-----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, TMKaZSLpbQjcdrjZeACb1uGyv2797OFXoWpMnN8kZNHyya5oDn0j2LTQGABPRfNn p96UpGTm/iNeF2XTpSkLLg== 0000893816-00-000005.txt : 20000317 0000893816-00-000005.hdr.sgml : 20000317 ACCESSION NUMBER: 0000893816-00-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000131 FILED AS OF DATE: 20000316 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: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20824 FILM NUMBER: 571427 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 10-Q 1 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: January 31, 2000 Commission file number: 0-20824 COMPUTER OUTSOURCING SERVICES, 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) 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 4,889,687 shares of the registrant's Common Stock, $0.01 par value, outstanding as of March 15, 2000. Transitional Small Business Disclosure Form (check one): Yes [ ] No [X] Page 1 of 16 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS January 31, 2000 October 31, 1999 ---------------- ---------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and equivalents $ 4,217,436 $ 1,590,223 Marketable debt securities, at cost which approximates market value 549,318 1,673,441 Trade accounts receivable, net of allowance for doubtful accounts of $366,277 and $350,939 4,817,186 6,010,366 Prepaid and refundable income taxes 1,513,503 961,196 Deferred income taxes - current 591,178 591,178 Prepaid license fees 909,251 915,935 Prepaid expenses and other current assets 695,529 587,264 ----------- ----------- 13,293,401 12,329,603 ----------- ----------- PROPERTY and EQUIPMENT, net 4,721,386 3,638,993 ----------- ----------- OTHER ASSETS: Deferred software, net 2,358,354 2,223,823 Intangibles, net 9,441,537 8,484,564 Due from related parties, net 134,142 132,314 Deferred income taxes 235,986 235,986 Security deposits and other non-current assets 507,110 508,800 ----------- ----------- 12,677,129 11,585,487 ----------- ----------- TOTAL ASSETS $ 30,691,916 $ 27,554,083 =========== =========== See Notes to Consolidated Interim Financial Statements (Unaudited). Page 2 of 16 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS January 31, 2000 October 31, 1999 ---------------- ---------------- (Unaudited) LIABILITIES and STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,547,553 $ 1,237,479 Current portion of long-term debt and capitalized lease obligations 2,010,793 19,017 Current portion of accrued loss on office sublease 257,497 256,429 Accrued expenses 1,665,265 1,514,514 Customer deposits and other current liabilities 103,117 137,208 ----------- ----------- 5,584,225 3,164,647 ----------- ----------- OTHER LIABILITIES: Accrued loss on office sublease 1,546,996 1,564,592 ----------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value; 1,000,000 shares authorized, none issued - - Common stock, $0.01 par value; 10,000,000 shares authorized; shares issued 4,841,365 and 4,737,915, respectively 48,413 47,379 Additional paid-in capital 16,084,142 15,519,826 Common stock issuable (Note 2) 1,135,160 - Retained earnings 6,412,037 7,264,952 ----------- ----------- 23,679,752 22,832,157 Less 5,608 and 1,000 shares of common stock held in treasury at January 31, 2000 and October 31, 1999, respectively, at cost (119,057) (7,313) ----------- ----------- 23,560,695 22,824,844 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $ 30,691,916 $ 27,554,083 =========== =========== See Notes to Consolidated Interim Financial Statements (Unaudited). Page 3 of 16 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months ended January 31, ------------------------------- 2000 1999 ----------- ----------- REVENUES $ 7,114,803 $ 8,281,078 ----------- ----------- COSTS and EXPENSES: Processing costs 5,853,387 5,710,035 Selling and promotion costs 867,534 398,297 General and administrative expenses 1,827,184 1,348,262 Interest income, net (35,080) (121,357) ----------- ----------- 8,513,025 7,335,237 ----------- ----------- Income/(loss) from operations before provision/(benefit) for income taxes (1,398,222) 945,841 Provision/(benefit) for income taxes (545,307) 387,795 ----------- ----------- NET INCOME/(LOSS) $ (852,915) $ 558,046 =========== =========== Basic earnings/(loss) per share $ (0.18) $ 0.13 =========== =========== Weighted average number of shares outstanding 4,767,198 4,431,723 =========== =========== Diluted earnings/(loss) per share $ (0.18) $ 0.12 =========== =========== Weighted average number of shares and equivalents outstanding (Note 4) 4,767,198 4,845,108 =========== =========== See Notes to Consolidated Interim Financial Statements (Unaudited). Page 4 of 16 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited) Three Months ended January 31, ------------------------------- 2000 1999 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income/(loss) $ (852,915) $ 558,046 Adjustments to reconcile net income to cash provided by/(used in) operating activities: Depreciation and amortization 523,823 457,590 Income from a non-competition, confidentiality, and conduct of business agreement - (120,000) Deferred income taxes - 77,985 Decrease/(increase) in: Trade accounts receivable 1,193,180 (2,009,739) Prepaid and refundable taxes (552,307) (201,082) Prepaid expenses and other current assets (101,581) 349,001 Security deposits and other non-current assets (749) - Increase/(decrease) in: Accounts payable 310,074 123,468 Accrued expenses 150,751 (158,953) Payments on accrued loss on office sublease (12,230) - Customer deposits and other current liabilities (34,090) 11,745 ----------- ----------- Net cash provided by/(used in) operating activities 623,956 (911,939) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (1,275,356) (228,944) Redemption of investments in marketable debt securities 1,124,123 348,935 Payment for the purchase of certain assets and the business of Enterprise Technology Group, Inc. (the "Enterprise Purchase") - (4,000,000) Payment of expenses related to the Enterprise Purchase - (153,078) Increase in deferred software costs (284,767) (173,164) ----------- ----------- Net cash used in investing activities $ (436,000) $(4,206,251) ----------- ----------- Continued on next page. See Notes to Consolidated Interim Financial Statements (Unaudited). Page 5 of 16 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited - Continued) Three Months ended January 31, ------------------------------- 2000 1999 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit $ 2,000,000 $ - Repayment of long-term debt and capital leases (8,224) (11,424) (Advances to)/repayments by related parties, net (1,828) 6,825 Proceeds from the exercises of stock options and warrants 453,606 154,223 ----------- ----------- Net cash provided by financing activities 2,443,554 149,624 ----------- ----------- CASH FLOWS FROM DISCONTINUED OPERATION: Payment of taxes on gain and other expenses related to sale of the Payroll Division - (2,295,771) Payments on portion of accrued loss on office sublease relating to discontinued operation (4,297) - ----------- ----------- Net cash used in discontinued operation (4,297) (2,295,771) ----------- ----------- Net increase/(decrease) in cash and equivalents 2,627,213 (7,264,337) Cash and equivalents at the beginning of the period 1,590,223 9,403,006 ----------- ----------- Cash and equivalents at the end of the period $ 4,217,436 $ 2,138,669 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest expense $ 178 $ 14,230 =========== =========== Income taxes $ 7,000 $ 2,711,550 =========== =========== SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES: Stock issuable in 2000 and issued in 1999 for a portion of the Enterprise Purchase $ 1,135,160 $ 2,677,500 =========== =========== 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 6 of 16 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Par Paid in Shares Retained Treasury Shares Value Capital Issuable Earnings Stock Total --------- ------- ----------- ---------- ---------- --------- ----------- Balance, October 31, 1999 4,737,915 $47,379 $15,519,826 - $7,264,952 $ (7,313) $22,824,844 Exercises of stock options 78,450 784 439,566 440,350 4,608 shares surrendered for stock option exercise (111,744) (111,744) Contingent payment relating to purchase of assets (Note 2) 1,135,160 1,135,160 Exercise of warrant 25,000 250 124,750 125,000 Net loss (852,915) (852,915) --------- ------- ----------- ---------- ---------- --------- ----------- Balance, January 31, 2000 4,841,365 $48,413 $16,084,142 $1,135,160 $6,412,037 $(119,057) $23,560,695 ========= ======= =========== ========== ========== ========= ===========
See Notes to Consolidated Interim Financial Statements (Unaudited). Page 7 of 16 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated balance sheet as of January 31, 2000 and the consolidated statements of income and cash flows for the three month periods ended January 31, 2000 and 1999 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 periods ended January 31, 2000 and 1999 are not necessarily indicative of the operating results for the full fiscal years. 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 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. The consolidated financial statements include the accounts of Computer Outsourcing Services, Inc. and its wholly-owned subsidiaries (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated. 2. ACQUISITION On December 18, 1998, a subsidiary of the Company purchased certain assets and the business of Enterprise Technology Group, Incorporated ("Enterprise") for $4,000,000 in cash and 300,000 shares of the Company's common stock. On December 28, 1998, the subsidiary changed its name to ETG, Inc. The assets acquired consist predominately of intangibles associated with the business of providing information technology infrastructure management solutions to large companies and institutions. 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 defined 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 has been added to intangible assets (goodwill), and is being amortized over the remaining life assigned to this asset (168 months). On February 17, 2000, 36,471 shares of the Company's common stock were issued in payment of this additional consideration. 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, payable upon demand, will accrue interest (at the Company's option) at either the Prime Rate Page 8 of 16 or 1.25% over the 30, 60, or 90 day LIBOR rate. The interest rate will then be fixed during the period corresponding to the particular LIBOR rate selected. The line of credit does not have a fixed term, and is 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 a 90-day note utilizing the LIBOR rate option. The interest rate was 7.44% on an annualized basis. 