U.S. 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: July 31, 2000
Commission file number: 0-20824
INFOCROSSING, INC.
-------------------------------------------------
(Exact name of issuer 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, New Jersey 07605
-----------------------------------------------------
(Address of principal executive offices)
(201) 840-4700
--------------------------
(Issuer's telephone number)
COMPUTER OUTSOURCING SERVICES, INC.
-----------------------------------------
Former Name, if Changed Since Last Report
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 [ ]
There were 5,887,611 shares of the registrant's Common Stock, $0.01 par value,
outstanding as of September 13, 2000.
Transitional Small Business Disclosure Form (check one): Yes [ ] No [X]
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
INFOCROSSING, INC. & SUBSIDIARIES
(Formerly Computer Outsourcing Services, Inc.)
CONSOLIDATED BALANCE SHEETS
July 31, 2000 October 31, 1999
---------------- ----------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents $46,980,485 $ 1,590,223
Marketable debt securities, at cost
which approximates market value 5,367,016 1,673,441
Trade accounts receivable, net of
allowances for doubtful accounts
of $468,457 and $350,939 3,958,815 6,010,366
Prepaid and refundable income taxes 2,839,747 961,196
Deferred income taxes - 591,178
Prepaid license fees 1,082,347 915,935
Prepaid expenses and other
current assets 1,092,811 587,264
----------- -----------
61,321,221 12,329,603
----------- -----------
PROPERTY and EQUIPMENT, net 5,855,251 3,638,993
----------- -----------
OTHER ASSETS:
Deferred software, net 2,692,733 2,223,823
Intangibles, net 9,061,992 8,484,564
Due from related parties, net 168,092 132,314
Deferred income taxes - 235,986
Security deposits and other
non-current assets 2,583,791 508,800
----------- -----------
14,506,608 11,585,487
----------- -----------
TOTAL ASSETS $ 81,683,080 $ 27,554,083
=========== ===========
See Notes to Consolidated Interim Financial Statements (Unaudited).
<PAGE>
INFOCROSSING, INC. & SUBSIDIARIES
(Formerly Computer Outsourcing Services, Inc.)
CONSOLIDATED BALANCE SHEETS
July 31, 2000 October 31, 1999
---------------- ----------------
(Unaudited)
LIABILITIES and STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,491,023 $ 1,237,479
Current portion of long-term debt and
capitalized lease obligations 8,012 19,017
Current portion of accrued loss on
office subleases 470,745 256,429
Accrued expenses 2,166,947 1,514,514
Customer deposits and other current
liabilities 83,317 137,208
----------- -----------
4,220,044 3,164,647
----------- -----------
OTHER LIABILITIES:
Accrued loss on office subleases 1,744,938 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 issued and
outstanding (liquidation preference
$61,109,333 at July 31, 2000) 32,108,795 -
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value;
2,700,000 shares authorized,
none issued or outstanding - -
Common stock, $0.01 par value;
50,000,000 shares authorized;
shares issued 5,883,523 and
4,737,915, respectively 58,835 47,379
Additional paid-in capital 58,714,177 15,519,826
Retained earnings/(deficit) (4,023,819) 7,264,952
----------- -----------
54,749,193 22,832,157
Less 5,608 and 1,000 shares of common
stock held in treasury, respectively,
at cost (119,057) (7,313)
Unamortized restricted stock award (11,020,833) -
----------- -----------
43,609,303 22,824,844
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $ 81,683,080 $ 27,554,083
=========== ===========
See Notes to Consolidated Interim Financial Statements (Unaudited).
