-----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, B5tWRFeG618ygtjKbkUMX3CDHpVE0bW560w7BGNik18DyurBjRxzHlQyXOQPN5+D Z60pkng2cOCkYxmie2JH8w== 0000893816-97-000008.txt : 19970325 0000893816-97-000008.hdr.sgml : 19970325 ACCESSION NUMBER: 0000893816-97-000008 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970131 FILED AS OF DATE: 19970324 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: 97561114 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: January 31, 1997 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 3,789,850 shares of the registrant's Common Stock, $0.01 par value, outstanding as of March 4, 1997. Transitional Small Business Disclosure Form (check one); Yes [ ] No [X] Page 1 of 12 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS January October 31, 1997 31, 1996 ------------- ------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents, including short-term, interest bearing invest- ments of $304,424 and $316,346 ............ $ 649,749 $ 1,083,545 Trade accounts receivable, net of allowance for doubtful accounts of $405,049 and $305,874 .................................. 4,141,920 3,716,343 Refundable income taxes ..................... 45,204 62,988 Prepaid expenses ............................ 878,640 699,005 Other current assets ........................ 171,141 125,850 ---------- ---------- 5,886,654 5,687,731 ---------- ---------- PROPERTY and EQUIPMENT, net ................... 3,112,031 3,132,847 ---------- ---------- OTHER ASSETS: Deferred software costs, net ................ 2,064,861 1,912,505 Intangibles, net ............................ 7,606,366 7,764,535 Due from related parties, net ............... 102,442 106,472 Security deposits and other non-current assets .................................... 685,037 705,307 ---------- ---------- 10,458,706 10,488,819 ---------- ---------- TOTAL ASSETS .................................. $ 19,457,391 $ 19,309,397 ========== ========== See Notes to Consolidated Interim Financial Statements Page 2 of 12 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) January October 31, 1997 31, 1996 ------------- ------------- (Unaudited) LIABILITIES and STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ............................ $ 1,814,646 $ 1,535,816 Current portion of long-term debt ........... 952,771 1,054,352 Current portion of capitalized lease obligations ............................... 183,734 195,979 Accrued expenses and taxes .................. 1,698,925 1,757,355 Customer deposits and other current liabilities ............................... 251,394 282,075 ---------- ---------- 4,901,470 4,825,577 ---------- ---------- LONG-TERM LIABILITIES: Long-term debt .............................. 1,520,484 1,629,234 Capitalized lease obligations ............... 246,232 284,775 Deferred income taxes ....................... 862,885 837,219 Stock option obligation ..................... 143,751 133,146 ---------- ---------- 2,773,352 2,884,374 ---------- ---------- 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 out- standing, 3,744,850 and 3,734,850.......... 37,448 37,348 Additional paid-in capital .................. 9,270,102 9,233,952 Retained earnings ........................... 2,501,368 2,363,278 Deferred costs arising from a financing and consulting agreement .................. (26,349) (35,132) ---------- ---------- 11,782,569 11,599,446 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .... $ 19,457,391 $ 19,309,397 ========== ========== See Notes to Consolidated Interim Financial Statements Page 3 of 12 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended January 31, 1997 1996 ------------- ------------- REVENUES ...................................... $ 8,182,101 $ 7,107,115 ---------- ---------- COSTS and EXPENSES: Data processing costs ....................... 5,392,180 4,370,314 Selling and promotion costs ................. 652,101 709,575 General and administrative costs ............ 1,803,219 1,827,886 Interest expense, net of interest income ... 74,114 93,926 ---------- ---------- 7,921,614 7,001,701 ---------- ---------- INCOME BEFORE PROVISION FOR INCOME TAXES ...... 260,487 105,414 PROVISION FOR INCOME TAXES .................... 114,000 59,392 ---------- ---------- NET INCOME .................................... $ 146,487 $ 46,022 ========== ========== INCOME PER COMMON SHARE ....................... $ 0.04 $ 0.01 ========== ========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING . 3,839,991 3,760,975 ========== ========== See Notes to Consolidated Interim Financial Statements Page 4 of 12 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended January 31, 1997 1996 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income..................................... $ 146,487 $ 46,022 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization ............... 555,033 482,367 Deferred income taxes ....................... 25,666 55,836 Decrease/(increase) in: Trade accounts receivable ................. (425,577) (281,044) Refundable taxes .......................... 17,784 (14,905) Prepaid expenses .......................... (179,633) (164,031) Other current assets ...................... (45,293) 95,333 Security deposits and other noncurrent assets .................................. 51,155 11,347 Increase/(decrease) in: Accounts payable .......................... 278,830 467,720 Accrued expenses and taxes ................ (56,221) (314,186) Customer deposits and other current liabilities ............................. (30,681) (15,942) ---------- ---------- Net cash provided by operating activities ... 337,550 368,517 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment .......... (225,631) (111,072) Disposal of equipment ....................... 2,074 - Settlement of contingencies relating to acquisitions ............................. (5,472) (37,263) Increase in deferred software costs ......... (269,037) (282,633) ---------- ---------- Net cash used in investing activities ....... $ (498,066) $ (430,968) ---------- ---------- Continued on Next Page See Notes to Consolidated Interim Financial Statements Page 5 of 12 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended January 31, 1997 1996 ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt ................. $ (210,332) $ (278,380) Repayments of amounts by related parties, net .............................. 4,031 21,904 Repayments of capital leases ................ (66,979) (41,656) ---------- ---------- Net cash used in financing activities ....... (273,280) (298,132) ---------- ---------- Net decrease in cash and cash equivalents ... (433,796) (298,132) Cash and cash equivalents at the beginning of the period.............................. 1,083,545 1,406,016 ---------- ---------- Cash and cash equivalents at the end of the period..................................... $ 649,749 $ 1,107,884 ========== ========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest .................................. $ 83,430 $ 93,395 ========== ========== Income taxes .............................. $ 51,215 $ 1,306 ========== ========== SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: New capitalized leases for data processing equipment ................................. $ 16,195 $ 135,204 ========== ========== For the three months ended January 31, 1997 and 1996, $8,397 and $11,703 (net of tax benefits), respectively, were accreted through a charge to retained earnings in connection with a stock option. See Notes to Consolidated Interim Financial Statements Page 6 of 12 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY THREE MONTHS ENDED JANUARY 31, 1997 (Unaudited)
Deferred Costs in Connection with a Financing/ Par Paid in Retained Consulting Shares Value Capital Earnings Agreement Total --------- -------- ----------- ----------- ---------- ------------ Balances, October 31, 1996 ....... 3,734,850 $ 37,348 $ 9,233,952 $ 2,363,278 $ (35,132) $ 11,599,446 Stock issued in connection with a covenant not to compete ....... 10,000 100 36,150 36,250 Amortization of deferred costs in connection with a financing and consulting agreement ....... 8,783 8,783 Accretion in connection with a stock option obligation, net ... (8,397) (8,397) Net income ...................... 146,487 146,487 --------- -------- ----------- ----------- ---------- ------------ Balances, January 31, 1997 ....... 3,744,850 $ 37,448 $ 9,270,102 $ 2,501,368 $ (26,349) $ 11,782,569 ========= ======== =========== =========== ========== ============ See Notes to Consolidated Interim Financial Statements Page 7 of 12
