-----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, DsC9/gthwIIxh661Xs2aJBXOYnXWprrHm+rFNDFHS/AK/n+QSg2kazIf1HgIqCEf dXZBkmSkkklNkIMXdx7wtw== 0000893816-03-000011.txt : 20030512 0000893816-03-000011.hdr.sgml : 20030512 20030512142252 ACCESSION NUMBER: 0000893816-03-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030512 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20824 FILM NUMBER: 03692435 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-Q 1 q0103.txt 1ST QUARTER 2003 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: MARCH 31, 2003 Commission file number: 0-20824 INFOCROSSING, INC. ------------------------------------------------------------- (Exact name of registrant as specified in its Charter) DELAWARE 13-3252333 ------------------------------------- --------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 2 CHRISTIE HEIGHTS STREET LEONIA, NJ 07605 ----------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (201) 840-4700 -------------- Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act): [ ] Yes [X] No. There were 5,3784,516 shares of the registrant's Common Stock, $0.01 par value, outstanding as of May 9, 2003. Transitional Small Business Disclosure Form (check one): Yes [ ] No [X] -1- PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS
INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) MARCH 31, DECEMBER 31, 2003 2002 ---------------- -------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and equivalents $ 7,137 $ 7,026 Trade accounts receivable, net of allowances for doubtful accounts of $625 and $1,051 3,407 4,369 Due from related parties 218 216 Prepaid license fees 697 827 Other current assets 1,388 1,308 ----------- ----------- 12,847 13,746 ----------- ----------- PROPERTY and EQUIPMENT, net 20,509 19,437 ----------- ----------- OTHER ASSETS: Deferred software, net 1,619 1,742 Goodwill, net 28,361 28,451 Other intangible assets, net 1,038 1,142 Security deposits and other non-current assets 1,127 977 ----------- ----------- 32,145 32,312 ----------- ----------- TOTAL ASSETS $ 65,501 $ 65,495 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable $ 3,503 $ 4,093 Current portion of long-term debt and capitalized lease obligations 2,129 1,741 Current portion of accrued loss on leased facilities 206 208 Accrued expenses 4,001 4,093 Income taxes payable 117 96 Customer deposits, deferred revenue, and other current liabilities 304 1,381 ----------- ----------- 10,260 11,612 ----------- ----------- LONG-TERM LIABILITES: Debentures due in 2005, net of unaccreted discount 10,147 9,372 Long-term debt and capitalized lease obligations 1,918 1,506 Accrued loss on leased facilities 877 925 Deferred revenue and other long-term liabilities 1,045 1,096 ----------- ----------- 13,987 12,899 ----------- ----------- COMMITMENTS AND CONTINGENCIES REDEEMABLE 8% SERIES A CUMULATIVE CONVERTIBLE PARTICIPATING PREFERRED STOCK; $0.01 par value; 300,000 shares authorized; 157,115 shares issued and outstanding (liquidation preference of $75,364 at March 31, 2003) 55,637 53,189 ----------- ----------- STOCKHOLDERS' DEFICIT: Preferred stock; $0.01 par value; 2,700,000 shares authorized; none issued - - Common stock; $0.01 par value; 50,000,000 shares authorized; shares issued of 5,973,506 at March 31, 2003 and December 31, 2002 60 60 Additional paid-in capital 61,135 61,135 Accumulated deficit (72,727) (70,549) ----------- ----------- (11,532) (9,354) Less 594,990 shares of common stock held in treasury, at cost (2,851) (2,851) ----------- ----------- TOTAL STOCKHOLDERS' DEFICIT (14,383) (12,205) ----------- ----------- TOTAL LIABILITES AND STOCKHOLDERS' DEFICIT $ 65,501 $ 65,495 =========== =========== See Notes to Consolidated Financial Statements (Unaudited).
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INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) THREE MONTHS ENDED MARCH 31, ------------------------------------- 2003 2002 ---------------- ---------------- (UNAUDITED) REVENUES $ 13,129 $ 11,233 ----------- ----------- COSTS and EXPENSES: Operating costs 8,310 5,418 Selling and promotion costs 806 773 General and administrative expenses 1,734 1,969 Depreciation and amortization 1,416 1,362 ----------- ----------- 12,266 9,522 ----------- ----------- INCOME FROM OPERATIONS 863 1,711 ----------- ----------- Interest income (20) (84) Interest expense 593 465 ----------- ----------- 573 381 ----------- ----------- INCOME BEFORE INCOME TAXES 290 1,330 Income tax expense 20 - ----------- ----------- NET INCOME 270 1,330 Accretion and dividends on redeemable preferred stock (2,448) (2,249) ----------- ----------- NET LOSS TO COMMON STOCKHOLDERS $ (2,178) $ (919) =========== =========== BASIC AND DILUTED EARNINGS PER SHARE: Net loss to common stockholders $ (0.40) $ (0.17) =========== =========== Weighted average number of common shares outstanding 5,379 5,342 =========== =========== See Notes to Consolidated Financial Statements (Unaudited).
