors. For the years ended October 31, 2000, 1999 and 1998, the Company did not make 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- 31 14. Quarterly Financial Information (Unaudited) The following is a summary of the quarterly results of operations for the two years ended October 31, 2000 (in thousands except per share data): THREE MONTHS ENDED: -------------------------------------------- JANUARY APRIL JULY OCTOBER 31, 2000 30, 2000 31, 2000 31, 2000 -------- -------- -------- -------- Revenues $ 7,115 $ 6,583 $ 5,359 $ 5,414 -------- -------- -------- -------- Net income/(loss) from continuing operations (853) (2,906) (5,671) (5,553) -------- -------- -------- -------- Net income/(loss) to common stockholders $ (853) $ (2,906) $ (7,529) $ (7,531) ======== ======== ======== ======== Net income/(loss) to common stockholders per basic common share $ (0.18) $ (0.59) $ (1.38) $ (1.28) ======== ======== ======== ======== Net income/(loss) to common stockholders per diluted common share $ (0.18) $ (0.59) $ (1.38) $ (1.28) ======== ======== ======== ======== THREE MONTHS ENDED: -------------------------------------------- JANUARY APRIL JULY OCTOBER 31, 1999 30, 1999 31, 1999 31, 1999 -------- -------- -------- -------- Revenues $ 8,281 $ 9,022 $ 9,072 $ 7,890 -------- -------- -------- -------- Net income/(loss) from continuing operations 558 775 636 (308) -------- -------- -------- -------- Net income/(loss) to common stockholders $ 558 $ 775 $ 636 $ (308) ======== ======== ======== ======== Net income/(loss) to common stockholders per basic common share $ 0.13 $ 0.17 $ 0.13 $ (0.07) ======== ======== ======== ======== Net income/(loss) to common stockholders per diluted common share $ 0.12 $ 0.16 $ 0.13 $ (0.07) ======== ======== ======== ======== F- 32 INFOCROSSING, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Balance at Charged Charged Balance Beginning of to Costs to Other at End of Description Period and Expenses Accounts Deductions Period (a) Year ended October 31, 2000 $350,939 $175,838 - $ 23,820 $502,957 Year ended October 31, 1999 216,659 158,000 - 23,720 350,939 Year ended October 31, 1998 111,577 115,429 - 10,347 216,659 (a) Uncollectible accounts written off, net of recoveries. S - 1 INFOCROSSING, INC. AND SUBSIDIARIES EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION PAGE No. 10.5B Consulting Agreement Amendment dated as of October 31, 1994 between the Company and Stanley Berger. X-2 10.6A Tenth Floor Option Agreement between the Company, G-H-G Realty Company ("GHG"), and RSL Com USA, Inc. ("RSL"), dated as of November 30, 1999. X-4 10.6B Eleventh Floor Option Agreement between the Company, GHG, and RSL, dated as of November 30, 1999. X-8 10.7D Third Amendment of Lease between Leonia Associates, LLC and the Company, dated as of August 28, 2000. X-12 21 Securities of the Company X-16 23 Consent of Ernst & Young, LLP X-17 X - 1 EX-10.5B 2 0002.txt INFOCROSSING, INC. AND SUBSIDIARIES EXHIBIT 10.5B CONSULTING AGREEMENT AMENDMENT Parties This agreement is made as of October 31, 1994 by the parties to the CONSULTING AGREEMENT dated November 1, 1992 to amend the CONSULTING AGREEMENT ("Agreement") between COMPUTER OUTSOURCING SERVICES, INC. a new York corporation with an address at 360 West 31st Street, New York, New York 10001 ("Company"), and STANLEY BERGER, an individual formerly residing at 11 Old Long Ridge Road, Stamford, CT. ("Consultant"), now residing at 20 Church Street, Greenwich, CT. 06830. AMENDMENTS 1. Consulting Services; Term. Section 2(a) The "Term" of the agreement is amended to extended the "term" to September 31, 2001. 2. Payments to Consultant. ---------------------- Section 3(a). The Consulting Fee for the Company's FYE October 31, 1994 is revised and shall equal $222,917. The Consulting Fee for the FYE October 31, 1995 is revised and shall equal $245, 209. The Consulting Fee shall be $22,292 for each month of the period commencing November 1, 2000 through September 31, 2001. Section 3(b). Delete entire Subsection 3 (b). Section 3(c). The Company is not required to contribute $30,000 to an annuity purchase for the years ending December 31, 1993 and 1994. GENERAL The Agreement dated November 1, 1992 is modified to incorporate the above amendments. All other terms and conditions of the Agreement remain unchanged. X - 2 Consulting Agreement Amendment Page 2 of 2 Execution The parties hereto, desiring to be bound hereby, have executed this Agreement as of the date first written above. COMPUTER OUTSOURCING