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The Consolidated Balance Sheet as of January 31, 1997, and the Consolidated Statements of Income and the Consolidated Statements of Cash Flows for the three month periods ended January 31, 1997 and 1996, 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, 1997 and 1996 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 financial statements should be read in conjunction with the Company's Annual Report on Form 10-KSB for October 31, 1996. 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 At January 31, 1997, the Company was indebted to a bank for three term loans under a Term Loan Agreement ("Agreement") orignally aggregating $2,620,000, the proceeds of which were used for acquisitions. The Agreement provides for monthly principal and interest payments in varying amounts through May 2000, with interest computed at the bank's prime rate plus 1.5%. An aggregate $1,399,170 was outstanding at January 31, 1997 under this facility. Substan- tially all of the assets of the Company are pledged as collateral for this indebtedness. As last amended on March 20, 1997, the Company and the bank agreed to, among other things, change certain financial covenants in the Agreement, reduce the interest rate on the outstanding debt, and replace one of the loans which had a balance of $1,218,750 at January 31, 1997. The replacement term loan is in the same principal amount and has generally the same terms except as to the reduced interest rate. This new term loan bears interest, at the Company's option, at either the Adjusted Eurodollar Rate (as defined in the agreement) plus 2.25%, or the Prime Rate. The Company is in compliance with the amended covenants. In March 1997, the Company and the bank entered into an additional agreement for a line of credit whereby the Company may borrow up to an additional $1,500,000. Interest on these borrowings, when made, may be at either of the rates discussed above. The line of credit expires on April 30, 1998. Page 8 of 12 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES 3. RELATED PARTY TRANSACTIONS In December 1996, in connection with the expiration of the employment agreement of an officer of the Company, the officer and the Company entered into a non- competition agreement whereby the officer agreed not to compete for a period of two years in return for 25,000 shares of the Company's Common Stock, to be granted in various amounts and at various times over the two year period. As of January 31, 1997, the Company had issued 10,000 shares of Common Stock pursuant to this agreement. Compensation associated with this arrangement will be amortized over the life of the non-compete agreement. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - --------------------- During the quarter ended January 31, 1997, revenues increased $1,075,000 to $8,182,000, an increase of 15.1% over the quarter ended January 31, 1996. The Company's Information Processing Division recorded a revenue increase of $721,000 (15% of divisional revenues), primarily due to contracts entered into in the prior fiscal year. The Pay USA Division recorded a revenue increase of $354,000 (16% of divisional revenues). Data processing costs increased $1,022,000 to $5,392,000 (65.9% of revenues) during the current quarter compared to $4,370,000 (61.5% of revenues) in the prior year's quarter. The Information Processing Division's data processing costs increased $816,000 to $4,109,000 (50.2% of divisional revenues), compared to $3,294,000 (46.3% of revenues) in the prior quarter. The increase as a percentage of revenues is attributable to the mix of services provided in the current quarter compared to the prior year's quarter. Pay USA's data processing costs increased $206,000 to $1,283,000 (15.7% of divisional revenues). Payroll processing and tax filing costs aggregated $1,077,000 (15.1% of revenues) in the prior year. The Company continued the process of standard- izing the Pay USA Division into one processing system and consolidating the computer operations of the Information Processing Division. Until the total integration of operations is completed, including payroll system standardiza- tion, the Company will continue to experience higher costs due to the cost of the conversion effort and the duplication of facilities and personnel. Selling and promotion costs decreased $57,000 to $652,000, a decrease of 2.0% as a percentage of revenues. A decrease of $84,000 in the Information Processing Division was partially offset by in increase of $27,000 in the Pay USA division. The decrease as a percentage of revenues resulted from the consolidation of the sales and marketing efforts in each of the divisions. General and administrative expenses decreased $25,000 to $1,803,000 in the current year's quarter, a decrease of 3.7% as a percentage of revenues, as the Company was successful in holding down administrative costs while growing its businesses. Net interest expense decreased $20,000 to $74,000 in the current year's quarter primarily as a result of a decreased level of outstanding debt. Page 9 of 12 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES Results of Operations - (Continued) - ----------------------------------- For the quarter ended January 31, 1997, the provision for income taxes was $114,000, an effective tax rate of 43.8%. For the comparable quarter of the prior year, the provision for income taxes was $59,000, a 56.3% effective tax rate. The decrease in the effective tax rate is the result of the amortization of nondeductible goodwill having less of an impact on a higher level of earnings, coupled with the increased investment of collected but unremitted funds into high quality, low risk tax exempt securities. The Company recorded a profit of $146,000 ($.04 per share) for the quarter ended January 31, 1997 compared to a profit of $46,000 ($.01 per share) for the quarter ended January 31, 1996. Liquidity and Capital Resources - ------------------------------- On January 27, 1993, the Company completed its initial public offering of 1,150,000 shares of Common Stock, which yielded net proceeds of $4,927,000 to the Company. Prior to the offering, the Company had financed its operations, capital expenditures, and acquisitions through internally generated funds and consequently the number and size of potential acquisitions had been limited. Proceeds from the offering, as well as certain borrowings discussed below, have enabled the Company to achieve significant growth through the acquisition of a number of companies in both the payroll processing and information processing markets. During the quarter ended January 31, 1997, the Company provided $338,000 from operations principally by generating $728,000 in net income before deductions for depreciation, amortization, and deferred taxes. It invested $226,000 for the purchase of equipment and spent $269,000 for product enhancements. In the aggregate, the Company's investing activities used $498,000. In its financing activities, the Company used $273,000 principally to repay long-term debt. As a result of these factors, the Company's cash and cash equivalents decreased by $434,000. As of January 31, 1997, the Company had cash and cash equivalents of $650,000 and working capital of $985,000. Its current ratio (i.e., the ratio of current assets to current liabilities) was 1.20 to 1, and its debt to equity ratio was 0.65 to 1. At January 31, 1997, the Company was indebted to a bank for three term loans under a Term Loan Agreement ("Agreement") orignally aggregating $2,620,000, the proceeds of which were used for acquisitions. The Agreement provides for monthly principal and interest payments in varying amounts through May 2000, with interest computed at the bank's prime rate plus 1.5%. An aggregate $1,399,170 was outstanding at January 31, 1997 under this facility. Substan- tially all of the assets of the Company are pledged as collateral for this indebtedness. Page 10 of 12 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES Liquidity and Capital Resources (Continued) - ------------------------------------------- As last amended on March 20, 1997, the Company and the bank agreed to, among other things, change certain financial covenants in the Agreement, reduce the interest rate on the outstanding debt, and replace one of the loans which had a balance of $1,218,750 at January 31, 1997. The replacement term loan is in the same principal amount and has generally the same terms except as to the reduced interest rate. This new term loan bears interest, at the Company's option, at either the Adjusted Eurodollar Rate (as defined in the agreement) plus 2.25%, or the Prime Rate, and is expected to save the Company approximately $30,000 in interest costs over the term of the loan. The Company is in compliance with the amended covenants. In March 1997, the Company and the bank entered into an additional agreement for a line of credit agreement whereby the Company may borrow up to an additional $1,500,000. Interest on these borrowings, when made, may be at either of the rates discussed above. The line of credit expires on April 30, 1998. Management believes that its cash flow from operations and its available line of credit will be sufficient to fund the Company's operations for at least the coming year. The Company continues to seek acquisition opportunities that fit the Company's long-term strategy. Any material acquisitions may require funding in excess of the level of current and projected operating cash flows, and would require additional debt and/or equity funding. PART II - OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.1 Fourth Amendment dated as of February 1, 1997 to the Standby Credit and Term Loan Agreement, as amended, among the Company and its subsidiaries and The Chase Manhattan Bank (formerly Chemical Bank) ("Chase") 10.2 1996 (Replacement) Term Note, dated as of February 1, 1997 by the Company to the order of Chase in the amount of $1,218,750. 