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INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT (UNAUDITED, IN THOUSANDS) ADDITIONAL TREASURY PAID IN ACCUMULATED STOCK AT COMMON SHARES PAR VALUE CAPITAL DEFICIT COST TOTAL -------------- ------------- ------------- --------------- ------------- ------------- Balances, 5,974 $ 60 $ 61,135 $ (70,549) $ (2,851) $ (12,205) December 31, 2002 Accretion and dividends on Redeemable preferred stock - - - (2,448) - (2,448) Net income - - - 270 - 270 -------------- ------------- ------------- --------------- ------------- ------------- Balances, March 31, 2003 5,974 $ 60 $ 61,135 $ (72,727) $ (2,851) $ (14,383) ============== ============= ============= =============== ============= ============= See Notes to Consolidated Financial Statements (Unaudited).
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INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) THREE MONTHS ENDED MARCH 31, ------------------------------------- 2003 2002 ----------------- ---------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 270 $ 1,330 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 1,416 1,362 Accretion of discounted Debentures 139 87 Credits granted by a software licensor, net of amounts used - (883) Decrease (increase) in: Trade accounts receivable 962 (451) Prepaid license fees and other current assets 50 81 Security deposits and other non-current assets (152) (133) Increase (decrease) in: Accounts payable (590) 2,325 Income taxes payable 21 - Accrued expenses 834 (2,691) Payments on accrued loss on leased facilities (37) (131) Customer deposits, deferred revenue, and other liabilities (1,128) (328) ----------- ----------- Net cash provided by operating activities 1,785 568 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (969) (1,441) Purchase of the outstanding stock of AmQUEST, Inc. and payments of related costs (200) (20,373) Increase in deferred software costs (28) (43) ----------- ----------- Net cash used in investing activities (1,197) (21,857) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Debentures - 10,000 Repayment of debt and capitalized leases (462) (3,080) Advances to related parties, net (2) (5) ----------- ----------- Net cash (used in) provided by financing activities (464) 6,915 ----------- ----------- Net cash provided by (used in) continuing operations 124 (14,374) CASH FLOWS FROM DISCONTINUED OPERATIONS: Payments on portion of accrued loss on leased facilities relating to discontinued operations (13) (13) ----------- ----------- Net increase (decrease) in cash and equivalents 111 (14,387) Cash and equivalents, beginning of period 7,026 24,344 ----------- ----------- Cash and equivalents, end of the period $ 7,137 $ 9,957 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 85 $ 171 =========== =========== Income taxes $ 51 $ - =========== =========== SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITY: Fees and other costs accrued in connection with the purchase Of AmQUEST, Inc. $ - $ 448 =========== =========== Equipment acquired subject to a capital lease $ 1,262 $ - =========== =========== SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: Treasury shares received in payment of a stock option exercise $ - $ 95 =========== =========== Additional Debentures issued in lieu of a cash payment of interest $ 636 $ - =========== =========== See Notes to Consolidated Financial Statements (Unaudited).
-5- INFOCROSSING, INC. AND SUBSIDIAIRES NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated balance sheet as of March 31, 2003, the consolidated statements of operations and the consolidated statements of cash flows for the three months ended March 31, 2003 and 2002, and the consolidated statement of stockholders' deficit for the three months ended March 31, 2003 have not been audited. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows for the periods indicated have been made. The results of operations for the periods ended March 31, 2003 and 2002 are not necessarily indicative of the operating results for the full years. Certain reclassifications have been made to the prior periods to conform to the current presentation. Certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These consolidated interim financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2002. The consolidated financial statements include the accounts of Infocrossing, Inc. and its wholly owned subsidiaries, including, subsequent to its acquisition on February 5, 2002, the accounts of AmQUEST, Inc. (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated. 2. ACQUISITION On February 5, 2002, the Company purchased all of the outstanding capital stock of AmQUEST, a Georgia corporation, from its former parent company American Software, Inc. ("ASI")(the "AmQUEST Acquisition"). As consideration for the purchase of AmQUEST's shares, the Company paid ASI approximately $19,634,000 in cash, after finalizing certain post closing adjustments. In addition, the Company incurred approximately $612,000 in professional fees and other costs related to the acquisition of which $150,000 remains unpaid at March 31, 2003. The Company financed the AmQUEST Acquisition through the application of the proceeds of the financing described in Note 3 and cash on hand. The Company acquired client contracts valued at $1,200,000. This intangible asset is being amortized over five years using an accelerated method to approximate the anticipated decline in the revenues of the