<PAGE>
INFOCROSSING, INC. & SUBSIDIAIRES
(Formerly Computer Outsourcing Services, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine months ended Three Months ended
July 31, July 31,
------------------------- ------------------------
2000 1999 2000 1999
------------ ----------- ----------- -----------
REVENUES $ 19,056,271 $26,375,499 $ 5,358,526 $ 9,072,218
------------ ----------- ----------- -----------
COSTS and EXPENSES:
Operating costs 19,293,308 17,680,781 6,804,774 6,016,716
Selling and promotion costs 2,570,320 1,959,569 836,684 674,180
General and administrative
expenses 8,392,996 3,767,337 4,158,547 1,494,318
Interest income, net (785,664) (226,334) (770,348) (47,519)
------------ ----------- ----------- -----------
29,470,960 23,181,353 11,029,657 8,137,695
------------ ----------- ----------- -----------
Income/(loss) from
operations before
provision/(benefit)
for income taxes (10,414,689) 3,194,146 (5,671,131) 934,523
Provision/(benefit)
for income taxes (984,249) 1,224,600 - 298,200
------------ ----------- ----------- -----------
Net income/(loss) (9,430,440) 1,969,546 (5,671,131) 636,323
Accretion and dividends on
redeemable preferred
stock (1,858,331) - (1,858,331) -
------------ ----------- ----------- -----------
NET INCOME/(LOSS) AVAILABLE
TO COMMON STOCKHOLDERS $(11,288,771) $ 1,969,546 $(7,529,462) $ 636,323
============ =========== =========== ===========
Continued on next page.
See Notes to Consolidated Interim Financial Statements (Unaudited).
<PAGE>
INFOCROSSING, INC. & SUBSIDIAIRES
(Formerly Computer Outsourcing Services, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - Continued)
Nine months ended Three Months ended
July 31, July 31,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Basic earnings/(loss)
per common share $ (2.24) $ 0.43 $ (1.38) $ 0.13
=========== =========== =========== ===========
Weighted average number
of common shares
outstanding 5,038,046 4,602,693 5,448,009 4,717,212
=========== =========== =========== ===========
Diluted earnings/(loss)
per common share $ (2.24) $ 0.40 $ (1.38) $ 0.13
=========== =========== =========== ===========
Weighted average number
of common shares and
equivalents outstanding 5,038,046 4,927,278 5,448,009 5,026,681
=========== =========== =========== ===========
See Notes to Consolidated Interim Financial Statements (Unaudited).
<PAGE>
INFOCROSSING, INC. & SUBSIDIARIES
(Formerly Computer Outsourcing Services, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Nine months ended July 31,
-------------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $(9,430,440) $ 1,969,546
Adjustments to reconcile net income/(loss)
to net cash used in operating activities:
Depreciation and amortization 1,661,764 1,429,183
Amortization of restricted stock award 479,167 -
Warrants issued in connection with
termination of a credit arrangement 120,000 -
Income from a non-competition,
confidentiality, and conduct of
business agreement - (360,000)
Accrued loss on sublease 514,371 -
Reduction in deferred income taxes 827,164 251,199
Decrease/(increase) in:
Trade accounts receivable 2,051,551 (1,797,717)
Prepaid and refundable taxes (1,878,551) -
Prepaid license fees, prepaid
expenses and other current assets (671,959) (440,089)
Increase/(decrease) in:
Accounts payable 253,544 542,838
Income taxes payable - (674,290)
Accrued expenses 684,361 (1,040,010)
Payments on accrued loss on
office subleases (88,585) -
Customer deposits and other
Current liabilities (53,891) (84,248)
----------- -----------
Net cash used in
operating activities (5,531,504) (203,588)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,906,480) (474,320)
Disposal of property and equipment 2,750 -
(Investment in)/redemption of investments
in marketable debt securities (3,693,575) 1,979,265
Payment for the purchase of certain assets
and the business of Enterprise Technology
Group, Inc. (the "Enterprise Purchase"),
Plus related expenses - (4,293,701)
Increases in security deposits (2,086,185) (2,311)
Payments received for Assets Held for Sale - 82,696
Increase in deferred software costs (874,276) (639,441)
----------- -----------
Net cash used in investing activities $(9,557,766) $(3,347,812)
----------- -----------
Continued on next page.
