-----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, GEwhXTWWPT8aPELL+ZHY8Jm9f0ji3Fuyl7rENMcL2MZqywcbk5YQN5tZJED71nQQ 0NumtOAD4bT9DIUg81vY1w== 0000893816-98-000008.txt : 19980914 0000893816-98-000008.hdr.sgml : 19980914 ACCESSION NUMBER: 0000893816-98-000008 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19980911 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: 98708219 BUSINESS ADDRESS: STREET 1: 360 WEST 31ST ST STREET 2: 11TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10001 BUSINESS PHONE: 2125643730 10QSB 1 U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: July 31, 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 4,255,115 shares of the registrant's Common Stock, $0.01 par value, outstanding as of September 1, 1998. Transitional Small Business Disclosure Form (check one); Yes [ ] No [X] Page 1 of 17 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS July October 31, 1998 31, 1997 ------------- ------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents, including short- term, interest bearing investments of $11,406,245 and $782,583 .................. $ 11,515,762 $ 972,459 Trade accounts receivable, net of allowance for doubtful accounts of $196,160 and $111,577 .................................. 4,705,495 3,990,630 Net assets of discontinued operations (Note 2) - 6,071,333 Note receivable (Note 2) .................... 750,000 - Prepaid expenses and other current assets ... 1,593,648 1,223,759 ---------- ---------- 18,564,905 12,258,181 ---------- ---------- PROPERTY and EQUIPMENT, net ................... 3,198,532 2,578,071 ---------- ---------- OTHER ASSETS: Deferred software costs, net ................ 1,672,612 1,545,935 Intangibles, net ............................ 2,528,877 2,715,993 Due from related parties, net ............... 223,513 176,295 Security deposits and other non-current assets .................................... 530,219 523,797 ---------- ---------- 4,955,221 4,962,020 ---------- ---------- TOTAL ASSETS .................................. $ 26,718,658 $ 19,798,272 ========== ========== See Notes to Consolidated Interim Financial Statements Page 2 of 17 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) July October 31, 1998 31, 1997 ------------- ------------- (Unaudited) LIABILITIES and STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ............................ $ 1,084,298 $ 1,246,516 Current portion of long-term debt ........... 450,664 2,297,546 Current portion of capitalized lease obligations ............................... 22,272 23,034 Corporate income taxes payable .............. 2,076,947 243,342 Accrued expenses ............................ 2,636,185 1,536,330 Customer deposits and other current liabilities ............................... 153,404 231,699 ---------- ---------- 6,423,770 5,578,467 ---------- ---------- LONG-TERM LIABILITIES: Long-term debt .............................. 19,271 252,577 Capitalized lease obligations ............... 3,129 19,414 Deferred income taxes ....................... 605,057 645,910 Unearned portion of covenant not to compete . 1,120,000 - Deferred lease credits ...................... 741,186 762,841 ---------- ---------- 2,488,643 1,680,742 ---------- ---------- STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value; 1,000,000 shares authorized, none issued ............ - - Common stock, $0.01 par value; 10,000,000 shares authorized; shares issued and out- standing, 4,251,915 and 3,826,104.......... 42,519 38,261 Additional paid-in capital .................. 11,253,717 9,595,789 Retained earnings ........................... 6,510,009 2,905,013 ---------- ---------- 17,806,245 12,539,063 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .... $ 26,718,658 $ 19,798,272 ========== ========== See Notes to Consolidated Interim Financial Statements Page 3 of 17 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Nine Months Ended Three Months Ended July 31 July 31, -------------------------- -------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ REVENUES ........... $ 22,751,227 $ 17,845,369 $ 7,617,026 $ 6,048,603 ---------- ---------- ---------- ---------- COSTS and EXPENSES: Data processing costs .......... 14,819,111 12,692,903 5,027,780 4,177,121 Selling and promo- tion costs ..... 992,652 925,712 358,466 292,806 General and administrative expenses ....... 4,664,770 3,223,343 1,517,492 1,033,246 Interest expense, net of interest income ......... (396,648) 193,263 (155,786) 68,898 ----------- ---------- ----------- ---------- 20,079,885 17,035,221 6,747,952 5,572,071 ----------- ---------- ----------- ---------- Income from continu- ing operations before income tax provision ........ 