acquired contracts as they expire over that time. The acquisition also generated $20,624,000 in goodwill. This goodwill is not amortizable for tax purposes. The following unaudited condensed consolidated pro forma financial statement of operations is presented to illustrate the effects of the acquisition of AmQUEST as if such transaction had occurred on the first day of January 1, 2002. The pro forma statement of operations may not be indicative of the results that actually would have occurred had the combination been in effect on the date indicated, nor does it purport to indicate the results that may be obtained in the future. CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE DATA) THREE MONTHS ENDED MARCH 31, 2002 ------------------------ Revenues $ 12,708 ==================== Net income $ 1,115 ==================== Net loss to common stockholders $ (1,134) ==================== Net loss to common stockholders per basic and diluted share $ (0.21) ==================== -6- 3. DEBENTURES On February 1, 2002, the Company entered into a Securities Purchase Agreement (the "SPA") with a group of private investors (the "Investors") whereby the Company issued Senior Subordinated Debentures (the "Debentures") and warrants to purchase, initially, 2,000,000 shares of the common stock of the Company (the "Initial Camden Warrants") in exchange for $10,000,000. Pursuant to the SPA, the proceeds of the sale of the Debentures were used to fund a portion of the cost of the AmQUEST Acquisition. The Debentures were issued at an aggregate face value of $10,000,000 with a maturity of three years from February 1, 2002 (the "Issuance Date"), with the right to extend the term of the Debentures for one additional year at the Company's sole option. Pursuant to the terms of the Debentures, the Company is required to make semi-annual interest payments of 12% per annum for the first two years, 13% per annum for the period commencing on February 1, 2004 and ending on February 1, 2005, and (if the Company elects to extend the maturity date as described above), 14% per annum from February 1, 2005. The Company has the option to pay interest in the form of (a) cash, (b) additional Debentures, or (c) a combination of cash and additional Debentures. If the Company chooses to make interest payments using additional Debentures, the Company may be required to issue additional warrants (the "Additional Camden Warrants") pursuant to the terms of the Debentures. Additional Camden Warrants will not be subject to cancellation. The fair market value of Additional Camden Warrants issued, if any, will be recorded as deferred financing costs and amortized over the remaining term of the Debentures. The initial carrying values of the Debentures ($8,280,000) and Initial Camden Warrants ($1,720,000) were determined by apportioning an amount equal to the proceeds from the private sale multiplied by the relative value of each item as of the Issuance Date. The difference between the carrying value and the face value of the Debentures is being recorded as additional interest expense through February 1, 2005 (the initial maturity date of the Debentures) using the interest method. The Initial Camden Warrants have been issued pursuant to a Warrant Agreement dated as of February 1, 2002 by and between the Company and the Investors (the "Warrant Agreement") and are subject to certain customary anti-dilution adjustments. The exercise price of the Initial Camden Warrants is $5.86. The Camden Warrants expire on January 31, 2007 and may be cancelled, in part, upon the prepayment of the Debentures as more fully described in the Warrant Agreement. On July 31, 2002 and January 31, 2003, the Company made the interest payment then due by issuing additional Debentures totaling $600,000 and $636,000, respectively. The additional Debentures are subject to the same interest rates and other terms as the original Debentures. If any Debentures are outstanding at February 1, 2004, the Company will be required to issue Additional Camden Warrants to purchase 123,600 shares of common stock. 4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 provides guidance on the timing of the recognition of costs associated with exit or disposal activities, requiring such costs to be recognized when incurred. Previous guidance required the recognition of costs at the date of commitment to an exit or disposal plan. The provisions of SFAS 146 are to be adopted prospectively after December 31, 2002. Although SFAS 146 may impact the accounting for costs related to exit or disposal activities the Company may enter into in the future, particularly the timing of the recognition of these costs, the adoption of the statement did not have an impact on the Company's current financial condition or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure, an amendment of FASB Statement No. 123," which amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The transition and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has adopted the disclosure provisions of SFAS No. 148 and continues to account for stock-based compensation to employees under APB Opinion No. 25 and related interpretations. -7- 5. STOCK-BASED COMPENSATION The Company accounts for stock