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, 1996
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 3,734,850 shares of the registrant's Common Stock, $0.01 par value,
outstanding as of September 11, 1996.
Transitional Small Business Disclosure Form (check one);
Yes [ ] No [X].
Page 1 of 14
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, October 31,
1996 1995
------------ -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................... $ 1,061,138 $ 1,406,016
Accounts receivable, net of allowance
for doubtful accounts of $240,684 and
$265,415, respectively .................... 3,571,658 3,799,940
Refundable income taxes ...................... 128,884 414,558
Prepaid expenses ............................. 774,170 603,580
Other current assets ......................... 56,226 138,610
--------- ---------
5,592,076 6,362,704
--------- ---------
PROPERTY and EQUIPMENT, net ...................... 3,284,075 3,450,771
--------- ---------
OTHER ASSETS:
Deferred software costs, net .................. 1,676,879 1,083,051
Intangible assets, net ........................ 7,794,464 8,160,949
Due from related parties, net ................. 112,823 155,740
Cash surrender value of life insurance,
net of loans of $100,388 ................... 131,682 131,682
Security deposits and other non-current assets. 539,260 579,547
---------- ----------
10,255,108 10,110,969
---------- ----------
TOTAL ASSETS ..................................... $19,131,259 $19,924,444
========== ==========
See Notes to Consolidated Financial Statements
Page 2 of 14
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
July 31, October 31,
1996 1995
------------ -----------
(Unaudited)
LIABILITIES and STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................. $ 1,563,211 $ 1,365,480
Notes payable and current portion
of long-term debt ......................... 1,134,893 1,709,571
Current portion of capitalized
lease obligations ......................... 206,558 158,729
Accrued expenses ............................. 1,416,304 1,843,881
Income taxes payable ......................... 63,753 -
Customer deposits and
other current liabilities ................. 108,349 123,571
--------- ---------
4,493,068 5,201,232
--------- ---------
LONG-TERM LIABILITIES:
Long-term debt ............................... 1,887,984 2,352,175
Capitalized lease obligations ................ 312,437 376,293
Deferred income taxes ........................ 804,344 645,540
Stock option obligation ...................... 117,748 400,939
--------- ---------
3,122,513 3,774,947
--------- ---------
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
outstanding: 3,734,850 and 3,627,499,
respectively .............................. 37,348 36,275
Common stock issuable ........................ - 153,000
Additional paid-in capital ................... 9,233,952 8,752,637
Retained earnings ............................ 2,288,291 2,076,615
Deferred costs arising from a financing
and consulting agreement .................. (43,913) (70,262)
---------- ----------
11,515,678 10,948,265
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....... $19,131,259 $19,924,444
========== ==========
See Notes to Consolidated Financial Statements
Page 3 of 14
<PAGE>
<TABLE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Nine Months Ended July 31, Three Months Ended July 31,
------------------------------ ------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES ......................................... $21,576,396 $15,334,972 $ 7,259,305 $ 6,614,216
---------- ---------- ---------- ----------
COSTS and EXPENSES:
Data processing costs ....................... 13,332,731 8,856,006 4,499,663 4,122,331
Selling and promotion costs ................. 1,887,842 1,740,724 531,248 706,524
General and administrative expenses ......... 5,616,831 4,300,819 1,981,043 1,659,364
Interest expense, net of interest income ... 257,207 137,879 75,962 74,452
---------- ---------- ---------- ----------
21,094,611 15,035,428 7,087,916 6,562,671
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES ......... 481,785 299,544 171,389 51,545
PROVISION FOR INCOME TAXES ....................... 235,000 179,271 81,015 50,109
---------- ---------- ---------- ----------
NET INCOME ....................................... $ 246,785 $ 120,273 $ 90,374 $ 1,436
========== ========== ========== ==========
INCOME PER COMMON SHARE AND SHARE EQUIVALENTS .... $ 0.06 $ 0.02 $ 0.02 $ -
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND
SHARE EQUIVALENTS OUTSTANDING .................... 3,799,739 3,609,703 3,869,360 3,677,673
========== ========== ========== ==========
See Notes to Consolidated Financial Statements
</TABLE>
Page 4 of 14
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended July 31,
-----------------------------
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ....................................... $ 246,785 $ 120,273
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization ................ 1,452,940 1,149,567
Amortization of excess of fair value of net
assets acquired over cost ................. - (15,749)
Deferred income taxes ........................ 158,804 72,455
Decrease/(increase) in:
Cash surrender value of life insurance .... - (6,864)
Accounts receivable ....................... 228,282 97,419