2,671,342 810,148 869,074 476,532 Provision for income taxes ............ 1,097,846 324,100 297,076 190,500 ----------- ---------- ---------- ---------- Income from continu- ing operations ... 1,573,496 486,048 571,998 286,032 Income/(loss) from discontinued operations, net of income taxes (Note 2) ......... (60,509) 27,452 - (102,133) Gain on sale of the Payroll Division, net of income taxes (Note 2) ... 2,092,009 - 491,088 - ---------- ---------- ---------- ---------- NET INCOME ......... $ 3,604,996 $ 513,500 $ 1,063,086 $ 183,889 ========== ========== ========== ========== Continued on Next Page Page 4 of 17 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Nine Months Ended Three Months Ended July 31, July 31, -------------------------- -------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ EARNINGS PER COMMON SHARE (Note 3): Basic earnings per common share: Income from continuing operations ......... $ 0.40 $ 0.12 $ 0.14 $ 0.08 Income/(loss) from discontinued operations ......... (0.02) 0.01 - (0.03) Gain on Sale of the Payroll Division ... 0.52 - 0.11 - ----------- ---------- ---------- ----------- Net income ........... $ 0.90 $ 0.13 $ 0.25 $ 0.05 =========== ========== ========== =========== Weighted average number of common shares outstanding ........ 3,985,296 3,769,354 4,177,866 3,789,849 ========== ========== ========== ========== Diluted earnings per common share: Income from continuing operations ......... $ 0.36 $ 0.12 $ 0.13 $ 0.08 Income/(loss) from discontinued operations ......... (0.01) 0.01 - (0.03) Gain on Sale of the Payroll Division ... 0.48 - 0.10 - ----------- ---------- ---------- ----------- Net income ........... $ 0.83 $ 0.13 $ 0.23 $ 0.05 =========== ========== ========== =========== Weighted average number of common shares and other dilutive securities outstanding ........ 4,360,804 3,929,188 4,571,900 3,980,807 ========== ========== ========== ========== See Notes to Consolidated Interim Financial Statements Page 5 of 17 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended July 31, ------------------------------ 1998 1997 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Income from continuing operations ............. $ 1,573,496 $ 486,048 Adjustments to reconcile income from continuing operations to cash (used in)/provided by operating activities: Depreciation and amortization ............... 1,010,635 1,098,900 Increase/(reduction) in deferred income taxes (35,355) 175,545 Decrease/(increase) in: Trade accounts receivable ................. (714,865) (730,271) Prepaid expenses and other current assets . (369,889) (289,759) Security deposits and other noncurrent assets .................................. (48,992) (184,453) Increase/(decrease) in: Accounts payable .......................... (162,218) 96,767 Income taxes payable ...................... 120,092 (27,939) Accrued expenses .......................... (1,832,096) 34,853 Customer deposits and other current liabilities ............................. (78,295) (58,152) Deferred lease credits ...................... (53,965) - ---------- ---------- Net cash (used in)/provided by operating activities .............................. (591,450) 601,539 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment .......... (1,227,425) (281,976) Disposal of equipment ....................... 14,960 2,074 Proceeds from the sale of the Payroll Division .................................. 12,210,000 - Proceeds from a covenant not to compete ..... 1,440,000 - Settlement of contingencies relating to acquisitions .............................. - (423,938) Increase in deferred software costs ......... (603,311) (353,772) ----------- ----------- Net cash provided by/(used in) investing activities .............................. $ 11,834,224 $ (1,057,612) ----------- ----------- Continued on Next Page See Notes to Consolidated Interim Financial Statements Page 6 of 17 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited - Continued) Nine Months Ended July 31, ------------------------------ 1998 1997 ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt ................. $ (2,080,188) $ (789,928) Proceeds from the exercise of options and warrants .................................. 1,662,186 - Proceeds from longterm debt ................. - 500,000 Repayments from/(borrowings by) related parties, net .............................. (47,218) 22,735 Repayments of capital leases ................ (17,047) (77,935) ----------- ---------- Net cash used in financing activities ..... (482,267) (345,128) ----------- ---------- CASH FLOWS FROM DISCONTINUED OPERATIONS: Income/(loss) from discontinued operations .. (60,509) 27,452 Adjustments to reconcile income/(loss) from discontinued operations to cash (used in)/ provided by discontinued operations: Depreciation and amortization ............. 151,118 627,380 Increase in net assets of discontinued operations .............................. (307,813) (459,701) ----------- ----------- Net cash (used in)/provided by discontinued operations .............................. $ (217,204) $ 195,131 ----------- ----------- Net increase/(decrease) in cash and cash equivalents ............................. 10,543,303 (606,070) Cash and cash equivalents at the beginning of the period ........................... 972,459 857,204 ----------- ----------- Cash and cash equivalents at the end of the period .................................. $ 11,515,762 $ 251,134 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest .................................. $ 110,622 $ 205,906 =========== =========== Income taxes .............................. $ 1,013,106 $ 91,958 =========== =========== SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Capitalized leases for data processing equipment ............................... - 81,312 ========== =========== Note received in connection with the sale of the Payroll Division (Note 2) ........ $ 750,000 $ - ========== =========== For the nine months ended July 31, 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 17 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY NINE MONTHS ENDED JULY 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 stock options ......... 283,848 2,838 831,479 834,317 Exercises of warrants ........ 141,965 1,420 826,449 827,869 Net income ........ 3,604,996 3,604,996 ----------------------------------------------------------- Balances, July 31, 1998 .. 4,251,915 $ 42,519 $11,253,717 $6,510,009 $17,806,245 =========================================================== See Notes to Consolidated Interim Financial Statements Page 8 of 17 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION --------------------- The Consolidated Balance Sheet as of July 31, 1998, and the Consolidated Statements of Income and the Consolidated Statements of Cash Flows for the nine month periods ended July 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 July 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. (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 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 note is due on July 15, 1999, is subject to acceleration pro-rata if certain contingent liabilities of the Buyer were satisfied in whole or part, and requires quarterly payments of interest at 8.5% per annum. At July 31, 1998, the contingent liabilities were satisfied, and the Note became due. On August 14, 1998, the Buyer paid $601,607 plus interest, and asserted approximately $150,000 in charge-backs under the Sale Agreement as payment of the remainder of the Note. The chargebacks have not yet been agreed to by the Company. Page 9 of 17 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued) The terms of the Sale also provided for an additional payment by the Buyer of up to $1,500,000, which amount was contingent on the revenue of Pay USA for the three months following the Sale, and was also subject to adjustment based on a final determination of the net amount of assets and liabilities transferred to the Buyer on December 19, 1997. On June 1, 1998, the Company received the $1,500,000 contingent payment. Including the contingent payment, the Company has recognized a pretax gain of approximately $3,820,700 after recording various costs of the transaction amounting to approximately $2,926,700. 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 is being recognized over the three-year term of the agreement. 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 nine month period ended July 31, 1998 and the nine and three month periods ended July 31, 1997, revenues relating to the discontinued operations of Pay USA approximated $1,117,000, $6,731,000, and $2,129,000, respectively, and pretax operating results approximated a loss of $137,000, income of $46,000, and a loss of $170,000, 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. Page 10 of 17 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued) The following is a reconciliation of the weighted-average shares used in the computations of basic and dilutive earnings per share. Nine Months ended July Three Months ended July ---------------------- ----------------------- 31, 1998 31, 1997 31, 1998 31, 1997 -------- -------- -------- -------- Weighed-average common shares outstanding used for basic earnings per share ................... 