-----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, QWcNHuQCY+piPWgfDMUTovQg74VmA+O7FMEmLURUsnWIjkIW/8U5zlvWZLebcAZ4 HEOy3LLqAAuHPK83X7CTXA== 0000893816-98-000004.txt : 19980317 0000893816-98-000004.hdr.sgml : 19980317 ACCESSION NUMBER: 0000893816-98-000004 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980316 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: SEC FILE NUMBER: 000-20824 FILM NUMBER: 98566249 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, 1998 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 3,934,377 shares of the registrant's Common Stock, $0.01 par value, outstanding as of March 10, 1998. Transitional Small Business Disclosure Form (check one): Yes [ ] No [X] PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS January 31, October 31, 1998 1997 ------------- ------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents ................... $ 10,369,340 $ 972,459 Trade accounts receivable, net of allowance for doubtful accounts of $200,815 and $111,577 .................................. 4,875,157 3,990,630 Prepaid income taxes ........................ 559,700 - Net assets of discontinued operations (Note 2) - 6,071,333 Prepaid expenses and other current assets ... 884,142 1,223,759 ---------- ---------- 16,688,339 12,258,181 ---------- ---------- PROPERTY and EQUIPMENT, net ................... 2,691,440 2,578,071 ---------- ---------- OTHER ASSETS: Deferred software costs, net ................ 1,558,633 1,545,935 Intangibles, net ............................ 2,659,159 2,715,993 Due from related parties, net ............... 114,252 176,295 Notes receivable (Note 2) ................... 780,000 30,000 Security deposits and other non-current assets .................................... 466,823 493,797 ---------- ---------- 5,578,867 4,962,020 ---------- ---------- TOTAL ASSETS .................................. $ 24,958,646 $ 19,798,272 ========== ========== See Notes to Consolidated Interim Financial Statements Page 2 of 13 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) January 31, October 31, 1998 1997 ------------- ------------- (Unaudited) LIABILITIES and STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ............................ $ 1,341,051 $ 1,246,516 Current portion of long-term debt ........... 464,404 2,297,546 Current portion of capitalized lease obligations ............................... 23,226 23,034 Accrued expenses and taxes .................. 4,877,307 1,779,672 Customer deposits and other current liabilities ............................... 489,074 231,699 ---------- ---------- 7,195,062 5,578,467 ---------- ---------- LONG-TERM LIABILITIES: Long-term debt .............................. 245,024 252,577 Capitalized lease obligations ............... 13,687 19,414 Deferred income taxes ....................... 589,621 645,910 Unearned portion of covenant not to compete . 1,360,000 - Deferred lease credits ...................... 776,766 762,841 ---------- ---------- 2,985,098 1,680,742 ---------- ---------- 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, 3,862,227 and 3,826,104 ......... 38,622 38,261 Additional paid-in capital .................. 9,803,901 9,595,789 Retained earnings ........................... 4,935,963 2,905,013 ---------- ---------- 14,778,486 12,539,063 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .... $ 24,958,646 $ 19,798,272 ========== ========== See Notes to Consolidated Interim Financial Statements Page 3 of 13 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended January 31, 1998 1997 ------------- ------------- REVENUES ...................................... $ 7,216,595 $ 5,899,895 ---------- ---------- COSTS and EXPENSES: Data processing costs ....................... 4,620,995 4,277,101 Selling and promotion costs ................. 299,905 319,521 General and administrative expenses ......... 1,512,387 1,145,460 Interest (income)/expense, net .............. (91,576) 65,674 ----------- ---------- 6,341,711 5,807,756 ----------- ---------- Income from continuing operations before provision for income taxes .................. 874,884 92,139 Income tax provision .......................... 384,346 40,300 ---------- ---------- Income from continuing operations ............. 490,538 51,839 Income/(loss) from discontinued operations, net of income tax (Note 2) .................. (60,509) 94,648 Gain on the sale of the Payroll Division, net of income taxes (Note 2) .................... 1,600,921 - ----------- ---------- NET INCOME .................................... $ 2,030,950 $ 146,487 =========== ========== Earnings per Common Share (Note 3): Basic earnings per share: Income from continuing operations ............. $ 0.13 $ 0.01 Income/(loss) from discontinued operations .... (0.02) 0.03 Gain on the sale of the Payroll Division ...... 0.42 - ------------ ---------- Net income .................................... $ 0.53 $ 0.04 ============ ========== Weighted average number of common shares outstanding ................................. 3,829,895 3,740,285 ============ ========== Diluted earnings per share: Income from continuing operations ............. $ 0.11 $ 0.01 Income/(loss) from discontinued operations .... (0.01) 0.03 Gain on the sale of the Payroll Division ...... 