10.3 Promissory Note dated February 26, 1997, evidencing a line of credit advanced by Chase to the Company. 10.4 Fifth Amendment dated as of March 20, 1997 to the Standby Credit and Term Loan Agreement, as amended, among the Company and its subsidiaries and Chase. (b) Reports on Form 8-K: None Page 11 of 12 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, thereunto duly authorized. COMPUTER OUTSOURCING SERVICES, INC. /s/ March 21, 1996 ----------------------------- Zach Lonstein Principal Executive Officer /s/ March 21, 1996 ----------------------------- David N. Levine Principal Financial Officer Page 12 of 12 EX-10.1 2 FOURTH AMENDMENT dated as of February 1, 1997 to the STANDBY CREDIT AND TERM LOAN AGREEMENT dated as of April 5, 1994, as amended ("Credit Agreement") among COMPUTER OUTSOURCING SERVICES, INC., a New York corporation (the "Borrower"), NEDS, INC., a New York corporation, DATON PAY USA, INC., a California corporation, PAY USA OF NEW JERSEY, INC., a New York corporation, ACA ACQUISITION CORP., a New York corporation and MCC CORPORATION, a New York Corporation (each, a "Guarantor" and collectively, the "Guarantors") and THE CHASE MANHATTAN BANK (formerly Chemical Bank"), a New York banking corporation (the "Bank"). The Borrower desires to amend the Credit Agreement in order to (i) provide for a Eurodollar Rate option (as hereinafter defined) on the 1996 Term Loan and (ii) reduce the interest on Term Loans that are Prime Loans. Subject to the terms and conditions hereof, the Borrower, the Guarantors and the Bank are prepared to agree to such amendment. Unless otherwise defined herein, all capitalized terms used herein which are defined in the Credit Agreement shall have the same meanings herein as therein defined. Therefore, the Borrower, the Guarantors and the Bank agree as follows: 1. The Credit Agreement shall be amended accordingly: (a) Section 1.01, 'Definitions' shall be amended by (1) adding a definition of "Eurodollar Loan" as follows: "Eurodollar Loan" means any term loans advanced in accordance with the 1996 (Replacement) Term Note bearing interest, at the Borrower's option, at the Adjusted Eurodollar Rate plus 2.25%, subject to the terms, conditions and limitations of the 1996 (Replacement) Term Note (as hereinafter defined) which terms, conditions and limitations are expressly incorporated herein by reference with the same force and effect and to the same extent, as if such terms, conditions and limitations were stated in the Credit Agreement. No more than three (3) Eurodollar Loans may be outstanding at any one time. (2) expressly incorporating herein by reference the definitions of: "Adjusted Eurodollar Rate", "Business Day", "Interest Period" and "Statutory Reserves", as such terms relate to any Eurodollar Loan and are set forth in the 1996 (Replacement) Term Note with the same force and effect and to the same extent, as if such definitions were stated in the Credit Agreement. (b) Article II, 'Loans' shall be amended by: (i) deleting the last sentence of Section 2.02(b) and substituting therefor: "The 1996 Term Loan may be, effective February 1, 1997, made in any combination of Eurodollar Loan(s) or Prime Loan(s) at the Borrower's option in accordance with and subject to the conditions of the 1996 (Replacement) Term Note and Article V hereof." (ii) deleting Section 2.03(b) in its entirety and substituting therefor: "(b) The 1996 Term Loan will be evidenced by a restated and amended term note in the form of Exhibit "D-1" hereto (the "1996 (Replacement) Term Note" and together with the 1994 Term Notes, the "Term Notes" and sometimes each referred to as a "Term Note"). The 1996 (Replacement) Term Note shall be duly executed and delivered by the Borrower dated as of the date hereof, and payable as to principal in thirty-nine (39) equal consecutive monthly installments on the first of each month commencing March 1, 1997 and shall bear interest, at the Borrower's option at the Adjusted Eurodollar Rate plus 2.25% or the Alternate Base Rate. If the Term Loan is a Eurodollar Loan, it shall bear interest at the rate per annum computed in accordance with the 1996 (Replacement) Term Note. If the Term Loan is a Prime Loan, it shall bear interest at the rate per annum computed in accordance with the 1996 (Replacement) Term Note and also as set forth in Section 2.05 hereof. Interest shall be paid as provided in the 1996 (Replacement) Term Note." (3) deleting "plus 1-1/2%" from the last line of Section 2.05, 'Interest on Prime Loans', thereby amending the interest payable on Prime Loans (that are Term Loans) to the Alternate Base Rate. (4) adding a new subsection 2.06(d), 'Optional Prepayment of Loans', as follows: "(d) If a Eurodollar Loan is paid on a day other than the last day of an Interest Period, the Borrower shall reimburse the Bank on demand for any loss incurred or to be incurred by it in the reemployment of the funds released by any prepayment." (5) expressly incorporating herein by reference the provisions in the 1996 (Replacement) Term Note entitled "Indemnity" and "Change in Legality" as new Sections 2.15 and 2.16 respectively of the Credit Agreement, with the same force and effect and to the same extent as if such provisions were stated in the Credit Agreement. 2. The Borrower and each Guarantor jointly and severally represent and warrant that the Credit Agreement together with this Fourth Amendment and the 1996 (Replacement) Term Note, when delivered hereunder, will be legal, valid and binding obligations of each of them, as appropriate, and enforceable against each of them, as appropriate, in accordance with their respective terms. The Borrower and each Guarantor further represent and warrant that the representations and warranties set forth in Article III of the Credit Agreement shall be deemed restated and are true and correct, all as of the date hereof and that no Event of Default, as set forth in Article VIII of the Credit Agreement, exists and that no event which upon notice or lapse of time or both, would constitute an Event of Default has occurred and is continuing. 3. On or prior to the effectiveness of this Fourth Amendment, the Bank shall have received the following in form and substance satisfactory to it: i) The 1996 (Replacement) Term Note duly executed by the Borrower; and ii) Legal Processing Fee; and iii) Evidence of merger of Tru-Check Computer Systems, Inc. with and into the Borrower. 4. Upon the effectiveness of this Fourth Amendment, each reference in the Credit Agreement to "this Agreement", "hereunder", "herein" or words of like import shall mean and be a reference to the Credit Agreement, as affected and amended hereby. 5. The Credit Agreement, as amended by this Fourth Amendment, and each other document executed in connection therewith shall remain in full force and effect and are hereby ratified and confirmed, except as specifically amended hereby. 