3,985,296 3,769,354 4,177,866 3,789,849 Weighted-average number of shares from assumed exercises of dilutive options and warrants, computed by the treasury- stock method ............ 375,508 159,834 394,034 190,958 --------- --------- --------- --------- Weighted-average common shares outstanding used for dilutive earnings per share ................... 4,360,804 3,929,188 4,571,900 3,980,807 ========= ========= ========= ========= Total number of options and warrants excluded from the calculation of diluted earnings per share because they are anti-dilutive .. 63,900 271,402 27,500 273,902 ========= ========= ========= ========= 4. STOCK OPTIONS ------------- The Company applies the provisions of APB Opinion 25 and related Interpreta- tions 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 compen- sation 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("FASB 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 $1,508,669 which would be expensed over the options' vesting period as follows: Fiscal Years Ended October 31, ------------------------------ 1998 $ 75,433 1999 301,731 2000 301,731 2001 246,312 2002 186,148 2003 38,141 ---------- $1,149,496 ========== Page 11 of 17 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued) 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 FASB 123 on the Company's reported net income and net income per share would be as follows: Nine Months Ended Nine Months Ended July 31, 1998 July 31, 1997 ------------------ ----------------- Net income - as reported $ 3,604,996 $ 513,500 ============ =========== - pro forma $ 3,416,838 $ 434,742 ============ =========== Basic earnings per share - as reported $ 0.90 $ 0.13 ============ =========== - pro forma $ 0.86 $ 0.11 ============ =========== Diluted earnings per share - as reported $ 0.83 $ 0.13 ============ =========== - pro forma $ 0.78 $ 0.11 ============ =========== 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 17 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, NINE MONTH PERIODS ENDED JULY 31, 1998 AND 1997 During the nine month period ended July 31, 1998 (the "current period"), revenues from continuing operations were $22,751,000, an increase of 28% over the $17,845,000 recorded in the nine month period ended July 31, 1997 (the "prior period"). This increase is the result of several new Information Services contracts, as well as approximately $1,127,000 in income from the covenant not to compete and service contracts with the Buyer of the Payroll Division. Data processing costs increased $2,126,000 to $14,819,000 (65% of revenues) during the current period compared to $12,693,000 (71% of revenues) in the prior year's period. The improvement in margin arises from increases in revenue and improved margins on a contract-by-contract basis. Selling and promotion costs increased slightly, to $993,000, but decreased 1% as a percentage of revenues. General and administrative expenses increased $1,441,000 to $4,665,000 in the current period, an increase of 2% as a percentage of revenues, primarily due to increased rent and utility costs related to the Company's new computer center in New Jersey. The Company recorded net interest income of $397,000 in the current period, as compared to net interest expense of $193,000 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 $1,573,000 ($0.40 and $0.36 per share for basic and diluted shares, respectively) for the period ended July 31, 1998, a threefold increase compared to the profit of $486,000 ($0.12 per share, basic and diluted) for the period ended July 31, 1997. In connection with the sale of the Payroll Division, the Company recognized a gain of approximately $2,092,000 after taxes and after various costs of the transaction amounting to approximately $2,926,700. These costs include, among other things, the assumption or settlement 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. Page 13 of 16 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES RESULTS OF OPERATIONS, QUARTERS ENDED JULY 31, 1998 AND 1997 During the three month period ended July 31, 1998 (the "current quarter"), revenues from continuing operations were $7,617,000, an increase of 26% over the $6,049,000 recorded for the three month period ended July 31, 1997 (the "prior year's quarter"). This increase is the result of several new Information Services contracts, as well as approximately $231,000 in income from the covenant not to compete and service contracts with the Buyer of the Payroll Division. Data processing costs increased $851,000 to $5,028,000 (66% of revenues) during