See Notes to Consolidated Interim Financial Statements (Unaudited).
<PAGE>
INFOCROSSING, INC. & SUBSIDIARIES
(Formerly Computer Outsourcing Services, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited - Continued)
Nine months ended July 31,
-------------------------------
2000 1999
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from a private equity placement $58,430,596 $ -
Proceeds from debt financing and a
line of credit 7,000,000 -
Repayment of debt and capital leases (7,042,933) (244,720)
Advances to related parties, net of
Repayments (35,778) (42,117)
Purchase of treasury stock - (7,313)
Proceeds from the sale of common stock 999,996 -
Proceeds from the exercises of stock
options and warrants 1,158,775 662,309
----------- -----------
Net cash provided by financing activities 60,510,656 368,159
----------- -----------
CASH FLOWS FROM DISCONTINUED
OPERATION:
Payment of taxes on gain and other
expenses related to sale of the
Payroll Division - (2,533,092)
Payments on portion of accrued loss
on office sublease relating to
discontinued operation (31,124) -
----------- -----------
Net cash used in discontinued operation (31,124) (2,533,092)
----------- -----------
Net increase/(decrease) in cash
and equivalents 45,390,262 (5,716,333)
Cash and equivalents at the
beginning of the period 1,590,223 9,403,006
----------- -----------
Cash and equivalents at the end
of the period $46,980,485 $ 3,686,673
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense $ 112,360 $ 22,922
=========== ===========
Income taxes $ 55,878 $ 3,815,968
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING ACTIVITIES:
Stock issued for a portion of the
Enterprise Purchase $ 1,135,160 $ 2,681,201
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES:
Treasury shares received in payment
of a stock option exercise $ 111,744 -
=========== ===========
See Notes to Consolidated Interim Financial Statements (Unaudited).
<PAGE>
INFOCROSSING, INC. & SUBSIDIARIES
(Formerly Computer Outsourcing Services, Inc.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unamortized
Common Par Paid in Retained Treasury Restricted
Shares Value Capital Earnings Stock Stock Award Total
--------- ------- ----------- ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
October
31, 1999 4,737,915 $47,379 $15,519,826 $ 7,264,952 $ (7,313) - $22,824,844
Exercises
of stock
options 165,690 1,657 893,862 - - - 895,519
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 - - - - - 479,167 479,167
Issuance of
warrants in
connection
with
termination
of a financing
arrangement - - 120,000 - - - 120,000
Accretion and
dividends on
redeemable
preferred stock - - - (1,858,331) - - (1,858,331)
Issuance of
warrants in
a private
placement - - 28,180,132 - - - 28,180,132
Net loss - - - (9,430,440) - - (9,430,440)
--------- ------- ----------- ----------- --------- ------------ -----------
Balance, July
31, 2000 5,883,523 $58,835 $58,714,177 $(4,023,819) $(119,057) $(11,020,833) $43,609,303
========= ======= =========== =========== ========= ============ ===========
</TABLE>
See Notes to Consolidated Interim Financial Statements (Unaudited).
<PAGE>
INFOCROSSING, INC. & SUBSIDIAIRES
(Formerly Computer Outsourcing Services, Inc.)
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated balance sheet as of July 31, 2000 and the consolidated
statements of operations and cash flows for the nine and three-month periods
ended July 31, 2000 and 1999 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 July 2000 and 1999 are not necessarily indicative of the
operating results for the full fiscal 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 generally accepted accounting principles have been condensed or
omitted. These consolidated interim financial statements should be read in
conjunction with the Company's Annual Report on Form 10-KSB for the fiscal year
ended October 31, 1999.
On June 5, 2000, the Company changed its name to Infocrossing, Inc. This name
change was approved by the Company's Stockholders at the Annual Meeting of
Stockholders held on May 8, 2000. In connection with this change, the Company's
trading symbol on the Nasdaq National Market System changed from COSI to IFOX.