SERVICES, INC. BY: /s/ ___________________________________ Date: ___________________ Zach Lonstein, President /s/ __________________________________ Stanley Berger, individually X - 3 EX-10.6A 3 0003.txt INFOCROSSING, INC. AND SUBSIDIARIES EXHIBIT 10.6A TENTH FLOOR OPTION AGREEMNT AGREEMENT made as of the 30th day of November, 1999, by and among G-H-G REALTY COMPANY, L.L.C., a limited liability company formed in accordance with the laws of the State of New York (successor to G-H-G Realty Company, a partnership), having an office at 360 West 31st Street, New York, New York 10001 (hereinafter referred to as "Landlord"); RSL COM U.S.A., INC., a Delaware corporation, having an office at 430 Park Avenue, New York, New York 10022 (hereinafter referred to as "Subtenant"); and COMPUTER OUTSOURCING SERVICES, INC. (formerly known as Commercial Online Systems, Inc.), a Delaware corporation having an office at 2 Christie Heights Street, Leonia, New Jersey 07605 (hereinafter referred to as "COSI"). W I T N E S S E T H: WHEREAS, the Landlord previously entered into an Agreement of Lease dated January 24, 1991 with COSI with respect to certain space on the Tenth (10th) and Eleventh (11th) Floors and certain basement space in the building known as 360 West 31st Street, New York, New York (the "Building") (the said Agreement of Lease together with five (5) separate supplemental agreements by and between the parties thereto being collectively referred to herein as "the Lease"); and WHEREAS, COSI thereafter entered into an Agreement of Sublease dated July 1998 with the Subtenant (the "Sublease"), pursuant to which COSI sublet to Subtenant the entire Eleventh (11th) Floor of the Building (the "Eleventh Floor Premises") consisting of approximately 22,300 rentable square feet and part of the Tenth (10th) Floor (the "Tenth Floor Premises") of the Building, consisting of approximately 9,200 rentable square feet (the Eleventh Floor Premises and the Tenth Floor Premises being collectively referred to herein as the "Demised Premises"); and WHEREAS, Subtenant, as a condition of Landlord's consent to Sublease, agreed to be subject and subordinate at all times to all covenants, agreements, terms, provisions and conditions of the Lease and of a certain Consent to Sublease dated September 14, 1998 (the "Consent"); and WHEREAS, the parties have entered into a certain agreement of even date herewith (the "Eleventh Floor Option Agreement") pursuant to which COSI and Subtenant have granted to Landlord an option (the "Eleventh Floor Option") to take back the Eleventh Floor Premises, which option shall expire on December 3, 1999 (the "Eleventh Floor Option Expiration Date"); and WHEREAS, Landlord has requested an option to take back the Tenth Floor Premises, and COSI and Subtenant desire to grant such option to Landlord on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual obligations of the parties hereto, and other good and valuable consideration, receipt of which is acknowledged by each of them, the parties hereby covenant and agree as follows: 1. Grant of Option. Subtenant and COSI hereby grant Landlord the option (the "Tenth Floor Option"), expiring on February 15, 2000 (the "Tenth Floor Option Expiration Date") to take back the Tenth Floor Premises. X - 4 2. Manner of Exercise. The Tenth Floor Option may be exercised only by delivery of written notice of such exercise to Subtenant and COSI prior to the Tenth Floor Option Expiration Date. Such notice shall be deemed given on the date of actual receipt thereof by Subtenant and COSI (such date being referred to herein as the "Tenth Floor Option Exercise Date"). 3. Consideration. In the event that the Landlord elects ------------- to exercise the Tenth Floor Option, Subtenant shall pay the total sum of Eighty Seven Thousand ($87,000.00) Dollars, ("Consideration") as follows: a. To the Landlord, the sum of Twelve Thousand Dollars ($12,000.00); b. To S.L. Green Leasing, Inc., the sum of Fifty Two Thousand Five Hundred Dollars ($52,500.00); c. To COSI, the sum of Twenty Two Thousand Five Hundred Dollars ($22,500.00). 4. Payment. The aforementioned payments shall be made ------- within five (5) business days after receipt by Subtenant and COSI of notice of exercise of the Tenth Floor Option. If such payments are not timely made, they shall accrue interest at the highest rate permitted by law. In the event that Landlord, COSI, or S.L. Green Leasing, Inc. as the case may be, is required to expand any sums, including but not limited to reasonable legal fees, to collect any such payment, Subtenant shall, in addition to all other payments required hereunder, be liable for all such costs and expenses. 