the current quarter compared to $4,177,000 (69% of revenues) in the prior year's quarter. The improvement as a percentage of revenues arises from the increase in revenue and improved margins on a contract-by-contract basis. Selling and promotion costs increased $66,000 to $358,000, but remained the same as a percentage of revenues. General and administrative expenses increased $484,000 to $1,517,000 in the current quarter, 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 $156,000 in the current quarter, as compared to a net interest expense of $69,000 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 $572,000 ($0.14 and $0.13 per share for basic and diluted shares, respectively) for the current quarter, double the profit of $286,000 ($0.08 per share - basic and diluted) for the prior year's quarter. In connection with the sale of the Payroll Division, the Company received a contingent payment of $1,500,000 in the current quarter and recognized a gain of approximately $491,100 after taxes and after various additional costs of the transaction amounting to approximately $794,000. These costs include, among other things, the settlement of certain contractual obligations related to the Company's original acquisitions of the companies comprising Pay USA. LIQUIDITY AND CAPITAL RESOURCES During the nine months ended July 31, 1998, the Company used approximately $591,000 in continuing operations. This amount is net of depreciation and amortization of $1,011,000 and includes, among other things, a $1,832,000 increase in accrued taxes, primarily as a result of the sale of the Payroll Division. The Company generated cash from investing activities of approximately $11,834,000 during the period ended July 31, 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 $1,227,000 and software cost deferrals of $603,000. Page 14 of 17 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES (Continued) In financing activities for the period, the Company used cash of approximately $482,000, including $2,097,000 to repay long term debt and capital leases, offset by $1,662,000 generated from the exercises of stock warrants and employee stock options. As of July 31, 1998, the Company had cash and cash equivalents of $11,516,000 and working capital of $12,141,000. Its current ratio (i.e., the ratio of current assets to current liabilities) was 2.89 to 1, and the ratio of total liabilities to equity was 0.50 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. Page 15 of 17 COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- The Annual Meeting of Stockholders of the Company was held on June 3, 1998, at which the following actions were taken: (1) Five directors of the Company were elected for terms of one year, or until their respective successors are duly elected and qualified. The following table lists the name of each candidate for director, and the number of shares voted for or withheld from each candidate: Shares Voted Shares Nominee For Election Withheld ----------------- ------------ -------- Zach Lonstein 3,111,483 251,064 Jeffrey Millman 3,111,483 251,064 Robert B. Wallach 3,111,483 251,064 Howard Waltman 3,111,483 251,064 John C. Platt 3,111,483 251,064 (2) The Company amended Article 4.1 in the Company's Restated Certificate of Incorporation to provide that the total number of shares of stock which the Corporation shall have authority to issue is 11,000,000, consisting of 1,000,000 shares of preferred stock, par value $0.01 per share ("Preferred Stock)", and 10,000,000 shares of common stock, par value $0.01 per share ("Common Stock"). The shareholders approved this amendment by a vote of 3,088,693 for, 250,954 against, and 22,900 abstaining. ITEM 6 - Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K: None Page 16 of 17 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/ ----------------------------------- September 11, 1998 Zach Lonstein Principal Executive Officer /s/ ----------------------------------- September 11, 1998 Laurence L. Carpenter Acting Principal Accounting Officer Page 17 of 17 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 JULY 31, 1998, AND IS QUALIFIED IN IT'S ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT. 9-MOS OCT-31-1998 JUL-31-1998 11,515,762 0 4,901,655 196,160 0 18,564,905 8,014,488 4,815,956 26,718,658 6,423,770 495,336 0 0 42,520 17,763,725 26,718,658 0 22,751,227 0 14,819,111 5,657,422 94,930 93,362 2,671,342 1,097,846 1,573,496 (60,509) 0 0 3,604,996 0.90 0.83 INCLUDES CURRENT PORTION OF 472,936 INCLUDES GAIN ON SALE OF PAYROLL DIVISION OF 2,092,009 ACTUALLY EPS BASIC
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