-----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, Wul7r1e72d5GFDd1PeRWNRgewv/dgw8JTPEyUyq9HFBe5pV27mKQs0l1cZDEd4LG WQbzhwPu3XCcKeeW0X1cVw== 0000893816-96-000010.txt : 19960916 0000893816-96-000010.hdr.sgml : 19960916 ACCESSION NUMBER: 0000893816-96-000010 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960731 FILED AS OF DATE: 19960913 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPUTER OUTSOURCING SERVICES INC CENTRAL INDEX KEY: 0000893816 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 133252333 STATE OF INCORPORATION: NY FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-20824 FILM NUMBER: 96629772 BUSINESS ADDRESS: STREET 1: 360 WEST 31ST ST STREET 2: 11TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10001 BUSINESS PHONE: 2125643730 10QSB 1 U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: July 31, 1996 Commission file number: 0-20824 COMPUTER OUTSOURCING SERVICES, INC. (Exact name of small business issuer as specified in its charter) New York 13-3252333 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 360 West 31st Street New York, New York 10001 (Address of principal executive offices) (212) 564-3730 (Issuer's telephone number) 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 3,734,850 shares of the registrant's Common Stock, $0.01 par value, outstanding as of September 11, 1996. Transitional Small Business Disclosure Form (check one); Yes [ ] No [X]. Page 1 of 14 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS July 31, October 31, 1996 1995 ------------ ----------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents .................... $ 1,061,138 $ 1,406,016 Accounts receivable, net of allowance for doubtful accounts of $240,684 and $265,415, respectively .................... 3,571,658 3,799,940 Refundable income taxes ...................... 128,884 414,558 Prepaid expenses ............................. 774,170 603,580 Other current assets ......................... 56,226 138,610 --------- --------- 5,592,076 6,362,704 --------- --------- PROPERTY and EQUIPMENT, net ...................... 3,284,075 3,450,771 --------- --------- OTHER ASSETS: Deferred software costs, net .................. 1,676,879 1,083,051 Intangible assets, net ........................ 7,794,464 8,160,949 Due from related parties, net ................. 112,823 155,740 Cash surrender value of life insurance, net of loans of $100,388 ................... 131,682 131,682 Security deposits and other non-current assets. 539,260 579,547 ---------- ---------- 10,255,108 10,110,969 ---------- ---------- TOTAL ASSETS ..................................... $19,131,259 $19,924,444 ========== ========== See Notes to Consolidated Financial Statements Page 2 of 14 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) July 31, October 31, 1996 1995 ------------ ----------- (Unaudited) LIABILITIES and STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ............................. $ 1,563,211 $ 1,365,480 Notes payable and current portion of long-term debt ......................... 1,134,893 1,709,571 Current portion of capitalized lease obligations ......................... 206,558 158,729 Accrued expenses ............................. 1,416,304 1,843,881 Income taxes payable ......................... 63,753 - Customer deposits and other current liabilities ................. 108,349 123,571 --------- --------- 4,493,068 5,201,232 --------- --------- LONG-TERM LIABILITIES: Long-term debt ............................... 1,887,984 2,352,175 Capitalized lease obligations ................ 312,437 376,293 Deferred income taxes ........................ 804,344 645,540 Stock option obligation ...................... 117,748 400,939 --------- --------- 3,122,513 3,774,947 --------- --------- STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value; 1,000,000 shares authorized, none issued .. - - Common stock, $0.01 par value; 7,000,000 shares authorized; shares issued and outstanding: 3,734,850 and 3,627,499, respectively .............................. 37,348 36,275 Common stock issuable ........................ - 153,000 Additional paid-in capital ................... 9,233,952 8,752,637 Retained earnings ............................ 2,288,291 2,076,615 Deferred costs arising from a financing and consulting agreement .................. (43,913) (70,262) ---------- ---------- 11,515,678 10,948,265 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....... $19,131,259 $19,924,444 ========== ========== See Notes to Consolidated Financial Statements Page 3 of 14 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Nine Months Ended July 31, Three Months Ended July 31, ------------------------------ ------------------------------ 1996 1995 1996 1995 ----------- ----------- ----------- ----------- REVENUES ......................................... $21,576,396 $15,334,972 $ 7,259,305 $ 6,614,216 ---------- ---------- ---------- ---------- COSTS and EXPENSES: Data processing costs ....................... 