-----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, TZZIaSJswWrgoYilntBRcFoSRqdpfOF9lZ0nSJla4NxhFqjzWZNMDbd6cQ8Bi1z8 VTg2ubFz7FjNVx67hBBbxg== 0000893816-98-000007.txt : 19980616 0000893816-98-000007.hdr.sgml : 19980616 ACCESSION NUMBER: 0000893816-98-000007 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980430 FILED AS OF DATE: 19980612 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: 98647759 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: April 30, 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 4,162,415 shares of the registrant's Common Stock, $0.01 par value, outstanding as of June 5, 1998. Transitional Small Business Disclosure Form (check one); Yes [ ] No [X] Page 1 of 16 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS April October 30, 1998 31, 1997 ------------- ------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents, including short-term, interest bearing invest- ments of $10,690,916 and $782,583 ......... $ 10,700,095 $ 972,459 Trade accounts receivable, net of allowance for doubtful accounts of $290,814 and $111,577 .................................. 4,715,342 3,990,630 Net assets of discontinued operations (Note 2) - 6,071,333 Prepaid expenses and other current assets ... 1,304,805 1,223,759 ---------- ---------- 16,720,242 12,258,181 ---------- ---------- PROPERTY and EQUIPMENT, net ................... 2,847,490 2,578,071 ---------- ---------- OTHER ASSETS: Deferred software costs, net ................ 1,608,288 1,545,935 Intangibles, net ............................ 2,591,249 2,715,993 Due from related parties, net ............... 105,269 176,295 Notes receivable (Note 2) ................... 780,000 30,000 Security deposits and other non-current assets .................................... 529,609 493,797 ---------- ---------- 5,614,415 4,962,020 ---------- ---------- TOTAL ASSETS .................................. $ 25,182,147 $ 19,798,272 ========== ========== See Notes to Consolidated Interim Financial Statements Page 2 of 16 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) April October 30, 1998 31, 1997 ------------- ------------- (Unaudited) LIABILITIES and STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ............................ $ 1,260,084 $ 1,246,516 Current portion of long-term debt ........... 450,027 2,297,546 Current portion of capitalized lease obligations ............................... 23,220 23,034 Accrued expenses and taxes .................. 4,355,457 1,779,672 Customer deposits and other current liabilities ............................... 209,526 231,699 ---------- ---------- 6,298,314 5,578,467 ---------- ---------- LONG-TERM LIABILITIES: Long-term debt .............................. 27,150 252,577 Capitalized lease obligations ............... 8,012 19,414 Deferred income taxes ....................... 583,234 645,910 Unearned portion of covenant not to compete . 1,240,000 - Deferred lease credits ...................... 758,976 762,841 ---------- ---------- 2,617,372 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, 4,048,438 and 3,826,104.......... 40,484 38,261 Additional paid-in capital .................. 10,779,054 9,595,789 Retained earnings ........................... 5,446,923 2,905,013 ---------- ---------- 16,266,461 12,539,063 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .... $ 25,182,147 $ 19,798,272 ========== ========== See Notes to Consolidated Interim Financial Statements Page 3 of 16 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Six Months Ended Three Months Ended April 30, April 30, -------------------------- -------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ REVENUES ........... $ 15,173,675 $ 11,796,766 $ 7,957,080 $ 5,896,871 ---------- ---------- ---------- ---------- COSTS and EXPENSES: Data processing costs .......... 9,830,805 8,515,782 5,209,810 4,238,681 Selling and promo- tion costs ..... 634,186 632,906 334,281 313,385 General and administrative expenses ....... 3,147,278 2,190,097 1,634,891 1,044,637 Interest expense, net of interest income ......... (240,862) 124,365 (149,286) 58,691 ----------- ---------- ----------- ---------- 13,371,407 11,463,150 7,029,696 5,655,394 ----------- ---------- ----------- ---------- Income from continu- ing operations before income tax provision ........ 1,802,268 333,616 927,384 241,477 Provision for income taxes ............ 800,770 133,600 416,424 93,300 ---------- ---------- ---------- ---------- Income from continu- ing operations ... 1,001,498 200,016 510,960 148,177 Income/(loss) from discontinued operations, net of income taxes (Note 2) (60,509) 129,585 - 34,937 Gain on sale of the Payroll Division, net of income taxes (Note 2) ... 1,600,921 - - - ---------- ---------- ---------- ---------- NET INCOME ......... $ 2,541,910 $ 329,601 $ 510,960 $ 183,114 ========== ========== ========== ========== Continued on Next Page Page 4 of 16 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Six Months Ended Three Months Ended April 30, April 30, -------------------------- -------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ EARNINGS PER COMMON SHARE (Note 3): Basic earnings per common share: Income from continuing operations ......... $ 0.26 $ 0.05 $ 0.13 $ 0.03 Income/(loss) from discontinued operations ......... (0.02) 0.03 - 0.01 Gain on Sale of the Payroll Division ... 0.41 - - - ----------- ---------- ---------- ---------- Net income ........... $ 0.65 $ 0.08 $ 0.13 $ 0.04 =========== ========== ========== ========== Weighted average number of common shares outstanding ........ 