0.36 - ------------ ---------- Net income .................................... $ 0.46 $ 0.04 ============ ========== Weighted average number of common shares and share equivalents outstanding ............... 4,429,484 3,839,991 ============ ========== See Notes to Consolidated Interim Financial Statements Page 4 of 13 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended January 31, 1998 1997 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Income from continuing operations ............. $ 490,538 $ 51,839 Adjustments to reconcile income from continuing operations to cash provided by operating activities: Depreciation and amortization ............... 339,088 348,267 Current tax provision ....................... 435,134 40,300 Increase/(reduction) in deferred income taxes (50,788) 23,935 Decrease/(increase) in: Trade accounts receivable ................. (884,527) (236,243) Prepaid income taxes ...................... (559,700) 17,784 Prepaid expenses and other current assets . 339,617 (233,423) Security deposits and other noncurrent assets .................................. 1,700 33,046 Increase/(decrease) in: Accounts payable .......................... 94,535 213,962 Accrued expenses and taxes ................ (974,053) (149,289) Customer deposits and other current liabilities ............................. 257,375 (14,486) Deferred lease credits .................... (18,385) - ------------- ------------- Net cash provided by operating activities ... (529,466) 95,692 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment .......... (312,098) (113,101) Disposal of equipment ....................... 14,960 2,074 Proceeds from the sale of the Pay USA Division .................................. 10,710,000 - Proceeds from a covenant not to compete ..... 1,440,000 - Settlement of contingencies relating to acquisitions ............................. - (35,472) Increase in deferred software costs ......... (133,599) (136,393) ----------- ----------- Net cash (provided by)/used in investing activities ................................ $ 11,719,263 $ (282,892) ---------- ----------- Continued on Next Page See Notes to Consolidated Interim Financial Statements Page 5 of 13 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended January 31, 1998 1997 ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt ................. $ (1,840,693) $ (202,083) Proceeds from the exercise of options and warrants .................................. 208,473 - Repayments of amounts by related parties, net .............................. 62,043 6,716 Repayments of capital leases ................ (5,535) (20,671) ----------- ----------- Net cash used in financing activities ....... (1,575,712) (216,038) ----------- ----------- CASH FLOWS FROM DISCONTINUED OPERATIONS: Income/(loss) from discontinued operations .. (60,509) 94,648 Adjustments to reconcile income/(loss) from discontinued operations to cash (used in)/ provided by discontinued operations: Depreciation and amortization ............. 151,118 206,766 Increase in net assets of discontinued operations .............................. (307,813) (261,319) ----------- ----------- Net cash (used in)/provided by discontinued operations ................................ (217,204) 40,095 ----------- ----------- Net increase/(decrease) in cash and cash equivalents ............................... 9,396,881 (363,143) Cash and cash equivalents at the beginning of the period.............................. 972,459 857,204 ----------- ----------- Cash and cash equivalents at the end of the period..................................... $ 10,369,340 $ 494,061 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest .................................. $ 49,868 $ 73,006 ========== ========== Income taxes .............................. $ 559,700 $ 51,215 ========== ========== SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Note received for a portion of the sale price of the Pay USA Division (Note 2) ............ $ 750,000 $ - ========== ========== For the three months ended January 31, 1997, $8,397 (net of tax benefits) was accreted through a charge to retained earnings in connection with a stock option. See Notes to Consolidated Interim Financial Statements Page 6 of 13 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY THREE MONTHS ENDED JANUARY 31, 1998 (Unaudited) Common Par Paid in Retained Shares Value Capital Earnings Total --------- --------- --------- ---------- ----------- Balances, October 31, 1997 ....... 3,826,102 $38,261 $9,595,789 $2,905,013 $12,539,063 Exercises of warrants ....... 24,225 242 152,376 152,618 Exercises of stock options .. 11,900 119 55,736 55,855 Net income ....... 2,030,950 2,030,950 --------- --------- ---------- ---------- ----------- Balances, January 31, 1998 ....... 3,862,227 $38,622 $9,803,901 $4,935,963 $14,778,486 ========= ========= =========== ========== =========== See Notes to Consolidated Interim Financial Statements Page 7 of 13 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. Basis of Presentation --------------------- The consolidated balance sheet as of January 31, 1998, and the consolidated statements of income and cash flows for the three month periods ended January 31, 1998 and 1997, 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, 1998 and 1997 are not necessarily indicative of the operating results for the full fiscal years. Certain reclassifications have been made to the prior periods to conform to the current presentation. Certain disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated interim financial statements should be read in conjunction with the Company's Annual Report on Form 10-KSB for the fiscal year ended October 31, 1997. 