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 three months ended January 31, 2000, common stock equivalents were ignored since the effect of including such equivalents would have been anti- dilutive. 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 quarters ended January 31, 2000 and 1999 would be as follows: 2000 1999 ----------------------- ----------------------- Historical Pro Forma Historical Pro Forma ---------- ----------- ---------- ---------- Net income/(loss) $ (852,915) $(1,222,077) $ 558,046 $ 480,736 ========== =========== ========== ========== Net income/(loss) per diluted common share $ (0.18) $ (0.26) $ 0.12 $ 0.10 ========== =========== ========== ========== 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 quarters ended January 31, 2000 and 1999 was $1,368,7000 and $97,200, respectively. The fair value of each stock option grant is estimated on the date of the grant using the Black-Scholes Page 9 of 16 option pricing model with the following weighted average assumptions used for grants in 2000: a risk-free interest rate of 5.50%; expected lives of between six months and three and one-half years; and expected volatility of 49.5%. The following weighted average assumptions were used for grants in 1999: a risk-free interest rate of between 4.65% and 4.77%; expected lives of four years; and expected volatility of between 47.4% and 48.8%. 6. SUBSEQUENT EVENT On February 23, 2000, a subsidiary of the Company closed a transaction with three investors providing for a series of convertible notes. Each note will be due February 25, 2001 and will bear interest at 6% for the first six months. Thereafter, interest increases to 13% in the seventh month and rises 1% for each subsequent month that the applicable note remains outstanding. The notes may be prepaid by the Company without penalty. The notes are to be funded as follows: $3 million at closing; $2 million upon signing the lease for the subsidiary's second Internet Data Center ("IDC"); $2 million when the second IDC is 50% complete; and an aggregate of $7 million based upon certain other events. The notes are secured by a first lien on the assets, with certain exceptions, of the subsidiary. The notes are convertible into securities of the subsidiary issued in connection with a subsequent funding, if any, of such subsidiary by an unrelated third party. At the option of the holder, a note outstanding for more than 180 days may be exchanged for the Company's common stock. An exchanging note holder would receive shares valued at 90% of the average closing price for the ten trading days prior to the exchange. The agreement also provides, in certain instances, if the subsidiary is funded with the proceeds from the issuance of common stock by the Company, the note holders will receive warrants to acquire the Company's common stock at 110% of the average closing price for the ten trading days preceding the issuance date of the warrants. The bank which provides the Company with the $5 million line of credit agreed to release its lien on certain assets of the subsidiary as well as the subsidiary's guarantee of the $5 million line of credit. Due to a restriction against certain additional indebtedness, the bank's consent was necessary in order to close the agreement with the three investors. Page 10 of 16 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS, THREE MONTH PERIODS ENDED JANUARY 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. Subject to the availability of financing, the Company plans to develop twenty additional IDCs over the next two years. During the period ended January 31, 2000, revenues decreased $1,166,000 (14%) to $7,115,000 from $8,281,000 for the period ended January 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 also reflects the loss of a major publishing client and the absence of Year-2000 related revenues. 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. Data processing costs increased $143,000 to $5,853,000 (82% of revenues) during the period ended January 31, 2000 compared with $5,710,000 (69% of revenues) in the period ended January 31, 1999. The increase primarily consists of operating costs of the new IDC and the development of IDC Services to be offered throughout the planned network of IDCs. Selling and promotion costs increased $470,000 to $868,000 (12% of revenues) during the period ended January 31, 2000 compared with $398,000 (5% of revenues) in the period ended January 31, 1999. The increase is attributable to a larger sales staff needed to market the Company's IDC Services. Page 11 of 16 General and administrative expenses increased $479,000 to $1,827,000 (26% of revenues) for the period ended January 31, 2000 from $1,348,000 (16% of revenues) for the three months ended January 31, 1999, reflecting higher costs associated with the Company's IDC Services activities. Amortization of intangibles acquired in connection with the Enterprise Purchase was $124,000 in the current period versus $39,000 for the three months ended January 31, 1999. The Company recorded net interest income of $35,000 in the current period, compared with net interest income of $121,000 in the prior period. The decrease of $86,000 reflects the reduction of interest income arising from a lower average balance of interest earning assets during the period ended January 31, 2000 as well as