Refundable taxes .......................... 285,674 -
Prepaid expenses .......................... (170,590) (146,236)
Other current assets ...................... 82,384 (230,524)
Security deposits and other noncurrent
assets ................................. 8,677 (116,121)
Increase/(decrease) in:
Accounts payable .......................... 197,731 28,800
Accrued expenses .......................... (427,577) 82,747
Income taxes payable ...................... 74,841 -
Customer deposits and other current
liabilities ............................ (15,222) (41,625)
--------- ---------
Net cash provided by operating activities ........ 2,122,729 994,142
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ............... (465,047) (311,438)
Disposal of equipment ............................ 60,992 -
Redemption of marketable securities .............. - 1,098,269
Payment for purchase of ACA, net of cash acquired. - (716,091)
Payment for purchase of MCC, net of cash acquired. - (334,078)
Decrease in goodwill upon
settlement of contingencies .................. 6,566 61,579
Contingent payments relating to the purchase
of ESM, Inc. ................................. (118,173) (131,447)
Increase in deferred software costs .............. (804,764) (455,150)
--------- ---------
Net cash used in investing activities ............ (1,320,426) (788,356)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ...................... (1,307,042) (793,009)
Repayments/borrowings by related parties, net..... 42,917 (10,376)
Proceeds from issuance of long-term debt ......... 268,173 1,500,000
Repayments of capital leases ..................... (151,229) (95,737)
--------- ---------
Net cash (used in)/provided by
financing activities ......................... (1,147,181) 600,878
--------- ---------
Net (decrease)/increase in cash and cash equivalents (344,878) 806,664
Cash and cash equivalents at the beginning
of the period ................................ 1,406,016 686,286
--------- ---------
Cash and cash equivalents at the end
of the period ................................ $ 1,061,138 $ 1,492,950
========= =========
See Notes to Consolidated Financial Statements
Page 5 of 14
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Nine Months Ended July 31,
-----------------------------
1996 1995
----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ...................................... $ 293,549 $ 177,034
========= =========
Income taxes .................................. $ 49,747 $ 272,236
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITY:
New capitalized leases for data
processing equipment ..................... $ 135,202 $ -
========= =========
Acquisition of Key-ACA, Inc.:
Fair value of assets acquired .............. $ 1,729,524
Liabilities assumed ........................ (491,994)
Stock issued ............................... (462,529)
---------
Cash paid .................................. $ 775,001
=========
Acquisition of MCC Corporation:
Fair value of assets acquired ............... $ 3,115,567
Liabilities assumed ......................... (1,713,396)
Note issued ................................. (840,645)
---------
Cash paid ................................... $ 561,526
=========
During the nine months ended July 31, 1996 and 1995, $35,109 and $51,625
(each net of tax benefits), respectively, were accreted through a charge to re-
tined earnings in connection with a stock option.
See Notes to Consolidated Financial Statements
Page 6 of 14
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JULY 31, 1996
(Unaudited)
<CAPTION>
Deferred
Costs in
Connection
with a
Financing/
Common Par Stock Paid-in Retained Consulting
Shares Value Issuable Capital Earnings Agreement Total
--------- -------- -------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances,
October 31, 1995 ....... 3,627,499 $ 36,275 $153,000 $8,752,637 $2,076,615 $ (70,262) $10,948,265
Exercises of
stock option ........... 83,445 834 328,554 329,388
Issuance of stock in
connection with the
purchase of Tru-Check
Computer Systems, Inc... 23,906 239 (153,000) 152,761 -
Amortization of deferred
costs in connection
with a financing and
consulting agreement ... 26,349 26,349
Accretion in connection
with a stock option
obligation, net ........ (35,109) (35,109)
Net income ................. 246,785 246,785
--------- ------- ------- --------- --------- -------- ----------
Balances,
July 31, 1996 ......... 3,734,850 $ 37,348 $ - $9,233,952 $2,288,291 $ (43,913) $11,515,678
========= ======= ======= ========= ========= ======== ==========
See Notes to Consolidated Financial Statements
</TABLE>
Page 7 of 14
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. Basis of Presentation
The Consolidated Balance Sheet as of July 31, 1996, the Consolidated State-
ments of Income for the nine and three month periods ended July 31, 1996
and 1995, and the Consolidated Statements of Cash Flows for the nine month
periods ended July 31, 1996 and 1995 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 period ended July 31, 1996 are not
necessarily indicative of the operating results for the full fiscal year.
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 con-
densed or omitted. These consolidated financial statements should be read
in conjunction with the Company's Annual Report on Form 10-KSB/A for
October 31, 1995.