The consolidated financial statements include the accounts of Infocrossing, Inc.
and its wholly-owned subsidiaries (collectively, the "Company"). All significant
intercompany balances and transactions have been eliminated.
2. CONTINGENT PAYMENT
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. Certain
additional consideration in the form of cash and common stock may be payable, at
various times, based upon the future performance of the acquired business (and
certain other events) 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 added to
intangible assets (goodwill), and is being amortized over the remaining life
assigned to this asset (168 months at December 31, 1999). On February 17, 2000,
36,472 shares of the Company's common stock were issued in payment of the
additional consideration due.
<PAGE>
3. DEBT
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.
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 in Note 6, 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, matured on 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 in Note 6, 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 termination of all other potential equity interests in
either the parent or the subsidiary held by the Lenders. The warrants are
immediately exercisable and 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 July 31, 2000.
4. 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 stock-holders 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
which are anti-dilutive are excluded from the computation of weighted average
shares outstanding. Certain options which are currently anti-dilutive may be
dilutive in the future. In determining the diluted loss per common share for the
nine and three months ended July 31, 2000, common stock equivalents were ignored
since the effect of including such equivalents would have been anti-dilutive.
<PAGE>
5. STOCK OPTIONS
The Company accounts for options granted under the 1992 Stock Option and Stock
Appreciation Rights Plan, as amended, (the "Plan") in accordance with Accounting
Principles Board Opinion No. 25 and related Interpretations in accounting for
its stock options. Accordingly, no compensation cost has been recognized for
stock option awards. Had the compensation cost been determined in accordance
with Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," the Company's pro forma income/(loss) and pro forma
income/(loss) per common share for the nine-month periods ended July 31, 2000
and 1999 would be as follows:
<TABLE>
<CAPTION>
2000 1999
-------------------------- -----------------------
Historical Pro Forma Historical Pro Forma
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Net income/(loss) available
to common stockholders $(11,289,000) $(12,180,000) $1,970,000 $1,690,000
============ ============ ========== ==========
Net income/(loss)
per diluted common share $ (2.24) $ (2.41) $ 0.40 $ 0.34
============ ============ ========== ==========
</TABLE>
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. Non-qualified options issued under the Plan have all been
granted at fair market value, although the Plan permits issuance of
non-qualified options at less than fair market value. The weighted average fair
value of the stock options granted during the nine-month periods ended July 31,
2000 and 1999 was $3,315,000 and $519,000, 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 6.50%; expected lives of between
six-months and three and one-half years; and expected volatility of 50.0%. The
following weighted average assumptions were used for grants in 1999: a risk-free
interest rate of 5.71%; expected lives of between six months and six years; and
expected volatility of 49.5%.
6. 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. The closing was subject to the
satisfaction of certain conditions including approval by the Company's
stockholders. The transaction was approved by the Company's Stockholders at the
Annual Meeting of Stockholders held on May 8, 2000.
The private placement of $60 million of 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 Company primarily will use the proceeds ($58,430,596 after giving effect to
costs and legal fees) from this transaction to pursue its business plan of
developing and operating Internet Data Centers. The Company also repaid debt
from these proceeds as described in Note 3.
The carrying value 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
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) 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.
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-third 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
<PAGE>
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.
Warrant Agreement
The warrants issued to the Holders 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.
Registration Rights Agreement
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 piggy-back registrations, subject to certain
limitations.
Stockholders Agreement
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.
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.
7. LEASING ACTIVITIES
New Internet Data Centers.
On June 6, 2000, the Company announced the signing of a lease on a 52,000 square
foot building located in metropolitan Atlanta. The Company will redevelop this
building into its second IDC. On July 25, 2000, the Company announced the
signing of a lease for a 54,000 square foot building that was under construction
as its third IDC, located in the Northern Virginia high tech corridor.
<PAGE>
These 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.
Sales Office Closed.
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, which is not suitable for
conversion into an IDC. The Company has accrued approximately $514,000 for
future lease payments on this facility through the end of the lease on December
31, 2002.