3,888,159 3,758,937 3,956,190 3,778,219 ========== ========== ========== ========== Diluted earnings per common share: Income from continuing operations ......... $ 0.23 $ 0.05 $ 0.12 $ 0.03 Income/(loss) from discontinued operations ......... (0.01) 0.03 - 0.01 Gain on Sale of the Payroll Division ... 0.36 - - - ----------- ---------- ---------- ---------- Net income ........... $ 0.58 $ 0.08 $ 0.12 $ 0.04 =========== ========== ========== ========== Weighted average number of common shares and other dilutive securities outstanding ........ 4,379,701 3,895,610 4,222,087 3,937,936 ========== ========== ========== ========== See Notes to Consolidated Interim Financial Statements Page 5 of 16 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended April 30, ------------------------------ 1998 1997 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Income from continuing operations ............. $ 1,001,498 $ 200,016 Adjustments to reconcile income from continuing operations to cash (used in)/provided by operating activities: Depreciation and amortization ............... 718,648 710,250 Increase/(reduction) in deferred income taxes (57,175) 41,372 Decrease/(increase) in: Trade accounts receivable ................. (724,712) (267,323) Prepaid expenses and other current assets . (81,048) (181,880) Security deposits and other noncurrent assets .................................. (67,054) 26,415 Increase/(decrease) in: Accounts payable .......................... 13,568 246,284 Accrued expenses and taxes ................ (1,060,770) 88,239 Customer deposits and other current liabilities ............................. (22,173) (42,278) Deferred lease credits ...................... (36,175) - ---------- ---------- Net cash (used in)/provided by operating activities .............................. (315,393) 821,095 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment .......... (690,777) (225,588) Disposal of equipment ....................... 14,960 2,074 Proceeds from the sale of the Payroll Division .................................. 10,710,000 - Proceeds from a covenant not to compete ..... 1,440,000 - Settlement of contingencies relating to acquisitions .............................. - (82,858) Increase in deferred software costs ......... (386,307) (205,842) ----------- ---------- Net cash provided by/(used in) investing activities .............................. $ 11,087,876 $ (512,214) ----------- ---------- Continued on Next Page See Notes to Consolidated Interim Financial Statements Page 6 of 16 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited - Continued) Six Months Ended April 30, ------------------------------ 1998 1997 ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt ................. $ (2,072,944) $ (618,685) Proceeds from the exercise of options and warrants .................................. 1,185,489 - Repayments of amounts by related parties, net .............................. 71,026 15,843 Repayments of capital leases ................ (11,214) (73,973) ----------- ---------- Net cash used in financing activities ..... (827,643) (676,815) ----------- ---------- CASH FLOWS FROM DISCONTINUED OPERATIONS: Income/(loss) from discontinued operations .. (60,509) 129,585 Adjustments to reconcile income/(loss) from discontinued operations to cash (used in)/ provided by discontinued operations: Depreciation and amortization ............. 151,118 412,928 Increase in net assets of discontinued operations .............................. (307,813) (423,475) ----------- ----------- Net cash (used in)/provided by discontinued operations .............................. $ (217,204) $ 119,038 ----------- ----------- Net increase/(decrease) in cash and cash equivalents ............................. 9,727,636 (248,896) Cash and cash equivalents at the beginning of the period ........................... 972,459 857,204 ----------- ----------- Cash and cash equivalents at the end of the period .................................. $ 10,700,095 $ 608,308 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest .................................. $ 87,929 $ 154,126 =========== =========== Income taxes .............................. $ 894,803 $ 51,215 =========== =========== SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Note received in connection with the sale of the Payroll Division (Note 2) .......... $ 750,000 $ - ========== =========== For the six months ended April 30, 1997, $19,594 (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 7 of 16 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED APRIL 30, 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 stock options ......... 80,371 804 356,816 357,620 Exercises of warrants ........ 141,965 1,419 826,449 827,868 Net income ........ 2,541,910 2,541,910 ----------------------------------------------------------- Balances, April 30, 1998 .. 