13,332,731 8,856,006 4,499,663 4,122,331 Selling and promotion costs ................. 1,887,842 1,740,724 531,248 706,524 General and administrative expenses ......... 5,616,831 4,300,819 1,981,043 1,659,364 Interest expense, net of interest income ... 257,207 137,879 75,962 74,452 ---------- ---------- ---------- ---------- 21,094,611 15,035,428 7,087,916 6,562,671 ---------- ---------- ---------- ---------- INCOME BEFORE PROVISION FOR INCOME TAXES ......... 481,785 299,544 171,389 51,545 PROVISION FOR INCOME TAXES ....................... 235,000 179,271 81,015 50,109 ---------- ---------- ---------- ---------- NET INCOME ....................................... $ 246,785 $ 120,273 $ 90,374 $ 1,436 ========== ========== ========== ========== INCOME PER COMMON SHARE AND SHARE EQUIVALENTS .... $ 0.06 $ 0.02 $ 0.02 $ - ========== ========== ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND SHARE EQUIVALENTS OUTSTANDING .................... 3,799,739 3,609,703 3,869,360 3,677,673 ========== ========== ========== ========== See Notes to Consolidated Financial Statements
Page 4 of 14 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended July 31, ----------------------------- 1996 1995 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income ....................................... $ 246,785 $ 120,273 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization ................ 1,452,940 1,149,567 Amortization of excess of fair value of net assets acquired over cost ................. - (15,749) Deferred income taxes ........................ 158,804 72,455 Decrease/(increase) in: Cash surrender value of life insurance .... - (6,864) Accounts receivable ....................... 228,282 97,419 Refundable taxes .......................... 285,674 - Prepaid expenses .......................... (170,590) (146,236) Other current assets ...................... 82,384 (230,524) Security deposits and other noncurrent assets ................................. 8,677 (116,121) Increase/(decrease) in: Accounts payable .......................... 197,731 28,800 Accrued expenses .......................... (427,577) 82,747 Income taxes payable ...................... 74,841 - Customer deposits and other current liabilities ............................ (15,222) (41,625) --------- --------- Net cash provided by operating activities ........ 2,122,729 994,142 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ............... (465,047) (311,438) Disposal of equipment ............................ 60,992 - Redemption of marketable securities .............. - 1,098,269 Payment for purchase of ACA, net of cash acquired. - (716,091) Payment for purchase of MCC, net of cash acquired. - (334,078) Decrease in goodwill upon settlement of contingencies .................. 6,566 61,579 Contingent payments relating to the purchase of ESM, Inc. ................................. (118,173) (131,447) Increase in deferred software costs .............. (804,764) (455,150) --------- --------- Net cash used in investing activities ............ (1,320,426) (788,356) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt ...................... (1,307,042) (793,009) Repayments/borrowings by related parties, net..... 42,917 (10,376) Proceeds from issuance of long-term debt ......... 268,173 1,500,000 Repayments of capital leases ..................... (151,229) (95,737) --------- --------- Net cash (used in)/provided by financing activities ......................... (1,147,181) 600,878 --------- --------- Net (decrease)/increase in cash and cash equivalents (344,878) 806,664 Cash and cash equivalents at the beginning of the period ................................ 1,406,016 686,286 --------- --------- Cash and cash equivalents at the end of the period ................................ $ 1,061,138 $ 1,492,950 ========= ========= See Notes to Consolidated Financial Statements Page 5 of 14 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited) Nine Months Ended July 31, ----------------------------- 1996 1995 ----------- ----------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest ...................................... $ 293,549 $ 177,034 ========= ========= Income taxes .................................. $ 49,747 $ 272,236 ========= ========= SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITY: New capitalized leases for data processing equipment ..................... $ 135,202 $ - ========= ========= Acquisition of Key-ACA, Inc.: Fair value of assets acquired .............. $ 1,729,524 Liabilities assumed ........................ (491,994) Stock issued ............................... (462,529) --------- Cash paid .................................. $ 775,001 ========= Acquisition of MCC Corporation: Fair value of assets acquired ............... $ 3,115,567 Liabilities assumed ......................... (1,713,396) Note issued ................................. (840,645) --------- Cash paid ................................... $ 561,526 ========= During the nine months ended July 31, 1996 and 1995, $35,109 and $51,625 (each net of tax benefits), respectively, were accreted through a charge to re- tined earnings in connection with a stock option. See Notes to Consolidated Financial Statements Page 6 of 14 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY NINE MONTHS ENDED JULY 31, 1996 (Unaudited)
Deferred Costs in Connection with a Financing/ Common Par Stock Paid-in Retained Consulting Shares Value Issuable Capital Earnings Agreement Total --------- -------- -------- ---------- ---------- ---------- ----------- Balances, October 31, 1995 ....... 3,627,499 $ 36,275 $153,000 $8,752,637 $2,076,615 $ (70,262) $10,948,265 Exercises of stock option ........... 83,445 834 328,554 329,388 Issuance of stock in connection with the purchase of Tru-Check Computer Systems, Inc... 23,906 239 (153,000) 152,761 - Amortization of deferred costs in connection with a financing and consulting agreement ... 26,349 26,349 Accretion in connection with a stock option obligation, net ........ (35,109) (35,109) Net income ................. 246,785 246,785 --------- ------- ------- --------- --------- -------- ---------- Balances, July 31, 1996 ......... 3,734,850 $ 37,348 $ - $9,233,952 $2,288,291 $ (43,913) $11,515,678 ========= ======= ======= ========= ========= ======== ========== See Notes to Consolidated Financial Statements
Page 7 of 14 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. Basis of Presentation The Consolidated Balance Sheet as of July 31, 1996, the Consolidated State- ments of Income for the nine and three month periods ended July 31, 1996 and 1995, and the Consolidated Statements of Cash Flows for the nine month periods ended July 31, 1996 and 1995 have been prepared by the Company without audit. 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 period ended July 31, 1996 are not necessarily indicative of the operating results for the full fiscal year. Certain reclassifications have been made to the prior period to conform to the current presentation. Certain disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been con- densed or omitted. These consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-KSB/A for October 31, 1995. The consolidated financial statements include the accounts of Computer Out- sourcing Services, Inc. and its wholly-owned subsidiaries (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated. 2. Debt The Company is indebted to a bank for three term loans, the proceeds of which were used to fund various acquisitions by the Company. The loans bear interest at the prime rate plus 1.5%. Two term loans, initially $450,000 and $670,000, are being repaid with monthly payments of principal and interest over three years. The third term loan in the original amount of $1,500,000, incurred monthly payments of interest only for one year, and is being repaid with payments of principal and interest for three years be- ginning June 1996. As of July 31, 1996, the balances of these loans aggre- gated $1,773,336. Substantially all of the assets of the Company are pledged as collateral for these loans. The loan agreements contain certain financial covenants requiring the Com- pany to, among other things, maintain certain financial ratios. As of July 31, 1996, the Company was in compliance with these covenants. As of April 30, 1996, the Company reached an agreement with "K" Line Amer- ica, Inc. to amend the terms of the original $840,645 note issued in con- nection with the purchase of MCC Corporation. The note is now payable in four equal installments at various times from March 1997 through February 1999. Interest is payable quarterly at 7.5% per annum. Debt also includes miscellaneous loans for equipment purchases and acquisi- tion-related indebtedness aggregating $408,896 at July 31, 1996. Page 8 of 14 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS of OPERATIONS Nine Months Ended July 31, 1996 as Compared to the Nine Months Ended July 31, 1995: --------------------------------------------------- The following table sets forth, for the periods indicated, the percentage of revenues represented by selected items in the Company's Consolidated Statements of Income. Percentage of Total Revenues Nine Months Ended July 31, 1996 1995 -------- -------- REVENUES......................... 