options granted to employees and directors under the Plan in accordance with Accounting Principles Board Opinion No. 25 and related Interpretations. Accordingly, no compensation cost has been recognized for stock option awards. Had compensation cost been determined in accordance with Statement of Financial Accounting Standard No. 123 "Accounting for Stock-Based Compensation", the Company's income (loss) in thousands of dollars and income (loss) per common share for the three months ended March 31, 2003 and 2002 would have been as follows: 2003 2002 ---------------- ----------------- Net loss to common stockholders: As reported $ (2,178) $ (919) =========== =========== Pro forma $ (2,908) $ (1,642) =========== =========== Net loss to common stockholders per share: As reported $ (0.40) $ (0.17) =========== =========== Pro forma $ (0.54) $ (0.31) =========== =========== 6. BASIC AND DILUTED EARNINGS PER COMMON SHARE Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128") requires the presentation of basic and diluted earnings per share ("EPS"). Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted EPS is computed using the weighted average number of common shares plus the dilutive effect of common stock equivalents. Common stock equivalents that are antidilutive are excluded from the computation of weighted average shares outstanding. Certain common stock equivalents that are currently antidilutive may be dilutive in the future. In determining the diluted loss per common share for the three months ended March 31, 2003 and 2002, common stock equivalents are ignored since the effect of including such equivalents would have been antidilutive. -8- ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Infocrossing is a leading provider of information technology and business process outsourcing services to enterprise clients. We deliver a full suite of managed and outsourced solutions that enable clients to leverage our infrastructure and process expertise to improve their efficiency and reduce their operating costs. We have gained significant expertise in managing complex computing environments, beginning with traditional data center outsourcing services and evolving to a comprehensive set of managed solutions. We support a variety of clients, including Global 2000 companies, and help assure the optimal performance, security, reliability, and scalability of our clients' mainframes, distributed servers, and networks, irrespective of where the systems' components are located. Due to rapid changes and increasing complexities in information technology, we believe outsourcing is an efficient solution for many businesses and continues to be a growing trend. We have grown through strategic acquisitions as well as organic growth. On February 5, 2002, we completed the acquisition of AmQUEST, Inc., an Atlanta-based IT outsourcing company, for approximately $19.6 million in cash after certain post-closing adjustments (the "AmQUEST Acquisition"). This acquisition combined two highly complementary businesses and enabled us to benefit from increased scale, enhanced services, and expanded geographic reach. The combination strengthens our position as one of the leading providers of IT outsourcing solutions for large and mid-size companies enterprises across a broad range of industries including financial services, security, publishing, healthcare, telecommunications and manufacturing. THREE-MONTHS ENDED MARCH 31, 2003 AND 2002 For the three months ended March 31, 2003 (the "Current Quarter"), revenues increased $1,896,000 (17%) to $13,129,000 from $11,233,000 for the three months ended March 31, 2002 (the "Prior Quarter"). This revenue growth is primarily attributable to new customer contracts added in 2002. Operating costs increased $2,892,000 (53%) to $8,310,000 during the Current Quarter compared with $5,418,000 for the Prior Quarter. Operating costs in the Prior Quarter reflect a settlement of certain claims with a software licensor whereby we received credits totaling $2,000,000 to be used toward certain future purchases (the "Credits"). The entire value of the Credits was recorded in the Prior Quarter, and we also reversed accrued expenses of $796,000 for software support and maintenance fees in the Prior Quarter in connection with the settlement of the dispute. Selling and promotion costs increased $33,000 (4%) to $806,000 in the Current Quarter from $773,000 in the Prior Quarter. General and administrative expenses decreased $235,000 (12%) to $1,734,000 for the Current Quarter from $1,969,000 for the Prior Quarter, primarily due to continued cost savings initiatives. Depreciation and amortization for fixed assets and other intangibles increased $54,000 (4%), from $1,362,000 in the Prior Quarter to $1,416,000 in the Current Quarter, primarily as a result of fixed asset additions since March 31, 2002. We recorded net interest expense of $573,000 in the Current Quarter, compared with $381,000 in the Prior Quarter. The net change of $192,000 reflects an increase of $128,000 in interest expense on a larger average outstanding debt balance than in the Prior Quarter and a decrease in interest income of $64,000, primarily due to a lower average balance of interest-earning assets