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
The Company is indebted to a bank for three term loans, the proceeds of
which were used to fund various acquisitions by the Company. The loans
bear interest at the prime rate plus 1.5%. Two term loans, initially
$450,000 and $670,000, are being repaid with monthly payments of principal
and interest over three years. The third term loan in the original amount
of $1,500,000, incurred monthly payments of interest only for one year, and
is being repaid with payments of principal and interest for three years be-
ginning June 1996. As of July 31, 1996, the balances of these loans aggre-
gated $1,773,336. Substantially all of the assets of the Company are
pledged as collateral for these loans.
The loan agreements contain certain financial covenants requiring the Com-
pany to, among other things, maintain certain financial ratios. As of July
31, 1996, the Company was in compliance with these covenants.
As of April 30, 1996, the Company reached an agreement with "K" Line Amer-
ica, Inc. to amend the terms of the original $840,645 note issued in con-
nection with the purchase of MCC Corporation. The note is now payable in
four equal installments at various times from March 1997 through February
1999. Interest is payable quarterly at 7.5% per annum.
Debt also includes miscellaneous loans for equipment purchases and acquisi-
tion-related indebtedness aggregating $408,896 at July 31, 1996.
Page 8 of 14
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS of OPERATIONS
Nine Months Ended July 31, 1996
as Compared to the Nine Months Ended July 31, 1995:
---------------------------------------------------
The following table sets forth, for the periods indicated, the percentage
of revenues represented by selected items in the Company's Consolidated
Statements of Income.
Percentage of Total Revenues
Nine Months Ended July 31,
1996 1995
-------- --------
REVENUES......................... 100.0% 100.0%
-------- --------
COSTS AND EXPENSES:
Data processing............... 61.8 57.8
Selling and promotion......... 8.7 11.4
General and administrative.... 26.0 28.0
Interest expense, net of
interest income............ 1.2 0.9
Provision for income taxes.... 1.1 1.2
-------- --------
NET INCOME....................... 1.1% 0.8%
======== ========
Revenues increased $6,241,000 to $21,576,000, an increase of 40.7% for the
current nine month period. The Company's Outsourcing division recorded a
revenue increase of $4,658,000. A revenue increase by MCC Corporation
("MCC") of $5,294,000, due to the inclusion of MCC's results for the full
current nine month period, more than offset a decrease in processing rev-
enues in the rest of the Outsourcing division. MCC was acquired by the
Company effective June 1, 1995. The PayUSA division recorded a revenue in-
crease of $1,584,000. Revenues in the Company's Key-ACA, Inc. subsidiary
("ACA"), acquired as of May 1, 1995, accounted for $1,235,000 of this in-
crease.
Data processing costs increased $4,477,000 to $13,333,000, (61.8% of rev-
enues) compared to $8,856,000 (57.8% of revenues) during the prior nine
month period. MCC's data processing costs increased $3,886,000. MCC's
data processing costs were 73.4% of their revenues for the period, which
was the principal reason for the Company's increase in data processing
costs as a percentage of revenues. ACA's payroll processing costs in-
creased $563,000 compared to the prior period as a result of the timing of
its acquisition. In addition, a $96,000 increase in payroll processing
costs was recorded by the rest of the PayUSA division, offsetting a com-
parable decrease in processing costs recorded by the Outsourcing division
other than MCC.
Page 9 of 14
<PAGE>
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Selling and promotion costs increased $147,000 to $1,888,000, but decreased
2.7% as a percentage of revenues. Increases of $130,000 and $332,000 were
attributable to the acquisitions of ACA and MCC, respectively. Offsetting
these were decreases of $102,000 and $213,000 in the PayUSA division and
Outsourcing division, respectively. These decreases resulted from consoli-
dation of the selling efforts in the PayUSA division.
General and administrative expenses increased $1,316,000 to $5,617,000 in
the current period but decreased 2.0% as a percentage of sales. Increases
of $425,000 and $515,000 were attributable to the timing of the acquisi-
tions of ACA and MCC, respectively. The remainder of the increase resulted
from the additional costs of managing the Company's increased size and com-
plexity.
Net interest expense increased $119,000 to $257,000 in the current period.
This was due to a higher level of borrowings to partially fund its acqui-
sitions and a decrease in interest income previously generated by excess
proceeds from the Company's public offering.
As a result of the aforementioned, the Company recorded a profit of
$247,000 ($.06 per share) during the nine months ended July 31, 1996 com-
pared to a profit of $120,000 ($.02 per share) during the corresponding
previous nine month period.
RESULTS of OPERATIONS
Quarter Ended July 31, 1996
as Compared to the Quarter Ended July 31, 1995:
-----------------------------------------------
The following table sets forth, for the periods indicated, the percentage
of revenues represented by selected items in the Company's Consolidated
Statements of Income.