100.0% 100.0% -------- -------- COSTS AND EXPENSES: Data processing............... 61.8 57.8 Selling and promotion......... 8.7 11.4 General and administrative.... 26.0 28.0 Interest expense, net of interest income............ 1.2 0.9 Provision for income taxes.... 1.1 1.2 -------- -------- NET INCOME....................... 1.1% 0.8% ======== ======== Revenues increased $6,241,000 to $21,576,000, an increase of 40.7% for the current nine month period. The Company's Outsourcing division recorded a revenue increase of $4,658,000. A revenue increase by MCC Corporation ("MCC") of $5,294,000, due to the inclusion of MCC's results for the full current nine month period, more than offset a decrease in processing rev- enues in the rest of the Outsourcing division. MCC was acquired by the Company effective June 1, 1995. The PayUSA division recorded a revenue in- crease of $1,584,000. Revenues in the Company's Key-ACA, Inc. subsidiary ("ACA"), acquired as of May 1, 1995, accounted for $1,235,000 of this in- crease. Data processing costs increased $4,477,000 to $13,333,000, (61.8% of rev- enues) compared to $8,856,000 (57.8% of revenues) during the prior nine month period. MCC's data processing costs increased $3,886,000. MCC's data processing costs were 73.4% of their revenues for the period, which was the principal reason for the Company's increase in data processing costs as a percentage of revenues. ACA's payroll processing costs in- creased $563,000 compared to the prior period as a result of the timing of its acquisition. In addition, a $96,000 increase in payroll processing costs was recorded by the rest of the PayUSA division, offsetting a com- parable decrease in processing costs recorded by the Outsourcing division other than MCC. Page 9 of 14 ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Selling and promotion costs increased $147,000 to $1,888,000, but decreased 2.7% as a percentage of revenues. Increases of $130,000 and $332,000 were attributable to the acquisitions of ACA and MCC, respectively. Offsetting these were decreases of $102,000 and $213,000 in the PayUSA division and Outsourcing division, respectively. These decreases resulted from consoli- dation of the selling efforts in the PayUSA division. General and administrative expenses increased $1,316,000 to $5,617,000 in the current period but decreased 2.0% as a percentage of sales. Increases of $425,000 and $515,000 were attributable to the timing of the acquisi- tions of ACA and MCC, respectively. The remainder of the increase resulted from the additional costs of managing the Company's increased size and com- plexity. Net interest expense increased $119,000 to $257,000 in the current period. This was due to a higher level of borrowings to partially fund its acqui- sitions and a decrease in interest income previously generated by excess proceeds from the Company's public offering. As a result of the aforementioned, the Company recorded a profit of $247,000 ($.06 per share) during the nine months ended July 31, 1996 com- pared to a profit of $120,000 ($.02 per share) during the corresponding previous nine month period. RESULTS of OPERATIONS Quarter Ended July 31, 1996 as Compared to the Quarter Ended July 31, 1995: ----------------------------------------------- The following table sets forth, for the periods indicated, the percentage of revenues represented by selected items in the Company's Consolidated Statements of Income. Percentage of Total Revenues Quarters Ended July 31, 1996 1995 -------- -------- REVENUES......................... 100.0% 100.0% -------- -------- COSTS AND EXPENSES: Data processing............... 62.0 62.3 Selling and promotion......... 7.3 10.7 General and administrative.... 27.3 25.1 Interest expense, net of interest income............ 1.0 1.1 Provision for income taxes.... 1.1 0.8 -------- -------- NET INCOME....................... 