during the Current Quarter. Also, to a lesser extent, the decrease in interest income results from lower interest rates. In the Current Quarter, we recorded income tax expense of $20,000, related to estimated state income tax obligations. No tax expense was recorded in the Prior Quarter. At March 31, 2003, we have net operating loss carryforwards of approximately $44.1 million for federal income tax purposes, including approximately $8.1 million acquired in the AmQUEST Acquisition, that begin to expire in 2019. The use of the acquired net operating loss acquired in the AmQUEST Acquisition may be restricted under current tax rules. Any future tax benefit generated by the use of the net operating loss acquired in the AmQUEST Acquisition will be treated as a reduction of goodwill. The deferred tax asset associated with carrying forward cumulative pre-tax losses has been fully offset by a valuation allowance due to the uncertainty of realizing such tax benefits. -9- We had net income of $270,000 for the Current Quarter compared with $1,330,000 for the Prior Quarter. Net income for the Prior Quarter includes $2,796,000 related to the settlement of a dispute with a software licensor, as previously described. Excluding the settlement of the dispute in the Prior Quarter, net income increased by $1,736,000. Net loss to common stockholders after accretion and accrued dividends on preferred stock was $2,178,000 for the Current Quarter compared with $919,000 in the Prior Quarter. The loss per common share was $0.40 for the Current Quarter compared with $0.17 in the Prior Quarter, on both a basic and diluted basis. Common stock equivalents were ignored in determining the net loss per share for both periods, since the inclusion of such equivalents would be antidilutive. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was approximately $1,785,000 for the three months ended March 31, 2003. During the Current Quarter, we had $270,000 of net income, $1,416,000 of depreciation and amortization, and $139,000 of debenture discount amortization. Among other operating items, the decrease in accounts receivable was offset by a decrease in customer deposits, and the increase in accrued expenses was largely offset by a decrease in accounts payable and an increase in non-current assets. Principal investing activities include $969,000 for the purchase of property and equipment. During the first quarter of 2003, we also incurred capital leases of approximately $1,262,000. Principal financing activities included $462,000 in payments of principal with respect to debt and capital lease obligations. On February 1, 2002, the Company entered into a Securities Purchase Agreement (the "SPA") with a group of private investors (the "Investors") whereby the Company issued Senior Subordinated Debentures (the "Debentures") and warrants to purchase, initially, 2,000,000 shares of the common stock of the Company (the "Initial Camden Warrants") in exchange for $10,000,000. The Debentures were issued at an aggregate face value of $10,000,000 with a maturity of three years from February 1, 2002 (the "Issuance Date"), with the right to extend the term of the Debentures for one additional year at the Company's sole option. Pursuant to the terms of the Debentures, the Company is required to make semi-annual interest payments of 12% per annum for the first two years, 13% per annum for the period commencing on February 1, 2004 and ending on February 1, 2005, and (if the Company elects to extend the maturity date as described above), 14% per annum from February 1, 2005. The Company has the option to pay interest in the form of (a) cash, (b) additional Debentures, or (c) a combination of cash and additional Debentures. If the Company chooses to make interest payments using additional Debentures, the Company may be required to issue additional warrants (the "Additional Camden Warrants") pursuant to the terms of the Debentures. Additional Camden Warrants will not be subject to cancellation. The fair market value of Additional Camden Warrants issued, if any, will be recorded as deferred financing costs and amortized over the remaining term of the Debentures. On July 31, 2002 and January 31, 2003, the Company made the interest payment then due by issuing additional Debentures totaling $600,000 and $636,000, respectively. The additional Debentures are subject to the same interest rates and other terms as the original Debentures. If any Debentures are outstanding at February 1, 2004, the Company will be required to issue Additional Camden Warrants to purchase 123,600 shares of common stock. -10- Another measure of a company's ability to generate cash from its operations is earnings before interest, taxes, depreciation, and amortization ("EBITDA"). For the three months ended March 31, 2003, our EBITDA was $2,279,000 compared with $3,073,000 in the Prior Quarter. EBITDA for the Prior Quarter includes $2,796,000 related to the settlement of a dispute with a software licensor, as previously described. Excluding the settlement of the dispute in the Prior Quarter, the significant improvement in EBITDA reflects the contribution of AmQUEST to our operations along with organic revenue growth and the additional cost savings