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. Sale of the Payroll Division ---------------------------- On December 19, 1997, the Company consummated the sale (the "Sale") of all the outstanding capital stock of Daton Pay USA, Inc., NEDS, Inc., Pay USA of New Jersey, Inc. and Key-ACA, Inc., each a wholly-owned subsidiary of the Company, and together comprising the Payroll Division ("Pay USA"), to Zurich Payroll Solutions, Ltd. ("Zurich" or the "Buyer"). At closing, the Company received $12,900,000, of which $12,150,000 was in cash and $750,000 was in the form of a note from the Buyer. The note is due on July 15, 1999 and requires quarterly payments of interest at 8.5% per annum. The amount received at closing included $1,440,000 for a three-year covenant not to compete and $500,000 in connection with a services agreement. The terms of the Sale also provide for an additional payment by the Buyer of up to $1,500,000, which amount is contingent on the revenue of Pay USA for the three months following the Sale, and is also subject to adjustment based on a final determination of the amounts of assets and liabilities transferred at December 19, 1997. The Company has recognized a pretax gain of approximately $3,099,000 after recording various costs of the transaction amounting to approximately $2,133,000. These costs include, among other things, the assumption of certain contractual obligations related to the original acquisitions, and payments and accruals relating to certain employment agreements. Income related to the $1,440,000 covenant not to compete will be recognized over the three-year term. Any contingent payment received from the Buyer will be recognized as income in the period received. Page 8 of 13 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued) 2. Sale of the Payroll Division (cont'd) ---------------------------- Of the cash received at the closing, $1,713,509 was used to repay a bank for a term loan and the outstanding balance on a line of credit (including interest accrued). During the eight-week period ended December 19, 1997 and the three month period ended Janaury 31, 1997, revenues relating to the discontinued operations approximated $1,117,000 and $2,409,000, and pretax operating results approximated a loss of $137,000 and income of $81,000, respectively. 3. Basic and Diluted Earnings per Common Share ------------------------------------------- The Company has adopted the provisions of Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"), which establishes new standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock such as employee stock options. SFAS 128 replaces the presentation of primary earnings per share with a presentation of basic earnings per share and also requires, among other things, a dual presentaion of basic and diluted earnings per share for all entities with complex capital structures. Basic earnings per share excludes dilution and is computed by dividing the components of net income by the weighted-average number of shares outstanding for each period presented. Diluted earnings per share is computed by dividing the components of net income by the weighted-average number of shares outstanding plus dilutive potential common shares which would result from the exercise of stock options and warrants. The prior period has been restated to reflect the requirements of SFAS 128. The following is a reconciliation of the weighted-average shares used in the computations of basic and dilutive earnings per share. January 31, ------------------------ 1998 1997 ---------- ---------- Weighed-average common shares outstanding used for basic earnings per share ................... 3,829,895 3,740,285 Weighted-average number of shares resulting from imputed exercises of dilutive stock options and warrants, computed using the treasury-stock method ......................................... 599,589 99,706 ---------- ---------- Weighted-average common shares outstanding used for dilutive earnings per share ................ 4,429,484 3,839,991 ========== ========== Total number of options and warrants excluded from the calculation of diluted earnings per share because they are anti-dilutive ................. 25,000 998,040 ========== ========== Page 9 of 13 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations --------------------------------------------- Results of Operations, Three Month Periods Ended January 31, 1998 and 1997 On December 19, 1997, the Company sold the four subsidiaries comprising the Payroll Division. In the accompanying financial statements, all revenues and expenses of the Payroll Division have been classified as discontinued operations. The following discussion relates only to continuing operations. During the period ended January 31, 1998, revenues from continuing operations increased $1,317,000 to $7,217,000, an increase of 22% over the period ended January 31, 1997. This increase is the result of several new Information Services contracts, including those for Year-2000 testing. Data processing