4,048,438 $ 40,484 $10,779,054 $5,446,923 $16,266,461 =========================================================== See Notes to Consolidated Interim Financial Statements Page 8 of 16 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION --------------------- The Consolidated Balance Sheet as of April 30, 1998, and the Consolidated Statements of Income and the Consolidated Statements of Cash Flows for the six month periods ended April 30, 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 April 30, 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. (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 net amounts of assets and liabilities transferred at December 19, 1997. Page 9 of 16 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued) 2. SALE OF THE PAYROLL DIVISION (cont'd) ------------------------------------- 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 Company's original acquisitions of the companies comprising Pay USA, 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. Of the cash received at the closing, $1,713,509 was used to repay a term loan and the outstanding balance on a line of credit. During the eight-week period ended December 19, 1997 and the six and three month periods ended April 30, 1997, revenues relating to the discontinued operations of Pay USA approximated $1,117,000, $4,602,000, and $2,193,000, respectively, and pretax operating results approximated a loss of $137,000, income of $216,000, and income of $135,000, 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 presentation 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. Page 10 of 16 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued) 3. BASIC AND DILUTED EARNINGS PER COMMON SHARE (cont'd) ---------------------------------------------------- The following is a reconciliation of the weighted-average shares used in the computations of basic and dilutive earnings per share. Six Months ended April Three Months ended April ------------------------ -------------------------- 30, 1998 30, 1997 30, 1998 30, 1997 ----------- ---------- ------------ ----------- Weighed-average common shares outstanding used for basic earnings per share .............. 3,888,159 3,758,937 3,956,190 3,778,219 Weighted-average number of shares from imputed exercises of dilutive options and warrants, computed by the treasury- stock method ........... 491,542 136,673 265,897 159,717 --------- --------- --------- --------- Weighted-average common shares outstanding used for dilutive earnings per share .............. 4,379,701 3,895,610 4,222,087 3,937,936 ========= ========= ========= ========= Total number of options and warrants excluded from the calculation of diluted earnings per share because they are anti-dilutive ...... 111,100 537,600 111,100 537,600 ========= ========= ========= ========== Page 11 of 16 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued) 4. STOCK OPTIONS ------------- The Company applies the provisions of APB Opinion 25 and related Interpretations in accounting for its stock options. Accordingly, no compensation cost has been recognized for stock options granted. The excess, if any, of the fair market value of shares on the measurement date over the exercise price is charged to operations each year as the options become exercisable. Had compensation cost for options granted since November 1, 1995 been determined using the Black-Scholes option-pricing model described in Statement of Financial Accounting Standards No.123 ("SFAS 123") (which permits, but does not require, companies to recognize as expense over the vesting period the fair value of all stock-based awards, measured as of the date of grant), the Company would have recorded aggregate compensation expense of approximately $1,509,000. The remaining annual amortization over the options' remaining vesting periods is as follows: Fiscal Years Ended October 31, ------------------ 1998 $ 150,866 1999 301,731 2000 301,731 2001 246,312 2002 186,148 2003 38,141 ---------- $1,224,929 ========== The assumptions used in the option-pricing model include a risk-free interest rate of 6.5%, expected lives of between six months and five years, and expected volatility of 48.6%. The pro forma impact of following the provisions of SFAS 123 on the Company's reported net income and net income per share would be as follows: Six Months Ended Six Months Ended April 30, 1998 April 30, 1997 ---------------- ---------------- Net income - as reported $ 2,541,910 $ 329,601 =========== =========== - pro forma $ 2,429,185 $ 278,605 =========== =========== Basic earnings per share - as reported $ 0.65 $ 0.08 =========== =========== - pro forma $ 0.62 $ 0.07 =========== =========== Diluted earnings per share - as reported $ 0.58 $ 0.08 =========== =========== - pro forma $ 0.55 $ 0.07 =========== =========== Net income per common share has been calculated using the weighted average number of shares of common stock outstanding during the period. Page 12 of 16 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- On December 19, 1997, the Company sold 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. Unless otherwise noted, the following discussion relates only to the results from continuing operations. RESULTS OF OPERATIONS, SIX MONTH PERIODS ENDED APRIL 30, 1998 AND 1997 During the six month period ended April 30, 1998, revenues from continuing operations were $15,174,000, an increase of 29% over the six month period ended April 30, 1997. This increase is the result of several new Information Services contracts, as well as approximately $912,000 in income from the covenant not compete and service contracts with the Buyer of the Payroll Division. Data processing costs increased $1,315,000 to $9,831,000 (65% of revenues) during the current period compared to $8,516,000 (72% of revenues) in the prior year's period. The seven percent improvement in margin is derived from economies of scale and improved