noted above. The following table reconciles EBITDA to net income for the Current and Prior Quarter. RECONCILIATION - IN THOUSANDS THREE MONTHS ENDED MARCH 31, 2003 2002 ----------------- ----------------- NET INCOME $ 270 $ 1,330 Add back: Tax expense 20 - Net interest expense 573 381 Depreciation and amortization 1,416 1,362 ----------- ----------- EBITDA $ 2,279 $ 3,073 =========== =========== As of March 31, 2003, we had cash and equivalents of $7,137,000. We believe that our cash, current assets, and cash generated from future operating activities will provide adequate resources to fund our ongoing operating requirements for the next 12 months. We would need to obtain additional financing to fund any significant acquisitions or other substantial investments. EBITDA "EBITDA" is defined as earnings before income taxes, depreciation, amortization, amortization of a restricted stock award, interest and, when applicable, restructuring costs, impairment of assets, and other income and expenses. The issuance of purchase credits by a software licensor in connection with the settlement of a dispute and leased facilities and office closing costs have been treated as operating items and are included in EBITDA. EBITDA should not be considered as an alternative to operating income, as defined by accounting principles generally accepted in the United States, as an indicator of our operating performance, or to cash flows, as a measure of liquidity. NEW FINANCIAL ACCOUNTING STANDARDS In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 provides guidance on the timing of the recognition of costs associated with exit or disposal activities, requiring such costs to be recognized when incurred. Previous guidance required the recognition of costs at the date of commitment to an exit or disposal plan. The provisions of SFAS 146 are to be adopted prospectively after December 31, 2002. Although SFAS 146 may impact the accounting for costs related to exit or disposal activities the Company may enter into in the future, particularly the timing of the recognition of these costs, the adoption of the statement will not have an impact on the Company's current financial condition or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure, an amendment of FASB Statement No. 123," which amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The transition and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has adopted the disclosure provisions of SFAS No. 148 and continues to account for stock-based compensation to employees under APB Opinion No. 25 and related interpretations. -11- CRITICAL ACCOUNTING POLICIES AND ESTIMATES General The Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the U. S., which require the selection and application of significant accounting policies, and which require management to make significant estimates and assumptions. We believe that the following are some of the more critical judgment areas in the application of its accounting polices. Revenue Recognition The majority of revenues are invoiced on a monthly recurring basis under long-term contracts, typically ranging from one to five years in length, providing for either fixed monthly fees or time and material billings. Revenue is recognized under these contracts when we process the agreed upon transactions in accordance with the contractual performance standards, or perform the services, and collection is reasonably assured. Application of these standards can involve management's judgments, including judgment as to the collection of invoiced amounts. Allowance for Doubtful Accounts We maintain allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Tangible and Intangible Assets We have significant tangible and intangible assets on its balance sheet, primarily property and equipment, deferred software costs, and intangible assets, primarily goodwill, related to acquisitions. The assignment of useful lives to these assets and the valuation and classification of intangible assets involves significant judgments and the use of estimates. The testing of these tangible and intangibles under established accounting guidelines for impairment also requires significant use of judgment and assumptions. Our assets are tested and reviewed for impairment on an ongoing basis under the established accounting guidelines. Changes in business conditions or changes in the decisions of management as to how assets will be deployed in our operations could potentially require future adjustments to asset valuations. FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. As such, final results could differ from estimates or expectations due to risks and uncertainties including, but not limited to: incomplete or preliminary information; changes in government regulations and policies; continued acceptance of the Company's products and services in the marketplace; competitive factors; new products; technological changes; the Company's dependence on third party suppliers; intellectual property rights; and other risks. For any of these factors, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended. -12- ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk The Company is not exposed to material gains or losses related to the