5. Termination of Sublease; Mutual Release. --------------------------------------- A. The Sublease shall automatically be deemed cancelled and terminated in full, effective as of the Tenth Floor Option Exercise Date, and Subtenant shall have no further liability whatsoever to COSI or Landlord as of the Tenth Floor Option Exercise Date, arising out of the Sublease, the Lease, the Consent or otherwise, all of which liabilities are hereby released, except for rent or other obligations under the Sublease accruing prior to the Tenth Floor Option Exercise Date and the Consideration payment obligations set forth herein. B. Effective as of the Tenth Floor Option Exercise Date, Subtenant releases COSI from all liability under the Sublease, except for obligations or liabilities of COSI accruing thereunder on or after December 1, 1999. 6. COSI Liability. Upon the Tenth Floor Option Exercise Date, COSI shall continue to be liable for the rent and additional rent due under the Lease but for no other obligations thereunder, the Landlord releasing COSI from all claims, obligations, actions, suits and the like under the Lease except COSI's liability for the rent and additional rent thereunder as limited herein and except for obligations under the lease, if any, arising prior to the Tenth Floor Option Exercise Date; provided, however, that effective as of the Tenth Floor Option Exercise Date, the liability of COSI thereunder shall be reduced by an amount equal to the amount of the liability of Subtenant under the Sublease for rent and additional rent which shall have been eliminated pursuant to the provisions of the Eleventh Floor Option Agreement and this Tenth Floor Option Agreement. X - 5 7. Refund of Security. Simultaneously with the receipt of the payment to be made to it pursuant to paragraph "3" hereof, COSI shall take all steps as may be required to permit all security remaining on deposit, or otherwise posted by, Subtenant under the sublease to be released to Subtenant. 8. Brokerage Commission. Subtenant shall have no ---------------------- liability for any brokerage commission in connection with this transaction other than as set forth in Paragraph 3(b) hereof. Subtenant shall, however, pay any commission which may be due any broker, other than S.L. Green Leasing, Inc., with whom Subtenant may have dealt. COSI shall have no liability for any brokerage commission in connection with this transaction. 9. Expiration of Eleventh Floor Option. In the event that the Landlord fails to exercise the Eleventh Floor Option on or before the Eleventh Floor Option Expiration date, this Tenth Floor Option Agreement shall immediately cease to be of any further force or effect, and shall be deemed cancelled and terminated, as of the Eleventh Floor Option Expiration Date. 10. Expiration of Tenth Floor Option. In the event that the Landlord shall exercise the Eleventh Floor Option, but shall fail to exercise the Tenth Floor Option on or before the Tenth floor Option Expiration Date, this Agreement shall immediately cease to be of any further force or effect, and shall be deemed cancelled and terminated, as of the Tenth Floor Option Expiration Date. 11. Third Party Beneficiary. S.L. Green Leasing, Inc. Shall ------------------------- be deemed a third party beneficiary of paragraphs "3" and "4" of this Agreement. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of this 30th day of November, 1999. G-H-G REALTY COMPPANY, LLC, Landlord /s/ Bruce Gittlin By: _______________________________________ RSL COM U.S.A., INC., Subtenant /s/ Ruth Fisher By: _______________________________________ Vice President COMPUTER OUTSOURCING SERVICES, INC. /s/ Nicolas J. Letizia By: ________________________________________ Chief Financial Officer X - 6 G-H-G REALTY COMPANY 21 PENN PLAZA o SUITE 1000 360 WEST 31ST STREET NEW YORK, NY 10001 (212) 244-4646 February 14, 2000 BY: HAND DELIVERY Computer Outsourcing Services, Inc. 2 Christie Heights Street Leonia, NJ 07605 RSL Com U.S.A., Inc. 430 Park Avenue New York, NY 10022 Gentlemen: In accordance with Paragraph 2. of the 10th Floor Option Agreement between us, made as of the 30th day of November 1999 (the "Agreement"), this letter will serve to formally notify you that we have elected to exercise the 10th Floor Option set forth in Paragraph 1. of the Agreement. Please note that in