8. RESTRICTED STOCK AWARD
The employment agreement with the Company's CEO provides 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) will be amortized ratably over the four year
vesting schedule. 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.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS, NINE-MONTH PERIODS ENDED JULY 31, 2000 and 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
infra-structure management solutions.
With the rapid growth of the Internet, the Company formed a subsidiary during
the fiscal year ended October 31, 1999 to meet the exploding requirements of
enterprises to outsource their Internet activities into facilities that provide
the highest degree of availability and security. The Company retooled a portion
of its state-of-the-art data center into an Internet Data Center ("IDC") from
which the Company will offer colocation as well as systems and network
management services (collectively, the "IDC Services") to companies with
mission-critical Internet requirements. On June 6, 2000, the Company announced
the signing of a lease on a 52,000 square foot building located in metropolitan
Atlanta. The Company will redevelop this building into its second IDC. On July
25, 2000, the Company announced the signing of a lease for a 54,000 square foot
building that was under construction as its third IDC, located in the Northern
Virginia high tech corridor. Subject to the availability of financing, the
Company plans to develop a total of 20 IDCs over the next three years.
Initially, the Company had planned to build 20 smaller IDCs over the next two
years. 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
developing 20 IDCs over the next three years.
During the nine-month period ended July 31, 2000, revenues decreased $7,319,000
(28%) to $19,056,000 from $26,375,000 for the nine-month period ended July 31,
1999. 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 ("RFPs") for
major outsourcing contracts. With Year 2000 concerns alleviated, there appears
to be renewed interest in outsourcing. The potential effect of this renewed
interest may not be realized, if at all, until later in the current fiscal year,
due to the lengthy sales cycle of a major outsourcing contract. Revenues also
were impacted negatively as a result of the redeployment of consultants from
providing services for fees to developing a comprehensive suite of IDC 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 $1,612,000 (9%) to $19,293,000 during the period ended
July 31, 2000 compared with $17,681,000 in the period ended July 31, 1999. The
increase primarily consists of IDC operating costs and the development of IDC
Services to be offered throughout the planned network of IDCs.
<PAGE>
Selling and promotion costs increased $610,000 (31%) to $2,570,000 during the
period ended July 31, 2000 compared with $1,960,000 in the period ended July 31,
1999. The increase is attributable to a larger staff needed to market the
Company's IDC Services.
General and administrative expenses increased $4,626,000 to $8,393,000 for the
period ended July 31, 2000 from $3,767,000 for the nine months ended July 31,
1999, reflecting higher costs associated with the Company's IDC Services
activities. Current period expenses also include: $479,000 of amortization of a
restricted stock award; an accrual of $514,000 of future lease costs related to
a closed sales office; $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 extinguish certain rights
held by investors in a financing arrangement. Amortization of intangibles
acquired in connection with the Enterprise Purchase was $344,000 in the current
period versus $267,000 for the nine months ended July 31, 1999.
The Company recorded net interest income of $786,000 in the current period,
compared with net interest income of $226,000 in the prior period. The increase
of $560,000 reflects interest income from a significantly higher average balance
of interest-earning assets during the period ended July 31, 2000, offset by
interest expense on a larger average outstanding debt balance than in the period
ended July 31, 1999.
The Company recorded a tax benefit of $984,000 for the nine months ended July
31, 2000 versus a tax provision of $1,225,000 for the nine months ended July 31,
1999. The potential tax benefit for the period ended July 31, 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 and IDC services.
The Company recorded a net loss of $9,430,000 in the period ended July 31, 2000
versus net income of $1,970,000 for the period ended July 31, 1999. Net loss
available to common stockholders after accretion, accumulated dividends, and
accrued dividends on preferred stock was $11,289,000 for the nine months ended
July 31, 2000. The loss per common share was $2.24 for the period ended July 31,
2000 on both a basic and diluted basis. For the nine months ended July 31, 1999,
earnings per share was $0.43 and $0.40 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.