impact of interest rate changes, foreign currency fluctuations, or changes in the market values of its investments. The Company generally invests in fixed income securities - typically commercial paper, certificates of deposit and money market accounts issued only by major corporations and financial institutions of recognized strength and security - and holds all investments to maturity. At March 31, 2003, the Company's outstanding fixed rate debt was approximately $15,283,000. If market rates decline, the Company runs the risk that the related required payments on the fixed rate debt will exceed those that would be paid based on current market rates. Market Risk The Company's accounts receivable are subject, in the normal course of business, to collection risks. The Company regularly assesses these risks and has policies and business practices to mitigate the adverse effects of collection risks. As a result, the Company does not anticipate any material losses in this area in excess of the recorded allowance for doubtful accounts. Foreign Currency Risks The Company has no material foreign operations. ITEM 4 - CONTROLS AND PROCEDURES During the quarter ended March 31, 2003, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Senior Vice President of Finance, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the Chief Executive Officer and the Senior Vice President of Finance, concluded that the Company's disclosure controls and procedures were effective as of March 31, 2003. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to March 31, 2003. PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS None. -13- ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 2.1 Stock Purchase Agreement dated as of February 5, 2002 by and between the Company and American Software, Inc., incorporated by reference to Exhibit 2.1 to a Current Report on Form 8-K filed February 5, 2002. 3.1A Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to the Company's Form 10-KSB for the period ended October 31, 1999. 3.1B Certificate of Amendment to the Company's Certificate of Incorporation, filed May 8, 2000, to increase the authorized shares and to remove Article 11, incorporated by reference to the Company's report on Form 10-Q for the period ended April 30, 2000. 3.1C Certificate of Amendment to the Company's Certificate of Incorporation, filed as of June 5, 2000, to change the name of the Company to Infocrossing, Inc., incorporated by reference to the Company's report on Form 10-Q for the period ended April 30, 2000. 3.2 Amended and Restated By-Laws, incorporated by reference to Exhibit 3.2 to the Company's Form 10-KSB for the period ended October 31, 1999. 4.1 Securities Purchase Agreement dated as of February 1, 2002 by and between the Company and the Purchasers named therein, incorporated by reference to Exhibit 4.1 to a Current Report on Form 8-K filed February 5, 2002. 4.2 Warrant Agreement dated as of February 1, 2002 by and between the Company and the Warrantholders party thereto, incorporated by reference to Exhibit 4.3 to a Current Report on Form 8-K filed February 5, 2002. 4.3 Amended and Restated Registration Rights Agreement by and between the Company, and the Holders named therein, incorporated by reference to Exhibit 99.4 to a Current Report on Form 8-K filed February 5, 2002. 4.4 Second Amended and Restated Stockholders Agreement dated as of February 1, 2002 by and between the Company and the Stockholders named therein, incorporated by reference to Exhibit 99.5 to a Current Report on Form 8-K filed February 5, 2002. 4.5 Management Rights Letter dated as of February 1, 2002 between the Company and the Purchasers named therein, incorporated by reference to Exhibit 99.3 to a Current Report on Form 8-K filed February 5, 2002. 4.6 Agreement Letter dated as of February 1, 2002 between the Company, the Warrantholders named therein, and the Camden Entities named therein, incorporated by reference to Exhibit 99.6 to a Current Report on Form 8-K filed February 5, 2002. 10.1 Lease Termination Agreement dated as of April 19, 2002 by and between Beco-Terminal LLC and the Company, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for March 31, 2002. (b) Reports on Form 8-K: None. -14- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INFOCROSSING, INC. May 12, 2003 /s/ ------------------------------------------ Zach Lonstein Chairman & Chief Executive Officer May 12, 2003 /s/ ------------------------------------------ William J. McHale Senior Vice President of Finance -15- CERTIFICATIONS I, Zach Lonstein, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Infocrossing, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of the quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. May 12, 2003 /s/ ----------------------------------------- Zach Lonstein Chairman and Chief Executive Officer -16- CERTIFICATIONS (CONTINUED) I, William J. McHale, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Infocrossing, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of the quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. May 12, 2003 /s/ ----------------------------------------- William J. McHale Senior Vice President of Finance -17- -----END PRIVACY-ENHANCED MESSAGE-----