costs increased $344,000 to $4,621,000 (64% of revenues) during the current period compared to $4,277,000 (72% of revenues) in the prior year's period. The improvement in margin is derived from economies of scale and improved margins on a contract-by-contract basis. Selling and promotion costs decreased $20,000 to $300,000, and decreased 1.2% as a percentage of revenues. The decrease as a percentage of revenues resulted from the consolidation of the sales and marketing efforts in the Information Processing Division. General and administrative expenses increased $367,000 to $1,512,000 in the current period, an increase of 1.6% as a percentage of revenues, primarily due to increased rent and utility costs connected with the Company's new computer center in New Jersey. The Company recorded net interest income of $92,000 in the current period, as compared to a net interest expense of $66,000 in the prior period. The Company repaid substantially all of its bank debt, and invested significant cash balances obtained from the proceeds of the sale of the Payroll Division. The Company recorded income from continuing operations of $491,000 ($0.13 and $0.11 per share for basic and diluted shares, respectively) for the period ended January 31, 1998, a ninefold increase compared to the profit of $52,000 ($0.01 per share - basic and diluted) for the period ended January 31, 1997. Results from discontinued operations declined from net income of $95,000 for the period ended January 31, 1997 to a loss of $61,000 for the period ended December 19, 1997, which was primarily the result of excluding revenues after the date of the sale. The month of January historically provided the highest revenues among the three months of the Payroll Division's first quarter. Page 10 of 13 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES Liquidity and Capital Resources During the three months ended January 31, 1998, the Company used approximately $529,000 in operating activities. This amount is net of depreciation and amortization of $339,000 and includes, among other things, an increase in accounts receivable of $885,000 and payment of $974,000 in accrued expenses. The Company generated cash from investing activities of approximately $11,719,000 during the period ended January 31, 1998, principally from the proceeds of the sale of the Payroll Division and $1,440,000 received for a related covenant not to compete. In investing activities for the period, the Company used cash of approximately $1,576,000, including $1,841,000 to repay long term debt, net of $208,000 generated from the exercises of stock warrants and employee stock options. As of January 31, 1998, the Company had cash and cash equivalents of $10,369,000 and working capital of $9,493,000. Its current ratio (i.e., the ratio of current assets to current liabilities) was 2.32 to 1, and the ratio of total liabilities to equity was 0.69 to 1. In March 1997, the Company and a bank entered into an agreement for a revolving line of credit whereby the Company may borrow up to $1,500,000. Interest on borrowings, when made, may be at either the Adjusted Eurodollar Rate (as defined) plus 2.25%, or the bank's prime rate. No amounts were outstanding on this line at January 31, 1998. The line of credit expires on April 30, 1998. Management believes that its cash on hand and its anticipated cash flow from operations will be sufficient to fund the Company's operations for at least the next twelve months. The Company continues to seek acquisition opportunities that are consistent with the Company's long-term strategy. Forward-looking statements in this report that are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements may be subject to certain risks and uncertainties, including but not limited to, 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 detailed from time to time in the Company's periodic report filings with the Securities and Exchange Commission. Accordingly, the actual results of the Company could differ materially from such forward-looking statements. Page 11 of 13 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 6 - Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: 27 Financial Data Schedule, filed electronically only. (b) Reports on Form 8-K: A Form 8-K was filed on January 5, 1998, and amended January 23, 1998, reporting the sale of the Payroll Division on December 19, 1997. Page 12 of 13 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 16, 1998 ------------------------------------- Zach Lonstein Principal Executive Officer /s/ March 16, 1998 ------------------------------------- Laurence L. Carpenter - Controller and Acting Principal Accounting Officer EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S QUARTERLY REPORT ON FORM 10-QSB FOR THE PERIOD ENDED JANUARY 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 3-MOS OCT-31-1998 NOV-01-1997 JAN-31-1998 10,369,340 0 5,075,972 200,815 0 16,688,339 7,099,161 4,407,721 24,958,646 7,195,062 746,341 0 0 38,622 14,739,864 24,958,646 0 7,216,595 0 4,620,995 1,812,292 89,570 48,500 874,884 384,346 490,538 (60,509) 0 0 2,030,950 0.53 0.46 CURRENT PORTION OF LONG TERM DEBT = 487,630 IN ADDITION, THERE IS A GAIN ON THE SALE OF THE PAYROLL DIVISION IN THE AMOUNT OF $1,600,921. THIS IS BASIC EPS.
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