RESULTS OF OPERATIONS, THREE-MONTH PERIODS ENDED JULY 31, 2000 and 1999
Revenues declined and expenses increased during the three months ended July 31,
2000 versus the three months ended July 31, 1999 for substantially the same
reasons as noted above for the changes between the nine-month periods ending on
such dates.
During the quarter ended July 31, 2000, revenues decreased $3,713,000 (41%) to
$5,359,000 from $9,072,000 for the quarter ended July 31, 1999. Operating costs
increased $788,000 (13%) to $6,805,000 during the quarter ended July 31, 2000
compared with $6,017,000 in the quarter ended July 31, 1999. Selling and
promotion costs increased $163,000 (24%) to $837,000 during the quarter ended
July 31, 2000 compared with $674,000 in the quarter ended July 31, 1999. General
and administrative expenses increased $2,665,000 to $4,159,000 for the quarter
ended July 31, 2000 from $1,494,000 for the three months ended July 31, 1999.
<PAGE>
Current quarter expenses include: $479,000 of amortization of a restricted stock
award; an accrual of $514,000 of future lease costs related to a closed sales
office; $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 extinguish certain rights held by
investors in a financing arrangement.
The Company recorded net interest income of $770,000 in the current quarter,
compared with net interest income of $48,000 in the prior period. The increase
of $723,000 reflects interest income from a significantly higher average balance
of interest-earning assets during the quarter ended July 31, 2000, offset by
interest expense on a larger average outstanding debt balance than in the
quarter ended July 31, 1999.
The Company did not record a tax benefit for the quarter ended July 31, 2000
since the ability to carry back losses to generate tax refunds is limited to
amounts paid in certain prior periods. Any potential tax benefit for the period
ended July 31, 2000 has been 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 and IDC services.
The Company recorded a net loss of $5,671,000 in the quarter ended July 31, 2000
versus net income of $636,000 for the quarter ended July 31, 1999. Net loss
available to common stockholders after accretion, accumulated dividends, and
accrued dividends on preferred stock was $7,529,000 for the quarter ended July
31, 2000. The loss per common share was $1.38 for the quarter ended July 31,
2000 on both a basic and diluted basis. For the quarter ended July 31, 1999,
earnings per share was $0.13 for both basic and diluted common shares. 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.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended July 31, 2000, the Company used net cash in
operating activities of approximately $5,531,000, primarily as a result of a
pretax loss of $10,415,000, offset by $2,052,000 in net receipts on accounts
receivable, the accrual of a lease abandonment loss approximating $514,000 and
$2,141,000 in depreciation and amortization.
The Company invested $2,906,000 for the purchase of equipment, IDC construction,
and other fixed assets; $2,082,000 in real estate security deposits (in the form
of fully-collateralized standby letters of credit); and $874,000 for product
development and enhancement. The Company also increased short-term investments
by $3,694,000.
The principal financing activities were (1) a private placement of $60 million
of convertible preferred stock and common stock warrants, (2) borrowings of
$3,000,000 in convertible notes and $2,000,000 from its line of credit with a
bank, and (3) sales proceeds of $2,159,000 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.
<PAGE>
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.
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, matured on 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 termination 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
July 31, 2000.
As of July 31, 2000, the Company had cash and equivalents and highly-liquid
short-term investments aggregating approximately $52,348,000.
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 twenty IDCs in the United States and
abroad over the next three years. Initially, the Company had planned to develop
20 smaller IDCs over the next two years. The Company will require additional
financing to effect its plan.
OTHER MATTERS
Certain of the Company's computer systems were reprogrammed to correct what is
known as the Year 2000 Problem ("Y2K"). This is a condition whereby a program
does not properly interpret a two-digit year, reading "00" as 1900 rather than
2000. As a result, nearly all computer systems, except for the most recent
software and hardware versions, may have produced computing errors or failed to
function after December 31, 1999.