6. This Amendment shall be governed by and construed in accordance with the laws of the State of New York and shall be binding upon the Borrower, each Guarantor, the Bank and their respective successors and assigns. IN WITNESS WHEREOF, the Borrower, each Guarantor and the Bank have caused this Fourth Amendment to be duly executed by their duly authorized officers, all as of the day and year first above written. COMPUTER OUTSOURCING SERVICES, INC. /s/----------------------------------- President NEDS, INC. /s/----------------------------------- President DATON PAY USA, INC. /s/----------------------------------- President PAY USA OF NEW JERSEY, INC. /s/----------------------------------- President ACA ACQUISITION CORP. /s/----------------------------------- President MCC CORPORATION /s/----------------------------------- President THE CHASE MANHATTAN BANK /s/----------------------------------- Vice President EX-10.2 3 1996 (REPLACEMENT) TERM NOTE $1,218,750 New York, New York As of February 1, 1997 FOR VALUE RECEIVED, COMPUTER OUTSOURCING SERVICES, INC. the "Borrower"), HEREBY PROMISES TO PAY to the order of THE CHASE MANHATTAN BANK (the "Bank"), at its offices located at 1411 Broadway, New York, New York 10018, or at such other place as the Bank or any holder hereof may from time to time designate, the principal sum of ONE MILLION TWO HUNDRED AND EIGHTEEN THOUSAND SEVEN HUNDRED AND FIFTY DOLLARS ($1,218,750), in lawful money of the United States, in immediately available funds in thirty-nine (39) equal consecutive monthly installments of $31,250 payable on the first of each month commencing on March 1, 1997 with the final installment due on May 1, 2000 (the "Maturity Date")(or earlier as hereinafter referred to), and to pay interest in like money at such office or place from the date hereof on the unpaid principal balance of each Loan (as hereinafter defined) made hereunder at a rate equal to the Applicable Interest Rate (as hereinafter defined) for such Loan, which shall be payable on the Interest Payment Date relating to such Loan (as hereinafter defined) until such Loan shall be due and payable (whether at maturity, by acceleration or otherwise) and thereafter, on demand. Interest after maturity shall be payable at a rate four percent (4%) per annum above the Applicable Rate in effect from time to time which rate shall be computed for actual number of days elapsed on the basis of a 360-day year and shall be adjusted as of the date of each such change, but in no event higher than the maximum permitted under applicable law. Interest/Grid Schedule ---------------------- The Bank is authorized to enter on the Grid Schedule attached hereto (i) the amount of each Loan made from time to time hereunder, (ii) the date on which each Loan is made, (iii) the applicable Interest Period for each Loan which in no event shall be later than the Maturity Date, (iv) the interest rate agreed between the Borrower and the Bank as the interest rate to be paid to the Bank on each Loan (each such rate, an "Applicable Interest Rate"), which rate, at the Borrower's option in accordance herewith, shall be at (a) the Alternate Base Rate (as hereinafter defined)(the "Prime Rate Loan(s)") or (b) the Adjusted Eurodollar Rate (as hereafter defined) plus 2.25% (the "Eurodollar Loan"), (v) the amount of each payment made hereunder, and (vi) the outstanding principal balance of the Loans hereunder from time to time, all of which entries, in the absence of manifest error, shall be rebuttably presumed correct and binding on the Borrower; PROVIDED HOWEVER, that the failure of the Bank to make any such entries shall not relieve the Borrower from its obligation to pay any amount due hereunder. Prepayment ---------- The Borrower shall not have the right to prepay any Loan, other than Loans based on the Prime Rate, prior to the last day of the applicable Interest Period of such Loan. In the event the Borrower does prepay a Eurodollar Loan prior to the last day of the applicable Interest Period, the Borrower shall reimburse the Bank on demand for any loss incurred or to be incurred by it in the reemployment of the funds released by any prepayment. Loans by the Bank ----------------- The term loan hereunder may be made in any combination of loans (each a "Loan" and collectively the "Loans") as may be requested by the Borrower hereunder, which Loans shall in no event exceed the lesser of $1,218,750 or the aggregate outstanding principal balance hereunder. Any Eurodollar Loan shall be in a minimum principal amount of $500,000 and in increments of $100,000. Each such request for a Loan shall be made by any officer of the Borrower or any person designated in writing by any such officer, all of which are hereby designated and authorized by the Borrower to request Loans and agree to the terms thereof (including, without limitation the Applicable Interest Rate and Interest Period with respect thereto). The Borrower shall give the Bank notice at least three (3) Business Days prior to the date hereof and the end of each Interest Period (as hereafter defined) specifying whether the Loan shall bear interest at the Eurodollar Rate and the Interest Period applicable thereto. Same day notice by noon is required for Prime Loans. No more than three (3) Eurodollar Loans may be outstanding at any one time. In the event the Borrower shall fail to provide such notice, the Loan shall be deemed to bear interest at the applicable Prime Rate and shall have an Interest Period of one month. The Borrower shall have the right at any time upon the prior irrevocable written notice to the Bank required above to continue at the end of the then prevailing Interest Period any Prime Rate Loan or Eurodollar Loan or portion thereof into a subsequent Interest Period and at the end of the then prevailing Interest Period to convert any Loan or portion thereof into a Prime Rate Loan or Eurodollar Loan, subject to the selection of Interest Periods in accordance with the definition thereof and to the following conditions : (a) no Eurodollar Loan maybe continued as such and no Prime Rate Loan may be converted to a Eurodollar Rate Loan if an Event of Default under the Standby Credit and Term Loan Agreement dated as of April 5, 1994, as amended among the Borrower, the Bank and certain guarantors named therein ("Credit Agreement") or, any event which upon notice or lapse of time or both would constitute an Event of Default thereunder, shall have occurred and be continuing at the time of such continuation or conversion; (b) in the case of a continuation of or conversion of less than all of a Loan, the principal amount of each Eurodollar Loan continued or into which another Type of Loan has been converted shall not be less than $500,000 and shall be in an integral multiple of $100,000; (c) each conversion shall be effected by the Bank by applying the proceeds of the new Prime Rate Loan or Eurodollar Loan to the Loan (or portion thereof) being converted, and accrued interest on the Loan (or portion thereof) being converted shall be paid by the Borrower at the time of conversion; (d) if the last day of an Interest Period with respect to a Loan that is to be converted to a Eurodollar Loan is not a Business Day, then such conversion shall be made on the next succeeding Business Day and during the period from the last such day of an Interest Period to such succeeding Business Day such Loan shall bear interest as if it were a Prime Rate Loan; (e) a Eurodollar Loan may be converted to another Type of Loan only on the last day of its Interest Period; and (f) any portion of a Eurodollar Loan that cannot be converted or continued as a Eurodollar Loan by reason of prepayment penalties thereon automatically shall be converted at the end of the prevailing Interest Period to a Prime Rate Loan. Increased Cost -------------- If at any time after the date hereof, the Board of Governors of the Federal Reserve System or any political subdivision of the United States of America or any other government, governmental agency or central bank shall impose or modify any reserve or capital requirement on or in respect of loans made by or deposits with the Bank or shall impose on the Bank or the Eurodollar market any other conditions affecting Eurodollar Loans, and the result of the foregoing is to increase the cost to (or, in the case of Regulation D, to impose a cost on) the Bank of making or maintaining any Eurodollar Loans or to reduce the amount of any sum receivable by the Bank in respect thereof, by an amount deemed by the Bank to be material, then, within 30 days after notice and demand by the Bank, the Borrower shall pay to the Bank such additional amounts as will compensate the Bank for such increased cost or reduction; 'provided', that the Borrower shall not be obligated to compensate the Bank for any increased cost resulting from the application of Regulation D as required by the definition of Adjusted Eurodollar Rate. Any such obligation by the Borrower to the Bank shall not be due and owing until the Bank has delivered written notice to the Borrower. Failure by the Bank to provide such notice shall not be deemed a waiver of any of its rights hereunder. A certificate of the Bank claiming compensation hereunder and setting forth the additional amounts to be paid to it hereunder and the method by which such amounts were calculated shall be conclusive in the absence of manifest error. Capital Adequacy ---------------- If the Bank shall have determined that the applicability of any law, rule, regulation or guideline adopted pursuant to or arising out of the July 1988 report of the Basle Committee on Banking Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards", or the adoption after the date hereof of any other law, rule regulation or guideline regarding capital adequacy, or any change in any of the foregoing or in the interpretation or administration of any of the foregoing