1.3% 0.0% ======== ======== Page 10 of 14 ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Revenues increased $645,000 to $7,259,000, an increase of 9.8% during the current quarter. The increase was primarily attributable to the timing of the acquisition of MCC. Data processing costs increased $377,000 to $4,500,000 (62.0% of revenues) compared to $4,122,000 (62.3% of revenues) during the prior quarter. This increase was primarily attributable to the timing of the acquisition of MCC. Selling and promotion costs decreased $175,000 to $531,000, decreasing 3.4% as a percentage of revenues, resulting from consolidation of the selling efforts in the Pay USA division. General and administrative expenses increased $322,000 to $1,981,000 in the current quarter, increasing 2.2% as a percentage of sales. An increase of $135,000 was attributable to the timing of the acquisition of MCC. The re- mainder of the increase resulted from the additional costs of managing the Company's increased size and complexity. Provision for income taxes in the prior year's quarter included approxi- mately $33,000 of adjustments relating to the differences between the tax and book treatment of certain assets purchased in the acquisitions of ACA and MCC. As a result of the aforementioned, the Company recorded a profit of $90,000 ($.02 per share) during the quarter ended July 31, 1996 compared to a profit of $1,000 ($.00 per share) during the corresponding prior year's quarter. LIQUIDITY AND CAPITAL RESOURCES The Company continues to invest in its businesses through the development of new products and the enhancement of existing products. During the nine months ended July 31, 1996, the Company provided $2,123,000 from operations principally by generating $1,859,000 in net income before deductions for depreciation, amortization, and deferred taxes. It invested $465,000 for the purchase of equipment and spent $805,000 for product enhancements. In the aggregate, the Company's investment activities used $1,320,000. In its financing activities, the Company used $1,147,000 principally to repay debt of $1,093,000, net of issuances, and capital leases of $151,000. As a re- sult of these factors, the Company's cash and cash equivalents decreased by $345,000. As of July 31, 1996, the Company had cash and cash equivalents of $1,061,000 and working capital of $1,099,000. Its current ratio (i.e., the ratio of current assets to current liabilities) was 1.24 to 1, and its lia- bilities to equity ratio was 0.66 to 1. Page 11 of 14 ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The Company is indebted to a bank for three term loans, the proceeds of which were used to fund various acquisitions by the Company. The loans bear interest at the prime rate plus 1.5%. Two term loans, initially $450,000 and $670,000, are being repaid with monthly payments of principal and interest over three years. The third term loan in the original amount of $1,500,000, incurred monthly payments of interest only for one year, and is being repaid with payments of principal and interest for three years be- ginning June 1996. As of July 31, 1996, the balances of these loans aggre- gated $1,773,336. Substantially all of the assets of the Company are pledged as collateral for these loans. The loan agreements contain certain financial covenants requiring the Com- pany to, among other things, maintain certain financial ratios. As of July 31, 1996, the Company was in compliance with these covenants. In August 1996, the bank advised the Company that it had approved the Com- pany's request for an additional Three Year Revolving Credit Facility and an amendment to the existing loan agreements. The terms of the new facil- ity would enable the Company to increase its borrowings up to an additional $1,257,000. The Company is presently studying the commitment and there can be no assurance that this transaction will be consummated. As of April 30, 1996, the Company reached an agreement with "K" Line Amer- ica, Inc. to amend the terms of the original $840,645 note issued in con- nection with the purchase of MCC Corporation. This note is now payable in four equal installments at various times from March 1997 through February 1999. Interest is payable quarterly at 7.5% per annum. Management believes that its cash flow from operations will be sufficient to fund the Company's operations for at least the next year. It is manage- ment's intention to focus on consolidation and integration of the acquisi- tions made to date. Any significant acquisitions may require funding in excess of the current and projected operating cash flows, and may require additional debt and/or equity funding. Page 12 of 14 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 6 - Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K: None Page 13 of 14 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, there- unto duly authorized. COMPUTER OUTSOURCING SERVICES, INC. /s/ September 12, 1996 Zach Lonstein Principal Executive Officer /s/ September 12, 1996 Roger Kaufman Principal Financial Officer Page 14 of 14 -----END PRIVACY-ENHANCED MESSAGE-----