During December 1999, the Company completed its Y2K remediation compliance
procedures. Following December 31, 1999, the Company did not encounter any
significant problems due to Y2K. The problems that were encountered were few and
minor in nature, and were resolved quickly with minimal or no impact on the
Company.
Internal and external costs specifically associated with Y2K modifications for
internal purposes were expensed when incurred. The cost for this activity was
approximately $300,000.
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.
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.
<PAGE>
PART II - OTHER INFORMATION
ITEM 4 - Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on May 8,
2000, at which the following actions were taken:
(1) The stockholders approved, by a vote of 3,601,859 shares to
none, a resolution to change the name of the Company from
Computer Outsourcing Services, Inc. to Infocrossing, Inc.
(2) The stockholders approved, by a vote of 3,012,461 in favor to
589,398 against, a resolution to increase the number of
authorized common shares to 50,000,000 and the number of
authorized preferred shares to 3,000,000.
(3) The stockholders approved, by a vote of 3,452,759 in favor to
149,100 against, a resolution to amend the Company's
Certificate of Incorporation to remove restrictions on the
granting of pre-emptive rights.
(4) The stockholders approved, by a vote of 2,906,382 in favor to
695,477 against, the private placement of 157,377 shares of 8%
Series A Cumulative Convertible Participating Preferred Stock
and Warrants to purchase 2,531,926 shares of common stock for
an aggregate purchase price of $60,000,000.
(5) The stockholders approved, by a vote of 2,879,481 in favor to
722,378 against, a resolution to amend and restate the
Company's 1992 Stock Option and Stock Appreciation Rights Plan
to increase the number of shares of common stock for which
options may be granted to 2,700,000, and to incorporate all
prior amendments.
(6) Peter DaPuzzo, Warren E. Ousley, and Howard Waltman were each
elected to serve three year terms on the Company's Board of
Directors, or until their successors are duly elected and
qualified. In each case, the number of shares voted in favor
was 3,456,447 and the number of shares withheld was 145,600.
Items 1-3 above required a majority of the outstanding shares for
approval. Items 5-6 and the election of Directors required a
plurality of the shares cast.
<PAGE>
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
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 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; 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 Initial 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 Loan and Security Agreement by and among Infocrossing, Inc.;
Computer Outsourcing Services, Inc.; Kennedy-Wilson, Inc.;
Cahill, Warnock Strategic Partners Fund, LP; and Strategic
Associates, LP, incorporated by reference to Exhibit C-1
included in and 8-K filed on April 24, 2000.
<PAGE>
(a) Exhibits (continued):
10.2 Securities Purchase Agreement dated as of April 7, 2000 by
and between Computer Outsourcing Services, Inc.; DB Capital
Investors, LP; and certain other purchasers as named
therein, incorporated by reference to the Company's Proxy
Statement for the Annual Meeting held on May 8, 2000.
10.3 Employment Agreement, dated as of June 15, 2000, between the
Company and Charles F. Auster.
10.4 Employment Agreement, dated as of November 1, 1999, between the
Company and Zach Lonstein.
10.5 Employment Agreement, dated as of November 1, 1999, between the
Company and Robert Wallach.
10.6 Office Lease Agreement dated May 22, 2000 by and between Crocker
Realty Trust and the Company.
10.7 Deed of Lease between Beco-Terminal, LLC and the Company, dated
July 21, 2000.
27 Financial Data Schedule, filed electronically only.
(b) Reports on Form 8-K:
The Company filed a Report on Form 8-K on May 24, 2000 to announce the
closing of a $60 million private placement of securities.
The Company filed a Report on Form 8-K on June 2, 2000 to announce its
new name: Infocrossing, Inc. and its new trading symbol: IFOX.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INFOCROSSING, INC.
/s/
September 14, 2000 ------------------------------------
Zach Lonstein
Chairman
/s/
September 14, 2000 -------------------------------------
Nicholas J. Letizia
Chief Financial Officer