by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank (or any lending office of the Bank) or the Bank's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Bank's capital or on the capital of the Bank's holding company, if any, as a consequence of its obligations hereunder to a level below that which the Bank or the Bank's holding company could have achieved but for such adoption, change or compliance (taking into consideration the Bank's policies and the policies of such Bank's holding company with respect to capital adequacy) by an amount deemed by the Bank to be material, then from time to time the Borrower shall pay to the Bank such additional amount or amounts as will compensate the Bank or the Bank's holding company for any such reduction suffered. Indemnity --------- The Borrower shall indemnify the Bank against any loss or expense which the Bank may sustain or incur as a consequence of the occurrence of any Event of Default or any loss or reasonable expense sustained or incurred in liquidating or employing deposits from third parties acquired to effect or maintain any Eurodollar Loan or any part thereof which the Bank may sustain or incur as a consequence of any default in payment of the principal amount of the Loan or any part thereof or interest accrued thereon. The Bank shall provide to the Borrower a statement, supported where applicable by documentary evidence, explaining the amount of any such loss or expense, which statement shall be conclusive absent manifest error. Change In Legality ------------------ (a) Notwithstanding anything to the contrary contained elsewhere in this Note, if any change after the date hereof in any law or regulation or in the interpretation thereof by any governmental authority charged with the administration thereof shall make it unlawful (based on the opinion of any counsel, whether in-house, special or general, for the Bank) for the Bank to make or maintain any Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to any Eurodollar Loan, then, by written notice to the Borrower by the Bank, the Bank may require that all outstanding Eurodollar Loans made hereunder be converted to Prime Loans, whereupon all such Eurodollar Loans shall be automatically converted to Prime Loans as of the effective date of such notice as provided in paragraph (b) below. (b) For purpose of this Section, a notice to the Borrower by the Bank pursuant to paragraph (a) above shall be effective, if lawful and if any Eurodollar shall then be outstanding, on the last day of the then current Interest Period; otherwise, such notice shall be effective on the date of receipt by the Borrower. Events of Default ----------------- This promissory note is the 1996 (Replacement) Term Note referred to in the Credit Agreement and is subject to prepayment, acceleration of maturity and other terms and conditions as set forth therein. Set-Off ------- The Borrower hereby gives to the Bank a lien on, security interest in and right of set-off against all moneys, securities and other property of the Borrower and the proceeds thereof, now or hereafter delivered to, remaining with or in transit in any manner to the Bank, its correspondents, affiliates (including Chase Securities Inc.) or its agents from or for the Borrower, whether for safekeeping, custody, pledge, transmission, collection or otherwise or coming into possession, control or custody of the Bank in any way, and also, any balance of any deposit accounts and credits of the Borrower with, and any and all claims of the Borrower against the Bank at any time existing, as collateral security for the payment of this Note and of all other liabilities and obligations now or hereafter owed by the Borrower to the Bank, contracted with or acquired by the Bank, whether joint, several, absolute, contingent, secured, unsecured, matured or unmatured (all of which are hereafter collectively called "Liabilities"), hereby authorizing the Bank at any time or times, without prior notice, to apply such balances, credits or claims, or any part thereof, to such Liabilities in such amounts as it may select, whether contingent, unmatured or otherwise and whether any collateral security therefor is deemed adequate or not. The collateral security described herein shall be in addition to any collateral security described in any separate agreement executed by the Borrower in favor of the Bank. Definitions ----------- A. Adjusted Eurodollar Rate ------------------------ "Adjusted Eurodollar Rate" shall mean, with respect to any Eurodollar Loan for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/8 of 1%) equal to the product of (i) the Eurodollar Rate in effect for such Interest Period and (ii) Statutory Reserves. "Eurodollar Rate" shall mean, with respect to any Eurodollar Loan for any Interest Period, the rate (rounded upwards, if necessary, to the next 1/8 of 1% at which dollar deposits approximately equal in principal amount to the Bank's Eurodollar Loan and for the maturity equal to the applicable Interest Period are offered by the Bank in immediately available funds in an Interbank Market for Eurodollars at approximately 11:00 a.m., New York City time, two Business Days prior to the commencement of such Interest Period. B. Alternate Base Rate ------------------- "Alternate Base Rate" shall mean, for any day, a rate per annum (rounded upwards to the next highest 1/8 of 1% if not already an integral multiple of 1/8 of 1%) equal to the greater of (a) the Prime Rate (computed on the basis of the actual number of days elapsed over a year of 360 days) in effect on such date, or (b) the Federal Funds Effective Rate in effect on such date plus 1%. "Federal Funds Effective Rate" shall mean, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal Funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Bank from three Federal funds brokers of recognized standing selected by it. For purposes of this Agreement, any change in the Alternate Base Rate due to a change in the Federal Funds Effective Rate shall be effective on the effective date of such change in the Federal Funds Effective Rate. If for any reason the Bank shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including, without limitation, the inability or failure of the Bank to obtain sufficient bids or publications in accordance with the terms thereof, the Alternate Base Rate shall be the Prime Rate until the circumstances giving rise to such inability no longer exist. B. Business Day ------------ A "Business Day" shall mean any day other than a Saturday, Sunday or other day on which the Bank is authorized or required by law or regulation to close, and which is a day on which transactions in dollar deposits are being carried out in London, England for Eurodollar Loans and New York City for Prime Loans. C. Interest Payment Date --------------------- "Interest Payment Date" means (a) as to any Eurodollar Rate Loans or Prime Rate Loans at the end of each month following such Loan and (b) as to all Loans, the respective Maturity Date. D. Interest Period --------------- (i) For Eurodollar Loans, "Interest Period" shall mean the period commencing on the date of such Loan and ending 1, 3, 6 and 12 months subject to availability (as selected by the Borrower and recorded on the grid attached hereto) after the date of such Loan 'provided, however,' such Interest Period shall not extend past the Maturity Date. (ii) For Prime Loans, "Interest Period" shall mean the period agreed to by the parties hereto, however, the Interest Period shall not extend past the Maturity Date. If any Interest Period would end on a day which shall not be a Business Day, such Interest Period shall be extended to the next succeeding Business Day. E. Prime Rate ---------- "Prime Rate" shall mean the rate of interest as is publicly announced at the Bank's principal office from time to time as its Prime Rate. F. Statutory Reserves ------------------ "Statutory Reserves" shall mean a fraction (expressed as a decimal, the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including, without limitation, any marginal, special emergency or supplemental reserves) expressed as a decimal established by the Board of Governors of the Federal Reserve System and any other banking authority to which the Bank is subject, (a) with respect to the Adjusted Certificate of Deposit Rate, for new negotiable time deposits in dollars of over $100,000 with maturities approximately equal to the applicable Interest Period, and (b) with respect to the Adjusted Eurodollar Rate, for Eurocurrency Liabilities as defined in Regulation D. Eurodollar Loans shall be deemed to constitute Eurocurrency Liabilities and as such shall be deemed to be subject to such reserve requirements without benefit of or credit for proration, exceptions or offsets which may be available from time to time to the Bank under such Regulation D. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. Miscellaneous ------------- The Borrower hereby waives diligence, demand, presentment, protest and notice of any kind, and assents to extensions of the time of payment, release, surrender or substitution of security, or forbearance or other indulgence, without notice. This Note may not be changed, modified or terminated orally, but only by an agreement in writing signed by the party to be charged and consented to in writing by the party hereof. In the event the Bank or any holder hereof shall refer this Note to an attorney for collection, the Borrower agrees to pay, in addition to unpaid principal and interest, all the costs and expenses incurred in attempting or effecting collection hereunder, including reasonable attorney's fees, whether or not suit is instituted. The Bank reserves the right to sell participations in the Loans or the Note and to provide any participant or prospective participant with information of the Borrower previously received by the Bank. In the event of any litigation with respect to this Note, THE BORROWER WAIVES THE RIGHT TO A TRIAL BY JURY and all rights of setoff and rights to interpose counter-claims and cross-claims. The Borrower hereby irrevocably consents to the jurisdiction of the courts of the State of New York and of any Federal court located in such State in connection with any action or proceeding arising out of or relating to this Note. The execution and delivery of this Note has been authorized by the Board of Directors and by any necessary vote or consent of the stockholders of the Borrower. The Borrower hereby authorizes the Bank to complete this Note in any particulars according to the terms of the loan evidenced hereby. This Note shall be governed by and construed in accordance with the laws of the State of New York applicable to contract made and to be performed in such State, and shall be binding upon the successors and assigns of the Borrower and inure to the benefit of the Bank, its successors, endorsees and assigns. If any term or provision of this Note shall be held invalid, illegal or unenforceable the validity of all other terms and provisions hereof shall in no way be affected thereby. COMPUTER OUTSOURCING SERVICES, INC. /s/------------------------------- Chairman & CEO GRID SCHEDULE -------------- APPLICABLE AMOUNT OF TYPE AMOUNT INTEREST PRINCIPAL MATURITY DATE OF LOAN OF LOAN RATE REPAID DATE - ---- ------- ------- ---------- --------- -------- EX-10.3 4 PROMISSORY NOTE $1,500,000.00 February 26, 1997 - ------------- ----------------- FOR VALUE RECEIVED, 'Computer Outsourcing Services, Inc.' (the "Borrower"), HEREBY PROMISES TO PAY to the order of THE CHASE MANHATTAN BANK (the "Bank"), at its offices located at '1411 Broadway - Fifth Floor, N.Y., N.Y. 10018', or at such other place as the Bank or any holder hereof may from time to time designate, the principal sum of 'One Million Five Hundred Thousand and 00/00 DOLLARS ($1,500,000.00)', or such lesser amount as may constitute the outstanding balance hereof, in lawful money of the United States, on the Maturity Date (as hereinafter defined) set forth on the Grid Schedule (or earlier as hereinafter referred to), and to pay interest in like money at such office or place from the date hereof on the unpaid principal balance of each Loan (as hereinafter defined) made hereunder at a rate equal to the Applicable Interest Rate (as hereinafter defined) for such Loan, which shall be payable on the last day of the Interest Period relating to such Loan and, if such Interest Period is greater than three (3) months, at three (3) month intervals after such Loan is made, until such Loan shall be due and payable (whether at maturity, by acceleration or otherwise) and thereafter, on demand. Interest after maturity shall be payable at a rate four percent (4%) per annum above the Bank's Prime Rate which rate shall be computed for actual number of days elapsed on the basis of a 360-day year and shall be adjusted as of the date of each such change, but in no event higher than the maximum permitted under applicable law. "Prime Rate" shall mean the rate of interest as is publicly announced at the Bank's principal office from time to time as its Prime Rate. Interest/Grid Schedule ---------------------- The Bank is authorized to enter on the Grid Schedule attached hereto (i) the amount of each Loan made from time to time hereunder, (ii) the date on which each Loan is made, (iii) the date on which each Loan shall be due and payable to the Bank which in no event shall be later than 'April 30, 1998' (the "Maturity Date"), (iv) the interest rate agreed between the Borrower and the Bank as the interest rate to be paid to the Bank on each Loan (each such rate, the "Applicable Interest Rate"), which rate, at the Borrower's option in accordance herewith, shall be at (a) the Prime Rate (the "Prime Rate Loan(s)"), or (b) the Adjusted Eurodollar Rate (as hereafter defined) plus '2 1/4%' (the "Eurodollar Loan"), (v) the amount of each payment made hereunder, and (vi) the outstanding principal balance of the Loans hereunder from time to time, all of which entries, in the absence of manifest error, shall be rebuttably presumed correct and binding on the Borrower; 'provided, however', that the failure of the Bank to make any such entries shall not relieve the Borrower from its obligation to pay any amount due hereunder. Prepayment ---------- The Borrower shall not have the right to prepay any Loan, other than Loans based on the Prime Rate, prior to the Maturity Date of such Loan. In the event the Borrower does prepay a Eurodollar Loan prior to the Maturity Date, the Borrower shall reimburse the Bank on demand for any loss incurred or to be incurred by it in the reemployment of the funds released by any prepayment. Discretionary Loans by the Bank ------------------------------- The Bank my lend, in its sole discretion in each instance, such amounts (each a "Loan" and collectively the "Loans") as may be requested by the Borrower hereunder, which Loans shall in no event exceed '$1,500,000.00' in aggregate principal amount outstanding at any time. Any Eurodollar Loan shall be in a minimum principal amount of $500,000 and in increments of $100,000. Each such request for a Loan shall be made by any officer of the Borrower or any person designated in writing by any such officer, all of which are hereby designated and authorized by the Borrower to request Loans and agree to the terms thereof (including without limitation the Applicable Interest Rate and Maturity Date with respect thereto). The Borrower shall give the Bank notice at least three (3) Business Days prior to the date hereof and the end of each Interest Period (as hereafter defined) specifying whether the Loan shall bear interest at the Prime Rate or the Eurodollar Rate and the Interest Period applicable thereto. In the event the Borrower shall fail to provide such notice, the Loan shall be deemed to bear interest at the applicable Prime Rate and shall have an Interest Period of one month. The principal amount of each Loan shall be prepaid on the earlier to occur of the Maturity Date applicable thereto, or the date upon which the entire unpaid balance hereof shall otherwise become due and payable. Increased Cost -------------- If at any time after the date hereof, the Board of Governors of the Federal Reserve System or any political subdivision of the United States of America or any other government, governmental agency or central bank shall impose or modify any reserve or capital requirement on or in respect of loans made by or deposits with the Bank or shall impose on the Bank or the Eurodollar market any other conditions affecting Eurodollar Loans, and the result of the foregoing is to increase the cost to (or, in the case of Regulation D, to impose a cost on) the Bank of making or maintaining any Eurodollar Loans or to reduce the amount of any sum receivable by the Bank in respect thereof, by an amount deemed by the Bank to be material, then, within 30 days after notice and demand by the Bank, the Borrower shall pay to the Bank such additional amounts as will compensate the Bank for such increased cost or reduction; 'provided', that the Borrower shall not be obligated to compensate the Bank for any increased cost resulting from the application of Regulation D as required by the definition of Adjusted Eurodollar Rate. Any such obligation by the Borrower to the Bank shall not be due and owing until the Bank has delivered written notice to the Borrower. Failure by the Bank to provide such notice shall not be deemed a waiver of any of its rights hereunder. A certificate of the Bank claiming compensation hereunder and setting forth the additional amounts to be paid to it hereunder and the method by which such amounts were calculated shall be conclusive in the absence