margins on a contract-by-contract basis. Selling and promotion costs increased slightly, to $634,000, but decreased 1% as a percentage of revenues. General and administrative expenses increased $957,000 to $3,147,000 in the current period, an increase of 2% 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 $241,000 in the current period, as compared to a net interest expense of $124,000 in the prior period. The Company repaid substantially all of its bank debt on December 19, 1997, and has invested the cash obtained from the proceeds of the sale of the Payroll Division. The Company recorded income from continuing operations of $1,001,000 ($0.26 and $0.23 per share for basic and diluted shares, respectively) for the period ended April 30, 1998, a fivefold increase compared to the profit of $200,000 ($0.05 per share, basic and diluted) for the period ended April 30, 1997. Results from discontinued operations declined from net income of $130,000 for the period ended April 31, 1997 to a loss of $61,000 for the period ended December 19, 1997, primarily as a result of excluding revenues after the date of the Sale. Page 13 of 16 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES RESULTS OF OPERATIONS, QUARTERS ENDED APRIL 30, 1998 AND 1997 During the three month period ended April 30, 1998, revenues from continuing operations were $7,957,000, an increase of 35% over the three month period ended April 30, 1997. This increase is the result of several new Information Services contracts, as well as approximately $499,000 in income from the covenant not to compete and service contracts with the Buyer of the Payroll Division. Data processing costs increased $971,000 to $5,210,000 (66% of revenues) during the current quarter compared to $4,239,000 (72% of revenues) in the prior year's quarter. The improvement as a percentage of revenues is derived from economies of scale and improved margins on a contract-by-contract basis. Selling and promotion costs increased $21,000 to $334,000, decreasing 1% as a percentage of revenues. General and administrative expenses increased $590,000 to $1,635,000 in the current period, an increase of 3% 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 $149,000 in the current period, as compared to a net interest expense of $59,000 in the prior period. The Company repaid substantially all of its bank debt on December 19, 1997, and has invested the cash obtained from the proceeds of the sale of the Payroll Division. The Company recorded income from continuing operations of $511,000 ($0.13 and $0.12 per share for basic and diluted shares, respectively) for the quarter ended April 30, 1998, a 244% increase compared to the profit of $148,000 ($0.03 per share - basic and diluted) for the quarter ended April 30, 1997. LIQUIDITY AND CAPITAL RESOURCES During the six months ended April 30, 1998, the Company used approximately $315,000 in continuing operations. This amount is net of depreciation and amortization of $719,000 and includes, among other things, a $1,061,000 increase in accrued expenses and taxes, primarily as a result of the sale of the Payroll Division. The Company generated cash from investing activities of approximately $11,088,000 during the period ended April 30, 1998, principally from the proceeds from the sale of the Payroll Division and $1,440,000 for a related covenant not to compete. This amount is net of purchases of fixed assets of $691,000 and software cost deferrals of $386,000. In financing activities for the period, the Company used cash of approximately $828,000, including $2,084,000 to repay long term debt and capital leases, offset by $1,185,000 generated from the exercises of stock warrants and employee stock options. Page 14 of 16 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES (cont'd) As of April 30, 1998, the Company had cash and cash equivalents of $10,700,000 and working capital of $10,422,000. Its current ratio (i.e., the ratio of current assets to current liabilities) was 2.65 to 1, and the ratio of total liabilities to equity was 0.55 to 1. In March 1997, the Company and a bank entered into an agreement for a revolving line of credit whereby the Company could borrow up to $1,500,000. Interest on borrowings would have been at either the Adjusted Eurodollar Rate (as defined) plus 2.25%, or the bank's prime rate. The line of credit expired 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. PART II - OTHER INFORMATION ITEM 6 - Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: None (b) Reports on Form 8-K: None Page 15 of 16 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/ June 12, 1998 ------------------------------------ Zach Lonstein Principal Executive Officer /s/ June 12, 1998 ------------------------------------ Laurence L. Carpenter Acting Principal Accounting Officer Page 16 of 16 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S QUARTERLY REPORT ON FORM 10-QSB FOR THE PERIOD ENDED APRIL 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT. 6-MOS OCT-31-1998 NOV-01-1997 APR-30-1998 10,700,095 0 5,006,156 290,814 0 16,720,242 7,477,840 4,630,350 25,182,147 6,298,314 508,409 0 0 40,484 16,225,977 25,182,147 0 15,173,675 0 9,830,805 3,781,464 179,340 70,410 1,802,268 800,770 1,001,498 (60,509) 0 0 2,241,910 0.65 0.58 INCLUDES CURRENT PORTION OF $473,247 INCLUDES AFTER-TAX GAIN ON SALE OF THE PAYROLL DIVISION OF $1,600,921 ACTUALLY 'BASIC' EPS
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