Percentage of Total Revenues
Quarters Ended July 31,
1996 1995
-------- --------
REVENUES......................... 100.0% 100.0%
-------- --------
COSTS AND EXPENSES:
Data processing............... 62.0 62.3
Selling and promotion......... 7.3 10.7
General and administrative.... 27.3 25.1
Interest expense, net of
interest income............ 1.0 1.1
Provision for income taxes.... 1.1 0.8
-------- --------
NET INCOME....................... 1.3% 0.0%
======== ========
Page 10 of 14
<PAGE>
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Revenues increased $645,000 to $7,259,000, an increase of 9.8% during the
current quarter. The increase was primarily attributable to the timing of
the acquisition of MCC.
Data processing costs increased $377,000 to $4,500,000 (62.0% of revenues)
compared to $4,122,000 (62.3% of revenues) during the prior quarter. This
increase was primarily attributable to the timing of the acquisition of
MCC.
Selling and promotion costs decreased $175,000 to $531,000, decreasing 3.4%
as a percentage of revenues, resulting from consolidation of the selling
efforts in the Pay USA division.
General and administrative expenses increased $322,000 to $1,981,000 in the
current quarter, increasing 2.2% as a percentage of sales. An increase of
$135,000 was attributable to the timing of the acquisition of MCC. The re-
mainder of the increase resulted from the additional costs of managing the
Company's increased size and complexity.
Provision for income taxes in the prior year's quarter included approxi-
mately $33,000 of adjustments relating to the differences between the tax
and book treatment of certain assets purchased in the acquisitions of ACA
and MCC.
As a result of the aforementioned, the Company recorded a profit of $90,000
($.02 per share) during the quarter ended July 31, 1996 compared to a
profit of $1,000 ($.00 per share) during the corresponding prior year's
quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to invest in its businesses through the development
of new products and the enhancement of existing products. During the nine
months ended July 31, 1996, the Company provided $2,123,000 from operations
principally by generating $1,859,000 in net income before deductions for
depreciation, amortization, and deferred taxes. It invested $465,000 for
the purchase of equipment and spent $805,000 for product enhancements. In
the aggregate, the Company's investment activities used $1,320,000. In its
financing activities, the Company used $1,147,000 principally to repay debt
of $1,093,000, net of issuances, and capital leases of $151,000. As a re-
sult of these factors, the Company's cash and cash equivalents decreased by
$345,000.
As of July 31, 1996, the Company had cash and cash equivalents of
$1,061,000 and working capital of $1,099,000. Its current ratio (i.e., the
ratio of current assets to current liabilities) was 1.24 to 1, and its lia-
bilities to equity ratio was 0.66 to 1.
Page 11 of 14
<PAGE>
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The Company is indebted to a bank for three term loans, the proceeds of
which were used to fund various acquisitions by the Company. The loans
bear interest at the prime rate plus 1.5%. Two term loans, initially
$450,000 and $670,000, are being repaid with monthly payments of principal
and interest over three years. The third term loan in the original amount
of $1,500,000, incurred monthly payments of interest only for one year, and
is being repaid with payments of principal and interest for three years be-
ginning June 1996. As of July 31, 1996, the balances of these loans aggre-
gated $1,773,336. Substantially all of the assets of the Company are
pledged as collateral for these loans.
The loan agreements contain certain financial covenants requiring the Com-
pany to, among other things, maintain certain financial ratios. As of July
31, 1996, the Company was in compliance with these covenants.
In August 1996, the bank advised the Company that it had approved the Com-
pany's request for an additional Three Year Revolving Credit Facility and
an amendment to the existing loan agreements. The terms of the new facil-
ity would enable the Company to increase its borrowings up to an additional
$1,257,000. The Company is presently studying the commitment and there can
be no assurance that this transaction will be consummated.
As of April 30, 1996, the Company reached an agreement with "K" Line Amer-
ica, Inc. to amend the terms of the original $840,645 note issued in con-
nection with the purchase of MCC Corporation. This note is now payable in
four equal installments at various times from March 1997 through February
1999. Interest is payable quarterly at 7.5% per annum.
Management believes that its cash flow from operations will be sufficient
to fund the Company's operations for at least the next year. It is manage-
ment's intention to focus on consolidation and integration of the acquisi-
tions made to date. Any significant acquisitions may require funding in
excess of the current and projected operating cash flows, and may require
additional debt and/or equity funding.
Page 12 of 14
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
Page 13 of 14
<PAGE>
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, there-
unto duly authorized.
COMPUTER OUTSOURCING SERVICES, INC.
/s/
September 12, 1996 Zach Lonstein
Principal Executive Officer
/s/
September 12, 1996 Roger Kaufman
Principal Financial Officer
Page 14 of 14