of manifest error. Capital Adequacy ---------------- If the Bank shall have determined that the applicability of any law, rule, regulation or guideline adopted pursuant to or arising out of the July 1988 report of the Basle Committee on Banking Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards", or the adoption after the date hereof of any other law, rule regulation or guideline regarding capital adequacy, or any change in any of the foregoing or in the interpretation or administration of any of the foregoing by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank (or any lending office of the Bank) or the Bank's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Bank's capital or on the capital of the Bank's holding company, if any, as a consequence of its obligations hereunder to a level below that which the Bank or the Bank's holding company could have achieved but for such adoption, change or compliance (taking into consideration the Bank's policies and the policies of such Bank's holding company with respect to capital adequacy) by an amount deemed by the Bank to be material, then from time to time the Borrower shall pay to the Bank such additional amount or amounts as will compensate the Bank or the Bank's holding company for any such reduction suffered. Indemnity --------- The Borrower shall indemnify the Bank against any loss or expense which the Bank may sustain or incur as a consequence of the occurrence of any Event of Default or any loss or reasonable expense sustained or incurred in liquidating or employing deposits from third parties acquired to effect or maintain any Eurodollar Loan or any part thereof which the Bank may sustain or incur as a consequence of any default in payment of the principal amount of the Loan or any part thereof or interest accrued thereon. The Bank shall provide to the Borrower a statement, supported where applicable by documentary evidence, explaining the amount of any such loss or expense, which statement shall be conclusive absent manifest error. change In Legality ------------------ (a) Notwithstanding anything to the contrary contained elsewhere in in this Note, if any change after the date hereof in any law or regulation or in the interpretation thereof by any governmental authority charged with the administration thereof shall make it unlawful (based on the opinion of any counsel, whether in-house, special or general, for the Bank) for the Bank to make or maintain any Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to any Eurodollar Loan, then, by written notice to the Borrower by the Bank, the Bank may require that all outstanding Eurodollar Loans made hereunder be converted to Prime Loans, whereupon all such Eurodollar Loans shall be automatically converted to Prime Loans as of the effective date of such notice as provided in paragraph (b) below. (b) For purposes of this Section, a notice to the Borrower by the Bank pursuant to paragraph (a) above shall be effective, if lawful and if any Eurodollar Loans shall then be outstanding, on the last day of the then current Interest Period; otherwise, such notice shall be effective on the date of receipt by the Borrower. Events of Default ---------------- If the Borrower shall default in the punctual payment of any sum payable with respect to, or in the observance or performance of any of the terms and conditions of, this Note, or any other agreement with or in favor of the Bank, or if a default or event of default that is accelerated shall occur for any reason under any such agreement, or in the event of default in any other indebtedness of the Borrower, or if the Bank shall, in its sole discretion, consider any of the obligations of the Borrower hereunder insecure, or if any warranty, representation or statement of fact made in writing to the Bank at any time by an officer, agent or employee of the Borrower is false or misleading in any material respect when made, or if the Borrower shall be dissolved or shall fail to maintain its existence in good standing, or if the usual business of the Borrower shall be suspended or terminated, or if any levy, execution, seizure, attachment or garnishment shall be issued, made or filed on or against any material portion of the property of the Borrower, or if the Borrower shall become insolvent (however defined or evidenced), make an assignment for the benefit of creditors or make or send a notice of intended bulk transfer, or if a committee of creditors is appointed for, or any petition or proceeding for any relief under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, receivership, liquidation or dissolution law or statute now or hereafter in affect (whether at law or in equity) is filed or commenced by or against the Borrower or any material portion of its property, or if any trustee or receiver is appointed for the Borrower or any such property - then and in any such event, in addition to all rights and remedies of the Bank under applicable law and otherwise, all such rights and remedies cumulative, not exclusive and enforceable alternatively, successively and concurrently, the Bank may, at its option, declare any and all of the amounts owing under this Note to be due and payable, whereupon the maturity of the then unpaid balance hereof shall be accelerated and the same, together with all interest accrued hereon, shall forthwith become due and payable. Definitions ----------- A. Adjusted Eurodollar Rate ------------------------ "Adjusted Eurodollar Rate" shall mean, with respect to any Eurodollar Loan for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/8 of 1%) equal to the product of (i) the Eurodollar Rate in effect for such Interest Period and (ii) Statutory Reserves. "Eurodollar Rate" shall mean, with respect to any Eurodollar Loan for any Interest Period, the rate (rounded upwards, if necessary, to the next 1/8 of 1% at which dollar deposits approximately equal in principal amount to the Bank's Eurodollar Loan and for the maturity equal to the applicable Interest Period are offered by the Bank in immediately available funds in an Interbank Market for Eurodollars at approximately 11:00 a.m., New York City time, two Business Days prior to the commencement of such Interest Period. B. Business Day ------------ A Business Day shall mean any day other than a Saturday, Sunday or other day on which the Bank is authorized or required by law or regulation to close, and which is a day on which transactions in dollar deposits are being carried out in London, England for Eurodollar Loans and New York City for Prime Loans. C. Interest Period --------------- (i) For Eurodollar Loans, Interest Period shall mean the period commencing on the date of such Loan and ending 1, 2, 3 or 6 months (as selected by the Borrower and recorded on the grid attached hereto) after the date of such Loan. (ii) For Prime Loans, Interest Period shall mean the period agreed to by the parties hereto, however, the Interest Period shall not extend past the Maturity Date. If any Interest Period would end on a day which shall not be a Business Day, such Interest Period shall be extended to the next succeeding Business Day. D. Statutory Reserves ------------------ Statutory Reserves shall mean a fraction (expressed as a decimal, the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including, without limitation, any marginal, special emergency or supplemental reserves) expressed as a decimal established by the Board of Governors of the Federal Reserve System and any other banking authority to which the Bank is subject, (a) with respect to the Adjusted Certificate of Deposit Rate, for new negotiable time deposits in dollars of over $100,000 with maturities approximately equal to the applicable Interest Period, and (b) with respect to the Adjusted Eurodollar Rate, for Eurocurrency Liabilities as defined in Regulation D. Eurodollar Loans shall be deemed to constitute Eurocurrency Liabilities and as such shall be deemed to be subject to such reserve requirements without benefit of or credit for proration, exceptions or offsets which may be available from time to time to the Bank under such Regulation D. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. Set-Off ------- The Borrower hereby gives to the Bank a lien on, security interest in and right of set-off against all moneys, securities and other property of the Borrower and the proceeds thereof, now or hereafter delivered to, remaining with or in transit in any manner to the Bank, its correspondents, affiliates (including Chemical Securities Inc.) or its agents from or for the Borrower, whether for safekeeping, custody, pledge, transmission, collection or otherwise or coming into possession, control or custody of the Bank in any way, and also, any balance of any deposit accounts and credits of the Borrower with, and any and all claims of the Borrower against the Bank at any time existing, as collateral security for the payment of this Note and of all other liabilities and obligations now or hereafter owed by the Borrower to the Bank, contracted with or acquired by the Bank, whether joint, several, absolute, contingent, secured, unsecured, matured or unmatured (all of which are hereafter collectively called "Liabilities"), hereby authorizing the Bank at any time or times, without prior notice, to apply such balances, credits or claims, or any part thereof, to such Liabilities in such amounts as it may select, whether contingent, unmatured or otherwise and whether any collateral security therefor is deemed adequate or not. The collateral security described herein shall be in addition to any collateral security described in any separate agreement executed by the Borrower in favor of the Bank. Miscellaneous ------------- The Borrower hereby waives diligence, demand, presentment, protest and notice of any kind, and assents to extensions of the time of payment, release, surrender or substitution of security, or forbearance or other indulgence, without notice. This Note may not be changed, modified or terminated orally, but only by an agreement in writing signed by the party to be charged and consented to in writing by the party hereof. In the event the Bank or any holder hereof shall refer this Note to an attorney for collection, the Borrower agrees to pay, in addition to unpaid principal and interest, all the costs and expenses incurred in attempting or affecting collection hereunder, including reasonable attorney's fees, whether or not suit is instituted. The Bank reserves the right to sell participations in the Loans or the Note and to provide any participant or prospective participant with information of the Borrower previously received by the Bank. In the event of any litigation with respect to this Note, THE BORROWER WAIVES THE RIGHT TO A TRIAL BY JURY and all rights of setoff and rights to interpose counter-claims and cross-claims. The Borrower hereby irrevocably consents to the jurisdiction of the courts of the State of New York and of any Federal court located in such State in connection with any action or proceeding arising out of or relating to this Note. The execution and delivery of this Note has been authorized by the Board of Directors and by any necessary vote or consent of the stockholders of the Borrower. The Borrower hereby authorizes the Bank to complete this Note in any particulars according to the terms of the loan evidenced hereby. This Note shall be governed by and construed in accordance with the laws of the State of New York applicable to contract made and to be performed in such State, and shall be binding upon the successors and assigns of the Borrower and inure to the benefit of the Bank, its successors, endorsees and assigns. If any term or provision of this Note shall be held invalid, illegal or unenforceable the validity of all other terms and provisions hereof shall in no way be affected thereby. Computer Outsourcing Services, Inc. /s/-------------------------------- GRID SCHEDULE -------------- APPLICABLE AMOUNT OF TYPE AMOUNT INTEREST PRINCIPAL MATURITY DATE OF LOAN OF LOAN RATE REPAID DATE - ---- ------- ------- ---------- --------- -------- EX-10.4 5 FIFTH AMENDMENT dated as of March 20, 1997 to the STANDBY CREDIT AND TERM LOAN AGREEMENT dated as of April 5, 1994, as amended ("Credit Agreement") COMPUTER OUTSOURCING SERVICES, INC., a New York corporation (the "Borrower"), NEDS, INC., a New York corporation, DATON PAY USA, INC., a California corpora- tion, PAY USA OF NEW JERSEY, INC., a New York corporation, ACA ACQUISITION CORP., a New York corporation and MCC CORPORATION, a New York Corporation, (each, a "Guarantor" and collectively, the "Guarantors") and THE CHASE MANHATTAN BANK (formerly Chemical Bank"), a New York banking corporation (the "Bank"). The Borrow desires to amend the Credit Agreement in order to revise cer- tain financial covenants as herein set forth. Subject to the terms and condi- tions hereof, the Borrower, the Guarantors, and the Bank are prepared to agree to such amendment. Unless otherwise defined herein, all capitalized term used herein which are defined in the Credit Agreement shall have the same meanings herein as therein defined. Therefore, the Borrower, the Guarantors, and the Bank agree as follows: 1. The Credit Agreement shall be amended accordingly: (a) Section 1.0 "Definitions" shall be amended by deleting the current definition of Cash Flow Coverage Ratio and replacing it with the following: "Cash Flow Coverage Ratio" shall mean, with respect to the Borrower, the ratio of (i) the sum of Excess Cash Flow (as hereinafter defined) for the four most recent consecutive quarters ending on or prior to the date of determination to (ii) (x) the aggregate interest expense of such Person for such four quarter period plus (y) the current portion of long term Indebtedness outstanding on the date of determination plus (z) the current portion of Contingent Earnouts on the date of determination. (b) Section 7.08 "Consolidated Current Assets to Consolida- ted Current Liabilities" shall be amended by deleting it in its entirety and substituting therefor: SECTION 7.08 "Consolidated Current Assets to Consolida- ted Current Liabilities" With respect to the Borrower, permit the ratio of Consolidated Current Assets to Con- solidated Current Liabilities to be less than 1.15:1.00 until 10/30/97 and 1.25:1.00 thereafter. (c) Section 7.10 "Cash Flow Coverage Ratio" shall be amended by deleting it in its entirety and substituting there- for: SECTION 7.10 "Cash Flow Coverage Ratio" Permit the Cash Flow Coverage Ratio on a consolidated basis for each period specified below to be less than the ratio speci- fied below for such period: Period Ratio ______ _____ For the four previous consecutive quarters (taken as a whole) ending on each quarterly date until 10/30/97 1.25:1.00 For the four previous consecutive quarters (taken as a whole) ending on each quarterly date on or after 10/31/97 1.50:1.00 2. The Borrower and each Guarantor jointly and severally represent and warrant that the Credit Agreement together with this Fifth Amendment, when de- livered hereunder, will be legal, valid and binding obligations of each of them, as appropriate, and enforceable against each of them, as appropriate, in accor- dance with their respective terms. The Borrower and each Guarantor further rep- resent and warrant that the representations and warranties set forth in Article III of the Credit Agreement shall be deemed restated and are true and correct, all as of the date hereof and that no Event of Default, as set forth in Article VIII of the Credit Agreement, and that no event which upon notice or lapse of time or both, would constitute an Event of Default has occurred and is continu- ing. 3. On or prior to the effectiveness of this Fifth Amendment, the Bank shall have received the following in form and substance satisfactory to it: (i) the amendment fee of $1,000. 4. Upon the effectiveness of this Fifth Amendment, each reference in the Credit Agreement to "this Agreement", "hereunder", "herein" or words of like import shall mean and be a reference to the Credit Agreement, as affected and amended hereby. 5. The Credit Agreement, as amended by this Fifth Amendment, and each other document executed in connection therewith shall remain in full force and effect and are hereby ratified and confirmed, except as specifically amended hereby. 6. This Amendment shall be governed by and construed in accordance with the laws of the State of New York and shall be binding on the Borrower, each Guarantor, the Bank and their respective successors and assigns. IN WITNESS WHEREOF, the Borrower, each Guarantor and the Bank have caused this Fifth Amendment to be duly executed by their duly authorized officers, all as of the day and year first above written. COMPUTER OUTSOURCING SERVICES, INC. By /s/ Zach Lonstein Title: CEO NEDS, INC. By /s/ Zach Lonstein Title: CEO DATON PAY USA, INC. By /s/ Zach Lonstein Title: CEO PAY USA OF NEW JERSEY, INC. By /s/ Zach Lonstein Title: CEO ACA ACQUISITION CORP. By /s/ Zach Lonstein Title: CEO MCC CORPORATION By /s/ Zach Lonstein Title: CEO THE CHASE MANHATTAN BANK By /s/ Denise G. Thomas Vice President EX-27 6
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S QUARTERLY REPORT ON FORM 10-QSB FOR THE PERIOD ENDED JANUARY 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT. 3-MOS OCT-31-1997 JAN-31-1997 649,749 0 4,546,969 405,049 0 5,886,654 7,619,455 4,507,424 19,457,391 4,901,470 2,903,221 0 0 37,448 11,745,121 19,457,391 0 8,182,101 0 5,392,180 2,455,320 99,175 84,390 260,487 114,000 146,487 0 0 0 146,487 0.04 0.04 INCLUDES CURRENT PORTION OF $1,136,505 ALSO INCLUDED IN OTHER EXPENSES
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