accordance with Paragraph 4. of the Agreement, RSL is required to make the payments referred to in Paragraph 3. of the Agreement within five (5) business days after receipt of this notice. Very truly yours, G-H-G REALTY COMPANY, L.L.C. By: G-H-G Realty Management Co., Inc. Management Member /s/ Bruce D. Gittlin ------------------- Bruce D. Gittlin President X - 7 EX-10.6B 4 0004.txt INFOCROSSING, INC. AND SUBSIDIARIES EXHIBIT 10.6B ELEVENTH FLOOR OPTION AGREEMNT AGREEMENT made as of the 30th day of November, 1999, by and among G-H-G REALTY COMPANY, L.L.C., a limited liability company formed in accordance with the laws of the State of New York (successor to G-H-G Realty Company, a partnership), having an office at 360 West 31st Street, New York, New York 10001 (hereinafter referred to as "Landlord"); RSL COM U.S.A., INC., a Delaware corporation, having an office at 430 Park Avenue, New York, New York 10022 (hereinafter referred to as "Subtenant"); and COMPUTER OUTSOURCING SERVICES, INC. (formerly known as Commercial Online Systems, Inc.), a Delaware corporation having an office at 2 Christie Heights Street, Leonia, New Jersey 07605 (hereinafter referred to as "COSI"). W I T N E S S E T H: WHEREAS, the Landlord previously entered into an Agreement of Lease dated January 24, 1991 with COSI with respect to certain space on the Tenth (10th) and Eleventh (11th) Floors and certain basement space in the building known as 360 West 31st Street, New York, New York (the "Building") (the said Agreement of Lease together with five (5) separate supplemental agreements by and between the parties thereto being collectively referred to herein as "the Lease"); and WHEREAS, COSI thereafter entered into an Agreement of Sublease dated July 1998 with the Subtenant (the "Sublease"), pursuant to which COSI sublet to Subtenant the entire Eleventh (11th) Floor of the Building (the "Eleventh Floor Premises") consisting of approximately 22,300 rentable square feet and part of the Tenth (10th) Floor (the "Tenth Floor Premises") of the Building, consisting of approximately 9,200 rentable square feet (the Eleventh Floor Premises and the Tenth Floor Premises being collectively referred to herein as the "Demised Premises"); and WHEREAS, Subtenant, as a condition of Landlord's consent to Sublease, agreed to be subject and subordinate at all times to all covenants, agreements, terms, provisions and conditions of the Lease and of a certain Consent to Sublease dated September 14, 1998 (the "Consent"); and WHEREAS, the parties have entered into a certain agreement of even date herewith (the "Tenth Floor Option Agreement") pursuant to which COSI and Subtenant have granted to Landlord an option (the "Tenth Floor Option") to take back the Tenth Floor Premises, which option shall expire on February 15, 2000 (the "Tenth Floor Option Expiration Date"); and WHEREAS, Landlord has requested an option to take back the Eleventh Floor Premises, and COSI and Subtenant desire to grant such option to Landlord on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises, the mutual obligations of the parties hereto, and other good and valuable consideration, receipt of which is acknowledged by each of them, the parties hereby covenant and agree as follows: 1. Grant of Option. Subtenant and COSI hereby grant Landlord the option (the "Eleventh Floor Option"), expiring on December 3, 1999 (the "Eleventh Floor X - 8 Option Expiration Date") to take back the Eleventh Floor Premises, effective as of November 30, 1999 (the "Eleventh Floor Effective Date"). 2. Manner of Exercise. The Eleventh Floor Option may be exercised only by delivery of written notice of such exercise to Subtenant and COSI prior to the Eleventh Floor Option Expiration Date. Such notice shall be deemed given on the date of actual receipt thereof by Subtenant and COSI (such date being referred to herein as the "Eleventh Floor Option Exercise Date"). 3. Consideration. In the event that the Landlord elects to ------------- exercise the Eleventh Floor Option, Subtenant shall pay the total sum of Two Hundred Fifty Thousand ($250,000.00) Dollars, ("Consideration") as follows: a To the Landlord, the sum of Eighty Thousand Dollars ($80,000.00); b To S.L. Green Leasing, Inc., the sum of One Hundred Twenty Five Thousand Dollars ($125,500.00); c To COSI, the sum of Forty Five Thousand Dollars ($45,000.00). 