interest expense in connection with a $2,000,000 borrowing under the Company's bank line of credit. The Company recorded a net loss of $853,000 in the period ended January 31, 2000 (($0.18) per share for both basic and diluted shares) versus net income of $558,000 ($0.13 and $0.12 per share for basic and diluted shares, respectively) for the period ended January 31, 1999. Common stock equivalents were ignored in determining the net loss per share, since the inclusion of such equivalents would be anti-dilutive. LIQUIDITY AND CAPITAL RESOURCES During the three months ended January 31, 2000, the Company generated net cash of approximately $624,000, primarily as a result of a decrease in accounts receivable of $1,193,000, offset by a $461,000 increase in accounts payable and accrued expenses. The Company invested $1,275,000 for the purchase of equipment, construction of the IDC, and other fixed assets, and $285,000 for product development and enhancement. The Company also reduced short-term investments by $1,124,000. The principal financing activities were the Company's borrowing of $2,000,000 from its line of credit with a bank and receiving proceeds of $454,000 from exercises of a warrant and employee stock options. 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, payable upon demand, will accrue interest (at the Company's option) at either the Prime Rate or 1.25% over the 30, 60, or 90 day LIBOR rate. The interest rate will then be fixed during the period corresponding to the particular LIBOR rate selected. The line of credit does not have a fixed term, and is 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 a 90-day note utilizing the LIBOR rate option. The interest rate was 7.44% on an annualized basis. As of January 31, 2000, the Company had cash and equivalents and highly liquid, short-term investments aggregating approximately $4,767,000. Page 12 of 16 On February 23, 2000, a subsidiary of the Company closed a transaction with three investors providing for a series of convertible notes. Each note will be due February 25, 2001 and will bear interest at 6% for the first six months. Thereafter, interest increases to 13% in the seventh month and rises 1% for each subsequent month that the applicable note remains outstanding. The notes may be prepaid by the Company without penalty. The notes are to be funded as follows: $3 million at closing; $2 million upon signing the lease for the subsidiary's second Internet Data Center ("IDC"); $2 million when the second IDC is 50% complete; and an aggregate of $7 million based upon certain other events. The notes are secured by a first lien on the assets, with certain exceptions, of the subsidiary. The notes are convertible into securities of the subsidiary issued in connection with a subsequent funding, if any, of such subsidiary by an unrelated third party. At the option of the holder, a note outstanding for more than 180 days may be exchanged for the Company's common stock. An exchanging note holder would receive shares valued at 90% of the average closing price for the ten trading days prior to the exchange. The agreement also provides, in certain instances, if the subsidiary is funded with the proceeds from the issuance of common stock by the Company, the note holders will receive warrants to acquire the Company's common stock at 110% of the average closing price for the ten trading days preceding the issuance date of the warrants. The bank which provides the Company with the $5 million line of credit agreed to release its lien on certain assets of the subsidiary as well as the subsidiary's guarantee of the $5 million line of credit. Due to a restriction against certain additional indebtedness, the bank's consent was necessary in order to close the agreement with the three investors. The Company believes that the combination of its cash and other liquid assets, potential future operating cash flow, and potential borrowing capacity will provide adequate resources to fund its ongoing operating requirements. The Company has announced plans to develop twenty additional IDCs in the United States and abroad. The Company will require additional financing to effect this 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 final cost for this activity totaled approximately $300,000. Page 13 of 16 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 14 of 16 PART II - OTHER INFORMATION ITEM 6 - Exhibits and Reports on Form 8-K (a) Exhibits: 3.1 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. 3.2 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. 27 Financial Data Schedule, filed electronically only. (b) Reports on Form 8-K: None Page 15 of 16 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. COMPUTER OUTSOURCING SERVICES, INC. March 16, 2000 ------------------------------------ Zach Lonstein Chief Executive Officer March 16, 2000 ------------------------------------- Nicholas J. Letizia Chief Financial Officer Page 16 of 16 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JANUARY 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT. 3-MOS OCT-31-2000 JAN-31-2000 4,217,436 549,318 5,183,463 366,277 0 13,293,401 10,476,703 5,755,317 30,691,916 5,584,225 2,010,793 0 0 48,413 23,512,282 30,691,916 0 7,114,803 0 5,853,387 2,694,718 18,595 14,632 (1,398,222) (545,307) (852,915) 0 0 0 (852,915) (0.18) (0.18)
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