4. Payment. The aforementioned payments shall be made ------- within five (5) business days after receipt by Subtenant and COSI of notice of exercise of the Eleventh Floor Option. If such payments are not timely made, they shall accrue interest at the highest rate permitted by law. In the event that Landlord, COSI, or S.L. Green Leasing, Inc. as the case may be, is required to expand any sums, including but not limited to reasonable legal fees, to collect any such payment, Subtenant shall, in addition to all other payments required hereunder, be liable for all such costs and expenses. 6. Amendment of Sublease; Mutual Release. ------------------------------------- A. The Sublease shall automatically be deemed amended, effective as of the Eleventh Floor Effective Date, to eliminate the Eleventh Floor Premises from the Demised Premises, and Subtenant shall have no further liability to COSI or Landlord as of the Eleventh Floor Effective Date, for any rent or other obligation whatsoever pertaining to the Eleventh Floor Premises, whether arising out of the Sublease, the Lease, the Consent or otherwise, all of which liabilities are hereby released, except for rent or other obligations under the Sublease accruing prior to the Eleventh Floor Effective Date and the Consideration payment obligations set forth herein. All payments due from RSL under the Sublease shall thereupon be reduced, so that each such payment shall be in an amount equal to (x) the payment provided for under the terms of the Sublease, multiplied by (y) Twenty Nine and 21/100 Per Cent (29.21%). B. Effective as of the Eleventh Floor Effective Date, Subtenant releases COSI from all liability under the Sublease with respect to the Eleventh Floor Premises. 6. COSI Liability. After the Eleventh Floor Effective Date, COSI shall continue to be liable for the rent and additional rent due under the Lease but for no other obligations thereunder, the Landlord releasing COSI from all claims, obligations, actions, suits and the like under the Lease except COSI's liability for the rent and additional rent thereunder as limited herein and except for obligations under the lease, if any, arising prior to the Eleventh X - 9 Floor Effective Date; provided, however, that effective as of the Eleventh Floor Effective Date, the liability of COSI thereunder shall be reduced by an amount equal to the amount by which the liability of Subtenant under the Sublease for rent and additional rent shall have been reduced pursuant to the provisions of paragraph "5" hereof. 7. Refund of Security. Simultaneously with the receipt of the payment to be made to it pursuant to paragraph "3" hereof, COSI shall take such steps as may be required to permit a portion of the security deposited (or otherwise posted by) Subtenant under the sublease, equal to Seventy and 79/100 Per Cent (70.79%) of the amount thereof, to be released to Subtenant (or the Letter of Credit reduced accordingly). 8. Landlord's Work. Landlord shall, on or before the Tenth Floor Option Expiration Date, at its sold cost and expense, cause (i) the staircase connecting the Tenth Floor Premises and Eleventh Floor Premises to be removed and disposed of, with any structural damage resulting from such removal to be repaired in a workmanlike manner; (ii) the ceiling of the Tenth Floor Premises to be closed and finished in a manner consistent with the remainder of such ceiling; and (iii) the floor area of the Tenth Floor Premises under the staircase to be repaired and finished to match the surrounding floor area, except that no carpet repair or replacement shall be done. 9. Brokerage Commission. Subtenant shall have no ---------------------- liability for any brokerage commission in connection with this transaction other than as set forth in Paragraph 3(b) hereof. Subtenant shall, however, pay any commission which may be due any broker, other than S.L. Green Leasing, Inc., with whom Subtenant may have dealt. COSI shall have no liability for any brokerage commission in connection with this transaction. 10. Waiver of Claim. Subtenant agrees that, provided that Landlord exercises the Eleventh Floor Option, Subtenant shall not assert any claim against Landlord or COSI based upon or relating to efforts heretofore made by Subtenant to further sublet the Demised Premises or any part thereof. 11. Expiration of Eleventh Floor Option. In the event that the Landlord fails to exercise the Eleventh Floor Option on or before the Eleventh Floor Option Expiration date, this Agreement shall immediately cease to be of any further force or effect, and shall be deemed cancelled and terminated, as of the Eleventh Floor Option Expiration Date. 12. Third Party Beneficiary. S.L. Green Leasing, Inc. ------------------------- Shall be deemed a third party beneficiary of paragraphs "3" and "4" of this Agreement. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of this 30th day of November, 1999. G-H-G REALTY COMPPANY, LLC, Landlord /s/ Bruce Gittlin By: _____________________________________ RSL COM U.S.A., INC., Subtenant /s/ Ruth Fisher By: _____________________________________ Vice President COMPUTER OUTSOURCING SERVICES, INC. /s/ Nicolas J. Letizia By: _____________________________________ Chief Financial Officer X - 10 GHG REALTY COMPANY, LLC. 360 West 31st Street New York, New York 10001 December 2, 1999 Computer Outsourcing Services, Inc. RSL COM U.S.A. Inc. 2 Christie Heights Street 430 Park Avenue Leonia, New Jersey 07605 New York, New York 10022 Attention: Zach Lonstein Attention: Ruth Fisher In accordance with Paragraph 2 of the Eleventh Floor Option Agreement and Between us made as of the 30th Day of November, 1999, ("The" Agreement). This letter will serve to formally notify you that we have elected to exercise the Eleventh Floor Option set forth in Paragraph 1 of the Agreement. GHG Realty Company, LLC. /s/ Bruce D. Gittlin ----------------------- Bruce D. Gittlin President BDG:ag Cc: Richard Bier, ESQ. Howard Tenenbaum X - 11 EX-10.7D 5 0005.txt INFOCROSSING, INC. AND SUBSIDIARIES EXHIBIT 10.7D THIRD AMENDMENT OF LEASE DATE: as of 8/28/00 --------------- LANDLORD: Leonia Associates, L.L.C. a New Jersey limited liability company TENANT: Infocrossing, Inc. f/k/a Computer Outsourcing Services, Inc. a Delaware corporation ADDRESS OF TENANT: 2 Christie Heights Leonia, New Jersey 07605 LEASE DATE: June 2, 1997 DATE OF PRIOR AMENDMENTS: January 16, 1998 and September 9, 1999 BUILDING: 2 Christie Heights Leonia, New Jersey 07605 RECITALS WHEREAS, Landlord and Tenant entered into a lease agreement dated June 2, 1997 (the "Original Lease") wherein Tenant leased a portion of the Building; WHEREAS, the first lease amendment dated January 16, 1998 ("First Lease Amendment") provided for certain changes including an increase in the square footage of the Premises and an increase in Fixed Basic Rent, Additional Rent and number of parking spaces; WHEREAS, the second lease amendment dated September 9, 1999 ("Second Lease Amendment") provided for certain Tenant Renovations to the Premises and an increase in Fixed Basic Rent; WHEREAS, the parties now intend to further modify the Lease. NOW, THEREFORE, in consideration of the mutual covenants herein contained, it is hereby agreed as follows: 1. The Lease. For the purpose of this Third Lease Amendment, ---------- the term, "Lease" shall be defined as the Original Lease as amended by the First Lease Amendment and Second Lease Amendment. Unless otherwise defined herein, the capitalized terms shall have the meaning ascribed to it in the Lease. 2. Tenant Renovations. Tenant desires to renovate a portion of the Premises and Landlord is willing to allow Tenant to do so. Tenant shall have the right to perform the improvements indicated on Exhibit "A" attached hereto ("Supplemental Tenant Renovations"). Landlord must approve any material modification to the attached plans. For the purposes of this paragraph, X - 12 Supplemental Tenant Renovations shall include all work in Exhibit "A" and shall be performed in a workmanlike manner and in compliance with all state, local and federal laws and ordinances. 3. Tenant's Restoration of the Demised Premises. Notwithstanding anything to the contrary contained in this Amendment, Tenant hereby covenants and agrees that at Landlord's option Tenant shall, at its sole cost and expense, return the portion of the Demised Premises to which the Supplemental Tenant Renovations relate to its original, structurally sound condition that existed prior to Tenant's performance of any Supplemental Tenant Renovations as same are set forth on Exhibit "A", at such time, if at all, as Tenant should vacate the Building pursuant to the terms of the Lease or otherwise, reasonable wear and tear excepted. At Landlord's option, Tenant shall pay to Landlord the cost of such restoration and Landlord will be responsible to perform the necessary work. In this event, Landlord will provide Tenant with two proposals comparable in scope of work for the cost of such restoration and Tenant will obtain one comparable bid proposal. The amount of the payment by Tenant to Landlord shall be the lowest of the three bids, provided same is comparable in scope of work. The parties specifically agree that the maximum amount of $300,000 provided in Section 3 of the Second Lease Amendment does not apply with respect to the restoration of the portion of the Demised Premises to which the Supplemental Tenant Renovations relate. 4. The terms and provisions of the last two sentences of Paragraph 4 and Paragraphs 6, 7 and 13 of the Second Lease Amendment dated December 9, 1999 are hereby deemed null and void. 5. Paragraph 3 of the First Lease Amendment shall be modified to provide that Fixed Basic Rent for the period of January 1, 2009 through December 31, 2014 shall mean SEVEN MILLION ONE HUNDRED THOUSAND ONE HUNDRED AND 00/100 ($7,100,100.00) DOLLARS (A) Yearly Rate: ONE MILLION ONE HUNDRED EIGHTY-THREE ----------- THOUSAND THREE HUNDRED FIFTY AND 00/100 ($1,183,350.00) DOLLARS. (B) Monthly Installment: NINETY-EIGHT THOUSAND SIX -------------------- HUNDRED TWELVE AND 50/100 ($98,612.50) DOLLARS. 6. Successor-in-Interest. This Third Amendment of Lease shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives, successors and permitted assigns. 7. Definitions, Inconsistencies. In the event of any inconsistencies between this Third Amendment of Lease and the Lease, the Third Amendment of Lease shall govern and be binding. All words and terms used in this Third Amendment of Lease and not otherwise defined herein shall have the respective meanings ascribed to them under the Lease or unless the context clearly requires otherwise. This Third Amendment of Lease was drafted by Landlord as a matter of convenience and it shall not be construed for or against either party on that account since Tenant had the opportunity to review same and make changes thereto. 8. Ratification of Lease. Except as expressly modified and amended by this Third Amendment of Lease, all of the terms, provisions and conditions of the Lease are hereby ratified and confirmed by Landlord and Tenant. Tenant hereby releases and discharges Landlord from any and all claims or liability now X - 13 arising out of the Lease prior to the date hereof, including, but in no way limited to, any and all charges as billed by Landlord to Tenant pursuant to the terms of the Lease. This does not apply to any estimated billings charged to the Tenant. In the event of a conflict between the terms of the Lease and the terms of the Third Amendment, the terms of the Third Amendment shall control. IN WITNESS WHEREOF, the parties have set their hands and seals the date above first written. WITNESS: LEONIA ASSOCIATES, L.L.C. By: Jeffco Holding, Ltd., its Managing Member /s/ Dawn Meyer By: /s/ - ---------------------------------------- ----------------- Jeffrey E. Cole, President WITNESS: INFOCROSSING, INC. /s/ Kathryn A. Wade By: /s/ - ------------------------------------- ------- Name: Nicholas J. Letizia Title: CFO X - 14 EXHIBIT "A" The following work is to be performed in the existing loading dock area on the first floor, south side of the building (see Exhibit "A-1" attached hereto): 1. Add approximately 92 lineal feet of exterior wall, finished on both sides. 2. Add fifteen 2 ft. x 4 ft. fluorescent lights. 3. Six HVAC ducts. 4. Additional sprinkler heads and exit lights, etc., to meet code. 5. Surface mounted semi-portable ECOA/Bishamon hydraulic scissor lift (model #TAD-52-50-606). 6. One pair of new exterior entrance doors with appurtenant hardware. X - 15 EX-21 6 0006.txt INFOCROSSING, INC. AND SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF THE COMPANY ETG, Inc., a Delaware corporation. Infocrossing Services, Inc., a Delaware corporation. MICR Corporate Services, Inc., a New York corporation. MCC Key Services, Inc., a New Jersey corporation. Imperit, Inc., an inactive Delaware corporation. COSI.COM, Inc., an inactive Delaware corporation. X - 16 EX-23 7 0007.txt INFOCROSSING, INC. AND SUBSIDIARIES EXHIBIT 23 CONSENT OF ERNST & YOUNG, LLP CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-46720) pertaining to the Amended and Restated 1992 Stock Option and Stock Appreciation Rights Plan of Infocrossing, Inc. (formerly Computer Outsourcing Services, Inc. and Subsidiaries) and Registration Statements (Form S-3 No. 333-45663and Form S-3 No. 33-94040) of our report dated December 26, 2000, with respect to the consolidated financial statements and schedule of Infocrossing, Inc. included in the Annual Report (Form 10-K) for the year ended October 31, 2000. /s/ ERNST & YOUNG LLP New York, New York January 25, 2001 X - 17 -----END PRIVACY-ENHANCED MESSAGE-----